Europe Shoots to Badly Injure MFN Clauses in Investment Treaties: Latest Developments in the E.U. and the U.K.

Ivan Levy
Columbia Law School LL.M.

Introduction

In investment treaties, most favored nation (MFN) clauses commit contracting parties to treating each other’s investors no less favorably than investors of third states.[1] These clauses are directed at inappropriate distinctions between different foreign investors by the host state of the investment.[2]

In investment arbitration practice, tribunals have almost unanimously accepted that investors could ‘borrow’ standards of treatment from investment treaties concluded by the host state with third states through MFN clauses.  In some other cases, allegedly more favorable procedural treatment has also been claimed by investors, dividing tribunals with roughly equal numbers of decisions upholding and rejecting the application of the MFN clause to an arbitration provision.[3] In response to decisions subjecting procedural matters to MFN clauses, investment treaties begun to exclude the application of MFN clauses regarding dispute resolution. However, the latest trend in Europe is now to eliminate the application of MFN clauses to substantive treatment obligations assumed in other treaties.

Initial Restrictions on MFN Clauses: Procedural Matters

In investment treaty drafting, states have historically excluded the application of MFN clauses to treatment related to an agreement on taxation or a custom union. This practice can be traced back to the first Bilateral Investment Treaties (BITs), such as the Niger-Switzerland BIT (1962),[4] the Côte d’Ivoire-Switzerland BIT (1962),[5] or the Germany-Tunisia BIT (1963).[6]

On top of these initial drafting restrictions, particularly after the famous decision on jurisdiction in Maffezini v. Spain,[7] States began to exclude dispute resolution provisions from the scope of MFN clauses. Examples of this include the Japan-Peru BIT (2008),[8] the China-Japan-Korea Trilateral Investment Treaty (2012),[9] or the India-UAE BIT (2013).[10] In these treaties, as well as many others, the states expressly provide in the text that MFN clauses do not apply to procedural matters.

Latest Developments: Restrictions on Substantive Use of MFN Clauses

The E.U. and the U.K. seem to be stepping further down the path of restricting MFN clauses in their latest concluded agreements.  Thus far, MFN clauses have unanimously been employed by investors to take advantage of better substantive treatment available in other treaties concluded by the host state with third states.[11]

However, this well-established rule crumbles with a close look at some of the treaties concluded in 2019 and 2020 by the E.U. and the U.K. For instance, the E.U.-U.K. 2020 Trade and Cooperation Agreement (TCA) establishes that “[…] the existence of substantive provisions in other international agreements concluded by a Party with a third country […] do not in themselves constitute the “treatment” referred to in paragraphs 1 and 2 [MFN treatment]. Measures of a Party pursuant to those provisions may constitute such treatment and thus give rise to a breach of [MFN]”.[12] In a similar manner, the Japan-U.K. Comprehensive Economic Partnership (2020) also establishes that substantive provisions in other international agreements concluded by a party with a third country do not in themselves constitute treatment for purposes of MFN. However, like in the E.U.-U.K. TCA, actions in relation to those provisions may constitute treatment for purposes of MFN.[13]

Another example of this trend can be found in the 2019 E.U.-Viet Nam Investment Protection Agreement (IPA). The IPA established that substantive obligations in other agreements do not in themselves constitute “treatment” and thus cannot be taken into account when assessing a breach of the MFN clause. Again, measures by states could still be considered treatment.[14]

These three newly concluded treaties clearly suggest a new trend in MFN clauses of no longer allowing permissive incorporation of substantive standards of protection from other treaties. These treaties, therefore, may provoke a fragmentation of the system of state obligations assumed through investment treaties. The states, or the Union in the case of the E.U., will only assume the international law obligations prescribed in the treaty itself and will not be bound by any other obligations in existence at the time or assumed thereafter by virtue of other agreements. Each treaty will therefore constitute an independent and unrelated body of law.

The issue left to debate is the role and extent of MFN clauses in this scenario, particularly because the text of these agreements indicates that state measures are indeed subject to MFN.

Shoot to Kill or to Badly Injure? The Function Left for MFN Clauses

A much more limited scope of obligations is left for MFN clauses under these agreements. The text of all three abovementioned treaties leaves no reasonable doubt that the intent of the state parties is to bar the use of MFN provisions to incorporate other substantive obligations in force with third states. It is also clear in all three treaties that measures by the States, such as licenses and subsidies, which inappropriately distinguish between nationals of third states could still constitute a breach of MFN clauses.

The role left for MFN clauses under these agreements is now comparable to that of National Treatment (NT) clauses, which look at disparate treatment of state measures between the foreign protected investor and nationals, only with an international comparator instead. In practice, where a state party’s conduct or measures result in favoring a national of a third state and such treatment is not accorded to a national of the state party, a claim under MFN would arise.

An example from a claim of NT breach may be illustrative to the role left for MFN. In the case of Cargill v. Mexico, the claimant brought a NT claim based on the fact that Mexico imposed a tax on Cargill’s products for containing a certain ingredient, but not to other products produced locally with a different ingredient. In addition, the claimant also challenged as a breach of NT the failure by Mexico to issue a permit, the lack of which benefitted local producers.[15] The tribunal concluded here that Mexico did violate the NT provision in NAFTA.[16] Factual scenarios such as the one in Cargill, but with a comparator that is an investor from a third state rather than a local investor, would give rise to a violation of MFN clauses in the treaties under analysis. The focus will now only be on state conduct, and not on state assumption of obligations through international agreements. Only those disparate treatments in state practice between different third state investors without reasonable justification will give rise to an MFN claim under these agreements.

Conclusions

While the E.U. and the U.K. have severely injured MFN clauses, they have left them alive. Under these treaties, the scope of protection provided by MFN clauses is limited to state conduct. In these agreements MFN clauses continue to provide protection to investors, but they no longer augment the rights of the investor through the incorporation of provisions in other treaties.

Each of these agreements has now become a fragmented body of law; one that is not altered as a result of obligations in force in other agreements. Only time will tell if these limitations will become the trend of future agreements, or if MFN clauses will still be drafted in a manner so as to permit the incorporation of obligations in force in other agreements.

[1] See, e.g., U.S. Model Bilateral Investment Treaty art. 4, 2012.

[2] Chin Leng Lim, Jean Ho & Martins Paparinskis, International Investment Law and Arbitration 309 (2018).

[3] EDF Int’l S.A. v. Argentine Republic, ICSID Case No. ARB/03/23, Decision on Annulment, ¶238 (Feb. 5, 2016) (concluding that the use of MFN clauses to take advantage of another provision of substantive treatment has a relevant degree of unanimity amongst tribunals).

[4] Trade, investment agreement and technical cooperation between the Swiss Confederation and the Republic of Niger, Niger-Switz., art. 2, Mar. 28, 1962.

[5] Accord de commerce, de protection des investissements et de coopération technique entre la Confédération Suisse et la République de Côte d’Ivoire [Agreement on commerce, protection of investments and technical cooperation between the Swiss Confederation and the Republic of Côte d’Ivoire], Côt.-Swi., art. 2 Jun. 26 1962.

[6] Traite entre la Republique federale d’Allemagne et la Republique Tunisienne relatif a l’ encouragement et a la protection mutuelle des investissements de capitaux [Treaty between the Federal Republic of German and the Republic of Tunisia on the reciprocal encouragement and protection of investments], Ger.-Tun., Protocol, Dec. 20, 1963.

[7] Mafezzini v. Spain, ICSID Case No ARB/97/7, Decision on Objections to Jurisdiction, ¶¶54-56.

[8] Agreement between Japan and the Republic of Peru for the promotion, protection and liberalization of investment, Jap.-Per., art. 4(2), Nov. 21, 2008.

[9] Agreement among the government of Japan, the government of the Republic of Korea and the government of the People´s Republic of China for the promotion, facilitation and protection of investment, Chi.-Jap.-Kor., art. 4(3), May 13, 2012.

[10] Agreement between the government of the Republic of India and the government of the United Arab Emirates on the promotion and protection of investments, Ind.-UAE, art. 5(3), Dec. 12,2013.

[11] EDF Int’l S.A. v. Argentine Republic, ICSID Case No. ARB/03/23, Decision on Annulment, ¶238 (Feb. 5, 2016).

[12] Trade and cooperation agreement between the European Union and the European Atomic Energy Community, of the one part, and the United Kingdom of Great Britain and Northern Ireland, of the other part, E.U.-U.K., art. SERVIN.2.4(5), Dec. 30,2020.

[13] Agreement between the United Kingdom of Great Britain and Northern Ireland and Japan for a Comprehensive Economic Partnership, Jap.-U.K., art. 8.9(5), Oct. 23, 2020 .

[14] Investment Protection Agreement between the European Union and its Member States, of the one part, and the Socialist Republic of Viet Nam of the other part, E.U.-Vie., art. 2.4(5), Jun. 30, 2019.

[15] Cargill v. Mexico, ICSID Case No. ARB(AF)/05/2, Award, ¶185 (Sept. 18, 2009).

[16] Id., ¶223.

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