Consentia on Commerce and Economics

THE MOST FAVOURED NATION PRINCIPLE

Abstract:-

With the rise and increase of globalization, trade has become one of the determining factors for assessing relations between nations. This trade is called the International Trade Law. One of the core areas of this field is the International Investment law. An MFN clause in an investment treaty, which is the usual way of carrying out trade transactions between nations, is an obligation put on each state, who is signatory to a treaty, that neither of the states shall give investors from any third state any favorable treatment than the other states who have been signatories to a treaty. This article is an attempt to explain the relevance and significance of a MFN clause in the scenario of International Investment Law and the exceptions to it.

INTRODUCTION:-

One principal aspect of globalization is the emergence of a global economy in which goods, services and capital progressively cast off territorial ties and circulates increasingly freely across borders. As a corollary, economic activities in a global market bring about the need for legal regulation beyond national borders in order to structure and protect cross-border economic exchange and enhance cooperation. This accounts for the emergence of a growing body of international economic law that encompasses international trade law, international monetary law and international investment law and thereby provides a legal backbone for the global economy.[1] In such a scenario, it is very crucial to protect these international investments to facilitate free trade leading to economic growth and development. The international protection of investments is concerned with the safeguarding of foreign investments against interference by the host state.[2] The nature and special risks involved in the international investments which involves long duration and capital makes it distinct than the ordinary trade laws. Since, we know that the foreign investor starts falling under the regulations of the host country, once he has done the necessary investments, it is very important to provide him with remedies as a means of protection. But at the same time, the host country’s interests are also to be protected. So, here there has to be a balance as to how protection and justified protection of the foreign investor and at the same time, not interfering in the host country’s sovereignty in employing legitimate regulations.

The desire to attract foreign investments had led most countries to frame policies by creating a favourable investment climate. And one of the main ingredients of these policies is the remedy available to the foreign investor. These remedies include both the host country’s internal remedies and international legal guarantees in the form of BITs and multi-lateral investment treaties.

The Most-Favoured-Nation (MFN) treatment is a standard of protection (dealt in subsequent Chapters) is a core element of modern BIT’s.[3] Like many standards of investment protection offered under BIT’s, it is designed to avoid discrimination.[4] We can say that MFN treatment standard is a typical substantive commitment of modern international economic law.[5]

An MFN clause in an investment treaty is basically an obligation put on each state who is signatory to a treaty that neither of the states shall give investors from any third state any favorable treatment than the other states who have been signatories to a treaty. If more favorable treatment is provided to investors from a third state, an obligation arises to provide equivalent treatment to those investors benefiting from the MFN clause.[6] The said clause ensures equal treatment and also aims to curtail down disputes arising from issues concerning Foreign Investment. It is a means of curbing any sort of discrimination or prejudice in any given market.

The modern day trade is synchronized by the International Investment law, which is characterized by fragmentation. This fragmentation is mainly because of the diversity in the terms and conditions of the trade agreements or treaties between different countries.  And there is no unified multi-lateral treaty or any customary international law. Therefore, States incorporate a clause which strives to achieve uniformity- the MFN clause.[7]

 

SOURCES OF INTERNATIONAL INVESTMENT LAW:-

The major sources of international investment law are:-

ü  Multilateral Treaties:-

The first efforts to create multilateral treaties for investments dates back to 1950s-60s. Between 1995-1998, the Organization for Economic Co-operation and Development (OECD) launched a new initiative to establish a ‘Multilateral Agreement on Investment’ (MAI).  There were several other attempts to create multilateral investment treaties which all failed. Even on the regional level, there was North American Free Trade Agreement (NAFTA) in 1992.[8] However, most of the important things covered in these treaties are covered by the BITs.

ü  Bi-lateral Investment Treaties:-

The most important source in contemporary International Investment Law is the BITs. Today, international investment law is enshrined in over 2500 bilateral investment treaties.[9] BITs are designed to provide guarantees for foreign investors from the respective countries. They typically contain certain definitions like ‘investors’ and ‘investments’. It also contains certain other guarantees in the form of fair and equitable treatment (FET), national treatment principle, guarantee of full protection and security and the principle which is the scope of our discussion, i.e., the Most-Favoured Nation Principle, etc.

ü  Customary International Law:-

Customary international law plays an important role in investment law. It sets international minimum standards for the treatment of aliens which is relevant in a number of contexts including denial of justice. State responsibility is another important area. Nationality of individuals and corporations are important in determining applicability of treaties. [10]

ü  Investors and Investments:-

Investors may be both individuals and companies. An individual’s nationality is determined by the law of the country whose nationality is claimed while the nationality of a corporation is determined by the place of its incorporation. Investment usually involves the use of capital, technology and managerial skills and intellectual property.

MOST FAVOURED NATION TREATMENT: A STANDARD OF PROTECTION:-

The MFN treatment standard is a core element of modern Bi-lateral Investment Treaties (BITs)[11]. An MFN Clause is contained in every BIT. It is also reflected in Art 10(3) and (7) Energy Charter Treaty and in Art. 1103 NAFTA.[12] Like many standards of investment protection offered under BIT’s, it is designed to avoid discrimination.[13] As already mentioned above, the objective of a MFN clause is simply put to provide a mechanism to ensure that the relevant parties do not treat each other less favourable than the treatment offer by them to third parties. As soon as the State confers a relevant benefit, it is automatically extended to the State in whose favor the MFN Clause operates.

An MFN Clause, generally, applies to all matters falling within the scope of the treaty containing the Clause. However, the exact scope of the MFN Clause depends upon the wordings and the precise right granted to the investor.

The MFN treatment provision has the following main legal features[14]:

  • It is a treaty-based obligation that must be contained in a specific treaty.
  • It requires a comparison between the treatments afforded to two foreign investors in like circumstances. It is therefore, a relative standard and must be applied to similar objective situations.
  • An MFN clause is governed by the ejusdem generis principle, in that it may only apply to issues belonging to the same subject matter or the same category of subjects to which the clause relates.
  • The MFN treatment operates without prejudice to the freedom of contract and thus, States have no obligation under the MFN treatment clause to grant special privileges or incentives granted through a contract to an individual investor to other foreign investors.
  • In order to establish a violation of MFN treatment, a less favourable treatment must be found, based on or originating from the nationality of the foreign investor.

There are generally four types of MFN clauses that appear in bilateral investment treaties[15]:-

(1)   Clauses that explicitly affirm they are intended to apply to dispute settlement provisions.

(2)   Broad Clauses that refer generally to “all matters,” “all rights,” or “treatment,” without express mention of dispute settlement provisions.

(3)   Narrow Clauses containing non-exhaustive lists that make no specific reference to dispute settlement provisions.

(4)   Clauses expressly prohibiting application to dispute settlement provisions.

There are any numbers of cases that have come up before International Centre for Settlement of Investment Disputes (ICSID) but out of them the most landmark is Maffezini v. Kingdom of Spain[16]. The case stood up as a result of a treatment offered to Mr. Maffezini from Spanish entities with regard to the production and distribution of chemical products. And the Spanish government argued that he hasn’t exhausted the local remedies. To which, Mr. Maffezini argued that the MFN clause in the Argentine-Spain BIT would allow him to invoke Spain’s acceptance of ICSID arbitration contained in the Chile-Spain BIT and that none of the exceptions from MFN in the Argentine-Spain BIT applied to the dispute settlement provisions at issue in the case. The MFN Clause ‘the claimant had the right to import the more favourable jurisdictional provisions of the 1991 Chile-Spain Agreement and, as a result, to resort to international arbitration without being obliged to submit its dispute to Spanish courts for a period of eighteen months beforehand.’ The judgement was in Mr. Maffezini’s favour and it was held that MFN Clause can also extend to procedural and jurisdictional aspects.

The other side of the argument is that MFN clauses relate to the substantial protections afforded to investors and investments and that, therefore, their reach should not extend to procedural issues such as dispute resolution.[17] In Salini Costruttori and Italstrade v. Jordan-Argentina (2004)[18], where under the Jordan-Italy BIT, there was an alleged non performance of Jordan’s obligations under a dam construction project. There was a more advantageous provision in Jordon-US BIT, which provided for approach to the ICSID whereas in the Jordon-Italy BIT, it was said contractual disputes were governed by the dispute settlement provisions of the contract. The ICSID held jurisdictional issues in favor of Salini but also held that as far as the dispute settlement issue is concerned, it cannot avail this.

EXCEPTIONS:-

The GATT provides certain exceptions to the Most- Favored Nation obligation which can be categorized under the following heads:-

  • Regional Integration (GATT Article XXIV):

GATT Article XXIV provides that regional integration may be allowed as an exception to the MFN rule only if the following conditions are met.

(i)                  Tariffs and other barriers to trade must be eliminated with respect to substantially all trade within the region.

(ii)                The tariffs and other barriers to trade applied to outside countries must not be higher or more restrictive than they were prior to establishment of regional integration.

However, some have criticized this provision as being ambiguous which has allowed some very loose preferential arrangements to exist and thus it has become a major loophole.[19]

  • Generalized System of Preferences (GSP):-

The GSP is a system that grants products originating in developing countries lower tariff rates than those normally enjoyed under Most-Favoured-Nation status as a special measure granted to developing countries in order to increase their export earnings and promote their development.

The GSP has the following characteristics.

(i)                 Preferential tariffs may be applied not only to countries with special historical and political relationships, but to developing countries more generally.

(ii)               The beneficiaries are limited to developing countries.

(iii)             It is a benefit unilaterally granted by developed countries to developing countries.

  • Non-Application of Multilateral Trade Agreements between Particular Member

States (WTO Article XIII):-

This applies when a country does not want to enter into relations with a particular country due to political or other reasons. In the case of non-application, benefits enjoyed by other Members are not provided to the country of non-application, which leads to results that are contrary to the most-favored-nation principle but are consistent with the ground realities of geopolitics.

  • Other Exceptions:-

Other exceptions relate to various provisions of GATT such as Article XX regarding General Exceptions for measures necessary to protect public morals, life and health, etc., and Article XXI regarding Security Exceptions. Under WTO Article IX: 3, countries may, with the agreement of other contracting parties, waive their obligations under the agreement.

CONCLUSION:-

International Investment is one of the most vibrant areas of International Law today. With the burst of economic activities in the modern day, there are numerous issues faced by both the investors, i.e., from the capital exporting country as well as the host capital importing country. The contribution of the international investment tribunal is quite significant. The standards of protection have also improved and form a basic pillar of any investment treaty.

The MFN clause, being one of the most important forms of protection, must be used to its proper and full potential, both by tribunals and by treaty drafters. To remove uncertainties and ambiguity, States should clarify the scope of the MFN clauses contained in their BITs. They may elucidate their pose by additional documents. In the future, States may choose to expressly outline the ambit of the MFN clause in the treaty itself. To continue to encourage and increase the flow of foreign direct investment, however, continued favorable treatment towards investors is absolutely necessary. The MFN clause should therefore be treated as a valuable tool that ensures that investors receive the highest available level of treatment. An ideal MFN clause is when it provides investors with the protection they want, and States with the flexibility they need[20].

Article By: Ishani Acharya[1] and Rahul Das[2]


[1] Student, BBA LLB (Business Law Hons.), 4th year, School of Law, KIIT University, Bhubaneswar.

[2] Student, BA LLB (Business Law Hons.), 5th year, School of Law, KIIT University, Bhubaneswar.


[1] Stephan W. Schill, Mulitilateralizing Investment Treaties through Most-Favored-Nation Clauses, 27 Berkeley J. Int’l L, 497, 2009.

[2] Schreuer, Christoph, Investments, International Protection; page 1

[3] Dolzer, Rudolf; Schreuer, Christoph; 2008; Principles of International Investment Law; page 186.

[4] Such as the National Treatment (NT) standard and the Fair and Equitable Treatment (FET) standard.

[5]Sabanogullari, Levent, TDM 3 (2011), Intersections: Dissemblance or Convergence between International Trade and Investment Law

[6] Stephan W. Schill, Multilateralizing Investment Treaties Through Most-Favored-Nation Clauses, 27 Berkeley J. Int’l L. 496, 502 (2009)

[7] Tony Cole, Boundaries of Most Favored Nation Treatment, 33Mich. J. Int’l L. 538 (2012)

[8] Schreuer, Christoph, Investments, International Protection; page 3

[9] Stephan W. Schill, 2009, BERKELEY JOURNAL OF INTERNATIONAL LAW;  Mulitilateralizing Investment Treaties through Most-Favored-Nation Clauses, 27; 498

[10] Schreuer, Christoph, Investments, International Protection; page 4

[11] Schreuer, Christoph; 2008; Principles of International Investment Law; page 186.

[13] Such as the National Treatment and the Fair and Equitable Treatment principle.

[14] United Nations Conference on Trade and Development; 2010; Most-Favoured-Nation Treatment; UNCTAD Series on Issues in International Investment Agreements II; page 13-14.

[15] Stephanie L. Parker, 2012, American University Washington College of Law, A BIT at a Time: The Proper Extension of the MFN Clause to Dispute Settlement Provisions in Bilateral Investment Treaties, vol 2.

[16] Emilio Agustin Maffezini v. Kingdom of Spain (ICSID No. Apr/97/7), Decision on Jurisdiction of 25 January 2000 and Award of the Tribunal of 13 November 2000. (www.worldbank.org/icsid/cases)

[18] Construttori S.p.A. and Italstrade S.p.A. v. the Hashemite Kingdom of Jordan, (ICSID Case No. ARB/02/13), available at http://www.worldbank.org/icsid/cases/awards.htm

[19] K. Dam, Regional Economic Agreements and General Agreement on Tariff and Trade, Legacy of

Misconception, (1963), University of Chicago Law Review 615

[20] Stephanie L. Parker, 2012, American University Washington College of Law, A BIT at a Time: The Proper Extension of the MFN Clause to Dispute Settlement Provisions in Bilateral Investment Treaties, vol 2.

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