The Curious Case of MFN Clauses and Dispute Settlement Provisions in Investment Arbitration

Keywords – Most-favoured-nation, Dispute Settlement Provisions, base treaty, investor-State arbitration

Introduction

The most-favoured-nation (‘MFN’) clauses have appeared in international agreements since the twelfth century. [1] The MFN clause is a treaty provision whereby a State undertakes an obligation towards another State to accord most-favoured-nation treatment in an agreed sphere of relations. [2] In an investment relationship, MFN treatment implies a promise by the granting State to the beneficiary State to accord its investors and/or investments a treatment that is not less favourable than granted to those of any third country. [3] The essence is “to provide a level playing field between (…) foreign investors from different countries.” [4] 

For years, international courts, tribunals, and practitioners agreed that MFN clauses are applicable to substantive treatment standards (like ‘fair and equitable treatment’, ‘expropriation’, ‘full protection and security’, etc.). [5] At the dawn of the 21st century, one international tribunal [6] took it further and held that MFN clauses were also applicable to Dispute Settlement Provisions (“DSPs”) in investment treaties. The landscape of investment arbitration was changed forever.

In this article, we examine the jurisprudence on the applicability of MFN clauses to DSPs, by segregating it into the following two categories: 

a) the first category, where the DSP in the base treaty has a mechanism for investor-State arbitration, and 

b) the second category, where the base treaty contains no mechanism whatsoever for investor-State arbitration.

The first category: The DSP offers investor-State arbitration

In investment arbitration practice, investors began invoking the MFN clause in a treaty (i.e. the base treaty) to import into the DSP of the base treaty more-favourable procedural conditions from the DSP of another treaty, to which the host State was a party (i.e. the comparator treaty). The motive was to overcome the (otherwise) onerous conditions contained in the DSP of the base treaty since those conditions were pre-requisite to the host State’s consent to arbitrate and the investor could not (or chose not to) satisfy them.

The decision in Maffezini v. Spain was the first time a party was permitted to rely upon an MFN clause to modify the jurisdictional requirements of the DSP. [7] In that case, the DSP of the base treaty (Argentina/Spain BIT) required an investor to litigate in domestic courts for 18 months prior to launching an international investment arbitration whereas no such requirement existed in the Chile/Spain BIT. Arguing that Argentinian investors deserved to be treated at parity with their Chilean counterparts, the investor invoked the MFN clause to bypass that requirement. The tribunal found merit in that argument and concluded that the DSP in the Chile/Spain BIT was more favourable to the protection of the “investor’s rights and interests”, and could be extended to the investor through the MFN clause. [8] This was the first time an investor’s protected rights and interests were read as inclusive of his procedural rights under the DSP.

Notably, the tribunal added the following caveat: the operation of an MFN clause should be limited by “public policy considerations” that may be present in the DSP in the form of (a) a provision for the exhaustion of local remedies, (b) a fork-in-the-road provision, or (c) a provision for a specific arbitration forum (like the ICSID). [9] Interestingly, despite its own caveat, the Maffezini tribunal bypassed the ‘exhaustion of local remedies’ consideration. Many subsequent tribunals consistently adopted the Maffezini view to affirm that an MFN clause applies to the DSP. [10] However, this new hope for investors was short-lived as the empire was ready to strike back.

The first “concerns (…) with regard to the solution adopted in the Maffezini case” were expressed four years later by the Salini v. Jordan tribunal. [11] There, the tribunal felt that the MFN clause in the base treaty (Italy/Jordan BIT) did “not include any provision extending its scope of application to dispute settlement.” [12] Later, in Plama v. Bulgaria, [13] the tribunal watered-down Maffezini with the following observation: “an MFN provision in a basic treaty does not incorporate by reference dispute settlement provisions in whole or in part set forth in another treaty, unless the MFN provision in the basic treaty leaves no doubt that the Contracting Parties intended to incorporate them.” [14] The tribunal found that this was not the case with the MFN clause in the relevant base treaty (Bulgaria/Cyprus BIT). The tribunal further expressed its inability to find any basis for the “public policy considerations” test, which it felt was “made up” by the Maffezini tribunal. [15] The Plama tribunal’s departure from the Maffezini approach set a new precedent that found favour with various other investment tribunals. [16]

The position, as it stands, is that there is no settled answer as to which approach is correct. Scholars and practitioners are equally divided when it comes to applying MFN clauses to DSPs [17] and a recent tribunal has acknowledged this “difference of opinion”. [18] The wording of an MFN clause seems to play a decisive role with the tribunals in determining the effect of the MFN clause on the DSP. [19] If it is worded in a way to either expressly exclude its application to the DSP [20] or expressly include it, [21] then, the tribunals seem more confident in giving “ordinary meaning” to its language. [22] But when the MFN clause is not as expressly worded to reflect the true intention of the treaty parties, the debate is far from settled.

The second category: The Treaty offers no investor-State dispute resolution mechanism

Given that consent is the cornerstone of jurisdiction of international courts and tribunals, [23] investors are seen using the MFN clause to import consent to arbitrate into the base treaty to establish jurisdiction ratione voluntatis of an investment tribunal. Take the example of Garanti Koza v. Turkmenistan. There, the DSP in the base treaty (UK/Turkmenistan BIT) contained an investor-State arbitration mechanism, but it limited the choice of forum to what the investor and the host-State mutually agreed on. Failing an agreement, the default choice was an ad-hoc arbitration under the UNCITRAL Rules. The host-State argued that it did not agree to submit the dispute to the ICSID. [24] The investor invoked the MFN clause to import more-favourable conditions from the Turkmenistan/Switzerland BIT where there was no requirement for any mutual agreement and one could choose between an ICSID or UNCITRAL arbitration. [25] The majority tribunal found that the DSP contained the “essential consent of the State (…) to resolve disputes with (…) investors by means of international arbitration”. [26] It saw “an unrestricted choice between ICSID Arbitration and UNCITRAL Arbitration” as a “treatment more favorable to the investor than the treatment provided by the base treaty” and allowed the investor to rely on the MFN clause. [27] In her dissenting opinion, Professor Boisson de Chazournes distanced herself from the majority and saw its view as one that would “bypass the requirement of consent to ICSID arbitration” [28] and “would involve a forum-shopping attitude (…) running against the fundamental principles of international adjudication.” [29] A similar situation has subsequently arisen before other tribunals. Some have held that the MFN clause cannot operate to affect the “forums chosen by the States Parties” [30] while others have opined that “the availability of a choice between different forms of arbitration is a more favorable treatment of investors than limiting them to only one form.” [31]

These cases demonstrate not only the growing divide in practice but also the expanding limits of the applicability of the MFN clause. Therefore, the following question becomes important: what would be the outcome if the base treaty has no investor-State arbitration mechanism whatsoever and equally, no consent to arbitrate investment disputes between an investor and the host-State?

In Doutremepuich v. Mauritius, the tribunal was convinced that there is no consent to arbitrate in the base treaty (France/Mauritius BIT) [32] but the question remained as follows: whether the MFN clause in the base treaty may be used to import the consent to arbitrate from the Finland/Mauritius BIT, which, in fact, had a DSP providing for investor-State arbitration. The tribunal answered in the negative. Interpreting the MFN clause, the tribunal found that its scope of application was limited to “les matieres regies par la presente Convention” [33] (i.e. to the matters governed by the base treaty) and investor-State arbitration was not one those matieres. [34] It further examined the ejusdem generis principle but held that there was no “substantial identity” between the subject-matters of the DSPs in the base treaty and the comparator treaty. [35] In conclusion, the tribunal dismissed the claim for lack of jurisdiction holding that “a situation in which the Basic Treaty lacks any consent to arbitrate investor-State disputes, (…) that consent to arbitrate could not be imported via the MFN clause from a third State treaty.” [36]

Conclusion

Over the years, investment arbitration has witnessed a wide array of ways in which investors invoke the MFN clause to modify the jurisdictional requirements of the DSP in a treaty. While there are fundamental differences amongst practitioners on whether that is even permissible, there are some who have crossed that point to, now, discuss the extent that it might be permissible. While the chances of consistency in jurisprudence look slim, there’s always room for hope in the galaxy.

ENDNOTES

[1] Raddi, Y., ‘The Application of the Most-Favoured-Nation Clause to the Dispute Settlement Provisions of Bilateral Investment Treaties: Domesticating the ‘Trojan Horse’’, (2007) EJIL Vol. 18 Issue No. 4, pp. 757-774 at p. 757.

[2] International Law Commission (ILC), ‘Draft Articles on most-favoured-nation clauses’, (1978) Yearbook of the International Law Commission, Vol. II, Part Two, art. 4.

  [3] ibid art. 5; Sharmin, T., ‘Should the MFN within investment treaties exclude dispute resolution? An evaluation of the Australian approach’, (2017) Australian Year Book of International Law, Vol. 35, pp. 123-155 at p. 123.

  [4] Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Award, 27 August 2009, ¶ 387.

  [5]  Douglas, Z., ‘The MFN Clause in Investment Arbitration: Treaty Interpretation Off the Rails’, (2011) Journal of International Dispute Settlement, Vol. 2 No.1, pp. 97-113 at p. 101; Banifatemi, Y., ‘The Emerging Jurisprudence of the Most-Favoured-Nation Treatment in Investment Arbitration’, in: Bjorklund, A., Laird, I., and Ripinsky, S., (eds.), ‘Investment Treaty Law: Current Issues III’ (British Institute of International and Comparative Law, 2009), pp. 241-273 at pp. 241-242; Sharmin, T., ‘Should the MFN within investment treaties exclude dispute resolution? An evaluation of the Australian approach’, (2017) Australian Yearbook of International Law, Vol. 35, pp. 123-155 at p. 124.

  [6] Emilio Agustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7, Decision on Objections to Jurisdiction, 25 January 2000.

  [7] Douglas, Z., (n 5), p. 101.

  [8] Emilio Agustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7, Decision on Objections to Jurisdiction, 25 January 2000, ¶56.

  [9]  ibid ¶¶62-63.

  [10] Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. Argentine Republic, ICSID Case No. ARB/09/1, Decision on Jurisdiction, 21 December 2012, ¶¶ 182, 186; HOCHTIEF Aktiengesellschaft v. Argentine Republic, ICSID Case No. ARB/07/31, Decision on Jurisdiction, 24 October 2011, Austrian Airlines v. The Slovak Republic, Ad-hoc arbitration, Final Award, 9 October 2009, ¶124; RosInvestCo UK Ltd. v. The Russian Federation, SCC Case No. 079/2005, Award on Jurisdiction, 1 October 2007,  ¶131-133;  ¶72; Suez, Sociedad General de Aguas de Barcelona, S.A. and Vivendi Universal, S.A. (formerly Aguas Argentinas, S.A., Suez, Sociedad General de Aguas de Barcelona, S.A. and Vivendi Universal, S.A.) v. Argentine Republic (II), ICSID Case No. ARB/03/19, Decision on Jurisdiction, 3 August 2006,  ¶55; Vladimir Berschader and Moïse Berschader v. Russian Federation, SCC Case No. 080/2004, Separate Opinion of Mr. Todd Weiler (Award), 21 April 2006, ¶ 17; Gas Natural SDG, S.A. v. Argentine Republic, ICSID Case No. ARB/03/10, Decision on Preliminary Questions on Jurisdiction, 17 June 2005,  ¶49; Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction, 3 August 2004, ¶103.

  [11] Salini Costruttori S.p.A. and Italstrade S.p.A. v. Hashemite Kingdom of Jordan, ICSID Case No. ARB/02/13, Decision on Jurisdiction, 29 November 2004, ¶115.

  [12] ibid ¶118.

  [13] Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005.

  [14] ibid ¶223. (Emphasis added.)

  [15] ibid ¶221.

  [16] ST-AD GmbH v. The Republic of Bulgaria, PCA Case No. 2011-06, Award on Jurisdiction, 18 July 2013, ¶396; Accession Mezzanine Capital L.P. and Danubius Kereskedöház Vagyonkezelö Zrt. v. Hungary, ICSID Case No. ARB/12/3, Decision on Respondent’s Objection under Arbitration Rule 41(5), 16 January 2013,  ¶74; Daimler Financial Services AG v. Argentine Republic, ICSID Case No. ARB/05/1, Award, 22 August 2012,  ¶¶234-236; ICS Inspection and Control Services Limited v. The Argentine Republic (I), PCA Case No. 2010-09, Award on Jurisdiction, 10 February 2012, ¶313; Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Competence, 19 June 2009, for. 220.; Renta4 v. The Russian Federation, SCC Case No. 24/2007, Award on Preliminary Objections, 20 March 2009,  ¶119; Wintershall Aktiengesellschaft v. Argentine Republic, ICSID Case No. ARB/04/14, Award, 8 December 2008, ¶167; Vladimir Berschader and Moïse Berschader v. Russian Federation, SCC Case No. 080/2004, Award, 21 April 2006,  ¶206.

  [17] For those in favour, see: Schill, S.W., ‘Allocating Adjudicatory Authority: Most-Favoured-Nation Clauses as a Basis of Jurisdiction – A Reply to Zachary Douglas’, (2011) Journal of International Dispute Settlement Vol. 2 Issue No. 2, pp. 353-371; Schill, S.W., ‘MFN Clauses as Bilateral Commitments to Multilateralism: A Reply to Simon Batifort and J. Benton Heath’, (2017) American Journal of International Law, Vol. 111 Issue No. 4, pp. 914-935. For those against, see: Douglas, Z., (n 5); Batifort, S. and Heath, J.B., ‘The New Debate on the Interpretation of MFN Clauses in Investment Treaties: Putting the Brakes on Multilateralization’, (2017) American Journal of International Law, Vol. 111 Issue No. 4, pp. 873-913.

  [18] CMC Africa Austral, LDA, CMC Muratori Cementisti CMC Di Ravenna SOC. Coop., and CMC Muratori Cementisti CMC Di Ravenna SOC. Coop. A.R.L. Maputo Branch and CMC Africa v. Republic of Mozambique, ICSID Case No. ARB/17/23, Award, 24 October 2019, ¶448.

  [19] Christian Doutremepuich and Antoine Doutremepuich vs. Republic of Mauritius, PCA Case No. 2018-37, Award on Jurisdiction, 23 August 2019, ¶197.

  [20] For example, Peru-Australia FTA, dated 12 February 2018, article 8.5(3); Australia-China FTA, dated 17 June 2015, article 9.4(2); Colombia-UK BIT, dated 17 March 2010, article III(2).

  [21] For example, Sierra Leone-UK BIT, dated 13 June 2000, article 3(3); Barbados-Venezuela BIT, dated 15 July 1994, article 3(3).

  [22] Vienna Convention on the Law of Treaties, article 31(1).

  [23] Dawood Rawat v. Republic of Mauritius, PCA Case No. 2016-20, Award on Jurisdiction, 6 April 2018,  ¶158; Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Final Award, 26 March 2008,  ¶46; Phoenix Action Ltd v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, ¶54; Link-Trading Joint Stock Company v. Department for Customs Control of the Republic of Moldova, Ad-hoc arbitration, Award on Jurisdiction, 16 February 2001, ¶8.1; Ethyl Corporation v. The Government of Canada, Ad-hoc arbitration, Award on Jurisdiction, 24 June 1998,  ¶59; East Timor (Portugal v. Australia), ICJ, Judgment, 30 June 1995,  ¶34; Monetary Gold Removed from Rome in 1943 (Italy v. France, United Kingdom of Great Britain and Northern Ireland and United States of America), ICJ, Judgment, 15 June 1954, p. 32.

  [24] Garanti Koza LLP v. Turkmenistan, ICSID Case No. ARB/11/20, Decision on the Objection to Jurisdiction for Lack of Consent, 3 July 2013, ¶ 42.

  [25] ibid ¶69.

  [26] ibid ¶75.

  [27] ibid ¶ 79. (Emphasis added.)

  [28] Garanti Koza LLP v. Turkmenistan, ICSID Case No. ARB/11/20, Dissenting Opinion by Laurence Boisson de Chazournes (Decision on the Objection to Jurisdiction for Lack of Consent), 3 July 2013, ¶62.

  [29] ibid ¶63.

  [30] Enrique and Jorge Heemsen v. the Bolivarian Republic of Venezuela, PCA Case No. 2017-18, Award on Jurisdiction, 29 October 2019, ¶408. See also: Venezuela US, S.R.L. v. Bolivarian Republic of Venezuela, PCA Case No. 2013-34, Dissenting Opinion of Marcelo G Kohen (Interim Award on Jurisdiction), 26 July 2016.

  [31] Krederi Ltd. v. Ukraine, ICSID Case No. ARB/14/17, Award, 2 July 2018, ¶336. See also: Venezuela US, S.R.L. v. Bolivarian Republic of Venezuela, PCA Case No. 2013-34, Interim Award on Jurisdiction, 26 July 2016, ¶128.

  [32] Doutremepuich (n 19), ¶194.

  [33] ibid ¶210.

  [34] ibid ¶214.

  [35] ibid ¶218.

  [36] ibid ¶223 and 229 citing A11Y LTD. v. Czech Republic, ICSID Case No. UNCT/15/1, Decision on Jurisdiction, 9 February 2017, ¶104; Venezuela US (n 31) ¶105; Daimler (n 16), ¶204.

Subhiksh Vasudev is an International Arbitration Lawyer currently based in Paris, and an alumnus of the Geneva LL.M. in International Dispute Settlement (MIDS ’18).

The views and opinions expressed in the article are those of the author(s) solely and do not reflect the of official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.