Most Favoured Nation Treatment -- Substantive Protection in Investment Law

17 Pages Posted: 8 Apr 2015 Last revised: 26 May 2015

See all articles by David D. Caron

David D. Caron

King's College London – The Dickson Poon School of Law (deceased); University of California, Berkeley, School of Law (deceased)

Esme Shirlow

ANU College of Law

Date Written: April 6, 2015

Abstract

Most investment treaties contain most favoured nation (‘MFN’) clauses. These clauses vary in their precise wording but in general state that the treatment or rights enjoyed by investors covered by a particular investment treaty shall not be less than that ‘accorded to investments made by investors of any third State’. MFN clauses reflect principles of equality and non-discrimination. As the tribunal in Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan noted, for example, MFN clauses ‘provide a level playing field…between foreign investors from different countries’. If one reflects on the difficulties likely to arise in the negotiation of an investment treaty, then one can appreciate why such clauses are widespread. At the point of negotiation, the inclusion of an MFN clause arguably reduces the burden on the negotiating parties to review their treaty partner’s prior treaty practice. This is because, generally speaking, any better protections or concessions afforded by the treaty partner in existing treaties of the same class would be incorporated by reference through the MFN clause. MFN clauses arguably also operate to ensure that States will not be disadvantaged by the later conclusion by their treaty partner of treaties conferring more favourable treatment on investors of other countries. MFN clauses might also reduce the necessity for States to renegotiate older treaties if their policy toward the protection of foreign investment evolves to encompass more favourable standards of protection of a type encompassed by their earlier treaties.

As a substantive protection obligation, an MFN clause in a ‘base treaty’ operates by reference to any more favourable standards of protection accorded by the host State to investors of third party nationality – whether that treatment is accorded in practice (‘comparator practice’), or is stipulated in a provision of a treaty between the host State and a third State (a ‘comparator treaty’). The invocation of substantive MFN treatment is usually made by reference to a comparator treaty rather than comparator practice, though even the reference to a comparator treaty has various permutations.

The notion that MFN clauses could operate to incorporate stronger substantive protection standards is overwhelmingly accepted in principle, but successful invocation of the MFN provision to reach a stronger substantive protection obligation is extremely rare in practice. Whilst MFN clauses do have the potential to act as a ‘potent ratchet’ for substantive protections, therefore, it is important to recognise how such clauses have been invoked as well as the manner in which investment treaties, as interpreted by tribunals, in practice provide a scope of substantive MFN protection that is narrower than generally assumed to be the case.

Suggested Citation

Caron, David D. and Shirlow, Esme, Most Favoured Nation Treatment -- Substantive Protection in Investment Law (April 6, 2015). King's College London Law School Research Paper No. 2015-23, Available at SSRN: https://ssrn.com/abstract=2590557 or http://dx.doi.org/10.2139/ssrn.2590557

David D. Caron (Contact Author)

King's College London – The Dickson Poon School of Law (deceased)

University of California, Berkeley, School of Law (deceased)

Esme Shirlow

ANU College of Law ( email )

Canberra, Australian Capital Territory 0200
Australia

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