Most Favoured Nation Treatment -- Substantive Protection in Investment Law
17 Pages Posted: 8 Apr 2015 Last revised: 26 May 2015
Date Written: April 6, 2015
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.
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