True Purpose of the Most-Favoured-Nation Clause in International Arbitration: Substantive Guarantee or Only a Cause of Action?

Harmonisation of Serbian and Hungarian Law with the European Union Law, vol. 3, University of Novi Sad Faculty of Law, 2015, 323-341, ISBN: 978-86-7774-153-2.

19 Pages Posted: 30 Jul 2015 Last revised: 9 Jan 2020

See all articles by Sanja Djajic

Sanja Djajic

University of Novi Sad - Faculty of Law

Date Written: July 29, 2015

Abstract

There are very few international law standards which have such a long standing as the Most-Favoured-Nation Clause (MFN). This fundamental norm of international treaty law was left out from the Vienna Convention on the Law of Treaties, but was developed as a separate topic of the UN International Law Commission and extensively used in the area of economic and trade liberalization. MFN has been the cornerstone of the GATT/WTO and consistently present in bilateral investment treaties (BITs). Given that there are around 2,800 BITs it is certain that MFN has been markedly present in international treaty law.

On its face MFN clause provides a very powerful protection by equalizing the beneficiary of the MFN clause with all other persons (entities, States) with respect to rights and benefits. As the practice has shown its relevance is both substantive and procedural.

However, this paper will not dwell much on procedural and substantive contents of the MFN. It will focus on the way the MFN is being employed as a part of litigation strategy in international proceedings. An overview of cases tends to show that MFN clause is used rather as a cause of action than as a tool for ensuring substantive protection before the dispute arises. In other words, there are few, if any, examples, which show that applicants in international investment arbitration do not invoke MFN clause while trying to ensure the most favored nation treatment during the performance of their investment, but it is rather a belated MFN argument raised by the investor before the investment tribunal for the first time. In other words, investors rarely use the clause to have what would seem to be its primary purpose: substantive protection. If this argument is raised for the first time in the proceeding, this means that MFN clause is perceived as a cause of action rather than as a genuine substantive guarantee.

This approach of applicants and arbitral tribunals is criticized by the author from both deontological and normative perspective. Very simple testing of certain MFN awards can demonstrate their fallacy: retroactive construct of MFN clause makes the duty impossible to perform. Given a very genuine concept of the MFN and its effect, it is absurd to assume its automatic application. The main argument of the author is that the way the MFN is used as a cause of action demonstrates that it was never the intention of the applicants to use this clause as a ground for substantive guarantee but only for litigation strategy.

Keywords: Most Favoured Nation Clause, MFN treatment, investment arbitration, treaty interpretation

JEL Classification: K33

Suggested Citation

Djajic, Sanja, True Purpose of the Most-Favoured-Nation Clause in International Arbitration: Substantive Guarantee or Only a Cause of Action? (July 29, 2015). Harmonisation of Serbian and Hungarian Law with the European Union Law, vol. 3, University of Novi Sad Faculty of Law, 2015, 323-341, ISBN: 978-86-7774-153-2.. Available at SSRN: https://ssrn.com/abstract=2637565 or http://dx.doi.org/10.2139/ssrn.2637565

Sanja Djajic (Contact Author)

University of Novi Sad - Faculty of Law ( email )

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