The Case for Removing the Fair and Equitable Treatment Standard from NAFTA
CIGI Paper No. 128
32 Pages Posted: 5 Aug 2017
Date Written: April 27, 2017
The fair and equitable treatment (FET) standard has long been considered an indispensable part of international investment protection agreements and is often invoked in investor-state arbitration (ISA). Particularly after the North American Free Trade Agreement (NAFTA) came into effect in 1994, the standard went through a transformation from a little-known clause to being subject to ever expanding interpretations by arbitral tribunals. Although states have taken steps to rein in the use of the FET standard, these efforts have come undone in arbitral tribunals. The result of this situation has been some controversial awards in which both supporters and critics of ISA see a problematic development. Just as NAFTA propelled the FET standard to new heights, NAFTA parties can also send an important message to the arbitral community by removing it from this watershed agreement.
Removing the FET clause from NAFTA reconciles the text with the intent of the parties. This proposal is radical in the sense that it goes to the root of the problem regarding the interpretation of the FET clause. The main problem with the FET standard is that it lacks core meaning, leading tribunals to expand investment protection to levels never imagined by states. In the NAFTA context, the states parties, through the Free Trade Commission (FTC) established under NAFTA, issued a Note of Interpretation (the FTC note) to clarify what they meant by the FET clause, but arbitral tribunals have slowly eroded its meaning.
This paper argues that once the FTC limited the scope of the FET clause to no more than what customary international law required, it made this concept redundant and a source of conflicting interpretations. The FTC note was not enough to eliminate the confusion caused by the reference to the FET standard in NAFTA. The most important consequence of keeping the reference to the FET standard was the expansion, in application and interpretation, of the nebulous concept of legitimate expectations, which is not part of customary international law. Eliminating the reference to the FET standard in NAFTA should have no further consequence than giving full force to the FTC note and removing a source of confusion.
Keywords: investment law, investor-state arbitration, fair and equitable treatment, customary international law
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