The Evolution of Fair and Equitable Treatment in Investment Arbitration

Introduction

As a principle of international law, the principle of “Fair and Equitable Treatment (FET)” draws upon all relevant sources, including state practice and judicial precedents. It encompasses not only adherence to customary international law but also incorporates numerous principles found in various treaties. This standard serves as a key obligation of host countries to protect foreign direct investments by ensuring security and fairness for investors and their investments. While interpretations of this principle vary among governments, arbitrators, and scholars, its meaning often depends on the specific wording and context of the treaties in which it appears. Consequently, fair and equitable treatment remains a fundamental and evolving concept within the framework of international investment law.

FET has become a fundamental legal standard aimed at protecting foreign investments, complementing other protections such as those against expropriation. While its precise scope continues to develop, tribunals have sought to provide broad definitions of FET in several key cases. Despite some variation in interpretation, the standard remains central to investment arbitration.

I. Interpretation of the Fair and Equitable Treatment Standard: Approaches Based on Treaty Language and Typological Classifications

There exist multiple variations in the drafting of FET provisions; nevertheless, arbitral tribunals have consistently favored interpreting FET as an autonomous and independent standard under international investment treaties.

Accordingly, scholars and tribunals have identified three principal interpretative approaches to the FET standard, primarily based on the specific language employed in the relevant bilateral investment treaties (BITs).

The discourse surrounding the FET standard has primarily centered on the question of the appropriate benchmark against which the conduct of the host State should be assessed. Specifically, the debate concerns whether this assessment should be made:

● with reference to the minimum standard of treatment under customary international law;

● in light of general principles and all sources of international law; or

● as an autonomous and self-contained standard established independently within the treaty framework.

1. Fair and Equitable Treatment as a Part of the Minimum Standard Required by Customary International Law

The minimum standard of treatment consists of customary rules that host states agree to follow in order to protect foreign nationals.

The landmark case on this standard is Neer v. Mexico, decided by the USA-Mexico Claims Commission. In this case, although Mexico was not held liable for failing to prosecute the killers of a U.S. citizen, the Commission set an important principle: a state breaches international law only when its treatment of a foreigner is outrageous, done in bad faith, involves willful neglect, or is so egregious that it shocks the conscience of any reasonable person.

In Waste Management II v. Mexico, the tribunal clarified that under NAFTA Chapter 11, a host state breaches the minimum standard if its actions toward an investor are arbitrary, grossly unfair, discriminatory, or involve serious due process failures that affect judicial fairness. Breaches include denial of justice, lack of due process, and failure to exercise due diligence. Notably, NAFTA’s Article 1105 was interpreted as reflecting the customary international law minimum standard, guiding tribunals in their assessments.

2. Fair and Equitable Treatment as a Part of the Principles of International Law

Some investment treaties require fair and equitable treatment to be provided in accordance with general principles of international law. For example, the 1998 France-Mexico BIT suggests that this standard covers not only customary international law but also other sources of international law. Similarly, the 1999 USA-Bahrain BIT states that the host state must not offer treatment less favorable than required by international law. Such provisions imply that the protection for investors may go beyond the minimum standards set by international law.

3. Fair and Equitable Treatment as an Autonomous Standard

Arbitral tribunals often interpret fair and equitable treatment (FET) as an autonomous standard, separate from customary international law. This approach relies on the ordinary meaning of treaty terms and the general purpose of BITs, as guided by Article 31(1) of the 1969 Vienna Convention on the Law of Treaties, which requires interpretation in good faith and in light of the treaty’s object and purpose. In Azurix v. Argentina, the tribunal interpreted FET as requiring fair, balanced, and stable treatment that encourages investment.

Some BITs, such as the 2009 China–Switzerland BIT, define FET independently, without linking it to international law or the minimum standard of treatment. These autonomous clauses give tribunals broad discretion, potentially expanding the range of state actions considered violations of FET.

II. Core Components of the Fair and Equitable Treatment Standard in Investment Arbitration

FET has emerged as one of the most frequently invoked and conceptually complex standards in international investment arbitration. Initially understood in relation to the minimum standard of treatment under customary international law, arbitral tribunals have moved beyond this narrow conception and sought to identify substantive elements encompassed within the FET standard. Through an evolving body of case law, these elements have been interpreted as forming a set of interrelated obligations that define what constitutes fair and equitable conduct by host States. Scholars and tribunals have classified the core components of FET under five interrelated categories:

1. Obligation of vigilance and protection,

2. Due process, including non-denial of justice and lack of arbitrariness,

3. Transparency,

4. Good faith (which may overlap with transparency and arbitrariness),

5. Autonomous fairness elements (such as the protection of legitimate expectations.)

These categories reflect the multidimensional nature of FET and its function as a safeguard to ensure that foreign investors are treated justly, predictably, and in accordance with principles of international law and good governance. Below, each of these components is examined in light of arbitral jurisprudence.

1. Protection of Legitimate Expectations (Autonomous Fairness Element)

This component protects the investor’s legitimate expectations at the time of the investment, which arise from the existing legal and regulatory framework and any explicit commitments made by the host State. To be considered “legitimate,” expectations must be reasonable, made in good faith, and based on a stable and predictable legal environment.

In Tecmed v. Mexico, the tribunal affirmed the investor’s expectation of regulatory consistency and stated that the FET obligation reflects the bona fide principle of international law. The principle covers the investor’s expectation to be treated transparently and consistently, in a way a reasonable and impartial observer would consider fair. Referring to Mondev International LTD v. US, the tribunal held that bad faith is not necessary for a violation. This element highlights the autonomous nature of FET, interpreted according to Article 31 of the Vienna Convention.

2. Protection Against Arbitrary and Discriminatory Conduct (Including Good Faith)

FET prohibits arbitrary and discriminatory actions by the host State. Arbitrary conduct lacks a rational policy basis or is disproportionate, while discrimination involves unjustified unequal treatment of foreign investors compared to domestic or similarly situated ones.

In the Elettronica Sicula (ELSI) (US) v. Italy, the ICJ emphasized that arbitrariness in international law requires more than domestic unlawfulness; it involves a willful disregard of due process and a violation of the rule of law. Judge Schwebel, in his dissent, argued that even if local remedies exist, the failure to correct arbitrary acts breaches the treaty.

3. Transparency and Predictability

Transparency ensures that the legal and regulatory framework is clear, stable, accessible, and applied predictably. It allows investors to make informed decisions and operate with legal certainty.

In Metalclad Corporation v. United Mexican States, a local authority's refusal to permit a project despite federal approval and the lack of clear procedures were found to breach FET. Transparency also supports legitimate expectations and the principle of good faith.

4. Procedural Fairness and Due Process (Including Non-Denial of Justice)

FET requires fair procedures in administrative and judicial processes. This includes prior notice, the right to be heard, and access to an impartial tribunal.

In Waste Management II v. Mexico, serious procedural flaws and the lack of effective legal remedies led to a finding of FET breach. Arbitrary or grossly unfair conduct that undermines judicial integrity violates this standard.

5. Obligation of Vigilance and Protection (Linked with Full Protection and Security)

The host State must take reasonable measures to protect investments from harm. This duty goes beyond physical security and includes ensuring that institutions function effectively to safeguard the investment.

In Asian Agricultural Products Ltd. (AAPL) v. Republic of Sri Lanka, the tribunal held the State responsible for not adequately protecting a factory during civil unrest. While absolute protection is not required, the State must exercise due diligence. This obligation is both part of FET and linked to the “full protection and security” standard.

Conclusion

The principle of Fair and Equitable Treatment (FET) remains a cornerstone of international investment arbitration, balancing the interests of foreign investors with the sovereign rights of host states. While its interpretation varies from aligning with the minimum standard of customary international law to serving as an autonomous treaty obligation the standard continues to evolve alongside changing investment landscapes and legal doctrines. As tribunals refine their approach to elements such as investors’ legitimate expectations, transparency, and due process, FET contributes significantly to the predictability and stability necessary for fostering global investment. However, the ongoing debates and differing treaty formulations highlight the complexity and dynamism inherent in applying FET, calling for continued scholarly attention and careful treaty drafting. Ultimately, understanding FET’s multifaceted nature is essential for both investors seeking protection and states aiming to regulate in the public interest without deterring investment.

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