MFN Treatment:

principle and case study

 What is MFN treatment?
Example: MAI: similar to NAFTA
“Each Contracting Party shall accord to
investors of another Contracting Party and to
their investments, treatment no less favorable
than the treatment it accords [in like
circumstances] to investors of any other
Contracting Party or of a non-Contracting Party,
and to the investments of investors of any other
Contracting Party or of a non-Contracting Party,
with respect to the establishment, acquisition,
expansion, operation, management,
maintenance, use, enjoyment, and sale or other
disposition of investments.”
 Purpose
-- a traditional standard
• equality of competitive opportunities
-- Foreign investors seek sufficient assurance that
there will not be adverse discrimination which
puts them at a competitive disadvantage.
-- host state tries to ensure that foreign investors
can enjoy in the host country equal legal
treatment of the investors from any third country.
 The “free rider” issue
• multiplier effect of MFN
-- the MFN standard obliges a contracting
party to extend to its treaty partners any
benefits that it grants to any other country
in any other/past/future agreement dealing
with investment.
-- China-US BIT: pre-establishment NT,
could be extended to the investors from
other countries that have BITs with China.
eg. China-Canada BIT, Pre-establishment
MFN clause.
• The treaty-shopping issue
 Exceptions to MFN treatment
• MFN treatment is a general principle.
• Limitations to the “free rider” effect:
-- traditional exceptions
-- General exceptions to the IIAs
-- new trend to the exceptions in the recent
years
 Traditional Exceptions
Example: China-German BIT
•The provisions of Paragraphs 1 to 3 (NT and
MFN) of this Article shall not be construed so as to
oblige one Contracting Party to extend to the
investors of the other Contracting Party the benefit
of any treatment, preference or privilege by virtue
of 
(a) any membership or association
with any existing or future customs
union, free trade zone, economic
union, common market;
(b) any double taxation agreement
or other agreement regarding
matters of taxation.
• Reciprocal subject-specific exceptions
(Why?)
-- regional economic integration organization
(REIO) (EU, AU)
-- Regional trade arrangements (RTAs) &
(FTAs)
-- customs union
-- Tax agreements
 General exceptions to IIAs

-- Public order/health/morals
-- essential national security interests
 new trends to exclude
• Dispute settlement: procedural treatment
• To be further elaborated through cases
 Application of MFN treatment
• applies to pre- and/or post-establishment
• “Each Contracting Party shall accord to investors of
another Contracting Party and to their investments,
treatment no less favorable than the treatment it accords
[in like circumstances] to investors of any other
Contracting Party or of a non-Contracting Party, and to
the investments of investors of any other Contracting
Party or of a non-Contracting Party, with respect to the
establishment, acquisition, expansion, operation,
management, maintenance, use, enjoyment, and sale or
other disposition of investments.”
• Applies only to substantive rules,
sometimes and procedural rules (dispute
settlement mechanism) (treaty
interpretation)
• Debate: Whether MFN should apply to
procedural articles? (revert to MFN
articles) (look at some cases)
 Plama v. Bulgaria
(ICSID Case No. ARB/ 03/ 24) (2002-2005-2008)

MFN does not apply to procedural articles.

(Student presentation)
• Cyprus investor v Bulgaria
• invoked the ICSID arbitration provisions of the
Energy Charter Treaty ("ECT") and the MFN
provision of the 1987 Bulgaria-Cyprus BIT (final
result: Tribunal has no jurisdiction according to
ECT and ICSID Convention)
• The MFN provision in Article 3 of the Bulgaria-
Cyprus BIT:
1. Each Contracting Party shall apply to the
investments in its territory by investors of the other
Contracting Party a treatment which is not less
favourable than that accorded to investments by
investors of third states.
2. This treatment shall not be applied to the
privileges which either Contracting Party accords
to investors from third countries in virtue of their
participation in economic communities and unions,
a customs union or a free trade area. (exception)
• Claimant:
- Though the MFN clause in the Bulgaria-
Cyprus BIT does not say it applies to
dispute settlement, MFN clause must be
construed as extending to more favorable
dispute settlement mechanisms than those
in the Bulgaria-Cyprus BIT which are
contained in other investment treaties
concluded by Bulgaria.
- The treaty should be interpreted according
to its object and purpose.
Concerning the object and purpose of the
Bulgaria-Cyprus BIT are: "the creation of
favourable conditions for investments by
investors of one Contracting Party in the
territory of the other Contracting Party."
(Preamble)
- Investor’s relying on ICSID is a favorable
treatment
"the creation of an institution (ICSID)
designed to facilitate the settlement of
disputes between States and foreign
investors can be a major step toward
promoting an atmosphere of mutual
confidence and thus stimulating a larger
flow of private international capital in those
countries which wish to attract it.”
• Respondent:
- Cite Art. 4 of the International Law
Commission's Final Draft Articles on MFN
Clauses, an MFN obligation applies only
"in an agreed sphere of relations”.
• MFN treatment can be claimed only within
the framework set by the clause and
relates only to the subject matter for which
the clause has been stipulated.
- Bulgaria's treaty practice and the context of
the Bulgaria-Cyprus BIT demonstrated
that Bulgaria did not consider the terms of
its consent to international arbitration to be
encompassed in its agreements to extend
MFN treatment.
• Summary: (can be omitted)
- absent express evidence otherwise, an MFN
provision cannot create a basis for jurisdiction
where none exists in the basic treaty.
- the subject matter of the MFN provision in the
Bulgaria-Cyprus BIT does not encompass
dispute resolution.
• even if dispute resolution is deemed to fall within
the subject matter of the treatment contemplated
by the BIT, the Claimant cannot invoke MFN
treatment to override fundamental policy
considerations reflected in the BIT's provisions.
• Tribunal: treaty interpretation
- The second paragraph of Article 3 of the
Bulgaria-Cyprus BIT contains an exception
to MFN treatment relating to economic
communities and unions, a customs union
or a free trade area. This may be
considered as supporting the view that all
other matters, including dispute
settlement, fall under the MFN provision of
the first paragraph of Article 3.
- However, the fact that the second
paragraph refers to "privileges" may be
viewed as indicating that MFN treatment
should be understood as relating to
substantive protection.
- Hence, it can be argued with equal force
that the second paragraph demonstrates
that the first paragraph is solely concerned
with provisions relating to substantive
protection to the exclusion of the
procedural provisions relating to dispute
settlement.
- The context alone, in light of the other elements
of interpretation considered herein, does not
persuade the Tribunal that the parties intended
such an interpretation.
- And the Tribunal has no evidence before it of the
negotiating history of the BIT to convince it
otherwise. Actually, Bulgaria was under a
communist regime that favored with limited
protections for foreign investors and with very
limited dispute resolution provisions. (no
intention)
Tribunal: (can be omitted)
- They are legally insufficient to conclude
that the Contracting Parties to the
Bulgaria-Cyprus BIT intended to cover by
the MFN provision agreements to arbitrate
in other treaties to which Bulgaria (and
Cyprus for that matter) is a Contracting
Party.
- Here, the Tribunal is mindful of Sir Ian
Sinclair’s warning of the “risk that the placing
of undue emphasis on the “object and
purpose” of a treaty will encourage
teleological ( 目的论的 ) methods of
interpretation [which], in some of its more
extreme forms, will even deny the relevance of
the intentions of the parties.
- The Tribunal finds no guidance in the
provisions of paragraphs 2 and 3 of Article
31 of the Vienna Convention, as there are
no facts or circumstances that point to
their application. The same goes for
paragraph 4 of Article 31 of the Vienna
Convention ("A special meaning shall be
given to a term if it is established that the
parties so intended").
- the basic prerequisite for arbitration: an
agreement of the parties to arbitrate. It is a well-
established principle, both in domestic and
international law, that such an agreement should
be clear and unambiguous. In the framework of
a BIT, the agreement to arbitrate is arrived at by
the consent to arbitration that a state gives in
advance in respect of investment disputes falling
under the BIT, and the acceptance thereof by an
investor if the latter so desires.
 Cases supporting the idea that
MFN does not normally apply to
dispute settlement provisions

• Salini Construttori v. Jordan (2004)

• Plama Consortium v. Bulgaria (2005)
• Telenor Mobile Communications A.S. v.
Republic of Hungary (2006)
• Berschader v. Russia (2006)
 Maffezini v. Spain
(ICSID Case No. ARB/ 97/ 7) (1997 － 2000)
 (Argentine-Spain BIT and Chile- Spain BIT)
MFN applies to procedural articles.
(Student presentation)
• Mr. Maffezini, an Argentine investor
• Joint-venture: 70% v. 30%
• Applicable investment treaty: Argentina – Spain
BIT (1991)
• The request also invoked, by way of a MFN
clause in the Argentine-Spain BIT, the provisions
of a 1991 Chile- Spain BIT.
• the question of jurisdiction is a preliminary
matter, and therefore suspend the
proceedings on the merits.
• Article X of BIT between Argentina and
Spain (dispute settlement):
“2.If the dispute cannot thus be settled within
six months following the date on which the
dispute has been raised by either party, it
shall be submitted to the competent
tribunal of the Contracting Party in whose
territory the investment was made.
3.The dispute may be submitted to
international arbitration in any of the
following circumstances:
a) at the request of one of the parties to the
dispute, if no decision has been rendered
on the merits of the claim after the
expiration of a period of eighteen months
from the date on which the proceedings
referred to in paragraph 2 of this Article
have been initiated, or if such decision has
been rendered, but the dispute between
the parties continues;
• Respondent:
1. Article X(3)(a) requires the exhaustion of
certain domestic remedies in Spain and
that Claimant failed to comply with this
requirement.
2. Claimant did not submit the case to
Spanish courts before referring it to
international arbitration as required by
Article X(2) of the BIT.
• Claimant’s alternative argument: MFN
Article IV (MFN) of Argentina-Spain BIT:
“In all matters subject to this Agreement, this
treatment shall not be less favorable than
that extended by each Party to the
investments made in its territory by
investors of a third country.”
• Article 10(2) (dispute settlement) of the
Chile-Spain BIT provides merely that the
investor can opt for arbitration after the
six-month period allowed for negotiations
has expired.
• Claimant contends, that Chilean investors
in Spain are treated more favorably than
Argentine investors in Spain. Thus the
MFN clause in the Argentine-Spain BIT
gives him the option to submit the dispute
to arbitration without prior referral to
domestic courts.
• Respondent:
- The reference in the MFN clause of the
Argentine-Spain BIT to “matters” can only be
understood to refer to substantive matters or
material aspects of the treatment granted to
investors and not to procedural or jurisdictional
questions.
- Even if MFN applies, claimant should prove that
the submission of the dispute to Spanish
jurisdiction is less advantageous to the investor
than its submission to ICSID arbitration.
• The tribunal:
- A number of BITs have provided expressly that
the MFN treatment extends to the provisions on
settlement of disputes.
- “all matters subject to this Agreement” in this BIT
- Treaty interpretation: there are good reasons to
conclude that today dispute settlement
arrangements are inextricably （逃不掉
地） related to the protection of foreign investors
(as stated in the Preamble of the BIT)
- More favorable: The drafting history of the
ICSID Convention provides ample
evidence of the conflicting views of those
favoring arbitration and those supporting
policies akin to different versions of the
Calvo Clause.
 Suez v Argentina
ICSID Case No. ARB/03/17 (2006)

(France/Argentina and Spain/Argentina BITs)

MFN applies to procedural articles.
• French and Spanish shareholders v Argentina
• Similar to Maffezini v. Spain, but Respondent is
Argentina, not Spain.
• Claimant claims that the MFN obligation in the
Spain-Argentina BIT (“In all matters”) entitled
them to the better treatment found in the France-
Argentina BIT (which contained no local
remedies requirement).
• The tribunal: the earlier BIT dispute
(Maffezini v. Spain) had addressed the
MFN clause of the very same Spain-
Argentina BIT, and that the tribunal in the
Maffezini case had held that the MFN
guarantee extended to dispute settlement
matters.
 Cases supporting the idea that MFN
Provision applies to dispute settlement
• Maffezini v. Spain (2000)
• Siemens v. Argentina (2004)
• Gas Natural v. Argentina (2005)
• National Grid v. Argentine Republic (2006)
• Interaguas v. Argentina (2006)
• Rosinvest v. Russia (2007)
• Camuzzi v. Argentina
• Tecmed v. Mexico
• Vivendi v. Argentina
• Suez v Argentina (2006)
 Whether MFN applies to
Procedures?
Differences in Treaty Language and Consequences:
• Some MFN clauses are silent as to whether they are
meant to apply to all provisions in the treaty. (MAI)
• Others may state explicitly that the MFN clause does or
does not apply to all provisions of a treaty, including its
dispute-settlement provisions. (new trend)
• Dispute settlement provisions in dif. treaties vary
considerably (subject matter, time frames relating to
arbitration etc.)
• Problem: “Treaty-Shopping”, in particular to dispute
settlement
 Reactions to different awards on MFN

Legal Scholars:
• Difficult to reconcile various awards
• No rule of precedent
• Some authors try to show differences in
language
• E.g. Lochnie Hsu, “MFN and Dispute
Settlement: When the Twain Meet”,
Journal of World Investment & Trade,
Vol.7, No. 1, February 2006, pp-25-37.
Arbitrators:
• Many arbitrators like the idea of extending the
scope of MFN clauses – more work:
• “no reason to suppose that – absent some
specific treaty language – any given MFN
provision should be more or less narrowly
defined. In other words, MFN clauses apply to
all aspects of the regulatory environment
governed by an investment protection treaty,
including availability of all means of dispute
settlement.” (Todd Weiler, Dissenting Opinion
in Berschader)
States:
They seem to be rather reluctant to allow for a broad
scope of MFN clauses:
• E.g. CAFTA Negotiations 2004:
“the MFN Treatment Article of this Agreement is
expressly limited in its scope to matters ‘with
respect to the establishment, acquisition,
expansion, management, conduct operation and
sale or other dispositions of investments’. The
Parties share the understanding and intent that this
clause does not encompass international dispute
resolution mechanisms such as those contained in
Section C of this chapter, and therefore could not
reasonably lead to a conclusion similar to that of the
Maffezini case.”
 New trend
• exclude the procedural rules
“For greater certainty, treatment referred
to in paragraph 1 (MFN) does not
encompass dispute resolution
mechanisms provided for in this
Agreement or other International
Agreements.” (Norway, 2008)
Canada FIPA Model (2004) :
• ANNEX III Exceptions from Most-
Favoured-Nation Treatment
1. Article 4 (MFN) shall not apply to
treatment accorded under all bilateral or
multilateral international agreements in
force or signed prior to the date of entry
into force of this Agreement.
Comments:
• MFN does not encompass dispute settlement.
• MFN does not extend to treatment accorded
under existing treaties.
• The MFN guarantee is therefore prospective.
• This ensures that foreign investors under the new
model cannot reach back and try to obtain the
protection afforded by previous treaties (why?).
• This provision seeks to avoid investment treaty
shopping – the argument that MFN applies not
only to the actual treatment of other foreign
investors but also to the protection guaranteed to
other foreign investors in other FIPAs .
China-Canada FIPA:
Article 5 Most-Favoured-Nation Treatment
1. Each Contracting Party shall accord to investors of
the other Contracting Party treatment no less
favourable than that it accords, in like circumstances,
to investors of a non-Contracting Party with respect
to the establishment, acquisition, expansion,
management, conduct, operation and sale or other
disposition of investments in its territory.
2. Each Contracting Party shall accord to covered
investments treatment no less favourable than that it
accords, in like circumstances, to investments of
investors of a non-Contracting Party with respect to the
establishment, acquisition, expansion, management,
conduct, operation and sale or other disposition of
investments in its territory.
3. For greater certainty, the “treatment” referred to in
paragraphs 1 and 2 of this Article does not encompass
the dispute resolution mechanisms, such as those in
Part C, in other international investment treaties and
other trade agreements.
Article 8 Exceptions
1. Article 5 (MFN) does not apply to:
– (a) treatment by a Contracting Party pursuant
to any existing or future bilateral or multilateral
agreement:
• (i) establishing, strengthening or expanding a free
trade area or customs union; or
• (ii) relating to aviation, fisheries, or maritime
matters including salvage;
– (b) treatment accorded under any bilateral or
multilateral international agreement in force
prior to 1 January 1994.
• Why prior to 1 January 1994? (NAFTA).
• Any trick here?
• When questioned under oath about the China
FIPPA’s reach-back on MFN treatment, federal
trade official Vernon MacKay explained:
“China has over a hundred of what we call bilateral
investment treaties very similar to FIPPAs. Most
of them we would not want access to because
they’re not high-ambition – what we would call a
high-ambition treaty. But there were a few in the
early 2000s with some European countries that
are pretty high standard. They’re not directly
comparable, so it’s hard to say, you know, just how
much more advantageous they might be to an
investor, but they were – they were ones that we
were considering……
The fair and equitable standards of some of these
treaties are very broadly worded, certainly
worded in ways that we would not word ours,
which could lend themselves to an expansive
interpretation which our Canadian investors may
take advantage of in a Chinese market
situation….
 Some of these provisions were potentially more
of a broader scope and could provide high – you
know, more protection for a Canadian investor.
So since – and just to clarify, the Canadian
model, as we have included in here, does not
include that reach back to 1994, but it is – we
have the policy flexibility, if I could say that, to
modify that…. We use that 1994 reach-back as
an incentive to get the other party to reach back
as well.”
• Cited from Hupacasath First Nation v
Minister of Foreign Affairs of Canada and
Attorney General of Canada, Federal
Court Case No T-153-13, Cross-
Examination on Affidavit of Vernon John
MacKay (3 April 2013), at 51-3
 Assignments
• Reading materials: UNCTAD, Fair and Equitable
Treatment
• National Grid v. Argentina (facts and fair and
equitable treatment) (facts and full protection and
security)
• Metalclad v Mexico (facts and fair and equitable
treatment)
• Pope & Talbot v. Canada(facts and fair and
equitable treatment)
• Methanex Corp. v .US(facts and fair and equitable
treatment)