What Is Fair and Equitable Treatment in Investment Arbitration?

The principle of Fair and Equitable Treatment (FET) is one of the cornerstone protections granted to foreign investors in international investment law. Found in many Bilateral Investment Treaties (BITs) and other investment agreements, the FET standard requires host states to treat foreign investors in a fair, transparent, and non-arbitrary manner. FET ensures that investors are not subjected to unjust, discriminatory, or unreasonable treatment, thus safeguarding their rights and investments in foreign jurisdictions. This standard plays a crucial role in building investor confidence and fostering international economic relations.

What Is Fair and Equitable Treatment in Investment Arbitration?

Definition of Fair and Equitable Treatment (FET)

• Fairness: The treatment must be just, free from arbitrariness, and respectful of the investor's rights. Foreign investors should not be subjected to measures that are capricious or manifestly unreasonable.
• Equity: The host state must treat the foreign investor equally and without discrimination, ensuring that they are not disadvantaged compared to domestic investors or investors from other countries.
• Transparency: Host states are expected to be transparent in their regulatory and legal processes, allowing investors to understand the laws and policies that affect their investments.
• Due Process: FET guarantees that investors have access to fair legal processes and remedies, protecting their rights to challenge decisions that impact their investments.

Key Features of FET in Investment Arbitration

• Legitimate Expectations: One of the most important aspects of FET is the protection of the investor’s legitimate expectations. If an investor makes an investment based on a reasonable expectation that the host state will not change the legal framework or treat them unfairly, the state must not interfere with or undermine these expectations in an arbitrary or unjust manner.
• No Arbitrary or Discriminatory Treatment: FET prohibits arbitrary measures and discrimination, which could harm the investor or disadvantage their investment without proper justification. The host state must provide a stable, predictable, and transparent environment for foreign investments.
• Protection from Discriminatory Measures: Host states are not allowed to discriminate against foreign investors in favor of domestic ones, or vice versa, unless there are compelling public policy reasons that are proportionate and reasonable.
• Right to Access to Justice: FET protects an investor’s right to fair treatment in legal proceedings and provides access to independent and impartial tribunals or courts to resolve disputes.

Application of FET in Practice

• Arbitrary or Unreasonable Measures: If a host state takes action that is unreasonable or disproportionately harmful to a foreign investor (e.g., canceling permits or licenses without justification), it may violate the FET standard. The tribunal will assess whether the state's actions were arbitrary or unreasonable and if the investor's legitimate expectations were violated.
• Non-Discrimination: If a foreign investor is treated less favorably than a domestic investor in similar circumstances, this could be considered a violation of the FET standard. For example, if the government imposes stricter regulations on foreign companies but not on domestic firms, it could be considered discriminatory.
• Stability of the Legal Framework: The FET standard protects investors against sudden or unpredictable changes in laws and regulations that negatively impact their investments. Investors are expected to have some degree of legal stability when making long-term investments in foreign countries.

Enforcement of FET in Investment Arbitration

Investment treaty arbitrations are typically based on FET provisions in BITs or multilateral treaties. If an investor believes that the host state has violated the FET standard, they can initiate arbitration through Investor-State Dispute Settlement (ISDS) mechanisms, which allow them to seek damages or other forms of relief.

• Tribunal’s Role: The arbitral tribunal will evaluate whether the actions of the host state violated the FET standard. The tribunal looks at the specific facts of the case, the host state’s legal framework, and any international investment agreements to determine whether the FET obligation was breached.

FET in Relation to Other Standards

• National Treatment (NT): While FET ensures fair treatment for all foreign investors, National Treatment provisions guarantee that foreign investors are treated on equal terms with domestic investors. The two standards often work together to ensure that foreign investors are not unfairly treated or discriminated against.
• Expropriation: FET also intersects with protections against expropriation. If a host state unlawfully seizes an investor’s property without compensation, it may not only violate the expropriation clause but also breach the FET standard by acting in an arbitrary or unjust manner.

Key Legal Cases Involving FET

• Tecmed v. Mexico (2003): In this case, the arbitral tribunal held that Mexico violated the FET standard by refusing to renew the operating permit of a Spanish company, Tecmed, without providing adequate justification. The tribunal found that the company’s legitimate expectations were violated, and that the failure to provide a stable and predictable legal framework amounted to a breach of FET.
• Eureko v. Poland (2005): Eureko, a Dutch company, claimed that Poland's sudden regulatory changes violated the FET standard. The tribunal ruled that Poland’s actions were arbitrary and unfair, as they disrupted the company’s expectations and adversely affected its investments.
• Occidental Petroleum v. Ecuador (2012): In this case, Occidental Petroleum claimed that Ecuador's decision to terminate its oil exploration contract was arbitrary and violated the FET standard. The tribunal ruled in favor of Occidental, stating that Ecuador's actions had breached the investor’s legitimate expectations and were conducted in an arbitrary manner.

Legal Protections and Consumer Actions

Investors’ Rights

Investors should ensure that they understand the FET provisions in BITs before making investments in foreign countries. This will help them to assess the level of protection they have against arbitrary or discriminatory state actions.

Dispute Resolution

Investors should seek dispute resolution mechanisms, such as ISDS, if they believe that their rights under the FET standard have been violated. FET can provide a basis for claiming damages or other remedies in case of unfair or arbitrary treatment.

Due Diligence

Before making investments, investors should conduct thorough due diligence to ensure that the legal environment in the host country is stable, transparent, and conducive to long-term investments. They should also monitor any changes in laws or regulations that might impact their investment.

Example

Suppose a U.S. tech company invests in an emerging market to build a large data center. The company, after completing the construction, is told by the host government that it must shut down the data center due to new laws that were not disclosed at the time of the investment. These laws significantly increase operational costs and disrupt the company’s plans.

Steps the company might take:

• The company reviews the BIT between the U.S. and the host country, noting that the treaty includes an FET provision that protects foreign investors against arbitrary government actions.
• The company files for arbitration under the ICSID rules, arguing that the host country violated the FET standard by changing the regulatory framework in an arbitrary manner without providing adequate notice or justification.
• The arbitral tribunal examines whether the company’s legitimate expectations were violated and whether the government's actions were disproportionate or discriminatory.
• If the tribunal rules in favor of the company, it may award damages or other compensation to offset the financial loss caused by the host state's actions.