The Fair and Equitable Treatment (FET) Standard in International Investment Arbitration: Developing Countries in Context

226 Pages·2018·3.12 MB·English

by  Rumana Islam

International Law and the Global South
Perspectives from the Rest of the World
Rumana Islam
The Fair and
Equitable Treatment
(FET) Standard
in International
Investment Arbitration
Developing Countries in Context
International Law and the Global South
Perspectives from the Rest of the World
Series editor
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Rumana Islam
The Fair and Equitable
Treatment (FET) Standard
in International Investment
Arbitration
Developing Countries in Context
123
Rumana Islam
Department ofLaw
University of Dhaka
Dhaka,Bangladesh
ISSN 2510-1420 ISSN 2510-1439 (electronic)
International Lawandthe GlobalSouth
ISBN978-981-13-2124-5 ISBN978-981-13-2125-2 (eBook)
https://doi.org/10.1007/978-981-13-2125-2
LibraryofCongressControlNumber:2018951397
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To the beloved memory of my father, the sole
inspiration for writing this book.
Foreword
There have been many books written in recent times on the fair and equitable
treatment (FET) standard in investment treaties. It has become the basis on which
several recent awards have been made against developing countries. As a result
oftheextensiveinterpretationgiventothisonce-dormantphrasebyarbitratorsfrom
thedawnofthismillennium,everyclaimanthasmadethestandardthefocusofhis
claims. Consequently arbitrators’ intent on broadening the scope of investment
protection through this broadly phrased clause, claimants have seldom lost arbi-
trationstheyhadinitiated.Theexistingliteratureconstituteslargelyofanalysisthat
is devoid of the social and other consequences of such expansive interpretation.
These analytical studies are intent on dissecting the subtleties involved in the
possibleinterpretationssofaradvancedintheawardsthanintheragingdebatesas
the legitimacy of the system that has been evoked particularly by the centrality
of the fair and equitable treatment plays in modern investment arbitration.
Dr.RumanaIslamadoptsarefreshingapproachtothesubjectlookingatthelaw
inthecontextoftheintensedebatesithasprovokedinrecenttimes.Shebringsinto
focus the fact that the FET standard as the focal point of the law has created
inequities and imbalances against developing countries, after debunking the myth
that the law is held with even hands between the rich and the poor. She explores
issues as to the overall justice demands involved in the evocation of a standard
which in itself is paradoxically committed to justice but does not deliver it to the
statebydenyinganyargumentsbythestateastothedeleteriousandotherconduct
of the investor.
The context of her later discussions are set in a socio-economic account of the
developmentoftheFETstandard.Itisimportanttounderstandtheasymmetriesof
power in which the treaties were constructed as well as in the arbitration mecha-
nisms which provide it with compliance factors. To ignore the confrontation of
powerwiththeinabilityofpoorerstatestoresistimpositionsofstandardsfavorable
toinvestmentistoturnablindeyetotherealitythatbefuddlesthelawandhasled
to the present legitimacy crisis. The approach in this book draws away the curtain
that has hidden the factors that brought about the treaties and the interpretation
of the treaties. Imbalance in knowledge was also a factor as the developing
vii
viii Foreword
countries did not understand the possible uses to which such an innocent phrase
could be put to in later times by astute arbitrators seeking to liberalise further the
global system of investment protection.
Acriticismthatisdismissivelyadvancedofanyscholarshipthatseekstodepart
fromtheinaneandtraditionalanalyticalframeworkandemphasizecontextisthatit
is polemical. It is not a criticism that can be made of this work as there is a sound
chronological statement of the development of the treaties and an analysis of the
differentawardsaswouldmeetthestandardsofanypositivistbuttheworktakesthe
lawfurtherbyexplainingdevelopmentsinsuchamannerastoenabletheextraction
oftheprinciplesinthecontextofpolicy.Thediscussionenablestheachievementof
three strands in the case-law which would enable further exploration. There is a
novel categorization made but the work does not stop there as a positivist analysis
would but goes further to explore the developments in the context of the justifi-
cation of the system that it serves the welfare and economic development of the
poorer countries of the world.
Theultimatealtruistic rationalefor theexisting system ofinvestment protection
through arbitration is that it serves the economic development of the poorer states.
Therationalehasbeenchallengedinrecentliteratureonthegroundthatthereisno
empirical evidence that shows that investment treaties do in fact lead to greater
investment flows.The economicdebateisinconclusive butraises doubtsaboutthe
system. The work contributes to the discussion by contesting prevailing views on
economic development. It argues that the conditions and circumstances prevailing
in each developing country should be relevant to the application of the FET stan-
dard in any dispute concerning that country.
Twolinesofcasesbroughtaboutrethinkingfromtheextensivestancesadopted
bythearbitraltribunalsatatimethepolicyofinflexibleinvestmentprotectionwas
accepted.ThefirstinvolvedtheEastEuropeanstatestransitioningfromsocialistto
market economies. They signed investment treaties giving absolute protection to
foreign investment. But, in the course of transition, they had to take measures that
could have been interpreted as violating the FET standard. Many arbitral tribunals
showed an inclination to the plight of these states which did not quite understand
theworkingsofacapitalistmarketandtheregulatorymeasuresneededtocopewith
them. Their sympathetic consideration of the transitory measures that were needed
toeffectchanges broughtaboutasofteningoftherigorous standardsthathadbeen
developed in the interpretation of the FET standard in earlier awards.
The second strand was in the Argentine awards following measures adopted to
deal with the economic crisis in the country. The early awards which treated the
measures as violating the FET standard took broad stances interpreting them as
violations of legitimate expectations created by promises of investment stability.
The impact of these early awards on an impoverished country led to a backlash
within not only Argentina and Latin America but globally. The later Argentine
casesbegantoreacttothisbytakingamoresoberattitudeinthecontextoftheneed
tobringaboutthesemeasuresgiventhecircumstancesprevailinginArgentina.But
these are minority trends. There is a need for the reconceptualization of the issues
relating to the standard which the survey of the awards in the later chapters of the
Foreword ix
booknicelybring out.Inflexiblerules cannot beappliedtostatesinturmoilonthe
basis of an abstract universal standard that exists only in the minds of arbitrators.
Thesurveyleadtotheformulationofthethesisthatintheapplicationofthefair
andequitabletreatmentitisnecessarytotakeintoaccounttheactualcircumstances
ofthecountryinwhichthemeasuresweretakenratherthanapplyaglobalstandard
inflexibly. Developing countries are most vulnerable to global crises. They do not
have adequate resources to deal with such crises when they occur. To constrain
them in providing succor to their people during such times on the basis of some
arbitrarystandardisunjust.Ifthesystemistoberescued,themessageinthebook,
at a time when a huge crisis of legitimacy strikes at the roots of investment arbi-
tration, is that specific circumstances of the developing host states in which the
disputesaroseshouldbetakenintoaccountinassessingwhethertherewasinfacta
violation of the FET standard.
Singapore M. Sornarajah
July 2018 CJ Koh Professor of Law
Faculty of Law
National University of Singapore
Preface
Fair and Equitable Treatment (FET) Standard in International Arbitration:
Developing Countries in Context represents an empirical and doctrinal account
of the most important yet most controversial investment protection standard, i.e.
FET standard in investment arbitration from the perspective of host developing
countries. Current investment tribunals’ interpretation of the FET standard priori-
tises the interests offoreign investors and neglects the perspectives of host devel-
oping countries. Therefore, there is a pressing need to reconceptualise the
interpretation of the FET standard. In service to depicting the perspectives of host
developing countries, this book advances an understanding of classifications such
as ‘developing’ and ‘developed’ that reflects the issues and challenges that these
countries face in the investment dispute context, such as their lack of resources,
administrative capacity, technology and infrastructure, as much as the economic
andsociallevelsofdevelopmentinternationalorganisationsgenerallyemphasisein
their classifications. It addresses socio-political circumstances such as political
instability, social unrest, conflict and its aftermath, social and political transitions,
and economic crises and their impact on host developing countries in the invest-
ment dispute context. With that view, it shows that current investment tribunals
have taken inconsistent and inadequate approaches to the issues host developing
countries face. Therefore, this book argues the need for a reconceptualised inter-
pretation of the FET standard which acknowledges the developmental issues and
challengesidentifiedindifferent chapters ofthebookthatwouldaccommodatethe
needs of the host developing countries while continuing to give reasonable pro-
tectiontoforeigninvestorsandthereforeservetheneedsofthesystemasawhole.
Dhaka, Bangladesh Rumana Islam
xi