Most-Favoured Nation Treatment

This article is an extract from TLR The Investment Treaty Arbitration Review - Edition 8. Click here for the full guide.

I Introduction

The most-favoured nation (MFN) principle is an important component of international economic and investment law. MFN clauses are included in many investment treaties, free trade agreements (FTAs) and regional economic cooperation arrangements. Their key purpose is to protect foreign investors from unequal and discriminatory treatment in relation to foreign investors from third states in the host state. Since MFN treatment is a treaty-based obligation, the host state is not obliged to accord investors or their investments MFN treatment unless there is a specific treaty provision requiring the host state to do so.

i Definition

There is no universal formula to determine the scope of an MFN clause. Like any other treaty provisions, the scope of protection provided by a particular MFN clause must be determined through interpretation under Article 31 of the Vienna Convention on the Law of Treaties. The principle of ejusdem generis is also commonly applied by investment tribunals to limit the scope of MFN protection to treatment falling under the same category as that to which the clause in question relates. This becomes relevant, for example, in cases where the MFN clause is contained within the fair and equitable treatment (FET) standard, as MFN treatment may then be limited to affording the investor protection by a broader FET standard contained in a different treaty but may not serve to open up or broaden protection through other investment protection standards.

In reality, MFN clauses differ in their wording, and there is no uniform definition of MFN treatment. The International Law Commission (ILC) has attempted to codify an international standard for MFN protection. In its 1978 draft articles on MFN clauses, the ILC formulated the following definition of MFN treatment:

Most-favoured-nation treatment is treatment accorded by the granting State to the beneficiary State, or to persons or things in a determined relationship with that State, not less favourable than treatment extended by the granting State to a third State or to persons or things in the same relationship with that third State.²

The ILC's formulation has found support in academia³ and has been recognised by international investment treaty arbitration tribunals;⁴ however, the ILC's efforts to establish a common standard for the MFN standard have not achieved complete success.⁵ Instead, the MFN standard has been developed in a piecemeal fashion via application and interpretation by individual international investment tribunals with divergent approaches and outcomes. Consequently, there is currently no jurisprudence constante in respect of MFN treatment in international investment law.

ii Application

Generally speaking, there are at least two ways in which an investor can invoke MFN treatment in a given treaty.

MFN as a relative treatment obligation

The first approach is to invoke MFN protection as a relative treatment obligation. In these cases, the MFN standard operates in a way similar to the standard of national treatment (i.e., it precludes the host state from discriminating against the protected investor in relation to other similarly situated investors – in this case, investors from a third state).

The requirements to establish a breach of the MFN standard as a relative treatment obligation often turn on the specific language of the MFN clause. Following an assessment of the scope of the individual MFN clause, this will typically involve an analysis to ascertain whether there has been unequal treatment by the host state of the foreign investor compared to investors from a third state, and whether the unequal treatment arose under 'like circumstances'.⁶

To establish a breach of the MFN clause as a relative treatment obligation, the foreign investor does not usually need to demonstrate that the host state intended to discriminate against the investor; rather, the test is whether, from an objective perspective, the host state has treated the investor differently and less favourably than another foreign investor in like circumstances.

Not all unequal treatment automatically or necessarily amounts to a breach of the MFN standard. Differential treatment may be justified and justifiable on the basis of policy considerations or other legitimate objectives of the host state,⁷ which are within the state's inherent prerogative. As host states rarely impose openly discriminative measures without any policy reasons, it is challenging to establish a breach of an MFN clause as a relative treatment obligation.⁸

'Importation' of protection standards via MFN clauses

The second approach, which is commonly resorted to by investors, is to rely on the MFN clause by reference to other provisions in investment treaties between the host state and third states that provide more favourable protection than the applicable treaty.

This approach is premised on an expansive interpretation of the notion of 'treatment'. According to this approach, 'treatment' covers not only the actual protection afforded in an individual case; it also extends to the mere existence of, and therefore the possibility to benefit from, the substantive, and possibly also procedural, rights in other investment treaties concluded by the host state. By being able to invoke protection standards and, according to one school of thought (see in more detail below), procedural rights that are not provided by a treaty in the first place, an investor effectively tries to 'import' new terms into a treaty.

In theory, investment protection standards that are capable of being imported by reference to an MFN clause include substantive rights (e.g., autonomous FET, full protection and security treatment, umbrella clauses and effective means of asserting rights) and procedural rights (e.g., more expansive jurisdiction of investment tribunals, a broader selection of dispute resolution mechanisms and the absence of requirements to exhaust local remedies).

The invocation of MFN clauses to obtain more favourable substantive rights is common practice in investment arbitration proceedings, even though its success in an individual case still depends on the scope of the specific MFN clause; however, to do the same in respect of procedural rights is one of the most debated issues in investment arbitration.

The two divergent schools of thought on this topic can be best exemplified by the approaches taken by the tribunals in Maffezini v. Spain (Maffezini)⁹ and Plama v. Bulgaria (Plama).¹⁰

In Maffezini, the tribunal, in applying the MFN clause in the Argentina–Spain bilateral investment treaty (BIT) 1991, allowed the Argentinian investor to rely on the dispute resolution clause in the Chile–Spain BIT 1991 to bypass the requirement under the Argentina–Spain BIT to first litigate the dispute at local Spanish courts. The result was that the Argentinian investor was permitted to proceed with its claims directly to investment arbitration.

The Maffezini tribunal's reasoning centred on the notion that the dispute resolution mechanisms contained in BITs are inextricably linked to the substantive protections enjoyed by foreign investors and, therefore, could be imported into the Argentina–Spain BIT through its MFN clause from other Spanish investment treaties.¹¹ The tribunal also found support in the broad language of the MFN clause in the Argentina–Spain BIT 1991, which indicated that it extended to 'all matters' covered by the BIT.¹²

In contrast, in Plama, the tribunal rejected the investor's argument that the MFN clause in the Cyprus–Bulgaria BIT could be invoked to enable the investor to resort to arbitration at the International Centre for Settlement of Investment Disputes (ICSID) based on dispute resolution provisions contained in other investment treaties concluded by Bulgaria with third states, such as the Bulgaria–Finland BIT 1997.¹³ The Plama tribunal was of the view that MFN clauses, in general, do not apply to dispute settlement provisions of investment treaties, unless those treaties expressly indicate otherwise.¹⁴

It should not be overlooked that the scope of the MFN clause in the Cyprus–Bulgaria BIT can be perceived as narrower than that in the Argentina–Spain BIT. While the MFN clause in the Argentina–Spain BIT extends to 'all matters subject to this Agreement', the Cyprus–Bulgaria BIT lacks similarly broad language.¹⁵ Notwithstanding this difference in treaty language, the Plama tribunal found that, even if such broad language had been present in the Cyprus-Bulgaria BIT, it would not have changed its finding that the MFN clause did not cover the dispute resolution mechanism.¹⁶

The divided approaches adopted by the tribunals in Maffezini and Plama have influenced and, to a large extent, shaped the jurisprudence on MFN treatment for more than a decade and remain relevant to this day, as will be discussed further in Section II of this chapter.

The expansive interpretation of broadly worded MFN clauses inspired by Maffezini has led states to review and revise their take on treaty negotiation and drafting and, in some instances, to even expressly exclude, among other things, dispute settlement provisions from the scope of MFN clauses in the newer generations of model investment treaties. A primary concern for host states is that this expansive approach essentially supplants the explicit consent of states to settle disputes on alleged breaches of investment protection standards through arbitration proceedings in cases where consent had been purposefully limited to certain standards or consent had been made subject to the prior fulfilment of certain requirements. A survey on the most relevant treaty practice since 2022 is presented in Section III of this chapter.

The year 2022 brought the relevance of MFN treatment into the spotlight as investors attempted to expand the jurisdiction of arbitral tribunals under narrow jurisdictional clauses contained in the BITs of the Soviet Union, which are often limited to disputes over breaches of the expropriation standard or the amount of compensation resulting from expropriation. This is often owing to disputes that have arisen in connection with the substantial sanctions regime that has been imposed on Russian corporate entities and individuals, as well as the countermeasures implemented by Russia. A comparable trend can be observed in relation to cases in which investors wish to rely on MFN clauses to expand a tribunal's jurisdiction under older generations of China's BITs.¹⁷

II Notable recent jurisprudence

This section reviews the latest jurisprudence on MFN clauses and offers some thoughts about the evolution of their role and practical application in the investment treaty context.

i Zaza Okuashvili v. Georgia

Zaza Okuashvili v. Georgia (Zaza Okuashvili)¹⁸ represents an example of an expansive interpretation of MFN clauses in relation to the importation of dispute settlement provisions from other investment treaties. In this case, the investor sought to circumvent the dispute settlement clause in the Georgia–United Kingdom BIT 1995, which provides for arbitration administered by ICSID, in favour of reliance on the arbitration agreement under the 1993 BIT between Georgia and the Belgium–Luxembourg Economic Union (BLEU), which provides for arbitration at the Arbitration Institute of the Stockholm Chamber of Commerce. The purported reason behind this claim was the investor's dual Georgian–British nationality, which would preclude the investor's access to ICSID arbitration under Article 25 of the ICSID Convention.¹⁹

The tribunal accepted the investor's argument and ruled that it has jurisdiction based on the MFN clause in the Georgia–UK BIT and the dispute settlement clause in the 1993 Georgia–BLEU BIT. The tribunal's finding is, in particular, founded on the expansive wording of Article 3(3) of the Georgia–UK BIT, which lists specific provisions of the BIT to which the MFN clause applies, including the dispute resolution clause.²⁰

The tribunal acknowledges that certain language in the treaty does not support an expansive interpretation of the MFN clause, in particular the qualifier that MFN treatment concerns '“management, maintenance”, etc of investments “in the territory”” of the host state.²¹ It adopted the principle of effective interpretation to resolve these textual incongruences and eventually found that the text of the MFN clause covers the dispute resolution mechanism under the BIT.²²

The tribunal further rejected Georgia's contention that MFN clauses are, in principle, incapable of covering the dispute settlement mechanism, and that any argument to the contrary would conflict with the principle of consent in international arbitration. At the same time, it primarily substantiated its decision to uphold jurisdiction on the basis of the specific wording of the Georgia–UK BIT rather than any general notion that MFN clauses can be applied to cover procedural matters.²³

ii Beijing Everyway Traffic v. Ghana

In contrast to Zaza Okuashvili, the case of Beijing Everyway Traffic v. Ghana (Beijing Everyway Traffic)²⁴ concerns a differently worded BIT and a differently reasoned award. The tribunal in this case, constituted under the China–Ghana BIT 1989, was tasked to consider whether a narrow jurisdictional clause – one that provides for investor-state arbitration solely in relation to the amount of compensation for expropriation – could be circumvented by invoking broader jurisdictional clauses in other BITs concluded by Ghana by way of the MFN clause contained in the China–Ghana BIT.²⁵

The tribunal rejected such an expansive interpretation of the MFN clause. In its view, the MFN clause cannot substitute the parties' express consent regarding the scope of matters subject to arbitration under the treaty, absent 'clear and unambiguous' language to the contrary.²⁶ In so doing, the tribunal essentially followed the ILC's approach to the interpretation of MFN clauses, which presupposes that MFN clauses document obligations agreed between the signatory state parties and, therefore, are incapable of imposing on the host state any additional obligations towards investors regarding dispute settlement mechanisms that have not been envisaged by the original treaty.²⁷

The tribunal also dismissed the investor's references to Maffezini and distinguished the wording of the MFN clause in the China–Ghana BIT. Unlike the MFN clause in the Argentina–Spain BIT that was applicable in Maffezini, the MFN clause in the China–Ghana BIT does not include any similar language stipulating that it would or is intended to cover 'all matters subject to this Agreement'.²⁸ This clear treaty language, in the tribunal's view, formed the basis of the Maffezini tribunal's reasoning that procedural matters were covered by the MFN clause,²⁹ but is not present in the China–Ghana BIT.

Furthermore, the tribunal stated that the effect of the MFN clause's expansive interpretation in Maffezini is limited to removing a 'procedural impediment' to arbitration. In Beijing Everyway Traffic, by contrast, the investor sought to establish the host state's consent to arbitration in relation to categories of disputes in a situation where consent was absent in the first place.³⁰ This is another reason why the investor's contention was not upheld.

iii Sastre and others v. Mexico

In Sastre and others v. Mexico (Sastre and others),³¹ the investor brought a claim under the Mexico–Argentina BIT 1996, which does not allow investors who are simultaneously domiciled in Mexico to refer any disputes with Mexico to arbitration. To avoid this limitation, the investor sought to rely on less onerous procedural requirements in other investment treaties concluded by Mexico, such as the Mexico–France BIT 1996.³²

Instead of venturing into an extensive analysis of treaty language and the different interpretations of MFN clauses, the tribunal firmly rejected the idea that the MFN clause in the Mexico–Argentina BIT could apply to anything other than substantive obligations related to the treatment of investors. It reasoned that procedural matters, such as a party's consent to arbitration, lie outside the ambit of the MFN clause and found that Mexico's consent under the BIT with Argentina could not be replaced by consent expressed in another treaty.³³

iv Other notable cases

In The Lopez-Goyne Family Trust v. Nicaragua, the tribunal considered the host state's argument that the MFN clause in the Dominican Republic–Central America FTA (CAFTA-DR) only applies to post-dated treaties, therefore excluding the application of any treaties entered into before the conclusion of the CAFTA-DR. The tribunal rejected Nicaragua's argument, noting that the MFN clause under the CAFTA-DR contains no temporal limitations.³⁴

In AHG Industry v. Iraq, the tribunal dismissed the investor's attempts to import a jurisdictional provision from another treaty in a rare instance involving the summary dismissal rule in Article 41(5) of the 2006 ICSID Arbitration Rules. The investor sought to import consent to ICSID arbitration from Article 8 of the Iraq–France BIT 2010 into the Partnership and cooperation agreement between the EU and Iraq 2018 (the EU–Iraq PCA) through its MFN clause.

The tribunal rejected the investor's claim and upheld Iraq's objection that the claim was 'manifestly without legal merit' and therefore should be dismissed under Article 41(5).³⁵ In doing so, it made some notable observations on the application of the MFN clause. In particular, it found that the possibility to import protection standards via MFN clauses, when interpreted ejusdem generis, is subject to the scope of the respective treaties. In its view, the MFN clause in the EU–Iraq PCA applies to a narrow set of matters such as 'trade in services and establishment', whereas the MFN clause in the Iraq–France BIT applies to the treatment of 'investment' in general. To the tribunal, the two treaties do not cover the same subject matter in terms of MFN treatment and, as such, the investor could not on the MFN clause in the EU–Iraq PCA to establish the tribunal's jurisdiction by reference to the Iraq-France BIT.³⁶

v Non-disputing party submissions on MFN clauses

Participation of non-respondent states as non-disputing parties (NDPs) in investment arbitration cases has become more frequent in recent years. Many states view NDP submissions as a useful instrument in shaping their investment treaty policies in a proactive way by providing arbitral tribunals with their views on the 'correct' interpretation and application of investment treaties and protection standards.

In recent years, there have been some noteworthy NDP submissions concerning MFN clauses. For example, the NDP submission by the United States in Latam Hydro v. Peru states that the MFN clause in the US–Peru Trade Promotion Agreement 2009 requires the investor to identify foreign investors or investments that have actually received more favourable treatment by the host state. In the absence of such treatment being clearly identified, no violation of the MFN clause can occur.³⁷ According to the United States, treatment is not accorded through 'the mere existence of provisions in its other international agreements', such as umbrella clauses or clauses that impose autonomous FET standards. The United States, however, acknowledged that actual measures adopted or maintained in connection with carrying out obligations under such provisions could amount to treatment.³⁸

Similarly, Canada filed an NDP submission in Lupaka v. Peru. Canada stated that the MFN clause does not provide for the importation of substantive obligations or procedural rules contained in other international investment treaties.³⁹ Echoing the United States' NDP submission referenced in Latam Hydro v. Peru, it stated that, in order for the MFN clause to apply, there must be an actual instance of more favourable treatment of a foreign investor from a third state. Substantive obligations and procedural rights in other international treaties do not, in and of themselves, constitute treatment of other investors. According to Canada, hypothetical treatment that may result from a different treaty, therefore, cannot give rise to a breach of the MFN treatment obligation.⁴⁰

This line of interpretation, if adopted by arbitral tribunals, would effectively erase an important venue through which MFN treatment has been invoked and relied on by investors in various treaty arbitrations, albeit with varying degrees of success.

III Recent development in treaty-making practice

The Maffezini-style expansive interpretation of MFN clauses has alarmed host states, many of which have introduced language in their newer generations of model investment treaties to narrow the MFN clauses' scope of application. This trend has gained further momentum in recent years owing to the ongoing efforts by many states to modernise their BITS and multilateral investment agreements, including the Energy Charter Treaty (ECT).

i Development in BITs

In addition to addressing host states' concerns associated with the expansive interpretation of MFN clauses, the newer generations of model BITs are also generally far more detailed and specific regarding the scope, conditions and prerequisites of the application of MFN treatment.

For instance, both the Japan-United Arab Emirates BIT 2018 and the Georgia–Turkey BIT 2016 clarify that 'treatment' does not include substantive provisions contained in other treaties. The Hungary-United Arab Emirates BIT 2021 (the Hungary–UAE BIT) explicitly stipulates that 'like circumstances' require a case-specific analysis by the tribunal. More precisely, Article 4 of the Hungary–UAE BIT states that the analysis of like situations must include an examination of the investment's effect on the relevant persons of third states, the investment's effect on the local population or the environment, as well as the sector in which the investment is made. Article 4 further provides that the tribunal shall not be 'limited to or biased' towards any of those factors.

Although it is customary for MFN clauses to contain certain exceptions in relation to taxation or trade regulations, the overarching trend with the recently concluded investment treaties is to incorporate additional carve-outs in relation to particular economic sectors or with reference to domestic legislation or local public policy agendas. For example, Article 4(2) of the Hungary–Oman BIT 2022 contains carve-outs for matters relating to the acquisition and ownership of land and real estate in the host state.

ii EU–Chile Advanced Framework Agreement

In December 2022, the European Union and Chile agreed on the text for their advanced framework agreement (AFA). The AFA contains provisions on investment protection, including an MFN clause and agreement to investor-state arbitration.

Compared to existing BITs between Chile and the individual EU Member States, the MFN clause in the AFA seems to have a narrower scope. Article 10.8(4) of the AFA provides that 'treatment' in the MFN clause does not include investment dispute resolution procedures or mechanisms from other international agreements. This would effectively prevent any tribunal from following the Maffezini jurisprudence. It further stipulates that the substantive obligations contained in other treaties do not in themselves constitute treatment unless they result in specific measures adopted or maintained by the host state when carrying out those obligations.

The AFA also clarifies that the assessment of whether any treatment is provided in like situations requires a case-by-case, fact-based analysis. It further requires investment tribunals to take into consideration the 'totality of the situations' when assessing this element of the MFN treatment.⁴¹ This language and these limitations correspond to the general trend of treaty practice that the authors have identified above.

iii Italy Model BIT

Italy's Model BIT 2022 clarifies the scope of application for MFN treatment.

Article 5 of the Model BIT provides, among other things, that treatment does not cover dispute settlement procedures provided for in other international agreements. It also stipulates that the substantive obligations found in other international agreements shall not be considered as treatment unless the host state takes specific measures in carrying out those obligations.

Article 5(5) clarifies that 'measures' do not include the mere transposition of obligations established in other treaties into domestic legislation of the host state, provided that the transposition is necessary to incorporate those obligations into the host state's domestic legal order. The rationale behind these provisions appears to be similar to that underlying the NDP submissions from the United States and Canada, as discussed in Section II.v, above.

iv ECT modernisation

In June 2022, the contracting parties to the ECT announced that they had reached an agreement in principle on the key points of modernisation of the ECT's text.⁴² In respect of the MFN clause, the contracting states agreed to clarify that the MFN clause shall not extend to dispute settlement provisions provided in other international agreements and declared that substantive provisions contained in other treaties do not constitute treatment. This line of modernisation is in tune with the state parties' own evolving investment treaty practice.

IV Conclusion

Investment tribunals are increasingly wary of expansive interpretations of MFN treatment, even when applying a broadly worded treaty provision. While investors will likely continue to test the limit of the scope of early-generation inclusive MFN clauses in relation to both procedural and substantive protection standards, it remains to be seen whether, and to what extent, the attempts may still be successful with arbitral tribunals.

On the other hand, more and more states and regional economic organisations are actively reviewing and modernising existing and future investment and trade agreements, attempting to balance the need for foreign investment with the interest and pressing goals of domestic, regional or sectoral development. A certain level of uniformity in MFN treatment has started to emerge, suggesting a more restricted use and a return to the more conventional understanding of this standard.

The proliferation of investment arbitration has and will continue to drive investors and legal practitioners to explore avenues to access more favourable rights and investment protection wherever possible. This, in turn, has and will continue to push states to re-evaluate and reposition themselves in the drafting and negotiation of treaties, depending not only on whether it is a net investment exporting or importing state, but also on its mid- and long-term economic development needs and policy. This tension will contribute to further shaping and determining the trajectory of the treaty institutionalisation of the fundamental principle of non-discrimination.