What to do with "fair and equitable treatment" provisions?
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International Economic Law and Policy Blog | 10 October 2017

What to do with "fair and equitable treatment" provisions?

by Simon Lester

Politico has this report today:

U.S. ISDS PROPOSAL WOULD CUT TWO KEY PROTECTIONS: Expect USTR to put at least one of those “poison pills” forward at talks this week. The final U.S. proposal on investor-state dispute settlement comes not only with an “opt-in” provisions that effectively makes the whole process voluntary, but also rolls back two key investor protections private companies have been able to use under the mechanism in past U.S. agreements. U.S. business and agriculture groups have already signaled that a radical departure from the current U.S. approach to investor protections would be forcefully opposed by them.

Despite that warning, the U.S. will move forward on its ISDS proposal this week. It is said to no longer permit a violation of the “minimum standard of treatment” as grounds for foreign investors to request an independent arbitration panel if they feel government action has diminished the value of their investment.

The concept of a minimum standard of treatment, found in customary international law, establishes that governments must generally provide foreign investors with fair and equitable treatment under their laws. It is supposed to serve as a threshold for defining when a company experiences a "denial of justice." But critics have argued that the concept has repeatedly become subject to overly broad interpretations by arbitration panels.

Second, the NAFTA proposal the administration is expected to unveil would also eliminate “indirect expropriation” as an argument a foreign investor could use to file a claim. That would make it harder for a foreign company to win damages based on a government action that has only partially devalued an investment as opposed to a full seizure of the investment without proper compensation. Read the full story here.

Maybe I was thinking of this issue as I drove home today, but for some reason I noticed this quote on the Commerce Department building:

The full sentence from the Benjamin Franklin quote is: "Commerce among Nations as well as between Private Persons should be fair and equitable, by Equivalent Exchanges, and mutual Supplies."

It seems to me that "fair and equitable treatment" is a good general principle to follow, and maybe put in a preamble to offer general interpretive guidance, or include in some other way. But is it appropriate to make it a binding obligation that can be litigated? And to let investors invoke it with regard to the treatment of foreign investments? I have long had doubts:

the core principle [of investment agreements] should be nondiscrimination, with some of the broader principles currently in effect taken out. The point of constraints on discrimination is to establish a policy of openness toward foreign investment, so as to encourage capital to flow to its most productive use, at home or abroad. An anti-discrimination rule also prevents an escalating, back-and-forth economic competition between nations in the field of investment policy, where tit-for-tat retaliation against foreign investment may become a problem. One nation excludes its rival’s foreign investors; the rival then retaliates with a similar exclusion. In contrast, government actions that are not discriminatory can have an impact on investment, but not in the same way. Experiencing the incidental effects of domestic regulation usually does not lead to the same reaction as with intentional discrimination. While broader principles such as “fair and equitable” treatment or “indirect expropriation” sound reasonable in a general sense, and are part of many countries’ domestic legal systems, including them as part of the international investment regime pushes the regime into areas that bring great controversy, without addressing the core problem of promoting good economic relations through equal treatment for investors of all nationalities.

Not surprisingly, then, based on what I’ve heard about it so far, I like this proposal from the Trump administration, assuming it is close to what has been reported. (On the other hand, I’m still confused by the opt-in idea. Opt-in at what point? And is this a one-time decision?)

The politics of this proposal are going to be interesting. How will other ISDS critics, such as Senator Elizabeth Warren, react? One view is that this is the most they can possibly expect to get, so they should take it and celebrate. At the same time, I can imagine that they will find other reasons to object to a renegotiated NAFTA, and this won’t sway them. Nevertheless, I’ll be curious to see what they have to say about this specific proposal.

source: IELP Blog