Fair and Equitable Treatment

Rudolf Dolzer, “Fair and Equitable Treatment: A Key Standard in Investment Treaties”, 39 International Lawyer 87-106 (2005).

Dolzer’s article is presented as an introductory overview to the state of jurisprudence on the meaning of the term “fair and equitable treatment” as of 2005, which might indicate that it would have limited value today.  However, the quality of Dolzer’s discussion and the insight he brings to the topic give this article an ongoing relevance that its straight-forward presentation belies.

The interpretation of “fair and equitable treatment” is, of course, both a highly important area of current scholarship, and a highly controversial area of arbitral jurisprudence.  As Dolzer notes, even by 2005 it had become almost habitual for a “fair and equitable treatment” claim to be included in an investment arbitration, if only because the term’s meaning was so unclear that it was thought to be at least worth a try.  The potential expansiveness of the term has also made it a particular lightning rod for criticism by those concerned about a potential anti-State bias in the investment arbitration system.

It is with respect to this last point that Dolzer’s article has particular ongoing value, in addition to the simple benefit of the clarity of his discussion.  Dolzer discusses the now commonly voiced observation that the interpretation of “fair and equitable treatment” has come to be closely tied to the protection of an investor’s “legitimate expectations”.  Indeed, sometimes the suggestion is made that “fair and equitable treatment” consists of nothing more than this.  It is this development in particular that has concerned some observers, as on its face it appears to bias the standard strongly towards of investors.  All an investor must do, that is, to prove a violation of “fair and equitable treatment”, is demonstrate that it had reason to expect the State to behave in a particular way, and the State becomes liable simply because it took an action the investor did not expect.  No actual wrongdoing on the State’s part is required.

Dolzer, though, provides a far more balanced analysis of this connection than is usually done, noting that while tribunals have indeed tied the two ideas together, they have also held that a claim for a violation of “fair and equitable treatment” cannot be based on laws already in force when the investment commenced.  In short, if an investor wishes to argue that its “legitimate” expectations were violated, then it must demonstrate that those expectations were indeed legitimate.  This is, however, difficult if the law expressly contradicts the expectations the investor claims to have had.

As Dolzer puts it, “The principle of territorial sovereignty and of economic self-determination provide for the doctrinal basis of the jurisprudence here reviewed…[N]o other state and no foreign investor can be considered, in the absence of a treaty to the contrary, to have a right toward a host state to determine and organize its law in any particular manner, and the logical extension of this principle is that no investor has a right to base a claim against the host country upon the subsequent application of the law to the business of the investor.” (102)

Notably, though, Dolzer restricts his analysis to laws expressly adopted at the time an investor decides to invest.  This qualification, though, ignores a significant part of the interpretation and application of law, as it pays no attention to the role that normative principles play in giving substance to written legislation.  That is, two countries may have legislation that is word-for-word identical, but that is nonetheless applied in significantly different ways, because of the normative principles embodied in the national legal systems, and in terms of which the words of the legislation are interpreted.

If, then, we accept that investors should not be allowed to make “fair and equitable treatment” claims based on the application of laws that predated their decision to invest, it is not immediately obvious why claims should be allowed based on new laws that are nonetheless normatively consistent with pre-existing laws.  Such laws are, after all, merely furtherances of the law in force at the time the investor decided to invest.  If the investor cannot “legitimately” expect a law not to be enforced, surely it also cannot expect subsequent legislation to be normatively inconsistent with prior legislation.

What a proper appreciation of this limitation to “fair and equitable treatment” entails, then, is that the standard can only be violated if the Host State enacts a law that is normatively inconsistent with previous laws in the same field.  That is, the law must reflect a new guiding principle, rather than just be a new enactment.

An investor may, for example, invest in a State with a history of environmental protection with an expectation that the State’s environmental regulation of the field of the investment has reached its greatest extent, only to find its investment subject to a profit-damaging new environmental regulation.  In such a case it should arguably be no more necessary for the Host State to argue that the investor’s expectations were not “legitimate” than would have been necessary had the law been in place prior to the investment being made.  While the law itself was not written, the principles underlying the law were clearly incorporated into the relevant area of the legal system, and they constitute the law as much as does the written legislation.

This, anyway, would seem to be the consequence of Dolzer’s insightful observation, if followed to its conclusion.  The article as a whole is not a ground-breaking or cutting-edge piece of work, but it is a very high quality discussion that does significantly more than just summarize caselaw, and as a result it is worthwhile reading for anyone working on the meaning of “fair and equitable treatment”.

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About Tony Cole

I am Senior Lecturer at Brunel Law School in London. I specialise in international arbitration and international investment law.
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