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Drafting MFN Clause in Investment Chapter of Trans-Pacific Partnership Agreement

This memorandum examines interpretation of Most-Favoured-Nation (MFN) treatment standard for substantive protection in the context of international investment law.

Clinic: Graduate Institute, Spring 2012

Executive Summary

Full report available here 1. This memorandum examines interpretation of Most-Favoured-Nation (MFN) treatment standard for substantive protection in the context of international investment It also offers proposals for drafting the MFN clause of the Investment Chapter of the Trans- Pacific Partnership (TPP) Agreement. The main purpose of the proposals is to limit the importation of more favourable substantive treatment from other international treaties by invoking the MFN clause in the TPP.

2. In order to achieve the purpose, the comparison method and classification method are main analysis means used in this memorandum. The research in the memorandum focuses on two aspects. First, the current treaty language study regarding the MFN, including the MFN standards and other provisions relating to its application; and second, the case study, namely the debate on the interpretation of the MFN on the issue of importation of substantive treatments in investment dispute settlement practice, especially the tribunals’ attitude.

3. With respect to the treaty language, both the formulation method used by the TPP negotiating States and other typical MFN clauses are examined. More emphasis is put on the analysis of MFN clauses in the NAFTA, Energy Charter Treaty and UK Model BIT due to their influence and importance. Considering Argentina’s extensive involvement and experiences on investment arbitrations, its BITs are also taken into account together with its investment arbitration.

4. From the study on treaty language, the common features probably useful for limit the application of the MFN clause have been found, such as the terms “in like circumstances”, “within the territory”, etc.

5. More useful conclusions come from the analysis of international investment dispute settlement practice involving the subject issue. The memorandum examines twenty-one cases relating to discussion of the application of substantive treatment from reference treaty through MFN clause in basic treaty, in which five cases under NAFTA and sixteen under other The cases are divided into three different categories according to the different types of more favorable treatment to be imported. In most of the cases, the claimants wanted to import more favorable FET treatment and/or umbrella clause. The tribunals were more flexible to the importation of the former but stricter to the latter. The combination of the MFN and the FET in a same provision is more likely to lead the success of the importation.

6. The case study shows even though it’s hard to define the ejusdem generis principle; it still can form crucial obstacles to the invocation of more favorable treatment through MFN clause. The limitation requiring the more favorable treatment to be imported to fall within the scope of the base treaty is quite useful for the limitation, does not create a significant limitation since most of the more favourable treatments can be found within other international investment.

7. In particular, within the NAFTA framework, it’s extremely hard for a claimant to successfully reach an importation compare to other BITs and The NAFTA practice offered some important experience. The States could use the reservations in treaty provisions, annex and protocols to limit the application of the MFN. Moreover, using footnote or other documents to record the common intention of negotiation States on the limitation has significant effects while the tribunal makes the interpretation based on the Vienna Convention on the Law of Treaties. The contracting party intervention and the establishment of an interpretation note by Free Trade Commission are also examined. However, it turns out more difficult to achieve a consensus on this under the TPP due to the high number of the contracting states compared to NAFTA practice.

8. The memorandum also classifies Chile’s BITs, analyzes its FTAs and relevant cases, which reflects the common features and conclusion drew from the above-mentioned treaty practice.

9. As no common method found in formulating the MFN clause among the TPP negotiating States, this memorandum offers the final proposal in general and three drafted MFN clauses mainly based on the research of aforesaid treaty language and investment dispute settlement practice.

10. The first proposal offers the strictest limitation on the application of MFN. Besides the requirements made on the scope of the base treaty, it also adds a burden of proof that actually grant of treatment has happened on the claimant. The second proposal only put emphasis on the importation of new standards. It limits the MFN extension for the treatment standards that are already accorded in the base treaty. The last proposal provides limitation of MFN via customary international law principles through ejusdem generis and scope of the base treaty.

11. As outlined in the explanatory notes for each proposal, with different level of limitation, the three proposals have different possibility to get accepted by the negotiating States, and meanwhile, have different implications on the application of the MFN clause. As case study shows, unless otherwise provided by treaty text, tribunals were more likely to allow the party to attract better or even new treatment standards through the MFN clause. The three different narrow MFN clauses will help Chile to achieve the desired result, namely the non-importation of more favourable treatment standards into the TPP Investment Chapter.

Click this link to download the full memorandum in pdf format.

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