Fair and Equitable Treatment and Regulatory Space: A Comparative Analysis of Different Models

Executive Summary

(Summary of a project undertaken for the Ministry of Finance, Government of Israel)

(Full report can be read here)**

 

The fair and equitable treatment (FET) standard has become a major basis of investment treaty arbitration claims, with almost half of all recorded Investor-State Dispute Settlement (ISDS) claims based on the failure to meet FET obligations. The ambiguity surrounding the meaning of the FET standard and its components has left it prone to wide interpretation by tribunals and state parties involved in investment treaty arbitration claims. This lack of clarity has brought about significant regulatory chill among state parties to international investment agreements, in fear that their domestic regulation has become susceptible to costly arbitration claims by foreign investors and therefore the impact on the state's regulatory space could be major and unpredictable.


This memorandum surveys the existing formulations of FET clauses in investment treaties and studies the variety of components said to be part of the FET standard, in order to find the FET formulation that creates the desired balance between the protection of foreign investors' interests and the state's right to regulate. In order to avoid the problematic results of legal uncertainty that are analyzed in this memorandum, it is suggested that FET clauses should be as detailed as possible in order to increase legal certainty in regard to their content, to the benefit of both investors and host states. In order for the state to create certainty in regard to its regulatory space, legal certainty in treaty language is necessary. Therefore, the preferred model of FET, according to the analysis proposed in this memorandum, is FET linked to Minimum Standard of Treatment (MST) with specific clarifications. Connecting the FET standard to the MST may add some legal certainty and shed light on the parties' intentions concerning the scope of FET. However, this formulation still leaves room for interpretation of the clause by tribunals, as the components and precise meaning of MST are still unclear today. It is the opinion of this memorandum that states seeking to protect their regulatory space should strive to further clarify the obligations and the components under FET to be included, but also excluded, from their FET clauses, in the spirit of the emerging trends explained in the memorandum.

 

The full report can be read here.

 

** The contents of this submission are solely the views of the authors and should not be interpreted as being the work product of the Office of the Chief Economist or as reflecting the views of the Ministry of Finance or the Government of Israel

 

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