The MFN Clause in Investment Arbitration: Treaty Interpretation Off the Rails

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1 Journal of International Dispute Settlement, Vol. 2, No. 1 (2011), pp doi: /jnlids/idq015 Published Advance Access December 10, 2010 The MFN Clause in Investment Arbitration: Treaty Interpretation Off the Rails ZACHARY DOUGLAS* In this article the author revisits the vexed question of whether the jurisdiction of an international tribunal, established in accordance with the terms of the basic treaty, can be expanded by reference to the terms of a third treaty through the investor s reliance upon the MFN clause in the basic treaty. The recent line of cases suggesting that no general answer to that question can be provided in view of the nuanced differences in the wording of MFN clauses is considered and criticized as failing to pay adequate attention to the principles of general international law as mandated by Article 31(3)(c) of the Vienna Convention on the Law of Treaties. The application of those principles leads to a negative answer to the question. A claim for MFN treatment secures the treatment represented by the third treaty, it does not effect the automatic incorporation of the terms of the third treaty into the basic treaty before the investor files its claim. Moreover, for the investor to assert a claim for MFN treatment it must first accept the standing offer of international arbitration in accordance with the terms of the basic treaty and at that point an arbitration agreement comes into existence. The terms of that agreement cannot be amended retroactively at the suit of one of the parties. There is a fundamental distinction in general international law between the substantive obligations in a treaty, which are addressed to the state parties, and the provisions that create a jurisdictional mandate for an international tribunal, which are addressed to the tribunal and to the disputing parties, who enter into a relationship of procedural equality once arbitration proceedings have been commenced. This distinction must be respected by investment treaty tribunals in confronting the question of the scope of MFN clauses. 1. Introduction At the present stage in the development of an international law of investment, not many questions can be formulated so as to yield a yes or no answer. But one question that has been posed with precision and seems worthy of a straight answer is whether the jurisdiction of an international tribunal established in * University of Cambridge and Matrix Chambers. The opinions expressed in this article are those of the author and do not necessarily reflect the views of parties represented by the author. ß The Author Published by Oxford University Press. All rights reserved. For permissions, please journals.permissions@oup.com

2 98 Journal of International Dispute Settlement accordance with the terms of the basic treaty can be expanded by incorporating the more favourable treatment reflected in the jurisdictional provisions of a third treaty through the investor s invocation of the most-favoured-nation (MFN) clause in the basic treaty. It is notorious that this question has proved to be among the most divisive in the jurisprudence. This does not bode well for the future of precise questions in this field. There are, broadly, three schools of thought evidenced in the jurisprudence and no school can claim a clear numerical supremacy of adherents: there is the yes school, 1 the no school 2 and the question cannot be formulated in general terms school. 3 The third approach has the potential to be the most damaging to the legitimate expectations of the actual users of the investment treaty system. There is a high premium on certainty when it comes to rules for the adjudication of disputes because the alternative is litigation about how to litigate, which is hardly an attractive proposition for investors or respondent states. As the third approach makes litigation about the scope of claims that can be litigated quite inevitable, its purported justification deserves special scrutiny. The third approach is said to be consistent with or even mandated by Article 31 of the Vienna Convention on the Law of Treaties (1969): it is a question of treaty interpretation that must be resolved by giving an ordinary meaning to the terms of the particular MFN clause in the basic treaty. There are nuanced differences in the language of each MFN clause in each treaty and so it follows, according to this school of thought, that no general question on the application of MFN clauses to jurisdictional provisions can be formulated consistently with 1 Some of the decisions listed in the three footnotes relate to issues that are properly characterized as procedural rather than jurisdictional. The fundamental difference between jurisdictional and procedural requirements is that the latter can be waived by the tribunal in appropriate circumstances: see, in relation to a negotiation requirement, Z Douglas, The International Law of Investment Claims (CUP, Cambridge 2009) paras Some of the arguments set out in this article are also relevant to whether the MFN clause can be applied to procedural issues. In short, not only is the application of the MFN clause to procedural requirements flawed as a matter of principle, it is redundant in so far as such requirements are not condition precedents to the exercise of the tribunal s jurisdiction and can be waived in circumstances where strict adherence to them would be futile. Emilio Agustín Maffezini v Kingdom of Spain (Decision on Objections to Jurisdiction, 25 January 2000) ICSID Case No ARB/97/7, 5 ICSID Rep 396 (hereinafter Maffezini ); Gas Natural SDG, S.A. v The Argentine Republic (Decision of the Tribunal on Preliminary Questions on Jurisdiction, 17 June 2005) ICSID Case No ARB/03/10, 14 ICSID Rep 284; Suez, Sociedad General de Aguas de Barcelona SA & InterAguas Servicios Integrales del Agua SA v Argentine Republic (Decision on Jurisdiction, 16 May 2006) ICSID Case No ARB/03/17; National Grid plc v Argentine Republic (Decision on Jurisdiction, 20 June 2006) UNCITRAL. 2 Salini Costruttori S.p.A. and Italstrade S.p.A. v The Hashemite Kingdom of Jordan (Decision on Jurisdiction, 15 November 2004) ICSID Case No ARB/02/13, 14 ICSID Rep 306; Plama Consortium Limited v Republic of Bulgaria (Decision on Jurisdiction, 8 February 2005) ICSID Case No ARB/03/24, 13 ICSID Rep 272; Telenor Mobile Communications A.S. v Republic of Hungary (Award, 13 September 2006) ICSID Case No ARB/04/15, Vladimir Berschader & Moïse Berschader v Russian Federation (Award, 21 April 2006) SCC Case No 080/2004; Wintershall Aktiengesellschaft v Argentine Republic (Award, 8 December 2008) ICSID Case No ARB/04/14; Austrian Airlines v Slovak Republic (Final Award, 9 October 2009) UNCITRAL. 3 Siemens A.G. v Argentine Republic (Decision on Jurisdiction, 3 August 2004) ICSID Case No ARB/02/8, 12 ICSID Rep 174; RosInvestCo UK Ltd v Russian Federation (Award on Jurisdiction, October 2007) SCC Case No V079/2005 (hereinafter RosInvest ); Renta 4 S.V.S.A. et al v Russian Federation (Award on Preliminary Objections, 20 March 2009) SCC Case No 024/2007 (hereinafter Renta ).

3 The MFN Clause in Investment Arbitration 99 the tribunal s interpretive mission. Our destiny, then, is to have a series of sui generis answers to the question without the certainty of a uniform solution. I have analysed elsewhere the merits of the arguments deployed by the yes school and the no school in respect of the jurisdictional question under consideration. 4 In this article, I elaborate further upon the reasons why a negative answer must be given to this question as a matter of general principle. Another purpose of this article, however, is to confront the arguments that are said to justify the third school of thought, which seems to be on the rise in terms of its recruitment of adherents. The significance of this particular battle of ideas, of course, goes far beyond the interpretation of the MFN clause. There is a growing tendency to eschew the resolution of general propositions of international investment law by reference to the apparent strictures of Article 31 of the Vienna Convention. If each case is to be approached as a sui generis exercise in treaty interpretation, then the prospects for a coherent international law of investment seems remote. A law-making role for investment treaty tribunals is a functional necessity given the open-textured drafting that characterizes investment treaties. The healthy scepticism that greeted the emergence of a new lex mercatoria for contractual disputes has no place in respect of the international law of investment. This time it is not a question of suppressing what are often the elaborate rules of an otherwise applicable law; it is a question of elaborating the sparse applicable law in order to address the concrete issues in dispute. Koskenniemi s observation about the judicial process of treaty interpretation holds particularly true in this context: it tends to create meaning rather than to discover it. 5 Does Article 31 of the Vienna Convention really mandate a BIT by BIT 6 analysis of the MFN clause, in particular, or the investment protection standards, more generally? MFN is a term of art in international law and treaty obligations employing this term of art have an ancient pedigree. 7 When state parties enter into modern investment treaties with an MFN clause, they surely do not intend to relegate the received wisdom on the nature, scope and effect of such clauses to the dustbin of history. To the contrary, by agreeing upon a slender text with copious references to terms of art in international law ( expropriation, national treatment and so on), the state parties agree that the general principles of international law are to assume a major part 4 Douglas (n 1) Ch 9. 5 M Koskenniemi, From Apology to Utopia: The Structure of International Legal Argument (CUP, Cambridge 2006). 6 Renta (n 3) para See generally, S Hornbeck, The Most-Favored-Nation Clause (1909) 3 AJIL 395.

4 100 Journal of International Dispute Settlement of the interpretative burden when it comes to resolving disputes. 8 As Verzijl remarked: Every international convention must be deemed tacitly to refer to general principles of international law for all questions which it does not itself resolve in express terms and in a different way. 9 The International Law Commission, which has taken up the topic of MFN clauses again in recent times, appears to agree: The fundamental questions about MFN clauses are matters of public international law. The central issue is how should MFN clauses be interpreted. And while this may appear to be a narrow question, in reality it is a broad question involving both treaty interpretation and the nature and extent of obligations undertaken by States under the ambit of an MFN clause. It engages our understanding of the role and function of MFN clauses and of their relationship to the principle of non-discrimination in international law. 10 Article 31 of the Vienna Convention cannot be invoked by tribunals to sever the terms of art employed in investment treaties from international law as the legal system that hitherto has sustained them. There are not as many ordinary meanings of the MFN standard as there are investment treaties. As Schwarzenberger remarked: [t]hough there is not such thing as the m.f.n. clause, it is equally necessary to emphasize that there is such a thing as the m.f.n. standard. 11 Investment treaties frequently contain a definition of their spatial scope as including the territorial sea of the state parties. 12 In settling upon an interpretation of this term, is the final port of call really a dictionary? Would a permissible interpretation, in view of the dictionary meanings provided for each word, be a sea enclosed by a territory? Or given the object and purpose stated in the preamble of the investment treaty, would it be more appropriate to recognize that any investment operation taking place on the continental shelf of a state party is within the territorial sea of that state party if the investment operation generates economic benefits for that state party (such as the taxation of revenues)? Would an oil drilling investment in the Gulf of Mexico, for instance, fall within the definition of the territorial sea for the United States pursuant to the (hypothetical) UK/US BIT? 8 The preamble of the Vienna Convention itself requires that: disputes concerning treaties...should be settled...in conformity with the principles of justice and international law. 9 Georges Pinson (France v Mexico) 5 RIAA 327, 422 (1928). See also: P Daillier and A Pellet, Droit international public (L.G.D.J., Paris 2002) 266 ( Un traité ne peut être considéré isolement. Non seulement il est encré dans les réalités sociales, mais encore ses dispositions doivent être confrontées avec d autres normes juridiques avec lesquelles elles peuvent entrer en concurrence. ). 10 Report of the Working Group on the Most-Favoured-Nation Clause, UN Doc. A/CN.4/L.719, 20 July 2007, para G Schwarzenberger, The Most-Favoured-Nation Standard in British State Practice (1945) 22 BYBIL 96, See, eg UK Model BIT (2005, with 2006 amendments) Art 1(c). Reproduced in Douglas (n 1) p 560.

5 The MFN Clause in Investment Arbitration 101 The cult of the dictionary in treaty interpretation leads to the erosion of settled meanings for international legal concepts and, instead, fixates upon the lowest common denominator of meaning generated by a sterile linguistic analysis of the treaty terms. The consequences of such an approach are manifold: (i) the authority of past decisions and awards in giving content to an international law of investment will be undermined because of judicial insistence that everything depends upon the language used in the particular treaty; (ii) the opportunity to confront general problems and articulate general solutions in each case will be more limited; (iii) the consistency of outcomes across cases will be jeopardized because tribunals will profess to have a blank slate in each individual case; (iv) as tribunals will be less constrained by the authority of past decisions, there will be more focus upon the profiles of the individual arbitrators as a guide to likely outcomes; and (v) given that shift in focus, prominent arbitrators will be even less inclined to develop their views on matters of substance in academic texts despite the obvious value of such contributions for the development of the law. 13 This article is now divided into two sections. First, the arguments of general principle against permitting a claimant to rely upon an MFN clause in the basic treaty to modify or expand the jurisdiction of the tribunal constituted in accordance with the terms of the basic treaty will be reiterated and expanded. The second section analyses how those arguments of general principle should properly inform the interpretative exercise envisaged by Article 31 of the Vienna Convention. 2. The Background of General International Law A. The Position Before Maffezini v Spain The decision in Maffezini was the first time that a party has been permitted to rely upon an MFN clause to modify the jurisdictional mandate of an international tribunal. Across the hundreds of years of activity of international courts and tribunals leading up to Maffezini, there had only been judicial pronouncements against such a device, including: the International Court of Justice s judgment in the Anglo-Iranian Oil Company Case 14 and the British Venezuelan Mixed Claims Commission s decision in Aroa Mines. 15 Also, prior to Maffezini, there does not appear to be any support in the writings of publicists for the extension of the MFN clause to jurisdictional matters. 13 Indeed, one arbitrator has recently been subject to a challenge on the basis of his published academic views on the MFN clause. The challenge was unsuccessful: Urbaser S.A. & Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v Argentine Republic (Decision on Claimants Proposal to Disqualify Professor Campbell McLachlan, Arbitrator, 12 August 2010) ICSID Case No ARB/07/ (United Kingdom v Iran) 1952 ICJ Rep 93. The case is analysed in Douglas (n 1) para 649C. 15 J Ralston, Venezuelan Arbitrations of 1903 (1904) 344; Douglas (n 1) para 673.

6 102 Journal of International Dispute Settlement An error committed by the tribunal in Maffezini, and in several subsequent awards that have followed it, is the finding that the Commission of Arbitration s award in the Ambatielos Case 16 supports the application of the MFN clause to the jurisdictional provisions of a third treaty. 17 The Commission of Arbitration affirmed that there is no general principle preventing an MFN clause being applied to matters relating to the administration of justice. But the administration of justice in this context was the substantive obligation to provide foreign nationals with free access to the national courts of each contracting state to the treaty of commerce and navigation. The MFN clause in the treaty was invoked by the Hellenic Government, on behalf of Mr Ambatielos, to found a claim of denial of justice for prejudice alleged to have been suffered by Mr Ambatielos in the English courts. The MFN clause was not invoked in respect of the jurisdiction of the international tribunal hearing the case. The jurisdiction of the Commission of Arbitration was simply not in issue. 18 Some tribunals have exposed the error in Maffezini. InPlama v Bulgaria, 19 the tribunal said: [The Ambatielos] ruling relates to provisions concerning substantive protection in the sense of denial of justice in the domestic courts. It does not relate to the import of dispute resolution provisions of another treaty into the basic treaty. 20 Likewise, in Salini v Jordan, 21 it was observed in respect of the Ambatielos decision: The Tribunal will observe that in this case, Greece invoked the most-favored-nation clause with a view to securing, for one of its nationals, not the application of a dispute settlement clause, but the application of substantive provisions in treaties between the United Kingdom and several other countries under which their nationals were to be treated in accordance with justice, right and equity. The solution adopted by the Arbitration Commission cannot therefore be directly transposed in this specific instance. 22 The Maffezini decision represents a point of departure from the existing conception of the function of MFN clauses in international law. B. General Principles of International Law Relevant to the Question Underlying this conception is the fundamental distinction between the substantive obligations in a legal instrument, such as a treaty, and the provisions in the same instrument addressing the jurisdiction of a court or tribunal that is conferred adjudicative power to resolve disputes arising out 16 (Greece v UK) 12 RIAA 119 (1956). 17 Maffezini (n 1) para See Douglas (n 1) para 657C ff. 19 (Decision on Jurisdiction, 8 February 2005) ICSID Case No ARB/03/24, 13 ICSID Rep Ibid, para (Decision on Jurisdiction, 15 November 2004) ICSID Case No ARB/02/13, 14 ICSID Rep Ibid, para 112.

7 of the legal instrument. Recently, the International Court of Justice had to consider a plea that the jus cogens status of the prohibition of genocide should have the effect of invalidating a reservation to its jurisdiction founded upon the Genocide Convention. The Court ruled as follows: Rwanda s reservation to Article IX of the Genocide Convention bears on the jurisdiction of the Court, and does not affect substantive obligations relating to acts of genocide themselves under that Convention. In the circumstances of the present case, the Court cannot conclude that the reservation of Rwanda in question, which is meant to exclude a particular method of settling a dispute relating to the interpretation, application or fulfilment of the Convention, is to be regarded as being incompatible with the object and purpose of the Convention. [...] The MFN Clause in Investment Arbitration 103 [T]he Court deems it necessary to recall that the mere fact that rights and obligations erga omnes or peremptory norms of general international law (jus cogens) are at issue in a dispute cannot in itself constitute an exception to the principle that its jurisdiction always depends on the consent of the parties In other words, the status of the substantive obligation to desist from acts of genocide in the Genocide Convention has no impact upon the jurisdictional mandate of the Court in resolving disputes arising out of the Convention. Each treaty provision addresses different things. They are not ejusdem generis. The distinction between substantive obligations and jurisdictional provisions is manifest in dispute resolution in private international law as well. The provisions of commercial contracts conferring jurisdiction to arbitral tribunals, for instance, are severable from the main contract and their validity and interpretation can be subject to different legal rules from those regulating the substantive obligations in the main contract. The doctrine of the severability of the arbitration clause from the main contract is one of the most pervasive features of comparative arbitration law. 24 The principle is that a clause conferring adjudicative power to an arbitral tribunal has a different purpose and, therefore, legal quality from the substantive obligations in the main contract. A claim that the main contract is void for illegality does not, for instance, impact upon the continued viability of the arbitration clause that is severable. 25 The jurisprudence of investment treaty tribunals also reflects a distinction between the substantive obligations of investment protection and the provisions of the treaty conferring adjudicative power upon an international tribunal. It is now widely accepted that an investor can structure its investment in order to 23 Armed Activities on the Territory of the Congo (New Application: 2002) (Democratic Republic of the Congo v Rwanda), Jurisdiction and Admissibility, Judgment, ICJ Reports 2006, p 6, paras 67 and 125. See also, Case Concerning East Timor (Portugal v Australia) ICJ Reports 1995, p90,para See generally, E Gaillard and J Savage (eds), Fouchard, Gaillard & Goldman on International Commercial Arbitration (Kluwer, Leiden 1999) See, eg in England: Fiona Trust & Holding Corp v Privalov [2007] UKHL 40; [2008] 1 Lloyd s Rep 254.

8 104 Journal of International Dispute Settlement benefit from the substantive protection of an applicable investment treaty. What the investor cannot do, however, is to restructure its investment after a dispute with the host state has arisen in order to establish the jurisdiction of an international tribunal on the basis of an investment treaty. 26 The reason for the distinction between the substantive obligations in an investment treaty and the provisions creating a jurisdictional mandate for an international tribunal is straightforward. Substantive obligations of investment protection are addressed to the contracting state parties. The object of protection is, generally, investments made by nationals of one contracting state in the territory of the other contracting state. The provisions conferring adjudicative power upon an international tribunal are addressed to that judicial organ once constituted and to the parties to the dispute that has been submitted to that judicial organ. Those disputing parties are not the contracting state parties to the investment treaty but the investor and the host state, which enter into a relationship of procedural equality before the international tribunal once a dispute has been submitted to it. In the context of adjudicating a dispute between an investor and the host state, how can it make sense for one disputing party to receive MFN treatment from the other disputing party in respect of the rules for adjudicating the dispute? The whole purpose of the equality of arms principle in international litigation is to ensure that the parties are treated the same. The equality of arms principle is not respected if one of the parties has the ability to adjust the rules relating to the jurisdiction of the tribunal or some other aspect of the procedure after a dispute has arisen. One might also ask how a respondent state is expected to accord MFN treatment in relation to the jurisdictional mandate of the tribunal? Once a dispute with the investor has arisen, the only way for a respondent state to provide an investor that treatment would be to waive any jurisdictional objections it may have upon receipt of the investor s request for arbitration. Hence the Maffezini doctrine requires the respondent state to capitulate in respect of the investor s demands concerning the adjudication of a specific dispute. That is hardly consistent with the principle of procedural equality. The MFN clause is a treaty obligation just like the other substantive obligations in the treaty. It can be invoked by an investor/claimant by asserting a claim against the host state for a breach of that obligation. There are logically two parts to a claim based upon an obligation to accord MFN treatment. First, the host state has granted more favourable treatment to investors of another state under a third treaty or by some domestic legal enactment or as a de facto practice. Second, that in failing to accord that treatment to investors of the state party to the basic treaty, the host state has breached the MFN clause in the basic treaty and thus is liable to repair that breach. 26 See: Douglas (n 1) paras and authorities cited therein.

9 The MFN Clause in Investment Arbitration 105 We are fortunate that one tribunal has analysed the very different nature of an investor/claimant s reliance upon an MFN clause for jurisdictional purposes. In Renta, the Tribunal distinguished between asserting a breach of the MFN clause and relying upon the MFN clause as evidence of conferring a more expansive jurisdictional mandate to the tribunal: To be clear: the Claimants are not seeking to establish that Russia breached an obligation under the basic treaty (the Spanish BIT) by failing explicitly to grant to Spanish investors the same access to international arbitration as the access the Claimants say is enjoyed by Danish investors. The question is instead simply whether Article 5(2) of the Spanish BIT [the MFN clause] evidences Russia s consent that this Tribunal s jurisdiction should have an ambit beyond that of Article 10 [the investor/state dispute resolution clause]. 27 The difficulty, however, with the Renta Tribunal s characterization of the problem as the proper construction of the arbitration clause is that the invocation of provisions in a third treaty granting more favourable treatment requires the operation of the legal device built into the MFN clause in the basic treaty; the question is whether that legal device is triggered in the absence of a claim for MFN treatment. That is a question of law and it cannot be avoided by labelling the exercise as a search for evidence. The task confronting the tribunal cannot be defined as simply the construction of the terms of a written instrument that are alleged to address the parties consent to an arbitral jurisdiction. The MFN clause does not, in truth, operate automatically to incorporate provisions of a third treaty so that all that remains for a tribunal to do is to interpret the amended text of the basic treaty. It is not an exercise in the construction of a static legal text that has been modified by an invisible hand prior to or upon the commencement of arbitration proceedings. The MFN clause operates to secure more favourable treatment for the claiming party; it does not operate to rewrite the terms of a treaty in respect of which the claimant is not even a signatory. Let us not forget that the more favourable treatment can be granted to an investor of a third state by means of a domestic legislative enactment or by any other act of state (judicial decision, administrative circular and so on). 28 It would be wrong to suppose that the documents recording this treatment are incorporated into the basic treaty by the operation of the MFN clause. It is the treatment represented by these documents that can be invoked by the investor claiming through the MFN clause in the basic treaty. 27 Renta (n 3) para 83. Emphasis in the original. 28 Final Draft Articles on Most Favoured Nation Clauses YB of Int L Commission (Vol 2, Pt 2, 30th session, 1978) 16 and 25.

10 106 Journal of International Dispute Settlement So it turns out that the incorporation by reference analogy is inapposite and is liable to mislead. 29 If more favourable provisions of a third treaty were really incorporated into the basic treaty by operation of the MFN clause at the time the third treaty enters into force, then it would follow that the continued validity of that third treaty would be irrelevant to the right of investors under the basic treaty to invoke that more favourable treatment. But that is not the case, as the International Court 30 and the International Law Commission have made abundantly clear. 31 If the third treaty is terminated, then so is the right to invoke that treatment through the MFN clause in the basic treaty. The fundamental point is that the more favourable treatment granted in a third treaty must be claimed through the MFN clause in the basic treaty. That is how the MFN clause works. It does not operate to amend or supplement the text of the basic treaty. Schwarzenberger is responsible for the memorable phrase that m.f.n. clauses serve as an insurance against incompetent draftsmanship and lack of imagination on the part of those who are responsible for the conclusion of international treaties. 32 But Schwarzenberger was acutely aware that the idea of automatic incorporation is a fiction: The object of any attempt to give legal expression to the m.f.n. standard is to enable the beneficiary automatically to acquire the rights, present and future, granted by the promisor to any third State. The device by which this end can be achieved most conveniently is to consider the relevant stipulations of treaties between the promisor and third States as automatically becoming part of the treaty between the promisor and the beneficiary. As in other spheres of municipal and international law, so here the resort to legal fictions has enabled draftsmen to popularize a new legal principle. 33 One can appreciate the wisdom of the International Law Commission s decision to avoid the language of incorporation of reference in its Draft Articles on MFN Clauses and of the International Court s rejection of that approach. 34 It is a domestic contract law analogy that is probably the root cause of the mistaken approach taken by investment treaty tribunals to the MFN clause. Reliance upon an MFN clause is not the same as reliance upon an express term in a commercial contract making reference to the standard terms of a trade organization, for instance. 29 I am guilty of using the same terminology in the past: Douglas (n 1), Ch Case Concerning the Rights of Nationals of the United States of America in Morocco (France v USA) ICJ Reports 1952, 176 and Final Draft Articles on Most Favoured Nation Clauses (n 28) 16 and 55 (art 21). 32 G Schwarzenberger, The Most-Favoured-Nation Standard in British State Practice (1945) 22 BYBIL 96, Ibid, Case Concerning the Rights of Nationals of the United States of America in Morocco (France v USA) ICJ Reports 1952, 176 and

11 The MFN Clause in Investment Arbitration 107 The claimant, by relying upon an MFN clause in respect of a jurisdictional matter, is in essence asking the tribunal to declare that it is entitled to the more favourable treatment represented by the terms of a third treaty dealing with the jurisdiction of the tribunal that is to be constituted in the event of a dispute arising under that third treaty. A declaration is a remedy (or a secondary consequence attaching to an internationally wrongful act to adopt the nomenclature of the International Law Commission s Articles on State Responsibility). A remedy is not granted automatically or in abstracto; the claimant must establish the constituent elements of a wrongful act. And here the conceptual problems facing a claim for more favourable treatment in respect of the jurisdiction of the very tribunal constituted to resolve the claim become obvious. The claimant cannot maintain that it was wrongful for the host state to have made a standing offer of arbitration in the terms that it did in the basic treaty per se. Arbitration depends upon consent and it is open to the contracting state parties to investment treaties to consent to arbitration on the terms they see fit. Can the claimant maintain that it was wrongful for the host state to have made a standing offer of arbitration in a third treaty that is different (or more favourable from the claimant s perspective) from the standing offer of arbitration in the basic treaty by virtue of the MFN clause in the basic treaty? One hurdle to be overcome in the assertion of such a claim is to establish that the different terms relating to the consent of the host state to the jurisdiction of an arbitral tribunal fall within the concept of treatment under the MFN clause so that they are ejusdem generis. For the reasons already provided, this hurdle is insurmountable. There is another important consideration that is fatal to such a claim. As previously observed, it cannot be said that the terms of the standing offer of arbitration in the basic treaty were, prior to the commencement of proceedings, somehow automatically amended by reference to the terms of a third treaty before the standing offer is even invoked by the putative claimant. The MFN clause does not automatically incorporate the terms of a third treaty into the basic treaty. It secures the treatment afforded by the host state to investors with the requisite nationality under a third treaty for the benefit of investors with the requisite nationality under the basic treaty. The more favourable treatment must be identified and then compared with the treatment afforded to the particular claimant. The claimant must assert a right to more favourable treatment by claiming through the MFN clause in the basic treaty. It can only do so by instituting arbitration proceedings and thus by accepting the terms of the standing offer of arbitration in the basic treaty. At that point an arbitration agreement between the claimant and the host state comes into existence. And the existence of that arbitration agreement is critical to the viability of the arbitration regime envisaged by the investment treaty. For instance, it is essential to the application of the New York Convention on the Recognition

12 108 Journal of International Dispute Settlement and Enforcement of Foreign Arbitral Awards to the arbitration and to the ultimate award. 35 Hence there is a logical fallacy underlying the claim under consideration. The claimant can only assert the claim for MFN treatment by entering into an arbitration agreement on the terms offered by the host state in the basic treaty. But it is the terms of that arbitration agreement that the claimant is seeking to displace or modify by asserting the claim. In summary, investment treaty tribunals have attempted to convert the fiction of automatic incorporation into a reality by pretending that the terms of their own jurisdiction in the basic treaty are rewritten before the commencement of proceedings by reference to the provisions of a third treaty. The claimant/investor is not making a claim for MFN treatment but is rather being permitted to enforce this fiction. This is contrary to general principle and authority for the reasons discussed. 3. The Vienna Convention Rules of Interpretation Article 31 of the Vienna Convention reads: General rule of interpretation (1) A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. (2) The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: (a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty; (b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. (3) There shall be taken into account, together with the context: (a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) any relevant rules of international law applicable in the relations between the parties. (4) A special meaning shall be given to a term if it is established that the parties so intended. 35 See further: Douglas (n 1) paras

13 The MFN Clause in Investment Arbitration 109 Each of these four elements of Article 31 is expressed in mandatory terms and is designed to apply within a single and integrated exercise of treaty interpretation. Article 31 of the Vienna Convention is entitled General rule of interpretation and not General rules of interpretation. The significance of this is often overlooked. The International Law Commission described the importance of this choice of words in the following terms: The Commission, by hearing the article General rule of interpretation in the singular and by underlining the connexion between paragraphs 1 and 2 and again between paragraph 3 and the two previous paragraphs, intended to indicate that the application of the means of interpretation in the article would be a single combined operation. All the various elements, as they were present in any given case, would be thrown into the crucible, and their interaction would give the legally relevant interpretation. Thus, Article [31] is entitled General rule of interpretation in the singular, not General rules in the plural, because the Commission desired to emphasize that the process of interpretation is a unity and that the provisions of the article form a single, closely integrated rule. 36 The European Court of Human Rights has professed faith in the correct approach: In the way in which it is presented in the general rule in Article 3l of the Vienna Convention, the process of interpretation of a treaty is a unity, a single combined operation; this rule, closely integrated, places on the same footing the various elements enumerated in the four paragraphs of the Article. 37 Compare this statement on the integrated exercise of interpretation mandated by Article 31 of the Vienna Convention with the following ruling in an investment award, which is by no means unique in the jurisprudence: Since the Tribunal has come to the above conclusions on the basis of the ordinary meaning of Article 8 in the context of the object and purpose of the BIT in accordance with paragraph (1) of Article 31 VCLT, there is no need to go into the additional criteria for interpretation in the further paragraphs of that Article. 38 In another case, 39 the tribunal cited the Advisory Opinion of the International Court of Justice in Competence of the General Assembly for the Admission of a State to the United Nations with approval for the proposition that: if the relevant words [of a treaty] in their natural and ordinary meaning make sense in their context, that is the end of the matter. 40 The Advisory Opinion in question, however, was rendered some 30 years before the Vienna Convention came into force. When this statement was repeated by the International Court 36 A/CONF.39/11/Add.2, 39, para Golder v United Kingdom (Application no 4451/70) 1 EHRR 524, para RosInvest (n 3) para Austrian Airlines v Slovakia (Final Award, 9 October 2009) UNCITRAL, para Competence of the General Assembly for the Admission of a State to the United Nations, ICJ Reports 1950, 4 and 8.

14 110 Journal of International Dispute Settlement 40 years later, in Case Concerning the Arbitral Award of 31 July 1989, 41 it was immediately tempered with (or perhaps contradicted by) the following observation: The rule of interpretation according to the natural and ordinary meaning of the words employed: is not an absolute one. Where such a method of interpretation results in a meaning incompatible with the spirit, purpose and context of the clause or instrument in which the words are contained, no reliance can be validly placed on it. 42 A BIT by BIT approach to the interpretation of the text of each MFN clause in each individual treaty without reference to wider principles of international law risks prioritizing the interpretive task in subsection 1 of Article 31 of the Vienna Convention at the expense of the other elements in subsections 2 and Dictionary meanings of specific treaty terms may triumph over settled meanings in the general corpus of international law. In particular, the mandatory instruction to take into account any relevant rules of international law applicable in the relations between the parties in Article 31(3)(c) of the Vienna Convention is being ignored. 44 In fact, the relevant rules of general international law are sometimes juxtaposed with the tribunal s limited mandate to decide the specific case before it on the basis of the specific wording of the MFN clause. In RosInvest it was stated: [S]ince it is the primary function of this Tribunal to decide the case before it rather than developing further the general discussion on the applicability of MFN clauses to dispute-settlement-provisions, the Tribunal notes that the combined wording in Article 3 and 7 of the UK-Soviet BIT is not identical to than in any of such other treaties considered in these other decisions. 45 The point is, however, that this general discussion, to the extent that it elucidates the principles of international law that have a bearing upon the applicability of MFN clauses to dispute-settlement-provisions, is relevant to 41 (Guinea-Bissau v Senegal) Judgment, ICJ Reports 1991, Ibid, 69 70, quoting South West Africa, Preliminary Objections, Judgment, ICJ Reports 1962, In his recent treatise on treaty interpretation, Gardiner cautions against blinkered reliance on the ordinary meaning of treaty terms: First and foremost, in considering the role of the ordinary meaning to be given to the terms of the treaty, it is necessary to stress that the ordinary meaning is not an element in treaty interpretation to be taken separately when the general rule is being applied to a particular issue involving treaty interpretation. Nor is the first impression as to what is the ordinary meaning of a term anything other than a very fleeting starting point. For the ordinary meaning of treaty terms is immediately and intimately linked with context, and then to be taken in conjunction with all other relevant elements of the Vienna rules. R Gardner, Treaty Interpretation (2008), The leading modern analysis of this provision is: C McLachlan, The Principle of Systemic Integration and Article 31(3)(c) of the Vienna Convention (2005) 54 ICLQ RosInvest (n 3) para 137.

15 The MFN Clause in Investment Arbitration 111 the interpretative exercise in Article 31 of the Vienna Convention and, indeed, is mandated by subsection 3(c) of that provision. How would recourse to general principles of international law have impacted upon the analysis in RosInvest? The MFN clause in Article 3 of the UK Soviet BIT read as follows: (1) Neither Contracting Party shall in its territory subject investments or returns of investors of the other Contracting Party to treatment less favourable than that which it accords to investments or returns of investors of any third State. (2) Neither Contracting Party shall in its territory subject investors of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investments, to treatment less favourable than that which it accords to investors of any third State. 46 The RosInvest Tribunal held that the first paragraph of the MFN clause is not capable of extending to jurisdictional provisions of a third treaty but that the second paragraph is capable of being invoked for this purpose: [W]hile the protection by an arbitration clause covering expropriation is a highly relevant aspect of [the] treatment, if compared with the alternative that the expropriation of an investment can only be challenged before the national courts of the Host State, it does not directly affect the investment, but rather the procedural rights of the investor for whom paragraph (2) of Article 3 provides a separate rule. The Tribunal purported to ground its conclusion exclusively in the specific wording of the MFN clause without entering into the much more general question whether MFN-clauses can be used to transfer arbitration clauses from one treaty to another. 47 But it will be seen from the Tribunal s reasoning that, however it sought to portray its interpretative approach, in reality it made a value judgment about the relative merits of recourse to domestic courts versus recourse to international tribunals and concluded that the latter must be a highly relevant part of the corresponding protection for the investor. 48 The RosInvest Tribunal, like so many others that have declared fidelity to the specific terms of the treaty and eschewed engagement with general principles, actually decided on the basis of generalities. A purely textual analysis would have run into difficulties with the words in its territory that are to be found in each paragraph of the MFN clause. How can the host state provide more favourable treatment in relation to the scope of an international tribunal s jurisdiction in its territory? Article 31(1) of the Vienna Convention requires the interpreter to give effect to all the terms in the relevant provision: ut res magis valeat quam pereat. 49 Moreover, the context in which the MFN clause 46 RosInvest (n 3) para RosInvest (n 3) para RosInvest (n 3) para Territorial Dispute (Libyan Arab Jamahiriya/Chad) (Merits) ICJ Reports 1994, 6 and 23, para 47.

16 112 Journal of International Dispute Settlement appeared in the BIT was also disregarded by the Tribunal. Article 3 of the BIT is entitled Treatment of Investments. Article 8 of the BIT is entitled Disputes between an Investor and the Host Contracting State. It seems very implausible that, in defining the scope of the arbitral tribunal s jurisdiction in Article 8, the Contracting Parties intended that reference should also be made to Article 3. The titles of the articles of the BIT and the structure of the BIT (preamble, definitions, substantive obligations, dispute resolution and final provisions) are an important part of the context for the terms used in the treaty for the purposes of Article 31(1) of the Vienna Convention. 50 Interestingly, the Renta Tribunal did consider the relevance of the context of the provisions alleged to have an impact on the scope of the tribunal s jurisdiction: There is no rule that the entirety of arbitration agreements must be contained in a single article of an instrument. There is no rule that elements of arbitral jurisdiction may not be defined in an article (like Article 5) which also contains substantive provisions. 51 There is, indeed, no such rule but that is not the point. In considering the context of the terms used in Article 5 (the MFN clause in the Spain Russia BIT), the question is whether this reveals an intention on the part of the Contracting Parties that their agreement on the scope of the tribunal s jurisdiction in Article 10 ( Disputes between One Party and the Investors of the Other Party ) should be subject to modification by operation of the MFN clause in Article 5 ( Treatment ). But what of the RosInvest Tribunal s approach to general principles of international law? The Tribunal recognized a distinction between substantive and procedural protections but that, in essence, both should be considered under a single chapeau of treatment for the purposes of the MFN clause: an arbitration clause, at least in the context of expropriation, is of the same protective value as any substantive protection afforded by applicable provisions such as Article 5 of the BIT [the prohibition of expropriation]. 52 This conclusion rests upon the assertion that recourse to investment arbitration is of the same value to the investor as the substantive obligations in the investment treaty. But does satisfaction of the ejusdem generis principle for the application of the MFN clause really depend upon a perception of the relative value of different treaty provisions that is attributed to investors as a general class? 53 Or does it depend more upon an objective assessment as to 50 R Gardner, Treaty Interpretation (2008) Renta (n 3) para RosInvest (n 3) para The comment of the Tribunal in Telenor v Hungary remains apposite in this context: Those who advocate a wide interpretation of the MFN clause have almost always examined the issue from the perspective of the investor. But what has to be applied is not some abstract principle of investment protection in favour of a putative investor who is not a party to the BIT and who at the time of its conclusion is not even known, but the intention of the States who are the contracting parties. The

17 The MFN Clause in Investment Arbitration 113 whether the subject matter of substantive obligations of investment protection is the same as the subject matter of the treaty provisions that vest an international tribunal with jurisdiction over disputes arising out of the treaty? The latter approach is surely correct. And in answering this question, Article 31(1)(c) of the Vienna Convention directs us to general principles of law on the operation of MFN clauses. *** In this article, I have made the case for a negative answer to the question of whether an MFN clause in a basic treaty can be relied upon by the investor to expand the jurisdiction of an international tribunal established in accordance with the jurisdictional provisions in the basic treaty by incorporating the more favourable treatment reflected in the jurisdictional provisions in a third treaty. The Maffezini doctrine allows one of the disputing parties (the claimant investor) to rely upon a substantive obligation addressed to the contracting state parties to the treaty (the MFN clause) in order to modify the jurisdictional provisions in the treaty, which are addressed to the international tribunal and to the disputing parties collectively. It relies upon the fiction of the antecedent automatic incorporation of the terms of a third treaty when, in reality, a claim based on an MFN clause secures the treatment represented by that third treaty. It permits the jurisdictional mandate of the tribunal to be modified after a dispute has arisen at the suit of one of the disputing parties at a time when the claimant investor and respondent host state have already concluded a binding arbitration agreement and have entered into a relationship of procedural equality. It undermines the possibility of a valid and binding arbitration agreement between the disputing parties coming in existence before the tribunal rules upon its own jurisdiction, which is inimical to the requirement of certainty of terms for arbitration agreements and to the application of the New York Convention to investment treaty awards. 54 It leads to a mass of wasteful litigation about how to litigate. Whether or not the arguments deployed in making this case are ultimately found to be persuasive, let us not pretend that a tribunal s mandate in any given reference is confined to consulting a dictionary on the meaning of the word treatment. importance to investors of independent international arbitration cannot be denied, but in the view of this Tribunal its task is to interpret the BIT and for that purpose to apply ordinary canons of interpretation, not to displace, by reference to general policy considerations concerning investor protection, the dispute resolution mechanism specifically negotiated by the parties. Telenor Mobile Communications A.S. v Republic of Hungary (Award, 13 September 2006) ICSID Case No ARB/04/ 15, para See Douglas (n 1) paras