Is the interpretation and application of the “fair and equitable treatment” standard predictable? : An insight into the legal culture of NAFTA Chapter 11 investor-state disputes

This thesis is concerned with the predictability of the fair and equitable treatment (FET) standard. The aim is to understand the North American approach to international investment arbitration, especially how the FET standard has been interpreted and applied. Today, most Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) contain a clause on Investor-State Dispute Settlement (ISDS). ISDS allows disputes between foreign investors and the host country to be settled through international investment arbitration (IIA). In the last 20 years, investment disputes resolved through ISDS have increased substantially. Despite its growing popularity, ISDS clauses have not gone without their fair share of public critique. In Europe, the criticism against IIA culminated during the discussions on whether to include an ISDS clause in the Transatlantic Trade and Investment Partnership (TTIP). There was a fear that American investors would be able to influence European regulators by threatening them with costly proceedings through the ISDS clause. This has been referred to as causing a “regulatory chill” on legislative initiatives. Integral in the critique of ISDS is the assumption that proceedings in international investment arbitration are somehow biased towards investors. While this is by no means true statistically, the vagueness of investment protection standards, such as the FET standard, are often used as an example of the unpredictability of the whole system. Allegedly, host states are forced to settle the dispute as they perceive IIA as unpredictable. It is therefore the unpredictability of the investment protection standard that is the main driver behind the critique against the whole system. The thesis draws its theoretical inspiration from Critical Legal Studies in an attempt to meet the critique in the same theoretical framework. The objective of the theory is to discern the legal culture in which investment awards are given. By familiarizing with this culture, I postulate that there are patterns of behavior that, once known, increase the predictability of IIA as a whole. With regards to the FET standard, I argue that its predictability is determined by how readily an impartial person could recognize a violation of the standard. The analysis is limited to this standard, because of its prominent status in investment disputes. It is by far the most popular standard on which investors base their claims. The standard has been criticized because of its vagueness, which allegedly gives the arbitrators too much discretion in deciding the investment disputes. The analysis of the predictability of the FET standard can thus be seen as a representation of the predictability of the system as a whole. The focus of the analysis is limited to investment disputes decided under chapter 11 of the North American Free Trade Agreement (NAFTA). It functions as a representation of the North American interpretation of the standard and provides for an excellent example of how investment arbitration can be used efficiently between developed economies. This thesis takes a qualitative approach to the question as the focus of the analysis is on a handful of prominent NAFTA chapter 11 awards. The analysis is divided into the interpretation and application of the FET standard. The analysis of the interpretation focuses on the theoretical argumentation on which Tribunals have supported their awards. Here, the main conclusion is that the FET standard is considered part of the customary international law minimum standard of treatment of aliens, also referred to as “CILMSTA.” There is a test that most Tribunals use to determine whether acts of host states reach this standard. The test aims to reflect the actions of the state with the likely reaction of impartial persons and to determine whether this body of people would be “outraged” or “shocked” at the actions of the state. The chapter on the application of the standard is a more concrete approach. When applied, the standard is not used as such, but is actualized through one of its subsequent elements. If one or many of the elements can be considered to satisfy the test of “outrage” or “shocking”, then there has been a violation of the FET standard. As it becomes evident throughout my survey of prominent awards, Tribunals are cautious of finding a violation of the standard. The threshold for breaching the standard is high, and it is only in exceptionally pronounced cases where the requirements of the test have been met. In conclusion, it is evident that most Tribunals reflect the actions of the state to the reaction of an average impartial person. Tribunals are mostly conscious of the fact that a violation of the standard should be predictable and thus representative of a broader understanding of fair and equitable treatment in customary international law. In the interest of correcting false perceptions that many concerned state actors may have, this thesis hopes to contribute with a nuanced perspective of the predictability of the FET standard in North American investment arbitration