To protect foreign investors and their assets from political risks posed by host states, investment agreements often include obligations related to “treatment” principles, which host states must adhere to. These principles generally encompass several different rules, with the most fundamental being: (i) the principle of non-discrimination, and (ii) the minimum standard of treatment (including the principles of full protection and security and fair and equitable treatment).
Based on the standards of protection, these principles are typically divided into two categories: absolute protection principles (such as the principles of full protection and security, and fair and equitable treatment), and relative protection principles, which depend on the treatment granted by the host state to its own investors or investors from other countries (such as the principle of non-discrimination).
1. Principle of Non-Discrimination
The principle of non-discrimination includes two main sub-principles: most-favored-nation treatment (MFN) and national treatment (NT).
a. Most-Favored-Nation Treatment (MFN)
The MFN principle requires that the host state provide investors and investments from partner countries under the investment agreement with treatment no less favorable than that given to investors and investments from any third country. The aim of this principle is to prevent unequal treatment among foreign investors.
However, the specific provisions regarding this principle vary across investment agreements, leading to differences in its scope of protection. Some agreements limit the application of this principle to certain stages of the investment process, such as the management, maintenance, use, and enjoyment of investments. Others apply the principle broadly, covering all issues regulated by the agreement. In such cases, some argue that the MFN principle extends not only to substantive commitments but also to procedural obligations, such as dispute resolution mechanisms.
Regarding the timing of application, some agreements stipulate that the benefits of the agreement (including MFN treatment) only apply to cases where the investments of a party’s investors in the host state’s territory have been approved in writing by the relevant authorities. In more recent agreements, MFN treatment has been extended to cover the pre-establishment phase of investments in the host state.
As for exceptions, most investment agreements include certain exceptions to the MFN principle. For example, it does not apply to commitments made by the host state under a customs union, common market, free trade area, or double taxation avoidance agreements.
In the CPTPP Agreement, the MFN principle has a relatively broad scope compared to earlier agreements. The CPTPP stipulates that each party must provide investors and investments of another party with treatment no less favorable than that accorded to investors and investments of any other party or non-party in similar circumstances. This applies to the establishment, acquisition, expansion, management, conduct, operation, and disposition of investments within its territory. However, the CPTPP specifies exceptions for certain sectors and countries in its annexes. Beyond these exceptions, investors and investments from member states are entitled to MFN treatment during the investment process, starting from the establishment phase.
b. National Treatment (NT)
The NT principle requires a host state to treat foreign investors and their investments no less favorably than its domestic investors and their investments within its territory.
Granting NT to foreign investors is often more challenging than MFN treatment, especially for countries maintaining policies to protect domestic investments. Earlier investment agreements rarely included the NT principle. For those that did, the scope of NT application varied. Some agreements limited NT to ensuring full protection and security, while others applied NT to certain stages of the investment process, typically after the investment project was established. Most agreements signed after 2000 adopted this approach, except for certain new-generation free trade agreements.
Recent investment agreements have expanded the NT principle to include the pre-establishment phase of investments. This ensures that foreign investors have market access equal to domestic investors.
In the CPTPP Agreement, Article 9.4 requires each party to accord investors and investments of another party treatment no less favorable than that given to its domestic investors in similar circumstances. This applies to the establishment, acquisition, expansion, management, conduct, operation, and disposition of investments. Thus, the CPTPP mandates NT even during the investment establishment phase, meaning member states must allow foreign investors equal access to their investment markets. However, the CPTPP provides exceptions to the NT principle in Annexes I, II, and III. Beyond these exceptions, foreign investors in Vietnam enjoy the same treatment as domestic investors.
2. Principle of Full Protection and Security
The principle of full protection and security is a standard found in most bilateral and multilateral investment agreements.
This principle obliges a host state to provide physical protection and security for foreign investors and their investments against harm caused by the government or third parties. The level of protection must meet the minimum requirements of international law. In other words, the host state must take reasonable measures to prevent harm to foreign investments.
Although arbitral tribunals have interpreted this principle in various disputes, most investment agreements do not explicitly define its content. They only require states to provide full protection and security to investors and their investments. This has led to broad interpretations by arbitral tribunals.
In response, the CPTPP Agreement not only mandates full protection and security for investors and their investments but also clarifies its scope. Article 9.6 states that "full protection and security" does not require treatment beyond what is mandated by customary international law and does not create additional rights. It also specifies that a party’s failure to act according to an investor’s expectations does not constitute a violation of this principle, even if it results in damage to the investment.
This clarification underscores that, while the CPTPP refers to international customary law, it limits the scope of this principle to avoid overly expansive interpretations. Furthermore, the CPTPP explicitly states that deviations from an investor’s expectations do not inherently breach this principle, highlighting the agreement’s balanced approach to investor protection.
3. Principle of Fair and Equitable Treatment
The principle of fair and equitable treatment (FET) for foreign investors was first introduced in the Havana Charter of 1948 and subsequently in the OECD Draft Convention on Foreign Investment of 1959, the OECD Draft Convention on the Protection of Foreign Property of 1967, and a series of bilateral and multilateral investment agreements signed thereafter.
This is one of the most important principles in international investment law and is also the principle most frequently invoked by investors in international investment disputes to date. This principle is stipulated differently in various investment agreements. Some agreements recognize this principle as an independent provision in their investment protection clauses. In other investment agreements, it is combined with the principle of full protection and security. In some cases, it is incorporated together with the principle of non-discrimination.
Like the principle of full protection and security, most investment agreements do not define or clarify the concept or scope of this principle. The interpretation of its content has been left to arbitral tribunals in international investment disputes. Depending on the wording of specific agreements, the timing of the dispute, and the views of arbitrators, arbitral awards on this principle have varied. However, some recent agreements, such as the CPTPP, the EU-Vietnam Free Trade Agreement, and the ASEAN Comprehensive Investment Agreement (ACIA), have provided clearer definitions of the principle.
Due to the lack of clear definitions in most investment agreements, the application of this principle varies widely. The terms “fair” and “equitable” are inherently vague, leading to diverse interpretations.
Although the interpretations differ, arbitral tribunals have often relied on five key elements to determine whether a host country’s measure violates this principle:
i. Failure to Protect Investors’ Legitimate Expectations
Legitimate expectations are fundamental in the investment process. Investors form expectations based on their assessment of the risks and benefits of an investment, which significantly influence their investment decisions. The state’s actions, including laws and policies, often affect these expectations and create certain assumptions about the profitability of an investment. It is deemed unfair for a host state to enact laws or take actions that lead investors to form expectations and make investment decisions, only to later act in ways that negate or significantly reduce those expectations.
Arbitral tribunals generally interpret this element as a violation when a state enacts laws, policies, or actions that create legitimate expectations for investors, but later changes those laws or policies in ways that severely diminish or completely negate the anticipated benefits of the investment. Although host states have the right to change their laws or policies, they must consider compensating investors if those changes result in significant losses of legitimately expected benefits at the time of the investment decision.
This principle does not imply that host states must satisfy every desire or imagination of investors. It does not require freezing the legal framework for investors' benefit but rather ensuring a degree of stability that ordinary investors can reasonably expect.
ii. Lack of Transparency
The transparency of the host government clearly affects investors’ legitimate expectations. Investors’ legitimate expectations are often based on a clear legal framework or explicit or implied commitments by the host state. As noted by Thomas Walde, the principle of protecting investors’ legitimate expectations is closely tied to transparency: governments must clearly express their expectations of investors and cannot hide behind inconsistencies or ambiguities. Thus, in numerous international investment disputes, arbitral tribunals have ruled that a host state violated the FET principle by acting non-transparently and failing to protect investors’ legitimate interests.
iii. Arbitrary or Discriminatory Actions
The plain meaning of “fair and equitable treatment” inherently requires that the host state does not act arbitrarily or discriminatorily toward investors. However, determining whether a specific action by the host state is arbitrary or discriminatory can be challenging. In cases where host states’ actions harm investors, and investors allege discrimination or arbitrariness, host states often argue that such actions are reasonable and necessary to protect public interests.
In international investment disputes, arbitral tribunals typically focus on whether the host state’s actions were arbitrary. For instance, in the case of LG&E Energy Corporation v. Argentina, the ICSID tribunal ruled that Argentina’s actions were not arbitrary because they were necessary to prevent an economic collapse during a crisis and were the result of proper evaluation rather than disregard for the rule of law.
Arbitrary behavior often leads to discrimination. Thus, the terms “arbitrary” and “discriminatory” are frequently considered parts of the FET principle. Whether a measure constitutes discrimination often involves applying the non-discrimination principles, including national treatment and most-favored-nation treatment. Arbitral tribunals frequently reference the ICJ judgment in the ELSI case (United States v. Italy), which identified four elements of discriminatory measures: (1) intentional treatment, (2) preferential treatment for one party, (3) over another foreign investor, and (4) typically not applied against others. However, proving these elements in arbitration is often challenging.
iv. Denial of Justice or Due Process
Ensuring procedural fairness when dealing with issues involving individuals or foreign entities is a fundamental requirement of the rule of law and a cornerstone of the FET principle. Failure to uphold procedural fairness constitutes “denial of justice.” According to U.S. investment law, “denial of justice” refers to harm resulting from denial of access to courts or denial of proper procedures or fairness in criminal or civil proceedings. This suggests that denial of justice must involve clear and significant judicial errors. A mere legal misinterpretation or factual error by domestic courts or administrative bodies does not constitute denial of justice.
In international investment disputes, arbitral tribunals often find violations of the FET principle when government or judicial processes affect investors’ rights without proper notification or are biased against investors.
v. Bad Faith
Host states' actions taken in bad faith toward investors can be deemed violations of the FET principle. However, this is not considered a key element of the principle.
The concept of bad faith relates to the motivation of state authorities or public agencies in dealing with investors. However, no arbitral award has yet ruled that a host state acted in bad faith toward investors.
It is evident that this principle has been interpreted broadly in international investment disputes, encompassing the five elements discussed above. A host state’s action violating any of these elements may constitute a breach of the FET principle.
To limit arbitral tribunals' broad interpretation of the FET principle, some recent investment agreements, such as the CPTPP and ACIA, have clarified and narrowed its scope.
Under Article 9.6(2)(a) of the CPTPP, “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil, or administrative proceedings, consistent with due process principles in the world's fundamental legal systems. Additionally, Clause 4 of the CPTPP clarifies, “For greater certainty, the mere fact that a Party’s action or inaction may be inconsistent with an investor’s expectations does not constitute a breach of this Article, even if it results in harm to the investment under this Agreement.”
This CPTPP provision limits the scope of the FET principle to denial of justice and due process, rather than the five elements discussed above, thereby restricting arbitral tribunals from making broad interpretations of the principle.
4. Conclusion
In addition to the principles discussed, international investment law includes principles related to expropriation and specific commitments ensuring the protection of investors’ activities. However, the principles highlighted here are the most critical for investors when deciding to invest in a country and are often invoked by foreign investors in arbitration against host states. Understanding these principles to ensure domestic laws and regulatory practices align with them will significantly contribute to improving Vietnam's investment and business environment.
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