Most-favoured Nation Clause Research Articles

Singapore and Its Free Trade Agreement with the European Union: Rationality ‘Unbound’?

Abstract Querying Poulsen’s view that some States negotiate investment treaties in ‘bounded’ rational ways, this article focuses on how the recently concluded European Union-Singapore Free Trade Agreement (EUSFTA) illustrates the evolution of Singapore’s treaty practice. Singapore has abandoned the ‘old’, and has joined the bandwagon of next-generation FTAs; yet, shrewdly, it is not fully convinced about the ‘new’ either. For example, the EUSFTA does not include a most-favoured nation clause, and does not commit to an appeals mechanism, unlike its Canadian and Vietnamese counterparts. Singapore’s caution appears to be motivated by a pragmatic desire to avoid the pitfalls that these provisions could bring with them, as Investor-State arbitration (ISA) jurisprudence demonstrates, and to study the implications of a recent decision by the EU’s highest court regarding the FTA. Indeed, that shows that the EU itself is now equally wary of the ISA regime removing disputes from the jurisdiction of national courts.

The Use of Most-Favoured-Nation Clauses to Import Substantive Treaty Provisions in International Investment Agreements

The present work considers the use of Most-Favoured-Nation (MFN) clauses within Bilateral Investment Treaties (BITs), or other International Investment Agreements (IIAs), to import provisions, not included in the IIA (such as fair and equitable treatment provisions or umbrella clauses), by investment arbitral tribunals. Many tribunals have allowed the use of MFN clauses for this purpose, imported the absent standard in the treaty, and have subsequently considered whether or not there was compliance with the imported provision. This study analyses whether this is a proper use of MFN clauses in IIAs. It first examines the practice of some investment tribunals of importing substantive provisions through MFN clauses. Secondly, it analyses whether MFN clauses can be used to import a substantive provision in order to include a new obligation and, at the same time, confer jurisdiction to decide on breaches of imported provisions. In doing so it explores the nature, scope, and limits of MFN clauses as well as the principle of consent to international jurisdiction. Thirdly, it considers how tribunals should proceed when faced with this type of argument, focusing on the interpretation of the elements of MFN clauses. It is suggested that typical MFN clauses included in IIAs should not be used to import treaty provisions.

MFN Clauses as Bilateral Commitments to Multilateralism: A Reply to Simon Batifort and J. Benton Heath

Most-favored-nation (MFN) clauses have been included in international commercial treaties for many centuries. They also figure prominently as standard provisions in almost any international investment agreement (IIA). Their longstanding and widespread use notwithstanding, investment law doctrine and arbitral practice continue to struggle with the clauses’ application and interpretation, in particular as regards their scope of application. What Stanley Hornbeck observed more than one hundred years ago in this Journal, that “there appear[s] constant disagreements and ever-recurring irritation over what is the meaning and what are the obligations attaching to this or that [MFN] clause,” still characterizes the practice of investment tribunals and the literature on MFN clauses in IIAs today.

Most Favored Nation Clauses and Investment

This article examines the effect of most favored nation (MFN) clauses on investment. I find that MFN clauses can increase incentives to invest in product quality. I provide sufficient conditions for when MFN clauses increase investments relative to fixed price contracts. I also find that in some circumstances MFN clauses weaken investment incentives and reduce total welfare. Bilateral negotiating partners may have an incentive to adopt MFN clauses that reduce overall welfare because MFN clauses may benefit the negotiating parties but also extract surplus from third parties. I show that in some cases negotiating parties may be compelled by MFN clauses to enter into a contract even if more efficient investment is achieved without a contract.

The Politics of International Trade

Traditional international trade models explain comparative advantage and describe aggregate gains for a country from trade and from terms-of-trade improvement but do not address the politics of international trade policy. A positive or predictive model that studies the politics of trade policy requires two premises, both with public choice origins: (1) that political self-interest underlies policy determination of trade policy rather than social-welfare objectives, and (2) politically assignable rents are preferred to budgetary revenue from trade restrictions and aggregate gains from terms-of-trade improvement. Originating political-economy models of protectionism and reciprocal trade liberalization acknowledge on both premises. Subsequent popular (and popularly replicated) models of trade policy include the first premise but not the second. The popular models are inconsistent with the actual conduct of trade policy. We also present public-choice perspectives on strategic trade policy, the most-favored nation clause, preferential trading, duty-free zones, globalization, and direct voting on trade policy, and we review and interpret empirical evidence.

Некоторые особенности применения оговорок о наибольшем благоприятствовании в международном инвестиционном праве

The most-favoured nation clause is applied in international law in a different way in comparison to its application in international trade law. The article deals with the two possible ways how the most-favoured-nation clause can be applied, namely incorporation and de facto application. First, within the framework of international investment law the incorporation of standards of investment protection from the other international agreements often leads to the full-fledged „redrafting“ of the main bilateral investment treaty, and therefore, the uncertainty as regard to the obligations of the host State. Second, there are no established criteria of likeliness for the de facto application of the clause. The author illustrates how in the absence of the normative framework the arbitral tribunals have elaborated the limits of the application of the clause. In case of incorporation the term treatment means inclusion of more favourable standards of investment protection into the text of an international agreement. In order to apply the clause in such a way, it is suffice to have the two agreements applicable to „the investors”, whereas the definitions of an investor, and therefore the personal scope of foreign investors are not the same. There are several examples of successful incorporation of standards of foreign investors’ protection from the other bilateral investment treaties. For instance, a foreign investor referred to the clause in order to raise compensation in case of expropriation, to incorporate the fair and equitable treatment standard despite of the fact that there was no such a standard in the main treaty. In one case the tribunal did not exclude the possibility to import fair and equitable treatment provision from the treaty concluded earlier than the main treaty. In case of the de facto clause application the comparison is made between the foreign investors that are in the like circumstances with the applicant. With regard to the de facto application the author discusses the likeliness criteria, elaborated by the arbitral tribunals in national treatment cases, in particular, economic and business sector, competition among foreign investors, competition between their products and services, the public policy regulation. No investor has succeeded to persuade the arbitral tribunals to apply the clause de facto, however, this new approach can find its place but requires more detailed argumentation by the foreign investor. The author comes to the conclusion that the criteria for likeness of circumstances have the priority over the criteria for likeness of investors.

Shopping for a better deal: the use of MFN clauses to get ‘better’ fair and equitable treatment protection

The present article analyses the following question: can a most favoured nation (MFN) clause contained in an investment treaty that includes a fair and equitable treatment (FET) standard clause be used by an investor to claim the benefit of a better FET protection found in other treaties entered into by the host state? Tribunals have so far all accepted the importation of better FET protection through MFN clauses. The question is important in light of the fact that new treaties are increasingly containing FET clauses with a restrictive scope.

Wholesale Most-Favored-Nation Clauses and Third Degree Price Discrimination with Negative Consumption Externalities: A Duality Result

Most-favored-nation (MFN) clauses in wholesale contracts have been the subject of recent controversy and renewed antitrust scrutiny. We demonstrate that an environment where MFN clauses may be widely adopted shares a duality property with an environment where a monopolist sells a good exhibiting negative consumption externalities directly to consumers. Many arguments for or against wholesale MFN clauses can be re-framed in this consumer framework where the welfare effects closely follow those developed in the third degree price discrimination literature by Schmalensee (1981) and Varian (1985). Specifically, the risk that MFN clauses deter entry in the producer problem can be inter- preted equivalently in the consumer problem as the risk that a ban on price discrimination results in low types no longer being served, and also reduces welfare. We argue that ex- amining wholesale MFNs from this perspective offers a greatly simplified approach: the welfare effects of wholesale MFNs are in general ambiguous for the same reason the effect of uniform pricing on welfare is ambiguous in Schmalensee (1981) and Varian (1985).

Telenor Mobile Communications A.S. v. Republic of Hungary

170Expropriation — Burden of proof that expropriation occurred — Whether exercise by government of regulatory powers constitutes expropriation — Whether serious breach of contract constitutes expropriation — Considerations in determining expropriation — Substantial erosion of value of investmentJurisdiction — Most-favoured-nation (MFN) clause — Whether MFN clause extends jurisdiction to claims not listed in dispute settlement clause — Intention of parties to BITJurisdiction — Remedies if no jurisdiction of arbitral tribunal — Diplomatic protection — Domestic remediesCosts — Allocation of costs between parties — Effect of a party’s conduct on apportionment of costs — Initiation of proceedings without examination of jurisdictional basis

The law and economics of most-favoured nation clauses

The law and economics of most-favoured nation clauses

Toss out the Baby and Put the Water to Bed: On MFN Clauses and the Significance of Treaty Interpretation

The present article presents a study of past awards dealing with the question as to whether a recourse-to-national-courts requirement provided for in some bilateral investment treaties (BITs) may be bypassed by operation of a most-favoured-nation (MFN) clause contained in the same BIT. We posit that a more careful application of the rules of treaty interpretation contained in Articles 31 and 32 of the Vienna Convention on the Law of Treaties will reconcile the discrepancies existing in case law. Given the hierarchy built into Articles 31 and 32, where the ordinary meaning of terms such as ‘all matters’ does not appear to be ambiguous or absurd, supplementary means of interpretation—for example, the circumstances of conclusion of the BIT—may not supplant this meaning. Taking into account also the taxonomy of cases developed by the UNCTAD we conclude that the majority of cases accept the possibility of overcoming the local courts requirement on the basis of an MFN clause.

The 'Most Favored Nation' Clause under Multilateral vs Multiple Bilateral Trade Agreements

This paper examines how the welfare implication of the most-favored-nation (MFN) principle has changed as the trade agreement mode has shifted from the one-shot-multilateral-trade-agreement to sequential-bilateral-trade-agreements.'' In particular, it emphasizes that the MFN principle works as 'passive constraints' in the former but 'active commitments' in the latter. It demonstrates that under the latter, (i) the importing country strategically takes a cost-efficient country as the first (second) trading partner when the MFN principle is (is not) embedded, and (ii) embedding the MFN clause improves both trade surplus of the importing country and world economy. That the MFN principle is utilized as a commitment device to encourage production by the cost-efficient country causes a reversal of the welfare implication in the previous literature.

Rethinking Ethiopia’s Bilateral Investment Treaties in light of Recent Developments in International Investment Arbitration

International investment law is dynamic. As treaty practice and jurisprudence in the area constantly develop, global standards are always in the making. Rethinking Ethiopia’s Bilateral Investment Treaties (BITs) is thus a natural response to evaluate the status of the country’s obligations under the regime of global investment standards. This article briefly evaluates the concept of Most Favored Nation (MFN) treatment, in relation to the nature or purpose of MFN clauses and its interaction with dispute resolution provisions contained in BITs. In doing so, the article evaluates the different scenarios of ‘treaty shopping’ whereby an investor can possibly use BITs signed by Ethiopia and a state other than the investor’s home state, to benefit from treaty obligations entered by Ethiopia with other partners. A review of Ethiopian BITs indicate that in almost all of the BITs, the MFN clause is phrased in general terms and leaves leverageto raise competing interpretations and creating a matrix of obligations thereby stretching the country’s obligations under the respective agreements. This calls for revising the broad and incoherent application of the MFN standard contained in various BITs signed by Ethiopia with the aim to laying down a coherent investment treaty framework.Key words: Most Favored Nation, Bilateral Investment Treaties, InvestmentArbitration, Umbrella Clause, Standard of Treatment

The power politics of international tax co-operation: Luxembourg, Austria and the automatic exchange of information

ABSTRACTLuxembourg and Austria resisted exchanging bank data on non-resident interest income with European Union (EU) partners for over a decade. In March 2014 they eventually gave in. Theories of tax competition analysts usually apply to intra-EU bargaining over taxation cannot explain their change of tack. Instead, I argue that American imposition of bilateral exchange of information on the two countries unlocked negotiations at EU level. Concessions made to the United States (US) by Luxembourg and Austria activated a most-favoured nation clause contained in an EU directive. Moreover, the US also forced third countries to exchange bank data, thus reducing the risk of capital flight from Luxembourg and Austria.

Entrenchment of regionalism: WTO legality of MFN clauses in preferential trade agreements for goods and services

AbstractThe most favoured nation (MFN) clauses in preferential trade agreements (PTAs) under GATT Article XXIV or under GATS Article V entrench the preferential trade relations between the PTA parties because the trade liberalization in future PTAs with third parties will be constrained by the existing PTA MFN clauses. Trade liberalization based on PTA MFN clauses cannot be considered part of the internal trade liberalization required by GATT Article XXIV:8 or GATS Article V:1. The exclusionary effects caused by trade liberalization through PTA MFN clauses increase the burden on trade with third parties. As a result, PTA MFN clauses do not meet the necessity test under the Appellate Body's decision in Turkey–Textiles, as reasonable alternatives to the PTA MFN clauses are available. For these reasons, PTA MFN clauses fail the requirements for legal defences under GATT Article XXIV or GATS Article V for their violations of the general MFN clauses under GATT Article I and GATS Article II. For those products or services subject to existing PTA MFN clauses, any preferential liberalization based on PTA MFN clauses should be accorded non-discriminatorily to all WTO members in accordance with GATT Article I or GATS Article II.

Fragmentation in international trade law: insights from the global investment regime

AbstractWith World Trade Organization negotiations stagnant, and preferential trade agreements (PTAs) rapidly proliferating, international trade relations are shifting markedly toward bilateralism. The resulting fragmentation in the international trade regime poses serious risks to economic welfare and the coherence of international trade law. Similar challenges have been faced in the international investment regime, which is comprised of a highly fragmented network of bilateral investment treaties (BITs). However, scholars have identified several mechanisms that promote harmonization in the international investment regime. Among these are cross-treaty interpretation in dispute settlement and the inclusion of most-favoured nation (MFN) clauses in BITs. This paper assesses the scope for these two mechanisms to emerge in the international trade regime by comparing the legal framework, institutional dynamics, and political economy of the trade and investment regimes. The analysis suggests that cross-treaty interpretation is likely to emerge in the trade regime as PTA dispute settlement activity increases and that greater use of MFN clauses in PTAs is a viable possibility. These developments would mitigate the effects of fragmentation and advance harmonization in the international trade regime.

The Agency Model and MFN Clauses

I investigate the of sales, in which suppliers set retail prices and share revenue with retailers. Perhaps surprisingly, it is not the case that the agency model eliminates double markups; retailers continue to impose a markup because the revenue-sharing contracts they select distort the perceived marginal cost of suppliers. Nonetheless, when retailers compete in revenue shares, adopting the agency model lowers retail prices and industry profits. Yet, retailers' profits increase. Most-favored nation clauses that stipulate retail price parity can facilitate the emergence of high industry prices, but in some cases may also raise market-entry incentives and benefit consumers. My results provide an explanation for why many online retailers have adopted the agency model and MFN clauses.

Impregilo SpA v Argentine Republic1 and Hochtief AG v The Argentine Republic,2: Making Sense of Dissents: The Jurisprudence Inconstante of the MFN Clause

The interplay of a bilateral investment treaty’s (BIT) dispute settlement provision with a most-favoured nation (MFN) clause has proven to be a fertile ground for vigorous debate. Indeed, in the field of investor–State arbitration, it may be difficult to conceive an issue as intellectually stimulating and of such practical significance that remains difficult to synthesize. This seems especially true after the most recent awards addressing the issue, two of which were accompanied by strong dissents. Before turning to these recent decisions, it is worth recalling what was (or was not) settled by their antecedents. At the 2010 International Bar Association Annual Conference in Vancouver, Juan Fernández-Armesto spoke of a ‘long night’ (between 1960 and 2000)—during which parties simply ignored the MFN clause—interrupted by ‘three flashes’: Emilio Augustín Maffezini v The Kingdom of Spain,5 Plama Consortium Limited v Republic of Bulgaria6 and RosInvestCo UK Ltd v The Russian Federation.7 In Maffezini, the first ‘flash’, a BIT Tribunal ruled for the first time that an MFN clause could apply to a dispute settlement provision, and allowed the investor to circumvent a requirement that it litigate before the host State’s domestic courts for 18 months before instituting arbitration against the State. Many tribunals, with the notable exception of Wintershall Aktiengesellschaft v Argentine Republic,8 followed suit.9 At the same time, the Maffezini Tribunal warned of ‘disruptive treaty-shopping’10 and observed that the effect of MFN clauses should be limited by certain ‘fundamental’ ‘public policy considerations’ underlying State consent,11 such as the agreement to a particular forum, the requirement to exhaust local remedies, the agreement to a fork-in-the-road provision and the agreement to a highly institutionalized and very precise procedural mechanism to conduct arbitration such as under NAFTA.

Liberalization of Investment and Human Development

Particularly throughout the 1990s, one important strategy relied on by countries lacking capital or seeking to improve their access to technology by attracting investors has been to conclude international investment agreements (IIAs). Such treaties usually include provisions relating to the scope and definition of foreign investment ; admission and establishment ; national treatment in the post-establishment phase (a guarantee of non-discrimination against the investor of the other Party established in one Party); the most-favoured nation clause (ensuring that the investor of the other Party will benefit from the same treatment as any other foreign investor) ; fair and equitable treatment, including a protection from expriopriation ; guarantees of free transfers of funds and repatriation of capitals and profits ; and dispute settlement provisions (State-State and State-investor). But how successful was such a strategy? Did it succeed in attracting investment? And even if it did, how can we assess the 'sovereignty costs', or the loss of 'policy space', associated with the conclusion of IIAs? If countries indeed compete for the arrival of foreign investment and if the conclusion of such agreements is one tool they rely on to gain an advantage on potential competitors, does this entail the risk that the concesssions they make will go too far, for example by renouncing the possibility of imposing performance requirements on the investor (though this could arguably strengthen the linkages with the host economy), by guaranteeing a freeze in the regulatory framework applicable to the investment, or by authorizing transfer pricing between the local subsidiary and the foreign-based parent, thereby reducing the fiscal revenues that could be gained from the arrival of the foreign investor? By concluding an investment agreement, a country signals its intention to respect the rights of investors and to create a legal and policy framework that will provide the kind of stability they usually expect. But could it be that, while it may be understandable for each country considered individually to seek to conclude IIAs with a view to attracting investors, the result is collectively sub-optimal, as the IIAs lose their signalling function once they come to be generalized?We conclude that IIAs are not decisive in attracting investment. FDI inflows are generally dependent on other variables, especially the size of the market in the host country or trade openness ; and although a predictable and safe legal environment does matter to the investor, such predictability can be provided by other means (the more a country's traditional respect for the rule of law is established, the less it shall have to resort to investment treaties that protect the rights of investors). Moreover, if IIAs make any difference, it is especially in the extractive industry where very large investments are made, that are 'sunk' at the early stages of the project, and that are only profitable after a long period of time, leading the investor to be particularly risk-averse. It would therefore be ill-advised for countries seeking to attract investment to do so by providing incentives in investment agreements, especially where such incentives are designed in a way that could be interpreted as exempting the investor from having to comply with requirements linked to human rights, or to social and environmental considerations. Such incentives are no substitute for the establishment of an attractive macro-economic and business climate, and they may in fact even be counter-productive as regards the immediate aim of attracting investors (let alone as regards the more ambitious aim of human development) if, as a result of entering the country, the investor would be risking its reputation and subject itself to criticism because of the laxity of the standards applied. It is therefore entirely justified, even from the point of view of the attractiveness of a country to investors, to seek to explore which safeguards should be established under the domestic law of host countries in order to ensure that the arrival of FDI shall not negatively affect the rights of the local population, and shall instead contribute positively to human development indicators in the country ; and it is fitting for capital-exporting countries and for agencies such as export credit agencies or multilateral lending institutions to support this effort. Far from limiting the sovereignty of the countries seeking to attract investment, these tools are used in order to strengthen the bargaining position of these countries: they are a way to support them in making the choices that should benefit their populations most, when these countries could otherwise be tempted to 'signal' their willingness to attract investors by providing far-reaching forms of protection that reduce their policy space, or to offer advantages that will annul, or at least seriously diminish, the benefits they have a right to expect from the arrival of FDI.

Allocating Adjudicatory Authority: Most-Favoured-Nation Clauses as a Basis of Jurisdiction--A Reply to Zachary Douglas

The present article comments on Zachary Douglas, The MFN Clause in Investment Arbitration: Treaty Interpretation Off the Rails, published in the February 2011 issue of this Journal. It supports Douglas’ argument that arbitral tribunals should interpret investment treaties in accordance with general principles of law, and reason their decisions accordingly, in order to contribute to more consistency and coherence in the field. This, however, does not alleviate tribunals from taking a ‘BIT by BIT’-approach to the interpretation of most-favoured-nation (MFN) clauses. Furthermore, the present article argues that general principles do not support Douglas’ view that MFN clauses cannot serve as a jurisdictional basis in investment treaty arbitration. Much to the contrary, these principles, as enshrined in the jurisprudence of international and domestic courts, and codified by the International Law Commission in its 1978 Draft Articles on Most-Favoured-Nation Clauses, support exactly the effect Douglas sets out to deny. If one understands the issue at stake as one of allocating adjudicatory authority between domestic courts and arbitral tribunals, MFN clauses have been used by international and domestic courts precisely to that effect. Furthermore, the clauses have direct effect in extending more favourable treatment to foreign investors without the need to claim such treatment through an arbitration proceedings. Overall, the present article argues that MFN clauses in investment treaties can have the effect of allocating adjudicatory authority and thus serve as a basis of jurisdiction of an investment treaty tribunal.