Most-Favored-Nation (MFN) clauses present, in the words of the U.N. International Law Commission (ILC), one of the “most vexed interpretive issues under international investment agreements.” The clause nevertheless persists, supplying one of the key non-discrimination requirements in modern investment treaties and free trade agreements. In essence, the MFN clause prohibits nationality-based discrimination among foreign investors: the host state undertakes to treat the investor’s investment as favorably as investments from other countries.

The vexing issue that the ILC identified in 2015 concerns the scope of this commitment to non-discrimination, an issue that we think has provoked both too much and too little debate. For two decades, a debate has raged in investment arbitration over whether investors can invoke MFN clauses to “import” jurisdictional clauses from other treaties—for example, to circumvent local court requirements in the applicable treaty.  But this debate, which was provoked by the Maffezini v. Spain arbitration in 2000, has had a curious side effect.  By focusing on the importation of jurisdictional provisions, nearly every participant in this debate has simply assumed, without much analysis, that it is unproblematic to use MFN clauses to import substantive standards of treatment from third-party treaties.  And investors have frequently employed this technique to expand the scope of obligations under investment treaties or to claim the benefit of standards of treatment—such as “fair and equitable treatment”—that are entirely absent from the applicable treaty.

In our article published in Volume 111 of the American Journal of International Law (AJIL), we challenge this conventional wisdom. Most of the arbitral tribunals that have allowed this importation of substantive standards have relied on presumptions and have ignored meaningful variations among MFN clauses, which might have signaled a narrower scope of application—potentially limited to addressing discrimination resulting from actual state measures. Moreover, states are increasingly challenging the conventional view by curtailing their commitments in new treaties, removing MFN clauses altogether or narrowing their scope in response to adverse awards, and challenging expansive interpretations of MFN before tribunals. Our argument also draws on our work as counsel to the respondent in the İçkale v. Turkmenistan arbitration, which resulted in the first published award to find that a common formulation of the MFN clause does not permit the importation of substantive standards of treatment.

We are very pleased that our work in AJIL has indeed provoked a renewed debate among scholars and practitioners of investment law. This includes an extensive response by Stephan Schill in the same issue of AJIL, a symposium in AJIL Unbound, and a discussion at the Organization for Economic Co-operation and Development at which one of us was honored to participate. We are also honored and humbled that our article was recently awarded the 2019 Smit-Lowenfeld Prize for best article in the field of international arbitration. We look forward to observing how the new MFN debate continues to unfold.

You can read the article, The New Debate on the Interpretation of MFN Clauses in Investment Treaties: Putting the Brakes on Multilateralization, with our compliments for a limited time only.

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