1.1. Fair and equitable treatment and the international minimum standard of treatment

The international minimum standard of treatment has been the subject of considerable jurisprudence and academic commentary.Footnote ²⁰ In the Neer case, the Mexico–US General Claims Commission devised a test that has since been deemed a relatively uncontested formulation for determining a breach of the minimum standard. The commission ruled:

The international minimum standard of treatment is to be measured against the treatment of both aliens and nationals, however, as it is intended in part to counter attempts by a state to avoid responsibility based on the fact that it had treated all subjects equally, albeit very poorly.Footnote ²² In the context of foreign investment, the international minimum standard of treatment comprises a ‘series of interconnecting and overlapping elements’ that apply to foreigners and foreign-owned property.Footnote ²³

The question of whether the fair and equitable treatment standard should be understood as being synonymous with or substantively analogous to the international minimum standard of treatment under customary international law also requires one to examine the extent to which, if at all, the fair and equitable treatment standard has become a part customary international law. For its part, the international minimum standard of treatment is generally understood to form a part of customary international law.Footnote ²⁴ It has also been suggested, however, that the near-ubiquitous presence of fair and equitable treatment clauses in IITs is sufficient evidence of state practice to inaugurate the fair and equitable treatment standard into the canon of customary international law.Footnote ²⁵ This view may be tempered, however, by the fact that the fair and equitable treatment standard originates from and has been largely promoted through the state practice of developed and capital-exporting countries.Footnote ²⁶ Interestingly, while developed countries remain the principal proponents of IITs, there is an upward trend in the number and geographical coverage of such treaties between developing countries (so-called ‘south–south’ agreements).Footnote ²⁷ Although this trend is generating support for the view that these south–south agreements constitute broader state practice, there is by no means consensus on the subject.Footnote ²⁸ Thus, when coupled with an apparent lack of opinio juris that would otherwise amount to such a consensus, it is difficult to assert with sufficient certitude that the fair and equitable treatment standard has risen to the level of customary international law.Footnote ²⁹

In light of the foregoing, can the fair and equitable treatment standard reasonably be equated with the minimum standard of treatment? As a matter of interpretation, this issue is likely only to be resolved on case-by-case basis by arbitral tribunals in the setting of international investment disputes. Within the context of NAFTA investor–state dispute settlement, however, the issue has been settled. Faced with differing interpretive approaches by arbitral tribunals with respect to the scope and meaning of fair and equitable treatment standard contained in NAFTA Article 1105,Footnote ³⁰ the NAFTA Free Trade Commission (FTC) clarified that the second approach that likens fair and equitable treatment to the minimum standard of treatment under customary international law is the interpretation that the parties had intended to give Article 1105. In the 2001 Notes of Interpretation of Certain NAFTA Chapter 11 Provisions, the FTC stated that ‘the [concept] of “fair and equitable treatment” . . . [does] not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens’.Footnote ³¹

According to one author, despite the differences in interpretive approach, certain general characteristics can be gleaned from IIT case law that may help in developing a meaning for the fair and equitable treatment standard. First, the fair and equitable treatment standard is imprecise and flexible; therefore, its meaning is inherently dependent on the context in which it is invoked.Footnote ³² Second, it is an objective standard that should be determined and applied in accordance with established sources of customary international law.Footnote ³³ Third, there is no requisite element of intent or bad faith infused into the fair and equitable treatment standard that must be proven in order to determine a breach.Footnote ³⁴ Fourth, the standard itself is high and tribunals should not embark in overly evaluative exercises with respect to government decision-making.Footnote ³⁵ Fifth, the fair and equitable treatment standard is an ‘overarching standard that covers a number of specific obligations’.Footnote ³⁶

1.2. The constituent elements of the fair and equitable treatment standard

The aforementioned obligations, which form the scope and content of the fair and equitable treatment standard, are, not surprisingly, the subject of debate.Footnote ³⁷ Since they are seldom explicitly articulated in the IITs under which they are invoked, determining the form and tenor of the fair and equitable treatment obligations is often the province of independent arbitral tribunals whose decisions are binding on no one other than the parties to a dispute. Nevertheless and in spite of the absence of more legitimate sources, patterns have emerged from the ever-expanding body of IIT case law that shed light on the nature of these obligations and thus the constituent elements of the fair and equitable treatment standard. From this body of case law, at least seven obligations have been identified: good faith, non-discrimination, provision of justice, protection of legitimate expectations, transparency, freedom from coercion and harassment, and non-arbitrary conduct.Footnote ³⁸

Because they share the objective of ensuring fair and equitable treatment, these obligations are similar and may have overlapping characteristics. For instance, the obligation to act in good faith, which is the most closely associated with the fair and equitable treatment standard, is breached when a state acts in bad faith towards an investor or investment in a manner that is sufficiently severe.Footnote ³⁹ The connection of this obligation to other obligations and to that of freedom from coercion and harassment in particular is obvious.Footnote ⁴⁰ The obligation to act in a non-discriminatory manner, also intrinsically linked to the duty to act in good faith, prohibits any form of discrimination towards an investor or an investment contrary to international human rights norms, sound regulatory and administrative conduct, and the impartial application of the law.Footnote ⁴¹

The nature of the obligation to provide transparency, however, is less evidently linked to good faith and can relate to a state's duties: to adequately publish its laws, regulations, and other binding rules or policies; to notify an investor regarding changes or possible changes in its own or its investment's status as result of state action; to adhere to certain comments or representations it has made; and to properly carry out its administrative functions with respect to an investor or investment.Footnote ⁴² Closely linked to the transparency obligation is the duty to protect legitimate expectations.Footnote ⁴³ These expectations may arise from state conduct in the form of oral or written commitments and representations relating to an investment; from reliance on the fact that a state's legal and administrative framework is stable, consistent, predictable, and transparent; or even from the simple assumption that a state will abide by the terms of an IIT.Footnote ⁴⁴

The denial of justice to an investor is also a breach of a state's obligation to provide fair and equitable treatment.Footnote ⁴⁵ Both a maladministration and misadministration of justice in either a judicial or administrative context can result in a denial of justice to the extent that it relates to serious inadequacies in the legal protection of foreigners and their investments.Footnote ⁴⁶ A denial of justice is procedural in nature and may consist, for example, of a lack of due process; an obstructed access to courts, hearings, or other forums for remedy; undue delays; partiality; and the non-execution of judgments.Footnote ⁴⁷

The final constituent element of the duty to provide fair and equitable treatment is the obligation to refrain from arbitrariness or arbitrary conduct. This notion, which forms the centrepiece of this paper, appears to occupy a relatively uncontroversial place among the various obligations that make up both the fair and equitable treatment standard and the international minimum standard of treatment.Footnote ⁴⁸ It is therefore surprising that it has received relatively little individual attention from international jurists.Footnote ⁴⁹ Accordingly, this paper endeavours to shed more light on arbitrariness and arbitrary conduct. It is to this notion that the paper now turns.

2.1. Arbitrariness as a general principle of law

A recognized source of international law by virtue of Article 38 of the Statute of the International Court of Justice,Footnote ⁵³ the ‘general principles of law recognized by civilized nations’ are ‘anchored in the realm of legal phenomena, which guarantees that minimum level of legal certainty without which the law becomes arbitrary’.Footnote ⁵⁴ Indeed, when one considers the more severe definitions of ‘arbitrary’ set out above, arbitrariness is undoubtedly antithetical to the order otherwise guaranteed by the rule of law.

There are several theories as to the sources of ‘general principles of law’.Footnote ⁵⁵ Due to the reference to ‘civilized nations’ in Article 38, however, the practice of looking to principles generally recognized at the national level of various legal regimes has emerged as the most common method for determining the general principles of law at the international level.Footnote ⁵⁶ As such, it is useful to examine the meaning of ‘arbitrariness’ in various domestic contexts before looking to its meaning at the international level.

Prohibitions against arbitrariness are generally articulated within the context of domestic administrative law. As a matter of law, administrative decisions must not go beyond the bounds of the discretionary authority with which the government is vested. Various legal regimesFootnote ⁵⁷ have thus developed tests in order to determine whether or not a decision may be classified as ‘arbitrary’. In the United Kingdom, for example:

Courts in the United States apply similar testsFootnote ⁵⁹ to determine whether or not administrative actions are ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law’.Footnote ⁶⁰ Under France's civil legal system, arbitrary government action may be challenged via allegations of a misuse of power, lack of jurisdiction, or violation of the law.Footnote ⁶¹

In Canadian administrative law, the notion of arbitrariness is not explicitly included in the standards of review of government actions. Therefore, neither a test nor criteria have been devised to evaluate allegations of arbitrary conduct. As a qualifier of government action, however, the level of arbitrariness in administrative acts would certainly factor into determining the ‘correctness’ or ‘reasonableness’ of a decision.Footnote ⁶² Moreover, despite a lack of discussion surrounding arbitrariness in particular, the prohibition of arbitrary conduct is generally recognized as a principle of Canadian lawFootnote ⁶³ and is in accordance with the supremacy of the lawFootnote ⁶⁴ as guaranteed by the Canadian Charter of Rights and Freedoms.Footnote ⁶⁵

Ultimately, the similarity of certain domestic conceptualizations of arbitrariness and a general prohibition against arbitrary conduct not only serve to confirm the status of arbitrariness as a general principle of law, but also offer insight into the term's general meaning. Thus, if a government action may be classified as arbitrary if it is taken without legal authority or proper purpose, or under irrelevant circumstances, it is patently unreasonable, it is in violation of law, or it results from a misuse of power. Furthermore, though these elements of arbitrariness have been examined in relation to administrative acts, they are easily transferable to allegations of arbitrary conduct in a judicial context and must be taken into account along with elements of procedural fairness.Footnote ⁶⁶

2.2. Arbitrariness according to the International Court of Justice: the ELSI case

Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy) Footnote ⁶⁷ is the landmark caseFootnote ⁶⁸ for the definition of arbitrariness at international law. Conveniently (for the purposes of this paper), the case was brought before the International Court of Justice (ICJ) under a clause prohibiting arbitrary measures in the US–Italy FCN Treaty following alleged governmental mistreatment of an American investment in Italy. The dispute surrounded the requisition by an Italian mayor of a factory owned in part by American investors. While the illegality of the act was not at issue, the scope of the term ‘arbitrary’ measures was. While the United States argued that ‘arbitrary measures’ included ‘unreasonable or unfair exercise of government authority’, Italy argued that only measures marked by ‘a complete lack of justification, in the sense that there is no lawful basis for the exercise of power’, can be termed ‘arbitrary’.Footnote ⁶⁹

In deciding the issue in favour of Italy, the ICJ addressed the notion of arbitrariness head-on in two oft-cited passages:

One criticism of the decision points to the possibility that it could create a defence for states that are alleged to have engaged in arbitrary conduct in allowing them to avoid responsibility by the simple proof of a lawful basis for their actions as opposed to a justification.Footnote ⁷¹ In that regard, one author draws attention to the phrase ‘without more’ employed by the court above.Footnote ⁷² In order for arbitrary conduct to constitute a breach, arbitrariness must first be proven followed by ‘something more’, which may include bad faith, harmful intent, or abuse of authority. This ‘something more’ criterion not only creates an additional element of proof in proving arbitrariness; it is also very unclear.

Another author takes issue with the threshold standard that the arbitrariness must shock or surprise a sense of juridical propriety.Footnote ⁷³ This standard presumes that the senses of juridical propriety across nations are uniform and it relies on a test of conscience rather than a test of objectivity.Footnote ⁷⁴ Nevertheless, the definition of arbitrariness put forth by the ICJ has had a discernable impact on investor–state arbitration, which is examined in more detail below.

2.3. Formulations of arbitrariness in scholarly works and academic commentary

Many authors have attempted to capture the notions of arbitrary conduct or arbitrariness under international law. For instance, one author states there is arbitrariness when a measure is made ‘on the basis of irrelevant considerations’.Footnote ⁷⁵ Another qualifies unjust behaviour as arbitrary if it is capricieux (capricious), contrary to due process, unjustified, and unexplained by objective reason.Footnote ⁷⁶ Yet another submits that the:

One author argues that the fact that notions of arbitrariness vary across domestic administrative systems complicates the formulation of an international principle.Footnote ⁷⁸ This view would appear to be consistent with the various conceptualizations of arbitrariness offered in the dictionary definitions featured above.Footnote ⁷⁹ In other words, what may be considered a prohibited form of arbitrariness under one domestic administrative system may not provoke sanction in another. Such a view ignores the fact, however, that a base level of prohibitive arbitrariness must exist, in so far as states equally prohibit arbitrary conduct in principle, if not in equal degree.

Others see a universal character in arbitrariness that is transferable to international law, with one author even elevating the prohibition of arbitrary treatment to a rule of customary international law.Footnote ⁸⁰ ‘Arbitrariness’, according to another author, ‘in any form is – or ought to be – abhorrent to homo juridicus; his whole professional outlook is dominated by the attitude that, in the eyes of the law, equal situations require equal remedies’.Footnote ⁸¹ As such, international law prohibits the arbitrary or unreasonable exercise of rights or powers, by state officials within the exclusive jurisdiction of states, that cause damage to foreign investment.Footnote ⁸²

Another view is that there may be several forms of arbitrariness. For instance, government measures that ‘fail to meet some yardstick of rationality or proportionality . . . could be referred to as substantive arbitrariness’.Footnote ⁸³ The notion of substantive arbitrariness is extremely problematic, however, as it would essentially enable arbitral tribunals to review the decisions of a sovereign state's judicial and administrative systems. While the instances of substantive arbitrariness at the administrative level are not unheard of, the prospect that such a claim-based judicial arbitrariness would actually prevail is doubtful given the level of deference arbitral tribunals must afford to a state's judiciary. Furthermore, the strength of substantive denial of justice claims is tempered, however, by the fact that they can only be brought once the claimant has exhausted all remedies available to it. Otherwise, justice is never effectively denied.

Conversely, issues of procedural fairness, access to justice, due process, and due diligence would constitute ‘procedural arbitrariness’.Footnote ⁸⁴ The distinction between different types of arbitrariness may also be made with respect to specific arbitrariness and general arbitrariness. According to such a categorization, the former would include prohibitions on arbitrariness in the form of ‘due process protections, physical integrity of the individual and respect for acquired rights’, whereas the latter would be reflected in the ‘more generalized obligation to refrain from arbitrary conduct with respect to treatment of aliens and their property’.Footnote ⁸⁵

2.4. The prohibition of arbitrariness: a standard distinct from fair and equitable treatment?

Mention must also be made of arbitrariness in the context of so-called stand-alone clauses in comparison to the implicit incorporation of arbitrariness into fair and equitable treatment clauses. Several IITs contain stand-alone clauses that explicitly prohibit ‘arbitrary’ measures.Footnote ⁸⁶ These provisions often employ the terms ‘arbitrary’, ‘unjustified’, ‘unreasonable’, or ‘discriminatory’,Footnote ⁸⁷ sometimes in conjunction with one or the other (‘and’) and at other times disjunctively (‘or’). Typically, they have three elements in common: they tend to apply to investments and not investors, they refer to measures rather than treatment, and they are breached by measures that impair investment.Footnote ⁸⁸

Although the clauses in which they are featured share common traits, there is some debate as to whether the terms ‘arbitrary’, ‘unjustified’, ‘unreasonable’, or ‘discriminatory’ can be applied synonymously. One view presumes that they are interchangeable, as it is difficult to clearly distinguish between them.Footnote ⁸⁹ An opposing view cautions against such an approach, as it is not reflected in practice. Rather, they argue, the term ‘arbitrary measure’ in the context of stand-alone clauses should be taken on its own to mean a ‘manifest impropriety, such as the absence of a legitimate purpose, capriciousness, bad faith, or a serious lack of due process’.Footnote ⁹⁰

To some, there is no substantive difference between a specific prohibition of investment impairment by arbitrary measures and the obligation to avoid arbitrariness under the fair and equitable treatment standard. An arbitrary measure that violates a stand-alone clause would equally violate a fair and equitable treatment clause. Though many IITs contain clauses of both types, the inclusion of prohibitive ‘arbitrary’ measures clauses is thus seen as redundant.Footnote ⁹¹

Others point to the very fact that IITs contain both provisions as evidence that the two prohibitions must refer to different violations.Footnote ⁹² They find the argument that one standard (prohibition of arbitrary conduct) is simply an emanation of the other (obligation to provide fair and equitable treatment) to be equally unconvincing, as the language of the treaty reveals nothing of the sort.Footnote ⁹³ Accordingly, explicit prohibitions of arbitrary measures refer to measures that ‘inflict damage on the investor without serving any apparent legitimate purpose’, that are ‘not based on legal standards but on discretion, prejudice or personal preference’, and that ‘would be arbitrary if . . . taken for reasons that are different from those put forward by the decision maker, especially if a public purpose is merely a pretence for a different motive’.Footnote ⁹⁴

Yet, when one looks to these examples of arbitrariness, it is difficult to see how they would not constitute violations of the fair and equitable treatment standard as well. Although arguably much broader,Footnote ⁹⁵ the fair and equitable treatment standard, for all the debate surrounding its content, must incorporate a prohibition on arbitrariness, at the very least to the extent of the examples outlined in the previous paragraph.

There is considerable support for this position. One study of various interpretations of the contents of the fair and equitable treatment standard found that lack of arbitrariness was among the most prevalent.Footnote ⁹⁶ Recognizing that, while arbitrariness violates the fair and equitable treatment standard, what constitutes unfair and inequitable is not always arbitrary, one commentator submits that ‘arbitrary conduct therefore can be seen as a sufficient but not as a necessary requirement for the violation of fair and equitable treatment’.Footnote ⁹⁷ One author, inspired by ‘the idea that fair and equitable treatment inherently precludes arbitrary and capricious actions against investors’,Footnote ⁹⁸ states simply that ‘government conduct categorized as arbitrary . . . will generally breach the fair and equitable treatment standard’.Footnote ⁹⁹ Perhaps the greatest evidence pointing to the inclusion of arbitrariness under the fair and equitable treatment standard is that no authority on the subject has put forth a substantive argument as to why it does not belong, which is certainly more than can be said for other constituent elements of fair and equitable treatment.Footnote ¹⁰⁰

2.5. Prohibition of arbitrariness as an uncontested rule of international law

Lastly, before turning to the analysis of investor–state arbitration awards, it is worth noting that arbitrariness, irrespective of any discussion regarding fair and equitable treatment, is generally accepted as forming a part of the minimum standard of treatment under customary international law.Footnote ¹⁰¹ One commentator submits that, at this point in the evolution of customary international law, ‘it is largely beyond dispute that arbitrariness is anathematic to the rule of law as guaranteed by the customary international law minimum standard’.Footnote ¹⁰² Indeed, even in the context of the debate regarding the degree to which the fair and equitable treatment standard is imbedded in the international minimum standard of treatment, one of the few points of agreement is that arbitrariness belongs under both.Footnote ¹⁰³

Ultimately, when one considers the plain and ordinary as well as the legal meaning of arbitrariness, its interpretation by the ICJ, its inextricable place among the general principles of law, and the mass of commentary on related subjects up with which arbitrariness is often caught, there can be no doubt that it occupies an uncontroversial place among standards of investment protection. Whether these standards are explicit or consist of those subsumed under the rubric of the fair and equitable treatment or the international minimum standard of treatment is likely immaterial given that at least one of such standards is typically available under IITs. Rather, what is more important is the degree to which investors have attempted to avail themselves of these standards of protection in investor–state dispute resolution and the manner in which tribunals have ruled on claims alleging arbitrariness. To that end, this paper now turns to an analysis of investor–state arbitration awards.

3.1. Arbitrariness and IITs

This section features the most-cited arbitral awards on arbitrariness as well as the most recent awards to be made public that discuss arbitrariness.Footnote ¹⁰⁵ The majority of these awards were rendered by virtue of BITs that contain clauses that explicitly prohibit arbitrary measures vis-à-vis international investment.Footnote ¹⁰⁶ The others were rendered with respect to the Energy Charter TreatyFootnote ¹⁰⁷ or BITs that contain a provision calling for fair and equitable treatment under which claims of arbitrary state conduct were made. Taken together, these awards help illustrate the meanings of arbitrariness that have been adopted by tribunals, the place that arbitrariness occupies among the constituent elements of fair and equitable treatment, and the threshold that must be met in order to establish arbitrariness.

Several arbitral tribunals have resorted to dictionary definitions, particularly the Black's Law Dictionary definition cited above,Footnote ¹⁰⁸ to ascertain the plain or ordinary meaning of the terms ‘arbitrary’ or ‘arbitrariness’.Footnote ¹⁰⁹ For example, in the Lauder case, the tribunal cited and then applied the Black's Law Dictionary definition when it found that a certain Czech government measure was ‘arbitrary because it was not founded on reason or fact, nor on the law. . ., but on mere fear reflecting national preference’.Footnote ¹¹⁰ The tribunal in the Azurix case turns to the more severe definitions of ‘arbitrary’ in the Oxford English Dictionary, also cited above,Footnote ¹¹¹ before finding that the government of Argentina's actions were arbitrary.Footnote ¹¹²

While tribunals in some awards have turned to the previous rulings of their colleagues for reference with respect to the meaning of ‘arbitrariness’,Footnote ¹¹³ many arbitral tribunals have adopted the definition of ‘arbitrariness’ set out by the ICJ in ELSI.Footnote ¹¹⁴ In comparing the ELSI definition of ‘arbitrariness’ to the dictionary definitions of ‘arbitrary’, the tribunal in Azurix opines that the ‘definition in ELSI is close to the ordinary meaning of arbitrary since it emphasizes the element of wilful disregard of the law’.Footnote ¹¹⁵ In the Tecmed case, the tribunal applies the ELSI definition's standard in conjunction with the reasonable-person standard in Neer Footnote ¹¹⁶ in finding that state action may be characterized as arbitrary if it presents ‘insufficiencies that would be recognized “. . . by any reasonable and impartial man,” or, although not in violation of specific regulations, as being contrary to the law because: “. . . (it) shocks, or at least surprises, a sense of juridical propriety”’.Footnote ¹¹⁷

Other tribunals have injected their own interpretations into the meaning of ‘arbitrariness’. In the Enron case, the tribunal states that ‘irrespective of the question of intention, a finding of arbitrariness requires that some important measure of impropriety is manifest’ and that whether measures are ‘good or bad’ or ‘not consistent with the domestic and the Treaty legal framework’ does not necessarily render them arbitrary if they were ‘what the Government believed and understood was the best response’ in a time of crisis.Footnote ¹¹⁸ In the Genin case, the tribunal suggested that allegations of arbitrariness could be rebutted if it could be proven that the arbitrary measures in question ‘reflect[ed] a clear and legitimate public purpose’.Footnote ¹¹⁹ The tribunal in the Siemens case would seem to support such a stance, as it found ‘certain measures taken by Argentina [that did not] seem to be based on reason’ to be arbitrary.Footnote ¹²⁰ These interpretations serve not only to clarify the boundaries of claims of arbitrariness, but to differentiate such claims from others that might fall under the fair and equitable treatment standard, such as a denial of justice or failure to protect the investor's legitimate expectations. Although these interpretations are not inconsistent with any of the formulations of arbitrariness seen thus far, it is clear that the government behaviour alluded to in the citations above could otherwise constitute a violation of the fair and equitable treatment standard.

As many IITs contain fair and equitable treatment clauses, arbitral tribunals have also had occasion to rule on the status of arbitrariness as an element of the fair and equitable treatment standard. Contrary to the debate on the subject among academics, there appears to be relatively little objection among arbitral tribunals to the notion that a state's obligation to refrain from arbitrary conduct is included in its obligation to provide fair and equitable treatment.Footnote ¹²¹ In the CMS Gas case, the tribunal states succinctly that the ‘standard of protection against arbitrariness and discrimination is related to that of fair and equitable treatment’ and any ‘measure that might involve arbitrariness or discrimination is in itself contrary to fair and equitable treatment’.Footnote ¹²² In the LG&E case, the tribunal implies that, while arbitrariness may equal unfair and inequitable treatment, the reverse is not always true.Footnote ¹²³ In the Noble case, the fact that the fair and equitable treatment clause precedes other prohibitions in the US–Romanian BIT leads the tribunal to conclude that it constitutes ‘a more general standard which finds its specific application in inter alia the duty to provide full protection and security, the prohibition of arbitrary and discriminatory measures and the obligation to observe contractual obligations towards the investor’.Footnote ¹²⁴

The majority of the tribunals that interpret the fair and equitable treatment standard to include the prohibition of arbitrary conduct appear to classify arbitrariness as an element of the standard in and of itself.Footnote ¹²⁵ There are, however, some tribunals that have incorporated arbitrariness into other supposed constituent elements of the fair and equitable treatment standard. For instance, the tribunal in the Alpha case found that ‘the principle of fair and equitable treatment includes the obligation not to upset an investor's legitimate expectations and the obligation to avoid arbitrary government action’ and that ‘governments must avoid arbitrarily changing the rules of the game in a manner that undermines the legitimate expectations of, or the representations made to, an investor’.Footnote ¹²⁶ When addressing an alleged violation of provision prohibiting arbitrary measures, the tribunal in Genin linked arbitrariness to the obligations to provide justice and act in good faith in stating that the violation ‘would have to amount to bad faith, a wilful disregard of due process of law or an extreme insufficiency of action’.Footnote ¹²⁷ Such interpretations can be read in two respects. In one sense, they exhibit the pervasiveness of the prohibition of arbitrariness and demonstrate the breadth that such a claim may have. In another sense, by linking arbitrariness to other obligations under the fair and equitable treatment standard, they are perhaps intimating that claims of arbitrariness are insufficient in and of themselves, harking back to the proviso in ELSI that, ‘without more’, a claim of arbitrariness may prove wanting.Footnote ¹²⁸

The thresholds applied by IIT arbitral tribunals in order to classify conduct as arbitrary range from high to low to medium or vague. In instances in which tribunals apply the ELSI definition of arbitrariness,Footnote ¹²⁹ the threshold is particularly high, as a finding of arbitrariness must also shock or surprise the tribunal's sense of judicial propriety. Even in decisions in which ELSI is not explicitly cited, its influence is still felt, such as in the Sempra and Enron cases, where the tribunals specify that ‘a finding of arbitrariness requires that some important measure of impropriety be manifest’.Footnote ¹³⁰ Other tribunals have opted for a relatively low threshold by resorting exclusively to the aforementioned dictionary definitions.Footnote ¹³¹ In one such instance, the tribunal in the Occidental case found certain measures of the government of Ecuador to ‘not appear to have been founded on prejudice or preference rather than on reason or fact’, but that these still generated a ‘confusion and lack of clarity that resulted in some form of arbitrariness, even if not intended’.Footnote ¹³² Finally, the tribunals in the Saluka and Kardassopoulos cases set forth a rather subjective, if not vague, threshold in reference to the fair and equitable treatment standard in that ‘an infringement of the standard requires “treatment in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective”’.Footnote ¹³³

Of the awards reviewed, approximately 30 per cent of the arbitral tribunals found that certain state measures amounted to arbitrariness or arbitrary conductFootnote ¹³⁴ and the threshold applied appears to have some bearing on findings of arbitrariness. Of those tribunals that applied the ELSI threshold or a similar higher threshold, only 22 per cent found instances of arbitrariness, whereas those who applied a lower threshold found instances of arbitrariness at a frequency of 75 per cent. No arbitrariness was found under the subjective standard applied by the tribunals in Saluka and Kardassopoulos and only one case of arbitrariness was found under a fair and equitable treatment clause.Footnote ¹³⁵

It should be pointed out that a finding of arbitrariness is also quite fact-intensive. It is therefore not only the threshold that the tribunal applies that may lead to a finding of arbitrariness, but also the circumstances of the case. Government measures that have been found to be arbitrary include threats and the blocking of payments to a foreign-owned water treatment company,Footnote ¹³⁶ the transfer of contractual rights of a foreign-owned media company to one that was domestically owned,Footnote ¹³⁷ administrative decisions causing investor confusion regarding a country's tax regime,Footnote ¹³⁸ a breach of contract and eventual privatization of a state-owned hotel that had contracted with a foreign investor,Footnote ¹³⁹ and the permanent suspension of a foreign investor's operations after substantial investment.Footnote ¹⁴⁰ Conversely, instances in which claims of arbitrariness were found wanting involved measures that were deemed arbitrary but did not substantially impair the investment;Footnote ¹⁴¹ that had been the subject of negotiations with the investor;Footnote ¹⁴² that were consistent with pre-investment measures, if not more onerous;Footnote ¹⁴³ that were justified by a period of economic transition in an emerging economy;Footnote ¹⁴⁴ and that were made in response to an economic crisis.Footnote ¹⁴⁵

3.2. Arbitrariness and the NAFTA

The notion of arbitrariness is raised in only 15 of the 52 claims brought under NAFTA Article 1105. NAFTA, unlike the IITs featured above, does not contain a provision that explicitly prohibits arbitrary state measures or conduct. It is also unique in that it contains an obligation to provide investments the minimum standard of treatment in accordance with international law. These distinctions play a major role in the interpretations by NAFTA tribunals of the meaning of arbitrariness, of whether arbitrariness forms a part of the fair and equitable treatment standard or the international minimum standard of treatment, and of the threshold that must be met in order to establish arbitrariness.

The meaning of arbitrariness has yet to have been discussed by a NAFTA tribunal. Because the term ‘arbitrary’ is not found in any of the Chapter 11 provisions under which investors have based their claims, no tribunal has been required or at least felt compelled to inquire as to its plain or ordinary meaning. Arbitrariness has instead been invoked in conjunction with claims that NAFTA parties had failed to accord an investment fair and equitable treatment or treatment that otherwise fell below the international minimum standard of treatment under Article 1105. As mentioned above, the nature of the relationship between these two standards of treatment is as yet unresolved at international law.

The issue has been settled with respect to NAFTA, however, since 2001, when the parties to NAFTA clarified that the fair and equitable treatment standard is to be subsumed under the international minimum standard of treatment.Footnote ¹⁴⁶ A violation of the former thus constitutes a violation of the latter. One of the consequences of such an interpretation is that it renders discussions of whether arbitrariness belongs to either standard of treatment moot with respect to NAFTA disputes.

Even though one standard falls within the other, NAFTA tribunals have approached the applicability of arbitrariness under Article 1105 from the angle of both standards as well as their purported constituent elements. This is likely because Article 1105 contains references to both the terms ‘minimum standard of treatment’ and ‘fair and equitable treatment’. For instance, with respect to the fair and equitable treatment standard, the tribunal in the Waste Management case summarizes the findings of other NAFTA tribunals:

In the Merrill & Ring case, the tribunal found similarly that:

Finally, in the Glamis case, the tribunal acknowledged that previous NAFTA tribunals had ‘indeed found a certain level of arbitrariness to violate the obligations of a State under the fair and equitable treatment standard’.Footnote ¹⁴⁹

While some tribunals seem to have found arbitrariness to constitute a violation in and of itself,Footnote ¹⁵⁰ other tribunals have linked it to other supposed violations of the fair and equitable treatment standard. In Mondev, the tribunal states that an evaluation of arbitrariness is ‘useful also in the context of denial of justice’,Footnote ¹⁵¹ echoing a similar reasoning in the Azinian case that an arbitrary and malicious misapplication of the law constitutes a denial of justice.Footnote ¹⁵² Conversely, the tribunal in Glamis rejects the notion that bad faith is a required element of a violation of the fair and equitable treatment standard, thereby intimating that arbitrariness need not be connected to bad faith in order to be actionable.Footnote ¹⁵³

Certain tribunals have approached the notion of arbitrariness from the perspective of the international minimum standard of treatment. Most of these tribunals acknowledge the prohibition of arbitrariness through deliberations on the international minimum standard of treatment,Footnote ¹⁵⁴ whereas others explicitly qualify its place under such a standard. For instance, the tribunal in the Thunderbird case qualifies:

In Merrill & Ring, the tribunal finds that the prohibition of arbitrariness is a general principle of law and ‘hence also a part of international law’ that ‘no tribunal today could be asked to ignore’.Footnote ¹⁵⁶ According to the tribunal in Glamis, ‘a duty to protect investors from arbitrary measures exists in the customary international law minimum standard of treatment of aliens’.Footnote ¹⁵⁷

Regardless of the apparent willingness of NAFTA tribunals to include arbitrariness under the scope of violations of Article 1105, the threshold applied by tribunals in order to establish a finding of arbitrariness is decidedly and consistently high. Even in instances in which lower thresholds have been applied, these are seldom taken up by future tribunals. For example, the aforementioned test in S.D. Myers in which the tribunal considered ‘that a breach of Article 1105 occurs only when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective’Footnote ¹⁵⁸ has not been subsequently applied in isolation, but rather in conjunction with more stringent conditions. Similarly, the finding by the tribunal in Waste Management that ‘the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary’Footnote ¹⁵⁹ has since been tempered by higher thresholds in which arbitrariness has been restrictively interpreted.

These restrictive interpretations are mostly the result of NAFTA tribunals’ adoption of the arbitrariness standard set out by the ICJ in ELSI that requires, inter alia, that a finding of arbitrariness ‘shocks, or at least surprises, a sense of juridical propriety’.Footnote ¹⁶⁰ Of the ten tribunals that feature a threshold for determining arbitrariness, seven reference the ELSI standard either directly or indirectly.Footnote ¹⁶¹ For instance, in the ADF case, in an apparent acknowledgement of the ICJ's ruling that ‘by itself, and without more, unlawfulness cannot be said to amount to arbitrariness’,Footnote ¹⁶² the tribunal stated that:

The tribunal in Mondev clarifies the scope of the ELSI standard with respect to Article 1105, stating:

Some tribunals have built on the ELSI standard by formulating higher thresholds for a breach of Article 1105 that include restrictive qualifications of arbitrariness. As noted above, the tribunal in Thunderbird would require a ‘manifest arbitrariness falling below acceptable international standards’.Footnote ¹⁶⁵ The tribunal in Glamis, in which the notion of arbitrariness receives the most attention from a NAFTA tribunal, adopts the ELSI standard for arbitrariness, but also finds that the threshold for breach of Article 1105 is still that of Neer, formulated above.Footnote ¹⁶⁶

According to the Glamis tribunal, ‘a breach requires something greater than mere arbitrariness, something that is surprising, shocking, or exhibits a manifest lack of reasoning’,Footnote ¹⁶⁷ adding that ‘arbitrariness that contravenes the rule of law, rather than a rule of law, would occasion surprise not only from investors, but also from tribunals’.Footnote ¹⁶⁸ Reiterating that ‘mere appearance of arbitrariness’Footnote ¹⁶⁹ is insufficient, the tribunal holds that ‘there is an obligation of each of the NAFTA State Parties inherent in the fair and equitable treatment standard of Article 1105 that they do not treat investors of another State in a manifestly arbitrary manner’.Footnote ¹⁷⁰ The tribunal combines the ELSI standard and the Neer standard as well as this qualification of arbitrariness in formulating a markedly high threshold for breach:

Recently, a NAFTA tribunal appears to have rejected the tying of the ELSI standard for arbitrariness to the Neer standard and the high threshold set out in Glamis. In Merrill & Ring, the tribunal found that there is a prohibition against arbitrariness under the international minimum standard of treatment, but disagreed with the tribunal in Glamis as to the threshold for finding breach of that standard. It found instead that:

This standard of ‘reasonableness’ is a significant departure from the more stringent thresholds featured above and certainly undermines the efforts by the state parties to secure consistent interpretations of Article 1105. Moreover, recalling the Black's Law Dictionary definition of ‘arbitrary’ as a measure ‘founded on prejudice or preference rather than on reason or fact’,Footnote ¹⁷³ this threshold could lead to more frequent findings of arbitrariness should it be retained. Perhaps owing to the recentness of the award, however, it has not been discussed in subsequent Chapter 11 awards.Footnote ¹⁷⁴

The contrast between the Glamis and Merrill & Ring rulings reveals the divergences that can occur when NAFTA tribunals, for whatever reason, do not adhere to previous rulings on Article 1105. For instance, the Glamis tribunal's finding that the pith and substance of the almost 85-year-old Neer threshold for breach of the international minimum standard of treatment is still applicable to modern-day claims of Article 1105 is not in keeping with previous tribunals that had showed a willingness to entertain a relatively less stringent threshold.Footnote ¹⁷⁵ On the other hand, the Merrill & Ring ‘reasonableness’ threshold for a breach of Article 1105 is wholly inconsistent with the more restrictive interpretations that followed the 2001 Notes of Interpretation. While such interpretations relate to Article 1105 violations in general, they do have a bearing on findings of arbitrariness to the extent that they are forbidden under the fair and equitable treatment standard and the international minimum standard of treatment.

The tribunal in Glamis observed that ‘no Chapter 11 tribunal has found that decision-making that appears arbitrary to some parties is sufficient to constitute an Article 1105 violation’.Footnote ¹⁷⁶ In truth, no NAFTA party has been found responsible under Chapter 11 for any form of arbitrary conduct. Yet this does not necessarily mean that tribunals have not found certain state actions to be arbitrary. In the Feldman case, for example, the tribunal found Mexico's refusal to continue to honour tax exemptions and demand that an investor hand over revenue saved from previous exemptions to be arbitrary. These measures were examined in the context of a claim of expropriation, however, and the tribunal found that the measures ‘even though in some instances inconsistent, and arbitrary – should not be treated as expropriatory’.Footnote ¹⁷⁷

Moreover, in two of the few instances in which NAFTA parties have been found to have violated Article 1105, the notion of arbitrariness, though not explicitly stated, appears to be lurking in the background of the tribunal's reasoning. For instance, the tribunal in Pope and Talbot elects to employ the ELSI standard of arbitrariness and then finds that Canada's actions, though not arbitrary per se, were ‘egregious’ enough that they would ‘shock and outrage every reasonable citizen of Canada’ as they did the tribunal.Footnote ¹⁷⁸ In S.D. Myers, although an explicit connection between arbitrariness and Canada's breach of Article 1105 is not made, one recalls that the tribunal does state that ‘unjust or arbitrary’ treatment that ‘rises to the level that is unacceptable from the international perspective’Footnote ¹⁷⁹ constitutes a breach of Article 1105. Only a few paragraphs later, the tribunal finds that Canada has breached Article 1105.Footnote ¹⁸⁰

Consequently, one may infer that the inconsistent administration of tax exemptions,Footnote ¹⁸¹ threats and misrepresentations,Footnote ¹⁸² and permanent bans on exportationFootnote ¹⁸³ have borne the markings of arbitrary conduct, if not explicitly stated as such. Conversely, NAFTA tribunals have found the requisite level of arbitrariness to be lacking in the following government measures: domestic content and performance requirements;Footnote ¹⁸⁴ administrative proceedings and the closure of an investor's facility;Footnote ¹⁸⁵ export restrictions aimed at promoting local processing;Footnote ¹⁸⁶ a domestic court's upholding of a state's immunity and dismissing an investor's claim;Footnote ¹⁸⁷ and a city's breach of contract, failure to repay debt, and a court's dismissal of related claims.Footnote ¹⁸⁸

3.3. Arbitrariness compared under both regimes

When considered together, the arbitration regime of the NAFTA may have as much in common with IIT regimes as it has in differences. Tribunals of both regimes are blithe to include the prohibition of arbitrariness as an obligation under the fair and equitable treatment standard and both regularly incorporate the ELSI case as a standard by which to assess arbitrariness. Furthermore, while the debate regarding the place of arbitrariness under the fair and equitable treatment standard versus that of the international minimum standard of treatment has been resolved under the NAFTA regime, at the international arbitral level it does not even appear to be considered.Footnote ¹⁸⁹

Where the two regimes begin to diverge is the level of arbitrariness that could lead to a successful claim. While both regimes typically use high thresholds (ELSI), IIT arbitral tribunals have been willing to entertain lower thresholds for finding arbitrariness than their NAFTA counterparts. This is likely tied to the attention afforded to the meaning of ‘arbitrariness’ by IIT tribunals versus the lack of any discussion whatsoever on the topic by NAFTA tribunals. As a probable corollary to these differences in threshold, NAFTA tribunals have yet to find a single instance of arbitrary conduct that amounts to a breach of Article 1105, whereas IIT tribunals have found several breaches occasioned by arbitrariness.

One might wonder about the correlation of this difference in results with the differences in regime. As mentioned in the introductory remarks of this paper, the NAFTA investor-dispute regime differs from others in terms of interpretive approach and transparency. The regime's interpretive approach differs to the extent that NAFTA tribunals seldom look beyond the basic sources of international law as set out and recognized under Article 38 of the Statute of Rome.Footnote ¹⁹⁰ One consequence of such an approach is that NAFTA tribunals have continually refused to turn to the IIT regime for reference, let alone inspiration. The reasons for such an approach may be justified with respect to interpretations of arbitrariness by the fact that such interpretations, as seen above, are often undertaken in the context of IITs that contain explicit prohibitions against arbitrary measures. This might also explain the difference in thresholds and thus the difference across regimes in findings of arbitrariness.

The NAFTA regime is more transparent in that, barring settlement and highly sensitive information, the majority of procedural documents and transcripts are made public. This is not the case under many IIT disputes, where there is no obligation to make public an award. The relatively high degree of transparency likely has an impact on the relative consistency with which the high threshold for arbitrariness has been applied under NAFTA. NAFTA parties have remained very reticent about the idea of incorporating a ‘read-in’ prohibition against arbitrariness into Chapter 11, as the treaty simply does not contain such an interdiction. They have, however, recognized that an arbitrariness standard, to the extent that it is formulated in ELSI, does exist at international law.Footnote ¹⁹¹ For their part, NAFTA tribunals have typically sided with the state parties’ position. Given that different NAFTA tribunals have access to both past arguments and past awards, the regime's transparency may then partially account for the relative consistency in its awards with respect to the high threshold that has been maintained for arbitrariness.Footnote ¹⁹²

The dearth of findings of arbitrariness under the NAFTA in comparison to the multiple instances found under IITs may also be explained by differences in context. Many IITs are concluded between developed economies and underdeveloped economies, often in recognition of the substantial investment opportunities associated with lower costs and availability of exploitable resources. The dynamic of the investor–state relationship often correlates highly to the degree to which an economy is developed. Even a cursory survey of publicly available international investment dispute awards reveals that the investor party is often from a country with a developed economy and the state party is often a country with an underdeveloped economy.Footnote ¹⁹³ For instance, the IIT awards featured above involved investors who came almost exclusively from the United States or sophisticated European economies such as the Netherlands, Austria, and Germany. The state respondents, on the other hand, included the post-Soviet economies of Estonia, Romania, Hungary, Ukraine, and the Czech Republic, as well as Ecuador and crisis-plagued Argentina.

In comparison to these countries, NAFTA parties have enjoyed relative economic success since the conclusion of NAFTA. In that respect, it is perhaps not the threshold that is applied that determines a finding of arbitrariness, but the actual presence of arbitrariness itself. Economies in transition (and countries, for that matter) are inherently vulnerable to both political and economic instability, as are foreign investors in those economies. As an anathema to order, arbitrariness is intrinsically linked to instability. As the various formulations have shown above, arbitrariness is an extreme and exceptional form of government conduct. If desperate times do in fact call for desperate measures, such measures may also be qualified as arbitrary. Essentially, there may simply be more instances of arbitrariness, by measure of any threshold, under IITs than under NAFTA as a consequence of the political and economic status of the treaties’ state signatories.