1 National Grid PLC. V. The Argentina

2 I. Sinclair, The Vienna
Convention on the law of Treaties (1984)

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3 R. Yannick The Application of
the Most-favored Nation Clause to the Dispute Settlement Provisions of
Bilateral investment treaties : Domesticating the Trojan Horse

4 Supra

As a
conclusion States need to think twice before adding a MFN clause to the
bilateral investment treaties. They need to write the clause in way that the
scope of the MFN clause can be understood without a doubt.

“The clause
can thus be viewed as a ‘Trojan Horse’. The paradox of the ‘Trojan Horse’ is
that it was brought into the city by the inhabitants themselves, just as the
MFN clause is introduced by the contracting states within the BIT.”4

A very good
metaphor about the issue is been made by Yannick Radi as he states,

In this
article, the controversial issue about the scope of the MFN clause and its
effect to the dispute resolution clauses in the BIT’s is discussed. The relevant
cases are shown to understand the scope of the MFN clauses. Similar cases are
compared to demonstrate the inconsistency in the international practice. The
article targeted to find an answer to the question whether is it possible to
replace the clauses of the BIT’s with the MFN clause. Accordingly, the article
showed the possible ways to draft a MFN clause and its effects. Here it is also
explained that the interpretation of the MFN clause should be done according to
the all relevant circumstances including the negotiations before and after
treaty has signed. Article 36 of the Vienna Convention on the Law of Treaties
which regulates the interpretation of the international treaties should also be
taken into account while interpreting an international treaty.

Conclusion

This
statement also shows that the undeterminable scope of the MFN clause creates
irrationality about its place in the BIT’s. As we mentioned above, the MFN
clause enables the replacement of the provisions which were negotiated by the
states which can afford the best legal counsels. This situation undermines the
parties’ intention. Accordingly, in my opinion to prevent this situation,
parties to an agreement or a treaty needs to draw the scope of the MFN clause
very clearly. In order to achieve this the matters that the parties want to
include should be counted in the MFN clause. Additionally, not only the matters
that the parties want to include but also the matters that the parties want to
exclude should be stated explicitly in the agreement or the treaty. Only this
way the scope of the MFN clause is going to be determinable. Otherwise as it is
explained above, one may always argue that the MFN clause covers the dispute
settlement provisions unless they are clearly excluded.

“Contracting states bring a “Trojan Horse”
into the city when providing for most-favored nation clauses in bilateral investment
treaties. This affects the general equilibrium of treaties.”3
 

On the other
hand considering the inconsistent reviews of the tribunals and the ambiguous
interpretation of the MFN clause arises the question of whether the MFN clause
should be given place in the BIT’s or not. Since the MFN clause enables parties
to incorporate the more favorable provisions of a third State, the intention of
the parties become pointless. One of the articles about the issue likens the
MFN clauses in BIT’s to a Trojan horse. Yannick Radi states that

This way of
interpretation is also in line with the article 36 of the Vienna Convention on
the Law of Treaties which regulates the interpretation of the international
treaties.

While
determining whether parties intended the MFN clause to include the dispute
resolution provisions or not, we may take into account the preparatory stage of
the drafting of the BIT’s. Here it is not suggested that the sole
interpretation of the preparatory stage of the drafting of the agreement is
enough to reveal the parties’ intention, however drafting stage of the contract
is a supplementary tool to reveal parties intention. As an example of this is
the Free Trade of the Americas agreement, while at time of the drafting the
agreement, parties explicitly stated that “the
MFN clause does not encompass the international dispute resolution mechanism”.
This intention is showed before the signing of the agreement. However, if this
is not taken this into account and a sole interpretation from the purpose of
the agreement is made, then parties’ intentions are going to be denied. This is
why it is critical to consider all relevant circumstances. Additionally, as the
agreement suggests, explicit exclusion of the dispute resolution clause is not
the only way to understand the parties’ intension to exclude it.

While
determining the common intention of the parties all relevant circumstances
including the negotiations, preparatory stages, any practices which the parties
have established between the parties should be taken into account. Only this
way, we can reveal the real intention of the parties. 

In contrary,
this way of interpretation shouldn’t be used while determining the scope of the
MFN clause. Otherwise the result will always be the same because there is no
such BIT that is not aiming to protect the investor. This way of interpreting
however denies the parties’ intentions. Thus, it is a “risk that the placing of undue emphasis on the object and the purpose of a treaty will encourage teleological
methods of interpretation which, in some of its more extreme forms, will even deny the relevance of the
intention of the parties”.2
In this point of view, interpreting the clause according to all relevant
circumstances is the only way to come to the conclusion that the MFN clause
does not cover the dispute resolution clause.

The reason
behind signing a BIT is to protect investors. The whole International
Investment law aims to create an investor friendly habitat. Having this in
mind, if we try to make an interpretation according to the main purpose of the
BIT’s, it is almost impossible to conclude that the MFN clause does not cover
the dispute resolution clause. Since the reason of having a dispute resolution
clause is also to protect investors, an interpretation in the light of the
purpose will always be in favor of the investor.

b-       
Interpretation of the MFN
Clause According to All Relevant Circumstances 

To summarize
the drafting part, the scope of the MFN clause is ambiguous unless the matters
are explicitly excluded. One may always are argue that the MFN clause covers
the dispute settlement provisions unless they are clearly excluded. Since the
international practice and the Tribunal reviews are inconsistent with each
other it is not healthy to make an interpretation just from the wording of the
clause.

The third
way to draft a MFN clause is to exclude the dispute resolution clause
explicitly without a doubt. In this way of drafting, parties may either draft a
broad clause or may list the matters to be included as long as they explicitly
exclude the dispute resolution clause. As an example of this is the article 4/3
of the Spain-Argentina BIT. As the article states that “the treatment shall not extend
to the privileges which either Party…” The wording of the article 4/3
of the Spain-Argentina BIT clearly suggest that the matters listed are not in
the scope of the MFN clause. However, such an article also suggest that the
matters are not excluded are actually included vice versa. Accordingly, while
analyzing the Spain-Argentina BIT in the Suez-AWG case, tribunal stated that
the dispute resolution clause is not counted among the excluded matters.
Therefore the MFN clause covers the dispute resolution clause. A similar view
is also adopted by the Tribunal in the National Grid case National Grid PLC. V. The Argentina. In the case at hand the
Tribunal stated that “specific mention of
an item excludes others”1.
?f the dispute resolution clause is not counted in the list of the exclude
matters, then it shall be included.

The
differences between the interpretations of the scope of the MFN clauses creates
an ambiguity. One of the interpretation tools to interpret a clause is the
international practice. However, international practice is not consistent for
this issue.

According to
the Tribunal, the MFN clause mentioned above does not exclude the dispute
resolution clause. The Tribunal bases its argument on the fact that the word “maintenance” also covers the dispute
resolution provisions. Since the word “maintenance”
refers to the protection of the investment, it also covers the dispute
resolution clause.

“Neither contracting party shall in its territory
subject investors of the other Contracting Party, as regards their management, maintenance, use, enjoyment or
disposal of their investments, to treatment less favorable than that which
it accords to its own investors or to investors of any third state”

Secondly,
the MFN clause may be drafted in a way where the matters covered in the clause
are explicitly listed. Thus, if the dispute resolution clause does not take
place in the list then we may reach to a conclusion that it is excluded. As an
example of this may be found in the NAFTA, article 1103 reads as “each party shall accord to investors of
another party treatment no less favorable than it accords, in like
circumstances, to investors of any other party or of non-party with respect to
the establishment, acquisition,
expansion, management, conduct, operation, and sale or other disposition of
investments”. The Plama Tribunal in the case Plama Consortium Ltd. v. Republic of Bulgaria analyzed this
article. In the award, the tribunal accepted that the dispute resolution clause
was intentionally left out from the list, therefore this clause does not extend
to the dispute resolution clause. However, in a similar case, tribunal adopted
a very different view. In the Suez-AWG case, AWG Group Ltd. v. The Argentina
Republic the tribunal analyzed the UK-Argentina BIT. Article 3(2) of the
UK-Argentina BIT, it states that

Firstly, a
general and a broad wording such as the BIT signed between the Spain and
Argentina. This BIT had the MFN clause broadly drafted, “in all matters governed by this
Agreement, such treatment shall be no less favorable than that accorded by
each party to investment made in its territory by investors of a third country”.
In Spain-Argentina BIT the word “matter” creates an ambiguity about whether
the clause covering the substantive or procedural issues. Another example of a
broadly drafted MFN clause takes place in the BIT signed between Greece and
United Kingdom in 1886. In this BIT, the MFN clause stated “all
matters relating to commerce and navigation”. These somewhat broadly drafted MFN clauses were subject to
different tribunals such as Mafezzini v.
Kingdom of Spain, Gas Natural SDG, SA v. The Argentina Republic, Suez,
Sociedad General de Barcelona SA v. The Argentina Republic. Since the
dispute resolution provisions are matters in the treaty, these tribunals accepted that the word “matter” covers the dispute
resolution provisions. Additionally, the main reason behind signing a BIT is to
protect the investment, so excluding the dispute resolution clause from the
scope of a broadly drafted MFN clause is going to be against purpose of the
treaty. Therefore, broadly worded MFN clauses are accepted as they also cover
the dispute resolution clause. It is also stated that if a party is willing to
exclude the dispute resolution clause, then it should be written explicitly
while drafting the treaty. However, this interpretation also suggests that if a
MFN clause is not broadly drafted, in other words, does not articulate
statements such as “all matters” then it
does not cover the dispute resolution clause. Tribunals accept this opinion.

a-       
Drafting of the MFN
clause

There are
different opinions about the scope and the interpretation of the MFN clause. At
this point, the drafting of the clause plays an important role. Parties to a
treaty may choose to draft a broad or a narrow MFN clause. There are three
wording types of MFN clauses mostly seen in BIT’s. In this article
interpretation of the clause is going to be explained, firstly (a) an interpretation will be deduced
from the drafting of the MFN clause. Secondly, (b) the MFN clause will be interpreted according to all relevant
circumstances.

1-       
Understanding the Scope
of the MFN Clause in BIT’s through relevant cases

 

The issue is
whether the MFN clause covers the dispute resolution clause in BIT’s or not. In
other words, is it possible to incorporate dispute resolution provisions of a
third party BIT’s through the MFN clause. The conflict especially exists when
the parties does not expressly show their intentions in the wording of treaties.
If the MFN clause explicitly excludes the dispute settlement provisions or
clearly lists the scope of the clause, then there shall be no need for
interpretation. However not every MFN clause contains such statements.
Therefore, this kind of clauses needs interpretation in order to reveal the
intention of the parties and determine to scope of the clause. Firstly,
relevant cases are going to be examined. Secondly, the systematic
interpretation is going to take place.

According to
GATT, the most favored nation principle mainly aims to prevent discrimination
in international trade. Today, the MFN clause takes place in many different
areas such as international investment. The reason behind adopting MFN clause
in BIT’s is to protect investments and prevent discrimination between foreign
investors. However, usage of the MFN clause arises conflicts in international
investment law. Since the existence of MFN clause allows the party to be
treated equally as the more favored third party, the scope of the clause is
problematic.

Introduction

 

The controversial issue about the application of the Most
Favored Nation clause (hereinafter
“MFN clause”) to the dispute resolution
provisions in Bilateral Investment Treaties (hereinafter “BIT”) is going to be discussed in this article.
Is it possible to replace the dispute resolution provisions in BIT’s through
the MFN clause? This article considers the scope of the MFN clause in light of
the relevant cases and scholars opinions. Additionally, the article is
concerned about the rationale of adding a MFN clause to the BIT’s. This article
also suggests that the adoption of the MFN clause in the BIT’s requires parties
to show their intentions clearly. Finally, the interpretation of the MFN clause
is going to take place in the article.

Abstract