Untapped Potential of MFN Clauses: an MFN clause to invoke another “more” MFN clause

By Danilo Ruggero Di Bella[1]

On the premise that not all most-favoured-nation (MFN) clauses are created equal, this piece will explore whether it is possible to combine an MFN clause with a more favourable MFN clause contained in another treaty. The objective of doing so, would be to invoke another provision in that treaty (or yet, in another treaty), especially, with the aim of getting a stronger foothold when relying on a more advantageous dispute resolution mechanism.

MFN function and mechanism

MFN clauses are found in the vast majority of the over 3,000 International Investment Agreements (IIAs). An MFN clause requires the host country to extend to investors of the other Contracting State (i.e., the “beneficiary State”) “treatment” no less favourable than that granted to investors from “third States” in the agreed sphere of relations covered by the given treaty.

Its function is to ensure a level playing field for all foreign investors with different nationalities whose respective home States have an IIA with a given host country (or “granting State” for the purpose of the MFN clause). This function is achieved in two ways: a) by permitting a foreign investor from the beneficiary State to claim for itself the more favourable treatment effectively reserved for a concrete third-State’s investor in a similar situation; b) by allowing a beneficiary State’s investor to invoke the more favourable treatment to which a hypothetical third-State’s investor would be entitled to, had it found itself in the same situation.

In the latter instance, the foreign investor can import such other more favourable treatments contained in the IIAs concluded between the granting State and any third State. On this point, much of the debate has focused on whether an MFN clause can be used to import only other more favourable substantive standards (such as fair and equitable treatment, the full protection and security standard, more generous provisions on expropriation, umbrella clause, and so on and so forth) or also more favourable procedural rights (for instance, allowing to avoid compulsory pre-arbitration domestic litigation, shortening a cooling-off period, extending a time-limitation, disapplying a fork-in-in-the-road provision or using a different arbitral forum). This debate spurred, despite, in reality, the more favourable treatment to be accorded does not usually differentiate between substantive and procedural rights.

Factors influencing MFN diverging interpretations

Admittedly, the selection process of the arbitrators has a major impact on how this contentious issue, of whether MFN clauses cover substantive rights or also procedural rights, may be resolved in practice. Nonetheless, much will also depend on the wording of a given MFN clause, as these clauses come in a variety of forms, some of them being broader in scope than others.

Among the most broadly phrased MFN clauses are those that expressly encompass also dispute resolution mechanisms by pinpointing for the sake of clarity to which provisions of an IIA the MFN clause shall apply (such as in British, Cuban and more recent Russian treaty practice). On the opposing end, are instead MFN clauses that expressly deny their application to dispute resolution provisions (as in recent Japanese treaty practice), and in between the two poles, there are MFN clauses that are simply silent or neutral on the issue.

An MFN for an MFN?

Acknowledging this spectrum of different types of MFN clauses in the over 3,000 existing IIAs – from more permissive worded clauses to narrower ones – a somehow mundane (yet seemingly overlooked) question should intuitively arise: is it possible to use an MFN clause to invoke another more favourable MFN clause to rely on another yet more favourable treatment? In other words, is it possible to use an MFN clause to hinge on another more favourable MFN clause to import another provision from another treaty?

Suppose that a French-Cambodian national invokes breaches of the France-Cambodia BIT against Cambodia. The France-Cambodia BIT only provides for access to ICSID arbitration, whose Convention prevents investors with double nationality, including the one of the respondent State, from suing the host country. The France-Cambodia BIT has a neutral MFN clause as far as its applicability to procedural rights goes. The French-Cambodian national may proceed to invoke that MFN clause to invoke the MFN clause contained in the Cambodia-Russia BIT (which clarifies in its Article 3(5) its applicability also to the dispute resolution provision) to have a more solid grip to then, in turn, rely on the Cambodia-Hungary BIT (whose dispute resolution options provide for the application of the UNCITRAL Arbitration Rules, which do not prevent investors with dual nationalities from bringing a case against one of their States of nationality).

In this case, it would appear that an amplified MFN protection, covering dispute resolution provisions, was validly (and more “safely”) invoked, by combining the MFN clause in the basic treaty with the MFN clause in the third-party treaty, as long as the imported MFN clause is more favourable than the one contained in the basic treaty. This interpretation is in line with the ordinary meaning to be given to the text of a treaty as well as its purpose according to Article 31 of the Vienna Convention on the Law of Treaties (VCLT): an MFN clause is indeed meant to attract more favourable treatments, including those contained in other MFN clauses in third-party treaties. This argument easily satisfies also the ejusdem generis rule expressed in Articles 9 and 10 of the ILC Draft Articles on MFN Clauses, as an MFN clause in a third-party IIA will inherently fall within the same subject matter of the MFN clause of the basic treaty (being its scope the more favourable possible treatments accordable to the beneficiary State’s investor).

What would happen in case of a narrow MFN clause expressly denying its application to dispute resolution provisions? Would it be possible also, in this case, to combine such a restrictive MFN clause with a broader one? The answer should be in the affirmative. By operation of an MFN clause, a treaty’s scope is widened, and, therefore, an MFN clause naturally conflicts with the basic treaty’s original limitations to expand them. As a result, an originally non-accepted standard of protection (either expressly or implicitly) in the basic treaty becomes accepted by virtue of the MFN clause.

In a way, the possibility of importing a more favourable MFN clause through another MFN clause is indirectly confirmed by the analysis that some tribunals conduct in determining the procedural effect of an MFN clause. Although most of the analysis is usually circumscribed to other dispute resolution provisions subscribed by the respondent State in other treaties, at times, some tribunals weigh in also the treaty practice of the respondent State concerning the MFN clause and how such a clause is phrased in third-party treaties. For instance, it appears that the tribunal in RosInvestCo UK Ltd. v. the Russian Federation took note of claimant’s argument of looking into the consistent treaty practice of the UK and Russia to glean their understanding of the MFN clause (see para. 99 of the Award on Jurisdiction). Thus, these tribunals indirectly confirm the potential bearing that other MFN clauses entered into by the respondent State may have in interpreting the MFN clause in the basic treaty. Hence, claimants should be the first to leverage the intrinsic juridical link among different MFN clauses to benefit from it.

A new debate?

A question that may be raised on this issue is whether – by operation of an MFN clause importing another “more” MFN clause – it would be possible to attract a more favourable treatment contained in the same third-party treaty as the one containing the more favourable MFN clause or whether it would be required to attract only more favourable provisions contained in yet another treaty. As with the example above, would the French-Cambodian investor arguing the violation of the France-Cambodia BIT be entitled to rely on the more favourable Cambodia-Russia BIT’s MFN clause by virtue of the MFN clause of the France-Cambodia BIT so as to import the dispute resolution provision contained in Article 8 of the same Cambodia-Russia BIT (so to speak the treaty of origin of the second MFN clause)? Or, would the French-Cambodian investor necessary be required to deploy the Cambodia-Russia BIT’s MFN clause (viz. the second MFN clause) only to attract more favourable provisions outside that treaty and accordingly, for instance, from the Cambodia-Hungary BIT (i.e., a third third-party treaty)?

From one perspective, since the mechanism of an MFN clause is to import more favourable treatments contained somewhere else, it may not be allowed to rely on the second MFN clause to tap into the same treaty. Rather, it may be argued that such a clause could import only more favourable treatments contained outside of its treaty of origin (i.e., provisions in another third-party treaty). On the other hand, however, if we understand the mechanism of an MFN clause as the first MFN clause being replaced by the second more favourable MFN clause, then it would seem possible to use the second MFN clause to import also more favourable treatments contained within its treaty of origin (meaning the Cambodia-Russia BIT, using the previous example).

Conclusion

It appears that no obstacles are in the way of relying on an MFN clause to invoke another more advantageous MFN clause in a third-party treaty to benefit from another more favourable provision in another treaty. Admittedly, this might be a foregone conclusion. After all, an MFN clause is an equalizer in harmonizing upwards all treatments – including the very same more favourable treatment – accorded by the granting State to all foreign investors coming from home States with which the granting State has an MFN clause in place in the respective IIAs. Arguably, had the granting State wanted to avoid such an effect, its agreed upon MFN clause should have expressly contained a prohibition of renvoi to other MFN clauses in other IIAs. Nevertheless, this somehow still untapped combination of amplified MFN-protection may lead to surprisingly new overlooked openings. Although, at first sight, it may even appear too unnecessarily intricate to use an MFN clause in connection with another “more” MFN clause, this operation can offer a more solid foothold than jumping directly from a “shaky” or less advantageous MFN clause to the desired more favourable treatment contained in a third-party treaty. Firstly, another MFN clause is undeniably easier to import as opposed to any other more favourable treatments as it will most likely fall within the same scope of application of the first MFN clause. Secondly, the so imported MFN clause expressly mentioning the sought-after treatment will make harder for the respondent State to object that such a treatment is not covered by the application of the two combined MFN clauses.

  1. Danilo Ruggero Di Bella is a head of practice at Bottega Di Bella.

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