Report No. 260

D. Most Favoured Nation (Absent provision)

(i) Analysis and comment:

3.4.1 The meaning of Most Favoured Nation (MFN) clauses in international law can be understood with the help of a simple example: let us assume three States: A (the granting State), B (the beneficiary State) and C (the third State). Further assume that States A and B have entered into a treaty containing the MFN clause.

Now, if State A extends certain benefits to State C, State B can invoke the MFN clause in the treaty to ensure that State A extends the same benefits to her provided the granted benefits to State C falls within the scope of application of the MFN clause of the treaty between A and B.50 MFN treatment in international investment law aims to create a level-playing field for all foreign investors by prohibiting Host State from discriminating between investors from different countries.51

In context of BITs, it has been argued that one of the key roles played by MFN clauses is 'to import more favourable conditions from third-country BITs'. Stephan Schill, Multilateralization of International Investment Law, Cambridge University Press, 2009, p 140. Also see Vladimir Berschader v Russia, Award, 21 April 2006, Arbitration Institute of the Stockholm Chamber of Commerce, Case No. 080/2004, para 179. It has been argued that the MFN provision has the potential to multilateralize international investment law, by Schill (2009).

Arbitration tribunals frequently have to determine with respect to the MFN provision in BITs is whether a foreign investor can use the MFN provision in the treaty to be interpreted (primary BIT) to borrow a beneficial provision in another BIT signed by host country (secondary BIT). The beneficial provision could be a substantive provision like fair and equitable treatment (FET), full protection and security, or provision on expropriation. The beneficial provision that the foreign investor wishes to borrow by relying on the MFN provision could also be a procedural provision like a dispute resolution clause.

50 E Ustor, 'Most Favoured Nation Clause', in R Bernhardt and P Macalister-Smith (eds.), Encyclopedia of Public International Law, Volume III, 1997, p 468. Also see International Law Commission, Report of the International Law Commission on the Work of its Thirtieth Session 8 May-28 July 1978, 30 ILC Yearbook., vol. II, Part Two, 1978, p 11.

51 OECD, 'Most-Favoured-Nation Treatment in International Investment Law', 2004/02 OECD Working Papers on International Investment, September 2004, available at:
http://www.oecd.org/daf/inv/investment-policy/WP-2004_2.pdf;
Okezic Chukwumerije, 'Interpreting Most-Favoured-Nation Clauses in Investment Treaty Arbitrations', Journal of World Investment and Tradevol. 2007, volume 8, p 608; Jurgen Kurtz, 'The MFN Standard and Foreign Investment: An Uneasy Fit?', Journal of World Investment and Trade, 2004, vol. 5, p 873.

3.4.2 The use of the MFN provision to borrow beneficial substantive and procedural provisions from other BITs has been a matter of concern. In White Industries v India case, the Australian investor, relying on the MFN provision of India-Australia BIT, argued for the importation of a favourable substantive provision related to 'effective means of asserting claims and enforcing rights' given in the India-Kuwait BIT into the India-Australia BIT.

White Industries vs India, available at:
http://www.italaw.com/sites/default/files/case-documents/ita0906.pdf,
p 11.1.1-11.1.5. The MFN provision in India-Australia BIT is as follows: 'A Contracting Party shall at all times treat investments in its own territory on a basis no less favourable than that accorded to investments or investors of any third country.'

3.4.3 India contended this on two grounds - first, such importation would 'fundamentally subvert the carefully negotiated balance of the BIT'; and second, 'it would 'be contrary to the emphasis in the BIT on domestic law'. White Industries vs India, available at:
http://www.italaw.com/sites/default/files/case-documents/ita0906.pdf, p 11.2.1.

However, the tribunal did not agree with India's stance. White Industries vs India, available at:
http://www.italaw.com/sites/default/files/case-documents/ita0906.pdf, p 11.2.2-11.2.8.

The tribunal also held that an importation of the substantive provision into the primary BIT would serve the purpose for which countries have incorporated the MFN provision in the BIT. White Industries vs India, available at:
http://www.italaw.com/sites/default/files/case-documents/ita0906.pdf,
p 11.2.4. Thus, the tribunal allowed Australia to import a beneficial substantive provision from another BIT into the primary BIT, which did not have this provision.

3.4.4 The 2015 Model does not contain an MFN provision. The Indian government has not provided any detailed explanation for its absence. It appears that the purpose behind not having an MFN provision is to ensure that foreign investors are not able to borrow beneficial provisions from other Indian BITs (Treaty Shopping). India's major concern with the MFN is the use of this provision by foreign investors to borrow beneficial substantive and procedural provisions from third-country BITs.

The absence of an MFN provision will surely prevent the foreign investor from indulging in such borrowing. However, foreign investors will be exposed to the risk of discriminatory treatment by the Host State in application of domestic measures. Thus, absence of an MFN provision does not balance investment protection with regulation. In order to achieve this balance, India could consider having an MFN provision whose scope is restricted to the application of domestic measures. This will ensure non-discriminatory treatment to foreign investor, and, at the same time, will not allow a foreign investor to indulge in 'treaty shopping'.57

57 UNCTAD, Most Favoured Nation Treatment, UNCTAD Series on Issues in International Investment Agreements II, 2010, p 60, 111.