The most successful (and controversial) basis for investors’ challenges of government measures under U.S. trade and investment agreements is alleged violations of “fair and equitable treatment” (FET). Fully 74 percent of “successful” investor claims under U.S. Free Trade Agreements (FTAs) and Bilateral Investment Treaties (BITs) –17 awards—have found FET violations.

This note summarizes a review of the known investor-state rulings under U.S. FTAs and BITs. Our goal was to consider if actual tribunal decisions concerning the Minimum Standard of Treatment (MST) and FET standards supported the claims by the Office of the U.S. Trade Representative (USTR) that the language in past U.S. FTAs and BITs does not subject countries to claims under these obligations if, for instance, countries simply alter their policies. This is a critical question. No country wants to have its normal functions circumscribed by the threat of having to compensate foreign investors simply because a government alters a policy to respond to changing circumstances, such as financial crises or new scientific findings relating to the environment or health, or to respond to public demands that lead to the democratic creation of new laws of general application.

USTR argues that the FET standard only provides for compensation for denials of justice as that term has long been understood under customary international law (CIL) - denial of due process in court or administrative proceedings or denial of police protection. To bolster the argument that the current FET and MST language is not problematic, USTR points to an Annex included in U.S. FTAs since the Central America Free Trade Agreement (CAFTA), which is included in the draft Trans-Pacific Partnership (TPP) investment chapter as Annex 12-B. The Annex states that the MST and FET standards are rooted in CIL understandings of the relevant terms. USTR argues that this remedied the problem of runaway tribunals generating fanciful notions of investor expectations and imposing new obligations on states. Thus, USTR argues that no further definition or limitation of the standards, nor exceptions to the TPP’s investment chapter, are needed.

The June 29, 2012 investor-state ruling on the merits in the CAFTA Railroad Development Corporation (RDC) case confirmed that in fact the Annex is insufficient. The tribunal explicitly rejected arguments raised by Guatemala, the United States, El Salvador and Honduras that the tribunal must base its MST analysis on actual state practice. Instead, the tribunal relied on a definition issued by a tribunal in the North American Free Trade Agreement (NAFTA) Waste Management II award to find against Guatemala.

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