Investment protection is a fundamental aspect of international investment law, ensuring that foreign investors and their assets are safeguarded from political risks in the host state. Investment treaties commonly establish several treatment standards that host states must adhere to when dealing with foreign investors. These principles are broadly categorized into absolute protection standards (such as full protection and security, and fair and equitable treatment) and relative protection standards (such as non-discrimination principles, which depend on how the host state treats its own investors or those from other countries).
1. Non-Discrimination Principle
The principle of non-discrimination ensures that foreign investors are treated fairly and without bias compared to other investors. It consists of two key sub-principles:
Most-Favored-Nation (MFN) Treatment
The MFN principle requires the host state to treat investors from a contracting party no less favorably than investors from any third country. This prevents discriminatory treatment and ensures equal competition among foreign investors.
However, the scope of MFN treatment varies across different investment treaties. Some treaties limit its application to certain investment activities (e.g., management, use, and enjoyment of investments), while others extend it to all aspects of investment protection, including dispute resolution mechanisms. Recent investment treaties, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), provide broader MFN coverage, applying to the establishment, acquisition, operation, and sale of investments.
Despite its broad application, MFN treatment is often subject to exceptions. Many investment treaties exclude its application to economic integration agreements (such as free trade agreements, customs unions, and common markets) and double taxation agreements.
National Treatment (NT)
National treatment mandates that a host state must treat foreign investors no less favorably than its domestic investors in similar circumstances. Unlike MFN, NT is often more difficult for states to accept, especially in countries that maintain strong domestic investment protection policies.While early investment treaties often omitted NT, more recent agreements, including the CPTPP, explicitly incorporate it. The CPTPP (Article 9.4) extends NT to the full investment lifecycle, ensuring that foreign investors enjoy the same market access and operational rights as domestic investors. However, exceptions exist, outlined in specific annexes of the agreement.
2. Full Protection and Security (FPS) Principle
FPS is a fundamental principle found in most bilateral and multilateral investment treaties. It requires host states to take reasonable measures to protect foreign investments from harm caused by either governmental actions or third parties. The protection must meet the minimum standard of treatment under international law.
However, FPS does not impose an absolute duty on states to prevent all harm. As illustrated in Asian Agricultural Products Ltd. v. Sri Lanka, the host state is expected to take reasonable measures rather than guarantee absolute security. Furthermore, states cannot justify FPS violations based on national law or security concerns.To clarify FPS obligations, the CPTPP (Article 9.6) explicitly states that FPS does not extend beyond customary international law requirements and does not create additional investor rights. It also specifies that a state’s failure to meet investor expectations does not automatically constitute an FPS violation.
3. Fair and Equitable Treatment (FET) Principle
FET is one of the most frequently invoked principles in investment disputes. While its interpretation varies across treaties, arbitration tribunals commonly assess FET violations based on whether the host state:
- Failed to protect the investor’s legitimate expectations
- Did not act transparently
- Engaged in arbitrary or discriminatory behavior
- Denied access to justice or due process
- Acted in bad faith
Legitimate Expectations
Investors make decisions based on legal and regulatory frameworks in the host state. If a state induces investment through specific representations and later changes its policies to significantly undermine those expectations, it may be held liable under FET. However, as seen in Thunderbird v. Mexico, investor expectations must be reasonable and based on clear governmental assurances.
Transparency
Host states must provide a stable and predictable legal environment. In Metalclad v. Mexico, the tribunal ruled that Mexico violated FET by failing to ensure transparency, making it difficult for the investor to anticipate regulatory actions.
Arbitrariness and Discrimination
Arbitrary or discriminatory state actions violate FET. For instance, tribunals have ruled against states that apply inconsistent or politically motivated measures against foreign investors.
Investment protection principles are essential for fostering a stable and predictable investment environment. While states retain sovereignty over regulatory decisions, they must balance public policy objectives with investor rights. Treaties such as the CPTPP and EU-Vietnam Investment Protection Agreement (EVIPA) provide clearer definitions and limitations on these principles to ensure fairness for both investors and host states. As international investment law continues to evolve, the interpretation and application of these principles will remain central to investor-state dispute settlement.
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