{"id":29071,"date":"2026-07-06T12:00:48","date_gmt":"2026-07-06T10:00:48","guid":{"rendered":"https:\/\/voelkerrechtsblog.org\/?p=29071"},"modified":"2026-07-07T12:56:31","modified_gmt":"2026-07-07T10:56:31","slug":"rethinking-custom","status":"publish","type":"post","link":"https:\/\/voelkerrechtsblog.org\/de\/rethinking-custom\/","title":{"rendered":"Rethinking Custom"},"content":{"rendered":"

The fair and equitable treatment (\u2018FET\u2019) is a prominent protection granted to a foreign investor under investment treaties. This post\u00a0focuses on the formulation of FET under Article 1105 of the North American Free Trade Agreement (\u2018NAFTA\u2019), which links FET with the customary international minimum standard of treatment (\u2018MST\u2019). Previously, it has been argued<\/u><\/a> that Article 1105 has been interpreted restrictively.\u00a0This post advances a different evaluation: the MST-FET linkage is structurally problematic because it enables\u00a0the elevation of elements of the autonomous FET to custom without establishing the requirements of state practice and opinio<\/em> juris<\/em>.<\/p>\n

The analysis is relevant despite NAFTA\u2019s replacement by the United States-Mexico-Canada Agreement (\u2018USMCA\u2019) for three important reasons. Firstly, legacy claims still proceed under the USMCA\u2019s three-year sunset clause in Annex 14-C. Secondly, a number of subsisting treaties, including the Comprehensive Economic and Trade Agreement (\u2018CETA\u2019), the US Model Bilateral Investment Treaty (\u2018BIT\u2019)and several BITs of NAFTA countries retain the MST-linked FET formulation. Lastly, the NAFTA\u2019s interpretive approach has percolated non-NAFTA disputes. Rather than rehearsing whether the expansive interpretation is doctrinally correct, this post asks two further questions: whether the form<\/em> of argument tribunals use to bridge MST and FET is supportable and the resulting institutional consequences when tribunals act as creators rather than recognizers of custom.<\/p>\n

<\/a>Minimum Standard of Treatment & Fair and Equitable Treatment: A Brief Background<\/strong><\/p>\n

MST was conceived as a human rights standard of protection granted to aliens<\/u><\/a>. Neer<\/em><\/u> v. Mexico<\/em><\/u><\/a>\u00a0<\/em>articulated the breach of MST as \u201c\u2026<\/em>should amount to an outrage, to bad faith, to <\/em>wilful<\/em> neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency<\/em>\u201d. It was adopted by Western States to ensure a\u00a0level of protection to their nationals abroad since the existing standard of protection was considered to be low. As a result, the threshold for establishing its breach remains high.\u00a0Importantly, the MST is recognized as a rule of customary international law. A limited set of\u00a0obligations<\/u><\/a> on host States to: prevent the denial of justice in the administration of justice, provide due process, prevent arbitrary conduct and provide investors with \u2018full protection and security\u2019, are considered to be a part of the MST.<\/p>\n

Unlike the MST, the FET is a treaty-based standard that emerged because of the rejection<\/u><\/a> of the former by developing States. By the time of the rejection, the MST had already developed as a rule of custom. However, Western States introduced FET in their treaties with developing States, intending it to be different from and more exacting<\/u><\/a>\u00a0than the MST. The use of \u2018fair\u2019 and \u2018equitable\u2019 has allowed tribunals to interpret the standard broadly to include the protection of legitimate expectations, good faith, transparency, consistency and due process. This broad ambit of the standard corresponds with the relatively lower threshold required to establish its breach.<\/p>\n

Emergence of the Expansive Approach<\/strong><\/p>\n

Through the linkage of both standards, the scope of Article 1105 was intended<\/u><\/a> to be limited to include those \u00a0investor protection standards that have become a rule of custom. However, the interpretations in\u00a0Metalclad<\/em><\/u> v. Mexico<\/em><\/u><\/a>,\u00a0S.D. Myers v. Canada<\/em><\/u><\/a>\u00a0and Pope & Talbot v. Canada<\/em><\/u><\/a> had led to considerable confusion. Metalclad<\/em> introduced transparency, an element from the autonomous FET standard within the scope of Article 1105 without establishing that it was custom. S.D. Myers<\/em> held that a breach of the national treatment provision would lead to a breach of Article 1105 while the Pope & Talbot<\/em> adopted the additive character interpretation<\/u><\/a>, which offered an investor the protection of the MST plus<\/em> the FET. To limit this expansion, the Free Trade Commission (\u2018FTC\u2019) issued a binding Note of Interpretation<\/u><\/a>\u00a0in 2001. This Note clarified that Article 1105\u2019s reference to international law should be construed to mean that FET does not<\/em> require treatment in addition to or beyond that which is required by the customary MST. However, tribunals were able to circumvent this as well.<\/p>\n

In its post-Note award, the Pope & Talbot<\/em> tribunal upheld<\/u><\/a> its pre-Note award despite it being directly overruled. The tribunal held that there had been an evolution in customary international law since the time when Neer<\/em> was decided. This evolution had taken place to the extent where the FET was now considered to be a part of the customary MST. This interpretation of the tribunal was followed by subsequent tribunals in\u00a0Mondev<\/em><\/u> v. USA<\/em><\/u><\/a>, ADF v. Canada<\/em><\/u><\/a> and Merrill & Ring v. Canada<\/em><\/u><\/a>. The issue was that none of the tribunals had established the basis of this finding of \u2018evolution\u2019 of custom.<\/p>\n

However, this picture is not uniform. Glamis Gold v. USA<\/em><\/u><\/a> adopted a more deferential stance towards the FTC Note. The tribunal placed the burden of demonstrating the evolution of custom on the party asserting the change. After finding the burden unmet in the case, it retained the fundamentals of the Neer<\/em> standard to establish the violation of Article 1105. As a result, Glamis<\/em> drew a distinction between evolution in what conduct is considered outrageous and<\/em> evolution in the legal standard itself, which requires fresh evidence of customary formation. The tribunal focused on the former. This post endorses that approach because it accommodates contemporary state action without sacrificing the legal-conceptual basis of the MST. None of this is to suggest that the post-Note evolutionary turn produced uniform harm at the outset. As Dumberry has shown, the evolutionary approach adopted by the tribunals post-the Note had no practical impact<\/a>\u00a0on the outcome of these cases in terms of liability as the respondent States were not found to be responsible for any breaches of Article 1105 under this approach. The concern is what followed. Later tribunals lowered the threshold of liability\u00a0by importing the standards from autonomous FET case-law and, unlike their predecessors, did so to ground actual findings of breach.<\/p>\n

This is evident from the decisions of Bilcon<\/em><\/u> v. Canada<\/em><\/u><\/a>\u00a0and Eco Oro v. Colombia<\/em><\/u><\/a>. As per Bilcon<\/em>, there is a high threshold for the conduct of a host state to rise to the level of a NAFTA Article 1105 breach, but there is no requirement in all cases that the challenged conduct reaches the level of shocking or outrageous behavior.\u00a0 Based on this less stringent standard, the tribunal found Canada to be in breach of Article 1105 as it had breached the legitimate expectations of the investor. The protection of legitimate expectations is a part of the autonomous FET standard and not the MST. So, Article 1105\u2019s protection ambit was stretched to include the protection of legitimate expectations. This normative elevation of autonomous FET to custom percolated non-NAFTA MST-linked FET clauses\u2019 interpretation as can be seen in\u00a0Eco Oro<\/em>. This case\u00a0arose under the Canada-Colombia F<\/u>ree Trade <\/u>A<\/u>greement<\/u><\/a>, whose FET clause is\u00a0identical to that of the US Model BIT. Despite the FTC Note\u2019s obvious influence on the FET standard in the US Model BIT, the Eco Oro<\/em> majority tribunal followed the post-Note expansive approach to hold Colombia\u2019s actions as frustrative of the investor\u2019s legitimate expectations. This was considered to be a breach of the MST-linked FET standard of the treaty.<\/p>\n

Therefore, we can see that the expansive approach has influenced the practical outcome of cases as it has lowered the threshold for establishing a breach of the standard and included elements from the autonomous FET standard into the qualified standard without establishing the fulfilment of the twin conditions of state practice and opinio<\/em> juris<\/em>. There are institutional implications of such an approach as highlighted below.<\/p>\n

<\/a>Institutional Implications of the Expansive Approach<\/strong><\/p>\n

As per Schill<\/u><\/a>, FET is a \u201cgeneral clause\u201d that de facto delegates substantial rule making power to tribunals to ascertain its meaning. This is indicative of a deliberate shift in the power of norm generation from States to the tribunals, which converts arbitrators into legislators for the entire system of international investment law. However, this shift in power does not accord tribunals unlimited discretion in interpreting the treaty, especially when the treaty refers to a customary international law standard. This is because tribunals cannot<\/u><\/a> create custom. They can only recognize it. The NAFTA experience has been to the contrary as tribunals have not undertaken this recognition, instead they have normatively elevated elements to custom through the MST. This has influenced State behavior as reflected in treaties. Now, States have started enacting specific prohibitions in treaties to limit the interpretative scope of tribunals. For instance, Article 14.6 (4) of the USMCA<\/a> clearly states that a breach of the legitimate expectations of the investor will not constitute a breach of the MST-linked FET standard. This is in direct response to the tribunals\u2019 inclusion of legitimate expectations from the FET to Article 1105\u2019s scope.<\/p>\n

This negatively impacts developing countries. As per an empirical analysis<\/u><\/a>, it has been observed that developed countries generally incorporate elements identified by tribunals more frequently than developing countries do. This is owing to the latter\u2019s limited institutional-legal capacity. This limitation is now exacerbated as treaties have become the only<\/em> avenue to limit the scope of tribunals in interpreting the FET. In other words, this trend of States resorting to treaties as a response to the expansive approach will burden the institutional-legal capacity of developing countries as it would require proactivity in interpreting and incorporating changes to the standard in the treaties. This calls for tribunals\u2019 methodological adherence to their role of recognizing<\/em> custom rather than declaring<\/em> it through expansive treaty interpretations.<\/p>\n","protected":false},"excerpt":{"rendered":"

The fair and equitable treatment (\u2018FET\u2019) is a prominent protection granted to a foreign investor under investment treaties. This post\u00a0focuses on the formulation of FET under Article 1105 of the North American Free Trade Agreement (\u2018NAFTA\u2019), which links FET with the customary international minimum standard of treatment (\u2018MST\u2019). Previously, it has been argued that Article […]<\/p>\n","protected":false},"author":35,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6639],"tags":[7340,4003,3971],"authors":[8041],"article-categories":[6000],"doi":[],"class_list":["post-29071","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-america","tag-customary-international-law","tag-international-investment-law","authors-aakriti-rikhi","article-categories-article"],"acf":{"subline":"NAFTA Tribunals and the Elevation of FET to Customary International Law"},"meta_box":{"doi":"10.17176\/20260706-190126-0"},"_links":{"self":[{"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/posts\/29071","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/users\/35"}],"replies":[{"embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/comments?post=29071"}],"version-history":[{"count":3,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/posts\/29071\/revisions"}],"predecessor-version":[{"id":29077,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/posts\/29071\/revisions\/29077"}],"wp:attachment":[{"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/media?parent=29071"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/categories?post=29071"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/tags?post=29071"},{"taxonomy":"authors","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/authors?post=29071"},{"taxonomy":"article-categories","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/article-categories?post=29071"},{"taxonomy":"doi","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/doi?post=29071"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}