Murphy Exploration & Production Company International v. Republic of Ecuador

Whether F&ET is offers higher protection than Minimum Standard of Treatment under International Law

The debate whether the standard of Fair and Equitable Treatment [F&ET] is something more than the Minimum Standard of Treatment to Aliens under international law [MST] has been one of the most polarizing debates in the field investment arbitration. While the sovereign entities i.e. states argue that F&ET is a lower threshold, the investors strongly argue it to be offering higher protection than MST. The basic premise of this differentiation lies in the assertion that while F&ET is a treaty standard or creation, MST is a fluid norm deriving its existence and legitimacy from customary international law. The debate has been an issue in many ICSID and BIT disputes.

Recently, the Tribunal in the matter of Murphy Exploration & Production Company International v. Republic of Ecuador[i] was faced with this question. The dispute pertained to certain decrees promulgated by Ecuador which had a significant detrimental affect on the financial performance of the investments by the investors. The claim was brought by Murphy under the Treaty between the United States of America and the Republic of Ecuador concerning the Encouragement and Reciprocal Protection of Investment (US-Ecuador BIT). It argued that such decrees have in fact statutorily modified the Participation Contracts related to Hydrocarbon exploration and exploitation forcing Murphy to forgo its investments.

Arguments by Claimant

Murphy argued, citing various case laws, that the F&ET standard requires a host State to: a. protect and observe an investor’s legitimate expectations; b. ensure the stability and predictability of the legal and business framework c. act consistently and transparently towards the investor and its investment; and d. act in good faith and treat the investor and its investment free from coercion and harassment. Murphy also argued that the F&ET standard is an independent treaty standard that goes beyond the customary international law minimum standard.

Arguments by Respondent

Ecuador, on the other hand, argued that F&ET is nothing else but the international minimum standard of Aliens and cannot be allowed to correspond to an ever expanding standard of protection that continues to absorb each and every element which the investor wants. Murphy, to be precise, argued that F&ET does not refer to an autonomous fixed standard or an ever expanding catalog of constituent elements. Ecuador argued that in any case, any or all of the elements which are to be part of F&ET, as argued by the Claimant, must derive their existence and sustenance from customary international law. The onus to show that these elements form part of the customary international law lies with the Murphy, the Claimant.

Decision by the Tribunal

The Tribunal agreed that the debate if F&ET is something more that MST is more theoretical than substantial. The Tribunal, in brief, discussed and held that F&ET as a treaty standard has transparency, consistency, stability, predictability, conduct in good faith and the fulfilment of an investor’s legitimate expectations as its’ components. It further explained that F&ET is to ensure the stability and predictability of the legal and business framework in the host state but the same will be subject to any qualifications otherwise established by the treaty or by international law. The Tribunal further observed that the international minimum standard and the treaty standard continue to influence each other and both standards are increasingly aligned. They recognised that tribunals have held in past that F&ET standards are essentially the same as MST. Finally, the Tribunal concluded that there is no material or substantial difference between F&ET and MST and in any case, F7ET is not a lower threshold than the international minimum standard.

Analysis

There are two important aspects of the Tribunals decision. Firstly, the Tribunal has interestingly noted that the requirement to provide stable and predictable legal and/or business environment is subject to qualifications as established or practiced under international law. Secondly, the tribunal has observed that F&ET standard cannot be lower than the protection offered by international law. The Tribunal in essence, has ruled that F&ET cannot operate in its own vacuum and will have to derive its legitimacy from customary international law. Even if it is a creation of treaty, it cannot create a standard unbound or unaffected by the established norm of international law.

However, the tribunal in the end concluded that the question whether F&ET can be something more than the international law standard was not relevant to the present dispute and thus, declined to rule on that. It has effectively left the debate wide open for the academicians and future tribunals to debate and settle the position (if it ever will be).

The Partial Final Award dated 6 May 2016 (published in August 2016) is available here. The Tribunal’s analysis is available in Paragraphs 206-208.

[i] Murphy Exploration & Production Company – International v. Republic of Ecuador, PCA Case No. 2012-16 (formerly AA 434)

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