ASSESSMENT OF MOST FAVORED NATION CLAUSES IN TERMS OF EJUSDEM GENERIS PRINCIPLE AND ITS IMPACT OVER SOME BILATERAL INVESTMENT TREATIES EXECUTED BY THE REPUBLIC OF TURKEY IN 1990s

Assessment of Most Favored Nation Clauses in Terms of Ejusdem Generis Principle and its Impact over Some Bilateral Investment Treaties executed by the Republic of Turkey in 1990s

(By Turgut Aycan Özcan)

Most Favored Nation (MFN) clauses play an important role in international investment arbitration. Many investors, during the investment arbitration proceedings filed against respondent States, rely on MFN clauses existing in the bilateral investment treaties (the “BIT(s)”) in question in order to import substantive investment protection clauses or in order to benefit from more favorable procedural clauses such as dispute resolution mechanisms existing in the other BITs executed by the host States.

The main object of this essay is to discuss the availability of importation of substantive investment protection clauses (e.g. fair and equitable treatment, full protection and security, non-discrimination obligation, umbrella clause) from other BITs executed by the host States, which are not present in the original BIT relied on by the claimants. Since this issue has a close relationship with Ejusdem Generis principle, this assessment will be made by taking into consideration the main purpose of Ejusdem Generis principle. After the assessment of importation of substantive investment protection clauses which do not exist in the original BIT in terms of Ejusdem Generis principle, the impact of this assessment over some BITs executed by the Republic of Turkey will be separately analyzed.

​Before emphasizing the various opinions on the matter in question, it seems appropriate to give brief information on the meaning and scope of Ejusdem Generis principle and its relationship with MFN treatment. Ejusdem Generis is a Latin word which means “of the same kind” and it is often used to interpret written statutes. Where a law lists specific classes of persons or things and then refers to them in general, the general statements only apply to the same kind of persons or things specifically listed. For instance, if a law refers to automobiles, trucks, tractors, motorcycles and other motor-powered vehicles, “vehicles” would not include airplanes, since the list was of land-based transportation.[1]

When the Ejusdem Generis principle is applied to MFN clauses existing in the BITs, the wording of each MFN clause in question gains importance in order to determine the scope of substantive provisions which may be imported from other BITs. This issue is explicitly prescribed under Article 9 of the Draft Articles on Most Favored Nation Clause prepared by International Law Commission (“U.N. Draft Articles on MFN Clause”).[2] According to Article 9(1) of the MFN Clause “Under a most-favoured-nation clause the beneficiary State acquires, for itself or for the benefit of persons or things in a determined relationship with it, only those rights which fall within the limits of the subject-matter of the clause.”

In relation with scope of the MFN clause regarding its subject matter, in the Commentary to Articles 9 and 10 of U.N. Draft Articles on MFN Clause, it is stated that the rule which is sometimes referred to as the ejusdem generis rule is generally recognized and affirmed by the jurisprudence of international tribunals and national courts and by diplomatic practice.[3]

Similarly in the Study of United Nations Conference on Trade and Development regarding Most Favored Nation it is determined that “the MFN Clause is governed by the Ejusdem Generis principle, in that it may only apply to issues belonging to the same subject matter or the same category of subjects to which the clause relates… This principle circumscribes the application of the MFN treatment clause to those subject matters regulated by the basic treaty. For instance, the MFN treatment clause of a commercial treaty between States A and B could not apply to or attract a benefit conferred by State A to State C (for the benefit of State B) related to diplomatic immunity or to aviation or to taxation benefits. In IIAs, the subject/beneficiary is the investor and the subject matter is investment. Depending on the scope of the treaty, the subject matter can be investment protection, investment liberalization and/or a combination therefore.”[4]

In practice, the Commission of Arbitration in Ambatielos case, in its award of 6 March 1956, upon its assessment of Article X (most-favored-nation clause) of the Anglo-Greek Treaty of Commerce and Navigation of 1886 held that: “the most-favored nation clause can only attract matters belonging to the same category of subject as that to which the clause itself relates”[5]

With this regard, Emmanuel Gaillard also stated that “the more favorable treatment is found in a “third-party treaty”. To the extent the MFN standard is intended to protect beneficiaries in similar situations, it is generally admitted that, pursuant to the rule of ejusdem generis, the object of the basic treaty and that of the third-party must not be different in nature, for example a treaty on the protection of investments and a treaty on the determination of a maritime boundary.”[6]

In view of the foregoing, the wording and scope of MFN clause is the main and sole factor determining the substantive investment protections to be granted to the beneficiaries prescribed under the basic treaty to the extent that, pursuant to the rule of ejusdem generis, the object of the basic treaty and the treaty executed between the host States and the third country must be same in nature (e.g. both of them should be investment treaties) and there should not be an explicit restriction in the MFN clause of the basic BIT on importation of various provisions from other BITs.

Therefore, even though there exists no provision under the basic BIT such as fair and equitable treatment, full protection and security or umbrella clause, if the MFN clause of this basic BIT prescribes that the host State is obligated to provide a treatment to the investor no less favorable than the treatment provided to the investments of the national or other foreign investors who are in similar situations, regardless of the absence of such protections in the basic treaty (i.e. fair and equitable treatment, full protection and security or umbrella clause), such substantive investment protections can be imported from other BITs executed between the host State and other countries.

It is also noteworthy that the above determination is in conformity with the interpretation of MFN clause in accordance with the Vienna Convention on Law of the Treaties (the “VCLT”)[7].  If we assume that MFN clause has a wording such as “Each party shall accord to investments, once established, treatment no less favorable than that accorded in similar situations to investments of its investors or to investments of investors of any third country, which ever is most favorable” and if there is no definition of treatment in the basic BIT, in order to determine the scope of “treatment”, it would become vital to interpret the wording of “treatment” in accordance with Article 31 (1) of the VCLT which says “a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose” .

When the term of “treatment” is interpreted in good faith and in the light of the object and purpose of the basic BIT, it becomes clear that the scope of treatment at least includes the substantive investment protections such as fair and equitable treatment, full protection and security, umbrella clause which the host States are obligated to provide to the investments of local investors or other foreign investors. Consequently, the investor who relied on this kind of MFN clause existing in basic BIT, in any case, may be entitled to import aforementioned substantive investment protection provisions (e.g. fair and equitable treatment, full protection and security and umbrella clause) even these provisions are not present in the basic BIT.   Otherwise, if the investor is not allowed to import such substantive investment protection provisions from other BITs just because of the absence of such provisions in basic BIT, it will contradict with the main purpose of MFN clause and object of the basic treaty and therefore prevent the functioning mechanism of MFN treatment.

In practice, various arbitration tribunals applied Ejusdem Generis principle during the determination of scope of MFN clauses.  For instance, in Sergei Paushok v. Mongolia case, the Tribunal rejected importation of a substantive provision that was absent in the basic BIT. In that case, the claimant commenced arbitration proceedings under the Russia-Mongolia BIT, and sought to import an umbrella clause from another treaty. The Tribunal rejected that attempt, holding that an investor cannot use the treaty’s “MFN clause to introduce into the Treaty completely new substantive rights”[8].  Although this holding seems like in contradiction with above determinations, in fact, the tribunal, certainly applied Ejusdem Generis principle by focusing on the “wording” of the relevant MFN clause in Russian – Mongolia BIT.

Article 3 (2) of the Russian-Mongolia BIT states that: “The treatment mentioned under paragraph 1 of this Article, shall not be less favorable than treatment accorded to investments and activities associated with investments of its own investors or investors of any third State” Therefore, in order to determine the scope of treatment, the Tribunal rightfully looked at Article 3 (1) of the Russian-Mongolia BIT which says: “Each Contracting Party shall, in its territory, accord investments of investors of the other Contracting Party and activities associated with investments fair and equitable treatment excluding the application of measures that might impair the operation and disposal with investments.”  When Article 3 (1) of the Russian-Mongolia BIT is reviewed, it becomes clear that the treatment and consequently the scope of MFN clause are confined with “fair and equitable treatment”.

Thus, it seems that, in fact, the main reason of the Tribunal on rejection of importation of umbrella clause from another BIT executed by Mongolia is the narrow scope of MFN clause in question. In another word, if the scope of MFN clause was not confined with fair and equitable treatment by way of reference made to paragraph 1 of Article 3 of the Russian-Mongolia BIT, the Tribunal would apply Article 31(1) of the VCLT in order to determine the scope of MFN Clause and possibly accept that umbrella clause is also one of the substantive investment protection which is in the scope of treatment.

With parallel to above conclusion, recently, the Tribunal in EDF International SA and others v. Argentina case has permitted claimants to invoke MFN clause in the France-Argentina BIT to allow them to rely on the umbrella clauses existing in two other BITs executed by Argentina.[9] The claimants were investors in a company that was party to a concession agreement with Government of Mendoza. The claimants argued that Argentina had breached “commitments” that were contained in the concession agreement and in the regulatory framework.

It is stated in Article 4 of the France-Argentina BIT (MFN Clause): “Each Contracting Party shall accord in its territory and maritime zone to investors of the other Party, in respect of their investments and activities in connection with such investments, treatment that is no less favourable than that accorded to its own investors or the treatment accorded to investors of the most-favoured nation, if the latter is more advantageous.”

Upon its assessment of the Argentina’s arguments, the Tribunal emphasized that: “First Respondent asserts that the principle of ejusdem generis effectively bars Claimant from invoking substantive protections of a kind not explicitly contained in the Treaty itself.  In support of its position, Respondent cites inter alia to Article 9 (1) of the U.N. Draft Articles on the MFN Clause, which reads as follows: Under a most favored nation clause the beneficiary State acquires, for itself or for the benefit of persons or things in a determined relationship with it, only those rights which fall within the limits of the subject matter of the clause.

After due consideration of Article 4 of the France-Argentine BIT (MFN Clause) and parties’ position, the Tribunal concludes that the MFN clause does in fact permit recourse to the umbrella clauses of third-country treaties. The tribunal held that “to ignore the MFN clause in this case would permit more favorable treatment to investors protected under third countries, which is exactly what the MFN Clause is intended to prevent. To interpret the BIT otherwise would effectively read the MFN language out of the treaty.  Such a result cannot be what the two countries intended by the treaty language”

It is also noteworthy that in relation with Ejusdem Generis principle and Article 9(1) of the U.N. Draft Articles on MFN Clause, the Tribunal noted that: “Nothing in Article 9(1) of the ILC Draft Articles on the MFN Clause changes this result. In giving effect to the MFN provisions, the Tribunal does not in any way accord investors anything other than – those rights which fall within the limits of the subject matter of the clause.” [10]

Foregoing determinations recently made by the EDF Tribunal explicitly support that new substantive investment protection clauses which are not present in the basic treaty may duly be imported from other BITs executed by the host States in accordance with Ejusdem Generis principle to the extend that the scope of MFN clause should allow such importation. Above assessments made by the Tribunal in EDF v. Argentina case, will probably be indicative for the arbitral tribunals currently dealing with investment disputes and enable them to allow the importation of substantive investment protection clauses (e.g. fair and equitable treatment, full protection and security, umbrella clause) from other bilateral investment treaties in accordance with the scope of MFN clause and Ejusdem Generis principle, even though these protections do not exist in the basic BIT.

Aforementioned determinations also play a vital role for some BITs executed by Turkey with various countries in 1990s, especially for the BITs executed by Turkey with Turkmenistan, Albania, Bosnia Herzegovina, Georgia, Croatia, Kazakhstan, Kyrgyzstan, Latvia, Moldova, Uzbekistan, Pakistan and Ukraine.[11]  Although there exist a preamble referring to fair and equitable treatment and in the Reasoning of the Turkish Laws on Approval of these BITs, it is clearly prescribed that the Contracting States are obliged to provide fair and equitable treatment to the investors of the other party[12], some substantive investment protection provisions such as fair and equitable treatment, full protection and security and umbrella clause, which nowadays become very important, are absent under those aforementioned BITs.

On the other hand MFN clause under Article II of these BITs stipulates that: “Each Party shall permit in its territory investments, and activities associated therewith, on a basis no less favorable than that accorded in similar situations to investments of investors of any third country, within the framework of its laws and regulations.”   Further it is also stated in Article II of these BITs: “Each Party shall accord to these investments, once established, treatment no less favourable than that accorded in similar situations to investments of its investors or to investments of investors of any third party, whichever is most favourable.”

In view of the assessments with respect to Ejusdem Generis principle made in above paragraphs, in order to determine the substantive investment protection provisions which may be imported from other BITs to these Turkish BITs, first of all the scope of MFN clause should be determined by way of interpretation of the term of “treatment” in accordance with Article 31 (1) of the VCLT. Since under the MFN clause, the term of treatment is not restricted with some investment protections (e.g. fair and equitable treatment or full protection and security), this term should be interpreted broadly as it covers the treatment to investment of investors of any third party whichever is most favourable.

Therefore, in case where the host States (e.g. Turkmenistan, Albania, Bosnia Herzegovina, Georgia, Croatia, Kazakhstan, Kyrgyzstan, Latvia, Moldova, Uzbekistan, Pakistan and Ukraine) become obligated to provide fair and equitable treatment, full protection and security or umbrella clause protection to the foreign investors through the BITs executed with other countries, then the Turkish investors, by relying on Article II (MFN Clause) of the respective BITs, may import these substantive investment protection provisions existing in the other BITs.

​As parallel with the above conclusion, in practice, the Tribunal in Bayındır v. Pakistan case found that the obligation to grant fair and equitable treatment could be read into basic treaty, Turkey – Pakistan BIT (1995) even though this treaty did not contain any explicit provision on fair and equitable treatment. Upon its assessment of aforementioned MFN clause,  Bayındır Tribunal held that: “It remains however for the Tribunal to consider whether, through the most favoured nation clause contained in Article II(2) of the BIT, Bayındır is entitled to rely on Pakistan’s obligation to act in a fair and equitable manner contained in other BITs concluded by Pakistan…. Neither in its Reply nor at the jurisdictional hearing, did Pakistan dispute Bayındır’s assertion that the investment treaties which Pakistan has concluded with France, the Netherlands, China, the United Kingdom, Australia, and Switzerland contains an explicit fair and equitable treatment clause. Under these circumstances and for the purpose of assessing jurisdiction, the Tribunal considers, prima facie, that Pakistan is bound to treat investments of Turkish nationals “fairly and equitably”. [13]

In another ICSID arbitration case, in Rumeli Telekom v. Kazakhstan, where the wording of MFN clause is same as above, the parties agreed that the fair and equitable treatment contained in U.K – Kazakhstan BIT could be imported by virtue of MFN clause existing in Turkey – Kazakhstan BIT. The Tribunal accepted this agreement and confined itself for determination of the scope of the fair and equitable treatment provision imported from another BIT.[14]

​In the light of the foregoing, it becomes clear that during the previous arbitral proceedings, the tribunals who reviewed various Turkish BITs (e.g. Turkey-Pakistan BIT and Turkey – Kazakhstan BIT) did not hesitate to make a conclusion that a new substantive investment protection provision that is not present in the basic BIT may certainly be imported from another BIT on the condition that the MFN clause allows such importation in accordance with Ejusdem Generis principle.

​In conclusion, first of all, Ejusdem Generis principle has an important role in determination of the substantive investment protection provisions to be imported from the other BITs. However, during the application of this principle, Article 9(1) of the U.N. Draft Articles on MFN Clause stipulating that “under a most-favoured-nation clause the beneficiary State acquires, for itself or for the benefit of persons or things in a determined relationship with it, only those rights which fall within the limits of the subject-matter of the clause” should be taken into consideration and in order to determine the subject matter of MFN clause, such clause should be interpreted in accordance with Article 31 (1) of the VCLT. By doing so, the arbitral tribunals may be able to make a well-directed conclusion on determination of the provisions to be imported from other BITs by way of MFN clauses existing in the basic BIT.

​Secondly, above methodology would, not only help to determine the scope of MFN clause more correctly but also enable the tribunals to import new substantive investment protection clauses from other BITs which do not exist in the basic BIT to the extend that the scope of MFN clause allows this.

​Finally, as mentioned above, since some of the Turkish BITs executed in 1990s do not include various substantive investment protection clauses, foregoing methodology will also probably prevent the risks that the Turkish investors may face during the investment arbitration proceedings which arise from the objections of respondent States such as absence of fair and equitable treatment, full protection and security or umbrella clause in the basic BIT that the investors relied on.

[1] http://legal-dictionary.thefreedictionary.com/Ejusdem+generis

[2] Draft Articles on Most Favored Nation Clause Text adopted by the International Law Commission at its thirtieth session, in 1978 and submitted to the General Assembly as a part of the Commission’s report covering the work of that session (at para. 74). The report, which also contains commentaries on the draft articles, appears in Yearbook of the International Law Commission, 1978, vol. II, Part Two.

[3] Report of the International Law Commission on its thirtieth session

[4] Most-Favored Nation Treatment UNCTAD Series on Issues in International Investment Agreement II, United National New York and Geneva, 2010, p.24

[5] Ambatielos Claim (Greece, United Kingdom of Great Britain and Northern Island), decision of the Commission of Arbitration (6 March 1956), United Nations Reports of International Arbitral Awards, Vol. XII p. 83 [hereinafter “Ambatielos II” to distinguish it from the ICJ matter (Ambatielos I), in which the Court upheld the UK’s agreement to arbitrate with Greece], at p. 107. 

[6] New York Law Journal, Volume 233-No. 105, International Arbitration Law, Emmanuel Gaillard

[7] Vienna Convention on Law of the Treaties

[8] Sergei Paushok et al. v. Government of Mongolia, Ad Hoc/UNCITRAL, Award on Jurisdiction and Liability dated April 28, 2011 para. 570

[9] EDF International SA and others v. Argentina  (ICSID Case No. ARB/03/23) Award, 11 June 2012

[10] EDF International SA and others v. Argentina  (ICSID Case No. ARB/03/23) Award, 11 June 2012, paras. 925-934

[11] The BIT executed by and between Turkey and Turkmenistan on 2 May 1992, the BIT executed by and between Turkey and Albania on 1 June 1992, the BIT executed by and between Turkey and Bosnia Herzegovina on 21 January 1998, the BIT executed by and between Turkey and Georgia on 30 July 1992, the BIT executed by and between Turkey and Croatia on 12 February 1996, the BIT executed by and between Turkey and Kazakhstan on 1 May 1992, the BIT executed by and between Turkey and Kyrgyzstan on 28 April 1992, the BIT executed by and between Turkey and Latvia on 18 February 1997, the BIT executed by and between Turkey and Moldova on 14 February 1994, the BIT executed by and between Turkey and Uzbekistan on 28 April 1992, the BIT executed by and between Turkey and Pakistan on 16 March 1995, the BIT executed by and between Turkey and Ukraine on 27 November 1996.

[12] Draft Law on Ratification of the BIT executed by and between Turkey and Turkmenistan, Draft Law on Ratification of the BIT executed by and between Turkey and Kazakhstan, Draft Law on Ratification of the BIT executed by and between Turkey and Kyrgyzstan 

[13] Bayındır İnşaat Turizm Ticaret ve Sanayi A.Ş. v. Pakistan (ICSID Case No. ARB/03/29) Decision on Jurisdiction, 14 November 2005 paras. 230-232

[14] Rumeli Telecom A.Ş. and Telsim Mobile Telekomünikasyon Hizmetleri A.Ş. v. Republic of Kazakhstan (ICSID Case No. ARB/05/16) Award, 29 July 2008 paras. 591-592