Originally From World Arbitration and Mediation Review (WAMR)

I. Introduction

Let us begin with a mock scenario:  A foreign investor wishes to invest millions of dollars in a host state.  For that purpose the investor will typically enter into a contract (a “public” contract) with a public entity to undertake operations in a certain industry within the host state.  This contract might include an arbitration clause between the investor and the host state.  The contract might also incorporate by reference some domestic laws and regulations applicable to the particular industry in the host state, including any conditions for the entry of foreign investment.  Those incorporated laws or regulations might include provisions setting out sanctions in the event the investor breaches the contract or commits unlawful acts, such as failing to comply with installments or milestones in a timely manner or with the service the investor is meant to provide.  These sanctions may even be incorporated into the text of the contract and become part of the contractual framework applicable to the investment.

Let us also assume that during the performance of the contract the investor breaches the contract or carries out one of the prohibited acts under both the contractual and the pertinent legal frameworks.  At such time the host state’s authorities might verify the unlawfulness of the investor’s act and apply the corresponding sanction, such as a fine or the cancellation of the contract.  If the measure causes adverse effects on the investment, the investor may choose to start arbitration against the host state pursuant to the relevant investment protection treaty.

In this scenario, the investor may challenge the measure by claiming that the host state breached the fair and equitable treatment (FET) standard under the treaty, arguing that the standard includes an obligation of the host state to act in a “proportional manner” when adopting measures that affect the relevant investment.