BALANCING INVESTOR PROTECTION AND STATE REGULATORY AUTONOMY: THE EVOLUTION OF THE FAIR AND EQUITABLE TREATMENT STANDARD

Abstract

This paper examines the tension between investor protection and state regulatory autonomy under the Fair and Equitable Treatment (FET) standard in international investment arbitration. It argues that the FET standard has evolved from a narrow safeguard against egregious state conduct into a broad, unpredictable tool that increasingly encroaches upon legitimate state regulation. Using the example of a “regulatory adaptation scenario” – where a state modifies its environmental or tax legislation in response to changed circumstances without targeting specific foreign investors – the paper demonstrates how contemporary FET jurisprudence creates a “freezing effect” on state regulatory power. It further analyzes doctrinal inconsistencies across arbitral tribunals and the institutional limitations of the current investment arbitration system in reconciling these competing interests. The conclusion is that restoring balance requires not abolishing FET but transforming it through precise treaty drafting mechanisms, including an exhaustive illustrative list of violations, a regulatory carve-out for non-discriminatory public welfare measures, and a structured proportionality test. The paper offers specific drafting language for future bilateral investment treaties..