Role of Good Faith in Interpreting Fair and Equitable Treatment (FET) Standard in Arbitral Practice

Despite the lack of a precise meaning of the term, the investment tribunals have developed some broad principles for the application of the Fair and Equitable Treatment (FET) standard. These broad principles include good faith along with other principles. This article focuses on role of good faith as a means to interpret the FET standard. It discusses how the notion of good faith as referred by the arbitral tribunals has at least two distinct functions. Firstly, a more subjective function of good faith requires the parties to a treaty to comply with their obligations in a candid and loyal manner. Secondly a more objective function of good faith rather concerns the process of decision making being committed-while not distinguishable from the concept of equity to general considerations of justice. In the context of FET standard, the later function is especially connected with the approach of balancing the interests between host states and foreign investors. The article concludes with an analysis of the arbitral awards that shows that in interpreting and applying the FET standard they have identified among many other elements, the principle of good faith which singly or in combination have been encompassed in the standard. Finally it is stated that, the arbitral tribunals have found that FET standard encompasses the general obligation to act in good faith. This would include protection against the use of legal instruments for uses other than their intended purpose and any conspiracy by government authorities to destroy the investment. At the same time, it is clear that, action in bad faith is not a prerequisite for finding that the FET standard has been breached.