The Most-Favoured-Nation Clause in Investment Treaties

This guide by the International Institute for Sustainable Development (IISD) analyzes the Most-Favoured-Nation (MFN) clause in international investment treaties. It examines how arbitral tribunals have interpreted MFN to allow investors to import more favorable substantive and procedural rules from third-party treaties, a practice that has led to legal uncertainty and 'treaty-shopping.' The document provides a typology of MFN clauses, discusses the distinction between pre- and post-establishment phases, and offers recommendations for states to limit the scope of MFN in future treaties to protect national sovereignty and policy space.

• The MFN clause is a treaty-based obligation rather than a rule of customary international law, meaning a state is only bound by it if it has explicitly made such commitments in a treaty.
• Investment tribunals have diverged on whether MFN allows investors to import procedural rules, such as dispute settlement mechanisms, from third-party treaties. The 2000 Maffezini v. Spain case established a precedent for importing more favorable procedural provisions, though subsequent tribunals have either followed or rejected this approach.
• Tribunals generally allow the use of MFN to replace a BIT provision with a less restrictive one or to import a substantive protection rule where none exists in the basic treaty, though they typically oppose using MFN to extend the treaty's temporal or material scope.
• There is a distinction between MFN applied only after an investment is established (post-establishment) and MFN that covers the admission and acquisition phase (pre-establishment). Pre-establishment MFN is a growing minority approach, often found in FTAs and treaties from Canada, the US, EU, and Japan, and it significantly limits state sovereignty regarding entry requirements.
• To manage pre-establishment MFN, states use positive lists (listing only covered sectors) or negative lists (listing excluded sectors). Negative lists are more complex and time-consuming, often requiring a 'ratchet' mechanism to ensure that once a measure is made more conforming, it cannot be reversed.
• The practice of 'treaty-shopping' allows investors to selectively pick favorable provisions from multiple treaties to create a 'super-treaty' that does not exist in reality, potentially creating discrimination between different foreign investors.
• States are increasingly responding to unpredictable tribunal interpretations by explicitly excluding dispute settlement mechanisms from the scope of MFN or excluding the entire contents of past treaties.

APA

Nikièma, S. H. (2017). The Most-Favoured-Nation Clause in Investment Treaties. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/mfn-most-favoured-nation-clause-best-practices-en.pdf

Chicago

Nikièma, Suzy H. The Most-Favoured-Nation Clause in Investment Treaties. International Institute for Sustainable Development, 2017. https://www.iisd.org/system/files/publications/mfn-most-favoured-nation-clause-best-practices-en.pdf.

Wikipedia

{{cite report |last1=Nikièma |first1=Suzy H. |title=The Most-Favoured-Nation Clause in Investment Treaties |publisher=International Institute for Sustainable Development |date=February 2017 |url=https://www.iisd.org/system/files/publications/mfn-most-favoured-nation-clause-best-practices-en.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{nikima2017mostfavourednation, author = {Nikièma, Suzy H.}, title = {{The Most-Favoured-Nation Clause in Investment Treaties}}, institution = {International Institute for Sustainable Development}, year = {2017}, month = feb, url = {https://www.iisd.org/system/files/publications/mfn-most-favoured-nation-clause-best-practices-en.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }