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Max Planck Encyclopedia of Public International Law [MPEPIL]

Treaties of Friendship, Commerce and Navigation

Andreas Paulus

Development — Transport — Security assistance — BITs (Bilateral Investment Treaties) — Object & purpose (treaty interpretation and) — Treaties, application — Customary international law — Unilateral acts

Published under the auspices of the Max Planck Foundation for International Peace and the Rule of Law under the direction of Rüdiger Wolfrum.

A.  Meaning of the Term

Treaties of Friendship, Commerce, and Navigation are bilateral treaties concluded to facilitate commerce, navigation, and investment between the States Parties and reciprocally to protect individuals and businesses.

B.  Historical Background

On 6 February 1778, the United States concluded the first treaty of this kind with France as a treaty of amity and commerce. It established trade between the two countries on the basis of the most-favoured-nation (‘MFN’) principle (‘MFN’; Most-Favoured-Nation Clause; see also World Trade, Principles), and provided for generous treatment of neutral shipping in time of war (Neutrality in Naval Warfare). Similar treaties with the Netherlands, Sweden, Prussia, Morocco, and the United Kingdom (Jay Treaty [1794]) followed suit. In the 19th century, the US concluded further treaties with Latin American States, China, Japan, and the International Association of the Congo.

Until the late 1960s, Treaties of Friendship, Commerce, and Navigation (‘FCN treaties’), constituted an important part of US treaty practice. Typically, they provided for MFN treatment with respect to trade, guarantees against discrimination, exchange of consuls, and duties with respect to trade in time of war (‘free ships free goods’), as well as, in some cases, for access of foreigners to courts. By the end of the 19th century, FCN treaties began to include guarantees against expropriations without due process and full compensation (see also Property, Right to, International Protection). In some cases, currency transfer restrictions, and treatment of investment were also covered. Other States copied the US practice. For example, Germany concluded similar treaties in the late 1920s and early 1930s—eg with Ireland—as well as after World War II—eg with Italy.

The entry into force of the General Agreement on Tariffs and Trade (1947 and 1994) (‘GATT’) and of the Treaty establishing the European Community, as well as the conclusion of reciprocal trade agreements obviated many of the provisions in FCN treaties. In addition to the MFN clause, the GATT and other multilateral trade agreements provided for an institutional framework for negotiating trade concessions. The EC went well beyond this by establishing a customs union (Customs Unions) and economic rights and duties of individuals. After World War II, a new wave of FCN treaties, the so-called Modern FCN Treaty Series, concentrated on investment. They contained provisions on MFN status or national treatment (National Treatment, Principle), but also on protection from expropriation without prompt, adequate, and effective compensation. The US concluded the last FCN treaties of this kind with Togo and Thailand in 1966. A State Department compilation of 1980 lists FCN and similar treaties in force at that time extending to a total of 48 countries (Friendship, Commerce, and Navigation and Similar Treaties or Other International Agreements in Force in Whole or in Major Part [1981]).

Whereas most developing countries refused to sign an FCN treaty because they rejected the claim of full compensation for expropriations and similar provisions demanding equal treatment of foreign investments, several European countries, Germany and Switzerland leading among them, instead concluded bilateral investment protection agreements with developing countries (Investments, Bilateral Treaties; Investments, International Protection). Following the European lead, since 1982, the US has also concluded specific investment treaties instead of FCN treaties, leaving questions of commerce, navigation, diplomatic relations, and the like to more specific agreements or to general international law.

Many US Treaties of Friendship, Commerce, and Navigation contained a jurisdictional clause providing for the jurisdiction of the International Court of Justice (ICJ) for their interpretation and application. They thus set the stage for some of the more important battles before the court, covering both issues of commerce and investments proper such as expropriations (Case concerning Elettronica Sicula SpA [ELSI] [United States of America v Italy] [Elettronica Sicula Case] para 101), as well as questions of general international law and the use of force, although these treaties usually excluded matters involving national security.

C.  Contents of FCN Treaties

In the light of the largely historical importance of FCN treaties, the following description is limited to their basic contents and their interpretation by courts and in practice. The treaties may vary widely.

1.  Friendship

In the preamble or in the first article, some FCN treaties contain general clauses in which the conclusion of the treaty is placed in the context of the friendship between the countries in question and their mutual economic and cultural relations. However, in the Case concerning Oil Platforms and the Case concerning Military and Paramilitary Activities in and against Nicaragua, the ICJ decided that the States Parties do not thereby promise each other to abide by international law in general. Rather, the object and purpose of FCN treaties (Treaties, Object and Purpose) is limited to the development of commercial, financial, and consular relations (Case concerning Oil Platforms [Islamic Republic of Iran v United States of America] [Preliminary Objection] [Judgment] [‘Oil Platforms Case (1996)] para. 28; Case concerning Military and Paramilitary Activities in and against Nicaragua [Nicaragua v United States of America] [Merits] [‘Nicaragua Case’] para. 273). However, the provision on friendship may inform the interpretation of other articles of the treaty (Oil Platforms Case [1996] paras 31, 52).

2.  Commerce: Treatment of Nationals, Companies, and Investments of the Other Party

By ‘commerce’ in FCN treaties, the ICJ understands ‘commercial activities in general, not merely the immediate act of purchase and sale, but also the ancillary activities integrally related to commerce’ (Oil Platforms Case [1996] para. 49), such as shipping, transit of goods and persons, as well as the right to establish and operate businesses. This includes, according to the ICJ, the products of the continental shelf and the exclusive economic zone pursuant to the sovereign rights of the parties according to the Law of the Sea (Case concerning Oil Platforms [Islamic Republic of Iran v United States of America] [‘Oil Platforms Case (2003)’] para. 82).

10 ‘Freedom of commerce’ is provided for by guaranteeing MFN treatment and extends to the entry, sojourn, free travel, and residence in each State Party for the purpose of trade (‘treaty-merchant’ clause), investment, and capital transfer (‘treaty-investor’ clause ; Capital, Free Flow of), however limited by considerations of national security and of the maintenance of public order, the protection of public health, morals, and safety. FCN treaties may also contain public procurement rules on the same lines (see also Government Procurement, International Restrictions). Other competition matters are usually only touched upon by providing for consultation upon request (see also Antitrust or Competition Law, International). According to the ICJ, a clause that only relates to commerce ‘between the territories of the Parties’ does not cover injury to potential commerce nor commerce via an intermediary (Oil Platforms Case [2003] para. 92), a point of view that seems at odds with the realities of contemporary trade.

11  FCN treaties also regulate the treatment of nationals and companies of each party in the other, in particular their property, enterprises, and other interests. The standard for the treatment of nationals and enterprises of the other party is ‘fair and equitable treatment’, pursuant to the MFN principles and national treatment. Thus, nationals of each State Party are treated in the other State Party as favourably as any national from any other country, including the other State Party (see also Nationality). Advantages accorded to nationals of third States are thus automatically applicable to the nationals of the other State Party with regard to the activities covered by the FCN treaty. These provisions do not, however, apply to State-to-State relations as such (Oil Platforms Case [1996] para. 36).

12  The taking of property to the public benefit is conditioned by the payment of just compensation that is defined as ‘full equivalent of the property taken’ going beyond the more lenient standard of ‘appropriate compensation’ arguably applicable to cases of nationalization under customary international law, see eg Art. IV (2) of the 1955 United States of America and Iran Treaty of Amity, Economic Relations, and Consular Rights and Art. VI (3) of the 1953 United States of America and Japan Treaty of Friendship, Commerce and Navigation; see also Philips Petroleum Company v The Islamic Republic of Iran et al. paras 106–9 (see also Iran-United States Claims Tribunal). In the Elettronica Sicula Case, a Chamber of the ICJ accepted that impending insolvency of a subsidiary is a sufficient reason for depriving the parent company of ownership (Elettronica Sicula Case para. 101), but emphasized that national treatment, eg treatment pursuant to domestic law, may not satisfy the standard (ibid paras 71–2). Similarly, the right to ‘constant protection and security’ does not amount to a ‘warranty that property shall never in any circumstances be occupied or disturbed’ (ibid para. 74).

13  Older treaties also guarantee contacts of individuals with consular representatives, matters later codified by the Vienna Convention on Consular Relations (1963). The treaties may also accord some civil and social rights to foreign nationals, from the freedom to gather and disseminate information and the freedom of conscience to national treatment regarding certain social services such as maternity and emergency medical service during employment. FCN treaties also contain the right to national treatment regarding access to the courts, property rights, intellectual property, and taxes and fees on cultural and scientific activities. Some treaties also provide for free transfer of payments according to the national or MFN principles and limit exchange restrictions as well as exchange control of capital transfer. The FCN treaties may also deal with double taxation and the publication of the respective laws and regulations.

3.  Navigation

14  FCN treaties also contain detailed provisions as to the freedoms of navigation (Navigation, Freedom of)and transit (Transit of Goods over Foreign Territory), which was of particular importance before the codification of the law of the sea. On the basis of MFN treatment and national treatment, vessels of the other State Party shall have access to all ports and the right to carry cargo. Coastal and internal shipment is also usually accorded MFN treatment. In addition, FCN treaties may extend national treatment to ships in distress. Restrictions on the entering of vessels of the other party into the ports, and also the destruction or mining of ports, constitute violations of the freedom of navigation (Nicaragua Case para. 278).

4.  Limitations, in particular National Security

15  The freedom of commerce and navigation is not unlimited, however. Certain materials, such as fissile materials and weapons, but also gold, silver, and platinum, are usually excluded from the scope of FCN treaties, as well as fisheries and marine hunting. Purchase of land is largely made subject to domestic law (see eg Art. IX (1) (b) of the 1954 United States of America and Federal Republic of Germany Treaty of Friendship, Commerce and Navigation).

16  Individual rights are subject to public order exceptions. Obligations for the maintenance of international peace and security (Peace, Right to, International Protection; Security, Right to, International Protection), eg in systems of collective security such as the United Nations (UN) (Nicaragua Case para. 223), but also ‘essential security interests’ of the parties, may justify unilateral measures by either party otherwise not in conformity with the treaty (ibid para. 225; ‘power to derogate’ ; Unilateral Acts of States in International Law). If not explicitly provided otherwise, clauses containing such exceptions are not ‘self-judging’, but can be reviewed in substance by a competent court or tribunal (Oil Platforms Case [2003] para. 43; Nicaragua Case para. 222; CMS Gas Transmission Company v The Argentine Republic [Award of 12 May 2005] para. 373; Continental Casuality Company v The Argentine Republic [Award of 5 September 2008] para. 188; Sempra Energy International v The Argentine Republic [Decision on Annulment of 29 June 2010] para. 170); but see the different language of Art. XXI GATT. According to the controversial judgment of the ICJ in the Oil Platforms Case (2003) (at paras 40–1), such exceptions are to be interpreted in the light of general international law, in particular regarding the prohibition on the use of force (ibid para 42). Therefore, the saving clause regarding essential security interests may not condone the unlawful use of force by one party against the other.

D.  FCN Treaties and Adjudication

17  Most FCN treaties concluded by the US used to submit disputes concerning their interpretation and application to the ICJ. As a prerequisite for ICJ jurisdiction, States Parties need first, however, to attempt settlement by diplomacy and exhaust local remedies (Local Remedies, Exhaustion of), where applicable (Elettronica Sicula Case para. 63). Alternatively, the parties can agree on other means of settlement (see also Peaceful Settlement of International Disputes).

18  As to domestic law, US courts have long recognized that FCN treaties are self-executing and therefore confer rights on individuals directly applicable in domestic law without implementing legislation; see eg Spiess v C Itoh & Co (America), Inc United States Court of Appeals Fifth Circuit [24 April 1981] 356; McKesson HBOC, Inc v Islamic Republic of Iran United States Court of Appeals for the District of Columbia Circuit [16 November 2001] 1107–8. However, other States are under no obligation to follow the US example.

E.  Change of Treaty Practice

19  While 63 FCN treaties still exist with the US, it has concluded bilateral investment treaties rather than following the FCN model since 1982—for the first such treaties with Egypt and Panama, see Treaty between the United States of America and the Arab Republic of Egypt concerning the Reciprocal Encouragement and Protection of Investments (signed 29 September 1982) and Treaty between the United States of America and the Republic of Panama concerning the Treatment and Protection of Investments (signed 27 October 1982). In the case of disputes, these treaties allow, inter alia, for ICSID proceedings between an individual and a State, and condition ICJ jurisdiction on the specific consent of the parties. Commerce is regulated within the framework of the World Trade Organization (WTO) and in Free Trade Agreements, as well as in treaties on customs unions. Navigation is codified in the UN Convention on the Law of the Sea and customary law. Thus, due to the codification of many areas of international law and the conclusion of more specific treaties on economic matters, comprehensive FCN treaties have become increasingly redundant. Likewise, the inter-State model of the settlement of disputes has been supplemented by more specific procedures such as the Dispute Settlement Understanding of the WTO (World Trade Organization, Dispute Settlement) and by arbitration arrangements allowing for direct investor-State proceedings. Thus, the decline of FCN treaties is further evidence of the rise of direct relations between investors and States, but also of an increasing specialization, if not outright fragmentation of international law.

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