The discipline of fair treatment is one of many controversial issues in international law. Its importance lies more specifically in the protection of legitimate expectations of investors. It is a concept that appears in many trade treaties, but academics, governments and investors are still unable to define it. There is no definitive definition of fair and equal treatment but the parties are in agreement on what it is.
The idea is that, in an host state, investors and their investment will be treated to a minimum according to international standards. Foreign investors can enjoy a different standard of treatment than domestic investors, and this is often regarded as something more. [1] A foreign investor will have to deal with certain exceptions in foreign countries. The concept of reasonable expectations (also called basic expectations) is one of the key elements of the standard for fair and equitably treated. [2] Legitimate expectations can be derived from contractual agreements, informal representations, or the legal framework in the host country. There is no universally agreed upon definition of fair and equal treatment due to the fact that there are multiple treaties. In a landmark case on the subject, Waste Management V. United Mexican States[1] the panel ruled: “….. conduct by the state that harms the claimant is a violation of the fair and equitable standard if it is arbitrary and discriminatory or exposes them to racial or sectional prejudice. It is important that, in applying this standard to the claimant’s treatment, the state has failed to meet the representations it made.
Swisslion V. Macedonia, in 2012[3], stated that the FET standards are a tool to guarantee foreign investors justice. In a broader sense, accepting a standard is an attempt to avoid the problems that arise from a dated bargain. An investor may be intimidated by the host state if he invests in it only to find out later that he has been subjected discrimination. In the case Desert Line v. Yemen the Tribunal said that to think that the State’s head offered assurances with his hands crossed and made a reservation that he would welcome you but not give you the benefits from BIT. [4] The Relationship between Legitimate Hope and Fair and Equal Treatment In Investment Law, Legitimate Hope is a key aspect of Fair and Equality treatment. The standard of fairness and equity is closely linked to legitimate expectations, which are the main element of that standard. [5]
The doctrine of investment arbitral jurisprudence is applicable in four ways. First, the doctrine can be used to protect an investor against the exemplification of promises made by a host country that it then denied. The investor is protected from the breach of a license that denied the use and benefit of their investment. Third, the investor is granted substantive rights against changes in Government Laws and Policies. The Doctrine can also be used in its traditional sense to give the investor procedural protection against a decision made by the host state. [6] A. Changes in Statements By the Host First, the Doctrine protects the investor in case the state changes its statements. In PSEG’s case against Turkey, a tribunal found that there was no breach of expectations by the investor because the State did not make any identical commitments. In this case also, the background legislation that would have given rise to a legitimate expectancy was absent. A state’s statement that it is seeking foreign investment does not constitute a valid expectation. B. Protection against withdrawal of licenses. The Fair and Equitable Treatment clause states that the host country must not revoke any permits granted to an investor in advance. The Doctrine of Fair and Equitable Treatment was used by Mexico in two high-profile cases: Metalclad[8]and Tecmed[9]. In the first case, the state gave the permit. The second stated that the grant would be given if a certain set of criteria is met.
The tribunal in the Metalclad Case realized that there was no local support for the project. The Tribunal still felt that there was only one reason for denying the permit, and that is when the landfill is constructed with a defect. [10] The claimant in Tecmed owned 99% of a hazardous waste site. The landfill had been built on land purchased by host country. The government refused to renew it immediately. Tribunal ruled that denying a permit would be a breach to the fair treatment standard. C. Government policy changes ICSID Tribunals found that it’s important to maintain the Government Policy in order for investor expectations to remain unchanged. Azurix, v. Argentina: The Tribunal found that there was no fair or equitable treatment because the investors were unable to expand their business in water supply due to increased prices.
CIESA, an Argentine Holding Company, owned shares in TGS, a Gas Transport Company based in Argentina. Claimant invested in TGS primarily because of a law that fixed the Argentinean Currency in US Dollars. The Argentine Republic argued it was a result of the severe economic situation and that there was no other option than to remove the law in 1999. The tribunal found that Argentina violated Fair and Equitable Treatement and failed to comply with its obligations regarding the investment. The tribunal awarded damages, finding that the investor was entitled to expect that the laws would not change. D. Procedural Rights Legitimate Hopes also increase if due process and the right to take part are not respected. In Rumeli & Telsim v. Kazakhstan the court stated:
Legal Framework under Fair Treatment Standard for Legitimate Expectations The SPP Case[14] marked the first instance that a tribunal decided to look at Legitimate Expectations. The tribunal stated that the actions in question, whether legal or not under Egyptian law, were acts by Egyptian authorities, which included the highest executive authority within the government. The tribunal stated that these acts, now alleged as being in violation of Egyptian municipal law, created expectations that are protected by established international law principles. Many cases have acknowledged the similar grounds. The Tribunal found that in CME Case the State has violated standard by “eviscerating arrangements based upon which foreign investors were induced to make investments.”[17] CMF, the company owned by CMF, was a TV Services Company.
Czech Media Council set up a new CNTS Structure held by Cet21. Cet21 was the original founder of CNTS. CET21 was then forced to terminate the agreement with CNTS. CNTS’s broadcasting services ceased. The tribunal concluded that the Foreign Investor’s Legitimate Expectation had been harmed because the claimant held a legitimate belief in the investment structures provided. In this case the Tribunal dismissed the investor’s claims. [18] According to the court, the reversal by the state of an express prior permission could be a breach of a legitimate expectation as the investor expected the State Agency to act in a particular manner.
ADF Group was another case that was important in which legitimate expectations were considered. The claimant argued that the State Agency had violated their Legitimate expectation by refusing to follow and apply an existing case law regarding the undertaking. Tribunal determined that Claimant’s failure to establish a fair and equitable treatment breach was due to its inability to show that the State Agency failed to follow or apply a preexisting case law. This was because it did not believe the investor had been misled by officials authorized by the US Federal Government. The investor’s reliance on misrepresentations made by the State can constitute a violation of the Fair and Equitable treatment standard. A violation of legitimate expectation can also be a result when the state fails to meet contractual obligations.
Even though a mere failure to pay a debt is not enough. More would be needed. SGS against Philippines, the Tribunal noted that the refusal to pay money due pursuant to a contract or an award was unreasonable. [22]
The Tribunal in GAMI Investments, Inc., Inc., Inc., United Mexican States, stated that a host state’s repudiation, without justification, of the relevant regulations would amount to a denial fair and equal treatment. Balancing Investors & States Interests It is important to recognize the differences between investor expectations and state rights when discussing how to strike a balance. The investor is expecting a reasonable return on investment[24], while the state pursues its own interests via its legislative arm. Legislative activities are at the heart of a modern democratic state. They are the outcome of parliament’s activity, in which people elected by general conscience vote on a political commitment. The legal framework can change over time as the thinking of people changes. The state’s right to regulate itself is not compatible with protecting the investor.
Second, the definition of a total and unreasonable change is unclear. It was said that they were evaluated on a per-case basis. The idea of total or reasonable changes is based on parameters that have not been defined anywhere. But one can detect this by listening to the tribunal’s resonance. The Tribunal in Impregilo said that investors must be protected against unreasonable changes to the legal framework. This will be judged according to legitimate expectations that are present at the time. [26] The definition of what is reasonableness has not been given in this case. However, in a case that followed it was said that anything that affects excessively the reasonable profits of an investor does not qualify as reasonable.
The discussion has led to an apparent understanding that the doctrine is applicable in a broad sense against laws and policies of a state. Tribunals often go above and beyond their mandate because they have no constitutional restrictions. There are some extreme cases in which the state willfully violates an investor’s right to legitimate expectation. These cases are better classified under expropriation than legitimate expectations.
The state’s right to pass legislation that contradicts legitimate expectations of investors is another area of controversy. Sometimes states cannot do anything other than act against the public’s order. In the Argentine case, the tribunal dismissed the argument that necessity was necessary when the country was experiencing an economic crisis. In another case, the tribunal explained that a state of emergency such as a financial crisis can invoke international law’s doctrine of “necessity”, allowing it to pass laws in violation of its international obligations. [28] To me, it seems that the doctrine is based on the idea of legitimate expectation. This is because I think the state has to fulfill its promises if they are the reason an investor invested. This does not mean that a state would go to any lengths or violate public policy just to keep its promise.
In a host state, a foreign investor might invest in certain types of medicine. However, the state may realize that these medicines are harmful to the safety and health of its citizens. The state would be entitled to expropriate in such a case. This would be a dubious application of the tribunal’s social policy-making power. The tribunals should use a case by-case review system to adjudicate the dispute. There are significant differences between the administrative and policy development in each area where arbitration is being held. It is possible that there are conflicting economic, social and political interests which must be taken into consideration when deciding if a person has received a fair or equal treatment. The environment is another area where I feel policy should be changed.
Tribunal should not prevent the state from making public policies that will improve tomorrow’s environment, just because some investors have legitimate expectations. It is clear that the legal expectation of fairness in the treatment of investors defines the relationship that exists between the right for profit and those of the represented democracies.
