Between Fair and Equitable Treatment and Stabilization Clause_Moshe Hirsch_June 2013

The Hebrew University of Jerusalem

Faculty of Law

June 1, 2013 Published by the International Law Forum of the Hebrew University of Jerusalem Law Faculty Editor: Dr. Shai Dothan Assistant Editor: Doron Pe'er To subscribe, free of charge, contact: [email protected] This paper can be downloaded free of charge

Research Paper No. 07-13 June 2013

Between Fair and Equitable Treatment and Stabilization Clause:

Stable Legal Environment and Regulatory Change in International Investment Law

Prof. Moshe Hirsch

Prof. Hirsch is the Von Hofmannsthal Chair in International Law, Faculty of Law and

Department of International Relations, Hebrew University of Jerusalem.

Forthcoming : "The Interaction between International Investment Law & Human Rights

Treaties: A Sociological Perspective", in The Journal of World Investment & Trade, Vol. 12

(2011).

mailto:[email protected]

Between Fair and Equitable Treatment andStabilization Clause:

Stable Legal Environment and Regulatory Change inInternational Investment Law

Moshe HIRSCH1

I. INTRODUCTION

One of the most challenging questions in contemporary international investmentlaw relates to the balance between the competing needs of allowing a reasonable policyspace for host states, and enabling foreign investors to plan their operations in advance.These significant objectives highlight the ever-present tension between flexibility andpredictability in international investment relations. On the one hand, foreign investors(like most economic operators) must calculate their steps in advance, and unexpectedregulatory changes2 undertaken by the host state may frustrate their expectationsregarding economic returns. Frequent and significant regulatory changes maysignificantly reduce (or obliterate) the expected profits of foreign investors and deterfurther investments. On the other hand, governments, as regulators, should bepermitted to respond to changing circumstances in their domestic and externalenvironments, inter alia by regulatory measures. Imposing excessive limitations on hoststates’ freedom of action may significantly undermine their capacity to fulfill theirfundamental commitment to promoting the general welfare of their inhabitants.

Host states’ legislative powers highlight the asymmetric relations between foreigninvestors and sovereign states: host states are generally authorized to enact regulatorymeasures (where such are not prohibited by international law), including such measuresapplicable to foreign investments in their territory. By contrast, foreign investors areunable to unilaterally change the legal rules applicable to the investment relationsbetween them and the host states.3

1 Maria Von Hofmannsthal Chair in International Law, Faculty of Law and Department of InternationalRelations, Hebrew University of Jerusalem. [email protected]. I am grateful to Christoph H. Schreuer andStephan W. Schill for insightful comments on earlier draft of this article. Thanks also to Ohad Abrahami forexcellent research assistance.

2 The term ‘regulatory change’ refers in this article to various regulatory and legislative changes undertakenby the host state (including primary legislation, regulations, by-laws, writs etc.).

3 The legal inferior position of private investors (after the ‘entry stage’) leads certain investors to initiateinvestment arbitration to challenge governments’ measures (while host states rarely initiate arbitral proceedingsagainst foreign investors). See also Section IV below and the references therein.

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The dilemma regarding the appropriate balance between the competing interestsof host states in need of regulatory flexibility, and investors’ need for legal predictabilitypertains to several rules of international investment law (e.g., regulatory taking,emergency clauses, performance requirements); however it is particularly associatedwith the fair and equitable (FET) clause in investment treaties. This article analyzes theabove important question from the perspective of the FET principle, though itsconclusions may have some implications for the interpretation of some other rules ofinternational investment law.

An analysis of investment tribunals’ case-law on FET treatment and ‘stable legalenvironment’ indicates that the latter term includes three central components:(i) contractual and semi-contractual arrangements (e.g., contracts, licenses, concessions);(ii) unilateral promissory statements or specific representations made by the host state;and (iii) the host state’s regulatory measures at the time when investment was made. Thefirst two components – contractual and semi-contractual provisions as well aspromissory statements or specific representations – are the predominant components of‘legal environment’. Investors’ expectations created by contractual, semi-contractualarrangements, promissory statements or specific representations may generate‘legitimate expectations’ protected by the FET principle. The host state’s regulatorymeasures alone are insufficient in forming legitimate expectations protected by FETclauses. Only when such regulatory changes are accompanied by additional andexceptional factors, may the combination thereof amount to a breach of legitimateexpectations protected by the FET principle.4

It thus appears that contemporary investment law anchors the balance between theabove competing interests in the contractual and semi-contractual sphere (includingunilateral promissory statements). A brief review of literature on economic analysis oflaw indicates that the contractual sphere (in the broader sense) is suitable for allocatingthe risks involved in long-term investment relations, and protecting both parties’expectations to investment relations.

II. COMPETING AIMS AND ALTERNATIVE LEGAL MECHANISMS

The right of every state to enact legislative or regulatory measures applicable toactivities within its territory is one of the basic premises of public international law.5

International institutions6 and investment tribunals7 are well-aware of the basic right

THE JOURNAL OF WORLD INVESTMENT & TRADE2

4 See Section III below.5 See, e.g., MN Shaw, International Law (6th. Ed., CUP, 2008), 649; Section 402(1), Restatement of the Law

(Third) Foreign Relations Law (The American Law Institute, 1987).6 The importance of host states’ policy space to address domestic changes was particularly emphasized by

United Nations Conference on Trade and Development (UNCTAD) with regard to developing countries. UNCTAD,World Investment Report, FDI Policies for Development: National and International Perspectives (United Nations, NewYork and Geneva, 2003), pp. xvii, 145-154. Available at: http://www.unctad.org/en/docs/wir2003_en.pdf

7 Thus, for example, the Lemire tribunal recognized the “legitimate right of [the host state] to pass legislationand adopt measures for the protection of what as a sovereign it perceives to be its public interest”. Lemire v.

(footnote continued on next page)


(and duty) of governments to legislate and regulate domestic affairs in the public interest.Thus, for example, the Parkerings v. Lithuania award provides that:

It is each State’s undeniable right and privilege to exercise its sovereign legislative power. AState has the right to enact, modify or cancel a law at its own discretion.8

International investment law has also emphasized the importance of legalpredictability for the enhancement of foreign investments,9 and particularly thoseinvolving large initial investments.10 The need to enable foreign investors planning theiroperations in advance was linked by the Suez v. Argentina tribunal to Max Weber andthe rise of capitalism in Europe:

The resulting reasonable and legitimate expectations are important factors that influenceinitial investment decisions and afterwards the manner in which the investment is to bemanaged. The theoretical basis of this approach no doubt is found in the work of theeminent scholar Max Weber, who advanced the idea that one of the main contributions oflaw to any social system is to make economic life more calculable and also argued thatcapitalism arose in Europe because European law demonstrated a high degree of“calculability.11 [Footnote omitted]

Facing the above competing interests, and being aware that full acceptance of eitherneed will be neither efficient12 nor fair, investment tribunals and policy-makers strive tostrike an adequate balance between the interest of host governments in regulatoryflexibility and foreign investors’ interest in legal predictability. Thus, for example,13 theSuez v. Argentina tribunal stated:

Thus in interpreting the meaning of fair and equitable treatment to be accorded to investors,the Tribunal must balance the legitimate and reasonable expectations of the Claimants with Argentina’sright to regulate the provision of a vital public service.14 [Emphasis added]

FAIR & EQUITABLE TREATMENT AND STABLE LEGAL ENVIRONMENT 3

Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability of 14 January 2010, para. 273.Available at: http://italaw.com/documents/Lemirev.Ukraine2010.pdf. See also AES v. of Hungary, ICSID Case No.ARB/07/22, Award 23 September, 2010, at para. 9.3.29. Available at: http://italaw.com/documents/AESvHungaryAward.pdf; Impregilo v. Argentina, ICD Case No. ARB/07/17, Award of June 21, 2011, para. 290.Available at: http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC2171_En&caseId=C109

8 Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8 (Norway/Lithuania BIT), Award of11 September 2007, [332] Available at: http://ita.law.uvic.ca/documents/Pakerings.pdf

9 See, e.g., S Schill, ‘International Investment Law and General Principles of Law’, in J Bering et al (eds.). GeneralPrinciples of Law and International Investment Law, (The International Law Association: German Branch,December 2009), p. 16. http://www.50yearsofbits.com/docs/0912211342_ILA_Working_Group_ML_PIL.pdf

10 See, e.g., A Shemberg, Stabilization Clauses and Human Rights – para. 19 (OECD Global Forum, 2008).Available at: http://www.oecd.org/dataoecd/46/48/40314647.pdf

11 Suez v. Argentina ICSID Case No. ARB/03/17, Decision on Liability of 30 July 2010, para. 203. Availableat: http://italaw.com/documents/SuezlnterAguaDecisiononLiability.pdf

12 On the relationship between investors’ legitimate expectations and efficiency (particularly with regard to“moral hazard’), see J Bonnitcha, “The Problem of Moral Hazard and its Implication for the Protection of‘legitimate expectations’ under the Fair and Equitable Treatment Standard”, Investment Treaty News (7 April 2011).Available at: http://www.iisd.org/itn/2011/04/07/the-problem-of-moral-hazard/

13 See also the Saluka v. the Czech Republic award that emphasized that: “The determination of a breach ofArticle 3.1 by the Czech Republic therefore requires a weighing of the Claimant’s legitimate and reasonableexpectations on the one hand and the Respondent’s legitimate regulatory interests on the other.” Saluka v. the CzechRepublic, UNCITRAL, Partial Award of 17 March 2006, para. 306. Available at: http://italaw.com/documents/Saluka-PartialawardFinal.pdf; See also Lemire v. Ukraine, above n 7, at para. 285

14 Suez and Vivendi v. Argentina, ICSID Case No. ARB/03/19, Decision on Liability of 30 July 2010, para. 236.Available at: http://www.italaw.com/documents/SuezVivendiAWGDecisiononLiability.pdf


Investment scholars have also emphasized the need to balance between thelegitimate interests of both parties to investment relations.15

The equilibrium point may be anchored in several alternative legal concepts anddoctrines: administrative contracts, stabilization clause and the FET principle.

(a) ADMINISTRATIVE CONTRACTS

The concept of ‘administrative contract’, as developed in several domestic legalsystems (particularly in French law) aims to reconcile the private and public interestsinvolved in this sphere. Under the French law, administrative contracts (‘contractadministratif ’) are concluded between a public body and a private person, whereby thelatter undertakes to implement a public service.16

The rules applicable to administrative contracts are less stringent compared withthose applicable to regular contracts with concerning the basic obligation to implementthe agreement as well as well as the remedies for breach of agreement are concerned.Under special rules developed in this sphere,17 where it is necessary to protect the publicinterest, a state’s public authorities are allowed to unilaterally modify or abrogate thecontract and compensate the private party.18 In some legal systems, attempts to receivefull compensation occasionally encounter significant difficulties (such as lengthy andcostly litigation, as well as lengthier payment schedules).19

Arguments regarding the application of the concept of administrative contracts20 toagreements concluded between public bodies of host states and foreign investors wererejected by investment tribunals in the pre-BITs era.21


15 Thus, for example, McLachlan et al. concluded as follows: “Finally, the protection of legitimateexpectations must be qualified by the need to maintain a reasonable degree of regulatory flexibility on the part ofthe host state to respond to changing circumstances in the public interest.” McLachlan, Shore and Weiniger,International Investment Arbitration: Substantive Principles (OUP, 2007), 239. See also, Newcombe & Paradell, Law andPractice of Investment Treaties (Kluwer Law Intenational 2009), 282; S Schill, ‘International Investment Law and GeneralPrinciples of Law’, above n 9. at page 16.

16 See, e.g., B Nicholas, The French Law of Contract (2nd. Ed., Clarendon Press, Oxford, 1992), 25-26;HA Mairal. “Government Contracts Under Argentine Law: A Comparative Law Overview” (2002) 26 FordhamInternational Law Journal 1716,1722 et seq. See also Texaco v. Lybia, para. 55. (discussed below in Section II(b)).

17 For a classical comparative study on administrative contracts, see G Langrod, “Administrative Contracts”(1955) 4 American Journal of Comparative Law 325. See also, G Shalev, “Administrative Contracts” (1979) 14 IsraelLaw Review 444.

18 On the French law, see Nicholas, The French Law of Contract, above n 16, at p. 27; Mairal, GovernmentContracts under Argentine Law, above n 16 at 1724; JB Auby, ‘Administrative Law in France’, in R Seerden andF Stroinik (eds), Administrative Law of the European Union, Its Member States and the United States: A ComparativeAnalysis (Intersentia 2002) 59, 69. See also M Al-Saeed, ‘Legal Protection of Economic Development Agreements’(2002) 17 Arab Law Quarterly 150,154-155. c.

19 See, e.g., with regard to Argentina, Mairal, Government Contracts under Argentine Law, above n 16, at1743,1745, 1748-1750

20 For an argument regarding the application of the rules of administrative contracts to oif concessions, seeH Cattan, The Law of Oil Concessions in the Middle East and North Africa (Oceana publications, 1967) 1-4,73-76

21 Texaco v. Libya (1978) 17 ILM 1, para. 55-57; Aminoil v. Kuwait (Award 24 March 1982) 66 ILR 519,para. 90; Saudi Arabia v. Aramco 27 ILR 117, at pp. 163-164. See also, M Hunerand AC Sinclair, “AminoilRevisited: Reflections on a Story of Changing Circumstances”, in T Weiler, (ed.), International Investment Law andArbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May,2005), pp. 347-348 (2005); Al-Saeed, above n 18, at 158.


Dupuy, the sole arbitrator in the celebrated Texaco award, provided two mainexplanations for declining to apply the concept of administrative contracts to theagreement between the host state and foreign investor. The first reason relates to theunderlying unequal character of administrative contracts: the parties to administrativecontracts do not intend “to contract on a footing of equality,”22 primarily because suchcontracts confer on the host state’s administration rights and powers that are not usualin regular civil contracts (such as the power to modify the contract).23 In this particularcase, the sole arbitrator ruled that it was clear that the host state “intended to contracton a footing of strict equality with its partners: that it was the intention of the State, asunder a civil contract, to deal on an equal basis with the contracting party”.24 Thesecond reason concerns the question of whether the above domestic rules regardingadministrative contracts are considered as ‘general principles of international law’.25

Dupuy explained that the doctrine of administrative contracts was adopted by theFrench law and several other domestic legal systems “[b]ut it is unknown in many otherlegal systems which are as important as the French system and it has not been acceptedby international law notwithstanding wishes which de lege ferenda may have beenexpressed in this field. The distinction made by certain legal systems between ‘civilcontracts’ and ‘administrative contracts’ cannot therefore be regarded as correspondingto the a “general principle of law ..”.26

(b) STABILIZATION CLAUSES

A different legal technique that may reconcile between the rival interests ofregulatory flexibility and legal predictability is embodied in stabilization clauses includedin some contracts between host states and foreign investors.27 These contractual clausesdirectly address the issue of regulatory changes undertaken by the host state during theinvestment period. Stabilization clauses are designed to make new laws or regulatorychanges inapplicable to the particular investment project; or providing that althoughnew regulatory measures are applicable to the investment, the investor shall becompensated for the cost of compliance with them. Not all investment contracts includesuch provisions but they are common in long-term investments in the extractiveindustries as well as in private contracts for public infrastructure and essential services.28

Generally, domestic rules concerning tax regime, non-discrimination, favorable


22 Texaco v. Libya, above n 21, para. 5623 Texaco v. Libya, above n 21, paras. 54, 5624 Texaco v. Libya, above n 21, at para. 56, and see also para. 55.25 On ‘general principles of law’ as a source of obligations in international investment law, see, e.g.. M Hirsch,

Sources of International Investment Law (2011) 12-17, http://papers.ssrn.com/sol3/papers.cfm?abstractid=1892564; T Gazzini, ‘General Principles of Law in the Field of Foreign Investment” (2009) 10 Journal of WorldInvestment and Trade 103.

26 Texaco v. Libya, above n 21, at para. 57 [footnote omitted].27 On stabilization clauses that are included in domestic legislation, see PD Cameron, International Energy

Investment Law (OUP, 2010), p 90, 247.28 See, e.g., A Shemberg, Stabilization Clauses and Human Rights (OECD Global Forum, 2008), 4. Available at:

http://www.oecd.org/dataoecd/46/48/40314647.pdf


exchange rates, availability of foreign currency, and free remittance are often addressedin stabilization clauses.29

Thus, for example, the stabilization clause30 addressed in the Duke v. Peru awardprovided as follows:

THREE – By virtue of this Agreement, the STATE, and as long as it remains in effect, inconnection with the investment referred in CLAUSE TWO, the STATE guarantees legalstability for DUKE ENERGY INTERNATIONAL, according to the following terms: 1. Stability ofthe tax regime with respect to the Income Tax, as stipulated in ... of Article 10° ofLegislative Decree No. 662, .... Neither the remittances sent abroad of amountscorresponding to DUKE ENERGY INTERNATIONAL for any of the items contemplated in thissubsection are taxed pursuant to the aforementioned law.31

This Legal Stability Agreement shall have an effective term of ten (10) years as from the dateof its execution. As a consequence, it may not be amended unilaterally by any of the partiesduring this period, even in the event that Peruvian law is amended, or if the amendmentsare more beneficial or detrimental to any of the parties than those set forth in thisAgreement.32

The legal effects of stabilization clauses are not fully clarified in investmentjurisprudence. The sensitive issue relates to the question of whether such contractualclauses do indeed impose a blanket prohibition on the host state to change its domesticlegislation under international law; or whether they only bind the host government tocompensate the investor for deviating from the stabilization provisions.33 Mostinvestment tribunals that dealt with stabilization clauses (though often not directlyaddressing the above sensitive question) ruled that domestic regulatory changesinconsistent with stabilization clauses must be accompanied by a duty to compensate theforeign investor.34

Numerous investment agreements, however, do not include stabilization clauses,thus bringing to the fore the question regarding the third legal technique to balance thecompeting interests of regulatory flexibility and legal predictability: the FET clause.


29 Cameron, International Energy Investment Law, above n 27, 248-24930 For additional examples, see Cameron, International Energy Investment Law, above n 27, 248, 44331 Clause Three, Section 1 of the DEI Bermuda LSA as cited in Duke. v. Ecuador, ICSID Case No. ARB/04/19

(US/Ecuador BIT), Award of 18 August 2008, para. 186. Available at:http://italaw.com/documents/DukeEcuador Award_003.pdf

32 Clause Five of the DEI Bermuda LSA as cited in Duke v. Ecuador, above n 31, para. 187:33 For a survey of debate in legal literature See, T Wälde and G Ndi, “Stabilizing International Investment

Commitments: International Law Versus Contract Interpretation” (1996) 31 Texas International Law Journal 215,242-245. See also Dolzer & Schreuer, Principles of International Investment Law below n 34, 75; Cameron, InternationalInvestment Energy Law, above n 27, 89.

34 See, e.g. Duke v. Ecuador, above n 31, paras. 208, 366; Letco v. Liberia, Award and rectification of 31 Marchand 14 May 1986 respectively, (1987) 26 ILM 647, 666-667; Agip v. Congo, Award of 30 November 1979, (1982)21 ILM 726, 734-735; Mine v. Guinea (Annulment) (1990) 5 ICSID Review, 95, 11; Texaco Overseas PetroleumCompany v. Libyan Arab Republic, (1978) 17 ILM 1, 16-17; Revere Copper v. Opic, 56 ILR 258. See also R Dolzer &C Schreuer, Principles of International Investment Law (OUP, 2008), 75-76; Cameron, International Investment EnergyLaw, above n 27, 90-94; Walde, and Ndi, “Stabilizing International Investment Commitments: International LawVersus Contract Interpretation”, above n 33, 245-246.


III. FAIR AND EQUITABLE TREATMENT & STABLE LEGAL ENVIRONMENT

(a) FAIR AND EQUITABLE CLAUSES

The FET clause has existed as a ‘sleeping beauty’35 in bilateral treaties since the endof World War II but it is only since 2000 that investment tribunals have applied it to abroad range of circumstances. Currently, this principle is included (though in diversecontexts and different wordings) in the great majority of bilateral investment treaties(BITs) as well as in major multilateral investment treaties (such as the NAFTA36 and theEnergy Charter Treaty)37 and it is the most frequently invoked standard in investmentdisputes.38

While some aspects of the obligations flowing from the FET clause have beenclarified in investment jurisprudence, other aspects of this principle remain vague.39

Thus, while the Suez tribunal states that the obligation to accord fair and equitabletreatment is “the Grundnorm or basic norm of international investment law”,40 itconcedes that an attempt to analyze the ordinary meaning of this term “yields littleadditional enlightenment”.41

Investment tribunals have not sought to develop a comprehensive concept ofthe FET principle and their jurisprudence42 is generally limited to a list of examplesof conduct breaching the standard.43 The evolving jurisprudence indicates that theFET standard requires host states respecting investors’ legitimate expectations, to


35 C Schreuer, “Fair and Equitable Treatment in Investment Treaty Law’ in F Ortino, L Liberty, A Sheppardand HWarner (eds.). Investment Treaty Law-Current Issues II (British Institute of International and Comparative Law,2007) 92.

36 Article 1105(1) of the North American Free Trade Agreement (NAFTA), 32 ILM 289 (1993).37 Article 10(1) of the Energy Charter Treaty, 34 ILM 360.38 Dolzer & Schreuer, Principles of International Investment Law, above n 34,119; C Yannaca-Small, International

Investment Law: a Changing Landscape: Fair and Equitable Treatment Standard in International Investment Law (OECD,2005), 77-78 available at: http://www.oecd.org/dataoecd/11/52/40077877.pdf; KJ Vandervelde, A UnifiedTheory of Fair and Equitable Treatment (2010) 43 New York University Journal of International Law & Politics 43, 46;Newcombe & Paradell, above n 15, at 255. On the evolution of the FET standard, see, J Tudor, The Fair andEquitable Treatment Standard in the International Law of Foreign Investment (OUP, 2008), 15-44; Yannaca-Small,International Investment Law, pp. 74-77: Vandevelde, A Unified Theory, 44-49; Dolzer & Schreuer, above n 34,119-120; Newcombe & Paradell, above n 15, 255-261.

39 There is a view “that the vagueness of the phrase is intentional to give arbitrators the possibility to articulatethe range of principles necessary to achieve the treaty’s purpose in particular disputes.” Yannaca-Small, above n 38,p. 75

40 Suez and Vivendi v. Argentina, above n 14, para. 188.41 Suez and Vivendi v. Argentina, above n 14, para. 213. And the Lemire tribunal opines that “Fair and equitable

treatment” is a term of art, and any effort to decipher the ordinary meaning of the words used only leads toanalogous terms of almost equal vagueness.” Lemire v. Ukraine, above n 7, para. 258. Newcombe & Paradell notethat “[T]he irony is that the substantial interpretive uncertainty inherent in the meaning of the treatment that is fairand equitable may well be one of the reasons for its successful adoption. Unlike the minimum standard of treatment,which some states have historically viewed with suspicion because of the legacy of the gun-boat diplomacy andimperialism, the term fair and equitable treatment is not accompanied by unwanted political baggage.”....Newcombe & Paradell, n 15, at p. 263.

42 For a proposal to employ comparative law analysis of municipal laws as a method to extract generalprinciples of law to concretize fair and equitable treatment, see SW Schill, “Fair and Equitable Treatment, TheRule of Law, and Comparative Public Law”, in SW Schill (ed.). International Investment Law and Comparative PublicLaw (OUP, 2010) 151, pp. 159, 175.

43 See, e.g., Vandevelde above n 38, 47-48


undertake administrative decision-making in a transparent manner and in good faith,and refrain from arbitrary or discriminatory treatment, coercion and harassment, aswell as bad faith.44

The above-mentioned concept of ‘legitimate expectations’ is highly relevant tothe need for reconciling the competing interests of legal predictability and regulatoryflexibility. Investment tribunals and scholars have identified the protection oflegitimate expectations as one of the major components of the FET treatment.45 Aselaborated below, several investment tribunals have stated that a ‘stable and legalenvironment’ is an essential element of the FET treatment and several tribunalsmaintain that host state’s regulatory framework may create legitimate expectations forforeign investors.

An examination of investment tribunals’ case law on ‘stable legal environment’ (or‘stable regulatory framework’) indicates that the term ‘legal environment’ includesthree central components: (i) contractual and semi-contractual arrangements; (ii)unilateral promissory statements or specific representations made by the host state; and(iii) the host state’s regulatory measures existing at the time the investment is made.The first two components – contractual and semi-contractual provisions as well asunilateral promissory statements or specific representations – are certainly thepredominant components of the term ‘legal environment’. As elaborated below,investors’ expectations created by contractual, semi-contractual arrangements orpromissory pledges are considered ‘legitimate expectations’ protected by the FETprinciple. As for the third component, the host state’s regulatory measures alone areinsufficient in forming legitimate expectations protected by FET clauses. Only whenregulatory changes are accompanied by additional and exceptional factors, may thecombination thereof amount to a breach of legitimate expectations protected by theFET principle.


44 See, e.g., Tecmed v. Mexico, ICSID Case No. ARB(AF)/00/2, Award of 29 May 2003, para. 154. Availableat: http://www.italaw.com/documents/Tecnicas 001.pdf; Waste Management v. Mexico (Number 2), ICSID CaseNo. ATB(AF)/00/3, Final Award of 30 April 2004, para. 98. Available at: http://www.italaw.com/documents/laudo_ingles.pdf; Suez and Vivendi v. Argentina, above n 14, para. 213, 225; Saluka v. Czech Republic, above n 13,para. 309; Bayindirv. Pakistan, ICSID Case No. ARB/0/29, Award of 27 August 2009, para. 178. Available at:http://italaw.com/documents/Bayandiraward.pdf: Biwater Gauff v. Tanzania, ICSID Case No. ARB/05/22, Awardof 24 July 2008, at para. 602. Available at: http://www.italaw.com/documents/Biwateraward.pdf; Walter Bau v.Thailand, UNCITRAL, Award of 1 July 2009, para. 11.5. Available at: http://italaw.com/documents/WalterBauThailandAward_001.pdf; Lemire v. Ukraine, above n 7, paras. 260-262. See also Dolzer & Schreuer,above n 34,133-149; McLachlan et al., above n 15, 224-234; Newcombe & Paradell, above n 15, 279-296; BChoudhury, “Evolution or Devolution: Defining Fair and Equitable Treatment in International Investment Law”(2005) 6 Journal of World Investment and Trade 297; C Schreuer, “Fair and Equitable Treatment in Arbitral Practice”(2005) 6 Journal of World Investment and Trade 357; JR Picherack, “The Expanding Scope of the Fair and EquitableTreatment Standard: Have Recent Tribunals Gone Too Far?’ (2008) 9 Journal of World Investment and Trade255.

45 Thus, for example, the EDF tribunal states that it “shares the view expressed by other tribunals that one ofthe major components of the FET standard is the parties’ legitimate and reasonable expectations with respect to theinvestment they have made.” EDF v. Romania, ICSID Case No. ARB/05/13, Award of 8 October 2009, para. 216.Available at: http://www.italaw.com/documents/EDFAwardandDissent.pdf; See also Saluka v. Czech Republic,above n 13, para. 302 Teemed v. Mexico, above n 44, para. 154;Waste Management v. Mexico, above n 44, para. 98;Occidental v. Ecuador, below n 47, para. 183; Suez v. Argentina, above n 11, paras. 222-223. See also Dolzer &Schreuer, above n 34/ 133-134; Newcombe & Paradell, above n 15, 279.


(b) GENERAL STATEMENTS REGARDING A ‘STABLE LEGAL ENVIRONMENT’

Some investment awards emphasize the importance of a stable legal environment(or predictable business environment) and include general statements that may lead tothe conclusion that investors’ legitimate expectations directly result from the host state’sregulatory framework as it stands at the time when the investment is made. Accordingto this approach, later regulatory changes harming foreign investors’ interests are likelyto be considered as violations of the FET principle. Thus. the CMS tribunal underlinesthe importance of stable legal environment:

The Treaty Preamble makes it clear, however, that one principal protection envisaged isthat fair and equitable treatment is desirable “to maintain a stable for investments andmaximum effective use of economic resources.” There can be no doubt, therefore, that a stablelegal and business environment is an essential element of fair and equitable treatment46 [emphasisadded]

And more specifically, the Occidental tribunal’s statement addresses the obligationnot to modify the legal environment:

... It was earlier concluded that there is not a VAT refund obligation under international law,except in the specific case of the Andean Community law, which provides for the optionof either compensation or refund, but there is certainly an obligation not to alter the legal andbusiness environment in which the investment has been made.47 [Emphasis added]

Somewhat similar statements regarding the link between stable legal environmentand the FET principle are also included in the LG&E v. Argentina48 Enron v. Argentina49

Suez v. Argentina,50 the CME v. Czech Republic,51 and PSEG v. Turkey52 awards.


46 CMS v. Argentina, ICSID Case No. ARB/01/8, Award of 12 May 2005, para. 274. Available at:http://italaw.com/documents/CMS_FinalAward.pdf

47 Occidental v. Ecuador, LCIA Case No. UN3467, Final Award of 1 July 2004, para. 191, Available at:http://italaw.com/documents/Oxy-EcuadorFinalAward_001.pdf

48 The LG & E tribunal stated as follows: “Thus, this Tribunal, having considered, as previously stated, thesources of international law, understands that the fair and equitable standard consists of the host State’s consistentand transparent behavior, free of ambiguity that involves the obligation to grant and maintain a stable andpredictable legal framework necessary to fulfill the justified expectations of the foreign investor. LG&E v. Argentina,ICSID Case No. ARB/02/1, Decision on Liability of 3 October 2006. para. 131. Available at: http://italaw.com/documents/ARB021_LGE-Decision-on-Liability-en.pdf

49 The Enron tribunal stated as follows: “The Respondent might be right in distinguishing this case from thefactual scenarios that recent decisions have faced, but this does not mean that Argentina’s acts are consistent withthe meaning of the protection under the Treaty. It is clear that the ‘stable legal framework’ that induced theinvestment is no longer in place and that a definitive framework has not been made available for almost five years.Enron v. Argentina, ICSID Case No. ARB/01/3, Award of 22 May 2007, para. 267. See also para. 268. Available at:http://italaw.com/documents/Enron-Award.pdf

50 The Suez tribunal stated that as follows: “When an investor undertakes an investment, a host governmentthrough its laws, regulations, declared policies, and statements creates in the investor certain expectations about thenature of the treatment that it may anticipate from the host State. The resulting reasonable and legitimateexpectations are important factors that influence initial investment decisions and afterwards the manner in whichthe investment is to be managed. Suez v. Argentina, above n 11, para. 203.

51 The CME tribunal states as follows: “The Media Council breached its obligation of fair and equitabletreatment by evisceration of the arrangements in reliance upon with the foreign investor was induced to invest.”CME v. the Czech Republic, UNCITRAL, Partial Award of 13 September 2001, para. 611. Available at: http://italaw.com/documents/CME-2001PartialAward.pdf

52 The PSEG tribunal stated: “The aggregate of the situations explained raise the question of the need to ensurea stable and predictable business environment for investors to operate in, as required not only by the Treaty but alsoby the Turkish Constitution as noted above. This is what the United States Technical Memorandum on the BIT



These general statements by investment tribunals are supported by some leadingscholars on international investment law. Dolzer and Schreuer state in this regard:

The investor’s legitimate expectations are based on this legal framework and anyundertakings and representations made explicitly by the host state. The legal framework onwhich the investor is entitled to rely will consist of legislation and treaties, of assurances contains indecrees, licenses similar executive assurances as well as in contractual undertakings. A reversalof assurances made by host state that have led to legitimate expectations will violate the principle of fairand equitable treatment”.53 [Emphasis added, footnotes omitted]

And Salacuse underlined the link between investors’ legitimate expectations andsubsequent actions of the host state that fundamentally frustrate these expectations:

Investor expectations are fundamental to the investment process ... States seek to influencethese investment decisions through their actions, laws, regulations and policies. ... Thus,when a state has created certain expectations through its laws and acts that have led the investor toinvest, it is generally considered unfair for the state to take subsequent actions that fundamentally denyor frustrate those expectations.54 [Emphasis added]

The above-cited general statements by some investment tribunals and experts’publications may lead to the conclusion that the FET clause is effectively tantamount tostabilization clause; and that host states’ regulatory changes diminishing investors’benefits directly generate an obligation to compensate the investors for their losses. Aselaborated below, a careful analysis of investment tribunals’ awards indicates that such aconclusion does not reflect’ and is not supported by existing investment jurisprudence;nor does it reflect the appropriate balance between the interests of host states forregulatory flexibility and legal predictability. This jurisprudence is not inclined to acceptthat the FET clauses lead to outcomes similar to those flowing from stabilization clauses;and indicates that legislative or regulatory changes alone are insufficient for generatingan obligation to compensate foreign investors harmed by such regulatory changes.

(c) CONTRACTUAL AND SEMI-CONTRACTUAL ARRANGEMENTS

Some tribunals referring to the obligation to maintain a stable legal environment(cited above) address legitimate expectations created by contractual or semi-contractualinstruments55 (agreements, licenses, concessions, permits etc.).56 The CMS award (cited


had very much in mind when it referred to fair and equitable treatment as a standard “that can be invoked inarbitration to protect investments against possible vagaries of the host-Party’s national laws and theiradministration.” PSEG v. Turkey, ICSID Case No. ARB/02/5, Award of 19 January 2007, para. 253. Available at:http://www.italaw.com/documents/PSEGGlobal-Turkey-Award.pdf. Paragraph 250 of the award is discussedfurther below.

53 Dolzer & Schreuer, above n 34, p. 134. Dolzer and Schreuer also state: “These considerations indicate thatwhile the principle of legitimate expectations inherent in FET has an objective core, its application will depend uponexpectations nurtured and fostered by the local laws as they stand specially at the time of the investment”. Dolzer& Schreuer, above n 34, p. 135

54 JW Salacuse, The Law of Investment Treaties (OUP, 2010), p. 23155 This article focuses on regulatory changes that involve sovereign powers exercised by states’ authorities (and

not exclusively contractual acts). On the link between FET and the exercise of sovereign powers, see, e.g., Impregilov. Argentina, above n 7, para. 294; Bayindir v. Pakistan, above n 44, para. 377.

56 Licenses are often granted by the host state to foreign investors as an element of the contractualarrangements between parties, occasionally after negotiations between the parties. Thus, for example, the Suez



above)57 relates to a written commitment undertaken by the government of the hoststate in the license “that the tariff structure would not be frozen or subject to furtherregulation or price control”58, and “that in the event that a price control mechanismcompelled the licensee to adjust to a lower level of tariff ...the Licensee shall be entitledto an equivalent amount in compensation to be paid by the Grantor.”59 These clausesincluded in the license were characterized by the tribunal as stabilization clauses.60

The LG & E award (cited above)61 relates to commitments made by the host stateregarding periodic adjustment of gas tariffs62 included in a license63 as well as in domesticlegislation. The tribunal emphasized both sources for Argentina’s obligations in thiscontext.64

In this vein, the Enron award (cited above)65 also relates to an obligation made bythe host state regarding tariffs adjustments of gas distributed by the investor. Thisobligation of the host state was included in the license and domestic legislation.66

The tribunal however, emphasized the important role of the license’s provisions inthis context:67

The Tribunal must first note that it is correct that Article 41 of the Gas Law, while providingfor adjustment of tariffs in accordance with a formula based on international marketindicators, also related this formula to the change in value of goods and services. The formula,however, was not defined under the Law. This task was left to the Basic Rules of the License, whichprovided in this connection that tariffs were to be adjusted semi-annually in accordance with the USPPI. This was also the information conveyed to investors by the InformationMemorandum.68 [Emphasis added]

Similarly, the Suez award (cited above)69 deals with a refusal of the host state and


tribunal refers to ‘License Contract’, Suez v. Argentina, above n 11, para. 212 (cited below). In some jurisdictions,licenses are considered as contracts, and are classified as a specific type of contractual obligations. A Guadamuz,“The License/Contract Dichotomy in Open Licenses: A Comparative Analysis” (2009) 30(2) University of La VerneLaw Review, pp. 101. After analyzing the unilateral and contractual aspects of the concession, the Aramco tribunalstated concluded that “Particularly strong reasons support the idea of the contractual nature of the Concessiongranted by the Government .... This feature prevails over its unilateral character.’.”. Saudi Arabia v. Aramco, aboven 21, at p. 164.

57 See above Section III(b).58 CMS v. Argentina, above n 46, para. 14559 CMS v. Argentina, above n 46, para. 14560 The CMS tribunal explained in that respect: “302. While many, if not all, such interferences are closely

related to other standards of protection under the Treaty, there are in particular two stabilization clauses containedin the License that have significant effect when it comes to the protection extended to them under the umbrellaclause. The first is the obligation undertaken not to freeze the tariff regime or subject it to price controls. Thesecond is the obligation not to alter the basic rules governing the License without TGN’s written consent. CMS v.Argentina, above n 46, para. 302. See also para. 145.

61 See above Section III(b).62 LG & E v. Argentina, above n 48, para. 4963 LG & E v. Argentina, above n 48, para. 4264 LG & E v. Argentina, above n 48, paras. 132-13465 See above Section III(b).66 Thus, for instance, the Enron tribunal concluded as follows: “It is thus the conclusion of the Tribunal that

the licensees had a right to the US PPI adjustment under both the regulatory framework and the License, confirmedby the context and the practice of the privatization.” Enron v. Argentina, above n 49, para. 103

67 On the contractual instruments involved in this dispute, see also paras. 43-44, 73-74.68 Enron v. Argentina, above n 49, para. 10169 See above Section III(b).


its province to update tariffs in accordance with the terms set out in the ‘concessioncontract’ and domestic legislation. Though the tribunal refers several times to ‘legalframework’ in the context of the FET clause, the award reveals that the investor’slegitimate expectations in this particular case were based on both the contractualinstrument between the parties as well as the domestic legislation applied to this specificsector (water distribution). Furthermore, reading the award’s text suggests that thedominant element of this ‘legal framework’ was the concession contract. The tribunalstated in this regard:

The Concession Contract and the legal framework of the Concession described above clearly meet theconditions proposed in the cases just referred to. They set down the conditions offered by theProvince at the time that Claimants made their investment; they were not establishedunilaterally but by the agreement between the Provincial authorities and the Claimants; andthey existed and were enforceable by law. Like any rational investor, the Claimants attachedgreat importance to the tariff regime stipulated in the Concession Contract and theregulatory framework. ... These expectations of the Claimants were later included in the ConcessionContract, a document which certainly reflects in detail the Claimants’ legitimate expectations, as wellas those of the Province. In view of the central role that the Concession Contract and legal frameworkplaced in establishing the Concession and the care and attention that the Province devoted to thecreation of that framework, the Claimants’ expectations that the Province would respect theConcession Contract throughout the thirty-year life of the Concession was legitimate, reasonable, andjustified.70 [Emphasis added]

The statement of the CME tribunal71 is also often cited in this context, however“the arrangements” referred to in the tribunal’s relevant statement72 are the licensegranted to the investor to operate a television station,73 other relating writteninstruments (the “all-over structure”) “made an integral part of the License granted bythe Media Council”,74 and the “Memorandum of Association and InvestmentAgreement” which “became the basic document for the Claimant’s predecessor’sinvestor in the” host state.75 Thus, the often cited statement of the CME tribunaladdressing the FET clause76 essentially refers to breach of contractual instruments:

The Media Council’s intentional undermining of the Claimant’s investment in ÈNTS

equally is a breach of the obligation of fair and equitable treatment. The Respondent’sposition that the Media Council also required other broadcasters in the same way to revisethe structure of the 1993 split legal arrangements between licence-holder and serviceprovider is irrelevant. ... Should the Media Council have interfered with the contractual relations ofother broadcasters in the same way as it did between CET 21 and ÈNTS, these other actions might alsobe qualified as a breach of law as the case may be. ... The standard for actions being assessed as


70 Suez v. Argentina, above n 11, para. 212, see also para. 188. And the tribunal concluded as follows: “For theforegoing reasons, this Tribunal finds that the Province’s persistent and rigid refusal to revise the tariff in accordancewith the Concession Contract and the regulatory framework, particularly once the crisis had abated and economicgrowth returned, violated its commitments under both BITs to treat the Claimants’ investments fairly andequitably.” Suez v. Argentina, above n 11, para. 218. See also paras. 64, 213.

71 See above Section III(b).72 See CME v. The Czech Republic, above n 51, para. 61173 CME v. The Czech Republic, above n 51, para. 428-974 CME v. The Czech Republic, above n 51, para. 433, and see also para. 43475 CME v. The Czech Republic, above n 51, para. 446, and see also para. 45776 CME v. The Czech Republic, above n 51, para. 611


fair and equitable are not to be determined by the acting authority in accordance with thestandard used for its own nationals. ...The Media Council breached its obligation of fair andequitable treatment by evisceration of the arrangements in reliance upon with the foreign investor wasinduced to invest.77

The essential link between the formation of legitimate expectations and contractualor semi-contractual commitments made by the host government was emphasized by theMetalpar tribunal. After analyzing a long series of investment awards on this issue, thetribunal concluded:

After analyzing the abovementioned awards, the conclusions which, in essence, this Tribunal sharesas they properly reflect the concept of “fair and equitable treatment,” it is necessary to point out thefollowing: the tribunals in the cases [list of investment awards], amongst others, asserted thatinvestors’ expectations were related to fair and equitable treatment. However, in all of them,the conflict arose out of a state of facts different to the one under analysis in this case: in someof them, the relevant governments had invited the foreign investors to participate in a bidding processthat was awarded to each of those investors and ended with the signing of a contract. In other cases,there were other types of contractual relations which created legitimate expectations; in all of them,the Government refused to renew or to comply with the contract, license or permit.78 [Emphasis added]

The Total Tribunal arrived at a very similar conclusion and stated that “[t]heexpectation of the investor is undoubtedly “legitimate”, and hence subject to protectionunder the fair and equitable treatment clause, if the host State has explicitly assumed aspecific legal obligation for the future, such as by contracts, concessions or stabilizationclauses on which the investor is therefore entitled to rely as a matter of law”.79

As for legislative changes, the Parkerings v. Lithuania tribunal emphasized that in theabsence of some commitment contained in an agreement, the laws of the host states areexpected to evolve over time:

It is each State’s undeniable right and privilege to exercise its sovereign legislative power.A State has the right to enact, modify or cancel a law at its own discretion. Save for theexistence of an agreement, in the form of a stabilisation clause or otherwise, there is nothingobjectionable about the amendment brought to the regulatory framework existing at thetime an investor made its investment. As a matter of fact, any businessman or investorknows that laws will evolve over time. What is prohibited however is for a State to actunfairly, unreasonably or inequitably in the exercise of its legislative power.”80 [Emphasisadded]

This approach was adopted by the Paushok tribunal81 concerning new taxationlegislative measures.82


77 CME v. The Czech Republic, above n 51, para. 611 1778 Metalpar v. Argentina, ICSID Case No. ARB/03/5 (Chile/Argentina BIT), Award of 6 June 2008, para. 185.

Unofficial English Translation available at: http://italaw.com/documents/MetalparAwardEng.pdf79 Footnote omitted. Total v. Argentina, below n 94, para. 11780 Parkerings-Compagniet AS v. Lithuania, above n 8, para. 33281 The Paushok tribunal stated on this issue: “An investor, without an agreement which limits or prohibits

the possibility of tax increases, should not be surprised to be hit with tax increases in subsequent years and such anevent could not be considered as “unpredictable”.” Paushok v. Mongolia, UNCITRAL, Award on Jurisdiction andLiability of 28 April, 2011, para. 305. Available at: http://italaw.com/documents/PaushokAward.pdf

82 And see also the statement of the Impregilo tribunal: “If fair and equitable treatment is indeed linked to thelegitimate expectations of the investors, these have to be evaluated considering all circumstances. In the Tribunal’s



The AES v. Hungary award well-illustrates the contemporary jurisprudence constant ofinvestment tribunals in this sphere. The foreign investor in this case argued that Hungary’snew legislative measures (which restricted electricity prices) breached the legitimateexpectations upon which the claimant had relied when making the investments.83 Theapplicable investment treaty was particularly favorable to such claims since Article 10(1) ofthe Energy Charter Treaty (ECT) which included the ‘fair and equitable treatment’,specifically committed the parties to “encourage and create stable, equitable, favorable andtransparent conditions for Investors”.84 Notwithstanding this provision, the tribunalrejected the investors’ argument above regarding legitimate expectations and emphasizedthe likelihood of changes in the legal framework applying to the investment:

The stable conditions that the ECT mentions relate to the framework within which theinvestment takes place. Nevertheless, it is not a stability clause. A legal framework is by definitionsubject to change as it adapts to new circumstances day by day and a state has the sovereign right toexercise its powers which include legislative acts.85 [Emphasis added]

And as for the investors’ expectations,86 the tribunal added that “any reasonablyinformed business person or investor knows that laws can evolve in accordance with theperceived political or policy dictates of the times”.87 In this vein, the Saluka v. the CzechRepublic award also emphasized that “[n]o investor may reasonably expect that thecircumstances prevailing at the time of the investment is made remain totally unchanged”88

(d) UNILATERAL PROMISSORY STATEMENTS

As discussed above,89 the second component of the term ‘stable legal environment’


understanding, fair and equitable treatment cannot be designed to ensure the immutability of the legal order, theeconomic world and the social universe and play the role assumed by stabilization clauses specifically granted toforeign investors with whom the State has signed investment agreements.” Impregilo v. Argentina, above n 7,para. 290. Later the tribunal concluded that non-compliance with the “Concession Contract” led to violation ofthe FET clause (paras 324-331)

83 See AES v. Hungary, above n 7, Paragraph 9.1.484 Article 10(1) of the ECT provides as follows:

Article 10(1) Each Contracting Party shall, in accordance with the provisions of this Treaty, encourageand create stable, equitable, favourable and transparent conditions for Investors of other ContractingParties to make Investments in its Area. Such conditions shall include a commitment to accord at all timesto Investments of Investors of other Contracting Parties fair and equitable treatment.....

The Energy Charter Treaty (signed 17 December 1994,16 April 1998) 2080 UNTS 100, Article 10(1).85 AES v. Hungary, above n 7, para 9.3.29.86 Similarly the Telnor tribunal stated with regard to expropriation: “It is well established that the mere

exercise by government of regulatory powers that create impediments to business or entail the payment of taxesor other levies does not of itself constitute expropriation. Any investor entering into a concession agreement mustbe aware that investment involves risks and that in some degree the investor’s activities are likely to be regulatedand payments made for which the investor will not receive compensating advantages. These are all part of theprice the investor has to pay for securing the concession.” (Footnotes omitted). Telenor v. Hungary, ICSID Case No.ARB/04/15, Award of 13 September 2006, para. 64. Available at: http://www.italaw.com/documents/Telenorv.HungaryAward_001.pdf

87 AES v. of Hungary, above n 7, para. 9.3.34. And the tribunal “concludes that no breach of the fair andequitable treatment standard took place based on Hungary’s alleged failure to provide a stable legal and businessframework.” AES v. of Hungary, above n 7, para. 9.3.35

88 Saluka v. Czech Republic, above n 13, para. 305. See also EDF v. Romania, above n 45, para. 21789 See above Section III(a).


includes unilateral promissory statements or specific representations made by the hoststate to foreign investors (often in a contractual environment). Some investmenttribunals emphasized that regulatory changes violating such unilateral statements orspecific representations, constitute a breach of the FET clause. Thus, the EDF v. Romaniatribunal clarified as follows:

The idea that legitimate expectations, and therefore FET, imply the stability of the legal andbusiness framework, may not be correct if stated in an overly-broad and unqualifiedformulation. The FET might then mean the virtual freezing of the legal regulation ofeconomic activities, in contrast with the State’s normal regulatory power and theevolutionary character of economic life. Except where specific promises or representations are madeby the State to the investor, the latter may not rely on a bilateral investment treaty as a kind of insurancepolicy against the risk of any changes in the host State’s legal and economic framework. Suchexpectation would be neither legitimate nor reasonable.90 [Emphasis added]

Similarly, the EnCana v. Ecuador award addressed tax legislative changes and thetribunal emphasized that “In the absence of a specific commitment from the host State,the foreign investor has neither the right nor any legitimate expectation that the taxregime will not change, perhaps to its disadvantage, during the period of theinvestment.”91 In this vein,92 in the absence of specific commitments made by the hoststate, theAES tribunal rejected the argument that the host state limited its sovereign rightto change its laws.93 And the Total tribunal confirms this series of awards and concludesthat “[i]n the absence of some “promise” by the host State or a specific provision in thebilateral investment treaty itself, the legal regime in force in the host country at the timeof making the investment is not automatically subject to a “guarantee” of stabilitymerely because the host country entered into a bilateral investment treaty with thecountry of the foreign investor.”94

The Walter Bau v. Thailand tribunal also found that that the host state’s regulatorymeasures were relevant to the breach of the FET clause. The tribunal, however,highlights the important role of specific assurances given by the host state in this context:


90 EDF v. Romania, above n 45, para. 21791 And the tribunal continued: “Of its nature all taxation reduces the economic benefits an enterprise would

otherwise derive from the investment; it will only be in an extreme case that a tax which is general in its incidencecould be judged as equivalent in its effect to an expropriation of the enterprise which is taxed”. EnCana v. Ecuador,LCIA Case No. UN3481, UNCITRAL, Award of 3 February 2006, para. 173. Available at: http://www.italaw.com/documents/EncanaAwardEnglish.pdf

92 And see a similar statement by the Link-Trading v. Moldova tribunal with regard to expropriation: “Taxmeasures may also become expropriatory without necessarily being arbitrary or discriminatory, when theirapplication violates a specific obligation that the State has previously undertaken in favor of a particular person orclass of persons, such as an investor protected under a treaty.....” Link-Trading v. Moldova, UNCITRAL, Final Awardof 18 April 2002, para. 73. Available at: http://italaw.com/documents/Link-Trading-Moldova.pdf. Similarly, theGlamis tribunal stated: “Merely not living up to expectations cannot be sufficient to find a breach of Article 1105of the NAFTA. Instead, Article 1105(1) requires the evaluation of whether the State made any specific assurance orcommitment to the investor so as to induce its expectations.” Glamis v. USA, UNCITRAL, Award of 8 June 2009,para. 620 http://italaw.com/documents/Glamis_Award_00l.pdf And see also paragraph para. 622.

93 The AES tribunal stated as follows: “9.3.31 In this case, however, the Tribunal observes that no specificcommitments were made by Hungary that could limit its sovereign right to change its law (such as a stability clause)or that could legitimately have made the investor believe that no change in the law would occur.” (Footnoteomitted). AES v. Hungary, above n 1, para. 9.3.31

94 Total v. Argentina, ICSID Case No. ARB/04/01 Decision on Liability of 27 December 2010, para. 17. Seealso para. 309,118-119, 164. Available at: http://italaw.com/documents/TotalvArgentina_DecisionOnLiabilty.pdf


The legitimate expectations doctrine has been applied to protect the substantiveexpectations of investors where particular promises have been made .... The question of whether ornot there has been a violation of the standard will turn on what legitimate expectations the investor hadin light of the specific assurances given by the relevant state authorities against the backgroundof the domestic legal framework that was to govern the investment”.95 [Emphasis added]

The tribunal concluded that a reasonable rate of return on the investor’s investmentwas part of the “understanding between the parties”:96 The tribunal also found that thefact that the host state needed to have a toll-road but could not afford to construct it,and that it invited interested investors to participate in the construction projectsuggested that the host state “could not reasonably have expected that foreign investorswould enter into an arrangement of the nature proposed, over such a long period,without being fairly confident of a reasonable rate of return on investment.”97 Theaward indicates that a combination of the specific assurances made by the host state, theabove particular facts, and the particular contractual instruments led the tribunal to theconclusion that the FET clause had been breached in this case.

Scholarly opinion also supports the above jurisprudence regarding the link betweenthe host states’ right to change its legislation in the absence of unilateral promissorystatements vis-à-vis investors. As Newcombe and Paradell point out, such commitmentsof the host state may be included in licenses, permits or some other specific98 oral orwritten representations:

Legitimate expectations may arise as a result of specific state conduct directed at the investorupon which the investor relies. Any form of state conduct can, in principle, give rise tolegitimate expectations. Typically, the conduct giving rise to the legitimate expectations will be inthe form of oral or written representations, undertakings or commitments, various types ofadministrative acts such as licenses or permits or providing an official opinion or view.”99[Emphasis added]

The importance of specific representations100 made by the host state in this context


95 Walter Bau v. Thailand, above n 44, para. 11.1196 Walter Bau v. Thailand, above n 44, para. 12.197 Walter Bau v.Thailand, above n 44, para. 12.2(c). The tribunal explained also that “In spite of the fact that

there was no guarantee by the Respondent of an explicit rate of return, the Tribunal considers that a reasonablerate of return – reasonable in all the circumstances, including the signing of MoA2 – was part of the Claimant’slegitimate expectations and the failure to fulfill such a reasonable expectation was a breach of the Respondent’s FETobligations”.Walter Bau v. Thailand above n 44, para. 12.3.

98 As to the specific and unambiguous nature of the commitments made by the host state, see Newcombe &Pardell explain: “IIA jurisprudence highlights that, to create legitimate expectations, state conduct needs to bespecific and unambiguous. Encouraging remarks from government officials do not of themselves give rise tolegitimate expectations. There must be an ‘unambiguous affirmation’ or a ‘definitive, unambiguous and repeatedassurance.. The conduct must be targeted at a specific person or identifiable group.” [Footnotes omitted]Newcombe & Paradell, above n 15, 281 and see also 280. As to the impact of general statements, see p. 296. Seealso TJ Gierson-Weiler and IA Laird, ‘Standards of Treatment’ in P Muclinski, F Ortino and C Schreuer (eds) TheOxford Handbook of International Investment Law (OUP, Oxford, 2008) 259, 277

99 Newcombe & Paradell, above n 15, 280100 Schill is of the view that legitimate expectations may be formed where the host state deliberately acts in order

to make a foreign investor rely on the regulatory framework when making the investment. SW Schill, “Fair andEquitable Treatment, the Rule of Law, and Comparative Public Law”, above n 42, at 175. As discussed above, ananalysis of investment tribunals’ jurisprudence indicates that a legitimate expectation may be created where suchgovernmental deliberate action is accompanied by a promissory statement or specific representation made by thehost state.


was emphasized also by McLachlan et al.101 According to Vandevelde, the underlyingrationale of the FET principle is rule of law102 and the topic of regulatory change shouldbe discussed in the context of the principle of “consistency”.103 He notes that “theprinciple of consistency would seem to preclude a host state from changing its policies,but to hold that state policy may never change would be absurd”.104 And Vandeveldeexplains the existing jurisprudence in a broad manner:

The fair and equitable treatment standard has been interpreted by investor state arbitraltribunals to provide a form of security to covered investment. More particularly, thestandard requires that host states act in a way that is consistent. Tribunals have made clear thatthe standard does not impose on host states a general obligation always to act consistently over time.Host states generally have the discretion to change policies. A violation occurs, however, where the hoststate has promised to act in a certain way or has offered assurances to the investor (or investment) onwhich it has reasonably relied.105 [Emphasis added]

(e) HOST STATES’ REGULATORY MEASURES

As noted above,106 the host state’s regulatory measures (existing at the time theinvestment is made) constitute the third component of foreign investors’ ‘legalenvironment’. Investment tribunals’ jurisprudence indicates that such regulatorymeasures alone are insufficient in forming legitimate expectations protected by FETclauses.107 Still, the following awards indicate that where a host state’s regulatory changeis accompanied by exceptional factors, the combination thereof may amount to a breachof legitimate expectations protected by the FET principle.

The Occidental tribunal (cited above)108 found that legislative changes undertakenby Ecuador (regarding tax refund) led to a breach of the FET clause109 but the tribunalemphasized the accompanied negative conduct of the host state: the contract wasmanifestly wrongly interpreted by the state’s authorities and “clarifications that OEPC

[the investor] sought on the applicability of VAT by means of a “consulta”.... received awholly unsatisfactory and thoroughly vague answer. The tax law was changed withoutproviding any clarity about its meaning and extent and the practice and regulations werealso inconsistent with such changes.”110 Thus, it seems that this negative behavior by the


101 McLachlan et al. explained: “The making of specific representations has been a material factor in thedecision in favour of the investor in a number of the recent cases .....” McLachlan et al, above n 15, 237. And“Conversely, the absence of specific representations is a material factor in leading to a finding that the standard hasnot been breached.” McLachlan et al, above n 15, 238. See also 237.

102 On the FET principle as embodiment of the concept of rule of law, see SW Schill, “Fair and EquitableTreatment, the Rule of Law, and Comparative Public Law”, above n 42, 155-159.

103 Vandevelde, above n 38, pp. 49-51104 Footnote omitted. Vandevelde, above n 38, 53. See also SW Schill, “Fair and Equitable Treatment, the

Rule of Law and Comparative Public Law”, above n 42, pp. 161-162.105 Vandevelde, above n 38, p. 66. See also p. 68, 78-81, 104106 See above Section III(a).107 See, e.g., Metalpar v. Argentina, above n 78, para. 185; Total, above n 94, para. 117; Paushok v. Mongolia,

above n 81, para. 305; Parkerings v. Lithuania, above n 8, 232; AES v. Hungary, above n 7, para. 9.3.29 – and see thediscussion in above Section III(c).

108 See above Section III(a).109 Occidental v. Euador, above n 47, para. 196.110 Occidental v. Euador, above n 47, para. 184.


host state accompanying the new legislation was highly significant to the tribunal’sstatement regarding the obligations flowing fromthe host state’s regulatory changes andthe breach of the FET clause.

The PSEG award also includes a statement regarding the need to ensure a stable andpredictable business environment for investors111 and the tribunal explicitly linked thebreach of the FET principle to legislative changes undertaken by the host state. Thetribunal, however, explained that the FET clause was breached because of administrativenegligence,112 abuse of authority,113 ignorance of rights granted by laws as a matter ofpolicy or practice,114 as well as extreme circumstances revealing “endless” legislativechanges.115 On the extreme nature of the particular legislative changes that present“roller-coaster effect”, the tribunal noted:

Thirdly, the Tribunal also finds that the fair and equitable treatment obligation was seriously breachedby what has been described above as the “roller-coaster” effect of the continuing legislative changes. Thisis particularly the case of the requirements relating, in law or practice, to the continuous changein the conditions governing the corporate status of the Project, and the constant alternation between privatelaw status and administrative concessions that went back and forth. This was also the case, to a morelimited extent, of the changes in tax legislation.116 [Emphasis added]

These statements point out that the combination of the host state’s legislativechange, the negative conduct of the host state’s authorities (including abuse of authority)and the extreme nature of relevant legislation (involving endless legislative changes) ledthe tribunal to the conclusion that the FET clause was breached by the host state.

To sum up, the above-cited awards regarding the link between the FET clause and‘stable legal environment’ indicate that the term ‘legal environment’ includes threecentral components: (i) contractual and semi-contractual arrangements (e.g., contracts,license, concessions, permits etc.); (ii) unilateral promissory statements or specificrepresentations made by the host state; and (iii) the host state’s regulatory measures at thetime the investment is made. Investors’ expectations created by contractual, semi-contractual arrangements or unilateral promissory statements may generate legitimateexpectations protected by the FET principle. Unlike this conclusion regarding contractualand semi-contractual arrangements as well as unilateral statements, the host state’sregulatory measures alone are generally in sufficient in forming legitimate expectationsprotected by FET clauses. Only in the rare cases where the new regulatory measures areaccompanied by additional and exceptional factors (such as abuse of authority or theabove-mentioned ‘roller-coaster effect’), may this combination amount to a breach of


111 See the above Section III(a).112 PSEG v. Turkey, above n 52, para. 246113 PSEG v. Turkey, above n 52, para. 247114 PSEG v. Turkey, above n 52, para. 248115 The tribunal stated in that regard: “The handling of the case shows the exact opposite. Stability cannot exist

in a situation where the law kept changing continuously and endlessly, as did its interpretation and implementation.While in complex negotiations, such as those involved in this case, many changes will occur beyond the control ofthe government, as was particularly the case with the increased costs, the issue is that the longer term outlook mustnot be altered in such a way that will end up being no outlook at all. In this case, it was not only the law that keptchanging but notably the attitudes and policies of the administration”. PSEG v. Turkey, above n 52, para. 254

116 PSEG v. Turkey, above n 52, para. 250


legitimate expectations protected by the FET principle. Thus, investors’ legitimateexpectations protected by FET clauses are generally anchored in contractual or semi-contractual instruments between the parties or unilateral promissory statements that areoften made in a contractual environment. As discussed below, these conclusions are alsosupported by policy considerations regarding the functions of contractual arrangements.

IV. POLICY CONSIDERATIONS AND FUNCTIONS OF CONTRACTUAL ARRANGEMENTS

As discussed above,117 legal decision-makers (including investment arbitrators) areoften called upon to strike an adequate balance between the competing interests of legalpredictability for foreign investors and regulatory flexibility for host states. The aboveanalysis of investment jurisprudence reveals that contemporary international investmentlaw anchors the balancing point in the contractual and semi-contractual sphere.Promissory statements are often made in a contractual environment, and they are alsoconsidered as a part of the broader sphere of the law of contractual obligations.118 A briefreview of the primary functions of contractual arrangements indicates that thecontractual sphere is suitable for the protection of expectations by both parties regardingfuture regulatory change.

A brief examination of literature on economic analysis of law119 reveals that themajor functions of contractual arrangements are risk allocation, forward planning, andpromoting in advance production or investment. Contractual arrangements enable theparties to allocate in advance the risks involved in economic activities,120 and asKronman and Posner explain in their book on the Economics of Contract Law:

Risk may be defined as uncertainty in regard to cost, loss, or damage. ... By market risk wemean the unavoidable uncertainties due the fact that time elapses between the purchase and the sale ofthe commodities, during which time unpredictable changes often occur in the prices and other marketconditions surrounding the commodities dealt in.121 [Emphasis added]

This function is particularly important in long-term economic relations.122

Host states’ regulatory frameworks are inherently dynamic. Foreign investmentsare typically extended over long periods and such complex and long-term relations


117 See above section II.118 On contractual obligations as right-based promissory obligations, see SA Smith, Contract Theory (OUP 2004)

41. See also Restatement (Second) Contracts, Section 90(1) (American Law Institute, 1981). On the underlying basisfor the imposition legal liability for promissory statements, see RE Barnett and ME Becker, “Beyond Reliance:Promissory Estoppel, Contract Formalities, and Misrepresentations” (1986/7) 15 Hofstra Law Review 443. On thelegal basis of the binding character of unilateral declarations under international law, see Total v. Argentina, above n94, paras. 131-134.

119 For an excellent contract theory analysis of investment law (and particularly of BITs), see A van Aaken,“International Investment Law between Commitment and Flexibility: A Contract Theory Analysis”, (2011) Journalof International Economic Law 507.

120 BE Hermalin, AW Katz, and R Craswell, ‘Ch. 1 Contract Law’ in AM Polinsky and S Shavel (eds.) TheHandbook of Law & Economics (Elsevier, Amsterdam, 2007) p. 3-4. See also J Beatson, Anson’s Law of Contract(28th ed, OUP, 2002) 3.

121 AT Kronman and RA Posner, The Economics of Contract Law (Little, Brown and Company ,1979), p. 26.122 Kronman and Posner explain that:.. “the longer the time involved in the fulfillment of obligations entered

into, ... the greater the risk of adverse changes ...” Kronman and Posner, above n 121, p. 27.


naturally involve a significant risk that certain significant circumstances prevailing at thetime of the investment will not remain unaltered.123 Consequently, the parties toinvestment relations may reasonably anticipate that changing circumstances may lead thehost state to change the regulatory framework applicable to the investment (withfavorable or unfavorable impacts on the investors).

Such changing circumstances generate a risk that the resulting regulatory changesmight affect the benefits accruing to foreign investors. Consequently, variouscontractual arrangements are suitable for in advance allocation of the risk involved insuch changes. Stabilization clauses (discussed above)124 constitute one technique for theallocation of such risks and the parties may adopt diverse allocation formulas regardingthe risk of regulatory change. Investment tribunals have consistently ruled that FETclauses are not equivalent to stabilization clauses. Thus, it is highly desirable that theparties to investment relations negotiate adequate risk allocation formulas that willsignificantly reduce the uncertainties involved in future modifications of the regulatoryframework applicable to investors.125

An additional (and related) significant function of contractual arrangements isforward planning, i.e., enabling the parties to plan their steps in advance. And Shavelexplains in The New Palgrave Dictionary of Economics and Law:

At the most general level, parties make contracts when they have a need to make plans.They want contracts enforced to ensure that promised payments are made and to preventopportunist behavior that otherwise might occur over the course of the of the contractualrelationship and stymie fulfillment of their plans.126

Forward planning is particularly valuable in complex transactions.127 Economicrelations occasionally require a party (or both) to commit considerable resources inadvance (‘sunk costs’) and contractual instruments promote earlier investments that areoften essential in foreign investment.128 The planning function does not aim only to setout substantive rules of conduct; but also procedural rules regarding future remedies andprocedures applicable in case the contract is breached.129


123 See, e.g., Saluka v. the Czech Republic, above n 13, para. 217; AES v. Hungary, above n 1, para. 9.3.35; EDFv. Romania, above n 45, para. 217

124 See above Section II.125 On foreign investments that do not involve contractual or semi-contractual relations between the host state

and the foreign investor, see further below in this Section.126 S Shavel, “Contracts” in P Newman (ed.) The New Plagrave Dictionary of Economics of Law Vol.1 (Macmillan,

1998) 436, in 437127 As stated in Anson’s Law of Contract: “Another important function of contract is a constitutive one: to

facilitate forward planning of the transaction and to make provision for future contingencies. The more complexthe transaction the greater will be the need for such planning and the more detailed the provisions that are likelyto be made.” Anson’s Law of Contract, above n 120, at p. 3

128 Hermalin et al, above n 120, p. 4-6; Shavel, above n 126, 437.129 Richard Posner underlies the importance of this function of contracts: “ The most important function of

contract law is to provide a legal remedy for breach in order to enhance the utility of contracting as a method oforganizing economic activity, and that function is independent of whether there is any uncertainty about theterms.” RA Posner, The Law and Economics of Contract Interpretation (November 5, 2004)http://www.law.columbia.edu/center_program/law_economics/wkshops/2004FallTerm?exclusive=filemgr.download&file_id=95185&rtcontentdisposition=filename%3DPosner,+Richard +A.+_+Fall+04+WS.pdf


As discussed above, facilitating forward-planning is of major importance for foreigninvestors130 and it is also important for host states’ governments that are occasionallyinterested in modifying the existing regulatory framework in the public interest. Thus,in advance negotiations and the establishment of agreed legal provisions regarding theramifications of regulatory changes is expected to enable both parties to envisage therisks involved in such regulatory changes.

In advance arrangements in this sphere may take the form of adequate provisionsincluded in contractual or semi-contractual instruments (as well as unilateralpromissory statements). Such in advance rules may constrain the host state’s authorityto undertake certain regulatory measures in a particular sphere or in a specific set ofcircumstances, or limit the impact of such measures on foreign investors (e.g., aprohibition to undertake regulatory measures that would wipe out all foreign investors’profits – or secure a minimum return in such scenario). Such rules may also bind thehost state to undertake certain procedures before enacting the new regulatory measures(such as negotiations).

The contractual approach allows both foreign investors and host states to plan theirsteps in advance: foreign investors are able to foresee whether and to what extent futurenew regulatory measures will be applicable to their investments; and host states arecapable of envisaging whether and to what extent they are lawfully allowed to applynew regulatory measures to foreign investments.

In the absence of contractual or semi-contractual relations between the parties toinvestment relations, foreign investors may seek promissory statements from the hoststates’ authorities regarding future regulatory changes. Where there are no contractualor semi-contractual instruments and no promissory pledges applicable to the foreigninvestment, the default rule is that neither parties is bound as regards future regulatorychanges.

Large investors are generally in a better position to obtain such assurances from thehost government than small ones that often have no direct contact with governmentalagencies. Still, it is noteworthy that small investors involved in non-contractual relationsare protected by other rules deriving from FET clauses (not related to legitimateexpectations). These rules require host states to undertake administrative decision-making in a transparent manner, refrain from arbitrary or discriminatory treatment,coercion and harassment, or act in bad faith.131 In addition, regulatory changesaccompanied by exceptional negative conduct of the host state (discussed above)132 mayalso lead to a breach of the FET clause.


130 See above Section II.131 See above Section III(a).132 On these exceptional circumstances, see above Section III(e).


Radical regulatory changes may destroy the economic assumptions made at thetime of the investment and generate considerable losses to foreign and domesticinvestors. Such drastic losses, however, do not necessarily mean that the host state isbanned from undertaking major regulatory reforms or that such a change constitutes abreach of the FET clause. Radical regulatory changes destroying the economicassumptions made at the time of the investment and wiping out the investors’ returnson investment may lead investment tribunals to scrutinize the conduct of host statesmore vigilantly. Still, where it is clear that the drastic regulatory changes apply to bothforeign and domestic investors alike, do not involve discrimination or arbitrarytreatment of foreign investors, and do not deviate from previous contractual, semi-contractual or unilateral pledges, the host state should not be held liable for breachingthe FET principle.

The above contractual approach is consistent with the private law approachprevalent in contemporary investment tribunals’ jurisprudence. As elaboratedelsewhere,133 facing the above-discussed asymmetric relations between host states andforeign investors,134 investment tribunals tend to compensate investors that are in aninferior position under domestic law by enhancing their legal protection at theinternational level and ‘lowering’ these relationships to the private-law level.

At the institutional level, Investors’ rights are primarily protected by arbitraltribunals, which are primarily established by bilateral or trilateral investment treaties.Investment arbitral tribunals are regularly established on an ad hoc basis, premised on theparties’ autonomy135 and consent,136 and they tend to adopt the private inter partesmodelcharacterizing international commercial arbitration.137


133 On the private law features of investment jurisprudence, see M Hirsch, “Investment Tribunals & HumanRights: Divergent Paths”, in PM Dupuy, FF Francioni, and EU Petersmann (eds.) Human Rights in InternationalInvestment Law and Arbitration (OUP, 2008) 97, in Section IV. See also M Hirsch, “Interactions between Investmentand Non-Investment Obligations in International Investment Law”, in C Schreuer (ed.) Oxford Handbook ofInternational Law on Foreign Investment (OUP, 2008) 154, 179.

134 See Section I above. See also CN Brower and SW Schill, “Is Arbitration a Threat or a Boon to thelegitimacy of International Investment Law?”(2008) 9 Chicago Journal of International Law 471, 478.

135 On the major role of parties’ autonomy and private aspects of international economic arbitration, Bagherinotes: “In essence, arbitration is an institution by which individuals adjudicate disputes privately insofar as the lawallows. The distinguishing factor of this form of private justice is its consensual and voluntary nature.” M Bagheri,‘Party Autonomy in ItsJurisdictional Capacity: The Place of International Commercial Arbitration’ in M Bagheri(ed.), International Contracts and National Economic Regulation, (Kluwer, 2000) 95, 106. This author also states: “Thesupremacy of private initiative in international trade and investment is recognized once it is translated into the legalnotion of party autonomy in international economic transactions. [at p. 113]

136 See, for instance, the following statement regarding the jurisdiction of ICSID tribunals: “Consent of theparties is the cornerstone of the jurisdiction of the Centre.” Report of The Executive Directors on the Conventionon the Settlement of Investment Disputes Between States and Nationals of other States (1965), available athttp://www.worldbank.org/icsid/basicdoc/partB-section05.htm.

137 See, e.g., T Wälde, ‘The Present State of Research Carried Out by the English-Speaking Section of theCentre for Studies and Research’ (2007) Hague Academy Report on International Investment Law, 75-76; G VanHarten, Investment Treaty Arbitration and Public Law (OUP, 2007) 5-6, 58; G Van Harten and M Loughlin,‘Investment Treaty Arbitration as a Species of Global Administrative Law” (2006) 17 The European Journal ofInternational Law 121, 126-145. On the dominant private features of international arbitration, see also C Rogers,The Vocation of International Arbitrators’ (2005) 20 American University International Law Review 944, 957,993-994.


At the substantive level,138 investment tribunals tend to attach considerable weightto reciprocal and promise-based obligations primarily formed during negotiations andthe ‘entry stage’. During negotiations towards contractual or semi-contractualinstruments taking place at the ‘entry stage’, the gap between the parties’ legal capacitiesis relatively smaller. Following this stage, the host state’s superior position regarding itsinfluence upon regulatory change is glaring. In light of these asymmetric relations,investment tribunals are predisposed to pursue the contractual path as a technique forleveling the normative field between the unequal parties to investment relations.139 Theabove-cited statements of the Texaco award regarding the rejection of the doctrine ofunequal of administrative contracts and affirming the intention of the parties to theinvestment in this case “to contract on a footing of equality”140 well-illustrates thisapproach by investment tribunals.

V. CONCLUDING REMARKS

The central question addressed in this article is whether and under what circumstances,regulatory changes undertaken by the host state constitute a breach of the FET clause. Thisquestion involves the challenging issue of due balance between the competing interests oflegal predictability for foreign investors and regulatory flexibility for host states.

Host states’ regulatory powers highlight the asymmetric relations between foreigninvestors and sovereign states: host states are generally authorized to enact newregulatory measures, including those applicable to foreign investments in their territory.Foreign investors are not able to unilaterally change the legal rules applicable to theinvestment relations between them and the host states.

Contemporary investment law anchors the balance between the above-statedcompeting interests in the contractual and semi-contractual sphere. While investmenttribunals rejected the doctrine of ‘administrative contracts’, they generally upheld thatregulatory changes breaching stabilization clauses must be accompanied by


138 Schill and Kingsbury suggest a new conceptual framework focusing on analyzing international investmentlaw as a public law framework. According to this perspective, investment treaty arbitration is more akin toadministrative or constitutional judicial review than to commercial arbitration, and “that the theory and practice ofthe global administrative space, offers a potentially far-reaching way to conceptualize what investor-State arbitrationcan be and to bring it more into harmony with current needs and future directions”. B Kingsbury and S Schill,Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality and the Emerging Global AdministrativeLaw (International Law and Justice Working Papers 2009), p. 4. http://www.iilj.org/publications/documents/2009-6.KingsburySchill.pdf. See also S Schill, “International Investment Law and Comparative Public Law – AnIntroduction”, in SW Schill (ed.), International Investment Law and Comparative Public Law (OUP 2010), p. 3 et seq. Asto fair and equitable treatment, Schill suggests that the concepts of proportionality and reasonableness be employed tobalance between the competing interest of investment protection and other public interests. Schill, “Fair andEquitable Treatment” above n 42, at p 155,169-170 (and see the references therein). On the public law aspects ofinvestment arbitration, see also G Van Harten Investment Treaty Arbitration and Public Law (OUP 2007) 45-71.

139 The emphasis on the private law aspects of investment disputes enables also investment tribunals to evadecontroversial legal issues in international law (including human rights issues). In this sense, the focus on private lawaspects of investment relations also constitutes a de-politicizing strategy employed by investment tribunals. See, MHirsch, “The Interaction between International Investment Law & Human Rights Treaties: A SociologicalPerspective”, in Y Shany et al. (eds.) Multi-Sourced Equivalent Norms (Hart, 2011) 211, at 223.

140 Texaco v. Libya, above n 21, para. 56


compensation to foreign investors. In the absence of stabilization clauses, investmenttribunals are not inclined to interpret FET clauses as effectively equivalent to stabilizationclauses, and regulatory changes alone are insufficient in binding the host states tocompensate foreign investors harmed by such changes.

An analysis of investment tribunals’ case-law on ‘stable legal environment’ (or‘regulatory framework’) indicates that this term includes three central components:(i) contractual and semi-contractual arrangements (e.g., contracts, licenses, concessions);(ii) unilateral promissory statements or specific representations (often made in a contractualenvironment); and (iii) the host state’s regulatory measures in force at the time when theinvestment is made. In this context, the first two components – contractual and semi-contractual provisions as well as unilateral promissory statements or specific representations– are certainly the predominant components of ‘legal environment’. Investors’expectations created by contractual, semi-contractual arrangements or promissorystatements are considered ‘legitimate expectations’ and are protected by the FET principle.As for the third component, the host state’s regulatory measures alone are insufficient informing legitimate expectations protected by FET clauses. Only when such regulatorymeasures are accompanied by additional and exceptional factors, that combination mayamount to a breach of legitimate expectations protected by the FET principle.

A brief review of the primary functions of contractual arrangements points out thatcontractual and semi-contractual instruments (as well as promissory statements) aresuitable for in advance allocation of the risks involved in regulatory changes: they enableinvestors and host states to forecast their commitments, and promote in advanceproduction and investment. The above contractual approach is also consistent with theprivate-law approach prevalent in contemporary investment tribunals’ jurisprudence.


TABLE OF CONTENTS

I. INTRODUCTION

II. COMPETING AIMS AND ALTERNATIVE LEGAL MECHANISMS

(A) ADMINISTRATIVE CONTRACTS

(B) STABILIZATION CLAUSES

III. FAIR AND EQUITABLE TREATMENT & STABLE LEGAL ENVIRONMENT

(A) FAIR AND EQUITABLE CLAUSES

(B) GENERAL STATEMENTS REGARDING ‘STABLE LEGAL ENVIRONMENT’(C) CONTRACTUAL AND SEMI-CONTRACTUAL ARRANGEMENTS(D) UNILATERAL PROMISSORY STATEMENTS

(E) HOST STATES’ REGULATORY MEASURES

IV. POLICY CONSIDERATIONS AND FUNCTIONS OF CONTRACTUAL ARRANGEMENTS

V. CONCLUDING REMARKS


Documents

Between Fair and Equitable Treatment and Stabilization Clause_Moshe Hirsch_June 2013