In its judgment rendered on 1 October 2018 in the Bolivia v. Chile case, the International Court of Justice drew a distinction between public international law and investment arbitration with respect to the notion of legitimate expectations. The Court held that, contrary to bilateral investment treaties where the principle of legitimate expectations of foreign investors is often encompassed within the standard of fair and equitable treatment (“FET standard”), this principle does not exist under general international law:
“The Court notes that references to legitimate expectations may be found in arbitral awards concerning disputes between a foreign investor and the host State that apply treaty clauses providing for fair and equitable treatment. It does not follow from such references that there exists in general international law a principle that would give rise to an obligation on the basis of what could be considered a legitimate expectation. Bolivia’s argument based on legitimate expectations thus cannot be sustained.”[1]
Indeed, the breach of legitimate expectations has been invoked almost systematically by foreign investors against host States, more particularly on the basis of the FET standard.[2] In fact, arbitral tribunals have considered that the basic touchstone of the FET standard is to be found “in the legitimate and reasonable expectations of the parties, which derive from the obligation of good faith.”[3]
However, it is essential to note that, as such, the doctrine of legitimate expectations only serves as a pertinent factor in assessing the breach of BIT provisions and does not give rise to an independent standard of treatment “different from those contained in or enforceable under the BIT.”[4] This position is in line with the one adopted by International Court of Justice in its above-mentioned judgment.
In the following paragraphs we will review the basic contours of the notion of legitimate expectations as used in investment arbitration.
Content of Legitimate Expectations
The first definition of legitimate expectations was provided in the form of obiter dictum by the Tecmed tribunal as requiring “the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment. The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments.”[5]
Although some subsequent arbitral tribunals relied on this definition[6], it has been criticized for being extremely broad by several others[7], as well as by prominent legal scholars. For instance, Zachary Douglas pointed out that the Tecmed standard “is actually not a standard at all; it is rather a description of perfect public regulation in a perfect world, to which all states should aspire but very few (if any) will ever attain. But in the aftermath of the tribunal’s correct finding of liability in Tecmed, the quoted obiter dictum in that award, unsupported by any authority, is now frequently cited by tribunals as the only and therefore definitive authority for the requirements of fair and equitable treatment.”[8]
Today, arbitral tribunals consider almost unanimously that legitimate expectations form part of the FET standard contained in the BITs and should be interpreted within its limits. More particularly, the doctrine of legitimate expectations is concerned with “due process in administrative decision-making: ensuring the consistent application of the law and enforcing representations by the host State where these were made specifically enough to the particular investor to justify reliance.”[9]
Legitimate Expectations and Specific Representations Made by Host State
Not every expectation of foreign investors must automatically considered to be legitimate. Generally, arbitral tribunals have held that in order to be understood as such, the foreign investor’s expectations need to be intimately linked to a specific representation, be it a promise or assurance, made by a host State. In other terms, as stated by the Antaris tribunal, a foreign investor “must establish that (a) clear and explicit (or implicit) representations were made by or attributable to the state in order to induce the investment, (b) such representations were reasonably relied upon by the Claimants, and (c) these representations were subsequently repudiated by the state.”[10]
To understand what constitutes a specific representation an arbitral tribunal needs to assess all relevant circumstances. After having recalled the case-by-case analysis, the El Paso tribunal further ruled that two types of specific commitments exist that can be objectively given to foreign investors: “those specific as to their addressee and those specific regarding their object and purpose.”[11]
Legitimate Expectations and the General Legislative and Regulatory Framework of a Host State
Besides specific representations, foreign investors’ legitimate expectations can be rooted in the general legislative and regulatory framework existing at the moment of the making of their investment. However, this does not imply that the host State’s legislation is deemed frozen as of the time of the making of the foreign investor’s investment. As stated in the Impregilo case, “[T]he legitimate expectations of foreign investors cannot be that the State will never modify the legal framework, especially in times of crisis […].”.[12]
Thus emerges a thorny question regarding “the right balance between the stability and legitimate expectations on the one hand, and the host State’s right to amend the regulatory framework on the other”.[13] To resolve this dilemma, especially in the absence of any stabilization clause in a BIT, arbitral tribunals have held that although each State disposes of an undeniable right to exercise its legislative and regulatory powers, changes in such framework would be tantamount to a violation of foreign investors’ legitimate expectations “in case of a drastic or discriminatory change”[14] or “unreasonable modifications”.[15]
Zuzana Vysudilova, Aceris Law LLC
[1] Obligation to Negotiate Access to the Pacific Ocean (Bolivia v. Chile), ICJ, Judgment, 1 October 2018, ¶ 162.
[2] M. Potestà, Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept, 28(1) ICSID Rev. – FILJ 88, p. 100: “There is in fact no single tribunal on record that has steadfastly refused to find that—at least in principle—such a standard encompasses legitimate expectations.”
[3] El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Award, 31 October 2011, p. 119, ¶ 339. See also Gavrilovic v. The Republic of Croatia, ICSID Case No. ARB/12/39, Award, 26 July 2018, p. 258, ¶ 954.
[4] MDT Equity v. The Republic of Chile, ICSID Case No. ARB/01/7, Decision on Annulment, 21 March 2007, p. 28, ¶ 67.
[5]Tecnicas Medioambientales Tecmed v. Mexico, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, p. 61, ¶ 154.
[6] Eureko B.V. v. The Republic of Poland, Ad hoc, Partial Award, 19 August 2005, p. 76, ¶ 235.
[7] White Industries Australia Limited v. The Republic of India, UNCITRAL, Award, 30 November 2011, p. 93, ¶ 10.3.6.
[8] Z. Douglas, Nothing if Not Critical for Investment Treaty Arbitration: Occidental, Eureko and Methanex, 22(1) Arb. Intl. 27, p. 28.
[9] C. McLachlan QC et al. (eds.), International Investment Arbitration – Substantive Principles (2nd ed., 2017), p. 314, ¶ 7.179. See also Crystallex International Corporation v. Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016, p. 145, ¶ 552: “[I]t is rather trite to note that the investor may consider the regulatory framework at the time of the decision to invest and rely on the state’s intent to comply with its own laws (patere legem quam ipse fecisti). However, a simple general “expectation” of the state’s compliance with its laws may not always and as such form the basis of a successful FET claim. It would form such a basis if evidence is given that a specific representation as to a substantive benefit has been frustrated, or there is proof of arbitrary, or non-transparent conduct in the application of the laws in question or some form of abuse of power.”
[10] Antaris v. The Czech Republic, PCA Case No. 2014-1, Award, 2 May 2018, p. 97, ¶ 360(3). (emphases omitted)
[11] El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Award, 31 October 2011, p. 134-135, ¶ 375.
[12] Impregilo v. The Argentine Republic, ICSID Case No. ARB/07/17, Award, 21 June 2011, p. 68, ¶ 291.
[13] M. Potestà, Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept, 28(1) ICSID Rev. – FILJ 88, p. 113.
[14] Toto Costruzioni Generali v. The Republic of Lebanon, ICSID Case No. ARB/07/12, Award, 7 June 2012, p. 62, ¶ 244.
[15] Impregilo v. The Argentine Republic, ICSID Case No. ARB/07/17, Award, 21 June 2011, p. 68, ¶ 291.