The Principle of Fair and Equitable Treatment

Out of the many debatable issues in international investment law, the most significant one is the discipline of fair and equitable treatment and more precisely the protection of the legitimate expectation of the investor. The principle of Fair and equitable treatment is through a common concept found in multiple treaties related to trade but still, academics, governments, and even investors have failed to absolutely define it. Though there isn’t a clear definition of what is fair and equitable treatment, parties do not dispute the basic understanding of what is fair and Equitable Treatment.

The concept basically means that it is agreed that investors and investments in a host state will, at a minimum, be afforded an international standard of treatment. Thus, foreign investors and their investments can benefit from a standard of treatment dictated by international law that is different from treatment afforded to domestic investors or investments and which is generally thought to be something more.[1] Thus a foreign investor will always have certain basic exceptions while investing in a foreign country. Thus, the notion of legitimate expectations, also called basic expectations or reasonable and justifiable expectations, is a key element of the fair and equitable treatment standard.[2] A legitimate expectation can arise either by contractual arrangements or by informal representations or by the legal framework of the host state. Due to multiple treaties defining fair and equitable treatment standard, a universally accepted definition has yet been formed. In a very important case regarding the same, Waste Management V. United Mexican States, [1] The panel Stated: “….. the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the state and harmful to the claimant f the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety- as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candor in an administrative process. In applying this standard, it is relevant that the treatment is in breach of representations made by the host state which were reasonably relied on by the claimant.”[2]

In 2012, Swisslion V. Macedonia stated[3], “FET standards basically ensures that foreign investment is not unjustly treated, with due regard to all surrounding circumstances, and that it is a means to guarantee justice to foreign investors. In the broader perspective, agreeing to a standard is a reaction to the troubles of the obsolescent bargain which may intimidate an investor who invested in the host state but later finds out that he is subjected to discrimination and unfair behavior from the host state. In the case of Desert Line v. Yemen, in respect of to the situation the Tribunal stated, It would offend the most elementary notions of good faith, and insulting to the head of the State, to imagine that he offered his assurances and acceptance with his fingers crossed, a it were, making a reservation to the effect that we welcome you, but will not extend to you the benefits of BIT with your country.[4] The relationship between Legitimate Expectation and Fair and Equitable Treatment When it comes to Investment Law, the doctrine of Legitimate Expectation holds a prominent position as it is one of the key aspects of the Fair and Equitable treatment. It has been previously stated that “the standard of fair and equitable treatment is… closely tied to the nation of legitimate expectations which is the dominant element of the standard.[5]

Investment Arbitral jurisprudence has shown that the doctrine can be used in four ways. First is when to defend the investor from exemplifications of promises made by the Host Country which it later denied following up on. Second is to safe gourd the investor against a breach of an issuing of license that withheld the utilization of the investment in the host country. The third is to effect substantive rights to the investor against the changes of Government Law and policy. And Finally, the use of the Doctrine in its most traditional sense, as to grant the investor procedural rights against a decision of the Host State.[6] A. Changes In Statements Made by the Host The First Situation in which the Doctrine is used is to safeguard the investor from changes in the statements by the state. In PSEG v. Turkey, the tribunal stated that there could be no case for a breach of the investor’s expectations as there were no identical commitments or promises made by the State which gave rise to such an expectation.[7] As in this case, there was no background of legislation on which the legitimate expectation would arise. Moreover, the mere statement made by the state that it wants foreign investment was not a testimony which gives rise to a legitimate expectation. B. Protection from the withdrawal of license There is a responsibility under Fair and Equitable Treatment provision that the Host Country must not revoke the permits prearranged to an investor. This Doctrine was used in two famous cases Metalclad[8] and Tecmed[9], both against Mexico. In one case the state granted the permit whereas in the other it stated that the permit will be granted if certain criterions are fulfilled and later not fulfilling the promise.

In the Metalclad Case, the tribunal realized that the reason for not giving the permit was because there was no support from the local community. But Still, the Tribunal felt that the only reason why the permit can be denied is where there is a physical defect in constructing the landfill.[10] In Tecmed, the claimant had 99% of the shares in a site which deals with hazardous waste. The landfill was constructed on a land purchased by the Host country. Later the government straightway refused to renew the license. To this, Tribunal stated that non-grant of the permit was a breach of the fair and equitable treatment standard and noted that bad faith is not required for a breach of the fair and equitable standard. C. Changes in policy by the Government ICSID Tribunals have concluded that it is of utmost importance that Government Policies remain the same to ensure that investor expectations remain the same. In the case of Azurix v. Argentina, it was held that fair and equitable treatment was violated as investors water supply business being restrained by increased pricing.

CIESA which was an Argentine Holding Company had shares in TGS which was n Argentine Gas Transport Company. Claimant primarily invested in TGS because there was a convertibility Law in place which fixed the Argentinean Currency to US Dollars. This was removed in 1999 due to the economic crisis to which the Argentine Republic contended that it was due to the dire economic crisis and they had no option but to do the same. The tribunal held that Argentina has breached Fair and Equitable treatment and had failed to respect its obligations in relation to the investment. The tribunal ordered damages as it found that the investor had a legitimate expectation that the law will remain unchanged. D. Procedural Rights Legitimate Expectation also rises when the right to participate and due process has been neglected. In Rumeli & Telsim v. Kazakhstan it was stated: “as emphasized by the AMCO and I and II decisions, regardless of the examination of the substantive grounds relied upon by a State agency in the framework of the revocation of a license, the mere lack of due process would have been an insuperable obstacle to the lawfulness of the revocation.

Legal Framework for Legitimate expectations doctrine under Fair and Equitable treatment standard The first time a Tribunal decided to study Legitimate Expectation was in the SPP Case[14] where it tried to study Fair and Equitable Treatment. The tribunal talked about investors’ expectations by stating that: “Whether legal under Egyptian law or not, the acts in question were the acts of Egyptian authorities, including the highest executive authority of the Government. These acts, which are now alleged to have been in violation of the Egyptian municipal legal system, created expectations protected by established principles of international law.” The law got stricter when in the Tecmed Case, the tribunal held that Fair and Equitable treatment obliges the host to offer treatments that do not disturb the legitimate expectations that were the reason the foreign investor invested in the first place. The similar ground has been acknowledged in many cases. In CME Case, The Tribunal found out that the State has dishonored the standard by “evisceration of the arrangements in reliance upon which the foreign investor was induced to invest.”[17] In this case, CMF owned a television Services Company.

To stop foreign ownership of licensees required to broadcast television, Czech Media Council created a new CNTS Structure which was held by Cet21, who actually founded CNTS. The Council later coerced CNTS and CET21 to create a service agreement between them, following which CET21 terminated the said agreement and replaced CNTS and thus the broadcasting services of CNTS became idle. To which the tribunal found out that Legitimate Expectation of the foreign investor was harmed as the claimant had a legitimate expectation on the investment structure which was provided and the Council should not act with mala fide intentions towards the investors business. The facts of this case gave rise to a similar dispute though in this case, the Tribunal rejected the claims of the investors.[18] The court stated that the reversal of a prior express permission by a state could constitute a breach of legitimate expectation because there was an expectation on part of the investor that the State Agency would act in a certain manner.

Another important case where the issue of legitimate expectations was considered was in the case of the ADF group. In that case, the contention of the claimant was that their Legitimate Expectation was breached as the State Agency refused to follow and apply a preexisting case law in regard of the endeavor. Tribunal came to the conclusion that Claimant failed to establish a breach of fair and Equitable Treatment since the investor's expectations with respect of the relevance or applicability of the case-law it cited to the State Agency had not been created by misleading representations made by authorized officials of the US Federal Government. Thus, Misrepresentative representations made by the State which is relied on y the investor can be constituted as a violation of Legitimate Expectation in regards to Fair and Equitable Treatment Standard. Violation of Legitimate expectation would also occur when the State fails to fulfill contractual obligations.

Though mere non-payment of debt would not demonstrate a violation of minimum standard and more than that would be required. Though in SGS v. Philippines, the Tribunal pointed out that unreasonable refusal to pay money which is payable under an award or contract goes against the legitimate expectations of the investor.[22]

Moreover, in GAMI Investments, Inc. v. the United Mexican States, the Tribunal stated that an outright and unjustified repudiation of relevant regulation by the host state would constitute a denial of fair and equitable treatment. Balancing Investors and States Interests When we are discussing the balance between the investor's legitimate expectations and the states right we need to realize that the two are heterogeneous kinds of interests. The investor expects that the investment will result in a profit which is reasonable[24], and on the other hand the state executes its interests through its legislative wing. The legislative activities of the state are the core to a functioning modern democracy as it is the result of the activity of the parliament, where people who have been elected by the general conscience vote for a political commitment. This legal framework is subject to change as peoples thought process changes as well over time. Thus, the protection of the investor is against the sovereignty of the state to decide on its own regulations.

The second issue which makes the balancing troublesome is that there is no proper definition as to what constitutes as a total or unreasonable change as it has been stated that it has been evaluated in a case by case basis. The concept of reasonable or total change consists of parameters which haven’t been laid down anywhere, but one needs to understand the resonating of the tribunal to detect that. In the case of Impregilo, the tribunal stated that” Investors must be protected by unreasonable modifications of the legal framework, which will be judged in respect of the legitimate expectations at that precise moment.[26] Though what constitutes as reasonableness hasn’t been defined in that case, in a subsequent case it was stated that something that excessively affects the reasonable profit of the investor is not reasonable.

After the discussion, it can be apparently understood that the doctrine of legitimate expectation has a wide application against the laws and policies of the state. The Tribunals sometimes even go beyond the mandate as there aren’t any constitutional constraints on the Tribunals. Sometimes though there are cases of extreme nature where the state intentionally passed something which would breach the investor's legitimate expectations. I strongly believe that such cases should be put under expropriation or arbitrary conduct rather than legitimate expectation.

Another place where there is a lot of debate is when the state can pass a law contrary to investments legitimate expectations. Sometimes, states can’t do anything but to do an act contrary to maintaining its public order. That’s why I strongly feel that the tribunal was wrong in dismissing the argument of necessity in the Argentine Case when the entire country was going through an economic collapse. Fortunately, in another case of Continental Causality, the tribunal stated that state emergency, such as an economic crisis, can invoke the doctrine of “necessity” in international law to pass laws contrary to its international obligations. [28] The doctrine of Legitimate Expectation has shaped up like this according to me, simply because the state should fulfill its promises as those promises were the only reason why the investor invested in that particular state. But that doesn’t mean that the state would exhaust itself or go against public policy to fulfill a promise.

A foreign investor may invest on a certain type of medicines in a Host state but in due time the state realizes that the medicine is detrimental to the health and safety to its citizens. In such a situation, the state should be able to expropriate. So, it cannot be said that the investor had a legitimate expectation that the medicine would be made as that would be a dubious use of social policy-making powers of the tribunal. I also strongly support the case by case review used by the tribunals to adjudicate a dispute rather than a precedent based scheme as there is a tremendous difference in the development of administration and policy in the different areas where the arbitration will take place. There may be conflicting social, political, economic needs which need to be taken into account while adjudicating on the case of fair of equitable treatment. Another subject which I strongly feel that policy needs to change is the environment.

Many Countries may not have given importance to environmental pollution before but with time if they start giving it due importance, Tribunal shouldn’t stop the state from making better public policies for tomorrow, just to safe gourd some investors legitimate expectation. It is certain that legitimate expectation in respect of fair and equitable treatment defines the relationship between the right to a profit and the rights of democracies which are represented, not excluding the human rights enforcement that passes through the legislation.