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.

Understanding 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]

Key Cases in Fair and Equitable Treatment

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

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]

Application of Legitimate Expectation in Investment Arbitral Jurisprudence

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]

Changes in Statements Made by the Host

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.

Protection from the Withdrawal of License

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.

Changes in Policy by the Government

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.

Balancing Investors and States Interests

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.

Conclusion

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.