The Protection of Legitimate Expectations under the Fair and Equitable Standard

Riccardo Fornasari, LLM Candidate, King’s College London

One of the most controversial issues in international investment law is the discipline of fair and equitable treatment (FET), and more specifically, the protection of legitimate expectations of the investor.  The matter, after the signature of the EU-Canada Free Trade Agreement and the present negotiations on the Transatlantic Trade and Investment Partnership, is extremely current, because the FET concept challenges states’ power to legislate. In particular, legitimate expectations can arise by contractual arrangements, by informal representations or by the legal framework of the host state at the time of the investment. This third type of legitimate expectations, arising from host state laws, and the protection that should be afforded to them will be analysed.

Investment tribunals, in this regard, have taken different approaches towards the issue: this essay will briefly recap the line of argument originally taken by tribunals which were very favourable to the investor, will examine the second line, where the interests of the investors and host states were more balanced, and finally will assess the competing interests at stake.

The Conflicting Legal Authorities

The first approach of the tribunals, to which Occidental[1], Enron[2] and CMS[3] are good examples, tended to narrow the host state’s ability to change its legal framework. The tribunals held that the protection of legitimate expectations rooted in the legal framework of the host state (which has to be considered at the moment of the investment) is an essential element for the success of a commercial operation and the host state has to respect this need for stability. Therefore, the host state cannot change the legislation that governs a specific matter in a way that would affect the legitimate expectations of the investor.

The issue of legal framework, as in Tecmed[4] and Metaclad[5] is often factually linked to licenses.  In these cases a theoretical issue could arise because, even if these licences are more individualised than a general law they are not specific contractual agreements: it is sufficient to highlight that in these cases the stability of the legal framework is strictly coupled with the duty of transparency and due process.

This approach, which places a great restraint on the host state, has been considered too restrictive by other tribunals which have affirmed the state’s right to adapt and change its regulatory framework.

In Parkerings[6] and Saluka Investments[7] the tribunals rejected the notion that the legal framework should be frozen and that the circumstances will remain totally unchanged. These second line of cases stress the importance of the sovereign legislative power of the state, which should not be sacrificed with respect to a foreign investment. In Parkerings[8] and Total[9] the arbitrators assessed that an investor, to be protected against any regulatory change, should rely on specific stabilisation clauses inserted in the investment agreement[10]: the FET cannot carry out the same function, unless the alteration of the legal framework is “total”[11] or “unreasonable”[12].

This second line of reasoning seems to be preferable to the first one, because it assesses more deeply the issue and attempts to find a balance between the different interests involved. However, it has yet to be clarified what is a total or an unreasonable change of the regulatory framework. In Impregilo, the tribunal found that Argentina had breached its duty to afford a fair and equitable treatment because it failed to restore a reasonable equilibrium in the concession.[13] In El Paso the tribunal stated that the investor cannot expect that the regulatory framework will remain unchanged. Thus, no legitimate expectation can arise by the regulatory framework, unless the alteration is total. The tribunal did not give a definition of “total alteration” and simply found that the several measures taken by the host state constituted a breach of the Bilateral Investment Treaty.[14] Therefore it has to be highlighted that the concept is decidedly subjective and difficult to assess, especially because it seems to refer to a yardstick of good governance.

Balancing Economic and Political Interests

Discussing the balance – between the investor’s legitimate expectations and the state’s right to change its legal framework, it has to be considered that we are not comparing two homogeneous kinds of interests: on one side there is the investor and its economic operation (the investor hopes its investment will guarantee them a “reasonable profit”, as stated in Total[15]); on the other side there is a state and its interests which are executed through its legislative power. What has to be briefly highlighted is that behind the state’s legislative power can be found the core principles of modern representative democracies: the legal framework is the result of the activity of the Parliament, elected by people in order to realize a specific political commitment. The legal framework is per se subject to changes, because it should reflect the will of the peuple souverain. In sum, what is balanced, in the interpretation of FET clauses, are not the interests of two different parties as per a contractual relationship. Rather, the protection of the investment is opposed to the sovereign power of a state to determine its regulatory regime, which should be the result of a political commitment of its people.

The second element that makes the balance problematic is that there is no definition of what it is a total or an unreasonable change in the legal framework of the host state. It has been said that it has to be evaluated in every specific case[16], but this does not mean that it is not assessed in relation with the yardstick of what seems reasonable to the arbitrator. Excluding changes due to corruption or other crimes, the result is that this evaluation has to be made by tribunals: a group of arbitrators becoming the judge of the policies of the state, deciding on the basis of a subjective standard, because there is no public and shared determination about it. For example: is it reasonable to change the plan of a privatisation, which deprives the investor of their expected profit?

The idea of a reasonable or total change seems to refer to parameters which are not stated anywhere, but can be detected in the reasoning of the tribunals. For instance, in Impregilo, the tribunal says that “investors must be protected by unreasonable modifications of the legal framework”[17]; which will be assessed in relation to the legitimate expectations at the moment of the investment. However, what is “reasonable” is not defined, but by the subsequent decision it can be guessed that something that excessively affects the “reasonable” profit of the investor is not reasonable[18] (The point again being, what is reasonable profit? Is the tribunal limiting the business risk of the commercial operation? Is not the business risk the justification for profit?).


The variables that are taken into account in the evaluation of legitimate expectations that arise from the legal framework call into question two basic principles of the FET discipline: first, that it refers to the investment and not to the investor, and second, its absolute nature (in contrast with the national treatment or most favoured nation treatment, which are relative and need a comparator)[19]. It seems very difficult to make the two fundamental premises consistent with a highly subjective concept that has no defined standard, thus creating a space for further confusion.

This kind of implicit standard in the protection of legitimate expectations, based on the legal framework, has enormous potential to shape the normative context. In fact, it defines the relationship between certain rights, as the right to a profit, and the core rights of representative democracies, including the enforcement of human rights that passes through legislation. Utilising a concept elaborated by Teubner[20], it can be said that investors and investment tribunals work as “constitutional” agents in the construction of rules which can affect the whole legal framework. It does not mean to deny that foreign investors can be harshly damaged by a total change in the policies of the host state. It is, on the contrary, to recognise it and to point out that, even if a general balance can be found between the different interests at stake, there will always remain a core contradiction that explodes when the host state calls into question the ideology that underpins international investment law and decides to enforce its sovereign power in a manner which is radically in contrast with the interests of the investor.



[1]Occidental Exploration and Production Company v The Republic of Ecuador, LCIA Case No UN 3467, Final Award (1 July 2004), in particular para 183.

[2]Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa Assets, LP v Argentine Republic, ICSID Case No ARB/01/3, Award (22 May 2007), in particular para 260.

[3]CMS Gas Transmission Company v Argentine Republic, ICSID Case No ARB/01/08, Award (12 May 2005), in particular para 274.

[4]Tecnicas Medioambientales Tecmed, SA v United Mexican States, ICSID Case No ARB(AF)/00/2, Award (29 May 2003).

[5]Metalclad Corp v Mexico, Award (30 August 2000) ICSID Case No. ARB (AF) 197/1, in particular para 76.

[6]Parkerings-Compagniet AS v Lithuania, ICSID Case No ARB/05/8, Award (11 September 2007), in particular para 332.

[7]Saluka Investments BV v The Czech Republic, UNCITRAL, Partial Award (17 March 2006), in particular para 351.

[8]Parkerings v Lithuania (n. 5) para 331.

[9]Total v Argentine Republic, ICSID Case No ARB/04/01, Decision on Liability (27 December 2010), in particular paras 117 and 429.

[10]However, some investment agreements do not have a stabilisation clause.

[11]El Paso v Argentine Republic, ICSID Case No ARB/03/15, Award (31 October 2011), para 374.

[12]Impregilo SpA v Argentine Republic, ICSID Case No ARB/07/17, Award (21 June 2011), para 291.

[13]Impregilo SpA v Argentine Republic (n 11) para 331. The disturbance of the equilibrium between rights and obligations in the concession was essentially due to measures taken by the Argentine legislator, who changed the currency exchange system. Therefore, the tribunal held that it must have been incumbent on Argentina to act to effectively restore an equilibrium on a new or modified basis.

[14]El Paso v Argentine Republic (n 10) para 374.

[15]Total v Argentine Republic (n. 8) para 333.

[16]M. Potestà, ‘Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept’ (2013) ICSID Review 30.

[17]Impregilo SpA v Argentine Republic, ICSID Case No ARB/07/17, Award (21 June 2011), para 291.

[18]At paragraph  330 the tribunal stated that Argentina should have at least tried “to act to effectively restore an equilibrium on a new or modified basis”.

[19]M. Potestà,  ‘Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept’ (n 15) 35.

[20]G. Teubner, Constitutional Fragments, Societal Constitutionalism and Globalization (Oxford University Press 2012).