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The concept of Legitimate Expectations, that is often invoked under the Fair and Equitable standard, has throughout its existence a contested space in terms of determining its position in International Investment Law. Despite the doctrine finding its presence in numerous BITs and having been invoked in several cases before Tribunals (as in International Thunderbird Gaming Corporation v. Mexico), it still remains uncertain whether the Doctrine finds its origins in Public International Law, through the channel of general principles of law recognised by civilised nations under Art. 38 (1)(c) of ICJ Statute, or if it emerges only through specific commitments made by a host state.
The deliberate decision not to define how a Legitimate Expectation arises under the ICSID Convention appears to align with the broader approach of respecting party autonomy, as seen in the Convention’s omission of precise definitions for key terms like ‘Investment’ and ‘Investor’. While the effort to leave broad discretion to contracting parties—through BITs or opt-out clauses under ICSID—in defining what constitutes a Legitimate Expectation may be commendable from a libertarian perspective, its accompanying drawbacks must also be critically examined.
This article makes an attempt to examine the doctrinal ambiguity that has emerged surrounding Legitimate Expectation and argues that the absence of a precise definition under ICSID has resulted in a fragmented jurisprudence wherein tribunals have offered differing interpretations. Through the standpoint of the inconsistent decisions in the Spanish Renewable Energy cases, this piece critiques the status quo and argues the case for a precise definition of Legitimate Expectation.
This article in its initial part discusses the disagreements that exist over the very scope and nature of legitimate expectation. Thereon, it analyses the conflict that exists in the tribunal rulings and eventually it sheds some light over the consequences of such inconsistencies and how a definitional clarity could possibly correct it.
Foundational Contentions Regarding Legitimate Expectations
One of the primary concerns that emerges on account of no treaty defining ‘Legitimate Expectation’ precisely, is the divergent interpretations made by the Tribunals. In some instances tribunals have upheld and emphasized the expectations with which the investors engage with the host country, while at other times they have ruled in favour of the sovereign state’s prerogative to formulate and mould its regulatory framework.
While the source of rooting Legitimate Expectations in Investment Arbitrations remains uncertain, it has been by and large settled that this doctrine does not create an independent obligation in and of itself. In MTD Equity v. Chile, it was ruled that a state’s duties under this doctrine emerges not from any independent expectations from the host state, rather it emerges only from the applicable investment treaty. The ICJ has also in one of its rulings (Bolivia v. Chile) negated the argument that the Doctrine of Legitimate Expectation exists as a general rule of International Law. Hence, there is barely any scope for investors to rely on this Doctrine as an obligation in General International Law is quite.
However, the investors have overtime made attempts to read the doctrine within the Fair and Equitable standard clause. It is argued by some of the scholars that legitimate expectation constitutes the ‘dominant element’ of the FET clause. Tribunals are required to balance two countervailing approaches—the Legal Stability approach and the Qualifying Requirements approach—within the context-specific framework of their adjudication. While the former approach states that a State cannot generate a legitimate expectation of a stable legal framework only to later mould/ reverse it, the latter approach states that to fall within the FET standard, the expectation must be based on specific representations made and the investor making investment by placing reliance on it. The Tribunals, however, while undertaking an attempt to create a balance between these two countervailing approaches have adopted contrasting positions to each other as discussed in this article below.
The Inconsistency in Spanish Renewable awards
The conflicting position undertaken by the Tribunals gets best reflected in the two cases emanating from similar factual backdrops. Both these cases relate to the incentives provided to Renewable Energy generators in terms of the discretion of selling the electricity at a relatively dearer price. The incentive ended up attracting numerous investors. However, the 2008 financial crises led to a tariff deficit and hence the State, while applying its economic prudence brought in certain measures which were regressive to the investors’ interests.
The Tribunal’s interpretational inconsistencies emerged in OperaFund Eco‑Invest v. Spain and Stadtwerke München (RWE Innogy) v. Spain. In Operafund, the investor had already made substantial investments to register solar plants in the earlier regime. The tribunal ruled that the State could not retrospectively amend the law which had created a promise to not retrospectively amend the law. The court ruled that subsequent amendments to the law were in breach of the Legitimate Expectation that was created and hence also the FET standard.
In contrast, in the Innogy ruling, the tribunal in similar factual backdrop ruled that no ‘specific commitment’ had been made to the investors, nor was any stability individually assured to the investor. Hence the Tribunal stressed on the requirement of an ‘explicit assurance’ for the Legitimate Expectation to emerge. Similarly in the Isolux Corsán v. Spain award, the tribunal emphasized that there emerges no guarantee of immutability merely by a statutory scheme where no individual commitment has otherwise been made. This contrast in position creates a challenge for the investors to predict what would constitute an existence of the Legitimate Expectation.
Emerging Concerns over Scope and its Larger Implications
The above discussion highlights that there exists a deeper infirmity about the doctrine. While the rooting of the doctrine in itself remains a challenge, the criterion to determine its existence in a particular treaty also remains uncertain. The definitional vacuum that exists is further exacerbated by the cascading jurisprudence that tribunals have delivered without rooting their rationale and analysis firmly in some treaty or other relevant source, as highlighted by Anthea Roberts where she describes Investment Law jurisprudence as a house of cards built largely by reference to other tribunal awards and academic opinions.
Another issue that emerges relates to the mechanical reliance placed on the earlier awards while adjudicating. The tribunals on account of relatively less developed jurisprudence largely place reliance and draw analogies from the classic precedents. While this might be a procedurally convenient method to interpret the law, Stephan Schill finds this methodology to be a matter of concern. By placing reliance on the settled precedents without undertaking a thoroughly thought through analysis, the tribunals effectively evade from their duty to explain the roots of their analysis. As Elizabeth Snodgrass argues, resorting to precedents cannot be a substitute for analysis.
This issue gets illustrated through the repeated reliance placed by tribunal on the Tecmed award, wherein the tribunal had without providing substantial clarity had correlated the Fair and Equitable Treatment with the good faith principle under international law. Hence, such precedent driven methodology over a concept that has not been defined precisely under ICSID could lead to more obscurement rather than providing clarity over the doctrine’s applicability.
The practical implications that follow are equally concerning. The confidence that an investor requires in the host state before making an investment decision, especially in a long term project, stands severely hindered in light of such jurisprudence. The concern is grimmer in specific sectors such as renewable energy (as was the case in Spanish renewables award) wherein the investments are made while relying on stability in environmental regulatory framework, which is more prone to getting altered where the concerns that the host state faces on the ecological front change or become graver. Legal unpredictability, especially in such sectors not only disincentivizes and undermines the interest of the investors, but it also poses the larger concern over possible lack of investment in green infrastructure development and hence impeding the global attempt to shift to cleaner sources of energy.
Key Takeaways
The jurisprudence over the Doctrine of Legitimate Expectation revolves around balancing the countervailing interests between the investors and the host state. The investors make long-term investments by posing confidence in stability in the legal framework of the host state. The investors’ concerns over stability have been recognised as one of the dominant features of the minimum standard expected. In contrast, the host states are apprehensive of their assurances acting as estoppels against their authority to overhaul the legislative framework.
In light of the countervailing interests, having an inconsistent jurisprudence only leads to practical concerns emerging for both the stakeholders. For investors, wayward jurisprudence can lead to difficulty in risk assessment, while for the States bringing in regulatory reforms might become a challenge. Hence there exists an imminent need to reassess where ICSID’s leeway by not defining Legitimate Expectation is eventually leading us to.
In this context, there emerges a need to revisit the reluctance over defining key standards. A possible critique to this argument would be that any such attempt to define ‘legitimate expectations’ would curb the flexibility that ICSID intended to provide for and moreover then a similar demand to define other terms like ‘investor’ might also arise. However, the answer to this critique stands apparently clear in light of the wayward jurisprudence that has emerged — the flexibility and autonomy provided to the parties by not defining the term, is coming at the risk of a greater opportunity cost of uncertainty and apprehensions to the parties on both ends of the transactions.
Therefore, defining this doctrine even if it curbs the autonomy is important because it would satiate the other impending concern of inconsistent interpretations and accordingly bolster confidence of both- the host states and the investors over the efficiency and legitimacy of the Investor-State dispute settlement mechanism.
Navjot Punia is a final year law student at National Law University Delhi. His areas of interest primarily revolve around International Investment Law and Arbitration law.
Picture Credit: AI Generated through WordPress/enhanced by JFIEL.
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