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A Critique of the Legitimate Expectations Doctrine in Investment Treaty Arbitration

Published on September 16, 2013        Author: 

Yenkong Ngangjoh-HoduDr Yenkong Ngangjoh Hodu is a Senior Lecturer in Law at the University of Manchester School of Law.

In recent years, the concept of ‘legitimate expectations’ has routinely been put forward by claimants as the basis of claims in investment treaty arbitrations, and endorsed by some arbitrators (see International Thunderbird Gaming Corporation v  United Mexican States, Separate Opinion of T. Walde, para. 37). Relying on ‘legitimate expectations’ that have been frustrated as grounds for an award is troubling, and in the words of a recent EJIL article by Martins Paparinskis “suggest[s] a radical departure from the traditional model of international responsibility”, and may even be tantamount to deciding ex aequo et bono [(2013) 24 EJIL 617, 628]. Tribunals have regarded the doctrine of legitimate expectations as  a part of the fair and equitable treatment standard provided for in investment treaties (see Sempra Energy International v Argentine Republic, pp. 87-88 at para. 298). This is incongruous with the law of state responsibility where the breach of a contract between a state and an alien is not necessarily a violation of international law (Article 4, ILC Articles on State Responsibility). Apart from references to precedent, investment tribunals have, in the majority of cases, hardly taken the pain to justify the overwhelming reliance on legitimate expectations in making awards (Anthea Roberts, 104 AJIL 2010).

Legitimate expectations presuppose that an agreement or a promise generates a certain level of expectations, known as legitimate expectations. It is still unclear what exactly will give rise to legitimate expectations and under what conditions such expectations require unhindered protection. The most popular use of legitimate expectations in domestic jurisdictions (England and Australia) has been in the area of administrative law and more precisely, concerning issues of judicial review. In this context, the basic test for legitimate expectations is the prior existence of a promise (R (Bibi) v London Borough of Newham [2001] EWCA Civ 607) that needed protection by a public authority (Wheeler v Office of the Prime Minister [2008] EWHC 1409). Similarly, in German law the doctrine is connected to the protection of trust (for instance, Article 38 of the German code on Administrative Procedure).

However, in the context of investment arbitration, legitimate expectations is somehow seen as an incentive for foreign investors to settle on a particular investment destination based on a legal structure and representations made by the receiving state. (Christoph Schreuer and Ursula Kriebaum in Jacques Werner et al eds., 2009 at p. 273). Therefore, predictability and stability of a particular legal regime and the mere existence of a unilateral representation by the host state will be seen by tribunals as grounds for legitimate expectations (Kenneth Vandevelde, 2011). Apart from the existing BIT, local laws and the business environment at the time of investment will be germane to whether a claimant’s claim to legitimate expectations that have been frustrated is well-placed. On the other hand, if there is somehow a lack of reasonableness on the part of the investor, the claim to have a legitimate expectation might be held unjustifiable (Duke Energy Electroquil Partners & Electroquil SA v Ecuador, ICSID, ARB/04/19, 2008).  For instance, if at the time of investment, the investor failed to take into account the economic, historical and socio-political environment in the host state, a claim of legitimate expectations may be unlikely to succeed. This precisely was the case in Saluka Investment BV (The Netherlands) v The Czech Republic, where a claim of legitimate expectations based on the claimant’s reliance on a promise made by a former Minister of Finance was rejected by the Tribunal. Accordingly, the Tribunal noted, “whatever assurance the Minister of Finance may have given, he could not bind future Governments” (UNCITRAL Partial Award, 17 March 2006, para. 351 at p. 74).

Moreover, an unqualified endorsement of the protection of legitimate expectations by an arbitral tribunal maybe counterproductive to the rights of the host state to regulate and to use foreign direct investment as a development tool. Although tribunals have stressed the importance of reasonableness in legitimate expectations, the exact meaning of the term ‘reasonableness’ is generally uncertain, as it is mostly used as a synonym to ‘legitimate’. (International Thunderbird Gaming Corporation v United Mexican States, NAFTA and UNCITRAL Award, 26 January, 2006, at p. 49, para. 147)  In the absence of an express qualification of the fair and equitable standard, the bedrock of legitimate expectations, it would be repugnant to the development trajectory of a host developing country if tribunals were to consider legitimate expectations in isolation of the level of development of the host states. Because of the breadth of the fair and equitable treatment principle, some investment treaties have avoided it altogether. For instance, the July 2012 Southern Africa Development Community (SADC) Model Bilateral Investment Treaty opted for ‘fair administrative treatment’… [taking into consideration the level of development of the State Party] rather than fair and equitable treatment from which legitimate expectations is derived. (Article 5(a)(2) at p. 23). Consequently, if for some reason, expected returns from an investment are not realised or an investment is completely wiped out as a result of political upheavals, economic instability or host government measures to stabilise the economy, it will be unrealistic from a developing country perspective for an investment to rely on legitimate expectations.

A further argument could also be developed from the host state’s perspective where its legitimate expectations are frustrated as a result of tax avoidance by an investor. A minimal compromise on tax avoidance was reached at the last G8 summit in Northern Ireland hosted by David Cameron, the British Prime Minister. It is true that some developed countries including the United States, Canada, Norway and Australia have in recent years tried to tackle the problem of tax avoidance by investors taking advantage of loopholes in the law. However, the existence of multiple jurisdictions with tax secrecy and variations in tax law have continued to facilitate tax avoidance by investors. Yet from the host state’s perspective, avoiding taxes by investors is incongruous with the spirit of any bilateral investment agreement or regional investment agreement. Consequently, instead of unqualified ‘legitimate expectations’, tribunals ought to clearly take into account investor’s conduct. In other words, whether they have fulfilled their own part of the bargain so that there will be no doubt that the claimant or investor are ‘delivering to the best standard of care and due diligence, the reasonably anticipated economic and other benefit of the investment’ as expected by the host state. (Peter Muchlinski, 55 ICLQ, 2006).

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