Legitimate Expectations in Investment Disputes: A Reply to Sadie Blanchard

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Let me clarify some few points which Sadie Blanchard has disagreed with in my last post. As indicated in my last post, the fair and equitable standard from which the doctrine of legitimate expectations is derived requires the host state among other things to act in good faith and without arbitrariness towards foreign investors (See Techmed v Mexico, ICSID,  2003).  While it is clear that the state is always at the receiving end with regards to the fair and equitable treatment doctrine, the role/the conduct of the investor may not be totally irrelevant in assessing the application of the standard. Surprisingly, Sadie seems to disagree with this very simple fact despite the well settled maxim ‘Caveat Investor’.  In EDF (Services) Limited v. Romania , the tribunal stated that: “Legitimate expectations cannot be solely the subjective expectations of the investor. They must be examined as the expectations at the time the investment is made, as they may be deduced from all the circumstances of the case, due regard being paid to the host State’s power to regulate its economic life in the public interest.” (Award Merits, (8/10/2009), para. 219). Moreover, it is clearly not sufficient not to contextualise the interpretation of fair and equitable treatment when considering whether the legitimate expectation of an investor has been frustrated. Such context will obviously take into account the conduct of the claimant as well as the overall objective of the investment treaty. Surprisingly, Sadie finds this view problematic although it is not new (see Peter Muchlinski, 55 ICLQ, 2006, Garcia-Bolivar, O. CUP, (2011)).

Sadie seems to be unconvinced that the legal framework of foreign investment must protect the legitimate expectations and interests of both the investor and the host state. To Sadie, the centre of the universe in investment treaty should be the protection of the interests of the investors rather than balancing the interest of the latter and the development needs of the host state expected under any FDI. Sadie’s one-sided approach is very troubling because it is incongruous with the object and purpose of most investment treaties. For instance, the second tiret of the preamble to SADC model BIT clearly identifies economic development and poverty eradication, as key objectives of any investment agreement with third countries.

Surely, such objectives cannot be achieved at the backdrop of massive tax avoidance by investors.

For the sake of clarity, although, there is no universally accepted definition of tax avoidance, tax avoidance occurs when a company operates through legal schemes to minimise their tax bills but in doing so undertake aggressive tax planning or arrangements that “push the limits” of acceptable tax planning. Such practice is of course incompatible with the spirit of any FDI as a development tool. As a consequence, it is difficult to find a host state that does not frowned at such practice. The Canada Revenue Agency’s interpretation of the term “tax avoidance” includes all unacceptable and abusive tax planning.  In the UK, HMRC’s Anti-Avoidance Group (AAG) offers guidance on what may constitute tax avoidance.

In the US for instance, it has been reported that about 60% of corporations with at least US$250 million in assets did not pay any federal tax between 1996 and 2000 (Christian Aid). Similarly, in 2005, the Kenyan Revenue Authority (KRA) revealed that it is currently owed a staggering US$1.32 billion in unpaid taxes, by multinationals employing aggressive tax avoidance scheme. Although this might be technically legal, such practice is surely incongruous with the spirits of any investment treaty which Sadie seems to disagree with.  As has been clearly articulated, fair and equitable treatment and consequently legitimate expectations in international investment must be seen from the prism of ‘key developmental priorities’. (Thomas Frank, 1995). It is therefore not inconceivable for the forgoing standard to be used by a tribunal in assessing the conduct of a foreign investor whenever there is a claim.



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