1. JURIsDICTIONal DeFeNses
Investment treaty tribunals have typically assessed the investor’s legitimate expectations at the merits stage. However, legitimate expectations may already be relevant in determining the existence of a protected investment, and an investor’s failure to establish legitimate expecta- tions based on valid and enforceable rights under applicable domestic law may provide a basis for a successful objection to jurisdiction ratione materiae.
Most investment treaties contain an asset-based definition of protected investments.
“Asset” means a right or claim having an economic value.65 In the absence of a specific repre- sentation or assurance by the host state, rights that do not exist or are not enforceable under applicable domestic law will not create a right or legitimate expectation having an economic value. While investment treaty tribunals rarely employ the concept of legitimate expectations at the jurisdictional stage, the tribunal in Nagel v. Czech Republic relied on this concept to determine whether a contract between the investor and a state-owned company was a “claim to […] performance under contract having a financial value”66 so as to constitute a protected investment. The claimant alleged that the Czech authorities had reneged on a commitment to award it a Global System for Mobile Communication (GSM) mobile phone license. Interpreting a broad, asset-based definition of investment in the UK-Czech and Slovak Federal Republic BIT, the Nagel tribunal found that the terms “asset” and “investment,” when read in context, only cover rights and claims that had a financial value for the holder, a question determined mainly by the rules of domestic law which created the rights and gave protection to them.67 The tribunal stated that a claim would usually have a financial value only if it was well-founded or at the very least created a legitimate expectation of performance.68 Following an analysis of the claimant’s contractual rights, the tribunal concluded that the claimant had neither a right nor a “‘legitimate expectation’ with a financial value” that could qualify as an “asset” for purposes of Article 1 of the UK-Czech and Slovak Federal Republic BIT.69
The Nagel tribunal’s approach resembles that taken by the European Court of Human Rights, which also recognizes the role of legitimate expectations in determining the existence of “possessions” within the meaning of Article 1 of Protocol No. 1 of the European Convention on Human Rights.70 In addition, the Convention organs have frequently held that a revocation
65. Eureko v Poland, [145] (‘While investments under the present Treaty may include assets that are not “bal- ance sheet assets,” in the opinion of the Tribunal, to qualify as investments entitled to protection, provi- sions for the governance of PZU which are rights derived from its shareholding must have some “economic value.”’); Alps Finance and Trading AG v Slovakia (Final Award, 2011) UNCITRAL, [231]; Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka (Award, 2012) ICSID Case No ARB/09/2, [285].
66. Mr William Nagel v The Czech Republic (Final Award, 2003) SCC Case No 049/2002, [298].
67. ibid [300].
68. ibid [301].
69. ibid [326].
70. See e.g., Kopecký v Slovakia, E.C.H.R. [GC], Application No 44912/98, Judgment (28 September 2004), [35(c)]; Polacek and Polackova v The Czech Republic, E.C.H.R. [GC], Application No 38645/97, Decision as to the Admissibility (10 July 2002), [62]; ệneryildiz v Turkey, E.C.H.R. [GC], Application No 48939/99, Judgment (30 November 2004), [124]; Djidrovski v The Former Yugoslav Republic of Macedonia, E.C.H.R., Application
of a license does not affect property rights for the purposes of Article 1 of Protocol No. 1 and that the application was therefore incompatible ratione materiae with the Convention if a license was revoked in accordance with the conditions attached to the license or provided for by law. In such cases, the license holder is considered to have no reasonable or legitimate expectation to continue his activities if the conditions are no longer fulfilled or if the license is withdrawn in accordance with the provisions of law in force when the license was issued.71
A jurisdictional defense based on the absence of valid or enforceable rights is, however, likely to be unsuccessful if the investor benefitted from and relied on a specific representation or assurance by the host state as to the validity of the rights representing an investment or the invalidity was caused by the state’s own actions or omissions, as Kardassopoulos v. Georgia, Arif v. Moldova and Paushok v. Mongolia discussed in Section A.4, above, demonstrate. Absent special circumstances, investment treaty tribunals are reluctant to allow respondent states to invoke their organs’ failure to comply with domestic law, often without subjecting the inves- tor’s expectations based on such a representation to a test of reasonableness, in order to avoid jurisdiction.
2. meRITs DeFeNses
Failure to establish legitimate expectations based on rights under applicable domestic law may also provide a basis for a full defense on the merits against investment treaty claims. In particular, an investment treaty claim may fail in its entirety where the investor’s expecta- tions are based on benefits resulting from illegal investments or the operation of an invest- ment in breach of domestic law.72 The award in Thunderbird v. Mexico thus dismissed all of the investor’s claims for breach of Articles 1102, 1105, and 1110 NAFTA on the ground that the investor never had any vested right or legitimate expectation in the business activity that
No 46447/99, Judgment (24 February 2005), [80]; S.A. Dangeville v France, E.C.H.R., Application No 36677/97, Judgment (16 April 2002), [48]; Pine Valley Developments Ltd and Others v Ireland, E.C.H.R., Application No 12742/87, Judgment (29 November 1991), [51]; Anheuser-Busch Inc v Portugal, E.C.H.R. [GC], Application No 73049/01, Judgment (11 January 2007), [65].
71. For instance, Pudas v Sweden, E.C.H.R., Application No 10426/83, Decision on the Admissibility of the Application (5 December 1984), 234, 241 (declaring a complaint that the revocation of taxi license violated Article 1 of Protocol No 1 incompatible ratione materiae on the ground that the revocation was based on conditions that attached to the license when it was granted); H.J. Batelaan and J. Huiges v The Netherlands, E.C.H.R., Application No 10483/83, Decision on the Admissibility of the Application (3 October 1984), 170, 173 (declaring a complaint that the revocation of a license for dispensing medicines falls outside the scope of Article 1 of Protocol No. 1 because the license, although granted for an indefinite period, was subject to revocation as the interest in medicine supply ceased to exist and the legal conditions for termination of the license were fulfilled by the establishment of a dispensing chemist); M. v The Federal Republic of Germany, E.C.H.R., Application No 10748/84, Decision on the Admissibility of the Application (7 October 1985), 203, 206–207 (holding that a complaint about the withdrawal of a license to dispense medical treatment under the health insurance scheme falls outside the scope of Article 1 of Protocol No. 1 because the license, although granted for an indefinite period, was subject to conditions allowing for its possible revocation, including if a doctor breached his duties of an economic management of social security funds); Jostein Stứrksen c. Norvốge, E.C.H.R., Application No 19819/92, Decision as to the Admissibility of the Application (5 July 1994), 88, 94–95 (holding that the revocation of a fishing license in accordance with the applicable legislation did not affect any property rights protected under Article 1 of Protocol No. 1).
72. Peter Mulchinski, ‘“Caveat investor”? The relevance of the conduct of the investor under the fair and equi- table treatment standard’ (2006) 55 International and Comparative Law Quarterly 527, 552.
was subsequently prohibited.73 Thunderbird had invested in a Mexican company created to set up certain gaming facilities in Mexico. The Mexican authorities closed Thunderbird’s gaming facilities because the gaming machines were illegal under Mexican law. Since Thunderbird was knowingly operating illegal machines, it had never had any right or legitimate expectation that it would be able to pursue its activities under Mexican law, and no investment treaty claim could thus be based on Mexico’s enforcement of pre-existing limitations on property rights, in this instance, regulatory sanctions for the use of illegal gaming machines.
a. Expropriation Claims
Property rights have inherent limitations and a host state has the power to define the rights acquired by an investor at the time an investment is made.74 An expropriation claim based on rights that never validly existed under domestic law will generally fail. In principle, there can be no deprivation of invalid rights, whether or not the host state represented the validity of these rights.75 At most, there may be a breach of the fair and equitable treatment standard if the host state made a representation as to the validity of invalid rights.
In the absence of a specific commitment to the contrary, an investor has no legitimate expectation protected under an investment treaty that pre-existing limitations on property rights will not be enforced. Investment treaty tribunals have no mandate to evaluate statutory and regulatory restrictions that pre-date the investor’s decision to invest.76 For example, if the host state’s courts terminate an investment contract on statutory grounds that existed when the investment was made, an expropriation claim will typically fail. The tribunal in Swisslion v. Macedonia held that the termination of a share purchase agreement by the Macedonian courts for breach of the investor’s contractual investment obligations did not amount to an expropriation.77 Likewise, the tribunal in Arif v. Moldova dismissed a claim that the Moldovan courts’ invalidation of contractual rights based on competition legislation that was in force when the investment was made amounted to an expropriation.78
In addition, the concept of legitimate expectations plays an important role in establishing the scope and content of the protection against indirect expropriation. The effect of a state mea- sure on an investor’s legitimate expectations is an important element in determining the extent of interference with property rights79 and balancing the investor’s private interests against the
73. Thunderbird v Mexico, [183], [195–196], [208].
74. Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International 2009), 351–352, [7.19].
75. Arif v Moldova, [417]; Generation Ukraine v Ukraine, [8.8]; Robert Azinian, Kenneth Davitian, & Ellen Baca v The United Mexican States (Award, 1999) ICSID Case No ARB(AF)/97/2, [100]; Hege Elisabeth Kjos, Applicable Law in Investor-State Arbitration: The Interplay Between National and International Law (Oxford University Press 2013), 242.
76. Gami v Mexico, [93]; Rudolf Dolzer, ‘Fair and equitable treatment: a key standard in investment treaties’
(2005) 39 The International Lawyer 87, 103.
77. Swisslion DOO Skopje v The Former Yugoslav Republic of Macedonia (Award, 2012) ICSID Case No ARB/09/16, [314].
78. Arif v Moldova, [420]. See also The Loewen Group, Inc and Raymond L. Loewen v United States of America (Second Opinion of Christopher Greenwood QC, 2001) ICSID Case No ARB(AF)/98/3, [114].
79. Yves Fortier and Stephan Drymer, ‘Indirect expropriation in the law of international investment: I know it when I see it, or caveat investor’ (2004) 19 ICSID Review 293, 306; André von Walter, ‘The Investor’s expec- tations in international investment arbitration’ in August Reinisch and Christine Knahr (eds), International
public interest in determining whether an indirect expropriation has occurred.80 The absence of interference with legitimate expectations may therefore be a weighty factor indicating that regulatory measures are not expropriatory. The importance of the existence of and interfer- ence with an investor’s legitimate expectations in establishing a claim for indirect expropria- tion is highlighted in recent investment treaties and Model BITs. For example, the 2012 U.S.
Model BIT states that “[t] he determination of whether an action or a series of actions by a Party […] constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers, among other factors: […] the extent to which the government action interferes with distinct, reasonable investment-backed expectations.”81 Similar language can be found, for example, in the Australia-Chile Free Trade Agreement,82 the Canada-Latvia BIT,83 and the India-Slovakia BIT.84 Some Model BITs and investment treaties also confirm that such refer- ences to legitimate expectations are “intended to reflect customary international law concern- ing the obligation of States with respect to expropriation.”85
Investment treaty tribunals have likewise emphasized the importance of legitimate expec- tations in determining whether an indirect expropriation has occurred as a result of regulatory changes following the making of an investment. The tribunal in LG&E v. Argentina, for exam- ple, emphasized that in evaluating the degree of a measure’s interference with the investor’s ownership rights, “one must analyze the measure’s economic impact—its interference with the investor’s reasonable expectations […].”86 Investment treaty tribunals have also confirmed
Investment Law in Context (2008), 173, 179–180. Similarly, where the Convention organs under the European Convention on Human Rights held that Article 1 of Protocol No. 1 was applicable to the revocation of a license, they have found no breach of Article 1 of Protocol No. 1 if the revocation was in accordance with applicable law, not contrary to assurances given by the state and, to the extent revocation was discretion- ary, struck a fair balance between the public interest and the economic interests of the applicant. (Fredin v Sweden, E.C.H.R., Application No 12033/86, Judgment (18 February 1991), [54] (holding that the revocation of a permit to exploit gravel in accordance with the Swedish authorities’ statutory powers did not amount to a deprivation of possession and did not interfere with the applicants’ possessions in violation of Article 1 of Protocol No. 1 because Swedish law provided for a potential revocation of the license after the expiration of a ten-year period and the Swedish authorities had not given any assurances when the applicants made their investments that they would be allowed to continue to extract gravel thereafter); Tre Traktửrer Aktiebolag v Sweden, E.C.H.R., Application No 10873/84, Judgment (7 July 1989), [62] (holding that the revocation of a license to serve alcoholic beverages at a restaurant because of irregularities in the bookkeeping struck a fair balance between the economic interests of the applicant company and the general interest, even though under Swedish law, the authorities could have taken less severe measures, and therefore did not violate Article 1 of Protocol No. 1).
80. Saluka v Czech Republic, [306].
81. 2012 U.S. Model Bilateral Investment Treaty, Annex B, arts 4(a)(ii); 2004 U.S. Model Bilateral Investment Treaty, Annex B, art 4(a)(ii); 2004 Canada Model Bilateral Investment Treaty, Annex B.13(1), art (b)(ii).
82. Australia-Chile Free Trade Agreement (2008), Annex 10-B, [3(a)(ii)].
83. Agreement between the Government of Canada and the Government of the Republic of Latvia for the Promotion and Protection of Investments (2009), Annex B, [2(b)].
84. Agreement between the Republic of India and the Slovak Republic for the Promotion and Reciprocal Protection of Investments (2006), Annex, [2(b)].
85. 2012 U.S. Model Bilateral Investment Treaty, Annex B, [1] ; 2004 U.S. Model Bilateral Investment Treaty, Annex B, [1]; Agreement between the Government of the Republic of India and the Government of the Republic of Latvia for the Promotion and Protection of Investments (2010), Protocol, Ad Article 5, [1].
86. LG&E v Argentina, [190]; Consortium RFCC v Kingdom of Morocco (Award, 2003) ICSID Case No ARB/00/6, [69] (holding that deprivation of legitimately to be expected benefits is a necessary element of an indirect expropriation claim); Metalclad Corp v United Mexican States (Award, 2000) ICSID Case No
that, absent special circumstances, an investor has no right or legitimate expectation that the legal or regulatory regime in the host state will not change. For that reason, the NAFTA tribu- nal in Methanex v. United States rejected an expropriation claim challenging Californian leg- islation that banned the production and sale of gasoline containing methanol-based additives on environmental grounds. The investor had no legitimate expectation that such regulatory changes would not occur.87 The Methanex tribunal held that non-discriminatory regulation for a public purpose, enacted in accordance with due process, is not expropriatory unless specific commitments had been given by the host state to the then putative investor to the effect that the government would refrain from such regulation.88 As another example, in EnCana v. Ecuador, the investor claimed that the tax authorities’ denial of value-added tax (VAT) refunds had such a significant impact on its subsidiaries to be equivalent to expropriation of its investment.89 In rejecting the expropriation claim, the EnCana tribunal held that “[i] n the absence of a specific commitment from the host State, the foreign investor has neither the right nor any legitimate expectation that the tax regime will not change, perhaps to its disadvantage, during the period of the investment.”90
b. FET Claims
Depending on the particular circumstances of each case, the absence of legitimate expecta- tions based on valid and enforceable rights under applicable domestic law may provide a full or partial defense against a claim asserting unfair and inequitable treatment. As a line of invest- ment treaty awards confirms, where the host state’s authorities enforce statutory requirements that pre-date the investment, absent a specific representation, the impairment or even loss of the investment may not be compensable under the fair and equitable treatment standard.
The tribunal in Oostergetel v. Slovak Republic held that an investor has no right or legitimate expectation that the host state will not enforce its tax laws91 and dismissed the fair and equi- table treatment claim on this basis. The tribunal in Roussalis v. Romania dismissed a fair and equitable treatment claim based on the tax authorities’ enforcement of tax regulations that existed and were enforceable by law at the time the investment was made.92 For the same rea- son, it also rejected a fair and equitable treatment claim based on food safety inspections and
ARB(AF)/97/1, [103]; Occidental v Ecuador, Final Award, [89]; CME v The Czech Republic, [606] (dismissing an expropriation claim on the ground that there was no ‘deprivation of the use or reasonably to be expected economic benefit of the investment.’).
87. Methanex Corporation v United States of America (Final Award, 2005) UNCITRAL, Part IV, chap D, [9–10].
88. ibid [7] .
89. EnCana v Ecuador, [172].
90. ibid, [173]; El Paso v Argentina, [294].
91. Oostergetel v Slovak Republic, [236] (‘In the absence of specific assurance, it does not appear reasonable or legitimate for a tax payer to expect to be relieved from tax liabilities. It is indeed one of the important functions of a State to collect taxes. Every tax payer should expect that his dues will be collected.’).
92. Spyridon Roussalis v Romania (Award, 2011) ICSID Case No ARB/06/1, [506] (‘The tax regulations which led to the incriminated decisions existed and were enforceable by law at the time of the investment. Each of the controls and decisions was based on Romanian legal provisions. Moreover, Claimant could not reasonably have expected that the Romanian authorities would refrain from resolving reasonable concerns they might have concerning Claimant’s fulfillment of its tax obligations.’).
the subsequent suspension and revocation of an operating license.93 The tribunal in Maffezini v. Spain dismissed a claim for breach of the fair and equitable treatment standard based on measures by the Spanish authorities that enforced Spanish and European law requirements of an environmental impact assessment.94 In another example, the tribunal in Lauder v. Czech Republic dismissed a claim for unfair and inequitable treatment based on the Czech Media Council’s initiation of administrative proceedings for unauthorized broadcasting in violation of the Czech Media Law.95
In addition, as in the context of expropriation claims, absent special circumstances, an investor has neither a right nor a legitimate expectation that the legal or regulatory regime will not change.96 The tribunal in Paushok v. Mongolia thus dismissed a fair and equitable treat- ment claim based on significant tax increases resulting from the enactment of a windfall profit tax since “in the absence of such a stability agreement in favor of GEM, Claimants have not succeeded in establishing that they had legitimate expectations that they would not be exposed to significant tax increases in the future.”97
However, a claim of unfair and inequitable treatment may succeed even though the investor had no legitimate expectations based on enforceable rights under domestic law if the host state made a representation as to the validity and enforceability of such rights. The Arif v. Moldova tribunal, while dismissing a claim alleging expropriation of rights under lease contracts that were held to be null and void by the Moldovan courts, found a discrete violation of the fair and equitable treatment standard on the ground that the investor was entitled to expect that the contracts would be valid and enforceable because the competent state organs had approved them and issued a license to operate the duty-free shops pursuant to the contracts.98
A fair and equitable treatment claim may also succeed if the host state enforced a pre-existing limitation on an investment, but the enforcement was discretionary or alternative measures were available to the state. In Occidental v. Ecuador, the tribunal dismissed the claim that the imposition of caducidad of a state contract violated Occidental’s legitimate expecta- tions because Ecuador was entitled under Ecuadorian law to impose a caducidad in response to the investor’s failure to secure a required authorization.99 A breach of the fair and equitable
93. ibid [691] (‘In the Tribunal’s view, Claimant may not have expected that the State would refrain from adopting regulations in the public interest, nor may Claimant have expected that the State would refrain from implementing those regulations.’).
94. Emilio Maffezini v Kingdom of Spain (Award, 2000) ICSID Case No ARB/97/7, [71] (‘The Kingdom of Spain and SODIGA have done no more in this respect than insist on the strict observance of the EEC and Spanish law applicable to the industry in question. It follows that Spain cannot be held responsible for the decisions taken by the Claimant with regard to the EIA. Furthermore, the Kingdom of Spain’s action is fully consistent with Article 2(1) of the Argentine-Spain Bilateral Investment Treaty, which calls for the promotion of investment in compliance with national legislation. The Tribunal accordingly also dismisses this contention by the Claimant.’).
95. Ronald S. Lauder v The Czech Republic (Final Award, 2001) UNCITRAL, [296–297].
96. EDF v Romania, [217] (holding that legitimate expectations are not meant to cause ‘the virtual freezing of the legal regulation or economic activities.’); Parkerings v Lithuania, [332] (holding that ‘[s] ave for the exis- tence of an agreement, in the form of a stabilisation clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment.’).
97. Paushok v Mongolia, [302].
98. Arif v Moldova, [540–542].
99. Occidental Petroleum Corporation & Occidental Exploration and Production Company v Ecuador (Award, 2012) ICSID Case No ARB/06/11, [383].