The fair and equitable treatment (“FET”) standard has been widely discussed in investment arbitration. Eminent commentators have established that the FET standard contains several elements of protection, including those commonly associated with the minimum standard of treatment, the protection of legitimate expectations, non-discrimination, transparency, protection against bad faith, coercion, threats; that is, investments must always receive fair and equitable treatment and in no case will they be granted less treatment than that required by international law.[1]

The FET has acquired prominence in investment arbitration because other standards traditionally provided by international law might not be entirely appropriate in the circumstances of each case, for example, when the facts do not support a claim for direct expropriation but nonetheless the rights of the investor have been breached.[2]

This paper will mostly be focused on the concept of legitimate expectations, which has been considered co-extensive of FET. Notwithstanding, arbitral tribunals have gradually posed limits and qualifications to such recognition.[3] In addition, the concept of legitimate expectations is not limited to FET cases, but it is also present in the analysis of the defining elements of other standards such as indirect expropriation.[4] In any case, for the expectations to be legitimate, it is necessary to have a direct and concrete promise by a high-ranked authority, specific laws, a contract, stabilization clauses within a contract or even letters of commitments that provide that the investment will be treated in a certain matter or that the practice is such that is it unreasonable to think that the investment will be frustrated.

Before investing in a foreign country, it is a common practice for investors to hire local counsel and carry out a thorough due diligence process to consider all the risks that might impact their investment. Arbitral tribunals have seconded this idea by holding that without a due diligence, legitimate expectations cannot be reasonable.[5] Among the risks that must be considered, investors shall analyze the tax, labor, and administrative legal frameworks. In the specific case of administrative laws, special attention must be brought to civil law jurisdictions, where the state’s police powers may be reflected in administrative contracts as exorbitant clauses or in the law as exorbitant powers,[6] allowing the state to modify, interpret, suspend, or terminate the contract unilaterally, among other faculties.

I submit that, depending on the strength of the rule of law of a country, exorbitant clauses and powers may undermine the legitimate expectations of investors as these may not be reasonable, considering that it is a possibility for the state to exercise such faculties. As such, I will first conceptualize the FET standard and how arbitral tribunals have understood the legitimate expectations doctrine. Second, I will discuss how these expectations need to be reconciled with the state’s right to regulate. Lastly, I will describe exorbitant clauses and their impact on investors’ legitimate expectations.

1. Scope of the fair and equitable treatment standard.

The FET can be understood as embodying the concept of the rule of law (état de droit) as it is widely recognized as an administrative or constitutional law concept in most liberal legal systems, imposing certain procedural and substantive standards on all branches of government.[7] It has developed into the single most important standard of international investment protection, which moreover has the potential to shape domestic administrative law, influence the deployment of judicial proceedings, and serve as a quasi-constitutional standard that sets limits to the activity of legislators.[8]

A striking feature of this standard is that unlike other international obligations, those who  may cause a breach subject to responsibility/compensation, are not only the state bodies responsible for managing international relations or who exercise the foreign policy of a country, but any authority that represents the state internally, that is, mayors, prefects, assembly members, judges, et al., who can cause –without any knowledge of the provisions in international law – a breach of investment protection treaties, when their actions violate a standard such as FET.[9]

As such, arbitral tribunals have ordered host states to pay damages to foreign investors for the refusal to grant or to prolong an operating license (Tecmed v. Mexico), for committing a denial of justice in domestic courts (Compañía de Aguas del Aconquija v. Argentina; Loewen v. United States; Waste Management v. Mexico), for unpredictable, frequent, and conflicting changes in domestic laws (Eastern Sugar v. Czech Republic; Occidental Exploration v. Ecuador), for inconsistent government action (MTD v. Chile), for violating an obligation of cooperation in negotiations (PSEG v. Turkey), for the misuse of administrative authority (PSEG v. Turkey), or for fundamentally changing the regulatory framework of gas distribution in times of economic crises contrary to the legitimate expectations of investors in the stability of the legal framework (CMS v. Argentina; LG&E v. Argentina).[10]

Additionally, in situations where the BIT states that the treatment given to investors must be in “accordance with international law” (e.g., article 1105 of NAFTA) embodied under the Minimum Standard of Treatment (“MST”),[11] the FET has been interpreted as a mere alter ego of the MST.[12] For example, in Duke Energy et al. v. Republic of Ecuador, the tribunal agreed with Azurix Corp. v. Argentine Republic that the FET and MST are essentially the same:[13]

“This conclusion was also reached by the CMS tribunal in the following terms: 284. While the choice between requiring a higher treaty standard and that of equating it with the international minimum standard might have relevance in the context of some disputes, the Tribunal is not persuaded that it is relevant in this case. In fact, the Treaty standard of fair and equitable treatment and its connection with the required stability and predictability of the business environment, founded on solemn legal and contractual commitments, is not different from the international law minimum standard and its evolution under customary law.”[14]

 

In Philip Morris v. Uruguay, “the tribunal at first refused to accept that FET was an autonomous standard and in turn concluded that it did not correspond to the traditional MST under international law, but that under the influence of the FET standard the MST had evolved to a new one, one under which treatment of direct foreign investment must be tested.”[15]

It is important to note that a violation of FET does not necessarily involve bad faith on the part of the state (i.e., objective responsibility), however, proof of a bad faith conduct of the respondent state can serve as a strong indicator that a violation has occurred.[16] Additionally, a number of arbitral tribunals have recognized that states may be entitled to a margin of appreciation (or policy space) in exercising their regulatory powers, requiring a certain deference to government decisions relating to taxation, banking, protection of health and environment, and similar areas of public interest.[17]

In Waste Management, Inc. v. United Mexican States, the tribunal found that the FET is breached when the conduct of the state “is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety – as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process.”[18] Because of its broad definition, the FET standard is one of the most invoked in investment cases aside from expropriation (either direct or indirect).

The tribunal in Joseph Charles Lemire v. Ukraine established that the standard requires an action or omission on the part of the state that violates a certain property threshold, causing damage to the investor, and that there is a causal link between the action or omission and the damage.[19]

Notwithstanding the above, the determination of whether the standard has been breached rests on the specific facts of the case because taken too literally, it would impose upon host states obligations which would be inappropriate and unrealistic:[20]

“No investor may reasonably expect that the circumstances prevailing at the time the investment is made remain totally unchanged. In order to determine whether frustration of the foreign investor’s expectations was justified and reasonable, the host State’s legitimate right subsequently to regulate domestic matters in the public interest must be taken into consideration as well. As the S.D. Myers tribunal has stated, the determination of a breach of the obligation of “fair and equitable treatment” by the host State must be made in the light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders.”[21]

 

The tribunal in Enron Corporation et al. v. Argentina recognized that a key element to grant FET is the requirement of a ‘stable framework for the investment’ and the protection of legitimate expectations.[22] The panel concluded that the consistency of the state in its relations with the investor is an important element of fair and equitable treatment, whether viewed independently or in conjunction with legitimate expectations.[23]

Because the state has a right to regulate, this right must be balanced with the expectations which investors have relied on to invest. For this reason, I will next discuss the concept of legitimate expectations and how these expectations can be weakened.

1. What are the legitimate expectations?

As the name suggests, legitimate expectations are the expectations on which an investor relies to execute an investment in a foreign country. This standard has been much debated because arbitral tribunals have either broadened or narrowed it depending on the circumstances of each case.

The “utopian” standard of legitimate expectations was illustrated by the tribunal in Técnicas Medioambientales Tecmed S.A. v. The United Mexican States, as follows:

“The Arbitral Tribunal considers that this provision of the [BIT], in light of the good faith principle established by international law, requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment. The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations.”[24]

 

The protection of the investor’s legitimate expectations has been considered as the “dominant element” of the FET standard.[25] It can be said that the investor’s fair expectations have the following characteristics: they are based on the conditions offered by the host state at the time of the investment; they may not be established unilaterally by one of the parties; they must exist and be enforceable by law; in the event of infringement by the host state, a duty to compensate the investor for damages arises except for those caused in the event of state of necessity; however, the investor’s fair expectations cannot fail to consider parameters such as business risk or industry’s regular patterns.”[26] Other risks that should be considered by investors are political risk and regulatory risks. In politically unstable countries, changes in government can mean changes in regulation (within the principle of legality and providing compensation) that can affect an investment. Also, regulatory risks can arise in the context of applying exorbitant clauses/powers, which will be discussed below.

In the specific case of NAFTA 1105, Thomas Wälde argued that even though “the concept of ‘legitimate expectation[s]’ is not explicitly mentioned [in NAFTA] nor in other similar investment treaties, it is, however, considered to be part of the “good faith” principle which is a guiding principle (also a general principle of international law)[27] for applying the “fair and equitable treatment” standard in Art. 1105, a standard that is repeated, more or less identically, in most of the other over 2500 investment treaties in force at present.[28]

To determine whether measures taken by the state violate the standard, tribunals frequently examine “the impact of the measure on the investor’s reasonable expectations backed by investments; and if the state is trying to avoid expectations based on investments that it itself created or reinforced through its own actions.”[29]

Moreover, the tribunal in Saluka established that the investor protected by a treaty (in this case the Czech Republic-Netherlands BIT) may in any case properly expect that the host state implements its policies bona fide by conduct that is:

“As far as it affects the investors’ investment, reasonably justifiable by public policies and that such conduct does not manifestly violate the requirements of consistency, transparency, even-handedness and nondiscrimination. In particular, any differential treatment of a foreign investor must not be based on unreasonable distinctions and demands, and must be justified by showing that it bears a reasonable relationship to rational policies not motivated by a preference for other investments over the foreign-owned investment.”[30]

 

It adds that arbitral practice has established the following: “according to the “fair and equitable treatment” standard, the host state must never disregard the principles of procedural propriety and due process and must grant the investor freedom from coercion or harassment by its own regulatory authorities.”[31] Therefore, when invoking exorbitant powers, the state should respect the due process, i.e., issuing an administrative act that is clear, explains the motives, compensates the investor, and allows it to appeal within the administration or through the administrative courts.

It seems like the standard expressed by the Saluka tribunal is much more realistic than that in Tecmed, because even though it considered that the expectations of foreign investors include fundamental standards such as “good faith,” “due process,” and “non-discrimination,”[32] it observed that if these terms are taken too literally, “host States’ obligations would be inappropriate and unrealistic,” therefore the FET standard cannot solely be specified by foreign investors’ subjective considerations.[33] Additionally, the Saluka tribunal emphasized the importance of proportionality between “investors’ expectations” and “public interest considerations” of the state.[34]

1. Specific representations made by the host state.

As discussed above, legitimate expectations are said to be breached when specific representations are made to the investor, upon which it relies in making the investment. A favorable investment regulatory framework alone cannot be considered to justify a “legitimate expectation,” as the state has the authority to modify it per its necessities. Tribunals have established that “in applying this standard [FET] it is relevant that the treatment is in breach of representations made by the host state which were reasonably relied on by the claimant.”[35]

For instance, citing Waste Management v. Mexico, the tribunal in Parkerings v. Lithuania established that “the expectation is legitimate if the investor received an explicit promise or guaranty from the host-State, or if implicitly, the host-State made assurances or representation that the investor took into account in making the investment.” It added that “in the situation where the host-State made no assurance or representation, the circumstances surrounding the conclusion of the agreement are decisive to determine if the expectation of the investor was legitimate.”[36] Therefore, in absence of a specific commitment, an investor cannot have a legitimate expectation that existing rules will not be modified.

These commitments can take the form of a contract, a stabilization clause, a comfort letter, among others. Declarations and promises made by high-ranked authorities have also been considered to create legitimate expectations.[37]

Despite this, a state must evolve, and with this evolution changes may occur in the legal and regulatory framework. For example, with climate change and nationally determined contributions, countries are adapting their policies to reduce their greenhouse gas emissions. This can seriously impact long term investments in the fossil fuel industry and mining operations and claims will be probably filed (e.g., if climate change is used as a pretext but the government continues operating the project or similar projects). Foreign investment cannot impede a country from meeting its sustainable development goals; still, investors must be compensated.

Keeping in mind these potential claims, when making regulatory changes or justifying the use of exorbitant powers, a state must consider not only the wellbeing of the country, but its international commitments towards foreign investors. As such, the state must try to make these changes in a reasonable manner, without impacting a specific sector and carrying out meaningful negotiations (i.e., fully consider the investor’s interests, compensate, reestablish the economic equilibrium of the contract et al.) with the actors that will likely be affected by the regulatory changes.

1. Stability of the host state’s regulatory framework.
2. The degree of impact on the investor legitimate expectations of general legislative or regulatory change or of legislation “specific” to the investor.

 

As previously established, when hearing a claim in breach of legitimate expectations, the tribunal will analyze if the regulatory change or decision is justifiable, i.e., the reasonableness of the measure. Only drastic or unreasonable modifications to a regulatory framework relied on by an investor may rise to a violation of legitimate expectations,[38] such as: “sudden elimination of the essential features of a general regulatory framework; continuing and unpredictable legislative changes; changes to a regulatory framework that are disproportional to the goal intended to be achieved by such changes; and changes that have been conducted in an unfair and discriminatory manner towards an investor.”[39]

A prime example are the cases involving the economic crisis in Argentina. The tribunal in LG&E v. Argentina found that the measures taken by the Argentine government to deal with the economic crisis of 2001 were unreasonable, unfair, and targeted at a specific sector (gas). In this case, as in many others that arose out of the same measures, the claimants decided to invest in Argentina because of specific guarantees laid down in the tariff system, guaranteeing calculation of the tariffs in U.S. dollars before their conversion into pesos, semi-annual PPI adjustments, tariffs set to provide sufficient revenues to cover all the costs and a reasonable rate of return, and compensation in the event that the government altered the tariff scheme.[40] However, the state abrogated these guarantees when the Argentine peso was devaluated. Despite this, certain contracts, such as those in the export industry, were excluded from the forced conversion to pesos regulation, or the conversion was performed at a more favorable rate to the individual or company.[41]

Because of the above, the arbitral tribunal established that Argentina acted unfairly and inequitably in “forcing the licensees to renegotiate public service contracts, and waive the right to pursue claims against the Government, or risk rescission of the contracts.”[42] It held that there was no real renegotiation, but rather the imposition of a process.[43] Moreover, the tribunal recognized that while LG&E was aware of the risks inherent in investing in a foreign state, Argentina “went too far by completely dismantling the very legal framework constructed to attract investors.”[44]

Based on the facts laid down by the award, it can be concluded that even though Argentina faced a severe economic crisis, it did not abide by due process (e.g., imposed negotiations) and did not treat all investments equally. It appears that less damaging measures must have been taken.[45] Notwithstanding, these issues must be examined carefully because in principle it is the state who is in a better position to determine its public and regulatory policies, not an arbitral tribunal; however international commitments must be respected.

1. Did the state act unfairly, unreasonably, or inequitably in the exercise of its legislative power affecting legitimate expectations?

 

In Parkerings v. Lithuania, the claimant, through a subsidiary, entered into an agreement with the Municipality of the City of Vilnus for the creation, development, maintenance, and enforcement of the public parking system in the city. More specifically, the Agreement provided for an exclusive concession to operate the city’s street parking and to operate ten multi story car parks.[46]

However, the laws governing the subject-matter of the investment were amended and claimant argued that such regulatory change deprived it of a substantial amount of income, violating, among other things, its legitimate expectations. While analyzing the facts of the case, the tribunal concluded that the state had not acted unfairly, unreasonably nor inequitably in the exercise of its legislative powers.[47] To dismiss claimant’s allegations, the tribunal established the following:

“By deciding to invest notwithstanding this possible instability, the Claimant took the business risk to be faced with changes of laws possibly or even likely to be detrimental to its investment. The Claimant could (and with hindsight should) have sought to protect its legitimate expectations by introducing into the investment agreement a stabilisation clause or some other provision protecting it against unexpected and unwelcome changes.”[48]

 

It is important to mention that arbitral tribunals, when considering if the expectations were “legitimate,” have looked into the due diligence process carried out by investors prior to executing any project or business. As such, the more extensive and detailed a due diligence is, the more concrete expectations can be.

In Parkerings (above), the tribunal stated the following: “The investor will have a right of protection of its legitimate expectations provided it exercised due diligence and that its legitimate expectations were reasonable in light of the circumstances. Consequently, an investor must anticipate that the circumstances could change, and thus structure its investment to adapt it to the potential changes of legal environment.”[49]

The tribunal also considered that at the time of the agreement “the political environment in Lithuania was characteristic of a country in transition from its past being part of the Soviet Union to candidate for the European Union membership. Thus, legislative changes, far from being unpredictable, were in fact to be regarded as likely.”[50] This issue was also touched upon in Charanne et al v. The Kingdom of Spain[51] and in Frontier Petroleum Services Ltd. v. Czech Republic.[52]

Within the required due diligence, it is not enough to just cover the laws regulating the sector (e.g., renewable energy laws if a wind farm is being constructed) nor tax and employment, but, for example, rather administrative laws must be analyzed in detail, considering the agreements will likely be entered with a state entity or administrative body, thus being governed by administrative law.

1. Was the state’s transformation of a regulatory framework ‘capricious or unnecessary’ and amounted to a ‘sudden and unpredictable elimination of the essential characteristics of the existing framework’ violating legitimate expectations?

 

Another aspect that arbitral tribunals take into consideration when deciding if legitimate expectations have been violated is whether the state’s transformation of a regulatory framework was ‘capricious or unnecessary’ and amounted to a ‘sudden and unpredictable elimination of the essential characteristics of the existing framework.’ For example, to promote investment in renewable energy, Spain created a regulatory framework that included incentives to producers of photovoltaic (“PV”) energy. However, due to an economic crisis, Spain enacted legislative measures withdrawing these incentives.

As such, Charanne et al. brought a claim against Spain challenging the “Royal Decree (“RD”) 1565/2010 (dated November 19, 2010) and Royal Decree Law (“RDL”) 14/2010 (dated 23 December 2010), which affected their installations in the following manner: (a) RD 1565/2010 primarily removed all incentive payments for PV installations operating under a classification made in a previous regulation from the 26^th year of operation, where previously there had been no time limit established, and demanded additional technical requirements, namely that the generation plants install reaction mechanisms to protect the electricity system in case of a decrease in the voltage in the network; and (b) RDL 14/2010 was established to pass urgent measures in order to correct the rising tariff deficit by, inter alia, limiting the operational hours of the PV installations and requiring owners to pay tolls for the use of the transport and distribution networks.”[53]

Claimants argued that these measures amounted to an indirect expropriation and a breach of the FET standard, by violating their legitimate expectations. Claimants asserted that the regulations at the time of their investment and brochures where Spain promoted investment in PV projects were the basis for legitimate expectations that the regulatory framework would not change.

The tribunal, citing Electrabel v Hungary, CMS v. Argentina, and El Paso v. Argentina, dismissed the claim, stating that in the absence of a specific commitment an investor cannot have a legitimate expectation that existing rules will not be modified:

“The Tribunal agrees in this respect with the position adopted by the tribunal in Electrabel v. Hungary under the ECT, according to which “[w]hile the investor is promised protection against unfair changes, it is well established that the host State is entitled to maintain a reasonable degree of regulatory flexibility to respond to changing circumstances in the public interest. Consequently, the requirement of fairness must not be understood as the immutability of the legal framework, but as implying that subsequent changes should be made fairly, consistently and predictably, taking into account the circumstances of the investment.”[54]

 

It concluded that claimants could not have a legitimate expectation that the regulatory framework would remain frozen, which was also reinforced by the “jurisprudence of the highest Spanish judicial authorities [which] had clearly established, prior to the investment, the principle that national law allowed to make changes to the regulation.”[55]

Lastly, it adopted Spain’s position that “in order to exercise the right of legitimate expectations, the Claimants should have made a diligent analysis of the legal framework for the investment,”[56] as the law clearly left open the possibility that the system of compensation applicable to PV could be modified.[57]

Despite this, other arbitral tribunals held Spain liable for similar facts,[58] establishing that Spain radically altered the essential characteristics of the legislation upon which the investors relied in making long-term investments.[59] One tribunal noted that “that there is no need for specific commitment for a legitimate expectation to arise, especially when it comes to highly regulated industries.”[60] In Eiser, the tribunal referred to El Paso v. Argentina to establish that “the legitimate expectations of any investor […] [have] to include the real possibility of reasonable changes and amendments in the legal framework, made by the competent authorities within the limits of the powers conferred on them by the law.”[61] However, the Eiser tribunal considered that Spain drastically and abruptly revised its regime consequently depriving claimants of essentially all the value of its investment.[62]

1. Exorbitant clauses in civil law jurisdiction.

In civil law jurisdictions there is a well-defined concept in administrative law called exorbitant powers, which is reflected through clauses incorporated in government/administrative contracts; either the foreign investor has a commercial contract with an autonomous state entity, or it has an investment agreement with the state, in which some “clauses exorbitantes du droit commun” are inserted.[63] In essence this means that in the contractual relationship the public administration is superior to the individual or private party because the main object of the contract must always be focused on the general interest. Hence, although there is an agreement between the parties, it is based on a legal inequality[64] and this inequality allows the contract not to be governed by civil law, empowering the administration, among other things, to interpret, modify, or terminate the contract unilaterally.

Boquera Oliver has established that the inequality that exists between the public entity and the private party is not of a contractual nature but external, since it has its origin in the privileges granted to the public administration through exorbitant powers in the law, such as those of interpreting, varying, or terminating the contract.[65] The exorbitant clauses can be explicit, that is expressly included in the contract or implicit, insofar as they derive from the administrative nature of the contract, thus included by force of the law.[66]

Examples of such exorbitant clauses are the following:[67]

1. The privilege of unilateral and enforceable decisions, in front of contentious-administrative jurisdiction, allowing the administration to decide on the perfection of the contract and its validity, its interpretation, the performance of due services in terms of manner, time, and form, qualification of non-compliance situations, imposition of contractual sanctions, extension and termination of the contract, responsibility of the contractor, etc. The contractor is bound by these decisions subject to administrative appeals or challenges in the jurisdictional forum.
2. The ius variandi, potestas variandi, “act of the prince” or “factum principis” that allows the public entity to unilaterally modify the contract.
3. The powers to resolve or unilaterally terminate the contract.
4. The management and preventive or concomitant control of benefits of the contractor carried out by the Public Administration, with the possibility, even, to issue instructions on the form of execution or compliance.[68]

 

As noted above, these formidable prerogatives do not result properly from the contract but from the general legal position of the public administration, as the object of the contract is to serve public interests and collective needs, and these clauses exist to safeguard against any delay or other failure in the contractual execution.[69]

This short enumeration is subject to both doctrine and jurisprudence that is expanding and delimiting each of the powers. A more robust enumeration of powers would be the following: power of direction and control, sanctioning power, non-application of the “exceptio non adimpleti contractus,” unilateral modification of the contract (ius variandi), unilateral interpretation of the contract, unilateral termination of the contract, and extension of the contract (…).[70]

The ius variandi is the power or privilege enjoyed by the public administration to unilaterally modify, without the consent of the contracting party, any of the clauses, benefits, or obligations of the contract.[71] This power is granted solely and exclusively to the public administration. “The possibility of modifying the administrative contract is not a consequence of their mutability, but rather the mutability is a consequence of the administrative nature of the contract.”[72]

In García de Enterría’s opinion, this prerogative “is the most spectacular of the singularities of the administrative contract insofar as it points directly to one of the basic presuppositions of the contractual institute –pacta sunt servanda.”[73] It is necessary to clarify that the modification to the terms of the contract, in the cases in which it proceeds, brings as a consequence the obligation of the state to compensate the contracting party for the damage suffered as a way of maintaining the economic balance or equilibrium of the contract.

However, the power held by the administrative authority in these contractual relations cannot be exercised with absolute discretion. The administration must base its action on issues of public interest or economic contingencies that forces its intervention (like “opportunity, merit or convenience,” necessity, or emergency power as in non-precluded measures), and in any case it must respect the principle of financial balance of the contract.[74] That is why, when a unilateral termination occurs for reasons not attributable to the contractor, the administration must proceed to compensate him according to legally established criteria.[75]

To set an example, in the Dominican Republic, Law 340-06 on Purchases and Hiring of Goods, Services, Works, and Concessions (“Law 340-06”), grants the contracting public entity a set of exorbitant powers, within which is the power to revoke, modify or replace administrative contracts for reasons of opportunity, merit or convenience, but this power cannot be exercised without cause.[76] Article 31 reads as follows:

“The contracting entity will have the powers and obligations established in this law, without prejudice to those provided for in other legislation and in its regulations, in the specifications, or in the contractual documentation. It will especially have: 1) The right to administratively interpret contracts and resolve the doubts that its compliance offers, the Governing Body will issue the final opinion; 2) It  will be able to modify, decrease or increase up to twenty-five per percent (25%) of the amount of the original contract of the work, as long as the object is maintained, when circumstances arise that were unforeseeable at the time the contracting process began, and that it is the only way to fully satisfy the public interest; 3) In the contracting of goods, there will be no modification of the amounts provided for in the specifications; 4) In the case of contracting services, it can modify, reduce or increase up to fifty percent (50%), for reasons justified that the regulation establishes; 5) It may agree to the temporary suspension of the contract for technical or economic reasons not attributable to the contractor, or by circumstances of force majeure or fortuitous event, observing the conditions that are foreseen in the respective regulation; 6) It will carry out the administration of the contract in its technical aspects, administrative and financial, as well as the quality control of the goods, works or services. The fact that the entity does not supervise processes, does not exempt the contractor from fulfilling its duties or of the responsibility to which it is contractually bound; 7) The power of control, inspection and direction of the contracting; 8) The power to impose the sanctions provided for in this law to bidders and contractors, when they fail to comply with their obligations; 9) The prerogative to proceed to the direct execution of the object of the contract, when the supplier or contractor does not do so within reasonable terms and proceed to prosecute the defaulter before the corresponding jurisdiction; 10) The power to inspect the offices and books that are required to bring suppliers and contractors, prior authorization of the corresponding jurisdictional authority. Paragraph.- The revocation, modification or substitution of contracts by reasons of opportunity, merit or convenience, will not generate the right to compensation for loss of profit.”

 

Additionally, article 127 provides:

“Causes of modifications and suspension of the contract: The Contracting Entity may modify, decrease, or increase up to twenty-five percent (25%) of the amount of the original work contract and up to a fifty (50%) in the case of contracting services, as long as the object of the contract is maintained, when circumstances arise that were unforeseeable at the time the contract began, and that it is the only way to fully satisfy the public interest.”

 

Even though the law provides examples of the powers granted to the administration, it acts with unlimited discretion (subject to appeal). Even when these changes are subject to compensation, note that the compensation usually does not include loss of profit or lucrum cessans, which can – in an international framework – amount to an illegal expropriation.

When the administration exercises an exorbitant power (e.g., unilateral termination, suspension, or variation of the contract), it is important that it states the cause of the action and motivates its decision appropriately, not only based on the letter of the law or contract, but also on specific public order event that led it to make that decision. Additionally, it should refer to the appliable legal provisions dealing with the use of exorbitant powers, such as the above-cited articles of Law 340-06 or to the exorbitant clause in the contract which authorizes the use of such power. This allows the concessionaire to remedy the alleged situation and/or appeal the administrative act.

In any case, even though these powers are regulated by the state’s administrative legal framework and considered valid from a domestic law perspective, invoking them might breach international obligations, including legitimate expectations. Under well-established principles of international law, as codified in Article 3 of the ILC Articles on State Responsibility, the fact that a law has been declared constitutional by the local courts, even by the highest court of the land, is not dispositive of whether it was in conformity with international law.[77] These obligations, usually contained in BITs for the purpose of this analysis, can nevertheless be weakened considering the investor must be aware – through the due diligence performed – of the legal framework of the host country and consider the risks these powers may pose to its investment. After all, investments are not free of risks and due diligence processes must be carried out for said purpose.

One of the main problems regarding exorbitant clauses arises when these are invoked without a clear cause, frustrating foreign investment projects. In this scenario, legitimate expectations can be breached as there has been a lack of transparency and due process. Additionally, these ambiguous acts can be considered illegal within the domestic framework[78] and amount to an indirect expropriation in the international framework.

1. Can a state invoke exorbitant clauses/powers and breach legitimate expectations?

As previously discussed, an exorbitant clause or the state’s exorbitant powers are ways in which the state can exercise its right to regulate when invoked for public purpose reasons and must be a known risk to investors when contracting with the government. Despite this, compliance with domestic legal frameworks can anyways cause a breach of international obligations when investor’s rights are protected under BITs.

As a result, when entering into an administrative contract with a foreign government the investors must be aware that exorbitant clauses might be applied, which can modify the terms of execution of the contract or its interpretation. It can also be applied as to terminate the contract unilaterally. Like mentioned earlier, these do not have to be included in the contract to apply, as these powers are incorporated in legal provisions. The use of exorbitant powers is usually done through an administrative act such as a resolution or decree.

When invoking exorbitant powers, the administration must rely on a just cause and negotiate in good faith with the investor to avoid liability under a BIT for breach of legitimate expectations. For example, if the terms of the contract must be changed or the state interprets such terms differently, the state must warn the investor of what it intends do and try to get an agreement as of how those changes can be made without substantially affecting the investment. If the investor incurs losses as a result of such modifications, it must be compensated. If the changes result in a less favorable economic position for the investor, the economic equilibrium of the contract should be reestablished through negotiations with the contractor.

Alternatively, a way in which exorbitant actions of the state can give rise to a violation of international law is if it the state abuses of these faculties and does not negotiate in good faith, returns the economic equilibrium of the contract nor compensates the investor. These actions can in fact breach legitimate expectations because the standard provides for due process, transparency, and good faith and meaningful negotiations.

A solution for a state not to breach legitimate expectations whilst exercising its exorbitant powers could be similar to the approach the Court of Justice of the European Union has followed. As discussed by Thomas Wälde:

“In ECJ [European Court of Justice] jurisprudence, the public authority [cannot] lightly reverse course once it has created such investment-backed legitimate expectations, but has to take its prior conduct into account when planning to reverse its course with a detrimental effect on individuals/ investors. The principle has also been recognised in the jurisprudence of the European Court of Human Rights, here in particular to define the existence of legally protected “acquired rights”. European law does not prevent a public authority from reversing its course, but requires a balancing process where the strength of the individual’s interest is balanced against the need for flexibility in public policy (…) [Citing the ECJ] ‘An expectation is then legitimate and ought to be protected if “taking a new and different course will amount to an abuse of power” – “Once the legitimacy of the expectation is established, the courts will balance the requirements of fairness against any overriding interest relied upon for the change of policy.”[79]

 

It is worth noting that in addition to a violation of legitimate expectations, these same regulatory measures can amount to an expropriation.[80] However, a mere frustration of investor’s expectations, even when legitimate, which is not a result of an interference with the control or use or the investment, is not an indirect expropriation.[81]

An example of how administrative law/exorbitant powers affects foreign investments is seen in Perenco v. Republic of Ecuador. Here, the ICSID tribunal found that the decision by an Ecuadorean ministry to declare caducidad (expiry) constituted an expropriation of Perenco’s contractual rights.[82] Additionally, it found that the FET was violated.

In Perenco, claimants had entered into participation contracts with Ecuador which contained an exorbitant clause recognizing the Ministry of Energy and Mines’ power to declare caducidad (expiry) for the reasons and under the procedure established in Articles 74-76 of the Hydrocarbons Law (the presence of such a clause was, as the claimant’s Ecuadorian law expert acknowledged, an indication of the existence of an administrative contract).[83] Accordingly, both the Hydrocarbons Law and the participation contracts required the mutual consent of the parties to amend the contracts (Article 31-A of Hydrocarbons Law established that oil contracts may be amended, if that is in the interests of the State, provided that, among other things, the contractor’s consent is obtained).[84] Both contracts also contained an “economic stability clause” tied to potential modifications of the tax regime[85] and contained a comprehensive list of fiscal measures and was clearly designed to operate such that if a new tax was implemented, or an existing tax was changed, the right to seek a modification of the Contract would be triggered.[86] Note that such clauses were not considered stabilization clauses per se as they plainly did not purport to freeze Ecuadorian law as at the time of their signing and prohibit the State from modifying the tax regime.[87] Moreover, the Constitutional Court held that the “renunciation of exercise [of the State’s power to modify or reform administrative contracts] must be made expressly in the corresponding administrative contract.”[88]

As oil prices rose, Ecuador amended the Hydrocarbons Law through the enactment of Law 42 with the aim of reaching an understanding for the equitable distribution of the extraordinary earnings, considering that the equilibrium in the contractual obligations needed to be reestablished.[89] Law 42 recognized in favor of the Ecuadorian state a participation of at least 50% of the extraordinary income generated by the difference in price.[90] A constitutional action was filed against Law 42 and the court ruled in favor of the state:

“The Constitutional Tribunal examined the distinction between administrative and civil law contracts under Ecuadorian law, and then between administrative contracts for the provision of public services and otherwise. It concluded that unlike contracts between private parties, the Administration in an administrative contract ‘is placed in a privileged position with respect to what is being administered…[a]nd it is precisely this position of privilege that allows the government…to exercise the power to modify or revise the agreement’.”[91]

 

Additionally, Decree No. 662 was passed which obliged Perenco to deliver to Ecuador, an additional participation in revenue of at least 99% of its income from all sales of oil above the applicable reference price, in addition to its contractually agreed participation in volume.[92] President Correa set out his view as to the options available to oil companies operating in Ecuador under a Participation Contract (like Perenco), stating that “a company could either pay the State its share of the extraordinary revenue under Law 42, renegotiate its contract into a service agreement or terminate the contract, with the State compensating the company for the monetary expense it had incurred thus far pursuant to its participation contract.”[93] Perenco engaged in negotiations and reached a preliminary agreement with Petroecuador, however, negotiations came to halt when the president announced that “all existing production-sharing agreements were to be terminated within the year and new contracts would be employed, the form and particulars of which were unspecified.”[94] Perenco filed an ICSID claim, and the tribunal issued a provisional measure “in which [it] ordered Ecuador to refrain from asserting Law 42 payment demands during the pendency of the arbitration. Perenco proposed the option of transferring the disputed Law 42 payments into an escrow account, maintained by an independent escrow agent in a neutral location, pending the resolution of its dispute with Ecuador,” but this order was not accepted by Ecuador.[95] Because Perenco had a debt regarding Law 42, Petroecuador exercised enforcement measures which eventually led to Perenco suspending operations invoking the exceptio non adimpleti contractus and the state declaring the caducidad (expiry) of the contracts.[96]

The arbitral tribunal agreed with the Constitutional Court’s reasoning that the modification of the participation contracts per Law 42 was an exercise of “the [exorbitant] power to modify or revise the agreement”[97] (…) and as Dr. Pérez Loose pointed out, this was an “act of the prince” (factum principis), i.e., an intervention by branches of government other than the contractual counterparty which changed the conditions pursuant to which Perenco performed the Contracts.[98] Accordingly, Law 42 modified the tax regime governing the participation contracts with the result that Perenco was entitled to require Petroecuador to engage in negotiations to determine Law 42’s effect on the economy of the Contracts and to arrive at a consequent correction factor (in the event the parties agreed that the tax affected the economy of the Contract). Perenco requested Petroecuador to initiate such negotiations and there was no official response from the administration.[99] Ecuador alleged that there was a government transition so since new people came in, there was a lot of confusion and considered it prudent to wait.[100]

The tribunal was “presented with a situation where organs of the State other than Perenco’s contractual counterparty modified the Contracts’ operation through the exercise of sovereign power not open to ordinary contracting parties,” and concluded that seeking an adjustment of the economic rent derived from exhaustible natural resources was not per se arbitrary, unreasonable, or idiosyncratic.[101]

The tribunal noted that Petroecuador was not automatically in breach of contract when the Congress enacted Law 42 or when the Executive fixed the 50% rate.[102]

“Rather, Perenco was faced with a measure taken by the Congress which could give rise to a breach of contract if Petroecuador refused to negotiate or if, its having agreed to negotiate, it refused to accept persuasive evidence tendered by Perenco that Law 42 had adversely affected the Contracts’ economy and/or refused to agree a correction factor. Had the contractual route been pressed and had Petroecuador refused to engage in negotiations as to the claimed disturbance of the Contract’s economy or to agree on a correction factor, the situation before the Tribunal would have been different.[103] (…)The situation in relation to the application of Decree 662 to Perenco is entirely different because of the magnitude of the “extraordinary revenues” claimed by the State and the demands made around the time of the decree’s promulgation and thereafter that Perenco migrate to a service contract.[104] In this respect, the Tribunal found Dr. Pérez Loose’s analysis of the constraints that Ecuadorian law places on the exercise of the jus variandi power to modify an administrative contract to be of assistance.[105]

 

Dr. Pérez Loose asserted that the power could only be exercised in certain ways and subject to certain limits.[106] The principal such limit, in his view, was that the unilateral power to modify administrative contracts existed only in relation to their “non-economic aspects” (…) the power must therefore be considered to exist only in relation to the performance of the administrative contract (i.e., the specification of the contractor’s duties) and could not apply to the economic bargain struck by the parties (…).[107] Dr. Pérez Loose further asserted that the exercise of the power was subject to four conditions which he extracted from the writings of civil law theorists such as Raúl Granillo Campo, Hector Escola, and Miguel Marienhoff:

“(i) the changes must have a reasonable justification (“in other words, they must not respond to a ‘deviation of power’”); (ii) the changes cannot distort the contract’s very objective; (iii) the contracting entity must respect constitutional guarantees that could be affected by its decision to amend the contract; and (iv) if the exercise of jus variandi negatively affects the economic rights of the contractor, the entity must compensate the contractor, in such a way that the stipulated price does not change. Only within these limits, in his view, could the administration lawfully exercise the jus variandi power.”[108]

 

Based on the above, the Tribunal held that Law 42 at 99% constituted a breach of contract:

“Having regard to limb (i), in the Tribunal’s view, there was no possible reasonable justification for the State to claim 99% of “extraordinary revenues” above the reference price. While the nature of a “deviation of power” is not precisely defined, the writings of the civil law theorists cited by Dr. Pérez Loose indicate that it concerns the misuse of power. In the Tribunal’s view, Decree 662 constituted an act of coercion when viewed within the context of the parties’ contractual relations and therefore it can be regarded to be a deviation of power. (…) In the Tribunal’s view, the application of Decree 662 and the statements of senior officials in relation thereto signaled a new phase in the State’s relationship with Perenco (and the other oil companies in similar circumstances). This was no longer a question of the State seeking an adjustment of an otherwise acceptable contractual relationship which, in its view, had been disrupted by price increases of an unanticipated magnitude. Rather, Law 42 at 99% unilaterally converted the Participation Contracts into de facto service contracts while the State developed a new model of such contracts which it demanded the contractor to sign. (In the 53rd National Address, given on 26 January 2008, President Correa stated that the oil companies would have three choices: comply with the payment of 99% of the “extraordinary income”, renegotiate their participation contracts by migrating to a service contract, or leave the country.) Limb (ii) was also violated. In the Tribunal’s view, as of 4 October 2007, Perenco’s Contracts were participation contracts in name only; Decree 662 completely modified the Contracts’ objective as it was understood under Ecuadorian law. It follows that Decree 662 cannot be justified as a lawful exercise of the jus variandi power under Ecuadorian law. Thus, in the Tribunal’s view, in moving beyond 50% up to 99% the Respondent breached the Participation Contracts. Whatever might have transpired in clause 11 negotiations on the impact of Law 42 at 50% on the Contracts’ economy (had they occurred), moving from 50% to 99%, in the Tribunal’s view, was no longer an attempt to claim an equitable distribution of the windfall revenues generated by an unexpected and significant increase in oil prices, and could not be justified under the applicable Ecuadorian legal standards for the exercise of the jus variandi power.” [109]

 

As such, the tribunal found that Ecuador breached the FET standard:

“It agrees with Perenco’s argument that the application of the law at 99% rendered a participation contract essentially the same as a service contract. Moreover, Decree 662 marked the beginning of a series of other measures in breach of Article 4 taken in relation to the Participation Contracts, namely: (i) demanding that the contractors agree to surrender their rights under their participation contracts and migrate to what for a considerable period of time was an unspecified model, such that the contractors were unable to discern precisely what they were being asked to move to; (ii) escalating negotiating demands, in particular in April 2008 when the President unexpectedly suspended the negotiations and rejected what had recently been achieved in a Partial Agreement in respect of one of the blocks; (iii) making coercive and threatening statements, including threats of expulsion from Ecuador; and (iv) taking steps to enforce Law 42 against Perenco (and Burlington) for non-payment of dues claimed to be owing, a portion of which has been held to be in breach of Article 4, and when no payments were made, forcibly seizing and selling the oil produced in Blocks 7 and 21 in order to realise the claimed Law 42 debt. This set the stage for the Consortium’s suspension of operations and ultimately the declaration of caducidad which formally terminated the Consortium’s rights in the two blocks.”[110]

 

In Perenco we can see how exorbitant powers came into conflict with rights protected under the BIT when such actions were a “misuse of power.” Regarding Perenco’s legitimate expectations, the tribunal considered that since there was not a stabilization clause in the contracts, Perenco could not have reasonably expected that the contracts would be completely immunized from future legislative or other measures.[111] However, it did consider that moving beyond 50% to 99% with the application of Decree 662 amounted to a breach of the FET and that all the measures, taken collectively, also constituted breaches of the FET.[112]

Furthermore, in Perenco, claimant cited Siemens v. Argentina and Eureko v. Poland in support, contending that “when a State exercises its public authority unilaterally to amend the key terms of a contract with an investor, with the effect of essentially depriving the investor of the contract’s benefits, such a repudiation of acquired contract rights constitutes a measure tantamount to expropriation.”[113]

In Siemens v. Argentina, the tribunal stated that “[t]he fact that the Contract is subject to Argentine law does not mean that it cannot be expropriated from the perspective of public international law and under the Treaty. The two issues are unrelated.”[114] As a consequence, the tribunal found that a decree issued by the Argentine government based on a 2000 Emergency Law and in exercise of its public authority, rather than on the contract, was an expropriation.[115] Additionally, the arbitrators were not able to find evidence of public purpose in measures taken by the state prior to the issuance of the decree, but rather that “it was an exercise of public authority to reduce the costs to Argentina of the Contract recently awarded through public competitive bidding, and as part of a change of policy by a new Administration eager to distance itself from its predecessor.”[116]

Moreover, the tribunal in AES v. Hungary explained that:

“It cannot be considered a reasonable measure for a state to use its governmental powers to force a private party to change or give up its contractual rights. If the state has the conviction that its contractual obligations to its investors should no longer be observed (even if it is a commercial contract, which is the case), the state would have to end such contracts and assume the contractual consequences of such early termination. This does not mean that the state cannot exercise it governmental powers, including its legislative function, with the consequence that private interests – such as the investor’s contractual rights – are affected. But that effect would have to be a consequence of a measure based on public policy that was not aimed only at those contractual rights. Were it to be otherwise, a state could justify the breach of commercial commitments by relying on arguments that such breach was occasioned by an act of the state performed in its public character.”[117]

 

To contrast this, the findings of the Saluka tribunal are illustrative. In the opinion of the tribunal:

“[T]he principle that a State does not commit an expropriation and is thus not liable to pay compensation to a dispossessed alien investor when it adopts general regulations that are “commonly accepted as within the police power of States” forms part of customary international law today. There is ample case law in support of this proposition. As the tribunal in Methanex Corp. v. USA said recently in its final award, “[i]t is a principle of customary international law that, where economic injury results from a bona fide regulation within the police powers] of a State, compensation is not required”. That being said, international law has yet to identify in a comprehensive and definitive fashion precisely what regulations are considered “permissible” and “commonly accepted” as falling within the police or regulatory power of States] and, thus, noncompensable. In other words, it has yet to draw a bright and easily distinguishable line between non-compensable regulations on the one hand and, on the other, measures that have the effect of depriving foreign investors of their investment and are thus unlawful and compensable in international law.”[118]

 

Neither sections of these holdings previously cited touch upon FET, legitimate expectations nor exorbitant powers. Nonetheless, an analogy could be made to argue that if the use of an exorbitant power (i) was not based on a public policy issue, (ii) deprives the investor of the contractual benefits and the economic equilibrium of the contract is not reestablished, (iii) terminates the contract unilaterally without a just compensation, (iv) the administration exercises the ius variandi and does not engage in good faith negotiations, or (v) suspends a contract without a public purpose and without a renewal date, claimants could argue that their legitimate expectations were violated.

Considering Perenco and the reasoning of the Court of Justice of the European Union (above), when the state exercises its right to regulate through exorbitant powers it must consider investor’s legitimate expectations. If such powers are exercised in a fair manner, it can be hard to assert that legitimate expectations were violated as the law recognizes in favor of the administration such rights and the public interest must prevail over specific commitments. Still, when such exercise is completely arbitrary or amounts to an abuse of process, the legitimate expectations can be violated, thus breaching the FET standard.

Despite this, the mere existence of these exorbitant powers weakens the legitimate expectations of investors unless stabilization clauses are included in administrative contracts or other representations are made by the state. As such, and as discussed in Perenco, the tribunal must be cautious as to how reasonable and legitimate the expectations were when hearing a claim against a sovereign. However, this does not exclude the possibility of breaching other standards, such as expropriation.

Lastly, to create a more investment-friendly environment, civil law countries should consider waiving exorbitant clauses when entering into agreements with foreign investors. Under this scenario, if the powers are waived but there is nevertheless a public purpose reason of why the state should interfere in the operation of the investment, the state could use its police powers to expropriate under the relevant BIT, always paying a fair, prompt, and adequate compensation (or the standard that applies in the treaty’s terms).

[1] ANDREW NEWCOMBE & LLUÍS PARADELL, Minimum Standards of Treatment, Law and Practice of Investment Treaties: Standards of Treatment, Kluwer Law International (2009), at 233 and 257.

[2] PSEG Global et al. v. Republic of Turkey, ICSID Case No. ARB/02/5, Award, 19 January 2007, at ¶ 238. See also Mobil Exploration et al. v. Argentina, ICSID Case No. ARB/04/16, Decision on Jurisdiction and Liability, 10 April 2013, at ¶ 812: “The Tribunal holds that FET is designed to guarantee that, in situations where the other more precise standards are not violated, but where there is an unreasonable interference bringing about an unjust result regarding an investor’s expectations, that investor can claim a violation of the FET and obtain reparation therefore.”

[3] MICHELE POTESTÀ, Legitimate expectations in investment treaty law: Understanding the roots and the limits of a controversial concept, ICSID Review – Foreign Investment Law Journal (Volume 28, Issue 1, Spring 2013), at 15. Available at https://lk-k.com/wp-content/uploads/potesta-legitimate-expectations-inv.-treaty-law-2013.pdf. Last accessed 10 May 2022.

[4] In Mobil Exploration et al. v. Argentine Republic, Op. Cit., the tribunal found that “[t]here is not always a clear distinction between indirect expropriation and violation of legitimate expectations, between the fair and equitable treatment (“FET”) and the full protection and security (“FPS”) standards” at ¶ 811. See also El Paso v. Argentina, ICSID Case No. ARB/03/15, Award, 31 October 2011, at ¶ 227: “There is not always a clear distinction between indirect expropriation and violation of legitimate expectations, as can be seen from an excerpt of the Claimant’s Memorial stating that “measures that are inconsistent with an investor’s legitimate expectations constitute an expropriation.”

[5] Parkerings v. Lithuania, ICSID Case No. ARB/05/8 Award, 11 September 2007, at ¶ 333.

[6] Examples of exorbitant powers are found in the following articles Colombia’s Law 80 of 1993, which issues the General Contracting Statute of the Public Administration: Art. 15: “Unilateral interpretation. If during the execution of the contract discrepancies arise between the parties regarding the interpretation of some of its stipulations that may lead to a serious affectation of the public service that is intended to be satisfied with the contracted object, the state entity, if no agreement is reached, will interpret in an administrative act duly reasoned, the stipulations or clauses object of the difference”; Art. 16: “Unilateral modification. If during the execution of the contract and to avoid a serious affectation of the public service that must be satisfied with it, it is necessary to introduce variations in the contract and previously the parties do not reach the respective agreement, the entity in a duly motivated administrative act, will modify it by deleting or adding works, works, supplies, or services.”

[7] STEPHAN W. SCHILL, The Multilateralization of International Investment Law, Cambridge University Press, (2009) at 79.

[8] Id., at 80.

[9] GUSTAVO PRIETO, El trato justo y equitativo en el derecho internacional de las inversiones, Universidad Andina Simón Bolívar, (magister series vol. 39, Ecuador, 2013), at 31.

[10]  STEPHAN W. SCHILL, The Multilateralization of International Investment Law, Op. Cit., at 80.

[11] Article 1105: Minimum Standard of Treatment 1. Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.

[12] TOMÁŠ MACH, Legitimate Expectations as Part of the FET Standard: An Overview of a Doctrine Shaped by Arbitral Awards in Investor-State Claims, Elite Law Journal (2018). Available at https://eltelawjournal.hu/legitimate-expectations-as-part-of-the-fet-standard-an-overview-of-a-doctrine-shaped-by-arbitral-awards-in-investor-state-claims/. Last accessed 27 April 2022.

[13] Duke Energy et al. v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award, 18 August 2008, at ¶ 337.

[14] Ibid.

[15] TOMÁŠ MACH, Legitimate Expectations as Part of the FET Standard: An Overview of a Doctrine Shaped by Arbitral Awards in Investor-State Claims, Op. Cit.

[16] BORZU SABAHI, NOAH RUBINS & DON WALLACE JR., ‘XIX. ‘Fair and Equitable Treatment’, ‘Full Protection and Security’, and ‘War Clauses”, Investor- State Arbitration (Second Edition), Oxford University Press (2019), at.  642.

[17] Id., at 643.

[18] Waste Management, Inc. v United Mexican States, ICSID Case No. ARB(AF)/00/3, Award, 30 April 2004, at ¶ 98.

[19] A. REDFERN ET AL., International Arbitration, Oxford University Press (6th ed., 2016), at 8.105.

[20] Saluka Investments B.V. v. The Czech Republic, UNCITRAL, partial award, 17 May 2006, at ¶ 304.

[21] Id., at ¶ 305.

[22] Enron Corporation et al. v Argentine Republic, ICSID Case No. ARB/01/3, Award, 22 May 2007, at ¶260-262.

[23] F. DUPUY ET AL., What to Expect from Legitimate Expectations: A Critical Appraisal and Look into the Future of the “Legitimate Expectations” Doctrine in International Investment Law, (2015), Kluwer Law International, at 289.

[24] Técnicas Medioambientales Tecmed S.A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/02, Award, 29 May 2003, at ¶ 154.

[25]Saluka Investments B.V. v. The Czech Republic, partial award, Op. Cit., at ¶ 302.

[26] LG&E Energy Corp, LG&E Capital Corp., LG&E International Inc. v. Argentina, Op. Cit., at ¶ 130.

[27] See BIN CHENG, who considers that one of the applications of the principle of good faith is crystallized in the doctrine of “estoppel”, the common law term for “legitimate expectations” (venire contra factum proprium). In International Thunderbird Gaming Corporation v. The United Mexican States, Separate Opinion (of Thomas Wälde) 1 December 2005, at ¶ 25.

[28] Ibid.

[29] A. Redfern et al., International Arbitration, Op. Cit., at 447.

[30] Saluka Investments B.V. v. The Czech Republic, partial award, Op. Cit., at ¶ 307.

[31] Id., at ¶ 308.

[32] Id., at ¶ 303.

[33] Id., at ¶ 304.

[34] ABDULKADIR GÜLÇÜR, The Necessity, Public Interest, and Proportionality in International Investment Law: A Comparative Analysis, University of Baltimore Journal of International Law (volume 6, issue 2, 2019) at 225.

[35] Waste Management, Inc. v. The United Mexican States, ICSID Case No. ARB(AF)/00/3, Award, 30 April 2004, at ¶ 98.

[36] Parkerings v. Lithuania, ICSID Case No. ARB/05/8 Award, 11 September 2007, at ¶ 331.

[37] For example, Thomas Wälde in International Thunderbird Gaming Corporation v. The United Mexican States, Separate Opinion, Op. Cit., stated the following: “It is not sufficient that Thunderbird had an “expectation”, and that this expectation contributed in a significant way to its readiness to commit risk capital and effort, but the expectation must also have been “legitimate”, i.e. it must have been created by government officials in an official way (i.e. attributable to the government of Mexico), they must have been competent (or at least appeared, credibly, to be competent) for the trust-inspiring action. The procedure for issuing the assurance (“comfort”) letter must have been legitimate and it must have been “reasonable” for Thunderbird to rely on that letter” at ¶ 21.

 

[38] DR. YULIA LEVASHOVA, Stability in FET, Jus Mundi, edited by Charis Tan (17 March 2022). Last accessed 10 May 2022.

[39] Ibid.

[40] LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc. v. The Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, at ¶ 134.

[41] Id., at ¶ 135.

[42] Id., at ¶ 137.

[43] Ibid.

[44] Id., at ¶ 139.

[45] Note that despite this, Argentina was exempted of responsibility from 1 December 2001 to 26 April 2006 as the tribunal accepted the defense of state of necessity. However, the tribunal also found that “the Respondent should have restored the tariff regime on 27 April 2003, or should have compensated the Claimants, which did not occur. As a result, Argentina is liable as from that date to Claimants for damages.”

[46] Parkerings v. Lithuania, Op. Cit., at ¶ 82.

[47] Id., at ¶ 337.

[48] Id., at ¶ 336.

[49] Id., at ¶ 333.

[50] Id., at ¶ 335.

[51] Charanne B.V. and Construction Investments S.A.R.L. v. The Kingdom of Spain, SCC Case No. 062/2012, Award, 21 January 2016, at ¶ 505: “In this regard, the Arbitral Tribunal shares the Respondent’s position according to which, ‘in order to exercise the right of legitimate expectations, the Claimants should have made a diligent analysis of the legal framework for the investment’.”

[52] Frontier Petroleum Services Ltd. v. Czech Republic, UNCITRAL Award, 12 November 2010, at ¶ 287. Unofficial translation: “a foreign investor has to make its business decisions and shape its expectations on the basis of the law and the factual situation prevailing in the country as it stands at the time of the investment.”

[53] INTERNATIONAL ARBITRATION CASE LAW, “Charanne B.V. and Construction Investments S.A.R.L. v. The Kingdom of Spain, SCC Case No. 062/2012, Award, 21 January 2016”. Case report by T. PILGRIM, School of International Arbitration, Queen Mary, University of London. Available at https://www.transnational-dispute-management.com/downloads/15994-case_report_charanne-v-spain-award.pdf. Last accessed 10 April 2022.

[54] Charanne B.V. and Construction Investments S.A.R.L. v. The Kingdom of Spain, Op. Cit., at ¶ 499-500.

[55] Id., at ¶ 504.

[56] Id., ¶ 504.

[57] Id., ¶ 505.

[58] See Cube Infrastructure Fund SICAV and others v. Kingdom of Spain, ICSID Case No. ARB/15/20, Decision on Jurisdiction, Liability and Partial Decision on Quantum, 19 February 2019. See also Eiser Infrastructure Limited et al. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Award, 4 May 2017, at ¶ 387: “Article 10(1) of the ECT entitled them to expect that Spain would not drastically and abruptly revise the regime, on which their investment depended, in a way that destroyed its value.”

[59] Eiser Infrastructure Limited et al. v. Kingdom of Spain, Op. Cit., at ¶ 382.

[60] MARIA BISILIA TORAO, In yet another renewable energy case, Spain held liable for FET breach for frustrating French and Luxembourger investors’ legitimate expectations under the ECT, Investment Treaty News, International Institute for Sustainable Development (17 December 2019). Available at https://www.iisd.org/itn/en/2019/12/17/renewable-energy-case-spain-held-liable-fet-breach-frustrating-french-luxembourger-investors-legitimate-expectations-under-ect-cube-infrastructure-fund-sicav-v-spain-icsid-case-no-arb-15-20/. Last accessed 10 May 2022.

[61] Eiser Infrastructure Limited et al. v. Kingdom of Spain, Op. Cit., at ¶ 382.

[62] Id., at ¶ 387 and 418.

[63] El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Decision on Jurisdiction, 27 April 2006, at 77.

[64] J. RIVERO, Derecho Administrativo, Institute of Public Law, Faculty of Juridical and Political Sciences of Universidad Central de Venezuela (9 ed., Caracas, 1984), at 130.

[65] JOSÉ MA. BOQUERA OLIVER, Los contratos de la administración desde 1950 a hoy, Revista de Administración Pública, No. 150, (September-December 1999), at 18-19. Cited in ERNESTO JINESTA, Concepto de Contrato Administrativo, (Costa Rica) at 4.

[66] ERNESTO JINESTA, Concepto de Contrato Administrativo, (Costa Rica), at 11.

[67]  EDUARDO GARCÍA DE ENTERRÍA, La figura del contrato administrativo, Revista Española de Administración Pública, No. 41 (May-August 1963), at 122-128. In ERNESTO JINESTA, Concepto de Contrato Administrativo, Op. Cit., at 11.

[68] MIGUEL V. MARIENHOFF, Tratado de Derecho Administrativo (volume III A, Buenos Aires, Abeledo-Perrot, 1970), at 75-76. In ERNESTO JINESTA, Concepto de Contrato Administrativo, Op. Cit., at 11.

[69] EDUARDO GARCÍA DE ENTERRÍA, La figura del contrato administrativo, Op. Cit., at 123.

[70] JESÚS FRANCOS RODRÍGUEZ, El Ius Variandi como potestad de la Administración en los contratos administrativos, Medina Garrigó Abogados (6 January 2018). Available at https://www.mondaq.com/contracts-and-commercial-law/623250/el-ius-variandi-como-potestad-de-la-administracin-en-los-contratos-administrativos. Last accessed 27 April 2022.

[71] Ibid.

[72] PATRICIA RAQUEL MARTÍNEZ, Prerrogativa de modificación unilateral del contrato administrativo, edited by ISMAEL FARRANDO, director of administrative contracts, (Buenos Aires, 2002), at 473. In JESÚS FRANCOS RODRÍGUEZ, El Ius Variandi como potestad de la Administración en los contratos administrativos, Op. Cit.

[73] EDUARDO GARCÍA DE ENTERRÍA & TOMÁS RAMÓN FERNÁNDEZ, Curso de Derecho Administrativo, (volume I), at 507.

[74] M. RODRÍGUEZ, Responsabilidad de la Administración en material contractual: Errada interpretación de las prerrogativas exorbitantes de derecho común, Gaceta Judicial (1 January 2009). Available at vlex.com. Last accessed 1 April 2022.

[75] J. RODRÍGUEZ & B. PUJALS, Odebretch frente a las Contrataciones Públicas, Gaceta Judicial (1 March 2017). Available at vlex.com. Last accessed 1 April 2022.

[76] Article 31 of Law 340-06.

[77] Perenco Ecuador Ltd v. Republic of Ecuador, at ¶ 583, citing Robert Azinian, Kenneth Davitian & Ellen Baca v. United Mexican States, ICSID Case No. ARB(AF)/97/2, Award, 1 November 1999, at ¶ 98.

[78] The Ecuadorian National Court of Justice declared an administrative act null because it lacked motivation. See Resolution 24-09 handed down by the Administrative Chamber of the Ecuadorian National Court of Justice (18 February 2009). Available at Vlex.com. Also, the administrative act is deemed null when it lacks an essential element (e.g., invocation of a just cause or motivation) and when its inconsistent with the public interest. See JUANA MORCILLO MORENO, La Invalidez de los Actos Administrativos en el Procedimiento Administrativo en el Derecho Español, Dialnet, at 155.

[79] International Thunderbird Gaming Corporation v. The United Mexican States, Op. Cit., at ¶ 27.

[80] See Metalclad v. United Mexican States, ICSID Case No. ARB (AF)/97/1, Award, 30 August 2000, at ¶ 108: The present case resembles in a number of pertinent respects that of Biloune, et al. v. Ghana Investment Centre, et al., 95 I.L.R.183, 207-10 (1993) (Judge Schwebel, President; Wallace and Leigh, Arbitrators). In that case, a private investor was renovating and expanding a resort restaurant in Ghana. As with Metalclad, the investor, basing itself on the representations of a government affiliated entity, began construction before applying for a building permit. As with Metalclad, a stop work order was issued after a substantial amount of work had been completed. The order was based on the absence of a building permit. An application was submitted, but although it was not expressly denied, a permit was never issued. The Tribunal found that an indirect expropriation had taken place because the totality of the circumstances had the effect of causing the irreparable cessation of work on the project. The Tribunal paid particular regard to the investor’s justified reliance on the government’s representations regarding the permit, the fact that government authorities knew of the construction for more than one year before issuing the stop work order, the fact that permits had not been required for other projects and the fact that no procedure was in place for dealing with building permit applications.

[81] Mobil v. Argentina, Op. Cit., at ¶ 828.

[82] Perenco Ecuador Ltd v. Republic of Ecuador, ICSID Case No ARB/08/6, Decision on Remaining Issues of Jurisdiction and on Liability, 12 September 2014, cited in DR MARKUS BURGSTALLER, Expropriation in International Investment Law, Practical Law UK Practice Note 5-384-7442, Hogan Lovells. Available at Thomson Reuters.

[83] Perenco Ecuador Ltd v. Republic of Ecuador, Op. Cit., at ¶ 357.

[84] Id., at ¶ 359.

[85] Id., at ¶ 360

[86] Id., at ¶ 361.

[87] Id., at ¶ 366.

[88] Id., at ¶ 367.

[89] Id., at ¶ 88, 90.

[90] Id., at ¶ 94.

[91] Id., at ¶ 102.

[92] Id., at ¶ 110.

[93] Id., at ¶ 117.

[94] Id., at ¶ 123.

[95] Id., at ¶ 128.

[96] Id., at ¶ 214, 215.

[97] Id., at ¶ 372.

[98] Id., at ¶ 373.

[99] Id., at ¶ 379, 380.

[100] Id., at ¶ 382.

[101] Id., at ¶ 591.

[102] Id., at ¶ 592.

[103] Ibid.

[104] Id., at ¶ 402.

[105] Ibid.

[106] Ibid.

[107] Id., at ¶ 403.

[108] Id., at ¶ 404.

[109] Id., at ¶ 407-411.

[110] Id., at ¶ 606.

[111] Id., at ¶ 569.

[112] Id., at ¶ 607.

Perenco Ecuador Ltd v. Republic of Ecuador, Op. Cit., at ¶ 636.

[114] Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, award, 17 January 2007, at ¶ 267.

[115] Id., at ¶ 271.

[116] Id., at ¶ 273.

[117] AES Summit Generation Limited and AES-Tisza Erömü Kft v. The Republic of Hungary, ICSID Case No. ARB/07/22, award, 23 September 2010, at ¶ 10.3.12-10.3.13.

[118]Saluka Investments B.V. v. The Czech Republic, Op. Cit., at ¶ 262-264.