The notion of legitimate expectations has been essential to the fair and equitable treatment standard (FET), as recognised by various tribunals since the 2003 Tecmed award. The Tecmed tribunal has come up with a definition which has come to be a classic definition of the FET:

“The Arbitral Tribunal considers that this provision of the Agreement [embodying the FET standard], 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.”

In the same vein, Saluka tribunal held that: “The standard of “fair and equitable treatment” is therefore closely tied to the notion of legitimate expectations which is the dominant element of that standard….”. This principled was echoed in the recent Orazul International España Holdings S.L. v. Argentine Republic case, where the tribunal also held that “it is in line with the object and purpose of the FET standard to give protection to an investor’s legitimate expectations.”

Although protection of legitimate expectations has been widely accepted as a central element of FET standard, it is still a hotly debated topic. The focal point of the legitimate expectations doctrine lies in the controversy surrounding its nature. This controversy stems from the fact that although numerous arbitration awards articulate the criteria for determining what amounts to a notion of legitimate expectations, there is no uniform test as to when an investor’s expectation is legitimate. In the absence of such test, two principal approaches have surfaced in assessing the legitimacy of investor’s expectations have emerged. Under the first approach, legitimate expectations stem from general statements in laws and regulations, while the second requires the investor to show particular assurances or representations by the host State specifically given to the investor and relied upon by the latter in making the investments. Hence, applying both lines of thinking leads to inconsistent rulings on the matter and fragmentation of international law. As an example of this inconsistency, one can mention the Spanish renewable cases. The registration of two plants in the same public registry, according to Spanish internal regulation, was decided by one tribunal to create legitimate expectations (OperaFund v. Spain), while another tribunal held an entirely different position (RWE Innogy v. Spain). Nevertheless, the following trends of the application of legitimate expectations in investor-state dispute settlement maybe be observed in the recent years.

• Firstly, tribunals universally recognize legitimate expectations as a fundamental aspect of the FET standard. It is also essential to acknowledge the tribunals’ discretion in allowing governments a margin of appreciation to regulate in the public interest. This discretion can either absolve the respondent State of any liability for violating investors’ legitimate expectations or significantly reduce the magnitude of such liability.
• Secondly, when determining legitimate expectations, tribunals consider the overall circumstances of the dispute at hand, taking into account the socio-economic conditions and developmental stage of the host State.
• Lastly, the evaluation of whether the expectation was reasonable and, therefore, legitimate in those specific circumstances, heavily relies on the investor’s due diligence conducted before the investment.

Thus, developing the doctrine of legitimate expectations remains pivotal in investor-state arbitration.

by Anna Shvetsova