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Can host countries have legitimate expectations?
by Karl P. Sauvant and Güneş Ünüvar *
The concept of “legitimate expectations” was introduced into the legal relations between foreign investors and host country governments to denote that the latter cannot act contrary to certain expectations they have set in the past. Absent a clear-cut framework regarding which expectations qualify as “legitimate”, dispute-settlement practice indicates that such expectations can be relevant under fair-and-equitable treatment and indirect expropriation articles in international investment agreements (IIAs). They can be based on:
Governments’ written commitments to investors, e.g., contractual commitmentsbeyond mere contractual expectations;
- Governments’ representations vis-à-vis specific investments, e.g., direct and public endorsements; or
- Host countries’ unilateral representations, e.g., favorable regulatory frameworksas they existed at the time of an investment.1Foreign investors can claim breach when host countries fail to fulfill expectations based on any of these sources. Since the early 2000s, “legitimate expectations” have often beeninvoked in investor-state arbitrations.By analogy, the question arises whether host countries too can have legitimate expectations concerning the behavior of foreign investors within their economies, absent any specific investor obligations in IIAs. Such expectations could be inferred from treaty preambles recognizing the objectives of IIA parties’ economic or “sustainable development”, as well as articles providing that investors “shall strive to carry out the highest level possible of contributions to the sustainable development of the host Stateand the local community”2 or corporate social responsibility (CSR) articles reaffirming“the importance of each Party encouraging enterprises … to voluntarily incorporate intotheir internal policies those internationally recognised standards, guidelines andprinciples of [CSR]”.3 Expectations could be based on:
- Investors’ written commitments to host country governments, e.g., contractualinfrastructure commitments concerning the quality of services such as water and sanitation;4
- Investors’ representations, e.g., statements by corporate executives aboutcontributions their investments will make to a host country; or
Investors’ unilateral representations, e.g., as evidenced by CSR policies or by support for such instruments as the United Nations (UN) Guiding Principles on Business and Human Rights, the UN Global Compact or the OECD Guidelines for Multinational Enterprises.5
Host countries could claim breach when investors fail to fulfill expectations based on any of these sources.
In any event, assessing the legitimacy of expectations involves an inherent, context-bound balancing of investors’ and states’ expectations. Arguably, in fact, even theassessment of investor’ legitimate expectations under the current approach should require that a state’s legitimate expectations are taken into account.
Countries are beginning to refer to their own expectations. In Sempra v. Argentina, for example, Argentina argued that it “had many expectations in respect of the investment that were not met or otherwise frustrated … [such as] that the investor would bear anylosses resulting from its activity, work diligently and in good faith, not claim extraordinary earnings exceeding by far fair and reasonable tariffs, resort to local courts for dispute settlement, dutifully observe contract commitments, and respect the regulatoryframework” in response to the investor’s claim that its expectations went unfulfilled.6While the expectations of Argentina did not play a significant role in the outcome of thisparticular case, Argentina’s reference to such expectations per se illustrates their inherent relevance to disputes between investors and host countries.
However, since governments currently cannot initiate IIA-based arbitral proceedings against foreign investors, their reliance on legitimate expectations is limited tocounterclaims brought in response to investors’ claims.7
Tentative steps are underway toward reducing this asymmetry and laying the ground forrecognizing host countries’ legitimate expectations. For example, more than 75% of IIAs concluded between 2008 and 2013 reference “sustainable development” or “responsible business conduct”.8 Future IIAs could explicitly stipulate that host countries’ legitimateexpectations are protected (or, going further, recognize investor obligations) and establishan independent, substantive right to claim for breach of host countries’ legitimateexpectations, provided that treaty-based or domestic regulatory prerequisites regarding consent are satisfied. This would help to ensure that IIAs further the interests of all parties and, in so doing, contribute to a more balanced international investment regime—thereby strengthening the regime’s legitimacy.
* Karl P. Sauvant (karlsauvant@gmail.com) is Resident Senior Fellow, Columbia Centre on Sustainable Investment, Columbia University; Güneş Ünüvar (gunesunuvar@gmail.com) is a Ph.D. Fellow at the Centre of Excellence for International Courts (iCourts), Faculty of Law, University of Copenhagen, and a Visiting Scholar at Columbia Law School. This research has been partially funded by the Danish National Research Foundation Grant no. DNRF105. This Perspective focuses on treaty-based disputes only. The authors are grateful to José Alvarez, George Bermann, Gabriel Bottini, Patrick Robinson, and Lou Wells for their comments, and to Stephan Schill, David Schneiderman and Stephen Schwebel for their peer reviews. The views expressed by the authors of this Perspective do not necessarily reflect the opinions of Columbia University or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
1 Christoph Schreuer and Ursula Kriebaum, “At what time must legitimate expectations exist?,” in JacquesWerner and Arif Hyder Ali, eds., Law Beyond Conventional Thought (London: Cameron May, 2009), pp. 265-276.
2 Brazil–Mozambique CIFA, art. 10, available at http://www.iisd.org/sites/default/files/publications/comparison-cooperation-investment-facilitation- agreements.pdf.
3 Trans-Pacific Partnership (2016), art. 9.17.
4 See, e.g., Biwater Gauff (Tanzania) Ltd. v. Tanzania, ICSID Case No. ARB/05/22, Award (Jul. 24, 2008), paras. 381-382.
5 See, e.g., BASF, “Our responsibility to respect human rights,” available at https://www.basf.com/en/company/sustainability/employees-and-society/human-rights.html.
6 Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award (Sept. 28, 2007), para. 289.
7 While “contributory fault” may curb host countries’ responsibilities insofar as claimants’ actionscontribute to the outcome that prompted claims, this principle does not create obligations for investors nor result in direct responsibility. See, Yukos Universal Limited v. Russia, PCA Case No. AA 227, Final Award (Jul. 18, 2014), pp. 500-510.
8 Kathryn Gordon, Joachim Pohl and Marie Bouchard, “Investment treaty law, sustainable developmentand responsible business conduct: a fact finding survey,” available at http://dx.doi.org/10.1787/5jz0xvgx1zlt-en, pp. 10-11.
The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “KarlP. Sauvant and Güneş Ünüvar, ‘Can host countries have legitimate expectations?,’ Columbia FDI Perspectives, No. 183, September 26, 2016. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center onSustainable Investment at ccsi@law.columbia.edu.
For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Daniel Allman, daniel.allman@columbia.edu.
The Columbia Center on Sustainable Investment (CCSI), a joint center of Columbia Law School and the Earth Institute at Columbia University, is a leading applied research center and forum dedicated to the study, practice and discussion of sustainable international investment. Our mission is to develop and disseminate practical approaches and solutions, as well as to analyze topical policy-oriented issues, in order to maximize the impact of international investment for sustainable development. The Center undertakes its mission through interdisciplinary research, advisory projects, multi-stakeholder dialogue, educational programs, and the development of resources and tools. For more information, visit us at http://www.ccsi.columbia.edu.
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