This paper attempts to explain issues of fairness and inconsistency in investor-state arbitration with the New Institutional Economics (NIE) framework. It argues that the NIE relates to international investment regime in two ways: First, municipal institutions are direct determinants in locational decisions of investors. And second, international investment law helps entrenching municipal institutional rights promised to foreign investors. This paper questions whether arbitral tribunals are responsive to these institutional peculiarities when they interpret treaty standards. It revisits some of the controversial Argentine decisions in examining whether arbitral tribunals were sensitive to concrete institutional realities in the interpretation of doctrine of legitimate expectations. The paper shows that there are contradictions between the earlier set of awards including CMS, Enron, Sempra and LG&E, which established host-state obligation by applying the concept of stability, and the Total award, which introduced the concept of “regulatory fairness or regulatory certainty”. This paper argues that tribunals could be provided with interpretative tools in order to overcome such inconsistencies. It proposes that the NIE could provide a useful framework to strike a fair balance in investor-state arbitration and to promote establishment of consistent arbitral jurisprudence. Consequently, it discusses codification of institutional principles in individual clauses and/or annexes to IIAs as an option for reform.