Legitimate expectations in the TTIP proposal, in CETA, in EU law and in international investment law: a paradigm of Heraclitean hidden harmony?

by Artemis Malliaropoulou*

The problems are solved, not by giving new information, but by arranging what we have known since long.” ― Ludwig Wittgenstein, Philosophical Investigations, 1953

The wording of the European Commission Public Consultation Paper on modalities for investment protection and ISDS in TTIP signals, among other questions, the necessity to conduct further research and elaborate on the ambit of legitimate expectations in international investment law as well as in EU law and compare the standard of protection provided so far with potential differences in interpretation arising out of the Public Consultation Paper’s clarification. It is stated that: “The “legitimate expectations” of the investor may be taken into account in the interpretation of the [FET] standard. However, this is possible only where clear, specific representations have been made by a Party to the agreement in order to convince the investor to make or maintain the investment and upon which the investor relied, and that were subsequently not respected by that Party. The intention is to make it clear that an investor cannot legitimately expect that the general regulatory and legal regime will not change. Thus the EU intends to ensure that the standard is not understood to be a “stabilisation obligation”, in other words a guarantee that the legislation of the host state will not change in a way that might negatively affect investors.[i]”.

CETA, as a point of comparison, makes clear from the outset that the EU and Canada preserve their right to regulate and to achieve legitimate policy objectives, such as public health, safety, environment, public morals, social or consumer protection and the promotion and protection of cultural diversity. This is a clear instruction to the tribunal for the interpretation of the investment provisions. It is also explicitly foreseen that Governments can change their laws, including in a way that affects investors’ expectations of profit and that the application of EU’s state aid law does not constitute a breach of investment protection standards[ii]. Paragraph 2 of the Article 8.9 states that: “For greater certainty, the mere fact that a Party regulates, including through a modification to its laws, in a manner which negatively affects an investment or interferes with an investor’s expectations, including its expectations of profits, does not amount to a breach of an obligation under this Section.”

Unlike many agreements encompassing investment protection, CETA expressly deals with the issue of the role that legitimate expectations play in finding a breach of the FET standard. It limits their applicability to situations where a State party made a specific representation to the investor and subsequently frustrated it. Paragraph 4 of the Article 8.10 states that: “When applying the above fair and equitable treatment obligation, a Tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated.”.

It is worth mentioning four questions, as a minimum basis, arising out of the CETA text. First, the language of the provision leaves it up to the tribunal whether legitimate expectations must be considered or not[iii]. This uncertainty does not seem to be in line with the nature of legitimate expectations as seminal part of the FET standard and fundamental principle of EU law. Second, it remains unclear what a specific representation is and if the precedent in international investment law cases is going to be followed. A report[iv] of the International Institute of Sustainable Development points out the vagueness of this provision by a comparison with a previous draft for an umbrella clause. This clause specifically mentioned “any specific written obligation”. In comparison with the reference in paragraph 4 of the fair and equitable treatment provision to a “specific representation”, it shows clearly that “a specific representation is more open than a specific written obligation.”.

However, it should be pointed out that the requirement of a specific written obligation does not correspond to an existing precedent in EU law or in international investment law. Third, there is a lot of jurisprudence on the question of legitimate expectations based on objective criteria. Decisive is what a “reasonable investor is entitled to expect on the basis of the host State’s representations”[v], however, it is not clear if this “objective test” is going to be followed. Fourth, it seems that the expectation must be present at the time of the investment or maintenance of the investment[vi], which is in line with existing case-law. It is not clear whether it will be up to arbitral tribunals to interpret at what point investors’ expectations have been legitimate.

As arbitration scholars find the roots of legitimate expectations in investment law in the 2003 award “Tecmed v. Mexico”[vii], it could be rightfully supported that this principle is entering its adolescence in this field[viii], while in the EU law field it is in its forties.

In international investment law the concept of legitimate expectations has developed to be at the heart of the FET standard. In a nutshell, under a FET clause, a foreign investor can expect that the rules will not be changed without justification of an economic, social or other nature. Investors’ expectations can be based on governments’ written commitments to investors (e.g., contractual commitments beyond 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 frameworks) as they existed at the time of an investment[ix].

Conversely, it is unthinkable that a State could make a general commitment to all foreign investors never to change its legislation whatever the circumstances, and it would be unreasonable for an investor to rely on such a freeze[x]. Given the State’s regulatory powers, in order to rely on legitimate expectations the investor should inquire in advance into the prospects of a change in the regulatory framework in light of the then prevailing or reasonably to be expected changes in the economic and social conditions of the host State[xi]. No reasonable investor can have an expectation of an unaltered regulatory framework, unless very specific commitments have been made towards it or unless the alteration of the legal framework is total[xii].

In EU law legitimate expectations is a concept derived from German law, where it is known as Vertrauensschutz which was originally translated in English as “protection of legitimate confidence”; a translation that corresponded more closely to the French concept of “protection de la confiance légitime”[xiii]. This was thought to be misleading in English and henceforth the term “legitimate expectations” has been used[xiv]. This term indicates that administrative acts lato sensu[xv], in the absence of overriding public interest, must not violate the legitimate expectations of those concerned and it presupposes a careful balancing of conflicting rights-principles. From its early case-law, the Court of Justice of the EU has recognized that legitimate expectations form part of the European legal order[xvi] and provided EU citizens with a subjective right that justified expectations, which have been raised by the administration will actually be realized[xvii]. The principle of legitimate expectations is considered to be an assurance that the administration achieves its objectives while protecting the individual’s expectations and it has been used as a rule of interpretation[xviii], a ground for annulment[xix] or a basis for an action for damages for non-contractual state or EU liability.

The right to rely on that principle requires that three conditions are satisfied. First, precise, unconditional and consistent assurances originating from authorized and reliable sources must have been given by the state’s authorities to the person concerned. Second, those assurances must be able to give rise to an expectation which is legitimate for the person to whom they are addressed. Third, the assurances given must be consistent with the applicable rules[xx]. However, it is highlighted that, despite its status as a fundamental principle, economic operators are not justified in having a legitimate expectation that an existing situation which is capable of being altered by the EU institutions in the exercise of their discretion will be maintained, particularly in fields whose subject matter involves constant adjustment to reflect changes in the economic situation. The Court has held that, even if the European Union were first to have created a situation capable of giving rise to legitimate expectations, an overriding public interest may preclude transitional measures from being adopted in respect of situations which arose before the new rules came into force but which are still subject to change[xxi].

Nevertheless, in particular situations, where the principles of legal certainty and of the protection of legitimate expectations so require, it may be necessary to introduce transitional arrangements appropriate to the circumstances. Thus, the Court has held that a national legislature may breach the principles of legal certainty and of the protection of legitimate expectations when it suddenly and unexpectedly adopts a new law which withdraws a right that a category of taxable persons enjoyed until then, without allowing them the time necessary to adjust, when the objective to be attained did not so require[xxii].

The adverb “may” that accompanies the phrasal verb “take into account” in the context of the European Commission’s Public Consultation Paper, which is similar to the CETA wording, followed by a one-sided or superficial elaboration of a fundamental principle of EU law and international investment law may generate ambiguous outcomes. As soon as investors’ expectations are examined and considered to be justified, it is not clear why then they must not be balanced with the conflicting public interest at stake (or with the legitimate expectations of the state[xxiii]), applying the proportionality test. Bearing in mind the need for any type of dispute resolution mechanism created to not only do justice, but to be seen to be doing justice, a thorough research of the area is required and any attempt by policy makers (and later by adjudicators) to formulate sensitive concepts without following the precedent developed in the respective fields of law should state expressis verbis the reasons why that precedent should not be followed.

* Artemis Malliaropoulou, Visiting lawyer at the ICC (International Criminal Court) and visiting scholar at the University of Vienna.

[i]      European Commission Public Consultation Paper on modalities for investment protection and ISDS in TTIP, Question on FET standard, p.6, http://trade.ec.europa.eu/doclib/docs/2014/march/tradoc_152280.pdf

[ii]     http://trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151918.pdf

Legitimate expectations are also mentioned in paragraph 2 of the Annex 8-A as one of the factors that should be taken into consideration in the context of the determination of whether a measure or series of measures of a party, in a specific fact situation, constitutes an indirect expropriation The extent to which the measure or series of measures interferes with distinct, reasonable investment-backed expectations.

[iii]    Ursula Kriebaum, FET and Expropriation in the (Invisible) EU Model BIT, 2014 (15) The Journal of World Investment & Trade, p. 476.

[iv]    Nathalie Bernasconi-Osterwalder, Howard Mann‚ A Response to the European Commission’s December 2013 Document “Investment Provisions in the EU-Canada Free Trade Agreement (CETA)”, International Institute of Sustainable Development 2014, 7, http://www.iisd.org/pdf/2014/reponse_eu_ceta.pdf

[v]     Ursula Kriebaum, op.cit., pp. 476-479.

[vi]    Ibid.

[vii]    Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award (29 May 2003).

[viii]   Lucy Reed and Simon Consedine, Chapter 20: Fair and Equitable Treatment: Legitimate Expectations and Transparency in Meg N. Kinnear, Geraldine R. Fischer, et al. (eds), Building International Investment Law: The First 50 Years of ICSID, Kluwer Law International 2015, p. 283.

[ix]    Christoph Schreuer and Ursula Kriebaum, At what time must legitimate expectations exist?, in Jacques Werner and Arif Hyder Ali, eds., Law Beyond Conventional Thought, London: Cameron May, 2009, pp. 265-276.

[x]     El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Award (31 October 2011), para. 372.

[xi]    Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award (8 July 2016), para 427.

[xii]    El Paso, op.cit., para. 374.

[xiii]   Trevor C. Hartley, The Foundations of European law, 2008 OUP, p.149.

[xiv]   John A. Usher, The influence of national concepts on decisions of the European Court, 1976, 1ELR p.363.

[xv]    There is no uniformity as far as the definition of an administrative act is concerned. The 2004 Recommendation of the Council of Europe provides the following one: “legal acts- both individual and normative- and physical acts of the administration taken in the exercise of public authority which may affect the rights or interests of natural or legal persons or situations of refusal to act or an omission to do so in cases where the administrative authority is under an obligation to implement a procedure following a request”. It is worth mentioning that this definition compared to others is much more concrete, and includes not only acts but also omissions and refusals in cases where the administration has no discretionary powers, while it refrains from including any obligation of an act to directly affect rights/ interests.

[xvi]   C-78/74, op.cit.

[xvii]  T-199/99 Sgaravatti Mediterranea Srl v Commission of the European Communities [2002] E.C.R.II-03731.

[xviii]  C-78/74 Deuka, Deutsche Kraftfutter GmbH, B. J. Stolp v Einfuhr- und Vorratsstelle für Getreide und Futtermittel [1975] E.C.R.421.

[xix]   C-112/77 August Töpfer & Co. GmbH v Commission of the European Communities [1978] E.C.R.1019.

[xx]    C- 566/14 P,  Jean-Charles Marchiani v European Parliament, Judgment of the Court (Grand Chamber) of 14 June 2016, para. 77 and the case-law cited; Joined Cases T‑50/06 RENV II and T‑69/06 RENV II, Ireland and Aughinish Alumina Ltd vs. European Commission, Judgement of the General Court (First Chamber, Extended Composition) dated 22 April 2016, para. 213 and the case-law cited.

[xxi]   C- 526/14, Tadej Kotnik and Others v Državni zbor Republike Slovenije – Request for a preliminary ruling from the Ustavno sodišče Republike Slovenije, Judgment of the Court (Grand Chamber) of 19 July 2016, paras. 66, 68 and the case-law cited.

[xxii]  C-332/14, Wolfgang und Dr. Wilfried Rey Grundstücksgemeinschaft GbR v Finanzamt Krefeld – Request for a preliminary ruling from the Bundesfinanzhof, Judgment of the Court (Fourth Chamber) of 9 June 2016, paras. 56-58 and the case-law cited.

[xxiii]  Karl P. Sauvant and Güneş Ünüvar, Can host countries have legitimate expectations?, Columbia FDI Perspectives, No. 183, September 26, 2016.

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