Stability Guarantees through Investment Treaty Arbitration

Research Title: Protection of Stability Guarantees through Investment Treaty Formatted: Font: (Default) Times New Roman
Arbitration
1. Chapter One – Introduction
1.1 Research Overview
One of the hallmarks of investment promotion and protection is the ability of the policy, legal
and regulatory regimes to provide for stability in the business environment, giving the fact that
that Foreign Direct Investment (FDI) 1 plays a vital role in global economies and business. Formatted: Font: Times New Roman
Formatted: Font: (Default) Times New Roman
Therefore, both the host States 2 and foreign investors 3 have many benefits to derive from
Formatted: Font: Times New Roman
Foreign Direct Investment which can respectively translate to economic development of the Formatted: Font: (Default) Times New Roman
host State and improvement of the economies of scale of the foreign investors. FDI which Formatted: Font: Times New Roman
entails the investment in another country for the purpose of acquisition of lasting interest in the
enterprise ofin a country other than that of the investor, is different from portfolio investment Formatted: Font: (Default) Times New Roman
as FDI possesses the elements of management and control, which is not the case with portfolio
investment.4 Host States often focus on policy related determinants that they have control and Formatted: Font: Times New Roman
influence over to make investing in their countries attractive to foreign investors such variables
1
See Organisation for Economic Co-Operation and Development (OECD), OECD Benchmark Definition of Formatted: Font: Times New Roman, 10 pt
Foreign Direct Investment (4th Edn, 2008) 17. According to the World Bank, FDI is defined as “’Foreign direct Formatted: Font: Times New Roman, 10 pt
investment is a category of cross-border investment associated with a resident in one economy having control or
a significant degree of influence on the management of an enterprise that is resident in another economy ’’’. See
World Bank, ‘’’What is the difference between Foreign Direct Investment (FDI) net inflows and net outflows?’’’
<https://datahelpdesk.worldbank.org/knowledgebase/articles/114954-what-is-the-difference-between-foreign- Formatted: Font: Times New Roman
direct-inve,> accessed 28 December 2017. Formatted: Font: Times New Roman, 10 pt
2
In the context of this Thesis, the term host State means a State, other than the home State of an investor in which
the investor invests or commits funds or capital. A State is in turn defined as an organized political community Formatted: Font: Times New Roman, 10 pt
living under a single system of government within a defined territory. A state is often interchangeablye referred Formatted: Font: Times New Roman, 10 pt
to as “government”. A state has also been said to be the means of rule over a defined or "sovereign" territory, Formatted: Font: (Default) Times New Roman, 10 pt
which comprised of an executive, a bureaucracy, courts and other institutions. Other attributes of State include
the power to levy taxes, operate a military and police force, distribute and re-distribute resources and wealth. For
more description of a State, see Global Policy Forum, ‘What Is a "State"?’ Available at Formatted: Font: (Default) Times New Roman, 10 pt, Italic
<https://www.globalpolicy.org/nations-a-states/what-is-a-state.html> accessed 07 February 2017. Formatted: Font: (Default) Times New Roman, 10 pt, Italic
3
This Thesis adopts the definition of a foreign investor advanced in OECD Benchmark (n 1) 49: ‘A foreign direct
investor is an entity (an institutional unit) resident in one economy that has acquired, either directly or indirec tly, Formatted: Font: (Default) Times New Roman, 10 pt, Italic
at least 10% of the voting power of a corporation (enterprise), or equivalent for an unincorporated enterprise, Formatted: Font: (Default) Times New Roman, 10 pt
resident in another economy. A direct investor could be classified to any sector of the economy and could be any Formatted: Font: (Default) Times New Roman, 10 pt
of the following: i) an individual; ii) a group of related individuals; iii) an incorporated or unincorporated
enterprise; iv) a public or private enterprise; v) a group of related enterprises; …’ In a nutshell, a foreign investor Formatted: Font: Times New Roman, 10 pt
is a natural or legal person who commits resources and capital in a country other than his/its home state. Formatted: Font: Times New Roman, 10 pt
4
Blaire Harrison, Foreign Direct Investment (Nova Science Publisher Inc 2009) vii. Portfolio investments on the Formatted: Font: (Default) Times New Roman, 10 pt
other hand involves investment in stock, and debt securities, such as banknotes, bonds, and debentures that do not
Formatted: Font: Times New Roman, 10 pt
necessarily involve management and control of the enterprise. See Organisation for Economic Co-Operation and
Development (OECD), OECD Benchmark Definition of Foreign Direct Investment (4th Edn, 2008) 17, and 25. Formatted: Font: (Default) Times New Roman, 10 pt
1
include adopting investor-friendly exchange rate policy, ease of repatriation of funds,
environmental protection, fiscal reliefs and incentives etc.5 Indeed, the ability of host States to Formatted ...
attract inflow of foreign investment depends on a number of factors since investors are very
strategic in their decision making regarding their investments’ location.6 Foreign investors will Commented [I1]: In footnote 6, I stuck off Dordrecht from the
Publisher’s name. Dordrecht is a city in Western Netherlands, and
assess the political terrain, legal and regulatory framework of the host State, access to market, the publishers ‘Martinus Nijhoff Publishers” has one of its offices in
this city.
risks factors, economic viability of the investment, socio-cultural factors and a whole lot of Formatted ...
other variables before making final investment decisions to commit scarce capital in a foreign
state.7 For foreign investors, a major concern will be discerning and addressing risks associated
with stability of the legal regime.8 In particular, it’s often said that a stable and predictable
legal and contractual regime is necessary to attract FDI.9 Thus, host States recognizing the
importance of Stability Guarantees 10 have customarily offered various types of Stability
Guarantees such as legal stability agreements, stabilization clauses in state contracts, special
legislative instruments and entry into various international investment agreements as elements
of their overall investment policies. 11 The need for Stability Guarantee is particularly
heightened with investments based on state contracts as contracting with host States naturally
makes foreign investors susceptible to potential unilateral or premature termination of
5
All these can be considered investors’ Pull Factors which are those conditions or situations that pull in or entice Formatted ...
investors. In other words, pull factors are those political conditions of host States which engender foreign
investments or enhances the investments of the foreign investor such as political stability, executive ideology etc.
See Nathan Jensen & et al, Politics and Foreign Direct Investment (University of Michigan Press 2012) 7. See
also Harrison (n 43) vii.
6
Ibrahim IF Shihata,(ed), MIGA and Foreign Investment: Origins, Operation, Policies and Basic Documents of Formatted ...
the Multilateral Investment Guarantee Agency (Dordrecht Martinus Nijhoff Publishers 1988) 14. The author
postulated that no grand theory exists to neatly explain all the determinants of foreign investors’ decision to invest
in host States and that decision to invest is typically based on a complex interaction of several factors including
economic, financial, commercial and non-commercial factors depending on the investor’s objectives. He however
confirmed that empirical studies indicate that perception of political risks can greatly discourage FDI flow.
7
Abba Kolo, ‘Managing Post-Privatisation Political and Regulatory Risks in Nigeria - A Law and Policy Formatted ...
Perspective’ (2004) 22 (4) Journal of Energy & Natural Resources Law (JERL) 473, 473–506; Ramon Maronilla
and Kevin D Anderson, ‘The Changing Landscape of Global Sovereign Risk’ (2011) 10 (1) "Journal of
International Business and Law 99, 99-105.
8
Li Shoushuang Li, The Legal Environment and Risks for Foreign Investment in China (Springer Science & Formatted ...
Business Media 2007) 2.
9
United Nations Conference on Trade and Development (UNCTAD), ‘The Role of International Investment Formatted ...
Agreements in Attracting Foreign Direct Investment to Developing Countries’ (UNCTAD Series on International
Investment Policies for Development, 2009).Available a<thttp://unctad.org/en/Docs/diaeia20095_en.pdf>
accessed 07 October 20175.
10
For the purpose of this sStudy, Stability Guarantee encompasses a wide spectrum of host State’s undertakings, Formatted ...
assurances, pledges, commitments, agreements and covenants whether real or ostensible, to maintain a stable and
predictable legal, regulatory and contractual regime pertaining to foreign investments. Thus, in the context of this
thesis, Stability Guarantees include stabilization and renegotiation clauses in state contracts, stability
commitments in national legislations and investment treaties together with all forms of stability promises that
foreign investors can leverage on.
11
M Sornarajah, The International Law on Foreign Investment (3rd edn, , Cambridge University Press 2010) Formatted ...
281.Types and effects of stability agreements, stabilization clauses, special legislative instruments and stability
guarantee arising from international Investment agreements form part of the discuss in Chapter 2.
2
investment agreement.12 This is simply because host States at the main, retain their inalienable Formatted ...
sovereign powers to legislate and the fact that they have a wide range of instruments at their
disposal for the introduction of unilateral measures in post contractual agreement. 13 Host Commented [I2]: It is my view that this sentence is incomplete
Formatted ...
States will typically seek to retain their regulatory flexibility and autonomy because imposition
of “‘excessive limitations on host States’ freedom of action may significantly undermine their
capacity to fulfil their fundamental commitment to promoting the general welfare of their
inhabitants.’” 14
The power to freely legislate which invariably implies the right to interfere with investors’
property rights, premised on the principle of sovereignty of states over natural resources has
received much attention in international law and are well documented in various United
Nations Resolutions such as the Resolution 1803,15 Resolution 3171,16 Charter of Economic Formatted ...
Rights and Duties of State17 and later concretized by the United Nations Declaration on the
Establishment of a New International Economic Order (NIEO).18 Armed by the principle that
12
For in-depth review of impacts and implications of contracting with host States, see Ivar Alvik, Contracting with Formatted ...
Sovereignty – State Contracts and International Arbitration (Volume 31 (Studies in International Law, Hart
Publishing 2011).
13
Peter D. Cameron, ‘Stabilisation in Investment Contracts and Changes of Rules in Host Countries: Tools for Formatted ...
Oil & Gas Investors’ (Association of International Petroleum Negotiators (AIPN) Final Report 5th July 2006).
Available at<http://www.rmmlf.org/Istanbul/4-Stabilisation-Paper.pdf> accessed 07 October 20175. Formatted ...
14
Moshe Hirsch, ‘Between Fair and Equitable Treatment and Stabilization Clause: Stable Legal Environment and Formatted ...
Regulatory Change in International Investment Law’ 07-13 (2013) International Law Forum 1. Available at
<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2272952 > accessed 1August 20175. Formatted ...
15
The United Nations General Assembly in 1962 adopted Resolution 1803 on ‘Permanent Sovereignty over Formatted ...
Natural Resources’. The crux of this Resolution which was adopted by almost unanimous vote of all members,
is to facilitate the host States control over their natural resources and to reinforce their political right of self-
determination, to exercise their full and inalienable right over their natural wealth and resources. Resolution 1803
(XVII) provides that States and international organizations shall strictly and conscientiously respect the
sovereignty of peoples and nations over their natural wealth and resources in accordance with the Charter of the
United Nations and the principles contained in the resolution. See
<http://legal.un.org/avl/ha/ga_1803/ga_1803.html> accessed on 08.10.20165. See also Permanent Sovereignty
over Natural Resources, UNGA Res 1803 (XVII) (14 December 1962) United Nations General Assembly
Resolution 1803 (XVII) of 14 December 1962, "Permanent sovereignty over natural resources" Available at
<http://www.ohchr.org/EN/ProfessionalInterest/Pages/NaturalResources.aspx> accessed 30 May 2017. Formatted: Font: Times New Roman, 10 pt
16
UNGA Res 3171 (XXVIII) United Nations General Assembly Resolution 3171 (XXVIII) (adopted by the Formatted ...
United Nations General Assembly on 17 December 1973) on Permanent Sovereignty over Natural Resources’.
This Resolution more or less declared the principle of permanent sovereignty over natural resources in a much
more radical way considering that it reiterates that full control over natural resources is an indispensable element
of the sovereignty of a State.
17
United Nations General Assembly Resolution UNGA Res 3281 (XXIX) of (12 December 1974). The principle Formatted ...
of permanent sovereignty was included in a broader set of principles and rights expressed in this Resolution.
18
Declaration on the Establishment of a New International Economic Order (NIEO), United Nations General Formatted ...
Assembly Resolution UNGA Res 3201 (S-VI) of (01 May 1974) (adopted by UNGA special sixth session);
Available at< http://investmentpolicyhub.unctad.org/Download/TreatyFile/2775.> <http://www.un- Formatted ...
documents.net/s6r3201.html> accessed 10 February 2017. In specific terms, paragraph 4 (e) of this Resolution Field Code Changed
states while advancing one of the core principles of the Resolution to be “full, permanent sovereignty of every
State over its natural resources”, clarified that each state retains the right to nationalize foreign property when Formatted: Font: Times New Roman, 10 pt
necessary. Formatted ...
3
can be said to have attained a status on customary international law,19 host States can in the Formatted: Font: (Default) Times New Roman
exercise of their sovereignty make alterations to the regulatory regime or contracts which may
expose investors to regulatory risks.20 In fact, the legal principles enunciated by the various Formatted: Font: (Default) Times New Roman
UNGA Resolutions on permanent sovereignty can be regarded incompatible with foreign
investors’ quest for stability and inviolability of contracts terms. 21 Consequently, foreign Formatted: Font: (Default) Times New Roman
investors are much concerned with effective stability mechanisms to protect them from
unilateral exercise of host States’ sovereign powers to change the terms of the investment
agreement mid-stream. In simple terms, the average foreign investor’s primary concern is a
guarantee that the legal and regulatory regime within which it carries out its business is stable
and predictable. Hence, any potential threat of future governmental action which may detract
from the rights and benefits conferred on the foreign investor at the time of investing will be
guarded against. According to Abdullah Al Faruque, “The availability of legal protection
against political risks is considered to be one of the most significant factors taken into account
by foreign investors in long term capital-intensive projects.”22 Formatted: Font: (Default) Times New Roman
Whereas, availability of Stability Guarantee is key, ensuring that the full benefits of the
guarantees are enjoyed is a different ball game and even more crucial and so also is ensuring
the continuity of granted Stability Guarantee. Like every legal right, Stability Guarantee
without protection or enforcement mechanisms is as good as non-existent. Thus, as Stability
Guarantees are afforded through various means such as contracts, national legislations and
international treaties, their protection or enforceability can equally be sought through different
avenues and fora. The crux of this thesis is to critique investment treaty arbitration mechanisms
for the protection of Stability Guarantees regardless of how the Stability Guarantees were Formatted: Font: Times New Roman, 10 pt
created or deemed granted. Formatted: Font: Times New Roman, 10 pt

19
See Article 38(b) of the Statute of the International Court of Justice, c II, art 38(b) Formatted: Font: Times New Roman, 10 pt
20
Masood Hossain Masood, International Arbitration of Petroleum Disputes (PhD Thesis, University of Aberdeen Formatted: Font: Times New Roman, 10 pt
2004 1994) 188.
21 Formatted: Font: (Default) Times New Roman, 10 pt
Nico Schrijver, Sovereignty Over Natural Resources, Balancing Rights and Duties (Cambridge University Press
19972002) 255. The Principle of Permanent Sovereignty over Natural Resources (“PSNR” “) is rooted in the Formatted: Font: (Default) Times New Roman, 10 pt
right of self-determination and amongst other things lays down basic rules relating to treatment of foreign Formatted: Font: (Default) Times New Roman, 10 pt
investors. As the Principle of PSNR encompasses the right to possess, use and freely dispose of one’s natural
Formatted: Font: (Default) Times New Roman, 10 pt
wealth and resources, States have the right to regulate the use of their natural wealth and resources and in certain
instances take full control over their natural resources by expropriating, nationalizing and transferring ownership Formatted: Font: (Default) Times New Roman, 10 pt
of properties, whether owned by nationals of the State or by foreign investors. See Jane A . Hofbauer, The Formatted: Font: (Default) Times New Roman, 10 pt
Principles of Permanent Sovereignty and Its Modern Implications, (LL.M Master’s Degree Thesis, University of
Iceland, August 2009).
22
Abdullah Al Faruque, ‘Validity and Efficacy of Stabilisation Clauses: Legal Protection vs. Functional Value’ Formatted: Font: (Default) Times New Roman, 10 pt
[2006] 23 Journal of International Arbitration 321. Formatted: Font: (Default) Times New Roman, 10 pt
4
Investment treaty arbitration also known as investor-state arbitration, which is international
arbitration initiated pursuant to investment agreements or treaty provisions has frequently been
relied on by foreign investors to make claims of breach of Stability Guarantees against host
States. This has been made possible by the advent of modern investment treaties and
evolvement in principles of international investment laws which have aided the launch of
private rights of foreign investors to be asserted in realms that were traditionally within
exclusive sovereign precincts. The incessant recourse by foreign investors to investor-state
arbitration for redress whenever unilateral state actions alter or interfere with the legal or
regulatory regime affecting their investments is driven by the foreign investors’ desire to retain
the profitability and commercial viability of their investments in host States.23 The protection Formatted: Font: (Default) Times New Roman
of these individual rights principally the right to sanctity of contract and stability of investment
regime within the context of investment treaty arbitration is the focus of this thesis. Investment
treaties offer several substantive protections amongst which four are relevant and have been
employed to seek redress for multifarious breaches of Stability Guarantees. These four
substantive standards include (i) Fair and Equitable Treatment, (ii) Prohibition Against
Unlawful Expropriation, (iii) Umbrella Clause and (iv) Full Protection and Security Standards.
The diverse, multifaceted and interconnected range of issues emerging from foreign investors’
reliance on the protection mechanisms of these four treatment standards in pursuit of redress
for host States’ violation of previously granted Stability Guarantees, form the fulcrum of this
thesis.
As earlier asserted, there are two conflicting principal legal principles of international law
relating to Stability Guarantees and these are investors’ right to stability and certainty (principle Formatted: Font: Times New Roman, 10 pt
of pacta sunt servanda underlying contractual commitments) vis-a-vis those of host States to Formatted: Font: Times New Roman, 10 pt
regulatory sovereignty mainly accruing from the Principle of Permanent Sovereignty over
Formatted: Font: Italic
Natural Resources and Natural Wealth. Thus, underlying every Stability Guarantee argument, Formatted: Font: (Default) Times New Roman, 10 pt
is the issue of conflicting rights of investors to stability and certainty vis-a-vis those of host Formatted: Font: (Default) Times New Roman, 10 pt
States to regulatory sovereignty. Reconciling or balancing these conflicting rights remain the Formatted: Font: Times New Roman, 10 pt
main issue for investor-state arbitral tribunals in most of the cases seeking to enforce or obtain Formatted: Font: Times New Roman, 10 pt
23 Formatted: Font: (Default) Times New Roman, 10 pt

Examples are: Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v The
Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011 (hereinafter Paushok Formatted: Font: (Default) Times New Roman, 10 pt
v Mongolia Sergei Paushok); Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Formatted: Font: (Default) Times New Roman, 10 pt
Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20, Award 11 December 2013 (hereinafter Micula v
Romania (I)); , Duke Energy International Peru Investments No 1 Limited v Republic of Peru, Award, ICSID
Case No ARB/03/28 , Award (Not Public) 18th August 2008 ,IIC 334 (2008) (hereinafter Duke Energy Intl v Formatted: Font: (Default) Times New Roman, 10 pt
Peru)., 25th July 2008, despatched 18th August 2008. Formatted: Font: (Default) Times New Roman, 10 pt
5
redress for repudiated Stability Guarantees. According to the Saluka’s tribunal, the exercise of
host States’ legitimate regulatory powers to regulate domestic matters in the public interest
must be taken into consideration in the determination of existence of a frustrated legitimate
expectation and necessarily a breach of the applicable treaty.24The tribunal postulated further Formatted: Font: Times New Roman
that “a weighing of the Claimant’s legitimate and reasonable expectations on the one hand
and the Respondent’s legitimate regulatory interests on the other” is essential to determine a Formatted: Font: Times New Roman
breach of Article 3.1 of the Czech Republic – Netherlands treaty by Czech Republic.25 More
so, this complexities has further been brought to the fore by the tribunal in ADC Affiliate Formatted: Font: Times New Roman
Limited and ADC & ADMC Management Limited v The Republic of Hungary26 where it was Formatted: Font: (Default) Times New Roman
held that ‘the basic international law principles is that while a sovereign state possesses the
inherent right to regulate its domestic affairs, the exercise of such right is not unlimited and Formatted: Font: (Default) Times New Roman
must have its boundaries’.
Formatted: Font: (Default) Times New Roman, 10 pt, Italic
Unsurprisingly, the issue of rights balancing continues to be at the current focal point of debates Formatted: Font: (Default) Times New Roman, 10 pt
as to the content of FET on the one hand and stabilization clause on the other. 27 For this reason,
finding the right balance between investors’ right to stability on the one hand and host States Formatted: Font: (Default) Times New Roman, 10 pt
sovereign regulatory powers on another has become very pertinent. Instructive to this discuss Formatted: Font: Not Bold, Italic
is Rosalyn Higgins’ contention that the legal framework of foreign investment must protect the
legitimate expectation of both the foreign investor and the host State or else any protection the Formatted: Font: (Default) Times New Roman, 10 pt
investor appears to have will be merely illusory rather than real.28
Unfortunately, the investor-state arbitral system as it exists today, lacks an established or Formatted: Font: Times New Roman, 10 pt
consensual strategy for balancing these conflicting rights and this has created a deluge of
contradictory and incoherent decisions, dependent mainly on tribunals’ subjectivity. This state Formatted: Font: (Default) Times New Roman, 10 pt
of affair does not only portend uncertainty and unpredictability of the arbitral system, it may Formatted: Font: (Default) Times New Roman, 10 pt
ultimately undermine the system by raising questions as to its legitimacy. According to
Formatted: Font: (Default) Times New Roman, 10 pt, Not
Leonhardsen, the need to fashion an acceptable balancing strategy goes to the root of legitimacy Bold
of the investor-state system since negligible attention paid by tribunals in the wake of Argentine Formatted: Font: (Default) Times New Roman, 10 pt
24
Saluka Investment BV (The Netherlands) v The Czech Republic, UNCITRAL/PCA, Partial Award 17 March Formatted: Font: (Default) Times New Roman, 10 pt
2006, paras 305-6 (hereinafter Saluka v. Czech Republic).
25 Formatted: Font: Times New Roman, 10 pt
Ibid.
26
ICSID Case No. ARB/03/16 (Award, 2 October 2006) para. 423 (hereinafter ADC v. Hungary). Formatted: Font: (Default) Times New Roman, 10 pt
27
Michele Potesta, ‘The Doctrine of Legitimate Expectations in Investment Treaty Law’ [2012] 26; Paper Formatted: Font: (Default) Times New Roman, 10 pt
delivered at (Third Biennial Global Conference, Singapore, July 12 -14, 2014), Singapore Available at <
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2102771 > accessed 01 August 20175.
28
Rosalyn Higgins, ‘Legal Preconditions of Foreign Investment’ (1986) 232 Proceedings of the Intlernational Bar Formatted: Font: (Default) Times New Roman, 10 pt
Association Seminar on Energy Law 232(1986) 2, and 4. Formatted: Font: (Default) Times New Roman, 10 pt
6
2000 to 2002 economic crisis occasioned a perceived lack of legitimacy of the regime that
culminated in host States’ renunciation of investment treaty commitments. 29 He surmised that Formatted ...
“A balancing approach by treaty tribunals might help mitigate this legitimacy deficit … ”30 It
is therefore imperative that a consistent set of rules or balancing technique is adopted to rule
out arbitrators’ subjectivity, improve clarity, certainty and harmonious development of
investment law in this area.
While there are a number of balancing techniques that have been adopted or simulated by
investor-state arbitral tribunals since the recent upswing of investor-state arbitration,
proportionality has been flaunted as an appropriate analytical tool and global best test to weigh
these competing rights. 31 Proportionality which is an adjudicative technique for managing Formatted ...
disputes between rights involving an alleged conflict between two rights claims has been
embraced by many and is a common feature of most international dispute settlement
mechanisms.32 In simple terms, it is an analytical tool to determine if a host State’s exercise
of its police power is a reflection of an appropriate balance between host State’s and investor’s
interests. 33 Originally of German origin, proportionality analysis which has been more
popularly advanced in the context of expropriation in investor-state forum thus started with SD
Myers v. Canada34 tribunal’s endeavours. A number of arbitral decisions such as Saluka,v Commented [I3]: I applied the procedure on page 30 of the 4th
edn. FORMAT CASE NO/ CASE NAME/ (COURT/ DATE OF
Czech Republic35Tecmed v Mexico,36 EDF v Romania,37 Continental Casualty v Argentina,38 JUDGEMENT)
Formatted ...
Glamis Gold v USA39 and Total SA v Argentina40 have to some certain extent applied stages of
the proportionality test or the hybrid version in arriving at their decisions. On the other hand,
29
Erlend M. Leonhardsen, ‘Looking for Legitimacy: Exploring Proportionality Analysis in Investment Treaty Formatted ...
Arbitration’ (2011) 3 (1) Journal of International Dispute Settlement 3(1) (2012) 95-136.
30
Ibid Formatted ...
31
Alec Stone Sweet, ‘Investor-State Arbitration: Proportionality’s New Frontier’ [2010] Yale Law School Legal Formatted: Normal
Scholarship Repository 14. 4(1) Law & Ethics of Human Rights 48-76.
32
See Leonhardsen (n 20). Formatted ...
33
Caroline Henckels, ‘Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and Formatted ...
the Standard of Review in Investor-State Arbitration: Revisiting Proportionality Analysis in Investor-State Formatted ...
Arbitration’ (2012) 15(1) J Intl Economic Law (2012) 15 (1): 223
34
(1998) NAFTA/UNCITRAL (Final Award, 30 December 2002). Formatted ...
35
Saluka v Czech Republic, (n.24 19). Formatted
36 ...
Técnicas Medioambientales Tecmed S.A. v United Mexican States, ICSID Case No. ARB(AF)/00/2, Award 29
May 2003 (hereinafter Tecmed v Mexico). Formatted ...
37
EDF (Services) Ltd v Romania, ICSID Case No. ARB/05/13, Award October 8, 2009, para 217 (hereinafter EDF Formatted ...
v Romania).
38
Continental Casualty Company v. The Argentine Republic, ICSID Case No ARB/03/9, Award 5 September 2008 Formatted ...
(hereinafter Continental Casualty v Argentina).
39
Glamis Gold Limited v United States of America, NAFTA/UNCITRAL Award 8 June 2009, para 620 Formatted ...
(hereinafter Glamis Gold v USA).
40
Total SA v. The Argentine Republic, ICSID Case No ARB/04/1, Case No.ARB/04/1, Award 27 December Formatted ...
2013,0 para 129 (hereinafter Total SA v Argentina).
7
Formatted ...
Formatted ...
the CMS v Argentina, 41 Enron v Argentina 42 and Sempra v Argentina 43 tribunals did not Formatted ...
embrace proportionality principle while construing Argentina’s plea of necessity and Non- Formatted ...
Formatted ...
Precluded Measures Clause defence brought pursuant to Article XI of the applicable BIT.44 It
Formatted ...
is therefore imperative and apt to investigate if proportionality is an appropriate and suitable Formatted ...
balancing tool for the determination of foreign investors’ claims bordering on breach of Formatted ...
Formatted ...
Stability Guarantee. Overall, Stability Guarantee in the light of investor-state arbitration
Formatted ...
jurisprudence and all the attendant issues of weighing of conflicting rights and balancing Formatted ...
techniques, are the areas which this thesis seeks to contribute to existing knowledge. Formatted ...
Formatted ...
Formatted ...
1.2 Scope, Aims and Significance of the Research Formatted ...
Formatted ...
Formatted ...
Stability Guarantee as defined in this thesis encompasses stabilization clauses, legal stability Formatted ...
agreements, domestic law enacted stabilization clauses and treaty based stability commitments. Formatted ...
Formatted ...
Redress for violation or repudiation of these Stability Guarantees can be validly sought not
Formatted ...
only through investor-state arbitration system but also under both domestic judicial system and Formatted ...
international commercial arbitration regime, depending on enabling stability instrument. Formatted ...
Formatted ...
International investment arbitration is however the focus of this study because of its evolving
Formatted ...
rapid development45 which is indicative of foreign investors’ preference for the system.46Thus, Formatted ...
Formatted ...
this research is limited to international investment treaty resolution of disputes involving
Formatted ...
breaches of Stability Guarantees and does not contemplate delving into discussions on Formatted ...
Formatted ...
41
CMS Gas Transmission Company v. Argentine Republica, ICSID Case No ARB/01/08, Award 12th May 2005 Formatted ...
(hereinafter CMS Gas v Argentina ). Formatted ...
42
Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa Assets, LP v Argentine Formatted ...
Republic, ICSID Case No ARB/01/3, Enron CorpPonderosa Assets L.P v Argentina ICSID Case No. ARB/01/2,
Award, 22 May 2007 (hereinafter Enron v Argentina). Formatted ...
43
Sempra Energy International v Argentine Republic, a ICSID Case No ARB/02/16, Case No. ARB/02/16, Award Formatted ...
28 September 2007 (hereinafter Sempra v Argentina ). Formatted
44 ...
The Non-Precluded Measures Clause is similar to the customary international law necessity plea to delimit
Formatted ...
permissible measures from prohibited measures. The applicability of the Non-Precluded Measures clause of the
Argentina Bilateral Investment Treaties was determined in a lot of the cases involving Argentina’s emergency Formatted ...
measures with varied and inconsistent interpretations. A typical example of NPM is the Argentina-USA BIT, Formatted ...
Article XI which states ‘This Treaty shall not preclude the application by either Party of measures necessary for
Formatted ...
the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration
of international peace or security, or the Protection of its own essential security interests.’ Formatted ...
45
In Year 2014, known new known investor-state arbitration filed were 42 whilst the total number of cases filed Formatted ...
under the auspices of investment treaty reached 608. Year 2013 recorded the highest number of known investor -
Formatted ...
state arbitration filed in one year with the institution of 59 new cases, followed by Year 2012 with 54 new cases.
As at the end of Year 2014, 99 countries have responded to investment treaty claims. This is suggestive of a Formatted ...
continuous use of investor-state dispute settlement system despite some downsides pervading the system. See Formatted ...
__‘UNCTAD’s Investor-State Dispute Settlement: Review of Developments’ in (2014.) Available at <
Formatted ...
http://unctad.org/en/PublicationsLibrary/webdiaepcb2015d2_en.pdf > accessed 24 July 20175.
46
In this regard, it can be argued that investor-state arbitration’s purported disadvantages and downsides seem to Formatted ...
have been outweighed by its depoliticizing and other acclaimed advantages. Formatted ...
8
resolution of said stability Guarantee disputes by means of international commercial arbitration
mechanisms or other dispute resolution methods.
Investor claimants’ multifarious claims of breach or repudiation of Stability Guarantee as a

violation of at least one of the four named substantive standards, have been argued with varying
degrees of successes. On this premise, this thesis seeks to critique investment treaty arbitration
system mechanisms that protect and enhance Stability Guarantees. The thesis will also analyze
investment treaty arbitration tribunals’ findings in cases pertaining to breaches of Stability
Guarantees, in addition to examining diverse types of Stability Guarantees available in
investor-state arbitral jurisprudence and arbitral responses to claims that same exist. This is
with a view to distil those mechanisms or angles that will most likely elicit successful outcomes
or conversely portend a high risk of failure for intending investor-claimants. There is no
gainsaying that this analysis will be useful resource for claims profiling and reference guide
for both investor-claimants and host States.
As the main issue at stake in evaluation of Stability Guarantees related claims by investment
arbitration tribunals, is weighing competing rights of foreign investors against those of host
States, this thesis will examine arguments relating to the two conflicting principles legal
principles pertaining to Stability Guarantees and will attempt to decipher the balancing
parameters and techniques that were utilized by tribunal in stated cases. In the concluding parts
of this thesis, an analysis will be undertaken to distil the appropriateness and functional value
of application of Proportionality Technique by investor-state arbitral tribunals for the requisite
balancing requirement. This is against the backdrop of other balancing techniques, methods
and standards of review that have diffused into international investment law Proportionality
Technique, if deemed appropriate as a weighing or balancing technique for adoption as an
established and consensual standard or technique for determination of cases hinged on violation
of Stability Guarantee.

Furthermore, the thesis is contemplated with a fresh and original perspective even though Formatted: Font: Times New Roman
enough has been written about the topics of investment treaty arbitration on one hand and
Stability Guarantees, especially stabilization clauses in state contracts on the other.47 Albeit, Formatted: Font: (Default) Times New Roman, 10 pt
47
Peter Cameron’s book is one of the good reference materials on stabilization clauses. See Peter Cameron,
International Energy Investment Law: The Pursuit of Stability (1st Edn, Oxford University Press OUP 2010). Formatted: Font: (Default) Times New Roman, 10 pt
Furthermore, McLachlan et al’s book is an insightful exposition on investment treaty arbitration. See also, Formatted: Font: (Default) Times New Roman, 10 pt
9
studies or works singularly devoted to examining investment treaties’ protective standards used
to guarantee stability of investment terms juxtaposed with a critique of tribunals’ balancing
techniques remains underdeveloped. Moreover, the inconsistencies that characterize available
arbitral awards and the unsettled state of the law pertaining to enforceability of Stability
Guarantees within the realm of investor-state arbitration, make it a very topical issue for
perpetual academic and scholarly endeavours and continuous discussions. 48 This thesis is Formatted: Font: (Default) Times New Roman
indeed research-worthy considering the main themes traversing the entire thesis, such as
foreign investors’ perpetual desire for optimal observance of Stability Guarantees entailing the
immutability of investments’ contractual, legal and regulatory regimes, in contrast with host
States’ undying quest to retain absolute sovereign regulatory powers notwithstanding
international investment law commitments they may have entered into.
Essentially, this thesis hopes to produce tenable evidence of foreign investors’ pursuit of
stability using the instrumentalities of investment treaty arbitration and consequently foster the
development of clearer rules on international law of foreign investment. The thesis will enable
stakeholders from the perspective of both host States and investors, be attuned to and apprised
of recent developments in these crucial areas of international law and be better positioned to
make informed decisions germane for dealing with investment disputes or impasse relating to
Stability Guarantee breaches. Overall, this thesis will contribute to a better understanding or
appreciation of available protection mechanism within international investment arbitration
setting.
1.3 Research Hypothesis and Questions
Against this background, this thesis contends that investor-state arbitration jurisprudence
pertaining to Stability Guarantee has largely turned on the issue of weighing between
McLachlan, Dr Campbell, Laurence Shore, and Matthew Weiniger, International Investment Arbitration:
Substantive Principles (Oxford University Press 2007).Campbell McLachlan, Laurence Shore, and Matthew
Weiniger (eds), International Investment Arbitration: Substantive Principles (Oxford University Press 2008). Formatted: Font: (Default) Times New Roman, 10 pt
48
AIPN US Chapter Luncheon holding on 15 th February 2012 at Houston discussed “Petroleum Fiscal Design Formatted: Font: (Default) Times New Roman, 10 pt
Issues: Sovereignty vs Stability…" Also, for the AIPN 2012 Spring Conference which took place between 18 th
and 20th April 2012, with the theme New Global Resource Development, one of the topics for discussion was Formatted: Font: (Default) Times New Roman, 10 pt
“Stabilization in International Petroleum Contracts: What Works, What doesn’t”. AIPN, ‘Petroleum Fiscal Design
Issues: Sovereignty vs Stability…’ (AIPN US Chapter Luncheon, 15 February 2012). Also See, Jim Barnes
(Barnes & Cascio LLP), Garry Howe (Noble Energy Inc.) in conjunction with the AIPN’s Spring Conference,
‘New Global Resource Development, one of the topics for discussion was “Stabilization in International
Petroleum Contracts: What Works, What doesn’t.’ (AIPN Spring Conference, 18 April 2012)
10
conflicting interests of foreign investors to stability of the legal, regulatory and investment
framework of the host State as against host States’ inalienable sovereign rights to uninhibitedly
amend their laws and regulatory regimes as deemed necessary. This thesis further argues that
the requisite balancing exercise has in the main, been based on arbitrators’ subjectivity and
personal dispositions due to lack of well-established legal techniques or standards for
undertaking the requisite balancing exercise under the current international investment law
setting. Consequently, a systematic application of the structure-based tests of Proportionality
Analysis can be adopted to preclude arbitrators’ subjectivity and infuse a significant measure
of consistency and predictability into investor-state arbitration jurisprudence for the
determination of Stability Guarantee related claims.
Flowing from above hypothesis are the following key research questions:
1. Is there an arbitral trend of decisions emerging from foreign investors’ reliance on the
substantive treatment standards in their claims of violation of Stability Guarantees? In this
regard, to be addressed are specific questions relating to each of the protection standards, such
as:
 Does the Full Protection and Security Standard extend in scope to protection of legal and
regulatory framework affecting foreign investment?
 Whether stability and predictability of the legal and business environment is an element of the
Fair and Equitable Treatment standard?
 Do Stability Guarantees create legitimate and reasonable expectations which are subject to
protection of investor-state arbitration mechanism?
 What types of Stability Guarantees are considered undertakings or commitments that will give
rise to host states liability under the Umbrella Clause?
 Will breach of Stability Guarantee translate to unlawful expropriation and therefore incur for
host States an obligation to pay compensation beyond the treaty specified standard of
compensation?
2. How can the conflict between investors’ right to stability protection and host states’ sovereign
rights to regulate investments in its domain be reconciled by international investment tribunals?
3. Is Proportionality Technique as appropriate and suitable analytical tool to deploy in balancing

competing interests in the determination of Stability Guarantee claims.
11
4. To what extent has international investment tribunals been able to achieve coherence and
consistency in their determination of claims arising from breach of stability commitments?
1.4 Methodology
This thesis adopts a doctrinal legal research methodology which is also known as ‘Black Letter
Law’ to analyze Stability Guarantee claims decided by international investment arbitration
tribunals. The approach is said to be doctrinal because it essentially focuses on case-law,
statutes and other legal sources relevant to addressing the research questions under
investigation49. Although a pure doctrinal approach with no attempt to examine the effect of Formatted: Font: Times New Roman
the law is employed, beyond highlighting the law as it exists, this thesis seeks to deduce
contemporary issues related to the subject under discourse and proffers solutions for tackling
the challenge of lack of established and consensual balancing technique. To effectively,
critique the investor-state arbitral jurisprudence pertaining to Stability Guarantee cases, it is
essential to review historical trends with a view to gain understanding of how related legal
norms and precepts have developed, rationale for any manifest change and possibly, indications
of future evolvement of the law.
As the intents is to review and dissect investor-state arbitral cases on Stability Guarantees to
ascertain the trend or pattern of awards and consequently draw conclusions therefrom, textual
analysis of selected investment treaties and legal analysis of arbitral jurisprudence on this
contemporary topic of investment law will be undertaken. Reliance on both primary and
secondary sources is deployed, with the primary materials including statutes, contracts, treaties
and arbitral and litigation decisions. Secondary sources to be used entail books, articles,
journals and other relevant contributions to the topic. More importantly, as this thesis entails
a comprehensive analysis of investor-state arbitration jurisprudence on the subject matter of
Stability Guarantee, it is imperative to use quantitative analysis tools as well as an investment
law research directory to support the doctrinal method. With well over 400 concluded
investment arbitration cases, a thorough review undertaken in this thesis will be efficiently and
effectively achieved when the cases for review have been pruned down to a manageable
49
See T Hutchinson, ‘Valé Bunny Watson? Law Librarians, Law Libraries and Legal Research in the Post -Internet Formatted: Font: Times New Roman, 10 pt
Era’, (2014) 106(4) Law Library Journal 579, 584. Formatted: Font: Times New Roman, 10 pt
12
number. Streamlining the cases for review will be achieved with the aid of three resourceful
research tools.
This first to be discussed is Investment Policy Hub which is United Nations Conference on Formatted: Font: (Default) Times New Roman, 12 pt
Trade and Development (UNCTAD) one-stop resource on all investment policy matters
including national and international regulation, investment policies, investment treaty database
and Investment Dispute Settlement Navigator containing known international arbitration cases
initiated by investors against States pursuant to international investment agreements (IIAs).50 Formatted: Font: Times New Roman
Investment Dispute Settlement Navigator has mapped available cases based on a number of
variables including Breaches alleged and found, Decision in favour of investor/host State or
neither party, Sector, Country, Arbitral Institution etc. As at 31st December 2017, the Navigator
which was last updated on 31st July 2017 reported a total of 817 cases as Known Treaty-Based
Investor-State Arbitration, with 278, 528 and 11 cases pending, concluded and unknown (data
not available) respectively. This thesis has relied mainly on the Navigator’s mapping of cases
based on Breaches alleged to identify cases where investor-claimants have alleged violation of
the Umbrella Clause, Full Protection and Security, Fair and Equitable Treatment and
Expropriation; direct and indirect. Following distillation of the cases based on ‘Breaches
Alleged’, a further pruning was done to isolate cases having one form of decision or award
written or interpreted in English. Consequently, cases which were pending at 31 st July 2017,
settled or discontinued without any form of decision and concluded with no English award or
decision are excluded from consideration in this thesis. Below is a schematic representation of
the resultant statistics based on above referred mapping and pruning:
S/No. Treatment Standards Breaches Alleged Breaches Found Concluded Formatted: Justified
1. Direct Expropriation 89 26 44 Formatted: Font: (Default) Times New Roman

Formatted: Justified
2. Indirect Expropriation 359 51 244 Formatted: Font: (Default) Times New Roman
3. Fair and Equitable 401 103 272 Formatted: Font: (Default) Times New Roman
Treatment

50
United Nations UNCTAD, ‘ Investment Policy Hub’, <http://investmentpolicyhub.unctad.org/ > accessed 07 Formatted: Font: Times New Roman, 10 pt
February 2018. Formatted: Font: Times New Roman, 10 pt
13
4. Full Protection and 206 20 150 Formatted: Font: (Default) Times New Roman
Security
5. Umbrella Clause 114 15 87 Formatted: Font: (Default) Times New Roman
Having used UNCTAD’s Investment Policy Hub online database to isolate and compile awards
and decisions wherein tribunals determined breaches of the four substantive standards relevant
for Stability Guarantee claims, this thesis equally relied on NVivo Software to select the cases
reviewed to undertake the doctrinal analysis. NVivo is a platform for analyzing all forms of
data with its search and query tools. Being a data analysis software, NVivo was deployed to
collect, organize and distil data relating to Stability Guarantees tailored along the lines of
Investment Policy Hub database compilation. A combination of both Investment Dispute
Settlement Navigator and NVivo has paved way for the opportunity to undertake analysis of
far more relevant cases that I would have been possible given all the attendant constraints in a
research of this nature. It is however to be noted that the main function of NVivo is not to
analyze data but rather to aid the analysis process.
The last but not the least research apparatus which has been very resourceful and instrumental
to effectively and efficiently address the research questions is Investor State Law Guide
(“ISLG”), a vast online electronic directory of investment treaty arbitral law. ISLG, a
multifaceted research tool enables one to conduct a research on investment treaty arbitration
cases with pinpoint accuracy. With this online resource, it has been possible to tailor the
research and pinpoint key themes relating to Stability Guarantee with the database’s Subject
Navigator, Jurisprudence and Article Citator research tools. Beyond restating the principles
emanating from various awards, enabling the drill down into the nuances of each issue and sub-
issue, highlight treatment of specific decisions by subsequent investment treaty tribunals inter
alia, makes no makes no attempt to judge or critique a particular finding as right or wrong. The
strategy is to accord users the liberty to decide what significance should be attached to a
particular finding.51 This approach, is what made ISLG a prolific and valuable research tool. Formatted: Font: Times New Roman
1.5 Structure of the Research

51
‘Investor-State Law Guide’, <https://www.investorstatelawguide.com > accessed 07 February 2017. Formatted: Font: Times New Roman, 10 pt
14
This thesis is structured into 6 chapters, including this introductory chapter which has largely
proffered the research overview, outlined main aims and significance of the research, distilled
the key research questions the scope, identified the methodology adopted to facilitate the
achievement of stated aims and the thesis layout.
Chapter Two is basically the part of this thesis geared towards setting the tone for discussions
in later parts of the thesis. It lays conceptual foundation of the thesis by defining and explaining
key concepts and topics that are relevant for understanding the research issues and questions.
This chapter commences with an introductory piece on FDI and political risks as these are
germane to any discourse on Stability Guarantee and investor-state arbitration. It proceeds to
examine the emergence and development of investment treaties and investor-state arbitration
system being derivatives of FDI. In this chapter, the distinction between international
investment arbitration and international commercial arbitration is highlighted because of the
considerable potentials for parallel adjudication between them. This distinction or comparison
will also outline the advantages of investment arbitration and the rationale for incessant
recourse to the system over and above international commercial arbitration for the protection
of Stability Guarantees. This chapter provides historical contexts to various issues raised in
later chapters such as standard of compensation for expropriation with emphasis on the
evolvement of the Hull Formula. More importantly, the chapter explains the concept of
Stability Guarantees and its many facets, specifically identifying key types of Stability
Guarantees that have given rise to claims in investor-state arbitral arena. This chapter
elaborates the interaction between investor-state arbitration and stability guarantees. This
chapter concludes with an examination of the two legal principles pertaining to Stability
Guarantees and their evolvement as established international law principles. As chapter two
will aid a thorough appreciation of the discourse undertaken in the remaining parts of the thesis
being an indispensable examination of the historical trends leading to the current state of the
law pertaining to Stability Guarantee protection under international investment law.
The next three chapters i.e. Chapters 3, 4 and 5 are devoted to answering the main research
question seeking to identify topical issues and pattern of arbitral decisions emerging from
foreign investors’ reliance on previously mentioned four substantive treatment standards in
their claims of violation of Stability Guarantees. Chapter Three which is centered on
Expropriation begins with an historical overview of foreign investors’ pursuit of stability way
back in the heydays of major mass expropriations and nationalizations which impinged on
15
stability commitments. This is followed by an exposition on the topic of Expropriation as an
international law concept; highlighting the conditions for lawful expropriation, the key tests to
determine if an indirect expropriation has occurred and factors to differentiate between indirect
expropriation from non-compensable regulatory actions taken in the public interest. This
Chapter seeks to decipher through systematic review of investment arbitral awards where
investor-claimants have contended repudiation of Stability Guarantees occasioned the violation
of treaty provisions on expropriations, thereby obligating the supposedly erring host States to
pay hefty compensation in excess of fair market value of the investments allegedly
expropriated.
Discourse on the protection mechanisms available with recourse to Full Protection and Security
and Fair and Equitable Treatment standards forms the fulcrum of Chapter Four. These two
treatment standards have been examined together because of the potentials for overlap of issues
relating to both and their acclaimed inter-relationship. With respect to Full Protection and
Security standard, the first part of the Chapter will query arbitral responses to investor-
claimants’ claims that the standard which originally was fashioned to guarantee physical
protection, extend in scope to legal protections including a guarantee of the legal, regulatory
and investment framework existing in the host State when investment decisions were made.
Unsurprisingly, investor-state tribunal findings on this issue are divided due to heterogeneity
of treaty language, tribunals’ unfettered adjudicatory discretion to adopt either a restrictive or
an expansive interpretation of the FP&S Standard and specificities of each case. Fair and
Equitable Treatment is one standard that has been habitually utilized to support and conversely
counter arguments on stability and predictability within investor state arbitration system. As
the above statistical analysis reveals, the Fair and Equitable Treatment which has been labelled
as the most frequently invoked standard in investment disputes, has the highest count of
allegations of breach in relation to the other treatment standards. The range of arguments that
arise from discourse of the Fair and Equitable Treatment are enormous and beyond the scope
of this thesis; hence this chapter is restricted to a consideration of the legitimate expectation
principle which is an element of the standard. The second part of the Chapter Four commenced
with brief overview of the Fair and Equitable Treatment standard for context and thereafter
proceeded to delve into the inquiry whether stability and predictability of the legal and business
environment is an element of the Fair and Equitable Treatment standard. Following which, the
question whether stability guarantees create protectable legitimate expectation is addressed.
16
Chapter Five on Umbrella Clause examines the question if Stability Guarantees are obligations
which host States have undertaken to observe by virtue of their investment treaty commitments.
This is against the background of the effect of Umbrella Clause which requires host States to
honour or observe commitments and undertakings made to foreign investors. ‘Contract Claim
versus Treaty Claim Debate’ was summarized to give context to arguments seeking protection
for contractual Stability Guarantees. Granted that Stability Guarantees are a creation of
contracts, municipal laws or treaties, the protection afforded these variants of Stability
Guarantees differ considerably. Tribunals are more inclined to hold that contractual
stabilization clauses are treaty protectable undertakings which host States are obliged to
observe. Whereas, there is less proclivity for endorsement of obligations supposedly
emanating from general legislations of host States. Typically, host States argue that such
obligations do not fall within the ambit of Umbrella Clause protections since they do not qualify
as specific representations. Conceivably, foreign investors usually argue tenaciously that the
guarantees and undertakings in general domestic laws are obligations. Tribunals’ role in
diffusing this tension and deciding one way or the other, forms the crux of this chapter.
Flowing from Chapters 3, 4 and 5 where Stability Guarantee claims were examined, the
imperative to balance investors’ right to stability vis-à-vis host states’ right to regulatory
flexibility and autonomy was brought to the fore. This is as a result of the fact that the two
competing legal principles of Pacta Sunt Servada on one hand and sovereign regulatory
autonomy enunciated by the Permanent Sovereignty over Natural Resources principle on the
other, are pari-passu entrenched principles under international investment law with neither of
them deemed superior to the other; hence the need for balancing in each case. Chapter Six
therefore commenced by succinctly recapping various tribunal findings calling for a balanced
approach to interpretation of treaty claims. This was immediately followed by identifying
factors contributing to the adoption of balanced interpretive approach. It goes without saying
that reconciling competing interests requires a review of host States’ actions or measures.
Arbitral tribunals are consistently faced with the challenge of choosing an appropriate standard
of review due to lack of coherent and consensual standard of review. Chapter Six explored
existing literature on applicable Standard of Review that my guide tribunals regarding the level
of scrutiny to apply will attempting to do the requisite balancing exercise. Furthermore,
Chapter Six narrows down to considering proportionality as a balancing tool in cases contesting
violation of a stability commitments by host States. Approaches and methodologies of
17
proportionality as a balancing tool were analysed and same were juxtaposed with other
renowned balancing techniques such as Margin of Appreciation theory. This Chapter attempts
to answer one of the research questions if proportionality is an appropriate balancing tool for
adoption by all tribunals in cases relating to Stability Guarantee. Finally, Chapter Six recaps
the research findings as ascertained in the earlier chapters and it also summarizes the
conclusions.
18
CHAPTER TWO
CURRENT LEGAL STATUS OF FDI, POLITICAL RISK, INVESTOR STATE
ARBITRATION AND STABILITY GUARANTEES
2.1 INTRODUCTION
2.2 REGULATING FOREIGN DIRECT INVESTMENT

2.2.1 Definition
2.2.2 Mitigating Political Risks and Regulating in Protection of FDI
2.3 THE ROLE OF INVESTMENT TREATIES IN PROTECTING OF FOREIGN

INVESTMENT
2.3.1 Treatification of Investment Protection in Furtherance of Foreign Investors’
Substantive Rights
2.3.2 Investor-State Arbitration – Effective Protection of Foreign Investment
2.4 STABILITY GUARANTEES – IN CONTRACTS, NATIONAL LEGISLATIONS

AND TREATIES
2.4.1 Contractual Stabilization Clauses
2.4.2 Stability Provisions in Domestic Legislation2.4.3 Treaty Based Stability
Guarantee
2.5 LEGAL PRINCIPLES PTTING FOREIGN INVESTORS’ RIGHTS AGAINST

HOST STATES’ REGULATORY RIGHTS
2.6 CONCLUSION
19
CHAPTER TWO
CURRENT LEGAL STATUS OF FDI, POLITICAL RISK, INVESTOR STATE
ARBITRATION AND STABILITY GUARANTEES
2.1 INTRODUCTION
A lot of countries devote effort, time and resources to fashioning and implementing initiatives,
policies and laws to attract and retain Foreign Direct Investments (FDI) in their states mainly
because of the popular opinion that FDI begets development gains and economic growth.1 This is
bearing in mind that global competition for FDI is intense and foreign investors consider various
factors in deciding where to invest and the amount to invest. Decision to invest mostly border on
either return on investment or investment risks, thereby necessitating the creation of pull factors
by host States desiring inflow of foreign capital.2 In this regard, host States’ institutional design
can serve as a pull factor as it is a germane determinant of FDI. By and large, host States can
control and engineer political pull factors in order to attract foreign investors through fortifying
legal and political institutions and adherence to rule of law tenets. The conventional conception
is that the political climate of a host State needs to be stable and favourable for it to attract foreign
investors whilst the political attitude of host States towards foreign investment and private
ownership of property are important considerations in assessing` the political stability of a host
1
On the issue of gains of FDI, it has been posited that FDI engenders transfer of technology, human resource capacity
development, profit generation by way of corporate taxes, acquisition of skills and innovation in products to the benefit
of the host country. 1 FDI also bring about competition and its attendant benefits eg, productivity, relativity, cost
reduction and opportunities for expansion. Sherif H Seid, Global Regulation of Foreign Direct Investment,(Ashgate
Publishing Limited, 2002) 3. Loungani and Razin in their article published in IMF Quarterly Magazine, concluded
that economic theory and empirical evidence suggest that FDI has a beneficial input on developing host States but
with some potential risks. They therefore advised that focus should be devoted to improving host States’ investment
climate for all kinds of capital including domestic and foreign. Prakash Loungani and Assaf Razin, ‘How Beneficial
Is Foreign Direct Investment for Developing Countries?’38(2) Finance & Development Quarterly Magazine of
International Monetary Fund (IMF), June 2001, 6-9. Furthermore, Overseas Development Institute (ODI), a United
Kingdom based independent think tank on international development and humanitarian issues, contends in its Briefing
Paper that FDI supports development in the aggregate but may not be directly connected to poverty reduction. There
are however indications that FDI can be indirectly linked to poverty reduction by facilitating the creation of an
enabling economic environment. See Oliver Morrissey and DirkWillem te Velde. ‘Foreign Direct Investment: Who
Gains?’ (Briefing Paper, Overseas Development Institute (ODI, 26 March 2002)
2
Pull factors are those economic and political conditions of the host State which engender investors to invest in host
States or enhances the investment of the foreign investor. In simple terms, pull factors are those conditions or
situations that pull in investors. Economic conditions may include access to raw materials, proximity to market; whilst
political conditions include political stability and investment risks, executive ideology. See Nathan Jensen and others,
Politics and Foreign Direct Investment (University of Michigan Press, 2012) 7.
20
State.3 Availability of Stability Guarantees, particularly Stabilization Clauses, have served as pull
factor in many host States. This is due to Stabilization Clauses’ purpose as a political risk
mitigation device to limit the scale of economic loss that may result from host States’ unilateral
abrogation, repudiation or amendment of negotiated contract terms and conditions.4 According to Commented [I4]: The ciitation in footnote 4 is incorrect. The
author's name was not cited at any point in chapter one, hence, i was
Abdullah Al Faruque, ‘[T]he availability of legal protection against political risks is considered to unable to insert the correct citation.
be one of the most significant factors taken into account by foreign investors in long term capital-
intensive projects.’5 It is an investor’s protection response to the risk of regulatory changes that
may adversely affect the investment.6
As this thesis is about the protection of Stability Guarantees through investment treaty arbitration,
it is essential to consider the key concepts underpinning the thesis without which an appreciation
of the review and analysis in later parts of this thesis may be incomplete or taxing. These key
concepts include foreign direct investment, political risks, international investment treaties,
treaties’ standards of protection, investor-state arbitration, Stability Guarantees and related
principles. In addition, the chapter will highlight the interaction between foreign direct investment
and political risk, which has caused not only regulation of foreign investment but also creation of
Stability Guarantees imperative. Stability Guarantee is just but one means of mitigating political
risks affecting investing in host States by foreign investors. Ensuring that this risk mitigation
device known as Stability Guarantee is enforceable and given effect, recourse is had to investor-
state arbitration apparatuses. As it happens, access to investor-state arbitration is necessarily
hinged on the existence of an investment. Investor-state arbitral case law is replete with decisions
on the issue as to what constitutes an investment to enable tribunals assume jurisdiction to
adjudicate investment disputes. For, no matter how stringently created or elegantly drafted a
Stability Guarantee is, if it is not in respect of an investment within the meaning of the applicable
3
Marilise Swart, ‘Introduction’ in Dennis Campbell (ed), International Protection of Foreign Investment (Vol. 1,
Yorkhill Law Publishing, 2009) 1. There are divergent schools of thoughts on whether the authoritarian or democratic
regime encourages FDI; however, such debate is outside the scope of this thesis.
4
Mustafa Erkan, ‘International Energy Investment Law: Stability through Contractual Clauses in Kurt Deketelaere
(ed), Energy and Environmental Law & Policy Series: Supranational and Comparative Aspects (Kluwer Law
International, 2011) 102
5
Abdullah Al Faruque, ‘Validity and Efficacy of Stabilisation Clauses: Legal Protection vs. Functional Value’ [2006]
Journal of International Arbitration 317, 321.
6
Lorenzo Cotula, ‘Reconciling Regulatory Stability and Evolution of Environmental Standards in Investment
Contracts: Towards a Rethink of Stabilization Clauses’ (2008) 1(2) The Journal of World Energy Law & Business,
158.
21
treaty and/or investor-state institutional framework such as ICSID, it will not pass the jurisdictional
hurdle and therefore be deemed unprotectable via investment arbitration. It is therefore crucial
that the concept of investment is examined to distil the definition by scholars, international
organisations, jurists and arbitrators, particularly investor-state tribunals. The correlation between
the concepts of foreign direct investment and political risks will be useful to enable the
understanding of the importance and significance of Stability Guarantees; as such this will be
proffered. A discourse on investment treaties and arbitration is a necessary precursor to any
meaningful examination of Stability Guarantee protection within the corridors of investor-state
arbitration system. The protection as provided by investor-state arbitration mechanisms for
investors’ Stability Guarantees in the three essential forms of stabilization clause, treaty based
Stability Guarantee and domestic legislation will be discussed. This examination paves way for
answering one of the main research questions of this thesis i.e. “Is there an arbitral trend of
decisions emerging from foreign investors’ reliance on the substantive treatment standards in their
claims of violation of Stability Guarantees?" It not only sets the conceptual background, it also
gives context to arguments and issues later to be raised during consideration of the substantive
standards in later chapters. A typical example of why the review embarked on in this Chapter is
necessary and insightful is with respect to the issue of expropriation. The emergence of the hull
formula for compensation is considered extensively in this chapter and this later came to fore in
Chapter three discussions on expropriation. On this note, this Chapter proceeds by first developing
the concept of foreign direct investment, articulating definitions by international organisations,
scholars and arbitral interpretation, succinctly tracing its history down to its modern-day adaption.
Political risk is examined in the subsequent section; not elaborately but sufficient to give context
to the topic.
2.2 REGULATING FOREIGN DIRECT INVESTMENT
2.2.1 Definition
As earlier noted, Foreign Direct Investment (FDI) is a powerful force to reckon with in economic
growth and development throughout the world and countries seek after foreign capital for a variety
of reasons. Defining FDI is not an easy task as FDI definitions differ for different intents and
22
purposes.7 At its basic level, investment which can be defined as the commitment of resources by
a physical or legal person to a specific purpose in order to earn a profit or gain a return8 can be
undertaken domestically and internationally. When commitment of capital is undertaken in a
country different from the physical or legal person’s home country, foreign investment has
occurred. This broadened definition of foreign investment subsumes both FDI and foreign
portfolio investment. It should however be noted that FDI which generally involves long term and
physical investment in host States is distinct from portfolio investment. 9 Furthermore, FDI is
different from international business transaction, which is characterised by arms-length contracts
and more of export transactions and typically of shorter duration. 10 There must be in existence a
parent enterprise and foreign affiliation relationship for FDI to exist. In any case, with these few
characteristics of FDI identified above, the question is, what is FDI? Unfortunately, the answer
lies not in one textbook, legal document, repository or database but can be garnered from various
definitions and judicial interpretations. Instructive to this discourse are the parameters laid down
by International Monetary Fund (IMF) and Organisation for Economic Co-operation and
Development (OECD) for setting an internationally acceptable standard for measurement or
compilation of FDI statistics. Direct Investment Technical Expert Group, a combined committee
of IMF and OECD stated in its joint publication11 that both IMF’s12 and OECD’s13 criteria for Commented [I5]: The citation for footnote 11 does not match
the online sources found. please verify and write out the correct
defining direct investment are largely the same. The Committee expressed the opinion that the citation
basic principles used for the definition of direct investment include the concept of ownership which
necessarily does not require absolute control of the direct investment by the direct investor.
7
M Sornarajah, The Settlement of Foreign Investment Disputes (Kluwer Law International, 2000) 8.
8
Jeswald W Salacuse, Three Laws of International Investment: National, Contractual and International Framework
for Foreign Capital (Oxford University Press 2013) 3.
9
FDI is different from portfolio equity investment which is an investment in form of shares by a foreign based
company (otherwise known as investor)0 towards the acquisition of less than 10% of the overall voting power of
another company. See Salacuse (n 8) 15. The difference between FDI and FPI is not the form of investment but in
the percentage of the shares which impacts the control of the company. FDI targets the control of the company or
enterprise in a foreign country. Some have advocated at least a 10% voting power will suffice to translate such an
investment to FDI as opposed to FPE. See Salacuse (n 8) 14, quoting Stephen D Cohen, Multinational Corporations
and Foreign Direct Investment: Avoiding Simplicity, Embracing Complexity (OUP Catalogue 2007) 38. See also
Blaire Harrison, Foreign Direct Investment (Nova Science Publisher Inc, 2009) 6.
10
Sornarajah (n 7) 5.
11
IMF Committee on Balance of Payments Statistics and OECD Workshop on International Investment Statistics
Direct Investment Technical Expert Group (DITEG), ‘Direct Investment – 10 Percent Threshold of Voting
Power/Equity Ownership, employment’ (Issues Paper 2, 2004).
12
International Monetary Fund (IMF), Balance of Payments Manual (5th edn, 1993) <
https://www.imf.org/external/np/sta/bop/BOPman.pdf > accessed 14 June 2016.
13
OECD, Benchmark Definition of Foreign Direct Investment (3rd edin, 1996) <
http://www.oecd.org/investment/investment-policy/2090148.pdf > accessed 14 June 2016.
23
According to the Committee, other important parameters for determining the existence of FDI
include existence of lasting long-term relationship objective and the ability to exercise significant
degree of influence on the management of the enterprise.14 Meanwhile to construe “ownership”,
a minimum 10 per cent criterion has been advocated by both IMF and OECD. To IMF ‘A direct
investment enterprise is defined as an incorporated or unincorporated enterprise in which a direct
investor who is resident in another economy, owns 10 per cent or more of the ordinary shares or
voting power (for an incorporated enterprise) or the equivalent (for unincorporated enterprise)’.15 Commented [I6]: citations for paragraphs 15, 16 and 17 are
inaccurate.
As earlier noted, OECD also subscribes to the 10 per cent minimum criterion when it
recommended that ‘a direct investment enterprise be defined as an incorporated or unincorporated
enterprise in which a foreign investor owns 10 per cent or more of the ordinary shares or voting
power of an incorporated enterprise or the equivalent of an unincorporated enterprise’16
Although both organisations do not propose any qualification or proviso to the 10 per cent cut off
point and do not encourage flexibility in application of the rule, they both acknowledge that the 10
per cent rule is not sacrosanct. This is because in certain instances an investor with less than 10
per cent shareholding or voting stock may have an effective voice in the management of the
enterprise whereas an investor owning more than 10 per cent interest may not be able to exercise
significant influence or participation over the affairs of the enterprise.17 Colin White and Miao Fan
whilst acknowledging that FDI is an ambiguous concept quoted Imad Moosa who defined FDI as
the process whereby residents of one country acquire ownership of assets for the purpose of
controlling the activities of a firm in another country.18 To Sornarajah, FDI is a transaction made
in the host State by a foreign investor for the purpose of setting up long term relationship typically
with a State Party or its entities.19 According to Klaus Berger, the desired result of FDI is for
foreign investor to acquire lasting interests with powers of management and control over the
enterprise in the host State. 20 To Klaus Berger, in the absence of the “lasting interest” and
14
DITEG, ‘Direct investment: 10 per cent threshold of voting power/equity ownership, employment’ (Issue Paper #
2, 2004) 2 < https://www.imf.org/external/np/sta/bop/2004/op2.pdf > accessed 24 September 2016.
15
IMF (n 12) 86.
16
OECD (n 13) 8.
17
Ibid.
18
Colin White and Miao Fan, Risk and Foreign Direct Investment (Palgrave Macmillan, 2006) 42.
19
Sornarajah (n 7 ) 5.
20
Klaus Peter Berger, ‘New Multilateral Investment Guarantee Agency Globalizing the Investment Insurance
Approach towards Development’ (1988) 15 Syracuse J. Int'l L. & Com 13, 17.
24
“management and control” criteria, the foreign investment can be considered portfolio investment
basically for its purely capital yielding objective.21
As can be seen in the definitions proffered above, defining FDI is no mean feat as there are various
and divergent parameters for determining same. Whilst IMF/OECD’s definition focuses on
minimum shareholding and participation in management, Imade’s definition stresses ownership
and control. With rising globalisation of economic activities, it is increasingly becoming difficult
to cursorily identify FDI as some economic activities which though have the semblance of FDI are
indeed and in truth, upon in-depth scrutiny, not FDIs. 22 The disparity in definitions and
descriptions of foreign investment particularly those subject to protection of investment treaties
and agreements, have formed the crux of a number of investment arbitration proceedings. The
issue of definition of investment is central to the subject of international investment law,
considering investor-state arbitration practice exist to promote and protect investments.23 For an
investment to be afforded treaty protection, it should fall within the definition of either an
investment treaty or Article 25 of ICSID Convention for ICSID administered arbitrations. Article
25 ICSID Convention provides that the jurisdiction of the ICSID shall extend to any legal dispute
arising directly out of an investment. The ICSID Convention did not attempt to define an
‘investment’ thereby leaving it to arbitral tribunals’ interpretive discretion based on the relevant
investment treaty. Most investment treaties define ‘investment’ elaborately as it is usual for the
first section of investment treaties to offer general definition of investment and investors. In the
main, arbitrators usually rely on two instruments to determine what an investment is and these
include the applicable treaty and ICSID Convention for ICSID cases, that for ICSID cases. Commented [I7]: REVIEW THIS SENTENCE.
Determination of the scope of application of rights and obligations under international investment
agreements to a large extent turn on the definition of investor and investment. For instance, the
Energy Charter Treaty in Article 1(6) defined investment as every kind of asset, owned or
controlled directly or indirectly by an Investor and includes:
21
Ibid.
22
OECD outlined five (5) instances of cross border transactions which at a glance can pass for FDI but which in fact
do not qualify as FDI as having not met the criteria set by OECD. See OECD (n 13) 11.
23
ML Campbell, S Laurence, W Matthew, ‘International Investment Arbitration: Substantive Principles’ Formatted: Font: Italic
(OUP 2007). 10 .
25
(a) tangible and intangible, and movable and immovable, property, and any property rights such
as leases, mortgages, liens, and pledges;
(b) a company or business enterprise, or shares, stock, or other forms of equity participation in a
company or business enterprise, and bonds and other debt of a company or business enterprise;
(c) claims to money and claims to performance pursuant to contract having an economic value and
associated with an Investment;
(d) Intellectual Property;
(e) Returns;
(f) any right conferred by law or contract or by virtue of any licences and permits granted pursuant
to law to undertake any Economic Activity in the Energy Sector.
Energy Charter provision on definition of investment concludes by stating that ‘“Investment”

refers to any investment associated with an Economic Activity in the Energy Sector and to
investments or classes of investments designated by a Contracting Party in its Area as “Charter
efficiency projects” and so notified to the Secretariat.’ While some treaties such as NAFTA
provide very broadened definition of investment to include Portfolio investment, some other
treaties such as 2005 Germany Model BIT provides no such broadened definition of investment.
As to what constituted ‘investment’ for purposes of the ICSID Convention or particular investment
treaties, Grand River v USA 24 tribunal pointed out that many of the investor-state arbitrations
involved treaties containing broad and sometimes open-textured definitions of investment unlike
NAFTA’s Article 1139 which is neither broad nor open-textured. The tribunal added that
NAFTA’s Article 1139, ‘prescribes an exclusive list of elements or activities that constitute an
investment for purposes of NAFTA.’
What is an investment subject to protection of international investment law is indeed a study on

its own with an avalanche of literature which will often start with the Fedax v Venezuela25 case
being one of the earliest cases on definition of investment. In this case that was brought pursuant
to Netherland-Venezuela BIT, the tribunal was required to determine if a Promissory Note was a
24
Grand River Enterprises Six Nations, Ltd and others v United States of America, Award 12 January 2011, Paras
81,82 (hereinafter Grand River v USA).
25
Fedax NV v The Republic of Venezuela, ICSID Case No. ARB/96/3, Decision on Jurisdiction, 11 July 1997
(hereinafter Fedax v Venezuela)
26
treaty protectable investment. To Venezuela, the Promissory Note could not qualify as an
investment because of lack of direct long-term transfer of financial resources. Relying on the
submission of a learned scholar in the field of international investment law, the tribunal articulated
five features of an investment to involve: (i) certain duration; (ii) certain regularity of profit and
return; (iii) assumption of risk; (iv) a substantial commitment; and (v) significance for the host
State’s development. On the basis that the Promissory Note met the basic features of an investment
as afore-mentioned, the tribunal rejected Venezuela’s arguments that the Promissory Note was not
an investment and assumed jurisdiction over the claim.
The principle expounded by the Fedax v Venezuela tribunal was applied in the popular case of
Salini v. Morocco, which has come to be known as the ‘Salini Criteria’. The Salini tribunal adopted
all but ‘certain regularity of profit and return’ out of the five Fedax criteria in its definition of
investment when it stated that:
The doctrine generally considers that investment infers: contributions, certain duration of
performance of the contract and a participation in the risks of the transactions. In reading the
Convention’s preamble, one may add the contribution to the economic development of the host
State of the investment as an additional condition.26
While the Joy Mining v. Egypt27 and a host of other tribunals applied the Salini Criteria, Biwater
v. Tanzania28 criticised Salini tribunal approach on the basis that the text of Article 25 ICSID
Convention contained no reference to the criteria established by Salini tribunal and that the
negotiation history of ICSID Convention deliberately left the definition of investments open.
Consequently, it was considered improper for the Salini tribunal to impose its conception of
investment on the parties. Contending further that such imposition has the likelihood of excluding
26
Salini Costruttori SPA and Italstrade SPA v Kingdom of Morocco, ICSID Case No ARB/00/4, Decision on
Jurisdiction 23 July 2001, Para 52 (hereinafter Salini v Morocco)
27
Joy Mining Machinery Limited v. Arab Republic of Egypt, ICSID Case No ARB/03/11, Award on Jurisdiction, 6
August 2004 (hereinafter Joy Mining v Egypt). Joy Mining v Egypt tribunal found that no investment exists in a dispute
brought pursuant to UK – Egypt BIT over performance guarantees given to the investor-claimant by Egyptian State
controlled enterprise.
28
Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No ARB/05/22, Award 24 July 2008,
para 323 (hereinafter Biwater v Tanzania)
27
covered investments and is in contradiction of individual agreements between investors and host
States. Moreso, this is inconsistent with BIT’s broad definition of investments.
The Annulment Decision in MHS v Malaysia29 equally criticised the Salini criteria and described
it as ‘a gross error that gave rise to a manifest failure to exercise jurisdiction.’ The Annulment
Committee in tandem with the position of Biwater tribunal, maintained that the history of ICSID
Convention’s negotiation nowhere points to Salini criteria and that Salini’s approach will unduly
narrow the circumstance under which parties may have recourse to ICSID.
This is an area of major controversy as it provides basis for arbitrators to assume subject matter
jurisdiction over any dispute (rationale materiae). Due to the non-defined use of the term
‘investment’ in the jurisdictional clause of ICSID Convention, tribunals have had to rely on
definitions in investment treaties. The nature and form of an economic activity are key
determinants of whether or not it is an investment within the meaning of the ICSID Convention or
the treaty. To be noted is CSOB v. Slovakia tribunal assertion that an investment is a complex
operation, composed of various interrelated transactions or economic activities which should not
be viewed in isolation.30 Further discussion on the definition of investment goes beyond the scope
of this thesis.31 In this Study the definition or description of FDI proffered by both IMF and OECD
suffices for our purpose.
2.2.2 Mitigating Political Risks and Regulating to Protect FDI
Foreign investment protection is the aggregate term of the various measures available to mitigate
political risks including those affecting the stability of host States’ legal and investment
framework. Suffice to say that the whole essence of the concept of foreign investment protection
is the determination of an acceptable just and fair standard of treatment to be meted to foreign
29
Malaysian Historical Salvors, SDN, BHD v Malaysia (2005) ICSID ARB/05/10, Decision on the Application for
Annulment, 16 April 2009 (hereinafter MHS v Malaysia)
30
Ceskoslovenska Obchodni Banka, AS v The Slovak Republic, ICSID ARB/97/4, Decision of the Tribunal on
Objections to Jurisdiction, 24 May 1999, para 72 (hereinafter CSOB v Slovak Republic) p
31
Discussion on definition of investment will however be undertaken if same is instrumental to the determination of
the existence of treaty protectable Stability Guarantee.
28
investors by host States.32 It is now widely acknowledged that a foreign investor is entitled to a
level of international protection against acts and conducts of host States, which might undermine
its investment in the host State. In other words, protection is to ensure protection of foreign
investors against unacceptable measures or actions of host States by international law rules, which
are independent of those of the host States.33 On the international plane, UNCTAD has contributed
to shaping investment policies and regulations in countries around the world in order for these
countries to get the largest development gains from FDI. This is mainly by encouraging host States
to design their investment framework in line with UNCTAD Investment Policy Review for
Sustainable Development (IPFSD). 34 Within National fora, FDI is regulated by one form of
regulation or legislation stating the regulatory authority, entry pre-conditions, permissible
investments sectors, controls which FDI is subject to etc.35 It is thus acknowledged that regulation
of FDI must be hinged on a legal framework for it to be effective. Beyond regulation of foreign
investment to douse the deleterious effect of FDI, a middle course approach adopts an ideal of the
neo-classical school which makes a case for protection of FDI principally pursuant to international
law principles. Protection of foreign investment became necessary because of the non-commercial
risks associated with FDI. In practical terms, all investments are fraught with one form of political
risks or the other. The fact that a relationship exists between political risks and FDI is
incontrovertible as inherent in every investment opportunity are some elements of risk. 36
According to Colin White and Miao Fan, risk is an ever-present associate of progress that
inevitably accompanies good pecuniary return.37 Indeed, the gains of FDI come with concomitant
risks.38 Risks is a determinant of FDI as it can constrain the flow of investment considering that
less investment takes place in countries perceived to be risky.39 To a Zimbabwean anonymous
32
Surya P Subedi, International Investment Law: Reconciling Policy and Principle (2nd edn, Bloomsbury Publishing
2016 ) 9.
33
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press 2012)
3.
34
NCTAD, ‘Investment Policy Framework for Sustainable Development
(IPFSD)’<http://unctad.org/en/PublicationsLibrary/diaepcb2012d5_en.pdf> accessed 18 October 2017.
35
.Sherif H Seid, Global Regulation of Foreign Direct Investment,(Ashgate Publishing Limited, 2002) 34. .
36
White & Fan (n 18) 24.
37
Ibid.
38
Noah Rubins and N Stephan Kinsella, International Investment, Political Risk and Dispute Resolution: A
Practitioner’s Guide, (Oceana Publications – OUP 2005).
39
Ibid 5.
29
investor, ‘Capital is a coward. It doesn’t go where it perceives danger.’40 A singular definition
eludes the concept of risk to the extent that inconsistency in the approach of defining same is
rampant. Particularistic approach adopted by Olsoon41 relates risks to instances where there is
lack of foreign currency while the definition set out in ISO Guide 73 links risk to objectives
because it defines risk as the “effect of uncertainty on objectives”; which effect may be positive,
negative or a deviation from the expected outcome.42
As to what exactly is political risk, various definitions have been proffered by scholars,
commentators and international organisations.43 To Comeaux and Kinsella, political risk is the
risk that the laws of a country will unexpectedly change to the investor’s detriment after the
investor has invested capital in the country, thereby reducing the value of the individual’s
investment.44 OECD’s definition of political risk is very expansive as it covers a broad spectrum
of investments related to both trade and direct investment and events which are within and outside
host States’ direct control. 45 In Year 2009 World Investment and Political Risk Report of
Multilateral Investment Guarantee Agency (MIGA), political risk was also defined broadly as the
probability of disruption of the operations of multinational enterprises by political forces or events,
whether they occur in host countries, home country, or result from changes in the international
40
Reported to have been expressed on 10 May 2010 – quoted by Krishna Chaitanya Vadlamannati, Impact of Political
Risk on FDI Revisited–An Aggregate Firm Level Analysis (2012) 38(1) International Interactions, 111-139
<http://www.uni-heidelberg.de/md/awi/professuren/intwipol/international.pdf> accessed 20 October 2015.
41
Carl Olsoon, Risk Management in Emerging Markets – How to Survive and Prosper (Pearson Education Limited
2002) 35. Olsoon defines country risk as the risk that a foreign currency will not be available to allow payment due
to be paid because of general lack of foreign currency or rationing of foreign currency by government. See also, White
and Fan (n 81) 24.
42
ISO Guide 73: Risk Management – Vocabulary – Guidelines for Use in Standards’, (2009) <
http://www.iso.org/iso/catalogue_detail.htm?csnumber=34998> accessed 14 June 2016.
43
Foreign direct investment is beset with all forms of business, commercial and political risk. An examination of
commercial risks in the strict sense of the word, besetting foreign investment shall not be embarked so as not to digress
from the focus of this thesis which is political risks that have potentials to adversely affect investments’ profitability
and consequently erode foreign investments’ value and worth. The focus on political risk is driven by the aim of this
thesis which is basically to critique investment treaty arbitration mechanisms that protect and enhance Stability
Guarantees.
44
Paul E Comeaux, and N Stephen Kinsella. ‘Reducing Political Risk in Developing Countries: Bilateral Investment
Treaties, Stabilization Clauses, and MIGA & (and) OPIC Investment Insurance.’ (1994) 15 NYL Sch. J. Int'l & Comp.
L,1
45
‘The risk of non-payment on an export contract or project due to action taken by the importer’s host government.
Such action may include intervention to prevent transfer of payments, cancellation of a license, or events such as war,
civil strife, revolution, and other disturbances that prevent the exporter from performing under the supply contract or
the buyer from making payment. Sometimes physical disasters such as cyclones, floods, and earthquakes come under
this heading.’ See OECD, ‘Glossary of Statistical Terms – Political Risk’
<https://stats.oecd.org/glossary/detail.asp?ID=5990> accessed on 14 June 2016.
30
environment.46 According to the Report, with respect to foreign investors’ investments in host
States, political risk is mainly determined by uncertainty over the actions of governments, political
institutions and others. Whilst in the investors’ home States, political risk may arise from political
actions directly aimed at investment destinations, such as sanctions, or from policies that restrict
outward investment.47 Furthermore, Political risk has been held to refer to losses caused by the
actions or inactions of a government (host or export country), a third-party country or supranational
entity (e.g. UN, EU), which actions or inactions may deprive an investor of its assets, prevent or
restrict the performance of a contract and have an influence on the repayment of loans to financing
banks and lenders. 48 AON’S in-exhaustive list of possible political risk include public
measures/state interference, breach of the underlying contract or concession agreements, import
or export embargos or border closures, cancellation or non-extension of licences, currency
inconvertibility or transfer risks, expropriation and creeping expropriation, confiscation,
nationalisation or deprivation, acts of war on land or of civil war, civil unrest, terrorism, sabotage,
non-honouring of arbitration award, fair and unfair calling of contractual bonds, non-honouring of
bank guarantees or letters of credit etc.49
In addition, political risks which negatively affect investors’ profitability can be categorised under
three broad headings according to UNCITRAL.50 In this regard, it was suggested that political
risk can be traditional,51 regulatory52 and quasi-commercial53 in nature. It is necessary to however
acknowledge that investors in recent times now contend with political risks associated with host
States subtle interference in investments through regulatory taking, creeping expropriation or
46
MIGA, ‘The Challenge of Political Risk’ <https://www.miga.org/documents/flagship09ebook_chap2.pdf>
accessed on 20th September 2016.
47
Ibid.
48
AON Risk Solutions, ‘Political Risks in sub-Saharan Africa – A View from the Power Sector’
<http://www.aon.com/unitedkingdoum/products-and-services/industry-expertise/attachments/power/political-risk-
white-paper2014.pdf> accessed on 20th September 2016.
49
Ibid.
50
UNCITRAL ‘UNCITRAL Legislative Guide on Privately Financed Infrastructure Project 2001’
<https://www.uncitral.org/pdf/english/texts/procurem/pfip/guide/pfip-e.pdf> accessed 20 September 2016.
51
For example, nationalization of the investor’s assets or imposition of new taxes that jeopardize the investor’s
prospects of debt repayment and investment recovery.
52
For example, introduction of more stringent standards for service delivery or opening of a sector to competition.
53
For example, breaches by host States or project interruptions due to changes in host State’s priorities and plans.
31
coercive re-negotiation as opposed to erstwhile practices when investors were faced with full-
fledged nationalization or direct expropriation.54
Notwithstanding the divergent and multifarious approaches or perspectives to defining risk, an

undisputable fact is that investors typically face a variety of risks in the course of their investments
as there is no investment without risk.55 Beyond ordinary business/commercial risk which besets
every investor, political risk is a major concern to investors particularly those investing in
developing countries with track record of instability and a regime hostile to property rights.56 Long Commented [I8]: The footnote is originally (n42) but changed
to (n44) when footnotes 25 and 29 were included. this changes bears
term, capital intensive, politically driven and volatile investments such as those in the natural footnote 26 and 30, and will auto-correct itself to 25 and 29 once the
changes made is accepted
resources and energy infrastructure sectors are particularly vulnerable to political risks due to their
complex nature. Investment in the oil and gas sector which is an immobile type of investment is
by nature inelastic to unfavourable policies and therefore susceptible to political risks. Inelastic to
the extent that oil and gas investors cannot readily withdraw or divest without major efforts or
costs due to high asset re-deployment, demobilization and sunk costs. In short, they are often more
like hostage investors in the host States and therefore vulnerable to opportunistic tendencies of
host States.57 This view is reiterated in the following assertion of Schill which attributes incessant
Stability Guarantee breaches to opportunistic behaviour of the host States:
‘While host State and investor initially have largely converging interests in attracting and making
investments, the situation changes once an investment has been made. As the investor’s option to
simply withdraw his investment and re-employ it elsewhere without severe financial loss is
limited, the host State has an incentive to change unilaterally the original investment terms by
54
Peter D Cameron, International Energy Investment Law – The Pursuit of Stability (Oxford University Press 2010)
142.
55
Erkan, (n 4) 21, 21.
56
Comeaux and Kinsella (n 44)
57
Jensen and others (n 2) 13. Vulnerability rationalized through the obsolescence bargain theory of Raymond Vernon
in Sovereignty at Bay (1971). --- The theory describes the changing nature of bargaining power between foreign
investors and host States. The theorist postulated that the initial entry bargain favours the investor but over time the
bargaining power shifts to the host state as investor’s assets increase and are transformed into hostages. The initial
bargain is somewhat deemed obsolete and host state takes advantage of the opportunity to impose new conditions
and/or force renegotiation of investment terms. See Lorraine Eden, Stefanie Lenway and Douglas A. Schuler, ‘From
The Obsolescing Bargain to The Political Bargaining Model’ (Annual Meetings of the Academy of International
Business in the Session, “International Business & Government Relations in the 21st Century”) <
http://www.voxprof.com/eden/Publications/Eden-Lenway-Schuler-AIB-2004.pdf > accessed 2 July 2017.
32
changing an investment contract, amending the law governing the investment, or even
expropriating the investor without compensation.’58
Of the numerous political risks identified by UNCITRAL, of particular relevance to this analysis
is the risk that affects the stability and certainty of host States’ legal and investment regime. These
subsets of political risks mainly derive from the exercise of host States’ political power to take
actions which may cause economic loss to foreign investors. Needless to say, that stability of the
legal and business environment is an important consideration in every investment decision since
the possibility of a unilateral change in the law of the host State could constitute a significant risk
to the financial viability of a project.59 The above passage of Schill underscores extractive industry
investors’ unique need for Stability Guarantees. Moreover, in an economic study that explored
the linkage between political risks, institutions and FDI inflow, it was discovered that government
stability, the absence of internal and ethnic tension, basic democratic rights and ensuring law and
order are highly significant determinants of FDI inflow.60
As political risk is not within investors’ control and it is impossible to avoid same in its totality, it
is imperative for political risk to be adequately mitigated or managed by possibly available means
including investment legislatures, 61 investment treaties mechanisms, 62 internationalized
contractual assurances63 and political risk insurance. 64 Political risk insurance are available for Commented [I9]: This footnote was originally (n62). i am
pointing your attention to this footnote because i am uncertain which
author/text you intended to cite in this footnote and the preceeding
one.
58
Stephan W Schill, Multilateralization of International Investment Law, (Cambridge University Press 2009) 3.
59
Osamede Osasu, ‘Legitimate Expectations and Political Risk: Lessons from Investment Arbitration for Energy
Investors’ (2013) 32 International Energy Law and Taxation Review,249-262.
60
Matthias Busse and Carsten Hefeker , ‘Political Risk, Institutions and Foreign Direct Investment’ (2007) 23 (2)
European journal of political economy, 397-415.
61
Ashurst, ‘International Investment Protection’ , 1 < https://www.ashurst.com/doc.aspx?id_Resource=4653 >
accessed 29 May 2017.
62
Investment treaties mechanisms for controlling political risks will avail foreign investors only when there is in
existence an effective investment treaty between the home state of the foreign investor and the state hosting the
investment. Admissibility of foreign investors’ claim must be based on consent granted in an extant investment treaty.
More of this issue is discussed in later parts of this chapter.
63
This protection presupposes existence of a State Contract. State Contract being interpreted as a contract between
foreign investor and a sovereign party or an agency of the sovereign. Hence, without a State Contract, this risk
mitigation device is not available to foreign investors. Contractual guarantees are afforded through inclusion of certain
clauses which tend to minimise political risk. These include arbitration clause, choice of law clause and stabilization
clause if and when agreed to by host State. For a better understanding of contractual political risk reduction
mechanisms see Rubin and Kinsella (n 44) 42. A sunset of this will also be discussed in later parts of this Chapter.
64
Rubin and Kinsella are in favour of foreign investors’ adoption of a combination of measures to reduce political
risks since investment treaties guarantee certain standards of treatment for the protection of foreign investors whilst
internationalized contracts guarantee for foreign investors at the very minimum, access to international dispute
resolution mechanism before neutral tribunals. Rubins and Kinsella (n 38) 6
33
procurement from a variety of sources including private insurers, national-sponsored insurance
agencies and international multilateral organization.65 In the words of Comeaux and Kinsella, ‘…
purchase of political risk insurance is one of the most direct and simplest steps that an investor can
take to reduce exposure to political risk.’66 Protection afforded by political risk insurance was
tested in the popular case of Revere Copper v. OPIC, where Revere Copper an American company
invested in the Bauxite-mining sector of Jamaica. Revere Copper procured an OPIC insurance
which it later sought to leverage on for redress when the Government of Jamaica in repudiation of
Stability Guarantees previously granted to Revere Copper, significantly increased tax rates which
led to the cessation of Revere Copper’s operations. The tribunal was required to determine whether
an expropriation had occurred in line with expropriation definition included in the terms and
conditions of the insurance policy. As the tribunal found in favour of Revere Copper, Revere
Copper could claim for losses suffered as a result of Jamaican Government breach of stabilization
clause and expropriatory conducts.67 Commented [I10]: A new footnote was again created...since
this was the first mention of the case in this chapter, i decided to
introduce the citation at this point.
Having asserted that political risk is a necessary part of investing in foreign countries, it is therefore
in the interest of foreign investors to not only find ways to mitigate political risks by means
aforementioned but also seek for a more robust and more encompassing avenue of protecting their
investments in foreign countries. In fact, a look at the evolvement of modern day protection
techniques supports the idea that the protection of foreign investment is a direct result of the
political risks prevalent in the 20th century. On this premise, it is apt to analyse what protection
mechanisms investment treaties offer that has led to the upsurge in investment arbitration.
65
Overseas Private Investment Corporation, popularly referred to as OPIC is a United State government agency that
provides political risk insurance and project financing to US investors. OPIC is available to cover three main headings
of political risks (currency inconvertibility, expropriation and political violence) under which other types of political
risks are subsumed. Apart from OPIC, other major government-sponsored political risk insurance agencies which are
members of the International Union of Credit and Investment Insurers (also known as Berne Union) include
Germany’s PwC Deutsche Revision, Japan’s Nippon Export and Investment Insurance. MIGA, a World Bank
multilateral institution also offers to nationals of its member countries with investments in a foreign country, political
risk insurance to complement government-sponsored and private insurer insurance packages. In addition to providing
insurance coverage for currency inconvertibility, expropriation and political violence; MIGA also covers contract loss
as a separate clause of risk insurance. Private insurers such as Lloyds of London, American International Group,
Citicorp International Trade Indemnity also offer political risk coverage similar to those offered by OPIC and MIGA
although at a more expensive or higher premium.
66
Comeaux and Kinsella (n 44) 69; Rubins and Kinsella (n 38) 70
67
Revere Copper & Brass Inc v Overseas Private Investment Corporation, 17 ILM (Int’l Arb Trib 1978) 1321, 1322
(hereinafter Revere Copper v OPIC).
34
2.3 THE ROLE OF INVESTMENT TREATIES IN PROTECTING OF FOREIGN
INVESTMENT
2.3.1 Treatification of Investment Protection in Furtherance of Foreign Investors’ Substantive Rights
The space filled by investment treaties in the sphere of protection available to foreign investment
is indeed a large chunk due to availability of substantive protection standards and access to
international arbitration. As the analysis in subsequent chapters will reveal, investment arbitration
offers foreign investors enormous avenues for canvassing stability breaches claims and they have
indeed tapped into this opportunity. To date, not less than 800 investment arbitration cases have
been initiated under various auspices with arbitration under the administration of ICSID having
the largest share.68 At least 25% of these cases relate to breach of one form of Stability Guarantee
or the other.69 While a detail discussion on investment treaties in general will go beyond the scope
of this thesis, at this point it is essential to attempt to decipher what investment treaties connote.
Investment treaties are treaties within the meaning of Article 2 (1) (a) of the Vienna Convention
on the Law of Treaties being agreement concluded between states in written form and which is
governed by international law. 70 Investment treaties also often referred to as international
investment agreements, can be bilateral, regional and sectoral for the purpose of providing
substantive and procedural protections for foreign investors against host States’ arbitrary and
undue interference.71 Save for being arrangements between three or more countries as opposed to
68
As at 31st December 2017, Investment Policy Hub reported a total of 817 cases as Known treaty-based investor-
State arbitrations. International Center for Settlement of Investment Disputes (ICSID) is the administering institution
for 520 of said known treaty-based arbitrations.
69
By virtue of the quantitative analysis undertaken with the aid of the NVivo software, approximately 200 cases have
Stability Guarantee related claims.
70
United Nations, ‘Vienna Convention on the Law of Treaties’ (opened for signature 23 May 1969, entered into force
27 January 1980) 1155 UNTS 331, The Vienna Convention on the Law of Treaties (VCLT) which was drafted by
the International Law Commission (ILC) of the United Nations is a treaty concerning the international law on treaties
between states. VCLT was adopted on 22 May 1969 and opened for signature on 23 May 1969. The Convention
which entered into force on 27 January 1980 has been ratified by 116 states as of January 2018.
71
The first Bilateral investment treaty was between the Federal Republic of Germany and Pakistan for the Promotion
and Protection of Investments (done at Bonn, 25 November 1959; entered into force on 28 April 1962) 457 UNTS 23
[Registration Number 1675]. In this thesis, the term “investment treaty or treaties” will be used in a generic sense to
connote BITs, MITs, Investment Chapters in FTA and Investment agreements.
35
between only 2 countries, Multilateral Investment Treaties (MIT)72 operate in substantially the
same manner as BITs. Investment treaties afford state parties the opportunity to set out the standard
that will be applicable to the investments of their respective nationals in each other’s country.
These standards include national treatment,73 umbrella clause,74 most-favoured-nation treatment,75
fair and equitable treatment,76 full protection and security,77 transfers78 and prohibition of direct
and indirect expropriations without compensation.79 To substantiate these protection treatments,
investment treaties create treaty-based rights to arbitrate various categories of international
disputes by containing the consent of host States to Investor-State arbitration. Despite the
72
Multilateral Investment Treaties or MITs are treaties between three or more states, often within defined set group
either geographic region or sectoral. Notable MITs include the Energy Charter Treaty which is sector specific, The
North America Free Trade Agreement (NAFTA), The Southern Common Market or MERCOSUR Treaty, The
Association of Southeast Asian Nations or ASEAN Treaty.
73
National Treatment as an investment treaty standard of protection entitles foreign investors to be accorded treatment
no less favourable than that, which host State accord, its own investors. National Treatment (NT) and Most Favoured
Nation Treatment are investment treaty standards categorised as non-discrimination standard. These two standards
intend to create level playing field for investors of all nations. Whilst in some BITs, National Treatment can be
asserted to claim pre-entry and right of establishment rights together with post-entry right, some BITs restrict the
application of National Treatment to only post-entry phases of an investment.
74
The Umbrella clause (or observance of undertaking clause or pacta sunt servanda clause) is a treaty provision which
obliges host States to observe or guarantee the observance of all their commitments and obligations. In other words,
it is host States’ confirmation to observe obligations entered into with foreign investors in relation to foreign investors’
investments.
75
Most Favoured Nation Treatment is a standard crucial to protection of foreign investors due to its importing
attributes. MFN effectively widens or broadens the rights of foreign investors since it can be used to incorporate
protection standards from treaties with other countries. As a relative and variable standard depending on the treatment
meted to others, it incorporates a mechanism for constant progress of foreign investment protection.
76
Investment treaties typically provide for fair and equitable treatment of foreign investments which has turned to the
most frequently invoked standard in investment disputes. What it means in essence is that all investors/investments
are to be treated fairly and equitably. The question is what is fair and equitable? With no clear definition of the FET
standard proffered by investment treaties, arbitral practice has in the last few years identified notable and specific
components of this standard to include the doctrine of legitimate expectation, discrimination, transparency, bad faith,
due process, coercion, threats and harassment. Instructive is the dictum of Waste Management tribunal when it stated
that FET will be breached if host States’ conduct is “arbitrary, grossly unfair, unjust or idiosyncratic, discriminatory
and exposes claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which
offends judicial propriety” See, ,Waste Management Inc v.United Mexican States (II), ICSID ARB(AF)/00/3. Award,
30 April 2004 (hereinafter Waste Management v Mexico (II)); Andrew Paul Newcombe and Lluis Paradell, Law and
Practice of Investment Treaties: Standards of Treatment (Kluwer Law International 2009).
77
Full Protection and Security treatment standard is a common feature in BITs which seeks to confer on foreign
investors a right to have their investment safeguarded by host State and its apparatus. FP & S which is often subsumed
with FET as the minimum standard of treatment required by international law, has many formulations. Full protection
and Security implies a duty of due diligence compelling host States to be vigilant and to take necessary precautionary
measures for the protection of foreign investors and investments.
78
A treaty based standard of protection nearly in all BITs and MITs include assurances that investors will be permitted
to transfer funds into and out of the host State freely subject to certain restrictions and exceptions. Ability to freely
repatriate investment profit is vital in making investment decisions. Investors right to freedom of transfers can either
be transfer into and out of host States or simply outwards transfer only.
79
Protection from uncompensated and discriminatory expropriation is another guarantee found in investment
treaties. Expropriation, being the formal withdrawal of property by host State can either be direct or indirect.
36
conclusion of the first BIT in 1959, it was not until the 1990s 80 that BITs multiplied and the
proliferation cut across development strata.
Compared to BITs which are numerous and currently numbering over 3000, 81 MITs are few and
are usually region and sector based. Usually, these regional and sectoral treaties or Free Trade
Agreements geared towards strengthening economic ties and encouragement of greater integration,
are more encompassing and do often contain investment chapters that give rise to foreign
investors’ protectable rights.82 For instance, Chapter 11 North American Free Trade Agreement
(NAFTA), Chapter 10 of the Dominican Republic–Central America Free Trade Agreement
(CAFTA-DR) and other similar agreements like the United States-Chile Free Trade Agreement
(USCFTA) all contain investment provisions. The 1994 Free Trade Agreement between Mexico,
Colombia and Venezuela (Cartagena FTA), the 1994 Colonia and Buenos Aires Investment
Protocols of the Common Market of the Southern Cone (MERCOSUR) also make provision for
investment protection. Generally, the provisions of many of the regional and sectoral investment
treaties closely resemble the standard content of BITs.83 Notable amongst the MITs that have
given rise to a number of investor-state arbitration are NAFTA and Energy Charter Treaty.84 By
way of an overview, the 1992 North American Free Trade Agreement between Canada, Mexico
and the United States (NAFTA) which came into force on 1st January 1994 includes provisions on
investments in its Chapter Eleven. NAFTA Chapter 11 on investment protection which is tailored
following the US model of Bilateral Investment Treaty is made up of 3 sections with Section A
outlining a set of substantive rules on investment85 while Section B deals with the “Settlement of
Disputes between a Party and an investor of another Party”.86 Section C contains the definitional
80
A total of 173 countries concluded at least one by the end of 1990s. Olivia Chung, ‘Lopsided International
Investment Law Regime and Its Effect on the Future of Investor-State Arbitration’ (2006) 47 Virginia. J Int'l L 953,
954.
81
UNCTAD, ‘World Investment Report 2015 – Reforming International Investment Governance’
<http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf > accessed 20 June 2016.
82
According to statistics provided by UNCTAD’s Investment Policy Hub, there are 374 Treaties with Investment
Provisions in total, with 310 of them in force as at 31st December 2017.
83
Schill (n 56) 43.
84
Investment Policy Hub reports that as at 31st July 2017, 59 and 102 arbitrations have been instituted on the basis of
Chapter 11 of the NAFTA and Energy Charter Treaty respectively.
85
NAFTA (North American Free Trade Agreement (Canada, Mexico and The United States) (1 Jan 1994), C 11, Sec
A (Arts 1101– 1114).
86
NAFTA, C 11, Sec B (Arts 1115 – 1138).
37
article.87 NAFTA with the overall goal of eliminating barriers to trade and investment between
the U.S., Canada and Mexico, has contributed significantly to the growth and development of
international law in the sphere of investor-state arbitration. Similarly, the Energy Charter Treaty
has also helped shape international investment law. The 1994 Energy Charter Treaty with 52
contracting states (including the European Union) has a much larger coverage in terms of
geographic spread and signatory members, although limited in scope as it relates solely to activities
in the energy sector. ECT opened for signature on 17 December 1994, came in force on 16 April
1998 and has a potentially global reach being the most widely ratified multilateral investment
agreements.88 Reputed as the only collection of international rules tailored to the specific needs
of the energy sector; covering a broad and diverse range of countries across the continents of
Europe and Asia.89 ECT establishes an international multilateral framework for cooperation in the
energy sector 90 and it seeks to create a stable and transparent investment climate by offering
foreign energy investors binding protection against key political risks. Part III of ECT pertains to
Investment Promotion and Protection while Part V, particularly Article 26, deals with Settlement
of Disputes between an Investor and a Contracting Party. The ECT has been described as an
extremely complex instrument covering not only investment matters but also trade, transit and the
environment.91 A number of ICSID cases have been instituted under the ECT for breach of the
obligations Contracting Parties undertook towards foreign investors of other Contracting Parties
as set out in Part III of ECT. These obligations are substantially the same with typical BITs’
standards of protection save for textual differences.
Notwithstanding the existence of ECT, there is no multilateral treaty on foreign investment like a
multilateral trade agreement. There were though discussions of a multilateral investment
87
NAFTA, C 11, Sec C (Art 1139). For full text of NAFTA, see <https://www.nafta-sec-alena.org/Home/Legal-
Texts/North-American-Free-Trade-Agreement?mvid=1&secid=539c50ef-51c1-489b-808b-9e20c9872d25> accessed
24 October 2017.
88
Matthew Happold and Thomas Roe, ‘The Energy Charter Treaty’ in Tarcisio Gazzini and Eric.De Brabandere (eds),
International Investment Law: The Sources of Rights and Obligations (Martinus Nijhoff Publishers 2012) 69, 70.
89
Energy Charter, ‘Frequently Asked Question about the Energy Charter Process: Why an Energy Charter?’
<http://www.energycharter.org/process/frequently-asked-questions/> accessed on 24 October 2017.
90
The Energy Charter Treaty covers all types of investments including investments in oil and gas business, electricity,
hydro-power, solar, wind energy, and all other renewable energy sources. See Energy Charter, ‘Frequently Asked
Question about the Energy Charter Process: Is the Energy Charter Treaty Just About Oil and Gas? What about
Renewable Sources of Energy?’ <http://www.energycharter.org/process/frequently-asked-questions/> accessed on 24
October 2017.
91
Happold and Roe (n 87) 70.
38
agreement within the context of OECD, United Nations Conference on Trade and Development
and WTO.92 These attempts failed and did not crystallise into a singular multilateral treaty on
foreign investment due to disagreements on key issues such as its scope, content and underlying
principles between its members.93 Jean D’aspremont argues that the emergence of thousands of
BITs have to some extent created or brought about the multilateralization of investment protection.
He contends further that a multilateral international legal regime on protection of investment has
been created by the numerous Bilateral Investment Treaties (BIT) in existence pursuant to the
Most Favoured Nation (MFN) clause inherent in most BITs. 94 This assertion of course is
contestable given that arbitral jurisprudence on the scope and effect of the MFN clause has
imposed certain restrictions on the applicability of the clause.95
It is essential to note that before the advent of investment treaties, foreign investment protection
evolved through sequential phases of protection commencing with host States’ use military power
and might, followed by diplomatic protection afforded to foreign investors instead of gunboat
diplomacy, thereafter protection by reference to the domestic laws of host States and not by any
autonomous international standard. 96 The next phase in the development of international
92
Organisation for Economic Co-operation and Development (OECD) drafted the Multilateral Agreement on
Investment and same was negotiated between 1995 and 1998 by its members. The agreement was to ensure that
international investment was governed uniformly between states. This attempt at establishing a multilateral
investment regime failed due to widespread criticisms from civil societies and developing countries of the potentials
for stifling and difficulty of regulating foreign investors. See OECD, ‘Multilateral Agreement on Investment (MAI)’,
< https://en.wikipedia.org/wiki/Multilateral_Agreement_on_Investment > accessed 19 June 2017. With regards to
World Trade Organisation (WTO) efforts at establishing a Multilateral investment regime, as part of the Doha
Development Agenda of the World Trade Organization (WTO) in 2003, a multilateral investment agreement was
debated on but not adopted.
93
Sornarajah (n 7) 2.
94
MFN clause which annexes substantive investment protection standards has been reputed to occasion the creation
of a uniform regime of investment protection. See Jean d'Aspremont, ‘International Customary Investment Law: Story
of a Paradox’ in Eric De Brabandere and Tarcisio Gazzini, (eds), Sources of Transnational Investment Law, (Martinus
Nijhoff, 2012) 19.
95
Further treatment of MFN exceeds the scope of this thesis and will therefore not be explored.
96
This type of protection is tailored towards the doctrine advocated by the Argentine diplomat and jurist Carlos Calvo,
in his 1868 International Law of Europe and America in Theory and Practice wherein it was stated that ‘Aliens who
established themselves in a country are certainly entitled to the same rights of protection as nationals, but they cannot
claim any greater measure of protection’. Calvo doctrine which was formulated against the background of the practice
of gun-boat diplomacy by capital exporting states or the use of force to redress any wrong done to foreign nationals,
canvassed the viewpoint that equal treatment of both nationals and foreign investors satisfied the requirement of
international law. The Calvo doctrine became popular amongst the Latin American countries such that it became
entrenched in their constitutions, laws and treaties. The doctrine was largely restated by the Drago Doctrine,
articulated by the Argentine foreign minister Luis Maria Drago in 1902. See Carlos Calvo, ‘Derecho International
Teórico y Práctico de Europa y América’ (1868) Vol 2 D'Amyot, 134-196; See also K Lipstein, ‘The Place of the
Calvo Clause in International Law’ (1945) 22 BYIL 130; The Editors of Encyclopædia Britannica, ‘Calvos Doctrine:
39
investment protection regime is the adaption of international protection of aliens abroad principles
to regulate foreign investment. The protection was deemed or interpreted as “international
minimum standard of behaviour” to which aliens were entitled and these later metamorphosed into
customary international law rule benefitting foreign investment. However, it was not long before
it became apparent that existing customary international law of investment protection became
incapable of meeting the needs of multinationals corporations and foreign investors, particularly
as host States had mastered means of interfering with property rights intrinsically or
sophisticatedly in less obvious or explicit ways. 97 In fact, one can attribute the development of
investment treaties protection regime to the inconclusiveness and indefiniteness of the foreign
investment protection regime under customary international law. In search of a more effective
investment protection strategy, the treatification of investment protection was birthed.
Instructive to this discourse, is the dictum of the Plasma tribunal which provides a succinct
description of transition to modern day foreign investment protection:
With the advent of bilateral and multilateral investment treaties since the 1980s … the traditional
diplomatic protection mechanism by home states for their nationals investing abroad has been
largely replaced by direct access by investors to arbitration against host States. Nowadays,
arbitration is the generally accepted avenue for resolving disputes between investors and states.98
While the spate of BIT conclusions has reduced compared to the 1990s, the dispute resolution
process emanating from investment treaties are on the increase. This underscores the fact that
investment treaties play a prominent role in the protection of foreign investment and their unique
set up cannot be overemphasised. Unique to the extent that foreign investors who principally are
the main beneficiaries of the investment treaty regime are extraneous to its conclusion by
Contracting States. 99 The diverse provisions of investment treaties attempt to attract foreign
International Law’ <http://www.britannica.com/topic/Calvo-Doctrine> accessed 22nd October 2017; M Belén Olmos

Giupponi, ‘The Protection of Foreign Direct Investment in Latin America: Where Do We Stand on International
Arbitration?’ (2015) 32 JIA 113, 114.
97
D’aspremont (n 94) 16.
98
Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No ARB/03/24, Decision on Jurisdiction, 08
February 2005, para 198 (hereinafter Plama v. Bulgaria)
99
Gazzini and De Brabandere (eds) (n87) 100.
40
investors by offering substantial guarantees and assurances to them.100 The differences in textual
language however make it difficult to conclude that a uniform set of standard exist.
Various guarantees and protections of investment treaties ensure that any interference with foreign
investors’ investment rights by the host State or any of its agencies will provide foreign investors
the opportunity of filing a claim. 101 Failure to provide or accord foreign investors treatment
according to these standards prescribed in investment treaties creates for the foreign investor a
cause of action and has led to the proliferation of investment disputes in recent times.102 Protection
accorded to foreign investors by virtue of investment treaties can either be substantive or
procedural. The substantive and procedural rights dichotomy becomes relevant particularly when
foreign investors seek to apply the Most Favoured Nation Treatment standard to import more
favourable dispute resolution provisions in other BITs. This topical issue which has elicited
divergent outcomes and extensive arbitral jurisprudence centres on whether dispute resolution
mechanisms incorporated in investment treaties are material rights/protections subject to
international law protection to which MFN could apply. Berschader v Russia103 is one case in
which the distinction between substantive rights vis-à-vis procedural rights was discussed
explicitly. Although the issue is not yet rested, the more adopted or established view is that dispute
resolution provisions are procedural rights which may or may not be outside the radar of MFN
depending on the language of the treaty and tribunal’s disposition. Substantive protections of
investment treaties include Fair and Equitable Treatment, Full Protection and Security, No
100
M Belén Olmos Giupponi, ‘The Protection of Foreign Direct Investment in Latin America: Where Do We Stand
on International Arbitration?’ (2015) 32 JIA 122 OR Giupponi (n 97) 122
101
The investor/claimant will typically rely on the dispute resolution provision of the relevant BITs’ which may
include one or more of host State’s municipal courts, arbitration pursuant to ICSID Arbitration Rules or the ICSID
Additional Facility Rules, adhoc arbitration pursuant to UNCITRAL Arbitration Rules, arbitration pursuant to the
Rules of Arbitration of the International Chamber of Commerce Rules, arbitration pursuant to the Rules of Arbitration
of the Stockholm Chamber of Commerce, arbitration pursuant to the Rules of the Cour Commune de Justice et
d’Arbitrage (CCJA) and such other rules as agreed by the contracting parties. See Zachary Douglas, The International
Law of Investment Claims (Cambridge University Press 2009) 5.
102
Dispute resolution provisions of most BITs are typically for resolution of dispute between the contracting state
parties and another for resolution of disputes between the investor from one of the contracting state and the other
contracting state (host State) over investments in the host State. Whilst over 300 cases have emerged on the
investor/host State arbitration, there is only one known case of state/state investment treaty based arbitration and that
is the one instituted by Peru against Chile on the basis of the Peru/Chile BIT which was basically intended as a strategy
to assist the Peruvian case in the arbitration filed by a Chilean investor. See Zachary Douglas, The International Law
of Investment Claims (Cambridge University Press 2009) 3.
103
Berschader (Vladimir) and Berschader (Moïse) v The Russian Federation, SCC Case No 080/2004, Award 21st
April 2006 IIC 314 (2006),),
41
unreasonable or discriminatory measures, Most Favoured Nation Treatment, National
Treatment, Umbrella Clause, No expropriation without compensation. As there is no single
version of a treatment clause, textual languages differ from treaty to treaty and each clause has to
be interpreted according to the principles laid down in Article 31 of Vienna Convention on the
Law of Treaties.104 Thus in accordance with the rule of treaty interpretation stipulated in Article
31, each treaty clause shall be interpreted in accordance with the ordinary meaning to be given to
the terms of the treaty clause in their context and in the light of its object and purpose. To
determine the context, regard would be had to the preamble and annexes, history and contracting
parties’ post-treaty agreements amongst other parameters. While conceding that language
variation in investment treaties has a significant impact on their interpretation, it should be noted
that the broad or underpinning concepts of each of these protective standards remain the same. A
more elucidatory expose of standards of treatment applicable to Stability Guarantees will be
undertaken in subsequent chapter.
2.3.2 Investor-State Arbitration – Effective Protection of Foreign Investment
Substantive standards of investment treaties on their own, offer little or no protection without
procedural provisions of the investment treaties. Investor-state arbitration is a procedural
provision of investment treaties available for the protection of foreign investors under investment
treaty regime. Failure to accord foreign investors, ‘treatment in accordance with investment
treaties’ standards of protection grants foreign investors the right to commence investment
arbitration under International Centre for the Settlement of Investment Disputes (ICSID)105 system
or other international arbitration rules or institutional framework. International arbitration is
desirable due to the fear of bias of domestic or national courts or tribunals and undue interference
of host States. Consequently, foreign investors have consistently favoured international arbitration
irrespective of the investment agreements’ requirements or stipulations.106 Meanwhile, recourse
104
Dolzer and Schreuer (n 33) 132.
105
The ICSID being the principal arbitration institution for investment treaty arbitration is an institution within the
framework of the World Bank Group which was established in 1965 by the Convention on the Settlement of
Investment Disputes between States and Nationals of other states (known as the ‘Washington’ ‘World Bank’ or
‘ICSID’ Convention) for the resolution of disputes between States and foreign investors. There are 143 Contracting
parties to the ICSID Convention. See < http://icsid.worldbank.org/ICSID/Index.jsp >.
106
Christoph Schreuer, ‘The Future of Investment Arbitration’
<http://www.univie.ac.at/intlaw/pdf/98_futureinvestmentarbitr.pdf> accessed 27 June 2017.
42
to investment contracts’ inbuilt mechanisms for protection of contractual rights such as dispute
resolution and forum selection clauses may necessarily lead to submission to domestic legal system
in the absence of international commercial arbitration clause.
International investment arbitration and international commercial arbitration share procedural

similarities but are conceptually different forms of dispute resolution systems. Commercial
arbitration which can be at both the national and international levels, has a long history compared
to investment arbitration which became popular with the advent of the first BIT in 1959 and
establishment of ICSID in 1965. It is sometime difficult to distinguish between commercial and
investment arbitration particularly if the arbitration clause is contained in a State Contract which
refers to an investment arbitration institution as was done in Duke v. Peru or if the arbitration
clause refers to commercial arbitration rules but the arbitration is commenced based on investment
treaties or ICSID Convention rules as was the case in Venezuela Holdings, B.V., et al v.
Venezuela. 107 One can begin to find the dividing line between commercial arbitration and
investment arbitration based on key features of arbitration in general such as parties, finality and
binding effect of award, consent, basis for claim, confidentiality and transparency etc.108
One distinct feature of investment arbitration that makes it more attractive than commercial
arbitration and can be considered as the main rationale for foreign investors’ preference for
investment arbitration, relates to the issue of consent to arbitration. Considering that arbitration is
a consensual type of dispute settlement mechanism an intrinsic characteristic is consent. Consent
to arbitration is a subject of intense debate which is not yet rested despite the extensive
determination of and deliberation on the concept in several fora. In commercial arbitration, the
jurisdiction of an arbitral tribunal is hinged exclusively on a valid contractual arbitration clause or
separate ad hoc arbitration agreement ie submission agreement indicating parties’ willingness to
107
Venezuela Holdings, B.V., et al (case formerly known as Mobil Corporation, Venezuela Holdings, B.V., et al.) v
Bolivarian Republic of Venezuela, ICSID Case No ARB/07/27, Award of the Tribunal 9 October 2014 (hereinafter
Mobil and others v. Venezuela)
108
For a better analysis of the differences between international commercial arbitration and international investment
arbitration see Karl-Heinz Böckstiegel, ‘Commercial and Investment Arbitration: How Different are they Today?’
(2012) The Journal of the London Court of International Arbitration, 577 -590, <http://www.arbitration-
icca.org/media/4/20743713842706/media113644853030910bckstiegel_lalive_lecture_offprint.pdf> accessed 20
April 2016. See also Maria Athanasiou, Hanotiau & Van Den Berg, ‘Commercial and Investment Arbitration:
Differences and Similarities’ (Cyprus Mediation and Arbitration Centre & Chartered Institute of Arbitrators One Day
Seminar : A Quick Way To Justice – Part Four, , Cyprus, 14 October 2013).
43
submit to arbitration and be bound by the decision. Investment arbitration tribunals on the other
hand, base their jurisdiction on consent of the parties which often are separately granted. Beyond
the host State’s consent which derives from investment treaties/agreements, domestic/national
investment legislation or contractual arbitration clauses, 109 foreign investor must also consent to
arbitration. Foreign investor’s consent is typically construed by submission to institution of
arbitral proceedings and inferred from the filing of a claim or submission to arbitration. Thus, in
investment treaty arbitration, parties’ non-contractual arbitration agreement is based on unilateral
offer of arbitration by host States incorporated in investment treaties, or national legislation. The
Energy Charter Treaty (ECT) however makes it mandatory for foreign investors to provide their
consent in writing to arbitration for the disputes to be deemed submitted to arbitration. 110 In the
same vein, NAFTA Chapter 11, Article 1121 requires investor-claimant to consent to arbitration
in writing when it submits a claim. Uncontested in investment treaty arbitration realm, is the fact
that the Investor claimant need not have a contractual relationship with the host State prior to
commencing arbitration proceedings.111 This singular fact has created an extension of arbitral
jurisdiction in the international realm to what is now known as “Arbitration Without Privity”.
Jan Paulsson distilled key attributes of Arbitration without Privity to include absence of contractual
relationship between investor-claimant and host States, host States’ incapacity to institute
investment arbitration and uncertainty regarding the ability to raise a counter-claim.112 Arbitration
without Privity which rests on unilateral promise to arbitrate contained in investment treaties and
national legislations connotes a genuine offer of arbitration to a class of foreign investors.113 This
offer is irrevocable so long as the enabling national legislation or investment treaty is in force and
is therefore a legally binding and enforceable treaty based obligation of the host State to arbitrate
regardless of whether or not an investor acts on it. 114 Hence, host State’s offer plus foreign
investor’s acceptance creates an arbitration agreement.115 It should be noted that just as in the case
109
Giupponi (n 95 or 97) 135.
110
ECT (n 85) Article 26 (4)
111
Jan Paulsson, ‘Arbitration Without Privity’ (1995) 10 ICSID Review 232.
112
Ibid.
113
Hege Elisabeth Kjos, ‘Counterclaims by Host States in Investment Dispute Arbitration “Without Privity"’ (2007)
4 TDM 604.
114
Michael D Nolan and Frédéric G Sourgens, ‘Limits of Consent – Arbitration Without Privity And Beyond’
(Wolters Kluwer 2010) 873.
115
Kjos (n 112) 606.
44
of the substantive claim filed by the investor-claimant, host State’s counter claim also depends on
the parties’ arbitration agreement. A counterclaim which is an independent separate claim under
investment treaty arbitration must fall within the scope of the consent given by the parties.116 On
the downside, there is a limit to party’s autonomy under investment arbitration due to lack of
privity of arbitral agreement.117
In the absence of express provision for international commercial arbitration in investment

agreements, foreign investors have in the last three decades sought to enforce international
obligations against host States through submission to the jurisdiction of various treaty-based
arbitral tribunals. It is generally believed that investor-state arbitral process is more efficient in
the enforcement of individual rights compared to domestic legal order.118 The 1990s proliferation
of BITs, its attendant lack of uniformity in the standards of protection and inconsistencies in
arbitral decisions have inevitably led to the increase in the number of treaty arbitral proceedings
since foreign investors will continually test the boundaries of investment protections through the
filing of their claims.119 Needless to say that diverse character of claims have been brought under
the ambit of investment treaty arbitration particularly under the ICSID procedures since it was
specifically established to facilitate arbitration of investment disputes. By way of statistics over
62% of investor-state arbitration have been brought under the auspices of ICSID.120 Nonetheless,
access to international arbitration is not sacrosanct since certain requirements or criteria must exist.
It must be noted that some of these treaties only allow foreign investors to resort to international
116
Ibid 602.
117
Michael Pryles, ‘Limits to Party Autonomy in Arbitral Procedure’ (2007) 24 (No.3) Journal of International
Arbitration, 327-339. < http://www.arbitration-
icca.org/media/4/48108242525153/media012223895489410limits_to_party_autonomy_in_international_commercia
l_arbitration.pdf > accessed 23 March 2016, Page 4 Online Source.
118
Adebayo Gregory Adaralegbe, Concurrent Jurisdiction between Treaty and Domestic Tribunals: An Examination
of Jurisdiction-Regulating Mechanisms within the Investor-State Treaty Arbitration System and their Effectiveness
(PhD Thesis, CEPMLP University of Dundee 2009) 13.
119
Olivia Chung, ‘The Lopsided International Investment Law Regime and its Effects on the Future of Investor-State
Arbitration’ (2007) 27 Virginia Journal of International Law 953, 954. A total of 173 countries concluded at least one
by the end of 1990s.
120
Piero Bernardini, ‘ICSID Versus Non-ICSID Investment Treaty Arbitration’ < http://www.arbitration-
icca.org/media/4/30213278230103/media012970223709030bernardini_icsid-vs-non-icsid-investent.pdf> accessed
30 June 2016. In 2008, of the known treaty-based investor-state cases numbering 317, 201 were filed with ICSID (or
the ICSID Additional Facility) representing 63.4%. Whilst in 2009 of the 290 investment treaty arbitration cases, 182
were filed with ICSID, including ICSID Additional Facility Rules making 62%.
45
arbitration after exhausting local remedies within a specified period.121 This pre-condition is often
referred to as “Soft Calvo Clause” in furtherance of the 19th Century Argentine Jurist Carlos
Calvo’s doctrine.122
As laudable and promising as investment treaty arbitration is in protection of foreign investors’

rights, the availability of a number of loopholes in the structure makes room for criticism of the
system. In fact, according to Rodrigo Polano Lazo, the ability of foreign investors to choose
international arbitration as a dispute resolution mechanism can create significant problems.123 In
the words of Todd Weiler, the legitimacy crisis besetting international investment law is as a result
of non-State actors being vested with an institutional right to ‘self-help,’ manifested in a relatively
efficient, and binding, dispute settlement mechanism.124 The clamour for investor-state mediation
is now being canvassed particularly as resource-rich Latin American countries such as Bolivia,
Ecuador and Venezuela have withdrawn from the ICSID. These countries have signified
intentions to discard existing BITs to which they are parties due to impact of excessive investor-
state arbitral award.125 These Latin American countries have incessantly found themselves as the
respondent party in more than a third of the investment treaty arbitrations brought before ICSID
and other international arbitration rules126 and have been burdened by the huge cost of defending
themselves and the excessive awards against them.127 Unsurprisingly, some Latin American states
are increasingly indisposed to submitting to international arbitration. Ecuador is an example of
one of these states as its new constitution in Article 422 forbids Ecuador from entering into any
121
The specific period in BITs, typically varies between three months (eg, Article 8 (1) Egypt – United Kingdom BIT)
and two years (eg, Article 10 France – Morocco BIT). For instance, Article 10 of the BIT between Argentina and
Germany specifies that if amicable settlement between foreign investor and host State cannot be achieved followed
by submission to competent tribunal of the host State, either party to the dispute can submit the dispute to international
arbitration if no decision on the merits of the claim has been rendered after the expiration of a period of eighteen
months from the date of the initiation of the court proceedings. See also Christoph Schreuer, ‘Calvo’s Grandchildren:
The Return of Local Remedies in Investment Arbitration’ (2005) 4(1) The Law and Practice of International Courts
and Tribunals, 1-17
122
Giupponi (n 96) 125
123
Rodrigo Polano Lazo, ‘International Arbitration in Times of Changes: Fairness and Transparency of Investor-State
Disputes’ Proceedings of the 104th Annual Meeting of the American Society of International Law.
124
Todd Weiler, International Litigation in Practice: Interpretation of International Investment Law: Equality,
Discrimination and Minimum Standards of Treatment in Historical Context (BRILL 2013) 9
125
Munir Maniruzzaman, ‘A Rethink of Investor-State Dispute Settlement’ (Kluwer Arbitration Blog ,30 May 2013)
<http://kluwerarbitrationblog.com/blog/2013/05/30/a-rethink-of-investor-state-dispute-settlement/> accessed 7 July
2016.
126
In 2011 and 2012, Venezuela responded to the largest number of investor-state treaty arbitration. See UNCTAD
website.
127
46
agreement which would require it to subject itself to any international arbitral tribunal. 128
Consequently, these countries as with some others have developed strategies to thwart the
applicability of treaty provisions and in some cases the ensuing arbitral awards through various
means such as withdrawal from treaties arrangements 129 and refusal to honour awards
timeously.130 There are indeed political, international and academic concerns contending against
the legitimacy and viability of the present day investor-state arbitration system.131
In recognition of the challenges, criticisms, pros and cons of investor-state dispute settlement
mechanism, the United Nations Conference on Trade and Development (UNCTAD) in May 2013
put forward a proposal towards the reform of the investor-state arbitration system, which
challenges have been succinctly summarised as follows:
[P]erceived deficit of legitimacy and transparency; contradictions between arbitral awards;

difficulties in correcting erroneous arbitral decisions; questions about the independence and
impartiality of arbitrators; and the length and the costs of arbitral procedures.132 Commented [I11]: for indented paragraphs, do not use
quotation marks except for quotations within quotations in which
case a single quotation mark is allowed (OSCOLA, 4th edn, page 8)
Regardless of the criticism of investment treaty arbitration, the number of international investment
arbitrations filed at the ICSID and under other arbitration rules has not diminished nor has there
128
Giupponi (n 96) 135.
129
In May 2007, Bolivia forwarded a written notice of denunciation to the World Bank, indicating its intentions to
withdraw from the ICSID Convention. This is with the aim of circumventing the recourse to ICSID for resolution of
the dispute between it and its foreign investors. See Cameron (n 52) 278. Apart from Bolivia, Ecuador and Venezuela
have also denounced the ICSID regime in 2009 and 2012 respectively, See Commercial Dispute Resolution News ‘If
Argentina flat-out refuses to pay ICSID awards, why do companies continue to file claims at the World Bank’s
arbitration court?’ <http://www.cdr-news.com/categories/spain/repsol-files-10.5-billion-icsid-claim> accessed 28
August 2016.
130
For some time Argentina refused to honour two longstanding ICSID judgments, worth USD 300 million. See
‘Linkedin’, <http://www.linkedin.com/groups/Interested-in-why-despite-Argentinas-3948480.S.193391131>
accessed 28 August 2016. It was only in 2013 that Argentina agreed to settlement five outstanding awards made
between 2005 and 2008 totaling $450 Million. See also Allen & Overy, ‘Argentina Settles Five Investment Treaty
Awards’ (7 November 2013) <http://www.allenovery.com/publications/en-gb/Pages/Argentina-settles-five-
investment-treaty-awards.aspx> accessed 30 June 2016.
131
Cesar R Mata-Garcia, Applying Principles of Administrative Law to Investor-State Treaty Arbitrations (PhD
Thesis, CEPMLP, University of Dundee 2012).
132
United Nations Conference on Trade and Development, ‘UNCTAD Puts Forward Reform Options for Investor-
State Dispute Settlement System’ (UNCTAD,
27May2013)<http://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=508> accessed 20 June 2016.
47
been significant impact on the rapid development of the investor-state arbitration system.133 This
is indicative of the preference for the system irrespective of its purported disadvantages and
downsides which seems to have been outweighed by its depoliticizing and other acclaimed
advantages.
As can be inferred from earlier parts of this chapter, investor-state arbitral practice is centred on
protection of foreign investors and enforcement of treaty obligations by host States. Stability
Guarantee is one of such obligations that foreign investors have increasingly sought to protect and
enforce through the instrumentalities of investment treaty arbitration. Host States recognise the
importance of these Stability Guarantees and have customarily offered inclusion of Stabilization
Guarantees in investment agreement or special legislative instruments as elements of their overall
investment policies.134 There are enough instances of investor-claimants’ claims hinged on breach
of Stability Guarantees as violation of treaty protection standards of treatment. These investor-
claimants have laid claim to right to stability of the legal, regulatory and fiscal regime applicable
to their investments by virtue of contractual stabilization clauses, unilateral stabilization
commitments of host States embedded in domestic legislation and treaty based stability assurances.
Both contractual and treaty based Stability Guarantees have elicited a lot of arguments within
international investment law realm. Nonetheless, arbitral jurisprudence on this challenging
concept of international law is not fully clarified or settled. How the tribunals have interpreted
and decided investor-claimants’ claims to treaty enforceable right to Stability Guarantees is
discussed extensively in the next three Chapters.
2.4 STABILITY GUARANTEES – IN CONTRACTS, NATIONAL LEGISLATIONS

AND TREATIES
133
Year 2015 recorded the highest number of known investor-state arbitration filed in one year with the institution of
77 new cases and the total number of cases filed under the auspices of investment treaty reaching 815. By the end of
2017, over 100 countries have responded to investment treaty claims. There is however a sharp decline in 2017 with
only 35 cases initiated in 2017. This does not detract from the viewpoint that foreign investors are increasingly
resorting to investor state arbitration. See UNCTAD, ‘Investor-State Dispute Settlement: Review of Developments in
2015’ <http://investmentpolicyhub.unctad.org/Upload/ISDS%20Issues%20Note%202016.pdf> accessed 04 February
2018.
134
Sornarajah (n 7) 281.
48
In earlier parts of this chapter, the term ‘Stability Guaranty’ has been defined to include contractual
stabilization clauses, stabilization clauses included in domestic legislations and treaty-based
stability assurances. As these three types of Stability Guarantees are afforded varying degrees of
protection under international investment law, it is essential that an analysis be undertaken to distil
the distinguishing features and meanings of each of the Stability Guarantees.
2.4.1 Contractual Stabilization Clauses
A topic of international investment law which has periodically excited controversy and received
enormous attention is the interpretation of Stabilization Clause. The efficacy, validity, legality,
scope, interpretation, application and consequence of Stabilization Clauses have been questioned
and contested at numerous fora and instances.135 1970s and 1980s saw a number of adjudication Commented [I12]: i am of the view that you can't use two
citations to reference a single text (see OSCOLA, 4th Edn, 34); you
on Stabilization Clauses’ interpretation of legal effect and validity. The reason for this is not can either cite it as an online journal or as a working/Research
Paper.
farfetched as Stabilization Clause although included in investment agreements for foreign
investors’ protection, on the other hand, work to fetter or limit the host State’s legislative powers.
In another word, the validity or legality of stabilization clause has been at the fore front of many
debates essentially because it presupposes a restriction on a state’s sovereign legislative rights.
Those that argue against the validity of Stabilization Clause, hold that the balance of power is
shifted towards private party due to restriction imposed by Stabilization Clauses.136 This group of
people argue that stabilization clauses run contrary to the principles of states’ permanent
sovereignty over their natural resources.137 To them Stabilization Clause represents a derogation
from host States’ permanent sovereignty over their natural resources and tend to inhibit the host
States’ capacity to effectively execute reforms and legislative changes related to public health,
environmental protection and human rights.138 This is because implementation and compliance
135
Moshe Hirsch, ‘Between Fair and Equitable Treatment and Stabilization Clause: Stable Legal Environment and
Regulatory Change in International Investment Law’ (2011) 12 Journal of World Investment & Trade 783 <
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2272952> accessed 29 March 2017.
136
Patrick Dumberry, ‘The Protection of Investors’ Legitimate Expectations and the Fair and Equitable Treatment
Standard under NAFTA Article 1105’ (2014) 31 Journal of International Arbitration 47.
137
Piero Bernardini, ‘The Renegotiation of the Investment Contract’ (1998) 13 (2) ICSID Review 411, 415.
138
The outcome of an IFC study suggests that depending on how Stabilization Clauses are drafted, they can pave way
for investors’ non-compliance or entitlement to compensation for compliance with laws and regulations designed to
promote environmental, social, or human rights goals. This practice consequently negatively impacts host States’
implementation of its environmental, social, human rights obligations. See. International Finance Corporation (IFC),
‘Stabilization Clauses and Human Rights’ (2009) A Research Project conducted for IFC and the United Nations
49
with new environmental regulations typically comes with associated costs which investors have in
the past passed on to host States through stabilization clauses devices.139 Commented [I13]: i was unable to find the full citation within
the chapter. please insert the full citation
On what the term ‘Stabilization Clause’ connotes, it is a political risk mitigation device to limit
the scale of economic loss that may result from host States’ unilateral abrogation, repudiation or
amendment of negotiated contract terms and conditions. Stabilization Clause seeks to guide
against political risk associated with alteration of legal, fiscal or regulatory regime applicable to
an investment.140 It is an investor’s protection response to the risk of regulatory changes that may
adversely affect the investment. 141 The protection is particularly desirable as balance of
negotiating power shifts in favour of host States after negotiation and commitment of contract
performance. Consequently, inclusion of Stabilization Clause in State Contracts is borne out of
the desire of foreign investors to protect themselves against host States’ conducts measures that
may impair the viability and profitability of their investments. 142 M. Sornarajah reasoned that
foreign investor's need to neutralize host State's sovereign legislative powers to alter or abrogate
the agreements during the lifespan of the contract is the key basis for including stabilization
clauses in state contracts.143 Furthermore, Stabilization Clause addresses the risk associated with Commented [I14]: For this footnote,it is not clear which of
Faruque's work you meant to reference. kindly clarify the applicable
the time element in contractual arrangements with host States and attempts to insulate contracts text for each footnote bearing Faruque's work
(particularly long term capital intensive natural resources and public infrastructure contracts)
which are by nature vulnerable to political risks from changes in the legal and regulatory regime
in which they are made.144
Special Representative of the Secretary-General on Business and Human Rights

<http://www.ifc.org/wps/wcm/connect/9feb5b00488555eab8c4fa6a6515bb18/Stabilization%2BPaper.pdf?MOD=AJ
PERES> accessed 1 July 2016.
139
Thomas Walde and George Ndi, ‘Stabilizing International Investment Commitments: International Law Versus
Contract Interpretation’ (1996) 31 Tex Int’l L.J 215, 218-9.230-1.
140
Erkan (n 4) 102.
141
Lorenzo Cotula, ‘Reconciling Regulatory Stability and Evolution of Environmental Standards in Investment
Contracts: Towards a Rethink of Stabilization Clauses’ (2008) 1(2) The Journal of World Energy Law & Business,
158
142
Andrey V Kuzentsov, ‘The Limit of Contractual Stabilization Clauses for Protecting International Oil and Gas
Investments Examined through the Prism of the Sakhalin- 2 PSA: Mandatory Law, the Umbrella Clause and the Fair
and Equitable Treatment Standard’ (2015) 22 (223) Willamette Journal of International Law and Dispute Resolution.
143
144
Faruque, (n 219) 317.
50
As a sophisticated tool to manage political risk, Stabilization Clauses are typically not incorporated
in contracts with developed countries because developed countries are believed to have relatively
stable legal and regulatory regimes. 145 Moreover, developed host States more often than not
decline granting Stabilization Clauses on the basis that they cannot bind a future government to
the policies of the current administration. Nonetheless, foreign investors are willing to invest in
these developed countries that do not provide Stabilization Clauses but are cautious of investing
in developing nations in the absence of Stabilization Clauses. 146 One rationale for this is the
perception of country investment risk which is a key factor in Stabilization Clause practices and
coverage. Developed countries are perceived to have the best risk ratings with very low risk as
compared to developing countries with poor risk rating.147
With regards to the definition of Stabilization Clause, there is no uniform or singular definition of
the term Stabilization Clause since different types of Stabilization Clauses have emerged over the
years. Typically the interpretation and construction turn on the wordings and drafting of the
particular clause and the facts of each case.148 Definition proffered by the Amoco Int’l Fin Corp v
Iran tribunal describes Stabilization Clause as ‘contract language which freezes the provisions of
a national system of law chosen as the law of the contract as of the date of the contract in order to
prevent the application to the contract of any future alteration of this system.’ 149 This definition
is not reflective of the evolving nature of the concept of Stabilization Clause which has developed
radically from the traditional classic freezing type, to intangible and economic rebalancing
variants. It must however be noted that hardly will one see a definition that subsumes the numerous
variants of Stabilization Clauses available today.
145
AFM Maniruzzaman, ‘Issue of Resource Nationalism: Risk Engineering and Dispute Management in the Oil and
Gas Industry’ (2009) 5 Texas Journal Oil Gas & Energy Law 79, 95.
146
Dennis Kakembo, ‘Stabilisation Clauses in International Petroleum Contracts Illusion or Safeguard?’
<http://www2.deloitte.com/content/dam/Deloitte/ug/Documents/tax/tax_StabilisationClauses_2014.pdf> accessed 10
April 2016.
147
International Finance Corporation (IFC), ‘Stabilization Clauses and Human Rights’ (A Research Project Conducted
for IFC and the United Nations Special Representative of the Secretary-General on Business and Human Rights 27
May 2009)
<http://www.ifc.org/wps/wcm/connect/9feb5b00488555eab8c4fa6a6515bb18/Stabilization%2BPaper.pdf?MOD=AJ
PERES> accessed 1 July 2016
148
149
Amoco International Finance Corporation v The Government of The Islamic Republic of Iran, National Iranian
Oil Company, National Petrochemical Company and Kharg Chemical Company Limited, Award No 310-56-3, Signed
14 July 1987 (hereinafter AMOCO).
51
According to Peter Cameron, “Stabilization Clause is a contractual assurance of negotiated terms
against future legal or regulatory changes, providing legal and fiscal stability”.150 This is in accord
with the definition proffered by Brownlie which holds that Stabilization Clause is an agreement
between host State and foreign investor whereby the host State undertakes neither to annul the
agreement nor to modify its terms either by legislation or by administrative measures. 151
Stabilization Clause is a device to protect the property rights (tangible and intangible) of the
foreign investor from unilateral introduction of new laws or regulation that affect the economic
equilibrium of the contract.152
Whilst there is no homogenous definition of Stabilization Clause, it however suffices to state that
various definitions are sync on the essence of Stabilization Clause to inhibit the investment
agreements from being altered or terminated through unilateral actions of the host State by the
promulgation or amendment of legislation or regulation. Stabilization Clause also serves to
maintain the sanctity of contract and uphold the international law cardinal principle of Pacta Sunt
Servada.153
In terms of scope, contract stabilization may be achieved by a number of means. Scope of

stabilization may be narrow consisting only stabilization of fiscal terms or wide in scope when it
seeks to impose a blanket restriction or constraints on the legislative powers of the host State.154 Commented [I15]: Still on Faruque's work, specify the correct
text to cite between footnote 5 and 152 (or 155 as the case may be).
A typical restrictive stabilization clause is the tax stabilization clause which formed the subject SEE ALSO, Page 34 of this chapter for more referencing of
FARUQUE'S WORKS.
matter of the Burlington v Ecuador 155 arbitration. Beyond the categorization of Stabilization
150
Cameron (n 52) 60.
151
James Crawford (ed), Brownlie’s Principles of Public International Law, (8th edn Oxford University Press 2012)
526
152
Abdullah Al Faruque, ‘Stability in Petroleum Contracts: Rhetoric and Reality: Lessons from the Experiences of
Selected Developing Countries and Economies in Transition 1980-2002’) (PhD Thesis, CEPMLP University of
Dundee 2005) 96.
153
Pacta Sunt Servanda which, when interpreted to English stands for ‘agreements or promises must be kept’, is a
basic principle of international law which requires parties to a contract or agreement to observe the various obligations
or undertakings agreed to.
154
Stabilization clause may also be confined or restricted to the contract by seeking for immutability of contractual
terms. Stabilization clause may also be drafted with a limited or narrow scope where it addresses specific legislation.
See Faruque (n 152) 97.
155
Burlington Resources Inc v Republic of Ecuador, ICSID Case No ARB/08/5, Decision on Reconsideration and
Award, 7 February 2017 (hereinafter Burlington v Ecuador)
52
Clause as per scope, Stabilization Clauses have been drafted in an avalanche of modes and can be
broadly classified into classic/traditional clauses and modern clauses. 156 Classic/traditional
clauses have been subject to arbitral interpretation. A significant feature of the traditional mode is
that it freezes or fixes the terms and conditions of the agreement thereby preserving the host States’
obligations and commitments till the termination of the investment agreement. Modern
Stabilization Clause which is akin to Renegotiation clause provides for restoration of the
investments' equilibrium or passes the risk of future regulatory changes to the host State. Modern
clauses seek to restore a dislocated equilibrium through a renegotiation mechanism.157
According to Cameron, there are four principal types of Stabilization Clauses prevalent in the oil
and gas industry and by analogy applicable to other foreign investors. These include Freezing,158
Intangibility Clause, 159 Rebalancing of Benefits 160 and Allocation of Burden variants. 161
Meanwhile, in categorizing Stabilization Clauses, Faruque adopted three headings or types to
include (1) Stabilization Clause in the Stricto Sensu (2) Intangible Clauses and (3) Economic
Stabilization Clause.162 Mustafa Erkan adopts a classification of stabilization clause similar to that
156
Lorenzo Cotula, ‘Regulatory Takings, Stabilization Clauses and Sustainable Development’ (2009) OECD
Investment Policy Perspectives 2008, 6.
157
Erkan (n 4) 107.
158
This clause prohibits the host State from amending its laws, or it may preclude the application of new laws to the
investor’s investment. As aforementioned, Faruque terms this as Stabilization clause in the Stricto Sensu. It aims to
impose an absolute bar or restraints on the legislative competence of host States by freezing the law applicable to
contracts.
159
Intangible Clause is a variant of the freezing clause. This type of stabilization clause precludes host State’s
unilateral amendment or modification of agreed terms by requiring mutual consent of both investor and host State to
effect contractual changes. Thus, amendments can only be effected to the terms of the agreement upon mutual consent
of both parties, host State’s unilateral alteration of the contract is foreclosed.
160
Rebalancing of Benefits is geared towards re-establishment of the economic balance struck between the parties
when they entered into the contract. This type of Stabilization Clause termed Economic Stabilization Clause by
Faruque, does not prevent legislative changes but only mitigates the adverse effects or impacts of those changes for
foreign investor. This type is fundamentally different from the freezing variant as it seeks not to prevent changes in
law or regulation but permits changes so long as the economic impacts of such changes are addressed. There are many
versions of balancing based on the techniques. See Al Faruque (n 152) 100; Cameron (n 52) 75. See also Professor
A. F. M Maniruzzaman’s categorization of the three types of economic balancing provisions that are found in
petroleum contracts; all of which prescribe different ways of re-establishing the economic equilibrium of the contract
whilst not prohibiting unilateral state action. These include (i) Stipulated Economic Balancing; (ii) Non-specified
Economic Balancing; and (ii) Negotiated Economic Balancing provisions.--AFM Maniruzzaman, ‘International
Energy Contracts and Cross-Border Pipeline Projects: Stabilization, Renegotiation and Economic Balancing In
Changed Circumstances – Some Recent Trends’ (2006) 4 OGEL 2.
161
This type of Stabilization Clause seeks to allocate the burden of the change of law or regulation to the state party to
the contract. Consequently, any additional obligation, eg taxes, levies, royalties arising as a result of legislative or
regulatory modification by host State, will be borne by the state party to the contract. In essence, the burden of the
change of law or regulation (if any) is transferred.
162
Faruque (n 152) 97.
53
of Faruque’s and these include Stricto Sensu, Intangibility clause, the third being the Hybrid Clause
because it combines both Intangibility and Stricto Sensu provisions. 163 There is not much
distinction between the referenced categorizations as Faruque’s Stricto Sensu is what Cameron
termed Freezing Clauses whilst Cameron’s Rebalancing of Benefits is deemed Economic
Stabilization Clause by Faruque.
Indeed, there is no consensus on the true or correct meaning, validity or effect of stabilization
clauses and the spate of arbitral awards on this issue have contributed to the deluge of inconsistent
debates and opinions. One cannot but allude to the statement of Faruque that ‘[A]rbitral
jurisprudence on stabilization clause is inconsistent and fraught with ideological conflicts…’ 164
Nonetheless, there is considerable authority in support of the view that Stabilization Clause is valid
both under national and international laws.165 In fact to counter these arguments against validity
of Stabilization Clause, it can be canvassed that a state is empowered and can legitimately restrict
its own authority and by doing so it is exercising its sovereign authority. Texaco v Libya tribunal
in giving effect to and declaring valid, stability commitment made by Libya, held that Stabilization
Clause is a manifestation and exercise of state sovereignty, and not a negation of or derogation
from same.166 This decision was followed by other tribunals such as Kuwait v Aminoil,167 AGIP v Commented [I16]: please find the correct and full citation of
cases cited on this page. Eg, i was unable to find citations for Topco,
Congo,168 Revere Copper v OPIC.169 In support of this line of thought, it can be argued that since Aminoil, Agip and Revere copper on ivestmentpolicyhub and italaw
163
Ibid 106. These three types of stabilization clause, he termed the classic or traditional type of stabilization clauses.
164
Faruque (n 152) 335.
165
Ibid 323.
166
Texaco Overseas Petroleum Company and California Asiatic Oil Company v The Government of the Libyan Arab
Republic, (Award 19 January 1977 (Int’l Arb Trib 1978) 53 ILR 389 (hereinafter referred to as ‘TOPCO’).
167
The American Independent Oil Company v The Government of the State of Kuwait, (Award 24 March 1982 1984)
66 ILR 519, 588 (hereinafter referred to as ‘Aminoil v Kuwait’). In recognising the legitimacy of stabilization clauses,
the ICSID Tribunal in this case held that host States can pledge themselves not to nationalize an investor’s undertaking
within a given period by way of stabilization clauses and same shall be deemed valid. The Tribunal however held that
the stabilization clause in this instance did not make specific reference to nationalization and could therefore not avai l
the investor. Notably, this position that stabilization clause must make specific reference or mention of expropriation
or nationalization has been subject to a number of criticism. See Thomas J Pate, ‘Evaluating Stabilization Clauses in
Venezuela's Strategic Association Agreements for Heavy-Crude Extraction in the Orinoco Belt: The Return of a
Forgotten Contractual Risk Reduction Mechanism for the Petroleum Industry’ (2009) 40(2) University of Miami Inter-
American Law Review 347, 355.
168
AGIP SPA v People's Republic of the Congo, ICSID Case No. ARB/77/1, Award, 30 November 1979(Int’l Arb.
Trib. 1977) 67 ILR 318 (hereinafter ‘AGIP’).
169
Revere Copper & Brass Inc v Overseas Private Investment Corporation, (Int’l Arb Trib 1978) 17 ILM 1321, 1322
(hereinafter ‘Revere Copper v OPIC’). The tribunal found that the tax stability commitments which imposed taxes
ceiling on profits and royalties, were valid and binding commitments under international law as the commitments
were entered into in an unqualified manner and in particular, host States ‘may for certain periods impose limits on the
sovereign powers of the State, just as it does when it embarks on international financing …’ Revere Copper () 1342.
54
Stabilization Clause is incorporated in state contract by mutual consent of foreign investor and
host State, the parties therefore intended the stabilization undertaking to be valid undertakings.170
Stabilization Clause, particularly the traditional type is indeed contentious. A less contentious
alternative is Renegotiation Clause which is a more flexible alternative to the traditional
stabilization or freezing clause. There is a decline in the use of the traditional freezing stabilization
clause whilst there is increasing popularity for renegotiation to restore the economic balance or
equilibrium of the investment. Renegotiation clauses are special mechanisms for dealing with
changes in economic and commercial equilibrium in contract. 171 Renegotiation clause which
acknowledges the mutability of the contract is hinged on the principle of rebus sic stantibus.172
Renegotiation provides a compromise between conflicting host States right to exercise their
legislative powers and foreign investors’ expectations of stability and predictability of legal and
fiscal regime governing their investment agreement. It paves way for parties to adapt to changes
in circumstances. In this regard, parties agree to renegotiate any future changes in law or regulation
that affects the investor’s economic position and these negotiations are expected to be undertaken
in good faith to enable the investment agreement’s economic balance be maintained.
Renegotiation clauses are drafted in a variety of ways and exist in various formulations but are all
aimed at keeping alive the contractual terms. 173 The essence is to ensure that parties agree to a
new commercial arrangement whenever the contractual balance is damaged or eroded.174 In the
absence of renegotiation clause, force majeure or hardship clauses under international
commercial/contract law may avail the investor in certain instances.
Be that as it may, on the issue whether Stabilization Clause can curtail legislative prerogative, the
view gaining support is that contractual undertakings cannot bind legislative competence of a state
bearing in mind the constitutional law principle of legislature not been bound by its own legislation
since it has inherent powers to change it. This view is buttressed by the fact that host States
170
Faruque (n 149) 106.
171
Klaus Peter Berger, ‘Renegotiation and Adaption of International Investment Contracts: The Role of Contract
Drafters and Arbitrators’ (2003) 36 Vanderbilt Journal of Transnational Law 1347, 1350.
172
Zeyad A Al Qurashi, ‘Renegotiation of International Petroleum Agreements’ (2005) 22(4) Journal of International
Arbitration 261.
173
Erkan (n 4) 196.
174
Ibid.
55
typically violate or breach contractual undertakings of stability due to outweighing public interest
considerations. Consequently, the principal consequence of stabilization clause is payment of
compensation which has more deterrence value than functional value as host States can regardless
of existence of Stabilization Clauses exercise their legislative powers to amend or alter the
investment agreement. The Aminoil Tribunal held that the host State had a right to expropriate
regardless of stabilization commitment; the relevance of Stabilization Clause in this instance was
held to be the calculation of the amount of compensation payable for such expropriation.175 This
line of decision lends credence to thought that stabilization clauses have been more honoured in
their breaches than through strict performance. 176 Legal debate on stabilization commitment/
clause has evolved from the days of validity and legal effect, to current discourse on scope,
interpretation and application of stabilization clauses. At the heart of much debate on stabilization
commitment are the scope, interpretation and application.177 Stabilization Clauses vary in scope
as to the level of host States’ stability commitment to the investor. Stabilization clauses’ scope
has tended to broaden, such that it includes changes in the regulatory framework falling short of
expropriation or contract modification.178 Meanwhile principles of state sovereignty tend to define
the scope of stabilization clauses restrictively.
On the issue of developments in stabilization clause jurisprudence, a case in line is Duke v Peru
where the ICSID tribunal found a breach of a tax stabilization commitment made to an energy
industry foreign investor by the Peruvian government for a new and adverse interpretation of the
existing laws.179 In this case, the key issue before the Tribunal was if the Stabilization Clause in
the Legal Stability Agreement cover situation where there is no formal amendment of law but the
law is subsequently interpreted in a manner that adversely affects the investment. The tribunal
postulated a 3- pronged stabilization violation classification to include (i) regulatory change (ii)
interpretive change and (iii) arbitrary interpretation.180 It was held that departure from established Commented [I17]: four different works of this author was cited
in this chapter, i am unable to ascertain which of Cotula's work is
being referenced in footnotes 179-186.
175
Kuwait v Aminoil (n 167). Meanwhile, the AGIP Tribunal required host State to pay compensation for breach of
Stabilization Clause. TOPCO Tribunal ordered restitution but this was difficult to carry out, therefore recourse was
had to compensation.
176
Faruque (n 152) 1,2.
177
Lorenzo Cotula, ‘Pushing the Boundaries vs. Striking a Balance: The Scope and Interpretation of Stabilization
Clauses in Light of the Duke v. Peru Award’ (2010) 11(1) Journal of World Investment & Trade 27, 32.
178
Cotula (n 234) 6.
179
.Duke Energy International Peru Investments No 1 Ltd v Republic of Peru, ICSID Case No ARB/03/28, Award (not
public) 18 August 2008, para 214 (hereinafter Duke Energy v Peru)
180
Cotula (n 270) 41.
56
interpretation is tantamount to legislative or regulatory amendment/changes since they are similar
in effect and therefore a breach of the Stability Guarantee in the Legal Stability Agreement.181
2.4.2 Stability Provisions in Domestic Legislation
Apart from contractual stabilization clauses and treaty based stability commitments, another type
of stability guarantee is that which host States provide through legislative actions. It may be
legislative support of a contractual undertaking of stability182 or standalone legislatives acts which Commented [I18]: incomplete footnote
provide specific guarantees for a category of investments. For instance, legislation was used to
provide stability for the first Nigerian LNG project. 183 The Act included copious stabilization
provisions such as prohibition of unilateral changes by the Nigerian Government, freezing of the
fiscal regime applicable to the project. The effect of the act was to create an enclave status for the
Nigerian LNG project.
It must be noted though that there are no absolute guarantees even where legislative act entrenches
Stability Guarantees as legislature may undo, what it enacts. Likewise, Professor Cameron
contends that legislative protection of stability commitment is of little consequence, 184 as
legislative may undo what it had previously done or amend the laws. Nonetheless, the grant of
stability by way of legislative or parliamentary acts represents at the very least a serious procedural
hurdle in the modification or rescission of investment contracts.185
A contract based Stability Guarantee introduced in Latin American countries is Special Legal
Stability Agreements. Most Legal Stability Agreements either derive their authority from
legislative acts or are subject to approval of legislature to be valid and effective. The tenure of
Legal Stability Agreements may subsist for the lifespan of the project and is typically tied to
fulfilment of a number of investment conditions such as minimum capital investment, percentage
181
Duke Energy (n 23).
182
This can be achieved in two ways (i) provision of additional legal support for contractual stability commitments
(ii) State Contract or investment agreement may be submitted to legislature for approval thereby giving the State
Contract or investment agreement a force of law. In Azerbaijan and Kazakhstan, petroleum agreements were in certain
instances accorded the status of law in view of
183
See the Nigeria LNG (Fiscal Incentives, Guarantees and Assurance) Act of 1990 amended in 1993.
184
More of a comfort factor for foreign investors that buttresses their claims to legitimate expectation of stability.
185
Cameron (n 54) 63.
57
premium payment etc.186 Peru is the pioneer state that launched these special stability instruments
that have the effect of reinforcing rights and protections already available to foreign investors
under the host States’ legal regime.187 These Agreements which grant the stability of a series of
rights for 10 years from their subscription dates, are entered into with investors on behalf of the
Peruvian government by ProInversión.188 By virtue of these Legal Stability Agreements, investors
are required to investment a minimum amount of funds in Peruvian economy. When the minimum
investment is not made within a defined period of time (typically two years from the signing of
the agreement) the Legal stability expires.189 With the introduction of Legal Stability Agreements
in Peru in 1991, over 766 LSA have been concluded and at least US$14 Billion investment
commitments made. Undoubtedly, this inevitably boosted Peruvian economy. The case of Duke
Energy v. Peru is instructive in construing the legal character of Legal Stability Agreement. Here,
Legal Stability Agreements are deemed a contract-law under Peruvian law having the effect of a
contract enforceable as law which cannot be unilaterally modified or terminated by Peruvian
Government. It can however be modified with the mutual consent of both parties ie, Investor and
host State. As in Peru, the situation is similar in other Latin American countries that have adopted
the use of Legal Stability Agreements eg, the Colombian Law 963 of 2005 (Law 963) created legal
stability contracts as a means for encouraging investment and protecting national and foreign
investors from subsequent changes in the laws or administrative interpretations that were
considered at the time the contract was entered into with the State.190
2.4.3 Treaty Based Stability Guarantee
186
Procolombia, ‘Legal Stability Guarantees’ <http://www.investincolombia.com.co/investment-incentives/other-
incentives/26-investment-incentives/92-legal-stability-agreements.html> accessed 29 April 2016.
187
Cameron (n 54) 247.
188
See Foreign Investment Law (Legislative Decree Number 662) Published in the Official Gazette “El Peruano”,
(August 29, 1991). Articles 2, 7 and 9 of the Legislative Decree 662 provide legal stability with respect to income tax
system stability and free foreign currency transfer. Overall, the Peruvian practice gives rise to high threshold of
investors’ confidence that their assets and investments will continue to be respected and protected by a well-
established legal framework. See Maria A. Maldonado-Adrian and Adolfo M. Zegarra, ‘Legal Stability Agreements: Another
Example of how Peru Embraces Foreign Investments’, <http://www.compasscayman.com/cfr/2011/07/19/Legal-stability-agreements--
Another-example-of-how-Peru-embraces-foreign-investments/ > accessed 30 April 2016.
189
Baker & Mckenzie, ‘Doing Business in Peru’
<http://www.bakermckenzie.com/files/Uploads/Documents/North%20America/DoingBusinessGuide/Dallas/br_dbi_
peru_13.PDF> accessed 30 April 2016.
190
María Paula Silva, ‘Legal Stability in Colombia, an Invitation to Invest’ (2013) 16 CEPMLP Annual Review, 13
<http://www.dundee.ac.uk/cepmlp/gateway/files.php?file=cepmlp_car16_69_452126627.pdf> accessed 30 April
2016.
58
Beyond contractual Stability Guarantees and Stability Guarantees based on local legislations,
treaty based Stability Guarantees have been known to avail foreign investors in their pursuit of
stability. Agreeing with Schill, investment treaties provide a substitute for failure of many
domestic legal systems to provide institutional framework that reduces political risk, ensures the
proper functioning of the economy and imposes constraints on the host States’ power to regulate
and interfere in economic activities. 191 In the first place, the legal framework affords foreign
investors a neutral venue for resolution of investment disputes and provides them a viable chance
of pursuing claims against host States based on contractual breach or violation of treaty protection
standards.192
Under this heading, the main issue often for determination before tribunals is investor’s claim to
stability of legal framework and continuity of investment terms and condition as determined by
laws and regulations prevailing at the time investments were made. This claim is mostly hinged
on one or more or a subset of the substantive protection standards of investment treaty. For
instance, the issue of Stability Guarantee becomes relevant to the legitimate expectation doctrine
which is a subset of the Fair and Equitable Treatment Standard, when foreign investors argue that
expectations have been created on the basis of host State’s legal and regulatory framework existing
at the time of investment. These arguments tend to contend that host States are obliged by virtue
of their treaty commitments to maintain the stability and immutability of the legal and business
environment in place at the time of making their investments. Thus, any subsequent unilateral
changes in legislations or regulations will be a violation of FET standard. The tribunals in the
earlier Argentina cases were proponents of the viewpoint that host States’ legal and regulatory
framework must foster stability; hence any amendment or modification thereof will violate the
investors’ legitimate expectations and thereby trigger the protection under the applicable treaty.
Thus, the tribunals in Azurix Corp v The Argentine Republic,193 BG Group Plc v Argentina,194
191
Schill, (n 56) 3, 5 & 6.
192
Cameron (n 54) 149.
193
Azurix Corp v The Argentine Republic (I), ICSID Case No ARB/01/12, Award, 14 July 2006 (hereinafter Azurix v
Argentina (I)).
194
BG Group Plc v The Republic of Argentina UNCITRAL Award, 24 December 2007 (hereinafter BG v Argentina)
59
CMS Gas Transmission Company v. Argentina, 195 Enron CorpPonderosa Assets LP v
Argentina,196 Sempra Energy International v Argentina197 all followed this line of award although
with differing opinions on the acceptability of the necessity defence canvassed by Argentina. 198
In particular, the LG&E Energy Corporation and ors v Argentina tribunal found that the investor’s
legitimate expectation was frustrated due to Argentina’s abrogation of the relevant laws and
regulations in the gas sector which initially had been deployed to attract investment.199 While the
tribunal in Enron v Argentina held that a stable framework is a key element of the Fair and
Equitable Treatment and consequently found Argentina in breach of the FET standard for failing
to provide a stable framework by the dismantling of the regulatory framework reasonably relied
on by the investor.200
Eureko BV v. Republic of Poland 201 and Occidental Exploration and Production Company v
Ecuador 202 are two non-Argentine cases which are in sync with the position in the earlier
Argentina cases. The Occidental tribunal like some other tribunals referred to and based its
reasoning on the textual language of the BITs’ preamble to assert that “stability of the legal and
business framework is ... an essential element of FET”203 To Occidental’s claim that Ecuador had
frustrated its legitimate expectation by revoking pre-existing decisions it had legitimately relied
upon to assume its commitments and plan its commercial and business activities, Ecuador retorted
claiming that no legitimate expectation was created as no investor could expect that all of its
195
CMS Gas Transmission Company v Argentine Republic, ICSID Case No ARB/01/08, Award 12 May 2005
(hereinafter CMS v Argentina).
196
Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa Assets, LP v Argentine
Republic, ICSID Case No ARB/01/3, Award 22 May 2007 (hereinafter Enron v Argentina)
197
(hereinafter Sempra v Argentina)
198
Out of the over 40 cases against Argentina (12 have been concluded by January 2012), following the measures
taken to address the Argentine 2000 – 2002, only the tribunals in LG&E and Continental Casualty accepted
Argentina’s reliance on the necessity defence. See Christina Binder, ‘Stability and Change in Times of Fragmentation:
The Limits of Pacta Sunt Servada Revisisted’ (2012) 25 Leiden Journal of International Law 909, 934.
199
LG&E Energy Corp, LG&E Capital Corp and LG&E International Inc v Argentine Republic, ICSID Case No
ARB/02/1, Award, 25 July 2007, paras 132- 139 (hereinafter LG&E v Argentina)
200
Enron v Argentina (n 195) para 251 -268.
201
Eureko BV v Republic of Poland, UNCITRAL Partial Award, 19 August 2005 (hereinafter Eureko v Poland)
202
Occidental Exploration and Production Company v. Republic of Ecuador (I), UN3467, UNCITRAL/LCIA Award,
I July 2004 (hereinafter Occidental v. Ecuador (I)) ).
203
Ibid para 183. See also Michele Potestà, ‘Legitimate Expectations in Investment Treaty Law: Understanding the
Roots and the Limits of a Controversial Concept’, (2013) 28(1) ICSID Review, 88-122. This Paper was originally
delivered at Third Biennial Global Conference in Singapore on the 12 – 14 July
2014<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2102771> accessed 28 September 2016.
60
expectations will be met.204 The Occidental tribunal went on to hold that the framework under
which the investment was made and operated had been changed in an important manner and
consequently found a violation of the FET standard.205
On the issue of whether general legal and regulatory framework of the host State can give rise to
investor’s legitimate expectation, the other school of thought argue that legitimate expectation is
created only by specific representations because of the difficulties and challenges of justifying
legitimate expectations on the basis of the pre-existing legal regime per se.206 Here, there is a
general reluctance to interfere in host States’ administrative acts or actions which may frustrate
expectations if they are of general policy and not a rescission of individualised assurances or
undertakings such as Stabilization Clause.207 Tribunals such as Saluka v Czech Republic208 and
Parkerings v Lithuania 209 tribunals argue that legitimate expectation is created only by specific
representations and typically uphold host States’ sovereign regulatory rights notwithstanding the
existence of treaties’ commitments which encourage stability of legal and business regime or
framework. 210 The Continental Casualty v Argentina 211 Total v Argentina 212 and El Paso v
Argentina213 tribunals in support of this approach hinged their arguments on the view that investors
must reasonably anticipate changes in the host States’ regulatory regimes and should be poised to
absolve whatever effect those future changes herald.
204
Ibid paras 181-2.
205
Ibid para 184.
206
Abhijit PG Pandya and Andy Moody, ‘Legitimate Expectations in Investment Treaty Arbitration: An Unclear
Future’ in FM Téllez, Conditions and Criteria for the Protection of Legitimate Expectations Under International
Investment Law: 2012 ICSID Review Student Writing Competition (2012) 27(2) ICSID review, 432-442.
207
Potesta (n 204 ) 9.
208
Saluka Investment BV (The Netherlands) v The Czech Republic, UNCITRAL/PCA Partial Award, 17 March 2006
((hereinafter Saluka v. Czech Republic)
209
Parkerings-Compagniet AS v Republic of Lithuania, ICSID Case No ARB/05/8, Award 11 September 2007, para
344 (hereinafter Parkerings v. Lithuania)
210
Michele Potesta, ‘Legitimate Expectation in Investment Treaty Law: Understanding the Roots and the Limits of a
Controversial Concept’ (2013) 28 ICSID Review 88, 112.
211
Continental Casualty Company v The Argentine Republic, ICSID Case No ARB/03/9, Award, 5 September 2008,
para 261 (hereinafter Continental Casualty v Argentina)
212
Total SA v The Argentine Republic, ICSID ARB/04/1, Award 27 December 2013, para 129 (hereinafter Total v
Argentina).
213
El Paso Energy International Company v Argentine Republic, ICSID Case No, ARB/03/15, Award 31 October
2011 (hereinafter El Paso v Argentina)
61
2.5 LEGAL PRINCIPLES PUTTING FOREIGN INVESTORS’ RIGHTS AGAINST HOST
STATES’ REGULATORY RIGHTS
‘“The guarantees afforded to foreign investors, must not jeopardise the state’s right to legitimate
regulation … The task of international investment law is to find an appropriate balance between
these potentially conflicting interests.’214
The above opinion of Schreuer underscores the real purport of investor state arbitral tribunals’
tasks as underpinning every argument in support or against protection of foreign investors’ rights
is this issue of conflicting interests. Concerning protection of Stability Guarantees under investor- Commented [I19]: KINDLY REVIEW THIS SENTENCE to
ensure it is grammatically correct.
state arbitration, it is trite that Stability Guarantees no matter how derived or craftily designed
cannot foreclose the possibility of future lawful expropriation. This is because it is now established
under international law, that a host State may interfere in the investment or restrict the property
rights of a foreign investor within its territory under certain circumstances including payment of
compensation. Thus, as host States sovereignty cannot be curtailed by contractual mechanism, it
is inevitable that conflict and tension subsists between the aims of the traditional Stability
Guarantees such as stabilization clause and the tenets of the Permanent Sovereignty over Natural
Resources (PSNR). PSNR which is a means of gaining control over natural resources entrenches
the political right of self-determination, requires host States to exercise their full and inalienable
right freely to dispose of their natural wealth and resources in accordance with their national
interests, and on respect for the economic independence of States. 215 At the onset of the
establishment of PSNR, developing countries attempted to downplay the principle of Pacta Sunt
Servada underlying contractual commitments by arguing that sovereignty over natural resources
superseded any contractual commitment or assurances. The contention here is that sovereignty
over natural resources supersedes any contractual promise, including express commitments by host
214
Christoph Schreuer, ‘Investments, International Protection’
<http://www.univie.ac.at/intlaw/wordpress/pdf/investments_Int_Protection.pdf> accessed 27 July 2016.
215
General Assembly resolution 1803 (XVII) of 14 December 1962, "Permanent sovereignty over natural resources"
<http://www.ohchr.org/EN/ProfessionalInterest/Pages/NaturalResources.aspx> accessed 30 May 2016. Permanent
Sovereignty over Natural Resources, UNGA Res 1803 (XVII) (14 December 1962)
<http://www.ohchr.org/EN/ProfessionalInterest/Pages/NaturalResources.aspx> accessed 30 May 2017.
62
States not to impair those contractual rights.216 According to Nico Schrijver, from the inception
of the principle of PSNR introduced in United Nations debates to underscore developing countries
right to benefits of resource exploitation, the principle of Pacta Sunt Servada and respect for
acquired rights have been an opposing or contracting principle to PSNR.217 Meanwhile, going by
the international law principle of Pacta Sunt Servada, it is expected that a party entering into an
agreement with another party will fulfil its promises. Pacta Sunt Servada (meaning “agreements
or promises must be kept”) an entrenched principle of international law with civil law and canon
law origins is synonymously referred to as the principle of Sanctity of Contract. This principle
postulates that as parties have the freedom to enter into contractual arrangements, parties must
honour their obligations under a contract duly and freely entered into even the ones that prohibit
future legislation and regulatory amendments. It noteworthy to mention that the doctrine of Pacta
Sunt Servanda, is applicable to all types of agreements, including those between foreign investors
and host States. Meanwhile, giving effects to the tenets of Pacta Sunt Servada doctrine essentially
curtails host States from freely exercising powers or prerogative to legislate or regulate accentuated
under the PSNR Principle.
Pacta Sunt Servada doctrine is particularly relevant to Stability Guarantee protection as foreign
investors typically seek to hold host States bound to agreements or commitments of stability and
certainty ostensibly or duly made to them. More importantly, in their bid to seek protection of
these Stability Guarantees, foreign investors’ interests inevitably run contrary to the host States’
interests in exercise of their full and free inalienable sovereign regulatory powers guaranteed by
PSNR principle. Tribunals confronted with the conflict between these two legal principles of
Pacta Sunt Servada as canvassed by foreign investors on one hand and PSNR by host States on
the other, must undertake a balancing of these divergent interests.
Unsurprisingly, the issue of interests balancing seems to be at the current focal point of debates as
to the content of FET on the one hand and stabilization clause on the other.218 For this reason,
216
DE Vielleville and BS Vasani, ‘Sovereignty Over Natural Resources Versus Rights Under Investment Contracts:
Which One Prevails?’ <https://www.crowell.com/documents/Sovereignty-Over-Natural-Resources-Versus-Rights-
Under-Investment-Contracts_Transnational-Dispute-Management.pdf> accessed 04 August 2016.
217
Nico Schrijver, Sovereignty Over Natural Resources; Balancing Rights and Duties (Cambridge University Press,
2008) 1.
218
Potesta (n 2024 ) 26.
63
finding the right balance between investors’ right to stability and host States sovereign regulatory
powers on another has become very pertinent. Supporting this position, the Tribunal in Total SA
v. The Argentine Republic specifically stated that ‘…The balance between these competing
requirements and hence the limits of the proper invocation of “legitimate expectations” in the face
of legislative or regulatory changes … has been based on a weighing of various elements pointing
in opposite directions.’219 This balancing requirement according to Leonhardsen goes to the root
of legitimacy of the investor-state system since negligible attention paid by tribunals in the wake
of Argentine 2000 to 2002 economic crisis occasioned a perceived lack of legitimacy of the regime
that culminated in host States’ renunciation of investment treaty commitments. 220 He surmised
that ‘A balancing approach by treaty tribunals might help mitigate this legitimacy deficit … ’221
As the aim is to provide balanced protection for both foreign investors and host States, tribunals
must rely on the standards of review in weighing these competing interests. Public law concepts
have been used to address tension between investment protection and regulatory rights of host
States. One of such concepts is proportionality legal technique for balancing conflicting interests.
With its German administrative and constitutional law origins, proportionality, as an adjudicative
technique for managing disputes between rights involving an alleged conflict between two rights
claims, has been embraced by many and is a common feature of most international dispute
settlement mechanisms. 222 In investor-state arbitration parlance it has been deployed as an
analytical tool to determine if host State’s exercise of its police power is a reflection of an
appropriate balance between host State and investor’s interests. 223 As a standard of review,
proportionality presupposes reconciling competing rights based on specific procedural framework
consisting of three phases of suitability, 224 necessity 225 and proportionality in the strict sense
219
Total v Argentina (n 2123) para 121 .
220
Erlend M. Leonhardsen, ‘Looking for Legitimacy: Exploring Proportionality Analysis in Investment Treaty
Arbitration’(2012) 3(1) Journal of International Dispute Settlement, 95-136. See also Benedict Kingsbury and
Stephan Schill, ‘Public Law Concepts to Balance Investors' Rights with State Regulatory Actions in the Public Interest
- the Concept of Proportionality’ in Stephan Schill (ed), International Investment Law and Comparative Public Law
(Oxford University Press 2010) 79.
221
Ibid.
222
Ibid.
223
Caroline Henckels, ‘Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the
Standard of Review in Investor-State Arbitration’ (2012) 15 (1) J Int Economic Law 223
224
This stage entails determining if the state measure is suitable to achieve the stated objectives.
225
At this stage, it will be assessed if the measure was necessary to the extent that the same objective cannot be
achieved through a less restrictive alternative measure.
64
(stricto senso) whilst taking cognizance of both parties’ interests. 226 Some commentators have
distinguished between juridical balancing per se and proportionality. The former which is
considered more flexible wide-ranging in scope is said to propel arbitrators towards the latter i.e.
proportionality, which is preferable for its potentials to “inject a measure of analytic, or procedural,
determinacy to the balancing exercise.” 227
The need for finding a proper balance between the protection of investors’ Stability Guarantees
and the right of a host State to bona fide exercise its police power to regulate conducts within its
borders has occasioned the diffusion of the Proportionality principle from other international and
domestic legal regimes. Proportionality is still evolving as an international investment law
concept.
2.6 CONCLUSION
Considering the intense global competition for FDI, a good deal of efforts is dedicated to creating
pull factors to attract and retain foreign investors due to the acclaimed benefits of FDI eg, its
potentials to drive development gains and economic growth. Pull factors hinged on political
climate of host State play a significant role in domiciliation of scarce investment capital. Political
stability of a host State is particularly very important due to prevalence of political risks affecting
investments. Indeed, every investor is faced not only with business/commercial risk but also
political risk in it mammoth and unascertainable dimensions. These non-commercial risks
associated with FDI caused protection, regulation of foreign investment and mitigation of these
political risks an imperative. Regarding the focus of this thesis ie,political risks affecting the
stability and certainty of host States’ legal, regulatory and investment regime, the necessity to
protect foreign investors cannot be over-emphasised. Over the years, one of the main means of
controlling political risks bordering on instability and uncertainty especially those that are
expropriatory in nature, is recourse to contractual Stability Guarantees and investment treaties
mechanisms. It is not farfetched to assert that the development of international investment law
226
Oystein Kværner-Svendsen, ‘Proportionality in International Investment Law: Are We There Yet?’ (Master Thesis
(LLM), University of Oslo, 2011) <https://www.duo.uio.no/handle/10852/19200> accessed 15 October 2017.
227
Alec Stone Sweet, ‘Investor-State Arbitration: Proportionality’s New Frontier’ [2010] Yale Law School Legal
Scholarship Repository 14.
65
from the days of customary international law to present day investment treaties regime is more in
favour of investors as it is believed that investor protection remains its primary objective over and
above promotion of economic growth and development of host States. The exponential growth in
investor-state arbitration since the first known arbitration is suggestive of its wide acceptance as a
dispute resolution mechanism. This however is not the total picture as there are increasingly
criticism of the regime and clamour for improvement of the system. Notwithstanding these
criticisms and renunciation of the treaty practice by certain Latin American countries, the
avalanche of investment treaties coupled with the upsurge in the number of publicly declared
investor-state arbitrations lend credence to the belief that the system has not only come to stay but
has potentials to evolve into a supranational legal system.
Investor-State arbitration system affords foreign investors the opportunity to seek redress before
an international arbitral forum for violation of at least one treaty standards of protection. Out of
the standards of treatment guaranteed by investment treaties those directly applicable 228 to
Stability Guarantees include Fair and Equitable Treatment, Umbrella Clause, Full Protection and
Security and No Expropriation without compensation; these shall form the crux of discussions in
later chapters of this thesis. Meanwhile, foreign investors’ recourse to investor-state arbitration
which has elicited divergent outcomes and extensive arbitral jurisprudence can be differentiated
from recourse to international commercial arbitration system due to certain distinctive features.
The issue of parties’ consent to arbitration is a significant differentiating element between
investment arbitration and commercial arbitration. Unlike commercial arbitration where the
jurisdiction of the arbitral panel is based solely on Parties’ mutually agreed contractual arbitration
agreement or separate ad hoc arbitration agreement, investment arbitration parties’ arbitration
agreement are usually based on unilateral offer of arbitration incorporated in investment treaties
and deemed accepted by foreign investors upon claims filing. This practice of investor-state
arbitration has created what is now frequently referred to as arbitration without privity.
Arbitration without privity is the main purview of ICSID, the World Bank institution set up
exclusively to administer investor-state arbitration. That ICSID has played a significant role in
228
Applicable to the extent that parties have used these the standards of protection to argue for protection of Stability
Guarantees.
66
the development of investor-state arbitration jurisprudence cannot be undermined. Needless to
say, that ICSID has contributed to the increasing growth of investor-state arbitral practice that
mainly centredcentered on protection of foreign investors and enforcement of treaty obligations of
host States. Of particular relevance to this thesis, is host States’ obligation to ensure the protection
of Stability Guarantees in favour of foreign investors. Investor-state arbitration apparatus for
protecting the Stability Guarantees available to foreign investors by virtue of contractual
stabilization clauses, unilateral stabilization commitments of host States embedded in domestic
legislation and treaty based stability assurances forms the thrust of this thesis. Although the pattern
of arbitration awards or arbitral jurisprudence on the protection of Stability Guarantees under
international investment arbitration will only be distilled after the analysis contemplated in the
next chapter, it may be too hasty to jump to conclusions as to the outcome of said analysis.
Nonetheless, it is not out of line to assert that one main issue most tribunals are called to resolve
in these instances borders on balancing of competing rights. Indeed, in any argument seeking to
entrench stability of investment terms and conditions over and above sovereign intervention in
investment, there is an intrinsic issue of clash of interests. Foreign investors right to sanctity of
contract and stability of investment terms as against exercise of host States’ sovereign regulatory
powers backed by the international law principles of Pacta Sunt Servada and Permanent
Sovereignty over Natural Resources respectively. A viable technique to balance these conflicting
interests is proportionality doctrine as diffused into international investment law arena from other
international and domestic legal systems. In subsequent parts of this thesis, the means and
techniques arbitral tribunals have adopted in their bid to balance these conflicting interests will be
reviewed. It will also be determined whether proportionality is a catchall balancing technique
suitable or appropriate in all instances to weigh competing rights of foreign investors seeking
protection of Stability Guarantees as against rights of host States to regulatory flexibility.
67
CHAPTER THREE
LAWFULNESS OF EXPROPRIATION IN BREACH OF STABILITY GUARANTEES
TABLE OF CONTENTS
1. INTRODUCTION
2. CLASSIC CASES ON STABILIZATION CLAUSE
3. INTERNATIONAL LAW RULES ON EXPROPRIATION AND INVESTMENT

TREATY PRACTICE
4. LEGAL REQUIREMENT FOR LAWFUL EXPROPRIATION
4.1 Compensating Over and Beyond Treaty Compensation Standard

4.2 To Defer or Not to Defer to Host States’ Designation of Public Purpose
5. FALLING WITHIN THE EXPROPRIATION SPHERE OR NOT – INDIRECT

EXPROPRIATION vV. LEGITIMATE REGULATORY MEASURES
6. STABILIZATION CLAUSE AS CONDITION AND INDICATOR OF

EXPROPRIATION
6.1 Observance of Specific Undertaking as the 5th Condition for Lawful Expropriation
6.2 Are Breaches of Stabilization Clauses Decisive for Distinguishing Between
Permissible Regulatory Measures and Indirect Expropriation?
7. CONCLUDING REMARKS
68
CHAPTER THREE
LAWFULNESS OF EXPROPRIATION IN BREACH OF STABILITY GUARANTEES
1. INTRODUCTION
A key substantive protection afforded to foreign investors by international investment treaties is

protection against unlawful expropriation and measures tantamount or equivalent to expropriation.
As investment treaties include specific rules on expropriation, foreign investors have relied a great
deal on investment treaties’ protective mechanisms to seek redress for host Sstates’ measures
which they consider unlawful expropriation. Historically, protection against unlawful
expropriation was virtually the only and most important investment protection. 1 Prior to the
incessant recourse to investor-state mechanisms for protection of Stability Guarantees, some
renowned arbitrations and litigations constituted under both international and domestic legal
systems pertaining to contractual Stability Guarantees breaches, have contributed to the case law
on the topic of expropriation. These classical cases on stabilization clauses involve allegations of
expropriation or nationalization of foreign investments by host Sstates. As with these early cases
on validity or legality of stabilization clause which involved allegations of expropriation or
nationalization, most investor-claimants’ claims pertaining to breach of Sstability Gguarantees
under investment arbitration regime have alleged as a principal claim, violation of expropriation
provisions of relevant investment treaties. To begin the review of arbitral awards touching on
expropriation claims involving Stability Guarantees, it is apt to rehash Katja Gehne & Romulo
Brillo’s assertion that scarcity of reported investor-state cases involving stabilization clauses
makes it challenging to identify trends in their interpretation by arbitrators. 2 Be that as it may,
while one might be unable to lay claim to an established trend with regards to a distinctive
interpretation of stabilization clause within the confines of investor-state arbitration, it is however
not out place to say that certain principles have emerged and become established even with the
limited case law on the issue. In this context, a main question that has arisen include if observance
or compliance with specific commitments or particular obligations undertaken with regards to
1
Christoph Schreuer, ‘Introduction: Interrelationship of Standards’ in August Reinisch (ed), Standards of Investment
Protection (Oxford University Press 2008) 1.
2
Katja Gehne and Romulo Brillo, ‘Stabilization Clauses in International Investment Law: Beyond Balancing and Fair
and Equitable Treatment’ NCCR Working Paper 2013/46 by (NCCR, WTI) 11.
69
investors such as Stability Guarantee, is a condition for lawful expropriation, the same way as non-
discrimination, public purpose, due process and compensation payment are. Another issue that
have come up for tribunal’s determination is if host States’ measures in breach of Stability
Guarantees would necessarily automatically amount to unlawful and compensable indirect
expropriation.
It is essential to note that whilst foreign investors in the classical cases had to contend with direct
expropriation or nationalization, in today’s international investment clime, the focus of the
discourse has moved from direct expropriation or nationalization to indirect expropriation and
regulatory taking.3 The discourse on the legality of expropriation which featured prominently in
customary international law debate has been whittled down with this new attention on indirect or
de facto expropriation. Due to this shift from outright direct expropriation to indirect expropriatory
legislative and regulatory takings, the debate is now more on what types of governmental measures
constitute indirect or de facto expropriation or regulatory taking.4 This is against the backdrop of
the trite consensus that expropriation is not illegal per se, if certain conditions are met. Thus,
international responsibility will not accrue to host States if a taking or expropriation of foreign
investors’ property or investment is (i) for public purpose, (ii) non-discriminatory, (ii) against
payment of compensation and (iv) under dues process of the law. These are the four principal
requirements to be satisfied for a taking or expropriation to be deemed lawful and legal. On the
other hand is non-compensable takings or regulations which connotes a lawful exercise of host
States police power to regulate even if it affects foreign investors properties. 5 Thus three distinct
scenarios are presented with respect to host Sstate’s measure alleged to be expropriatory. The first
scenario being lawful expropriation which has fulfilled all the four conditions of public purpose,
non-discrimination, due process and payment of compensation. The second scenario is unlawful
expropriation which suggests non-observance of all or one of the four above mentioned conditions.
3
The terms expropriation and taking are used interchangeably by commentators and writers on the subject. Anne K.
Hoffman, ‘Indirect Expropriation’ in August Reinisch (ed), Standards of Investment Protection (Oxford University
Press 2008) 153.
4
Azurix v. ArgentinaAzurix Corp. v. The Argentine Republic (I), ICSID Case No. ARB/01/12, Award, 14 July 2006
para 442 (hereinafter, Azurix v. Argentina (I))
5
Catherine Yannaca-Small, ‘Indirect Expropriation and the Right to Regulate in International Investment Law’ 2004
OECD Working Papers on International Investment 4.
70
The last and third scenario is the case of legitimate exercise of host Sstates police power to regulate
which requires no compensation.
Determining if host State’s regulation is either an ordinary exercise of its regulatory powers and
therefore not requiring payment of compensation or a disguised form of expropriation is not an
easy task.6 The dividing line between expropriation and bona fide exercise of host States’ police
power to regulate is quite thin such that it becomes difficulty to identify legitimate regulatory
measures when they slide over the line and become expropriation. The absence of bright and
easily distinguishable line between non-compensable regulations and measures that have the effect
of depriving foreign investors of their investment and unlawful compensable expropriation was
acknowledged by Saluka’s tribunal with the conclusion that arbitrators are to determine whether
particular conduct by a State “crosses the line” that separates valid regulatory activity from
expropriation.7 Notwithstanding that expropriation whether deemed lawful or unlawful requires
the payment of compensation, the question whether an expropriation is lawful or unlawful still
remains relevant as it has been argued that this distinction impacts mostly the quantum of
compensation payable at the very least. There are though arguments that this distinction is needless
and is not supported by treaty provision.
Stabilization clauses cum expropriation jurisprudence emerging from above referred classical
cases has historical relevance and continuous influential value on protection of Sstability
Gguarantees within investor-state arbitration arena. Indeed, these cases bordering on scope,
validity, functional value and legality of stabilization clauses and allegations of unlawful
expropriation or nationalization, are consequential to shaping investor-state jurisprudences on the
interaction of Stability Guarantees with expropriation provisions. Accordingly, before an
appreciable consideration of investor-state arbitral jurisprudence on Stability Guarantees in the
context of expropriation arguments is undertaken, it is essential to succinctly review said classical
cases which have helped create investor-state arbitral tribunals’ thinking and approach on
6
Jeswald W Salacuse, The Three Laws of International Investment: National, Contractual, and International
Frameworks for Foreign Capital (Oxford University Press 2013) 316.
7
The tribunal further held that in order to determine the point when an otherwise valid regulation becomes, in fact
and effect, an unlawful expropriation, tribunals must consider the circumstances in which the question arises and
context within which an impugned measure is adopted and applied. Saluka Investments BV (The Netherlands) v. The
Czech Republic, UNCITRAL Partial Award 17 March 2006, Para 263, and 264.
71
stabilization clauses on one hand and expropriation on the other. After which, it will be necessary
to lay some conceptual background on the topic of expropriation. As it is not the intention to
provide a detailed discourse on the topic of Expropriation either under customary international law
or investment arbitration system, this Chapter confines itself to the very salient issues which will
offer ample overview of the subject and are relevant to analysing tribunals’ interpretation of claims
and arguments pertaining to breaches of Stability Guarantees.
2. CLASSIC CASES ON STABILIZATION CLAUSES
As earlier asserted in Chapter 2, stabilization clauses have been enforced more in natural resources
investments as far back as the early 20th century under the commercial arbitration dispensation.
Several dicta flowing from these cases have set standards for determination of acts of expropriation
and nationalization principally because these cases were instituted against the backdrop of diverse
expropriation or nationalization by host Sstates. Needless to state that said dicta have been
repeated and relied on by several investor-state tribunals. These cases have been discussed more
in terms of legality and validity of stabilization clauses, calculation of damages, nature of relief
for wronged investor-claimants, standard of compensation etc. More importantly, these cases have
established the time-hallowed principle upholding host States inalienable sovereign rights and
power to expropriate foreign investors’ assets for public purposes notwithstanding the existence
of stabilization clauses. By implication, stabilization clause is ineffective in preventing acts of
expropriation or nationalization but will trigger payment of compensation. Perhaps this is because
giving absolute legal effect to stabilization clauses more or less impinges upon host State’s
sovereign prerogatives and is inconsistent with the principle of PSNR.8
Some of these cases date back to the early 1930s when conflicts and disputes on enforcement of
Stabilization Clauses existed particularly in Latin America and Middle East countries.9 Pervasive
unilateral host Sstates’ actions of Middle East countries and Libya which occurred in the 1970s
8
Patrick K.M.S. Ng’ambi, The Resource Nationalism Cycle, Stabilization Clauses and the Need for Flexibility in
Concession Agreements, (PhD Thesis University of Leicester 2014) 69. The issue of “sovereign prerogatives” or
“sovereign regulatory rights” also is a recurrent debate in lots of investor-state arbitral cases; hence the need to balance
conflicting rights of investors vis-à-vis host states.
9
Ibid 103.
72
contributed to the deluge of arguments centredcentered on stabilization clauses’ legality, validity,
construction, scope, effect etc. The 1930 Lena Goldfields case involving a British investor and
government of the then Soviet Union, was based on Concession Agreement to mine gold and other
metals. Lena Goldfield’s failure to meet its production requirement as stipulated in the Concession
Agreement led to a series of Soviet Union’s government actions including seizure of Lena
Goldfield’s assets. Meanwhile, the Concession Agreement’s stabilization provision prohibited the
government from making alteration in the Concession Agreement or taking unilateral actions
without Lena Goldfield’s consent. The Lena Goldfields’ tribunal in recognising the validity of
stabilization clauses laid down a landmark ruling, holding that international law and not only
domestic law could govern contractual relationship between investor and state party. Described
as one of the most remarkable occurrences in the field of arbitration, the tribunal awarded to Lena
Goldfields as damages, a staggering amount of £12,965,000, although thought to be
disproportionately high.10
The popular arbitration on stabilization clause, Revere Copper v. OPIC11 has surfaced in a number Formatted: Font: Italic
of investor-state arbitration cases seeking protection of one form of Stability Guarantee or the
other. In this case, Revere Copper had taken out an insurance policy with US OPIC in respect of
its investment in Jamaican bauxite mining sector. The agreement in this case contained a tax
stabilization clause which guaranteed that the taxes paid on the company’s bauxite/alumina plant
in Jamaica would be unchanged for 25 years.12 In 1972, far reaching reforms were undertaken
leading to the enactment of the Bauxite (Production Levy) Act 1974, pursuant to which the
Government of Jamaica imposed an increased tax rate in breach of the express tax stabilisation
clause in the investment agreement. In essence, the Jamaican government repudiated its long term
commitments to Revere. Although the investment agreement was not terminated, the measures
were so impactful such that by 1975, Revere stopped operations. On the premise that Jamaican
Government’s measures amounted to expropriation, Revere Copper subsequently sought recovery
under the OPIC insurance policy. The tribunal held that repudiation of the assurances previously
10
Arthur Nussbaum, “Arbitration between the Lena Goldfields Ltd. and the Soviet Government” (1950) 36 Cornell L.
Rev. 31. Available at <http://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=1582&context=clr> accessed
07 September 2016.
11
Revere Copper and Brass, Inc v Overseas Private - Investment Corp,. Aaward of 24 August 1978, 56 International Formatted: Font: Italic
Law Reports, 258, at 1331.
12
Clause 12 of the Agreement.
73
granted to Revere was expropriation because said repudiation prevented Revere ‘from exercising
effective control over the use or disposition of a substantial portion of its property’. 13 This is
against the backdrop of OPIC Insurance General Terms and Conditions which had defined
‘expropriatory action’ as ‘any action which … for a period of one year directly results in preventing
… the Foreign Enterprise from exercising effective control over the use or disposition of
substantial portion of its property or from constructing the project or operating the same.’ This
case is a toast of claimants seeking Sstability Gguarantees protection. For instance, the investor-
claimant in Burlington v. Ecuador relied on Revere Copper award to argue that a tax that is
contrary to a stabilization clause is expropriation. 14 It has equally enjoyed certain degree of
popularity with tribunals such as BG Group Plc. v. Republic of Argentina when it opined that:
‘… as illustrated by Revere Copper and Brass, Inc. v. Overseas Private-Investment

Corp., the importance of assurances given to investors predates the BIT
generation.”15
Another earlier case involving stabilization clause is Aramco case, where the tribunal held that a
state’s act of contractually binding itself irrevocably and granting irretractable rights to investors
is an exercise of its sovereignty.16 To the arbitrators, investors’ rights have the features or nature
of acquired rights.17
Formatted: Font: Italic, No underline, Font color: Auto

13
Revere Copper v. OPIC, (n 11) Award 24 August 1978 291-2.
14 Field Code Changed
Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability 14 December
2012, para 403. In addition, the Methanex v. United States cited Revere Copper to buttress its point that undertakings Formatted: No underline, Font color: Auto
and assurances that were given in good faith to foreign investors which they relied on to make their investment Formatted: No underline, Font color: Auto
decisions may give rise to responsibility if breached. See Methanex Corporation v. United States, NAFTA
Field Code Changed
UNCITRAL Final Award on Jurisdiction and Merits, (2005) 44 ILM 1345 (Part IV, Chapter D, paragraph
8).(hereinafter Methanex v USA) Formatted: No underline, Font color: Auto
15
BG Group Plc v. The Republic of Argentina, UNCITRAL Award 24 December 2007, para 296 (hereinafter BG v. Formatted: No underline, Font color: Auto
Argentina) Para 296.
16 Formatted: Font: Italic
The 1933 Concession contained a stabilization clause which guaranteed that the rights granted to Aramco were
irretractable. Formatted: Font: Italic
17
Government of Saudi Arabia v Arabian American Oil Company (1958) 27 ILR 117 (hereinafter Aramco) Para 168. Formatted: Font: Italic
The doctrine of ‘Acquired Rights’ prescribes that rights and interest legitimately acquired should neither be
expropriated nor destroyed. Respect for acquired rights was recognised as an aspect of the general principle of law
the Sapphire tribunal. Sapphire International Petroleum Ltd. v National Iranian Oil Company (19673), 35 ILR, Formatted: Font: Italic
(1967), 136, 183-84. Formatted: Font: Italic
74
Ad hoc arbitrations dealing with breaches of stabilization clauses and decided on international law
rules on expropriation under customary international law also include Libyan Oil concession cases.
In the wake of unilateral state actions of Libyan government in 1970s, affected oil and gas investors
who deemed Libyan acts of nationalization of their assets a breach of contractual stabilization
clauses incorporated in their long-term concession agreements instituted 3 significant arbitration
proceedings against Libyan government. The Claimants generally argued that the nationalization
acts were politically motivated, discriminatory and confiscatory in nature and a violation of the
express terms and guarantees previously granted by Libya Government. These cases which are
important for developing legal standards for nationalization, comprise of BP Exploration Co Formatted: Font: Italic
(Libya) v Libya,18 Texaco Overseas v Libya (TOPCO),19 Libyan American Oil Co (LIAMCO).20 Formatted: Font: Italic
Although these cases were determined by different ad hoc arbitral panels, the arbitral outcomes
were similar to the extent that the Concession Agreements were held to have been breached by
reason of the unlawful nationalization of the investors’ assets without payment of adequate
compensation. Nonetheless, Prof Dupuy, the Sole Arbitrator in Texaco Overseas v Libya
confirmed the right of host States to expropriate or nationalize private property when he stated
that:
‘The exercise of the national sovereignty to nationalize is regarded as the

expression of the State’s territorial sovereignty. It is an essential prerogative of
sovereignty for the constitutional authorities of the State to choose and build freely
an economic and social system.’21
It is still on the basis of the host State’s sovereignty that caused the Sole Arbitrator to assert that
Libya ‘cannot invoke its sovereignty to disregard commitments freely undertaken through the
exercise of the same sovereignty…’ Prof Dupuy is noted for having expounded the notion of
Internationalization of State Contract. This concept suggests that instead of State Contracts being
governed by national law, they should be governed by international law and have the status of a
18
B.P. Exploration Company (Libya) Limited v. Government of the Libyan Arab Republic, (1973) 53 ILR (1973). Formatted: Font: Italic
19
Texaco Overseas Petroleum Company/California Asiatic Oil Company vs. Government of the Libya Arab Formatted: Font: Italic
Republic, (1978) 17 ILM (1978) pp. 1-37 (hereinafter TOPCO).
Libyan American Oil Company (LIAMCO) v The Libyan Arab Republic, Award 12 April 1977, (1978) 17 I.L.M. 3
(1978) (hereinafter LIAMCO). Formatted: Font: Italic
21
LIAMCO (1978) 17 ILM 1978 p 1-20; (1979) 53 ILR 1979 427. Formatted: Font: Italic
75
treaty. The Sole Arbitrator, considered the Deed of Concession of having the special character of
Economic Development Agreement, which escalated the contractual arrangement to be ‘within the
domain of international law’. A State Contract is internationalized if certain parameters exist
including if the contract is an Economic Development Agreement and the presence of a
stabilization clause.22 The implication being, a breach of contract will amount to a violation of
international agreement and will therefore engage international responsibility of host States. These
contentions have though not found support in subsequent rulings as same has been subjected to
much criticism.23 The prevalent opinion is that investment contract is not a treaty and cannot be
equated analogous to a treaty.24
In all the Libyan cases, the arbitrators held that Libya had violated the binding obligations in the
Concession Agreements. Nonetheless, only one of the cases resulted in an award of damages for
Libya’s violation of its binding obligation. The LIAMCO arbitrator held that Libya had an
obligation to compensate LIAMCO for losses caused by the act of nationalizing LIAMCO’s assets.
A total of $80 Million was awarded to LIAMCO. Settlement was reached in both BP and TOPCO
prior to the decisions on damages. Notably, Libya did not take part in any of the proceedings.
On the other hand, the Kuwait Government participated in the Aminoil v. Kuwait arbitration.25 The
tribunal in Aminoil v Kuwait, had to consider arguments on validity of stabilization clauses and
re-negotiation obligations of parties. Aminoil case is notable for developing jurisprudence relating
to assessment of compensation for lawful expropriation, applicable law to govern arbitration, legal
effect of stabilization clause and effect of changes in host States’ circumstances on long term
contracts.26 In this case, an American investor signed a long-term concession agreement with
22
Abdullah Al Faruque, Stability in Petroleum Contracts: Rhetoric and Reality (Lessons from the Experiences of
Selected Developing Countries and Economies in Transition (1980-2002) (PhD Thesis University of Dundee 2005)
79-80.
23
Ibid, 81 Abdullah Al Faruque, ‘Stability in Petroleum Contracts 81.
24
Nagla Nassar, ‘Internationalization of State Contracts: ICSID, The Last Citadel.’ (1997) 14 J. Int'l Arb 185; Derek
William Bowett, ‘State Contracts with Aliens: Contemporary Developments on Compensation for Termination or
Breach’ British Yearbook of International Law 59.1 (1989) 59(1) British Yearbook of International Law, : 49-74; M Formatted: Font: Not Italic
Sornarajah, ‘The Myth of International Contract Law?’ (1981) 15 Journal of World Trade Law, 190.
25
The Government of the State of Kuwait v The American Independent Oil Company (1982) 21 ILM 976 (hereinafter Formatted: Font: Italic
Aminoil’). Formatted: Font: Italic
26
Martin Hunter and Anthony Sinclair, ‘Aminoil Revisited: Reflections on a Story of Changing Circumstances’ in
Todd Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral
Treaties and Customary International Law (Cameron May Ltd 2005) 348.
76
Kuwait Government. The initial concession agreement entered into in 1948 contained stabilization
clauses which strictly prohibited unilateral state actions. The 1961 Amendment also contained a
stabilization clause although not as restrictive as the one outlined in the 1948 concession agreement.
In 1977, Decree No 124 terminated the concession agreement and nationalized Aminoil’s assets
and property. Aminoil contended that since the Concession Agreement contained a Stabilization
Clause, Kuwait was precluded from terminating the contract unilaterally. According to Aminoil,
Kuwait’s act of nationalization was in violation of the principle of pacta sunt servada and therefore
an unlawful expropriation. In its award, the tribunal laid down landmark principles applicable to
re-negotiations clauses; such as negotiations to be carried out in good faith and an obligation to
negotiate not being equated to an obligation agree. The tribunal also held that Kuwait had lawfully
nationalized Aminoil’s assets despite the existence of stabilization clauses as same was undertaken
for a legitimate public purpose in line with Kuwait’s overall petroleum development policy. This
reasoning was influenced by the United Nations Resolution 1803 which declared the inalienable
right of host States freely to dispose of their natural wealth. 27 The tribunal however held that
damages were due to Aminoil because the nationalization undertaken by Kuwait had a confiscatory
character.28 The notable jurisprudence flowing from this case invariably means that stabilization
clauses cannot serve as a prohibition against nationalization but may prohibit measures
confiscatory by nature which might cause economic loss to the investor. In addition, the tribunal
held that stabilization clauses created legitimate expectations with respect to damages. 29
Ultimately, an award of damages to the tune of $179 Million was made in favour of Aminoil.
Aminoil tribunal’s holding that stabilization clauses created legitimate expectations with respect
to damages, is consistent with today’s investor-state arbitration practice on Stability Guarantees
wherein there is in-principle subscription to the position that Stabilization Clauses create legitimate
27
Martin Hunter and Anthony Sinclair (n 26), Page 359.
28
Notwithstanding the majority arbitrators’ award, a separate opinion of one of the arbitrators disagreeing with the
decision deeming the nationalization of Aminoli’s assets as lawful, posited that every nationalization is innately
confiscatory. By his separate decision, Sir Gerald Fitzmaurice held that the nationalization of Aminoil’s assets was
unlawful due to the inconsistency with stabilization clauses. It was however important to deem the act of
nationalization as either lawful or unlawful as such description had an impact on the amount of damages payable.
Thus, in this instant case, the host Sstate’s measures being deemed “lawful” had a resultant effect of reducing damages
accruing to Aminoil. Regardless of this plausible and tenable reasoning of Sir Gerald Fitzmaurice, the decision of the
majority to deem the act of nationalization as lawful constitutes the tribunal’s binding award.
29
Legitimate expectation doctrine mainly developed by European Court Union on the basis of German and Dutch
laws is a derivation of the principle of certainty, one of the requirements of the rule of law. Héctor Mairal, ‘Legitimate
Expectations and Informal Administrative Representations’ in Stephan Schill (ed), International Investment Law and
Comparative Public Law (Oxford University Press 2010) 416.
77
expectations subject to FET standard protection and upon which an act of expropriation can be
found.30 Aminoil received a lot of attention as it marked the beginning of a more rational approach
to awarding compensation for nationalization.31
The decision of the Iran-US Claims Tribunal32 has given rise to a vast body and prolific source of
jurisprudence on expropriation.33 The tribunal’s awards constitute a significant body of precedents
on the subject of expropriation, forming part of the body of laws which investor-state tribunals
have consistently relied on to construe expropriation claims.34 The Tribunal’s jurisprudence on
expropriation featuring approximately 60 cases, is considered its greatest contribution to public
international law. 35 For guidance on the definition of indirect expropriation, investor-state
tribunals have referred to Iran-US Tribunal’s awards in Starrett Housing, 36 Tippetts 37 etc. Formatted: Font: Italic
Following a review of certain empirical studies and review of investment treaty arbitration
references to Iran-US Claim Tribunal’s decisions, Romesh observed that the most frequently cited
30
Total v. Argentina tribunal argued that host Sstates do not automatically assume an obligation to maintain the Formatted: Font: Italic
stability of its legal regime merely because it entered into an investment treaty unless the host Sstate had given a
specific promise to that effect. The tribunal further averred that an investor has an indisputable legitimate expectation
which is subject to protection under the fair and equitable treatment clause, ‘if the host State has explicitly assumed a
specific legal obligation for the future such as by contracts, concessions or stabilisation clauses on which the investor
is therefore entitled to rely as a matter of law.’ Total S.A. v. Argentine Republic, ICSID Case No. ARB/04/01, Decision Formatted: Font: Italic
on Liability, 27 December 2010, Para 117. The tribunal in Bogdanov v. Moldova (IV) also confirmed that stabilization Formatted: Font: Italic
clause can give rise to legitimate expectation of stability. However, the scope of the stabilization clause is the decisive
factor of the protection accorded to the investor. Yuri Bogdanov and Yulia Bogdanov v. Republic of Moldova (IV), Formatted: Font: Italic
SCC Case No. V091/2012, Final Award, 16 April 2013, Para 188 (hereinafter Bogdanov v Moldova (IV)). For detailed Formatted: Font: Italic
study of the Iran-US Claim tribunal cases and issues see Rahmatullah Khan, The Iran-United State Claims Tribunal
Controversies, Cases and Contributions (Martinus Nijhoff Publishers 1990). Formatted: Font: Italic
31
Hunter and Sinclair (n 26), 361.
32
By way of succinct historical perspective, the 1978 – 1979 Iranian revolutionary movement leading to change of
Government in Iran, followed by the American Embassy hostage crisis and US freezing of Iranian assets held in the
US and with American institutions abroad; all of these led to the establishment of the Iran-US Claims Commission
with Algeria acting as the third party intermediary. The Tribunal was set up on 19 January 1981 by virtue of the
Claims Settlement Declaration to adjudicate debts, contract, expropriation and other measures affecting property rights
claims of Iran nationals and US nationals against US and Iran respectively. To date, the Tribunal has finalized over
3,900 cases, with a few cases outstanding. See Iran-United States Claims Tribunal < http://www.iusct.net/ > accessed
18 February 2018.
33
Jan Paulsson and Zachary Douglas, ‘Indirect Expropriation in Investment Treaty Arbitration’ in Nobert Horn and
Stefan Kroll (eds), Arbitrating Foreign Investment Disputes (Kluwer Law International 2004) 147.
34
Charles Nelson Brower and Jason D. Brueschke, The Iran-United States Claims Tribunal (Martinus Nijhoff
Publishers 1998) 370.
35
Charles Nelson Brower and Jason D. Brueschke, The Iran-United States Claims Tribunal (Martinus Nijhoff
Publishers 1998) 370. Maurizio Brunetti, ‘The Iran-United States Claims Tribunal, NAFTA Chapter 11, and the
Doctrine of Indirect Expropriation’ (2001) 2 Chi. J. Int'l L. 2 (2001) 203.
36
Starrett Housing Corp. v. Iran, Award No. ITL 32-24-1, reprinted in 4 Iran-U.S. C.T.R. 122 [hereinafter Starrett].
37
Tippetts, Abbett, McCarthy, Strattonv. TAMS-AFFA, Award No. 141-7-2 (29 June 29, 1984), reprinted in 6 Iran-
U.S. C.T.R. 219 [hereinafter Tippetts].
78
Iran-US Tribunal cases in investment arbitration are Phillips Petroleum Company v. Iran38 and Formatted: Font: Italic
Amoco International Finance Corporation v. Iran.39 For instance, the Tidewater v Venezuela. Formatted: Font: Italic
Bolivia tribunal quoted below Amoco’s Tribunal’s definition of expropriation while analysing the
expropriation claim before it:40 Formatted: Font: Italic
‘Expropriation, which can be defined as a compulsory transfer of property rights,

may extend to any right which can be the object of a commercial transaction, i.e.,
freely sold and bought, and thus has a monetary value.’41
The Iran – US Claims Tribunal also had to address the question whether expropriation of
contractual rights in breach of an obligation prohibiting same rendered an otherwise lawful
expropriation unlawful. In particular, on the relevance of intent to a finding of expropriation, the
Iran-US Claims Tribunal endorsed different approaches in two awards. While the tribunal held in
Tippets that intent is less important than effects of interference, in Sea-Land42 on the other hand, Formatted: Font: Italic
the tribunal held that deliberate governmental interference was necessary to establish expropriation
and nothing had demonstrated intentional conduct, therefore no finding of expropriation was made.
In the realm of modern day investment protection, AGIP v. Congo award is the first ICSID
arbitration centredcentered on repudiation of Concession Agreement containing a stabilization
clause. 43 AGIP’s 1974 Protocol Agreement with Congolese government had stabilization
38
Phillips Petroleum Co. Iran v. Iran, et al, Award 425-39-2 (29 June 1989), reprinted in 21 Iran-U.S. C.T.R. 79
[hereinafter Phillips Petroleum].
39
Romesh Weeramantry, ‘The Law of Indirect Expropriation and the Iran-United States Claims Tribunal’s Role in its
Development, in Leon E. Trakman and Nicola W. Ranieri (ed), Regionalism in International Investment Law (Oxford
University press 2013) 317. Amoco International Finance Corp. v. Iran, Partial Award No. 310-56-3 (14 July 1987),
reprinted in 15 Iran-U.S. C.T.R. 189
40
Tidewater Investment SRL and Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. Formatted: Font: Italic
ARB/10/5, Award, 13 March 2015, Para 116 (hereinafter Tidewater v Venezuela).
41
Amoco International Finance Corporation v. Government of Islamic Republic of Iran, Award No. 310-56-3, (17 Formatted: Font: Italic
July 1987), Award No. 310-56-3, 15 Iran. U.S. C.T.R. 108
42
Sea-Land Services, Inc. v. The Islamic Republic of Iran, Ports and Shipping Organization of Iran, Iran, Award No. Formatted: Font: Italic
135-33-1 (20 June 1984), 6 IRAN-U.S. C.T.R. 149
43
AGIP SPA.p.A. v. People's Republic of the Congo, ICSID Case No. ARB/77/1, Award 30 November 1979 Formatted: Font: Italic
(hereinafter AGIP v. Congo). Formatted: Font: Italic
79
clauses44 and an ICSID arbitration clause.45 By Decree 6/75 of 1975, AGIP was nationalized and
its assets transferred to Hydro-Congo State Corporation without any right to compensation.
Furthermore, AGIP’s office premises were forcibly occupied by Congolese government forces and
it was deprived of all its assets, documents and accounting records. Consequently, ICSID
arbitration ensued with AGIP submitting to an arbitration request in October 1977. The thrust of
AGIP’s claims was that nationalization of its assets was a violation of the contractual stabilization
commitments in the Protocol Agreement. The tribunal was required to determine if indeed the
Protocol Agreement guaranteed the stability of the company’s legal status which the act of
nationalization had intrinsically negated. The tribunal started by affirming the host Sstate’s right
to nationalize within certain parameters. However, as the unilaterally-decided dissolution
perpetuated via Order No. 6/75 represented a repudiation of the Protocol Agreement’s stability
clauses, the tribunal found Congo liable to pay AGIP compensation for damages suffered. 46
Moreover, the tribunal also opined that nationalization was not necessarily the only recourse of
the Congolese government in the achievement of its goals of protecting its interest as a shareholder
as it could have respected legal procedures and resorted to commercial/contractual remedies
instead.47
Despite being known as an investment arbitration, AGIP v. Congo award doesn’t incorporate
typical investor-state arbitration style arguments such as those relying on one or two substantive
treaty standards as basis for host Sstate’s liability. It is easy to decipher the reason for this apparent
rarity; for one, AGIP v. Congo is one of the early cases where jurisdiction was not predicated on
consent in an investment treaty but contractual arbitration clause. Another obvious reason for this
absence of the usual investor-state arbitration style arguments is the fact that these were early days
of investment arbitration when standards were still being shaped and formulated. Moreso, the
44
The Protocol Agreement’s Article 4 obliged Congo not to apply any other law or decree that will change the
corporate status of the Company from limited liability corporation, notwithstanding government participation. In
addition, by virtue of Article 11 Congo undertook to adopt appropriate measures to prevent the application to the
company of future amendments to company law affecting the structure and composition of company bodies. These
Sstability Gguarantees were granted to secure the commercial arrangements entered into with AGIP and exclude it
from the en-masse nationalization of companies in the oil product distribution sector immediately following the
execution of the Protocol Agreement.
45
Article 15 established an ICSID arbitration agreement and choice of law rule – Congolese law supplemented by
principles of international law.
46
AGIP v. Congo (n 43) Ppara 85, and 88. Formatted: Font: Italic
47
AGIP v. Congo (n 43) Ppara 78. Formatted: Font: Italic
80
publicly available award only cursorily re-stated the parties’ main contentions and defence without
in-depth rehashing the claims and defence as presented. Be that as it may, with or without the
explicit reliance on acclaimed treaty standards of Umbrella Clause, FET or FP&S, the award is a
forerunner to investor-state arbitral reasoning on implications of stabilization clause vis-à-vis host
Sstate’s sovereignty.48 It should be noted though that the precedential value of the AGIP v. Congo Formatted: Font: Italic
award leans towards aspects relating to the determination of quantum of compensation following
a holding of host Sstate’s liability. As will be seen in this and later chapters of this thesis,
protection of Stability Guarantees can be effected through the mechanisms of treaty substantive
standards of umbrella clause, fair and equitable treatment, full protection and security and
protection against unlawful expropriation. The crux of this chapter is to analyse the implications
of Stability Guarantees, particularly stabilization clauses for foreign investors’ expropriation
claims under investor-state arbitration setting. It is therefore necessary at this point to provide an
overview of the topic of expropriation for any appreciable review of expropriation and Sstability
Gguarantee coalition. Considering that investment treaties mostly incorporate requirements which
are in the main, very similar to the traditional norms on expropriation, a general discourse of the
topic of expropriation will be undertaken without finely distinguishing between the two
international law regimes, emphasis will therefore be on international investment law regime.
3. INTERNATIONAL LAW RULES ON EXPROPRIATION AND INVESTMENT

TREATY PRACTICE
There is no unanimously established rule as to what acts constitute expropriation nor is there is a
holistic definition of the subject of expropriation. Expropriation as a concept continues to evade
precise definition and is mainly determined by virtue of fact-driven analysis.49 Same opinion was
expressed by the Lauder tribunal in its finding that investment treaties do not usually define the
term expropriation, nationalization or other terms depicting similar measures of forced
48
In this respect, the tribunal noted that “These Stabilization clauses, freely accepted by the Government, do not affect
the principle of its sovereign legislative and regulatory powers, since it retains both in relation to those, whether
national or foreigners, with whom it has not entered into such obligations, and that, in the present case, changes in the
legislative and regulatory arrangements stipulated in the agreement simply cannot be invoked against the other
contracting party.” This is a view shared by many tribunals in recent investment treaty cases.
49
Yvette Anthony, ‘The Evolution of Indirect Expropriation Clauses: lessons from Singapore’s BITs/FTAs’ (2017) 7
Asian Journal of International Law 7 (2017) pp319-336, 325.
81
dispossession such as taking, deprivation etc.50 If any at all, definition of expropriation stated in
investment treaties are often very generic in nature such that they provide imprecise guidance to
aid tribunals’ determination of expropriation claims. Whereas the core concept or notion of direct
or formal expropriation is relatively clear being government’s outright or deliberate seizure or
dispossession of foreign investment, indirect expropriation on the other hand is not as clear due to
its multi-faceted features. In this regard, the Lauder tribunal defined expropriation and
nationalization as “the coercive appropriation by the State of private property, usually by means
of individual administrative measures. Nationalization involves large-scale takings on the basis of
an executive or legislative act for the purpose of transferring property or interests into the public
domain.” 51
Indirect expropriation is most often generally referred to without further illumination or

clarification on the scope and meaning of the concept.52 Spyridon Roussalis v. Romania Tribunal Formatted: Font: Italic
relying on the definition proffered by UNCTAD, contributed that Direct Expropriation is the
deliberate formal act of taking, while indirect expropriation occurs when measures “result in the
effective loss of management, use or control, or a significant depreciation of the value, of the assets
of a foreign investor”.53 To Glamis tribunal, a direct expropriation is readily apparent being an Formatted: Font: Italic
“open, deliberate and acknowledged taking of property, such as outright seizure or formal or
obligatory transfer of title in favour of the host State….”. On the other hand, indirect expropriation,
entail instances where the economic value of the property is radically diminished, but not through
a formal action such as nationalization.54 Sornarajah also noted that indirect expropriation cannot
be identified through a single principle as it takes place within a wide variety of circumstances. 55
Meanwhile, terms used to describe the variety of indirect expropriatory actions include “de facto,
50
Ronald S. Lauder v. The Czech Republic, UNCITRAL Final Award 3 September 2001, para 200 (hereinafter Lauder Formatted: Font: Italic
v Czech Republic). Formatted: Font: Italic
51
Ronald S. Lauder v. Czech Republic (n 50), UNCITRAL, Final Award, 3 September 2001 para 200
52
Anne K. Hoffman, ‘Indirect Expropriation’ in August Reinisch (ed), Standards of Investment Protection (Oxford Formatted: Font: Italic
University Press 2008) 154.
53
Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Award, 17 December 2011, Para 327(hereinafter Formatted: Font: Italic
Roussalis v Romania). The tribunal referenced UNCTAD Series on Issues in International Investment Agreements,
Taking of Property, 2000, p. 2.
54
Glamis Gold, Ltd. v. The United States of America, NAFTAUNCITRAL, Final Award, 8 June 2009, para 355
(hereinafter Glamis Gold v USA).
55
M Sornarajah, The International Law on Foreign Investment (3rd EditionCambridge University Press 2017) M. Formatted: Font: Italic
Sornarajah Page 369.
82
regulatory or creeping expropriation, equivalent to expropriation, tantamount to expropriation
etc.56 Creeping expropriation is however a special specie of indirect expropriation which connotes
a “slow and incremental encroachment on one or more of the ownership rights of a foreign investor
that diminishes the value of its investment.”57
Apart from the Lauder and Waste Management tribunals, lots of investor-state tribunals have
postulated varied definitions or descriptions of expropriation. One cannot but agree with the
RailwayRDV v Guatemala Tribunal that ‘The authorities on expropriation are numerous and Formatted: Font: Italic
Formatted: No underline
largely depend on their own facts…’58 Top amongst the tribunals that have contributed to the
definitional maze is the Metalclad Corporation v. The United Mexican States tribunal which
advanced an often quoted and equally often criticisedcriticized definition of expropriation as
follows:
‘Thus, expropriation under NAFTA includes not only open, deliberate and
acknowledged takings of property, such as outright seizure or formal or obligatory
transfer of title in favour of the host State, but also covert or incidental interference
with the use of property which has the effect of depriving the owner, in whole or in
significant part, of the use or reasonably-to-be-expected economic benefit of
property even if not necessarily to the obvious benefit of the host State.’59 Commented [I20]: incompete footnote. please review
Above Metalclad’s tribunal’s definition was criticised for extending too far the boundaries of
protection against indirect expropriation.60 Indeed, Metalclad tribunal’s definition comes with Formatted: Font: Italic
some controversy particularly as the British Columbia review judgment of the tribunal’s award
56
Anne K. Hoffman, ‘Indirect Expropriation’ in August Reinisch (ed), Standards of Investment Protection (Oxford
57
United Nations Conference on Trade and Development (UNCTAD), ‘Taking of Property’, (2002) Series on Issues
in International Investment Agreements United Nations New York and Geneva, 2000 page 11. UNCTAD equally lists
other categories of takings to include outright nationalizations in all economic sectors, outright nationalizations on an
industry-wide basis, large-scale taking of land by the state, specific takings and regulatory takings.
58
Railroad Development Corporation v. Republic of Guatemala, ICSID Case No. ARB/07/23, Award, 29 June 2012, Formatted: Font: Italic
Para 151 (hereinafter RDV v Guatemala). Formatted: Font: Italic
59
Metalclad Corporation v. The United Mexican States, ICSID Case No ARB(AF)/97/1, Award, 30 August 2000,
Para 103 (hereinafter Metalclad v Mexico). The judgment of the Supreme Court. Formatted: Font: Italic
60
ECE and PANTA ECE Projektmanagement International GmbH and Kommanditgesellschaft PANTA Formatted: Font: Italic
Achtungsechzigste Grundstücksgesellschaft mbH & Co v. The Czech Republic (PCA Case Νο. 2010-5), Award 19
September 2013, para 4.812 (hereinafter ECE v. Czech Republic). Formatted: Font: Italic
83
termed the definition as “extremely broad”. It has also been criticised as leading to ‘excessive
dilatation of the category of indirect expropriation’.61 Notwithstanding these numerous criticisms
of the Metalclad’s definition, it has found support and has been relied on by other investor-state
tribunals. In particular, the CME v. Czech tribunal made reference to Metalclad’s tribunal’s
definition of indirect expropriation to arrive at a decision that Czech Republic had taken a measure
tantamount to expropriation in violation of Article 1110 (1).62
Affirming same view that expropriation is not defined within the context of Article 1110 of the
NAFTA, Fireman's Fund v. Mexico undertook a distillation and summarization of elements and
description of the concept of expropriation as discerned from varied findings of about 10 NAFTA
cases and customary international law in general.63 The elements include:
(a) Expropriation requires a taking (which may include destruction) by a government-type

authority of an investment by an investor covered by the NAFTA;
(b) The covered investment may include intangible as well as tangible property;
(c) The taking must be a substantially complete deprivation of the economic use and
enjoyment of the rights to the property, or of identifiable distinct parts thereof (i.e., it approaches
total impairment);
(d) The taking must be permanent, and not ephemeral or temporary;
(e) The taking usually involves a transfer of ownership to another person (frequently the
government authority concerned), but that need not necessarily be so in certain cases (e.g., total
destruction of an investment due to measures by a government authority without transfer of rights);
61
Saverio Di Benedetto, International Investment Law and the Environment (Edward Elgar Publishing Limited 2013) Formatted: Font: Italic
120.
62
CME v. Czech RepublicCME Czech Republic BV v The Czech Republic UNCITRAL, Partial Award, 13
September, 2001, para 604 (hereinafter CME v. Czech Republic). Formatted: Font: Italic
63
Fireman's Fund Insurance Company v. United Mexican States, ICSID Case No. ARB(AF)/02/01, Award, 17 July
2006, Para 176 (hereinafter, Fireman’s Fund v Mexico).
84
(f) The effects of the host State’s measures are dispositive, not the underlying intent, for
determining whether there is expropriation;
(g) The taking may be de jure or de facto;
(h) The taking may be “direct” or “indirect.”;
(i) The taking may have the form of a single measure or a series of related or unrelated
measures over a period of time (the so-called “creeping” expropriation);
(j) To distinguish between a compensable expropriation and a non-compensable regulation by

a host State, the following factors (usually in combination) may be taken into account: whether the
measure is within the recognized police powers of the host State; the (public) purpose and effect
of the measure; whether the measure is discriminatory; the proportionality between the means
employed and the aim sought to be realized;161 and the bona fide nature of the measure; and
(k) The investor’s reasonable ‘“investment-backed expectations’” may be a relevant factor

whether (indirect) expropriation has occurred.
Without attempting to offer a fit for all purpose and all-encompassing definition of expropriation,
for the purpose of at hand, expropriation can be described as host Sstate measures which
occasioned substantial deprivation,64 need not involve a taking of legal title to property,65 deprived
investors the enjoyment or benefit of their investments, 66 entails permanent and irreversible
deprivation of the value of the investment in whole or in significant part,67 not justified under the

64
Bosh International, Inc and B&P Ltd Foreign Investments Enterprise v. Ukraine, ICSID Case No. ARB/08/11,
Award, 25 October 2012, para 218 (hereinafter Bosh v Ukraine)
65
Tidewater v Venezuela (n 40) 104 Inc., Tidewater Investment SRL, Tidewater Caribe, C.A., et al. v. The Bolivarian Formatted: Font: Italic
Republic of Venezuela, ICSID Case No. ARB/10/5, Award 13 March 2015, para 104 Formatted: Font: Italic
66
Crystallex v. Venezuela Award, Crystallex International Corporation v Bolivarian Republic of Venezuela, ICSID
Case No. ARB(AF)/11/2 , Award 04 April, 2016, para 667 (hereinafter Crystallex v Venezuela)
67
Anglia Auto Accessories Ltd. v. Czech Republic, SCC Case No. 2014/181, Final Award, 10 March 2017, para 292 Formatted: Font: Italic
(hereinafter, Anglia v. Czech Republic) Formatted: Font: Italic
85
police power doctrine,68 involves serious breach of a contract by a State organ; all of these and
more can constitute expropriation.69
In summary, direct expropriation is easier to recognise being a forcible and/or overt taking by host
Sstate of tangible and intangible property of private persons by means of administrative or
legislative actions. 70 This is taking with a view to transfer ownership to another person. 71
Invariably, the question of definition of expropriation is mainly of little consequence with regards
to formal direct expropriation. It however raises a high degree of complex issues with regards to
determination of indirect expropriation or measure equivalent or tantamount to expropriation.
According to Glamis Gold tribunal to determine an indirect expropriation claim, a tribunal will
first have to determine if investor-claimant’s property was in fact taken by examining the degree
of interference with the investor’s property right, which in turn requires evaluation of the economic
impact of host State’s measure and the duration of the impact.72 One notable point is that indirect
expropriation is always unlawful as it inevitably entails no payment of compensation since host
States deem the actions or measures as permissible within their police power to regulate.
Notwithstanding that both lawful and unlawful expropriation incur for host States liability to
compensate, the issue whether an expropriatory measure is lawful or not is still relevant as very
well demonstrated in the case of ADC v. Hungary73 Formatted: Font: Italic
4. LEGAL REQUIREMENT FOR LAWFUL EXPROPRIATION
‘acts of a government in depriving an alien of his property without compensation

impose International responsibility’ Formatted: Font: Italic
68
Formatted: Font: Times New Roman, 10 pt, Italic
Burlington Resources v. Ecuador (n 14) Decision on Liability 14 December 2012, para 506
69
Waste Management Inc. v. United Mexican States [II], ICSID Case No. ARB(AF)/00/3, Final Award, 30 April Formatted: Default Paragraph Font, Font: Times New
Roman, 10 pt, Not Bold, Font color: Auto, Border: : (No
2004, para 165 (hereinafter Waste Management v Mexico (II)) border), Pattern: Clear
70
Técnicas Medioambientales Tecmed v. United Mexican States, (ICSID Case No. ARB(AF)/00/2,) Award 29 May
2003, Para 103 (hereinafter Tecmed v Mexico). Formatted: Default Paragraph Font, Font: Calibri, 10 pt, Not
71 Bold, Font color: Auto, Border: : (No border), Pattern: Clear
See SD Myers Inc v Government of Canada, SD Myer v. Canada First Partial Award (Merits) 13 November 2000,
para 280 First Partial Award (hereinafter Myers v Canada). Formatted: Font: Italic
72
Glamis Gold, Ltd. v. The United States of America, UNCITRAL, Final Award, 8 June 2009, Para 356 (hereinafter Formatted: Font: Italic
Glamis Gold v USA)
ADC Affiliate Limited and ADC & ADMC Management Limited v. Republic of Hungary,
ICSID Case No. ARB/03/16, Award 2 October 2006 (hereinafter ADC v. Hungary) – Award 2 October 2006. The Formatted: Font: Italic
next section on Compensation provides requisite clarity regarding this assertion. Formatted: Font: Italic
86
Above Statement of the US- Panama Claims Commission in the De Sabla Case74 aptly depicts the Formatted: Font: Italic
thinking under general international law, even as far back as in the early 20th Century. Payment
of compensation was considered a crucial prerequisite for lawful expropriation or taking. Apart
from payment of compensation, other legal requirements validating expropriation including public
interests, non-discrimination and due process. All or most of these requirements have found
expression in several international law instruments such as the OECD Draft Convention on the
Protection of Foreign Property adopted by the OECD Council on 12th October 1967. Article 3 of
the Draft Convention states as follows;
‘No Party shall take any measure depriving, directly or indirectly, of his property a national
of another Party unless the following conditions are complied with:
(i) The measures are taken in the public interest and under due process of law;
(ii) The measures are not discriminatory or contrary to any undertaking which
the former Party may have given; and
(iii) The measures are accompanied by provision for the payment of just
compensation. Such compensation shall represent the genuine value of the property
affected, shall be paid without undue delay, and shall be transferable to the extent
necessary to make it effective for the national entitled thereto.’
Attempts made in the international sphere to lay down rules governing expropriation also include
United Nations General Assembly Resolutions, particularly Resolution 1803 which recognized
host States’ right to expropriate as an expression of the permanent sovereignty over natural
resources. Article 4 UNGA Resolution 1803 stipulates that:
‘Nationalization, expropriation or requisitioning shall be based on grounds or

reasons of public utility, security or the national interest which are recognized as
overriding purely individual or private interests, both domestic and foreign. In such
Formatted: Font: Italic, Not Superscript/ Subscript
Formatted: Not Superscript/ Subscript
74 Formatted: Not Superscript/ Subscript

Marguerite de Joly de Sabla (United States) v. Panama, Award 29 June 1933, [VOL VI] United Nations Reports
Of International Arbitral Awards, 358,366 ( hereinafter de Sabla Claim (US v Panama) Award 29 June 1993, 6 Formatted: Font: Italic
UNRIAA 358, 366) Formatted: Superscript
87
cases the owner shall be paid appropriate compensation, in accordance with the
rules in force in the State taking such measures in the exercise of its sovereignty
and in accordance with international law. In any case where the question of
compensation gives rise to a controversy, the national jurisdiction of the State
taking such measures shall be exhausted. However, upon agreement by sovereign
States and other parties concerned, settlement of the dispute should be made
through arbitration or international adjudication.’75
Article 2 (2)(c) of United Nations General Assembly Resolution 3281 (XXIX): Charter of
Economic Rights and Duties of States equally grants host States the right:
‘To nationalize, expropriate or transfer ownership of foreign property, in which

case appropriate compensation should be paid by the State adopting such measures,
taking into account its relevant laws and regulations and all circumstances that the
State considers pertinent. In any case where the question of compensation gives
rise to a controversy, it shall be settled under the domestic law of the nationalizing
State and by its tribunals, unless it is freely and mutually agreed by all States
concerned that other peaceful means be sought on the basis of the sovereign
equality of States and in accordance with the principle of free choice of means.’76
From the above it is indisputable that there exists a consensus that expropriation is allowed under
International Law, upon observance of certain conditions. A cursory comparison between the two
UNGA Resolutions on nationalization and expropriation points to the fact they both share a
commonality of confirming the rights of host States to expropriate, spell out the circumstances
under which expropriation is permissible, although Resolution 3281 is restricted to only payment
of appropriate compensation without any reference to public purpose requirement as Resolution
1803 did. Another distinct divergence between these two UNGA provisions on expropriation
borders on applicable standard of compensation and related terms. Whilst Resolution 1803
75
United Nations General Assembly Resolution 1803 (XVII) of 14 December 1962, ‘Permanent Sovereignty over
Natural Resources’ < http://www.ohchr.org/Documents/ProfessionalInterest/resources.pdf> accessed 12 March 2018.
76
United Nations General Assembly Resolution 3281 (XXIX) of 12 December 1974: Charter of Economic Rights and
Duties of States <investmentpolicyhub.unctad.org/Download/TreatyFile/2778>.
88
provides for payment of appropriate compensation, in accordance with international law and
domestic law rules, Resolution 3281 made no mention of international law rules, thereby making
it the exclusive preserve of domestic legal system. This issue has been subject to arbitral
interpretation in the Texaco Overseas Petroleum Co. v. Libya case where the sole arbitrator
preferred the provisions of Resolution 1803, which he considered a reflection of customary
international law due to its wide acceptance by member states.77 In the meantime, the relevance
of customary international law rules to investor-state tribunal’s determination of expropriation
claims cannot be over emphasisedemphasized. As earlier asserted, early ICSID cases on
expropriation involving State Contracts were decided upon reliance on Customary International
Law rules on expropriation e.g, AGIP v Congo,78 LETCO v Liberia,79 Amco Asia v. Indonesia.80 Formatted: Font: Italic
Essentially, Customary International Law on expropriation has been codified in the numerous mass
of investment treaties now existing. These treaty provisions on expropriation in their diverse and
varied permutations contain provisions detailing the pre-requisite of expropriation. A typical
formulation of expropriation provisions of investment treaties can be found in Denmark – Albania
BIT, Article 5 (1) titled ‘Expropriation and Compensation’ which states as follows:
‘Investments of investors of each contracting Party shall not be nationalized,

expropriated or subjected to measures having effect equivalent to nationalisation or
expropriation (hereinafter referred to as "expropriation") in the territory of the other
Contracting Party except for expropriations made in the public interest, on a basis
77
Texaco Overseas Petroleum Company and /California Asiatic Oil Company. v and tThe Government of the Libyan Formatted: Font: Italic
Arab Republic, Award on the Merits, 19 January 1977, (1978) 17 ILM, 1 (hereinafter Texaco v. Libya), 17 ILM 1, Formatted: Font: Italic
paras. 88-90 (Award, Jan. 19, 1977).
78
AGIP SPA v People's Republic of the Congo, ICSID Case No. ARB/77/1, Award 30 Nov 1979 (hereinafter AGIP Formatted: Font: Italic
v. Congo) Formatted: Font: Not Bold
79
In the Matter of the Application of Liberian Eastern Timber Corporation v. The Government of the Republic of
Liberia, ICSID Case No. ARB/83/2, Award 31 March 1986, (1987) 26 ILM 647 (hereinafter LETCO v. Liberia)
Award 15 March 1986 26 ILM 647. In this case the tribunal held that the revocation of the Concession was unlawful Formatted: Font: Italic
expropriation because there was neither a legislative enactment nor any evidence of stated policy for Government’s Formatted: Font: (Default) Times New Roman, 10 pt
measure. Consequently, the Tribunal found that there was no bona fide public purpose for the revocation of the
Concession.
80
Amco Asia Corporation and others v. Republic of Indonesia, ICSID Case No. ARB/81/1, Award 20 November Formatted: Font: (Default) Times New Roman, 10 pt
1984, 1 ICSID Reports 569 (hereinafter Amco v Indonesia). Formatted: Font: Italic
89
of non-discrimination, carried out under due process of law, and against prompt,
adequate and effective compensation.”81
Similarly, Article 13 of the Energy Charter Treaty provides that:
‘investments of investors of a Contracting Party in the Area of any other

Contracting Party shall not be nationalized, expropriated or subjected to a measure
or measures having effect equivalent to nationalization or expropriation” except
where such measure complies with the rules of customary international law in this
matter (public purpose, due process, non-discrimination and compensation).’
Apart from merely prohibiting expropriation without fulfilment of the three or four aforementioned
conditions, most investment treaties provide copious provisions relating to the standard of
compensation. A typical illustration is the expropriation provision of Argentina – USA BIT.
Article IV (1) states as follows:
‘Investments shall not be expropriated or nationalized either directly or indirectly

through measures tantamount to expropriation or nationalization ('expropriation-)
except for a public purpose; in a non-discriminatory manner; upon payment of
prompt, adequate and effective compensation; and in accordance with due process
of law and the general principles of treatment provided for in Article II (2)
Compensation shall be equivalent to the fair market value of the expropriated
investment immediately before the expropriatory action was taken or became
known, whichever is earlier; be paid without delay; include interest at a
commercially reasonable rate from the date of expropriation; be fully realizable;
and be freely transferable at the prevailing market rate of exchange on the date of
expropriation.’
81
Agreement between the Government of the Kingdom of Denmark and the Government of the Republic of Albania
Concerning the Promotion and Reciprocal Protection of Investments. Stated Expropriation provision continued to
detail copiously, provisions on standard of compensation, calculation of fair market value and date of valuation.
90
Notwithstanding guidance provided by treaty expropriation provisions, parties typically engage in
intense arguments over the date of valuation of investment, standard of compensation for lawful
being distinct from unlawful expropriation, method of computing fair market value etc. At
quantum phases of arbitration procedures, ascertaining the standard of compensation to apply has
been the primary preoccupation of international tribunals.82 While a detailed discussion on the
issue of standard of compensation for expropriation goes beyond the scope of this thesis, it suffices
to state at this point that payment of compensation is an international obligation and an essential
condition for lawful expropriation. The subsequent section will give succinct summary on the
topic.
4.1. Compensating Over and Beyond Treaty Compensation Standard
As earlier mentioned, the legality or lawfulness of expropriation is mostly conditional upon

fulfilment of established requirements of public purpose, non-discrimination,83 due process84 and
compensation payment. 85 These requirements which must be fulfilled cumulatively, can be found
in nearly all investment treaties.86 The conditions that host States’ measures must serve a public
82
83
A discriminatory taking or expropriation has been described as one which singles out a person or group of persons
without a reasonable or just basis. A discriminatory taking will be considered unlawful. Most discriminatory takings
or expropriation are deemed lacking or devoid of genuine public purpose. For discrimination to be established, host
Sstates must afford different treatments to different parties. ADC v. Hungary (n 73) Award para 442; Rubin and Formatted: Font: Italic
Kinsella, International Investments, Political Risk and Dispute Resolution, [2005] A Practitioner’s Guide (2005) p.
177.
84
A requirement that the Expropriation be undertaken in accordance with due process is almost always included in
investment treaties’ expropriation legality requirements. This requirement is however not well established in
customary international law or in treaty practice. Amongst other interpretations, due process could mean availing
investors the opportunity to review expropriatory act or compensation paid. To Khan Resources v. Mongolia tribunal, Formatted: Font: Italic
due process is the procedural component of the law of expropriation, entailing implementation of measures in
accordance with laid down laws. Khan Resources v. Mongolia Khan Resources Inc, Khan Resources BV and Cauc Formatted: Font: Italic
Holding Company Ltd v The Government of Mongolia and Monatom Co Ltd, PCA Case No. 2011-09, Award on
Merit 2 March 2015 PCA Case para 318 (hereinafter Khan Resources v. Mongolia).
85
The tribunal in Siag v. Egypt attested that expropriation is not in and of itself an illegitimate if certain conditions we Formatted: Font: Italic
met. According to the tribunal, of the five conditions outlined in the Italy – Egypt PIT, Egypt was found not have
complied with any, as such the tribunal found Egypt to have unlawfully expropriated. See Waguih Elie George Siag Formatted: Font: Times New Roman, 10 pt, Italic
and Clorinda Vecchi v Arab Republic of Egypt, ICSID Case No. ARB/05/15, Award 1 June 2009 (hereinafter Siag v Formatted: Font: Times New Roman, 10 pt
Egypt)
86
In Funnekotter v. Zimbabwe, the tribunal held that the prerequisites for a legal expropriation are cumulative such Formatted: Font: Italic
that a violation of any of the conditions set out in the BIT will amount to a breach of the treaty. Bernardus Henricus Formatted: Font: Italic
Funnekotter and others v. Republic of Zimbabwe, ICSID Case No. ARB/05/6, Award, 22 April 2009, para 98
(hereinafter Funnekotter v. Zimbabwe). Similarly, the tribunal in ConocoPhillips v. Venezuela Interim found that if Formatted: Font: Italic
one of the three cumulative conditions set out in the BIT’s expropriation provision has not been met, the effect is that
91
interest and be made against payment of compensation are worth elaborating on, as they
particularly relevant to construing Stability Guarantee cases.
The requirement of compensation is the most controversial aspect of expropriation.87 Whereas the
standard of compensation for expropriation remains controversial particularly under customary
International law, in today’s investor-state arbitration setting, the controversy is not as rife as treaty
language plays an important role in distilling the applicable standard of compensation for
expropriation.88 That is not to say that the issue of compensation is not contentious or laden with
uncertainty in investment arbitration system.89 An uncontested fact is that for expropriation to be
considered lawful, some form of compensation must have either been offered or paid. According
to the Sole Arbitrator in the case of BP v Libya,90 offer of compensation payment will suffice to Formatted: Font: Italic
satisfy the requirement of compensation. The fact that no offer of compensation had been made
indicated that the taking in that instance was confiscatory and therefore unlawful. LETCO tribunal
finding also suggest that offer of compensation will suffice.91
Although there is no consensus in international law on standard of compensation for expropriation,

most investment treaties incorporate the Hull formula type of ‘prompt, adequate and effective’
compensation payment for expropriation to be considered lawful.92 World Bank Guidelines on
treaty provision has been breached. See ConocoPhillips v. Venezuela, ConocoPhillips Petrozuata BV, ConocoPhillips Formatted: Font: Italic
Hamaca BV and ConocoPhillips Gulf of Paria BV v Bolivarian Republic of Venezuela, ICSID Case No ARB/07/30,
Interim decision, 17 January, 2017, para 145 (hereinafter ConocoPhillips v Venezuela). Formatted: Font: Italic
87
United Nations Conference on Trade and Development (UNCTAD), ‘Bilateral Investment Treaties 1995–2006:
Trends in Investment Rulemaking’ (Geneva United Nations 2007) 48 < http://unctad.org/en/Docs/iteiia20065_en.pdf>
accessed 12 February 2018.
88
Campbell et al page Campbell McLachlan, Laurence Shore, and Matthew Weiniger (eds), International Investment
Arbitration: Substantive Principles (Oxford University Press 2008) 415.
89
Shotaro Hamamoto, ‘Compensation Standards and Permanent Sovereignty over Natural Resources’ in Marc
Bungenberg and Stephan Hobe (eds), Permanent Sovereignty over Natural Resources (Springer 2016) 145.
90
Ibid,p 329
91
LETCO v Liberia (n 79), ICSID Rreports 343, at 366.
92
Campbell et al (n 88), page 415. On whether ‘the prompt, adequate and effective’ standard represents the prevailing
standard of compensation, August Rein contends that the current view is that Hull Formula compensation yardstick is
no longer of general consensus. 92 Page 194. He asserted that the near establishment of the New International
Economic Order through a number of UNGA Resolutions which introduced the “Appropriate Compensation”
Standard coupled with expropriation and nationalization that were rampant in the 20th Century, led to the erosion of
the common understanding and recognition of Hull formula compensation matrix. Page 194. Notwithstanding
August’s view, the Hull formula type compensation standard is frequently incorporated in investment treaties although
there are a variety of versions from treaty to treaty. See United Nations Conference on Trade and Development
(UNCTAD), ‘Expropriation: UNCTAD Series on Issues in International Investment Agreements II’ ([2012]) 40
<http://unctad.org/en/Docs/unctaddiaeia2011d7_en.pdf> 22 February 2018.
92
the Treatment of Foreign Direct Investments93 has enjoyed enormous popularity for its definition
of applicable compensation standard. The guidelines postulates that compensation will be deemed
appropriate if adequate, effective and prompt. Many treaties provide further clarification by
equating adequate compensation to market value of the expropriated property. Meanwhile various
methods can be utilized to determine or arrive at the market value. One method is the discounted
cash flow, book value is another, and so are liquidation value and replacement value. All of these
methods having varying consequences and impact on the returns to the investor; hence the
controversy. As quantification of compensation is an economic exercise, valuation Experts are
often called to assist with this process. Investor-State tribunals’ determination of the fair and
adequate compensation for expropriation will rest on the standard of compensation adopted,
method of valuation utilized and actual application of the method of valuation to the particular
investment expropriated.94
Investor-claimants alleging indirect expropriation will usually argue that the investment treaties’
standard of compensation is inapplicable for the wrongful act of expropriation committed by host
States. 95 They often contend that treaty provisions mandating payment of compensation as a
necessary condition for expropriation relate to lawful or legal expropriation. When expropriation
is deemed illegal or unlawful, apart from State responsibility being triggered for wrongful act, the
host Sstate is though required to pay compensation as a modality of reparation. 96 Whilst
compensation for lawful expropriation is typically calculated on the basis of market value at the
date of dispossession or expropriation, illegal or unlawful expropriation will in most cases be in
form of damages which ordinarily are aimed at restoring the wronged investors to economic
93
World Bank, ‘Guidelines on the Treatment of Foreign Direct Investment’ (1992) 31 ILM 1366.
94
Jeswald Salacuse, The Law of Investment Treaties (Oxford University Press 2010) 328.
95
A very apt reference is the investor-claimant’s arguments in the Santa Elena v. Costa Rica case. The investment Formatted: Font: Italic
which is the subject of this arbitration, a beach front property was expropriated by the Respondent-State. Over two
decades lapsed between the time of expropriation and the time parties submitted to ICSID arbitration; by which time
the property had significantly appreciated in value. Consequently, investor-claimant argued that compensation should
be calculated based of date of award as opposed to date of expropriation. The Tribunal rejected the investor-claimant’s
argument and awarded compensation of $4.5 Million on the basis that the date for valuation under international law
was ‘the date on which the governmental “interference” deprived the investor-claimant of its rights or made those
rights practically useless’. As far as the Tribunal was concerned in the instant case, the date of the expropriation was
when this occurred. Compañia del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, ICSID Case No.
ARB/96/1, Award 17 February 2000 (hereinafter Santa Elena v. Costa Rica).
96
David Khachvani, ‘Compensation for Unlawful Expropriation: Targeting the Illegality’ [(2017]) ICSID Review 1-
19, 1.
93
positions previously existing as if the takings never occurred. In this wise, investor-claimants’
preference is to invoke Chorzow Factory’s standard of damages which aims at obtaining full
reparation for the investor-claimants’ benefit. In the Chorzow factory case, the Permanent Court
of International Justice dealt with the amount, nature, method, standard of compensation payment
and formulated the principle of full reparation when it asserted that ‘… reparation must, as far as
possible, wipe out all the consequences of the illegal act and reestablish the situation which would,
in all probability, have existed if that act had not been committed.’97 Chorzow Factory principles Formatted: Font: Italic
is reflected in Article 36 of ILC’s Articles on State Responsibility on Compensation. 98 Chorzow Formatted: Font: Italic
Factory principles holds that because the value of the assets may have appreciated considerably
since the date of expropriation, the standard requires that the assets or investment be valued as of
the date of the Award as opposed to treaty standard of compensation which requires compensation,
assessed at the date of the expropriation. According to ADC tribunal, the distinction between the
standard of compensation applicable to lawful versus unlawful expropriation rests on the terms of
the applicable treaty.99 As noted by Houben v. Burundi tribunal, where treaty is silent on method Formatted: Font: Italic
for calculating compensation for unlawful expropriation, reliance should be had to Customary
International Law standard particularly Chorzow Factory. 100 In the same vein, the ADC v.
Hungary tribunal’s held that investment treaties’ compensation standard for expropriation are not
applicable in cases of unlawful expropriation as it would imply a conflation of compensation for
lawful expropriation with damages for unlawful expropriation. The tribunal further averred that
in the absence of special rules in the treaty governing compensation for unlawful expropriation,
customary international law standard prescribed in Chorzow Factory applies.101 In this case, the
tribunal noted the peculiar and novel scenario where the value of the asset had risen very
97
For a historical background and full review of the popular Chorzow Factory case, see Ronald E.M. Goodman and
Yuri Parkhomenko, Does the Chorzow Factory Standard Apply in Investment Arbitration? A Contextual Reappraisal,
(2017) ICSID Review 1 -22, see page 9.
98
Article 36 on Compensation states:
i1. The State responsible for an internationally wrongful act is under an obligation to compensate for the Formatted: Indent: Left: 0.5"
damage caused thereby, insofar as such damage is not made good by restitution.
ii2. The compensation shall cover any financially assessable damage including loss of profits insofar as it is
established
See Draft Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries 2001
<http://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf> accessed 23 September 2017. Formatted: Font: Italic
99
See ADC v Hungary (n 73) para 481
Houben v. Burundi Joseph Houben v Republic of Burundi, ICSID Case No. ARB/13/7, Award 12 January 2016,
para 220 (hereinafter Houben v. Burundi). Formatted: Font: Italic
101
ADC v. Hungary (n 73) Award para 481. Formatted: Font: Italic
94
considerably after the date of expropriation; hence the imperative is to follow the Chorzow Factory
standard to the letter. The tribunal clarified that the Chorzow Factory standard requires
compensation payment based on value of the investment/asset as at the date of award and not the
date of expropriation. Furthermore, ADC v Hungary tribunal reasoned that other tribunals had
adopted the ‘Date of Expropriation’ approach because they contended with decreases in value of
the assets/investments after the ‘Date of Expropriation’ such that awarding compensation based
on ‘Date of Award’ formula won’t have put the investor-claimants in the same position as if the
expropriations had not occurred.102
Borzu Sabahi agrees with ADC v Hungary Tribunal’s when he pointed that ‘[A] textual
interpretation of the compensation provisions of investment treaties seems to confirm the ADC
approach: that the investment treaties on their face do not apply to unlawful expropriations.’103
Meanwhile, application of the Chorzow Factory compensation principle by ADC v. Hungary
tribunal has been criticised as a flawed approach considering that the tribunal did not take into
account the distinction expressed by PCIJ on the damages payable to a State and that which is
payable to an individual.104 Contrary to ADC v. Hungary Tribunal’s approach, both Venezuela Formatted: Font: Italic
Holdings v. Venezuela and Guaracachi v. Bolivia Tribunals did not see or believe that the treaty
expropriation provisions permitted the distinction between the standard of compensation for lawful
expropriation and the standard of compensation for unlawful expectation. 105 The state of the law
remains unsettled as to compensation standard to apply in cases of unlawful expropriation.
4.2 To Defer or Not to Defer to Host States’ Designation of Public Purpose
102
ADC v. Hungary (n 73) Award para 497.
103
Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration: Principles and Practice (Oxford
104
On criticism of ADC v. Hungary tribunal quantification of damages, see James Crawford, Similarity of Issues in Formatted: Font: Italic
Disputes Arising under the Same or Similarly Drafted Investment Treaties’ in E. Gaillard and Y. Banifatemi (eds)
Precedent in International Arbitration (IAI Seminar 2007) 97 – 103, 99-100; Jeswald W Salacuse, The Law of
Investment Treaties (Oxford University Press 2010) 328. Formatted: Strikethrough
105
Venezuela Holdings B.V. and others (formerly Mobil Corporation and others) v. Bolivarian Republic of Venezuela,
Mobil Cerro Negro Holding, Ltd., Mobil Cerro Negro, Ltd., Mobil Corporation and others v. Bolivarian Republic of
Venezuela, ICSID Case No. ARB/07/27, Award, 9 October 2014, Para 306 (hereinafter, Mobil and others v. Formatted: Font: (Default) Times New Roman, 10 pt, Not
Venezuela); Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, PCA Case No. 2011- Bold, Italic
17, Award, 31 January 2014 Para 613 (hereinafter, Guaracachi v. Bolivia). Formatted: Font: Italic
95
The Public purpose condition have been coined in an avalanche of modes such as public purpose,
public interest, public good, general welfare and public benefit.106 The determination of what
constitutes public purpose is mainly fact-driven;107 so also is ascertaining whether it is genuine
interest of the public or mere reference to public interest. 108 The public purpose or interest
requirement for legitimizing expropriation has been subject to enough controversy under both
general international Law and investment treaty arbitration as there is no effective means of
determining whether or not an expropriation is for public purpose.109 This is because the concept
of public purposes is extremely broad and subject to imprecise definition. 110 International
adjudicators typically grant a high degree of deference to host states’ determination of public
purpose. For instance, the LIAMCO, Sole Arbitrator whilst contending in clear terms that public
utility principle is not a legal requirement for nationalization, opined that host States were at liberty
to determine by themselves what they consider useful or necessary for the public good.111 Similar
to the deference approach adopted by the LIAMCO arbitrator, the European Court of Human
Rights in James v United Kingdom,112 stated that generally, it would not question a States opinion
on the public interest characteristics of a taking. This is in line with ECHR’s practice of the Margin
of Appreciation. There are however one or two tribunal awards on the other side of the divide. In
Walter Fletcher Smith Claim (US v Cuba), 113 the Sole Arbitrator rejected the claim that the
expropriation was in furtherance of a public purpose after reviewing said purpose. This is an
exception to the norm with the norm being arbitral tribunals being reluctant to second–guess host
states’ determination of public purpose. In the same vein, the Sole Arbitrator in BP v Libya not
only considered public purpose requirement necessary to legalize expropriation, the arbitrator
106
Page 178 August.
107
Filip Balcerzak, Investor-State Arbitration and Human Rights (Brill Nijhoff 2017) 190.
108
According to ADC v. Hungary tribunal, mere reference to public interest without some genuine interest of the
public will render meaningless, the requirement that expropriation must be for a public purpose. ADC Affiliate
Limited and ADC & ADMC Management Limited v. Republic of Hungary, ICSID Case No. ARB/03/16, Award, 2
October 2006 Para 432.
109
Page 179 August Reinisch
110
Ibid 316
111
LIAMCO v Libya 12 April 1979, 62 ILR 140, 194
112
8 EHRR 123 (1986)
113
Award 2 May 1929 2 UNRIAA 913, 915. In the Claim of Walter Fletcher Smith v. The Compania Urbanizadora
del Parque Y Playa de Marianao available at http://legal.un.org/riaa/cases/vol_II/913-918.pdf accessed 02 February
2017.
96
proceeded to review same and ultimately held that the expropriation was unlawful due to the
retaliatory motive backing it.114 This is another case of exception to the general trend.
In essence, most Investor–State tribunals have not only endorsed the public purpose requirement,
they have also adopted the style of not keenly questioning host States’ determination of what
constitutes public purpose.115 An apt example is the opinion or view expressed by the Goetz
tribunal that:
‘…[In] the absence of an error of fact or of law, of an abuse of power or of a clear misunderstanding
of the issues, it is not the Tribunal’s role to substitute its own judgment for the discretion of the
Government of Burundi of what are imperatives of ‘public need…or of national interest.’116
Notwithstanding this view point according a high degree of deference to governmental

determination of public purpose or interest, there are tribunals which held that expropriatory
actions of host states were unlawful for the mere reasons that they did not serve public purpose.
A good illustration is LETCO tribunal finding revocation of a concession was not aimed at a bona
fide public purpose, was discriminatory and not accompanied by compensation payment and
therefore unlawful expropriation.117
5. FALLING WITHIN THE EXPROPRIATION SPHERE OR NOT – INDIRECT
EXPROPRIATION V. LEGITIMATE REGULATORY MEASURES
To be recalled is the assertion that a thin line separates legitimate regulatory measure from indirect
expropriation. To every claim of expropriation, there is a natural defence of exercise of sovereign
regulatory powers requiring no compensation payment. Generally, after determining the existence
of a Stability Guarantee, tribunals are required to determine if host States;’ repudiation or violation
of said Stability Guarantee is indirect expropriation or exercise of host States’ sovereign regulatory
114
British Petroleum v. Libya, Award, 10 October 1973 and 01 August 1974, 54 ILR 297, 329.
115
Page 183.
116
Antoine Goetz et al v Burundi ICSID case No. ARB/95/3, Decision on Liability 10 February 1999 Para 126.
117
The tribunal held that had Liberia raised a claim that it lawfully exercised its right to nationalize the investor-
claimant’s investment, the defence would have failed because the taking of LETCO's property was not for a bona fide
public purpose, was discriminatory and was not accompanied by an offer of appropriate compensation. Liberian
Eastern Timber Corporation v. Republic of Liberia, ICSID Case No.ARB/83/2, Award, 31 March 1986 Para 91.
97
power requiring no payment of compensation. Markus Perkams contends that uncertainty in
ascertaining indirect expropriation claims undermines the legitimacy of investment treaty
arbitration. 118 Consequently, to determine if host States’ breach of Stability Guarantee is
expropriatory, Tribunals have relied on one or more of the distinguishing tests such as Sole effect,
purpose, legitimate expectation etc. Some investment treaties’ provide some direction on the
determination of indirect expropriation claims. A typical example is the Argentina – Qatar BIT
which clarified in Article 5 (2) that:
‘For the purposes of this paragraph: a. "direct expropriation" means the formal transfer of
ownership of the investment or its direct seizure; b. "indirect expropriation" means an action or a
series of actions tantamount to direct expropriation without formal transfer of ownership of the
investment or its direct seizure.’119
Another example is Belgium-Luxembourg Economic Union and Colombia BIT which provides
elaborate provisions towards the definition and determination of indirect expropriation.
Expropriation and Compensation provisions spelt out in Article IX provides as follows in
Paragraph 3:
3. It is understood that:
a. indirect expropriation results from a measure or series of measures of a Contracting Party
having an equivalent effect to direct expropriation without formal transfer of title or outright
seizure;
b. the determination of whether a measure or series of measures of a Contracting Party
constitute indirect expropriation requires a case-by-case, fact-based inquiry considering, amongst
other criteria, the scope of the measure or series of measures and their interference on the
reasonable and distinguishable expectations concerning the investment;
c. except in rare circumstances, such as when a measure or series of measures are so severe
in the light of their purpose that they cannot be reasonably viewed as having been adopted and
118
Markus Perkams, ‘The Concept of Indirect Expropriation in Comparative Public Law—Searching for Light in the
Dark in Stephan Schill (ed), International Investment Law and Comparative Public Law (Oxford University Press
2010) 109.
119
The Reciprocal Promotion and Protection of Investments between the Argentine Republic and the State of Qatar.
98
applied in good faith, non-discriminatory measures of a Party that are designed and applied for
public purposes or with objectives such as public health, safety and environment protection, do
not constitute indirect expropriation.120
The above is however uncommon as most treaty provisions on expropriation merely provide some
guidance which is hardly sufficient to assist in fully and definitively determining direct and indirect
expropriation claims. Nonetheless, the author of an OECD working paper stated that despite the
inconsistencies in arbitral decisions distinguishing legitimate non–compensable regulations and
indirect expropriation, broad criteria have been identified to assist with differentiating between the
two concepts. These broad criteria include: (i) the degree of interference with property (ii) the
character of governmental measures (iii) the interference of the measure with reasonable and
investment – backed expectations.121 Determination of indirect expropriation in particular requires
a case-by-case fact based inquiry that takes into consideration at least one of the various tests that
have emerged over the years. According to Campbell et al, the various tests for determining the
different elements of expropriation have become more detailed and specific. 122 Thus, various
international arbitration tribunals called to decide on indirect expropriation claims, have
significantly contributed to shaping the contours defining the concept through postulation of pre-
requisites required to be met to determine if host state measures were indirect expropriations. For
instance, the fulcrum of the Sole Effect principle which has been frequently used to distinguish
between expropriation and non – compensable regulation is centred on a review of the effects of
the governmental measure on the economic value and benefit of the investor’s investment.
Numerous tribunals assess the effect of host States’ measures which occasioned substantial
deprivation over an investor’s management, control, economic value of the investment. To the
proponents of this test, emphasis is on the effect of the measure whilst intention is irrelevant. For
instance, Burlington v. Ecuador tribunal totally subscribed to the Sole Effect doctrine when it
found that the purpose or intent of a measure may serve as an additional and secondary factor to
be considered, but ‘[t]he most important factor to distinguish permissible from confiscatory
120
Agreement between the Belgium-Luxembourg Economic Union and the Republic of Colombia on the Reciprocal
Promotion and Protection of Investments.
121
Catherine Yannaca-Small, ‘Indirect Expropriation and the Right to Regulate in International Investment Law’ 2004
OECD Working Papers on International Investment 10.
122
Campbell McLachlan, Laurence Shore, and Matthew Weiniger (eds), International Investment Arbitration:
Substantive Principles (Oxford University Press 2008) 361.
99
taxation is the effect of the tax.’123 The magnitude, intensity or degree of interference with use or
enjoyment of the investment must be substantial for it to be considered expropriation. To Tecmed
v. Mexico tribunal, the government’s intention is less important than the effects of the measures
on the owner of the assets or on the benefits. 124 This test raises a cogent question which was
important for determination in Metalclad Corp v. Mexico; what is the threshold level of
interference? The Metalclad Tribunal discountenanced the host States justification proffered for
its measures but came to a conclusion that expropriation had occurred due to deprivation of the
use and intended purpose of the investment.125
The often-quoted Pope & Talbot v. Canada tribunal findings on substantial deprivation and criteria
for determining if a measure has an effect equivalent to expropriation has either been applied or
referenced by at least 20 tribunals.126 The Crompton (Chemtura) Corp Tribunal in particular,
did an apt recapitulation of Pope & Talbots criteria when it stated that:
‘In Pope & Talbot, the tribunal referred to a number of criteria to determine whether there had
been an indirect expropriation, including: (i) whether the investor remained in control of its
investment, (ii) whether it directed its day-to-day operations, (iii) whether its officers and
employees were detained by the State, (iv) whether the State supervised the work of the investor's
123
Burlington v. Ecuador Decision on Liability para 395 & 40
124
Tecnicas Medioambientales Tecmed S.A. v. The United Mexican States ICSID Case No. ARB (AF)/00/2, Award
29 May 2003 Para 116.
125
Metalclad Corporation v. The United Mexican States (AF)/97/1, Award, 30 August 2000 Para 159. Metaclad
tribunal award elicited reactions from both Canada and US to forestall the extensive broaden definition or scope
ascribed to expropriation provision. Other tribunals which applied the sole effect test include the Feldman v. Mexico,
Biloune v. Ghana Biloune and Marine Drive Complex Ltd v. Ghana Investments Centre and the Government of Ghana,
Award on Jurisdiction and Liability 27 October 1989, 95 TLR (1989) 183, 209, and Pope & Talbot v. Canada tribunals.
126
Pope & Talbot Inc. v. Government of Canada, UNCITRAL, Interim Award, 26 June 2000 Para 100. The cases in
which the above referenced findings of the Pope & Talbot tribunal has be cited include: UAB E Energija (Lithuania)
v. Republic of Latvia, ICSID Case No. ARB/12/33, Award, 22 December 2017 Para 1075-76; WNC Factoring Ltd.
v. Czech Republic, PCA Case No. 2014-34, Award, 22 February 2017 Para 397; Philip Morris Brand Sàrl
(Switzerland), Philip Morris Products S.A. (Switzerland) and Abal Hermanos S.A. (Uruguay) v. Oriental Republic of
Uruguay, ICSID Case No. ARB/10/7 Award, 8 July 2016 Para 192; Quiborax S.A. and Non Metallic Minerals S.A.
v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award, 16 September 2015 Para 238; Burlington
Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability, 14 December 2012 Para
396; Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law
and Liability, 30 November 2012 Para 6.62; Bosh International, Inc. and B&P, LTD Foreign Investments Enterprise
v. Ukraine, ICSID Case No. ARB/08/11, Award, 25 October 2012 Para 218; Railroad Development Corporation v.
Republic of Guatemala, ICSID Case No. ARB/07/23, Award, 29 June 2012 Para 151; GAMI Investments, Inc. v.
Government of the United Mexican States, UNCITRAL, Final Award, 15 November 2004 Para 125; Glamis Gold,
Ltd. v. The United States of America, UNCITRAL, Final Award, 8 June 2009 Para 357.
100
officers and employees or not, (v) whether the State had taken the proceeds of sales other than
through taxation, (vi) whether the State interfered with management or shareholders' activities,
(vii) whether the State prevented the distribution of dividends to shareholders, (viii) whether the
State interfered with the appointment of directors or management, and (ix) whether the State had
taken any other actions ousting the investor from full ownership and control of the investment.’ 127
After setting out these criteria, Pope & Talbot Tribunal asserted that for interference with business
activities to amount to expropriation, the interference must be sufficiently restrictive to support a
conclusion that the property investment has been taken. Citing the American Third Restatement128
provision which addresses the question whether regulation may be considered expropriation, the
tribunal added that under international law expropriation requires a Substantial Deprivation. As
the investor-claimant continued to carry on its business activities and earn substantial profit despite
the interference occasioned by Canada’s measures which resulted in reduced profits for the
investor-claimant, the Tribunal held that the degree of interference with investment operations did
not give rise to expropriation within the meaning of Article 1110 of NAFTA. 129
Scholars in the field of international investment law such as Y. Fortier & S. L. Drymer have equally
contributed towards efforts to distil defining criteria. In this regard, Y. Fortier & S. L. Drymer
note that:
127
Crompton (Chemtura) Corp. v. Government of Canada, Award, 2 August 2010 Para 245.
128
America Law Institute’s Restatement Third of The Foreign Relations Law of the United States 1987, (generally
referred to as ‘American Third Restatement’) is a compilation of the opinion of the America Law Institute (a leading
independent organization in the United States) on rules that an impartial tribunal would apply if required to decide a
controversy in accordance with international law. Section 712 of the American Third Restatement in order to
accentuate host states’ sovereign right to regulate and provide guidance for distinguishing legitimate regulatory
measures and expropriation provided that: ‘A state is responsible as for an expropriation of property under Subsection
(1) when it subjects alien property to taxation, regulation, or other action that is confiscatory, or that prevents,
unreasonably interferes with, or unduly delays, effective enjoyment of an alien’s property or its removal from the
state’s territory...A state is not responsible for loss of property or other economic disadvantage resulting from bona
fide general taxation, regulation, forfeit of crime, or other action of the kind that is commonly accepted as within the
police power of states, if it is not discriminatory.’ Apart from the Pope & Talbot tribunal, other tribunals such as
Glamis Gold, Ltd. v. USA and Feldman v. Mexico have cited the America Third Restatement to buttress arguments
related to host States’ police power to regulate vis-à-vis expropriatory measures. See Glamis Gold, Ltd. v. The United
States of America, UNCITRAL, Final Award, 8 June 2009 para 354 and Marvin Roy Feldman Karpa v. United
Mexican States, ICSID Case No. ARB(AF)/99/1, Award, 16 December 2002 para 104-7.
129
Pope & Talbot Inc. v. Government of Canada, UNCITRAL, Interim Award, 26 June 2000, Para 102. Formatted: Font: Italic
101
“in order to be considered an expropriation, the effect of a regulatory measure on property rights
– that is, the required level of interference with such rights – has been variously described as: (1)
unreasonable; (2) an interference that renders rights so useless that they must be deemed to have
been expropriated; (3) an interference that deprives the investor of fundamental rights of
ownership; (4) an interference that makes rights practically useless; (5) an interference sufficiently
restrictive to warrant a conclusion that the property has been ‘taken’; (6) an interference that
deprives, in whole or in significant part, the use or reasonably-to-be-expected economic benefit of
the property; (7) an interference that radically deprives the economical use and enjoyment of an
investment, as if the rights related thereto had ceased to exist; (8) an interference that makes any
form of exploitation of the property disappear (i.e., it destroys or neutralizes the economic value
of the use, enjoyment or disposition of the assets or rights affected); and (9) an interference such
that the property can no longer be put to reasonable use.”130
Beyond the type of measure, the duration of the deprivation or interference is also an important
consideration in the determination of Expropriation. While the Tribunal in S.D Myers v. Canada131
held that a temporary interference for 18 months did not amount to expropriation, the tribunal in
Wena Hotels v. Egypt found that interference by way of seizure of the Investor – Claimants hotels
for about a year was sufficient to constitute expropriation.132 The Middle East Cement Tribunal
adopted Wena Hotel tribunal type of approach by deeming four month’s suspension of an export
licence consequential enough to ground a claim for expropriation.133 Meanwhile, contrary to the
principles enunciated by the sole effect doctrine, host states intentions have been assessed in the
determination of expropriation. In CCL v. Kazakhstan, the tribunal whilst noting that ‘Investment
protection is not in place to safeguard a foreign investor from the adverse effects of economic
adversity, fully apparent at the time of investment, facing entities. Neither does it provide any
safeguards against the vagaries of loss-making business operations generally.’ held that there was
no evidence of host States’ intent or motivation to expropriate or take a variety of measures for the
130
Y. Fortier & S. L. Drymer, ‘Indirect Expropriation in the Law of International Investment: I Know It When I See
It, or Caveat Investor’ (2004) 19 ICSID Review 293, 326 at 305
131
S.D Myers v. Canada Partial Award 13 November 2000 Para 283. Formatted: Font: Italic
132
The Tribunal found that the seizure and illegal possession of the Claimant’s hotels for nearly a year is more than
an ephemeral interference in the use of the hotel and enjoyment of its benefits. Wena Hotels Limited v. Arab Republic
of Egypt ICSID Case No. ARB/98/4, Award 08 December 2000, Para 99.
133
Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6,
Award 12 April 2002, Para 107.
102
purpose of ultimately worsening the financial position of the investor-claimant. For this reason,
the tribunal concluded that investor-claimant had not been exposed to any "creeping" or "covert”
expropriation, leading to the rejection of the investor-claimant’s claim for expropriation
compensation under the Foreign Investment Law and customary international law.134
Another test similar to the intent test, emerging from decisions of arbitral tribunals on this issue is
the purpose test which focuses on the purpose or character of host States measures. Where the
purpose of host State’s measures is one of public interest such as environment, safety, public
health, human right, it is likely to be considered within host states police powers to regulate and
less likely to be seen as expropriatory. This line of thinking can be deciphered in Philip Morris v.
Uruguay Award where the tribunal stated that for a State’s action in exercise of regulatory powers
not to constitute indirect expropriation, the action must be taken bona fide for the purpose of
protecting the public welfare, must be non-discriminatory and proportionate. In the Tribunal’s
view the challenged measures were adopted in good faith, were non-discriminatory and
proportionate to the objective meant to be achieved. The tribunal rejecting the investor-claimant’s
claim regarding expropriation, concluded that the challenged measures were a valid exercise by
Uruguay of its police powers for the protection of public health.135 Needless to say that it is often
difficult to ascertain with precision the purpose of host States’ measures.
Proportionality has been equated to other testing methods used to determine if expropriation has
occurred or ascertain if a State’s measure was expropriatory or not. In this wise, the tribunals are
required to consider whether state measures are proportionate to the stated public purpose backing
or upon which the measures are based. The tribunal will equally review whether the State measures
are proportional to the protection accorded investor’s investment.136
Another test deployed by arbitral tribunals to distinguish between expropriation and non –
compensable regulation is determining if the legitimate and reasonable expectations of the
investors have been frustrated. To Saar Papier v. Poland, a state may not frustrate without paying
134
CCL Oil v. Republic of Kazakhstan, SCC Case No. 122/2001, Final Award dated 2004 Page 173.
135
Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, Formatted: Font: Italic
ICSID Case No. ARB/10/7, Award, 08 July 2016, para 305 to 307
136
EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award, Para 293. Formatted: Font: Italic
103
compensation, the legitimate expectation of foreign investor who relied on the host State’s
assurances when it invested. The Tribunal added that investment treaties’ expropriation provision
must be interpreted to provide for compensation if host State first ‘encourages an investment under
a particular interpretation of the law and then changes its mind to make the investment
economically worthless.’ 137 This test is particularly relevant for deciphering the relationship
between the concept of Stability Guarantees and prohibition against unlawful expropriation
protection. As succeeding section will show, most of the arguments pertaining to Stability
Guarantees in the context of expropriation have frustration of legitimate expectation undertone.
This, of course is not surprising as it is established that Stability Guarantees create legitimate
expectation subject to international law protection under the fair and equitable treatment standard.
A number of tribunals’ findings have suggested that a frustration of legitimate expectation of an
investor arising from repudiation of a Stability Guarantee is decisive for a finding of
expropriation.138 The Link Trading v. Moldova tribunal in particular expressed that tax measures
becomes expropriatory when the measures violate a specific obligation previously undertaken by
the host State in favour of the investor or investment.139 More of Link Trading type holdings will
be analysed in the next section.
Apart from arbitral tribunals, scholars in the field of international investment law, such as Waelde
and Kolo, also agree that a relevant factor to be taken into account in determining whether a
regulation has gone ‘too far’ is a breach of prior contractual commitment. Waelde and Kolo added
that such breach needs to be taken into account in determining whether the breach is confiscatory
and for undermining that legitimate expectation of the investor-claimant.140 They acknowledged
that a breach of commitment could be a separate cause of action enabling the award of damages,
‘but also fulfil the conditions of the more demanding requirements for expropriation if
additional conditions were met.’ Arguing further that where a regulation severely impacts on the
investment, then that breach of commitment weighs in on the side of the factors indicating
137
Saar Papier Vertriebs GmbH v. Republic of Poland, UNCITRAL, Final Award, 16 October 1995 para 78, 96-97. Formatted: Font: Italic
138
Tecmed v. Mexico tribunal implied that proportionality of host states’ measures and legitimate expectation of Formatted: Font: Italic
foreign investors are relevant for determining whether a measure is expropriatory. Tecmed v. Mexico Final Award
Paras 116, 122 and 150.
139
Link Trading Joint Stock v. Moldova Final Award of 18 April 2002 paras 64 and 73.
140
Thomas Waelde and Abba Kolo, ‘Environmental Regulation, Investment Protection and 'Regulatory Taking' in
International Law’ 50 Int'l & Comp. L.Q. 811 (2001) 843.
104
expropriation and would necessarily extinguish the host State's legislative authority to change or
enact new laws.141
Following review of cases dealing with expropriation claims, Campbell et al concluded that there
is an increasing convergence in the principles applied to determine indirect expropriatory measures
of host States.142 Paulsson and Douglas similarly opined that there is a wealth of material to draw
upon for making inductive conclusions on the rules for compensable taking.143 These conclusions
do not detract from the fact that there is yet no consensual criterion to determine if expropriation
has occurred. The criteria often employed by investor-state tribunals take into account a
combination of factors and circumstances of the cases, particularly regarding compliance with
treaty expropriation provisions, degree of interference, loss of ownership and control of investment
etc. In fact, due to lack of arbitral consensus on the criteria for determining indirect expropriation
acts of host States, Fortier and Drymer surmised that the definition of indirect expropriation
together with the protection foreign investors expect to receive against expropriatory conducts are
ambiguous.144 Regardless of the inconsistency in arbitral rulings on indirect expropriation which
is rooted in the different factual circumstances of each case and application of varied tests or a
combination of tests,145 it is widely accepted that when an investor suffers a substantial deprivation
of the use and enjoyment of its investment, and same is attributable to host States’ measure or
actions, a finding of unlawful expropriation may be tenable.
6. STABILIZATION CLAUSE AS CONDITION AND INDICATOR OF

EXPROPRIATION
141
Thomas Waelde and Abba Kolo Ibid 844. Waelde and Kolo gave examples of scenarios where a regulation will
severely impacts on the investment: (i) where the regulation renders the investment no longer profitable to operate, or
(ii) where the regulation adds exorbitant costs on the investor-which were not contemplated at the time of the
investment.
142
Campbell McLachlan, Laurence Shore, and Matthew Weiniger (eds), International Investment Arbitration:
Substantive Principles (Oxford University Press 2008) 411.
143
144
Yves L Fortier and Stephen L Drymer, ‘Indirect Expropriation in the Law of International Investment: I Know it
When I See it, or Caveat Investor’ (2004) 19.2 ICSID Review 326 – 327.
145
Peter Cameron, International Energy Investment Law: The Pursuit of Stability (Oxford University Press 2010) 222
and 223.
105
It is to be recalled that Stability Guarantee for the purpose of this study has been defined in Chapter
Two to include contractual stabilization clauses, Stability Guarantees based on local legislations,
Legal Stability Agreements and treaty based Stability Guarantees. These Stability Guarantees,
especially contractual stabilization clauses, are specific commitments or particular undertakings
of host States within the meaning of international investment law. For claims based on violation
of investment treaties’ expropriation provisions, most investor-claimants seeking protection of
Stability Guarantees, have profiled their claims arguing that host States measures are contrary to a
‘Specific Commitment’ and has thus failed to comply with the key requirements for lawful
expropriation. A number of Tribunals have been tasked with addressing the inquiry if observance
of a Specific Commitment undertaken in respect of foreign investment such as Stability Guarantee
is a legal requirement or condition for lawful expropriation. The inquiry has also been flipped to
query whether the breach of a Stability Guarantee will automatically elicit a finding of indirect
expropriation. In other words, is a breach of Stability Guarantee indicative of indirect
expropriation just as the effect, purpose and proportionality of host State’s measures are decisive
to a finding of indirect expropriation? To these inquiries, the answers have been varied and
circuitous but somehow in the affirmative with qualifiers.
Be that as it may, to determine if host States’ measures are consistent with prior specific or
particular commitments, a tribunal will need to first address the issue whether an undertaking or
specific commitment was in fact granted to the investor. It should also be noted that Specific
Commitments may arise from legislation, contract or treaty. Contractual stabilization clauses and
stabilization commitments included in dedicated domestic legislation are almost irrefutably
specific commitments, whereas arbitral case law suggests that it is still debatable if treaty-based
stability guarantees or stability guarantees embedded in the general legal and investment
framework of host States, are specific commitments for the purpose of investment treaty
protections. In this part, emphasis will be on Stabilization Clauses as opposed to other types of
Stability Guarantees as it is the most relevant and applicable to the topic of expropriation. A good
starting point is to examine those treaty provisions that directly or indirectly imply that observance
of specific commitments or compliance with undertakings to investors is a condition for lawful
expropriation. Arbitral tribunals’ findings aligning with this proposition will also be highlighted.
Subsequently to be examined, is the notion that a breach or repudiation of stability guarantee is
106
indicative of expropriation and therefore can be relied on to distinguish permissible non-
compensable measures from indirect expropriatory measures.
6.1 Observance of Specific Undertaking as the 5th Condition for Lawful Expropriation
As previously examined, classical cases on Stabilization Clause were consequences of direct

expropriation and nationalization. Less of these type of cases are seen in today’s international
investment law climate. Although the nexus between expropriation and stabilization clause
through international arbitration has palled, it has not altogether ceased even as occurrences of
direct expropriation are gradually fizzling out. There exist a line of investor-state arbitration cases
which suggest that host States' measures that contravene a Specific Commitment will be
considered unlawful expropriation, notwithstanding compliance with treaty expropriation
conditions of public purpose, due process, non-discrimination and compensation payment. One
must quickly add that the requirement for Specific Commitment observance is often a function of
treaty language,146 and is not generally applicable in all cases. Examples of treaty-provisions on
expropriation which stipulate that expropriation will be considered lawful upon observance of
specific commitments to foreign investors, in addition to the other four criteria of public purpose,
compensation payment, due process and non-discrimination include below stated Article 5 (1) of
the Armenia – Argentina BIT and Article 6 of the Netherlands – Nigeria BIT:
Article 5 (1) Armenia – Argentina BIT on Nationalization or Expropriation
‘Investments of investors of either Contracting Party shall not be nationalised, expropriated or

subjected to direct or indirect measures having effect equivalent to nationalization or expropriation
by the other Contracting Party unless:
a) the measures are taken in the public interest, on a non-discriminatory basis, under due process
of law and are not contrary to any undertaking which that Party may have given to the investor.
146
Another formulation of this requirement is that expropriation shall not be contrary to any undertaking which the
host State has given to the investor.
107
The measures are accompanied by provisions for the payment of prompt, adequate and effective
compensation;147
Article 6 Netherlands – Nigeria BIT on Expropriation
‘Neither Contracting Party shall take any measures depriving, directly or indirectly, nationals of
the other Contracting Party of their investments unless the following conditions are complied with:
(a) the measures are taken in the public interest and under due process of law;
(b) the measures are not discriminatory or contrary to any undertaking which the Contracting
Party which takes such measures may have given;
(c) the measures are accompanied by provision for the payment of just compensation. Such
compensation shall represent the genuine value of the investments affected, shall include interest
at a normal commercial rate until the date of payment and shall, in order to be effective for the
claimants, be paid and made transferable, without undue delay, to the country designated by the
claimants concerned and in the currency of the country of which the claimants are nationals or in
any freely convertible currency accepted by the claimants.’148
In the same vein, the BIT between US and Ecuador which was the applicable BIT in the Burlington
v. Ecuador case, incorporated the FET, Full Protection and Security, Umbrella Clause into the
Expropriation provision. Article III (1) Ecuador – US BIT provides:
Article III (1)
‘Investments shall not be expropriated or nationalized either directly or indirectly through

measures tantamount to expropriation or nationalization ("expropriation") except: for a public
purpose; in a nondiscriminatory manner; upon payment of prompt, adequate and effective
147
Agreement between the Republic of Armenia and the Argentine Republic for the Promotion and Reciprocal
Protection of Investments, Signed 16 April 1993, Entered into Force 20 December 1994.
148
Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands
and the Federal Republic of Nigeria. Signed 02 November 1992, Entered in Force 01 February 1994.
108
compensation; and in accordance with due process of law and the general principles of treatment
provided for in Article II (3).149
If the above expropriation provision is read with Article II (3) (c) which states that ‘Each Party
shall observe any obligation it may have entered into with regard to investments.’ the effect is
similar to those treaties stipulating that expropriation must not be contrary to prior specific
commitments or undertakings. Thus, a simplistic interpretation of these provisions lends credence
to the view that host states must observe previously granted specific commitments or guarantees
for expropriatory actions to be lawful. While one may be tempted to construe the requirement that
expropriation must align with prior specific commitments or undertaking as the fifth legal
condition to legitimise expropriation, a more cursorily look at such a proposition points to an
untenable and disjoint scenario. This is because the existence of Specific Commitment in the form
of Stability Guarantee will naturally operate to vitiate any expropriatory action of host States. To
the extent that Stability Guarantees seek to maintain legal, regulatory and investment framework
existing at the time investments were made; so as to retain the benefits and profits of investments
over a period of time; whilst expropriation connotes a taking, deprivation, seizure, transfer of
ownership or control. It is highly unlike or in limited instances that expropriatory actions or
measures will not impact or repudiate previously granted stability commitments. In fact, it would
be difficult to imagine an instance where stabilization clause will not expressly or implicitly
prohibit expropriation or nationalization. This invariably means, where there is in existence a
Stability Guarantee or any other specific commitment, expropriation cannot be lawfully executed.
As rightly noted by Burlington v. Ecuador tribunal when recounting Burlington’s position
‘Compliance with the tax stabilization clauses would have been incompatible with Ecuador's goal
of unilaterally changing the economic terms of the PSCs.’ 150 Cameron also subscribes to similar
viewpoint when he observed that ‘Even the presence of a stabilization clause in the energy
investment contract will be sufficient to prevent a lawful expropriation by the Host state…”151
Nonetheless, there is enough judicial and scholarly authority advancing the notion that stabilization
149
Treaty between the United States of America and the Republic of Ecuador concerning the Encouragement and
Reciprocal Protection of Investment. Signed 14 November 1991, Entered into force 20 October 1994.
150
Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5 Decision on Liability 14 December
2012 Para 356.
151
Peter Cameron, International Energy Investment Law: The Pursuit of Stability (Oxford University Press 2010) 220.
109
clause will not undermine host States’ right to lawfully expropriate.152 A typical example is when
Christoph and Rudolf noted that ‘Even clauses in agreement between the host state and the investor
that freeze the applicable law for the period of the agreement (‘stabilization clause’) will not
necessarily stand in way of a lawful expropriation.’153
In a slightly different but somewhat more direct manner, ‘Specific Commitment’ requirement has
made inroads into interpretation of indirect expropriation by virtue of the ASEAN Comprehensive
Investment Agreement.154 Article 14 on Expropriation and Compensation together with Annex 2
which provides context, definitions and clarifications for construing the Expropriation provision
of the treaty. Annex 2 Paragraph 3 (c) which offers guidance for determining types of Member
State’s actions or series of actions constituting indirect expropriation includes as one of the factors
to consider: ‘whether the government action breaches the government’s prior binding written
commitment to the investor whether by contract, licence or other legal document;’
The Malaysia-Australia Free Trade which defined indirect expropriation also as an action or series
of actions that has an effect equivalent to direct expropriation without formal transfer of title or
outright seizure, also clarified that to determine what constitutes indirect expropriation one of the
factors to be considered is ‘whether the government action breaches the government’s prior
binding written commitment, where applicable, to the investor whether by contract, licence or
other legal document;’ 155 Going by the textual interpretation of these two treaty provisions
elucidating on indirect expropriation, a breach of a Stability Guarantee is highly indicative of
indirect expropriation. Whether or not breach of Stability Guarantee can be solely determinative
of indirect expropriation on the basis of these particular clauses, is yet to be tested in investment
arbitration. One can however guess arbitral outcome going by findings of tribunals that have
reviewed very similar investment treaty clauses e.g. French BITs.
152
Piergiuseppe Pusceddu, ‘Contractual Stability in the Oil and Gas Industry: Stabilization, Renegotiation and
Unilateral State's Undertakings’ (2014) International Energy Law Review 2.
153
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press 2nd
Ed 2012) 98.
154
ASEAN Comprehensive Investment Agreement 2009 is an investment agreement signed on 26 February 2009 and
entered into force 24 February 2012 between the Association of Southeast Asian Nations (“ASEAN”), which comprise
of Brunei Darussalam, Cambodia, Indonesia, the Lao People’s Democratic Republic, Malaysia, Myanmar,
Philippines, Singapore, Thailand and Vietnam.
155
Chapter 12, Article 12.8 and Annex on Expropriation Paragraph 3 (b) of Malaysia-Australia Free Trade Agreement
Signed on 22 May 2012.
110
France, a signatory to 104 Bilateral Investment Treaties with 96 in force as at 31st December 2017,
appears to be a promoter of the ‘Specific Commitment’ requirement being a condition for
expropriation. Of the 96 BITs in force, only five BITs with Ethiopia, Malta, Mexico, Uganda and
Trinidad and Tobago are publicly available in English on UNCTAD’s Investment Policy Hub. 156
Expectedly, these five BITs contain Expropriation Provisions in similar but not identical
permutations. Three of these five BITs stipulate that expropriation should not be contrary to a
specific commitment, particular obligation157 or particular commitment.158 France – Uganda BIT
in particular provides in Article 5 (2) that:
‘Neither Contracting Party shall take any measures of expropriation or nationalization or any other
measures having the effect of dispossession, direct or indirect, of nationals or companies of the
other Contracting Party of their investments on its territory and in its maritime area, except in the
public interest and provided that these measures are neither discriminatory nor contrary to a
specific commitment.
Any measures of dispossession which might be taken shall give rise to prompt and adequate
compensation, the amount of which shall be equal to the real value of the investments concerned
and shall be set in accordance with the normal economic situation prevailing prior to any threat of
dispossession.
The said compensation, the amounts and conditions of payment, shall be set not later than the date
of dispossession. This compensation shall be effectively realizable, shall be paid without delay and
156
France: Bilateral Investment Treaties, <http://investmentpolicyhub.unctad.org/IIA/CountryBits/72#iiaInnerMenu>
accessed 18 February 2018.
157
Article 5 (2) of the Agreement between the Government of the Republic of Trinidad and Tobago and the
Government of the Republic on the Reciprocal Promotion and Protection of Investment, Signed 28 October 1993,
Entered into Force 16 May 1996.
158
Agreement between the Government of the Federal Republic of Ethiopia and the Government of the Republic of
France for the Reciprocal Promotion and Protection of Investments, Signed 25 June 2003, Entered into Force 07
August 2004.
111
shall be freely transferable. Until the date of payment, it shall produce interest calculated at the
appropriate market rate of interest.’159
As the above expropriation provision is a verbatim replication of the France 2006 Model BIT
expropriation provision extract, it is expected that the ‘Specific Commitment’ requirement will
feature in newer and future France BITs.160 Meanwhile, due to limitation of language barrier, one
is unable to review other France BITs which are mostly written in French. It can however be
surmised on the basis of probability, that at least a third of these French BITs will have
Expropriation provisions similar to the Uganda and Trinidad and Tobago BITs. In support of this
assumption are the De Levy v. Peru161 and Total v. Argentina cases in which the tribunal had to
construe the France – Peru BIT and France – Argentina BIT expropriation provision respectively,
which incorporated a ‘Specific Commitment’ requirement. 162 In this case, Total, a French
corporation which invested in the power generation, gas transportation and hydrocarbon
exploration and production sectors of Argentina filed an ICSID investment arbitration against
Argentina for measures taken by Argentina to tide the economic and financial crisis it faced in
early 2000s. The measures which included restrictions on transfers, rescheduling of cash deposits,
pesification of US dollar deposits, alteration of the Uniform Marginal Price Mechanism amongst
159
Agreement between the Government of the Republic of France and the Government of the Republic of Uganda on
the Reciprocal Promotion and Protection of Investment, Signed 03 January 2003, Entered into Force 20 December
2004.
160
Draft Agreement between the Government of the Republic of France and the Government of the Republic of (...)
On the Reciprocal Promotion and Protection of Investments,
<https://www.italaw.com/documents/ModelTreatyFrance2006.pdf> accessed 18 February 2018.
161
In this case in which the Investor-claimant claimed breach of the guarantee of legal stability without any concrete
specific commitment to her, Expropriation provision (Article 5 of the France – Peru BIT) including a ‘specific
commitment’ requirement, was subject to the tribunal’s interpretation. The Tribunal in Paragraph 444 of the award
reproduced the Article 5 (2) of France – Peru BIT as follows: ‘[n]either Contracting Party shall nationalize or
expropriate or take any measure depriving, directly or indirectly, nationals or legal persons of the other Contracting
Party, from their investments made in its territory or in its maritime area, unless such measures are in the public
interest, provided that these measures are not discriminatory, or against a particular commitment of one of the
Contracting Parties towards the nationals or legal persons of the other Contracting Party. Expropriation measures
that may be adopted shall cause prompt and adequate compensation.’ The Tribunal eventually considered as
unfounded her arguments in this respect. Renée Rose Levy De Levi v. The Republic of Peru, ICSID Case No. Formatted: Font: Italic
ARB/10/17, Award 26 February 2014, Para 346, 444, 479. Formatted: Font: Italic
162
It is essential to note that the France – Argentina BIT is written in French and has not been reviewed due to language
constraint. Reliance therefore, has been had to the Tribunal’s interpretation and ruling on the issue as contained in the
Decision on Liability 27 December 2010, Paragraph 185, Footnote 198, wherein the Tribunal quoted: ‘Article 5(2) of
the BIT states that: “The Contracting Parties shall not take, directly or indirectly, any expropriation or nationalization
measures or any other equivalent measures having a similar effect of dispossession, expect for reasons of public
necessity and on condition that the measures are not discriminatory or contrary to a specific undertaking.”’
112
many others, impacted all facets of Argentina’s business commercial and financial spheres;
thereby resulting in an avalanche of investment arbitrations against Argentina.
Total’s claims were profiled to align with its sectoral investments. With respect to its investment
in TGN (Transportadora de Gas Norte) an Argentine incorporated company operating in the gas
transportation sector, Total alleged indirect expropriation without compensation in violation of
Article 5(2) of the France – Argentina BIT. Contending that the same measures which constituted
breach of FET under Article 3 of the BIT, also gave rise to the breach of expropriation provision
claim, Total argued that Argentina’s measures constituted indirect expropriation having
substantially deprived it of the value and economic benefit of its investment. The effect of the
measures was the strength of Total’s indirect expropriation claim and to demonstrate substantial
deprivation, Total asserted that it lost 86% of the value of its investment in TGN due to direct
result of Argentina’ measure. Total considered this, an obliteration of the value of its investment
in TGN, well beyond and over substantial deprivation.
Argentina on the other hand, countered Total’s argument by relying on arbitral Jurisprudence
upholding “loss of control” as the main criterion to determine whether interference was substantial
enough to constitute indirect expropriation. Argentina in its defence argued that to the extent that
Total was still in control and managing its investments, the alleged interference was not
sufficiently substantial to amount to indirect expropriation.163 Furthermore, Argentina emphasised
that its measures were bona fide non – discriminatory regulatory measures within its police power,
therefore not expropriatory and requiring no payment of compensation.
Particularly relevant to the current discourse, is Total’s rejoinder to Argentina’s police power
regulatory autonomy defence. Total pointed out that
‘… Argentina’s Measures, even if regarded as regulatory or police power measures, constitutes an

expropriation because they contradict the specific undertakings Argentina gave to Total and are
therefore in breach of Article 5(2) of the BIT, last sentence. These specific undertakings or
assurances are identified by the Claimant as:
163
Total S.A v. Argentina Decision on Liability Para 188. Formatted: Font: Italic
113
“(a) the commitment to preserve TGN’s economic equilibrium through recurrent and extraordinary
tariff reviews with the aim of ensuring that tariffs remained sufficient to cover costs and earn a
reasonable rate of return; and, in support of this commitment (b) the promise to calculate tariffs in
dollars and adjust them in accordance with the US PPI; …”’164
By focusing on the phrase “similar effect of dispossession”, an extract from Article 5 (2) Argentina
– France BIT, the Tribunal interpreted dispossession as “loss of control”. The tribunal rejected
Total’s claim of indirect expropriation in breach of Article 5(2) of the BIT on the basis that Total
had not been deprived of all or substantially all of its investment’s value and had not been disposed
of its investment.165 Of significant relevance to Total’s claim that Argentina’s measures were
expropriatory because they contradicted specific undertakings Argentina gave to Total, the tribunal
recounted its holdings in relation to Total’s Fair and Equitable Treatment Claims by reiterating
that Argentina’s pesification measure was a reasonable and proportionate bona fide regulatory
measure of general application, considering Argentina’s economic and monetary emergency. As
the tribunal found that pesification did not amount to a breach of FET standard, it also found that
it was not a measure equivalent to expropriation or nationalisation requiring compensation
payment. More importantly, the tribunal held in clear terms that the pesification was not contrary
to any specific undertaking given by Argentina to Total as the erstwhile practice of calculating the
gas tariffs in US dollars subject to US PPI adjustments could not be ‘properly construed as
“promises” or “specific undertakings” given by Argentina to Total since they were not addressed
directly or indirectly to Total.’166 For these and other reasons the tribunal concluded that Argentina
did not indirectly expropriate Total’s investment in TGN in breach of Article 5(2) of the BIT.
The above summary shows that Total’s expropriation claim and tribunal’s ruling referenced
Total’s FET Claim; it is therefore necessary to cursorily shed light on the relevant issues pertaining
to the inquiry whether Argentina’s legislation, regulation and licence provisions invoked by Total
constitute a set of promises and commitments towards Total. In construing Total’s FET claim, the
tribunal clearly rebutted Total’s claim that there existed a specific commitment or promise upon

Total S.A v. Argentine Republic, ICSID Case No. ARB/04/1 Decision on Liability 27 December 2010 Para 190.
165
Total S.A v. Argentine Republic, ICSID Case No. ARB/04/1 Decision on Liability 27 December 2010 Para 196. Formatted: Font: Italic
166
Total S.A v. Argentine Republic, ICSID Case No. ARB/04/1 Decision on Liability 27 December 2010 Para 197. Formatted: Font: Italic
114
which it relied on the basis that Total did not enter into a contractual relationship with Argentina’s
authorities in 2000-2001 when it acquired an indirect share in TGN. Total claimed that Argentina’s
Gas Regulatory Framework provided assurances that TGN’s economic equilibrium would be
maintained throughout a 35 to 45 years term. Total further posited that additional commitments
in the form of stabilization clauses in TGN’s licence supported this assurance. Total claimed that
Argentina breached its legitimate expectation with respect to stability of the Gas Framework.
According to the tribunal, said promises and commitments were provided in the Gas Decree and
TGN’s Licence, which were established before Total acquired its interest in TGN. Total not being
a participant of the privatization process in 1991-1992 but having only acquired an indirect interest
in TGN in 2001, could not be held to be a recipient of Argentina’s specific commitments or
undertaking. Moreover, the tribunal opined that the promises and commitments Total purportedly
relied on were instruments of general application. Consequently, the tribunal held that no
assurance about stability was given to Total.167
This case being one of the several arbitrations against Argentina at the instance of foreign investors
operating in virtually all the economic sectors of Argentina over measures taken to deal with the
Argentine’s economic crisis in 2000 - 2002, the tribunal was opportune to review previous awards
dealing with the same matter. While noting that many of the previous awards adopted a different
approach, the tribunal stated that different factual situations warrant different legal conclusions as
to the presence or lack of specific commitment by Argentina and as to the issue of legitimate
expectation.168 The tribunal rationalized that Enron, BG, and National Grid tribunals found that
Emergency Law had breached FET standard for repudiating specific commitments of Argentina
towards foreign investors which were made to them via the Bidding Rules and related Information
Memoranda that regulated participation in the privatization of the various public utilities
concerned and upon which they had relied on in making their investments. The Total tribunal
distinguished these cases from this instant case implying that the finding that Specific Commitment
was made to Enron, BG and National Grid was because they were original participants in the
privatization process. The tribunal thereafter went on to mention the LG&E, CMS and Sempra
cases which involved investors with similar status as Total, not being original participants in the
167
Total v. Argentina, Decision on Liability Para 147 – 149. Formatted: Font: Italic
168
Total v. Argentina, Decision on Liability Para 178. Formatted: Font: Italic
115
privatization process of the public utilities sectors. The tribunals in these cases held that Argentina
breached the fair and equitable treatment standard because of the pesification of tariffs which
should have remained unaffected by the general pesification adopted by Argentina through the
Emergency Law. Total tribunal continued to justify its different conclusion as being firmly rooted
in international law.169
On this issue, Arbitrator Henri Alvarez disagreed with the majority and wrote a Dissenting Opinion
thereon. Arbitrator Alvarez argued and rightly so, that whilst Total did not participate in the
original privatization process and may not be able to rely on the license as a contractual or quasi-
contractual promise made to it, or lay claim to any legitimate expectation deriving from same,
however the existence of the detailed license granted to TGN and other relevant documentation
should have been considered as part of the relevant circumstances in determining Total's legitimate
expectations at the time of its investment.170 Arbitrator Alvarez further contended that as evidence
clearly established that Total relied on Gas legislative and regulatory framework in making its
decision to expand its investments in Argentina, this reliance created a legitimate expectation on
Total's part that Argentina would not totally and unilaterally dismantle the system. 171
Unfortunately, Arbitrator Alvarez’s opinion is a minority dissent one and can only serve a
reference value as opposed to that of the majority which forms the binding award. In agreement
with Arbitrator Alvazer, it can further be argued that since the commitment and assurance-rife
legal and regulatory framework existed when Total made its investment, Total is as good as having
participated in the privatization process for the purpose of harnessing the benefits of commitments
and promises to investors. Particularly as it is trite that legitimate expectation is created at the time
of investment and Total would have duly appraised the existing legal and regulatory framework
before investing in the gas transportation sector. Overall, it is therefore reasonable to conclude
that Arbitrator Alvazer and other tribunals which dealt with similar cases have a more logical and
convincing stance as compared with Total’s majority. At this rate, one can only guess but can’t
be certain of Total’s majority decision assuming Total participated in the initial privatization
169
Total S.A v. Argentine Republic, ICSID Case No. ARB/04/1 Decision on Liability 27 December 2010 Para 178.
170
Total S.A. v. Argentine Republic ICSID Case No. ARB/04/1 Individual Opinion of Henri Alvarez 21 December
2010 Para 23.
171
Total S.A. v. Argentine Republic ICSID Case No. ARB/04/1 Individual Opinion of Henri Alvarez 21 December
2010 Para 27.
116
process. With regards to the Tribunal’s ruling on expropriation, it is clear that the Tribunal’s
decision turned on establishing ‘dispossession’ rather than focusing on the breach of specific
commitment argument. Apart from the Tribunal, even Total was more assertive in its arguments
hinged on substantial deprivation as opposed to those based on breach of Stability Guarantee.
Could this perhaps, be a function of Total’s lack of conviction that seeking recourse from the
Specific Commitment angle will deliver the desired outcome?
The Sempra v. Argentina case has similar factual basis as the Total S.A. v. Argentina being another
cases emerging from Argentina enactment of Emergency Law and related measures. Contending
that its investments were directly and indirectly expropriated in violation of Article IV of the
Argentina – USA BIT,172 due to Argentina’s diverse measures to deal with its economic crisis.
Sempra claimed to have suffered substantial deprivation on a permanent basis without payment of
prompt, adequate and effective compensation. With respect to its claims linked to Stability
Guarantee, Sempra asserted that Argentina measures which resulted in the abrogation and
repudiation of stabilization rights granted in regulatory framework and licence173 were tantamount
to expropriation.174 Claiming that all the guarantees and assurances were determinative of decision
to invest, Sempra argued that Argentina measures caused violation of specific commitments or
stability guarantees of the licence.
Argentina refuted Sempra’s claims on the basis that the claims did not meet the requirements set
by several tests such as (i) no transfer of property rights to the benefit of the host State occurred;
(ii) the measures were temporary in nature; (iii) there was no substantial deprivation as losses were
172
Article IV on Expropriation by reference incorporates national treatment, most favoured nation, fair and equitable
treatment, arbitrary and discrimination, full protection and security and umbrella clause treatment standards by
stipulating that investments can be expropriated in accordance with due process of law and the general principles of
treatment provided for in Article II. Article II 2 (c) states that ‘Each Party shall observe any obligation it may have
entered into with regard to investments.’
173
According to Sempra tribunal clause 9.8 of the Licence prohibits freezing, administration or control of prices
Sempra also referred to Clause 18.2 which stipulates that the basic rule of the licence in whole or part shall not be
amended without the written consent of Sempra. Sempra Energy International v. Argentine Republic, ICSID Case
No. ARB/02/16 Final Award 28 September 2007 Para 170
174
Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16, Final Award 28 September 2007 Formatted: Font: Italic
2007, Para 274.
117
not significant etc.175 Furthermore, Argentina asserted the measures were adopted under the state’s
police power and were proportional to the requirement of public power.176
In its decision, the tribunal did not single out the claim hinged on repudiation of stability
commitments leading to expropriation but rather focused on the various tests developed to
distinguish between legitimate regulatory actions and expropriation. The tribunal deemed intention
to expropriate as relevant whilst supporting Argentina’s reliance on the authority of Pope &
Talbot’s list of measures deemed tantamount to expropriation. 177 To the tribunal, finding of
indirect expropriation would require more than adverse effects as substantial deprivation of rights
must be established through diverse conditions and scenarios.178 Tribunal agreed with Argentina
and opined that direct expropriation can only occur if at least some components of the property
rights has been transferred to a different beneficiary, particularly the host state by way of
redistribution. The tribunal was not convinced that the measures had interfered with the Sempra’s
contractual rights and has thus resulted in expropriation. The tribunal noted that while the breach
of stability guarantee under the contract can give rise to compensation, they cannot do so in
connection with or in relation with direct expropriation, as same is to be protected against and
compensated under a separate treaty guarantee and not expropriation.179 The tribunal concluded
that Argentina did not violate the expropriation provision of the Argentina – US BIT as Sempra
175
Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16 Final Award 28 September 2007
Para 276.
176
The Police Power doctrine stipulates that host States’ measures which are within its police powers, although
resulting in investors’ loss of profit do not amount to expropriation and will therefore not give rise to an obligation to
pay compensation. Catherine Titi describes a host State’s police power as including the ensemble of its sovereign
powers relating to public policy, public order maintenance, public health and environment protection, taxation powers.
It is an exercise of sovereign right to regulate which has long been established under international law and has been
said to form part of customary international law. Both the Saluka Investment and Philip Morris v. Uruguay tribunals
alluded to the fact that police power doctrine is considered an accepted principle of customary international law. In a
nutshell, host States’ reasonable, non-discriminatory and bona fide regulation for the general welfare and public
purpose will not constitute an expropriation and thus, non-compensable even if it causes economic damage or loss to
those subject to. Catharine Titi, ‘Police Powers Doctrine and International Investment Law’ in Andrea Gattini, Attila
Tanzi and Filippo Fontanelli (eds), General Principles of Law and International Investment Arbitration (Brill 2018 –
Unpublished) 5. 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, 08 July 2016, Paras 294. Saluka Investments BV (The Netherlands)
v. The Czech Republic, UNCITRAL Partial Award 17 March 2006 Paras 255, 260 and 262.
177
Pope & Talbot Inc. v. Government of Canada, UNCITRAL, Interim Award, 26 June 2000 Para 100. See Pages 32 Formatted: Font: Italic
and 33 and footnote 127 above.
178
Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16 Final Award 28 September 2007 Formatted: Font: Italic
Para 285.
179
Para 281.
118
retained control of the business and the value of the investment was not virtually annihilated.180
This in essence lends credence to the view that a breach of stability guarantee is better protected
by other treaty standards than expropriation provisions. It is to be recalled that the tribunal while
determining Sempra’s Fair and Equitable Treatment claim opined that FET serves the purpose of
justice and can of itself redress damage that is unlawful when there is no clear justification for
making a finding of expropriation, as in the instant case. The tribunal found that the both the FET
and Umbrella Clause have been breached by reason of Argentina’s measure which substantially
changed the legal and business framework under which the investment was decided and
implemented, particularly the repudiation of Specific Obligations undertaken not to freeze the
tariffs or subject them to price controls, to compensate for any resulting differences if such actions
were in fact taken, and not to amend the License without the licensee’s consent.181
Still on arbitral tribunal cases that ruled on specific commitments as a condition for lawful
expropriation, the next case to examine is the case of Methanex v. USA, a matter which though
does not involve a breach of stabilization clause claim but still relevant for deciphering arbitral
responses on the issue of specific commitment and violation of expropriation provisions of
investment treaties. By way of facts summary, a NAFTA arbitration was initiated by Methanex
Corporation, a Canadian marketer and distributor of methanol a by-product of MTBE which is
used to produce gasoline. Due to environmental and public health concerns, the state of California
banned the use of MTBE in gasoline. Claiming damages of $970 Million, Methanex argued
amongst other claims, that the California regulations banning MTBE expropriated parts of its
investments in the United States in contravention of Article 1110 NAFTA on expropriation.
Methanex further contended that California’s measure was tantamount to expropriation as
substantial portion of its share of the oxygenate market was taken and handled over to domestic
ethanol industry. This to Methanex, amounted to significant deprivation, more so the measure
didn’t serve a public purpose and was not in accordance with due process of the law.
180
Para 285-6.
181
Paras 304, 313, 314
119
According to the tribunal, a regulation enacted in accordance with due process and for public
purpose will only be considered expropriatory and compensable if specific commitments had been
given to the foreign investor that the host States will refrain from enacting said regulation. In this
regard, the tribunal stated that:
‘…as a matter of general international law, a non-discriminatory regulation for a public purpose,
which is enacted in accordance with due process and, which affects, inter alios, a foreign investor
or investment is not deemed expropriatory and compensable unless specific commitments had been
given by the regulating government to the then putative foreign investor contemplating investment
that the government would refrain from such regulation.’ 182
To buttress its point, the tribunal quoted Revere Copper and Waste Management dicta which in
essence enunciated the legitimate expectation doctrine as applicable and relevant to construing
expropriation claims. Both Revere Copper and Waste Management dicta, implied that a measure
or treatment in breach of representation or in conflict with undertakings and assurances given in
good faith by host states upon which investors reasonably relied or which served as inducement to
invest in the host States were relevant and applicable to determining an expropriation claim.183
The tribunal concluded that no such representation was made to Methanex and it did not enter into
the US market because of any special representations made to it. In addition, the tribunal held that
the California ban was made for a public purpose, was non-discriminatory and was accomplished
with due process. Moreover, Methanex could not establish that the California ban manifested any
of the features associated with expropriation. It was therefore deemed a lawful regulation and not
an expropriation.184
In a nutshell, it can be inferred that one key reason the tribunal did not find that expropriation had
occurred was due to lack of specific commitment such as Stability Guarantee to the investor.
Methanex tribunal’s approach summarizes the legitimate expectation doctrine which plays a
cardinal role in the interpretation of fair and equitable treatment. As the Methanex case depicts,

Methanex Corporation v. USA Award 03 August 2005, 44 ILM (2005) 1345, Part IV, Chapter D, Para 7.
183
Methanex Corp v. USA Part IV, Chapter D, Para 8. Formatted: Font: Italic
184
Methanex Corp v. USA Part IV, Chapter D, Paras 15 – 18 Formatted: Font: Italic
120
legitimate expectation doctrine is relevant to the construction or interpretation of indirect
expropriation. The question remains how relevant? The ASEAN expropriation provision
reproduced above, can be read to support the viewpoint that legitimate and reasonable expectations
created by host States’ explicit undertakings can incur indirect expropriation liability for host
States. Explicit contractual stability assurances granted to Revere Copper by Jamaican
government formed the fulcrum of the Revere Copper’s tribunal’s holding that:
‘We regard these principles as particularly applicable where the question is, as here, whether
actions taken by a government contrary to and damaging to the economic interests of aliens are in
conflict with undertakings and assurances given in good faith to such aliens as an inducement to
their making the investments affected by the action.’185
This notion that the legitimate expectation of the investor is a factor to be considered in
interpretation of expropriation cases, is reflected in the EnCana v. Ecuador tribunal’s finding that
in the absence of a specific commitment from the host State, the foreign investor had neither the
right nor any legitimate expectation that the tax regime would not change, during the period of the
investment. It can be argued that the tribunal’s caveat that it is only in extreme cases that that a
tax which is general in its incidence could be judged as equivalent in its effect to an expropriation
of the enterprise which is taxed’ detracts from the worth earlier placed on specific commitment.186
Needless to say, that the Encana Tribunal’s style of introducing an exception to the ‘Specific
Requirement’ rule is norm due to the Tribunal’s ultimate recourse to other distinguishing factors
eg. ‘effect of host state’s measure’ as the Oxus Gold’s holding clearly depicts.
Another case in which the issue of Specific Commitment was raised was the case of Guaracachi
and Rurelec v. Bolivia. In this case, an American company and a UK company instituted an
arbitration against Bolivia under the US – Bolivia BIT and UK – Bolivia BIT respectively,
claiming economic compensation for modification to the regulatory framework governing
electricity sector, failure of Bolivian courts to deliver justice to them and the ultimate
185
Revere Copper v. OPIC, Award 24 August 1978 at 271. Formatted: Font: Italic
186
EnCana Corporation v. Republic of Ecuador, LCIA Case No. UN3481, UNCITRAL, Award, 03 February 2006, Formatted: Font: Italic
para 173.
121
nationalization of their investments. In furtherance of their FET claim, the investor-claimants
averred that they invested in Bolivia relying on a series of fundamental principles enshrined in the
regulatory framework governing electricity spot prices at that time. They claimed that the
modification of these fundamental principles, undermined the stability and foreseeability of the
legal framework, and thus frustrated their legitimate expectations.187 Conceding that the existence
of a stabilization commitment is not a necessary precondition for finding a breach of FET standard,
the Claimants nonetheless, alleged that there was clear indication of the commitment by Bolivia
not to alter the spot price regime without first consulting stakeholders and ensuring sustainable
income `levels. To refute the investor-claimants’ claims, Bolivia asserted that ‘a commitment may
be specific in nature if its very purpose was to offer the investor an actual Stability Guarantee.’188
Bolivia further contended that ‘in the absence of a prior commitment by the State, the investor
cannot hold a legitimate expectation that the State will not exercise its power to modify the legal
framework applicable to the investment’. As no explicit legal commitment against modifications
as argued by the investor-claimants, was made, Bolivia stressed that the FET standard had not been
breached. Whilst the Stability Guarantee related arguments mainly pertained to the investor-
claimants’ FET claims, the tribunal when determining the creeping expropriation claim reiterated
the same principle as reflected in the statement that:
‘However, the Dignity Tariff agreement cannot be construed as a safety net against future changes.
Article 5 is a best efforts clause (“agotar esfuerzos”) and not an abdication of Bolivia’s right to
modify the pricing system. Nor did it expand from a legal point of view the investment protection
already in existence. In fact, “ensuring that [electricity sector companies’] income allows them to
ensure the sustainability and reliability of supply” (C119, Article 5) means what it says and nothing
more. No explicit legal commitment against modifications was made, except to the extent of
endeavouring to ensure that such modifications would not affect the supply of electricity.’189
The Tribunal expressed it doubts that the investor-claimants neither relied on the previous
regulatory environment nor did the regulatory changes form part of a scheme leading up to the
187
Guaracachi America Inc. & Rurelec Plc v. The Plurinational State of Bolivia, PCA Case No. 2011-17, Award 31
January 2014 Para 302.
188
Guaracachi v. Bolivia Award 31 January 2014 Para 306.
189
Guaracachi v. Bolivia Award 31 January 2014 Para 434
122
nationalisation of investor-claimants’ investment in Bolivia. In connection with the claim for
unlawful nationalization due to lack of compensation, the tribunal commenced its analysis by first
reiterating that the right to expropriate is a sovereign right recognised by international law, subject
to certain conditions including payment at the time of expropriation of a ‘just and effective
compensation’.190 To extricate itself from the obligation to pay just and effective compensation,
Bolivia had asserted that the value of the investor-claimant’s assets was less than zero at the time
of expropriation thereby dispensing with the obligation to pay just and effective compensation.
The tribunal found that the investor-claimants’ assets had a positive value at the time of
nationalization, therefore just and effective compensation was due and should have been paid.
Given that compensation was held to be due, the nationalisation was deemed unlawful with respect
to the requirement of compensation payment.191 In the main, the Tribunal did not find that the
nationalization was unlawful on account of noncompliance with specific commitment as argued
by the investor-claimant but because compensation was not paid. Considering that the US – Bolivia
BIT Expropriation provisions incorporates by reference the fair and equitable treatment and full
protection and security standards, it can be assumed that the tribunal would not have hesitated to
find violation of expropriation provisions solely on the basis of a breach of an explicit legal
commitment. This of course presupposes that the Tribunal would have in the first place found that
there was indeed a breached explicit legal commitment. As conceivable as this assumption may
seem, given the textual interpretation of the treaty and the Tribunal’s holdings implying that
legitimate expectation is determinative of expropriation, the assumption is still untested and
indefensible. Why, because, the tribunal in this case is not so different from the Total and Sempra
Tribunal which looked to other tests to concretise their expropriation finding. There is just not
enough conviction amongst tribunals that non-observance of the ‘Specific Commitment’
requirement is as good as not complying with the compensation payment or public purpose
conditions for lawful expropriation.
The Link Trading Tribunal however appears to be on a different plane as the Tribunal
unequivocally asserted that that if a tax measure violates a specific obligation that the host State
had previously undertaken in favour of a particular person or class of persons with regards to
190
Guaracachi v. Bolivia Award 31 January 2014 Para 436
191
Guaracachi v. Bolivia Award 31 January 2014 Para 442 – 444
123
investment, then such a tax measure has become expropriatory and unlawful.192 This was the
tribunal’s pronouncement regarding the investor-claimant’s contention that the elimination of
exemption and ten years tax stability originally granted to its customers under Moldovan Law was
expropriatory. The investor-claimant’s expropriation claim was eventually dismissed as the
Tribunal held that Moldova did not assume any specific obligation towards the investor-claimants
to maintain applicable tax rate. 193 Tribunal’s affirmative pronouncement suggests that the
Tribunal would have held differently had there been a specific commitment.
On this issue, other tribunal awards have also contributed to the discourse in one way or the other.
The ConocoPhillips v. Venezuela is in particular apt as the Expropriation provisions detailed in
Article 6 of the Venezuela – Netherlands BIT includes as part of lawful expropriation conditions,
a requirement that ‘the measures are not discriminatory or contrary to any undertaking which the
Contracting Party taking such measures may have given.’194 This particular clause was subject
to interpretation in the arbitration between ConocoPhillips and Venezuela over nationalization of
the ConocoPhillips’ investments in Venezuela’s upstream oil and gas sector. In determining
ConocoPhillips expropriation claims, the tribunal had to rule on whether Venezuela’s measure
expropriating or nationalizing ConocoPhillips’ investments was unlawful and if it constituted a
breach of Article 6(b) because it was contrary to an undertaking which Venezuela gave. In this
regard, despite the absence of stabilization clause, the investor-claimant argued that international
law protected the legitimate expectation relied upon by the Investor.195 Interpreting ‘undertaking’
in its ordinary sense to connote ‘promise’, the tribunal found no undertaking was breached by
Venezuela’s taking of ConocoPhillips’ assets.196 Notably, ConocoPhillips’ claim in this respect
failed due to ‘passing and unsupported reference to commitment’ without any concrete or genuine
192
The Tribunal based its opinion on the interpretation of the treaty expropriation provision which is linked with
Article II (3) relating to Fair and Equitable Treatment, Full Protection and Security, Umbrella Clause. The tribunal
particularly reference the Umbrella Clause provision to buttress its point -‘Indeed, expropriation under Article III of
the Treaty is prohibited when it violates the principles of treatment set out in Article II (3) of the Treaty, including
Article II (3 (c) which requires a State Party to "Observe any obligation it may have entered into with regard to
investments."’ Link Trading v. Moldova Final Award 18 April 2002 Para 64 and 73.
193
Link Trading v. Moldova Final Award 18 April 2002 Para 86.
194
and the Republic of Venezuela, Signed 22 October 1991, Entered into Force 01 November 1993, Terminated 01
November 2008.
195
ConocoPhillips v. Venezuela Decision on Jurisdiction and the Merits, 03 September 2013 para 347-8
196
ConocoPhillips v. Venezuela Decision on Jurisdiction and the Merits, 03 September 2013 para 351
124
specific undertaking like the type contemplated by Article 6 (b) of the BIT. To the Tribunal, this
claim may at best, fall within the protection scope of the fair and equitable treatment under Article
3 of the BIT.197 The tribunal ultimately held that Venezuela breached the Expropriation provision
of the treaty for failing ‘to negotiate in good faith for compensation for its taking of the
ConocoPhillips assets in the three projects on the basis of market value as required by Article 6(c)
of the BIT.’198 The tribunal also concluded that the date of valuation of the ConocoPhillips’ assets
is the date of the Award, notwithstanding Venezuela’s reliance on the authorities of LIAMCO and
Santa Elena to buttress its arguments that mere failure to pay compensation does not change the
valuation date.199
Following it issuance of the Decision on Jurisdiction and the Merits (‘the Decision’) on 03
September 2013, the Tribunal was required to clarify the purport of its finding in Paragraph 404
(d) of the Decision which held that Venezuela breached its obligation to negotiate in good faith for
compensation for its taking of the ConocoPhillips assets on the basis of market value as required
by Article 6(c) of the BIT.200 In so doing, the Tribunal made certain categorical statements which
lends credence to the view that the requirement that host states’ measures must not be contrary to
prior undertaking to the investor, is equal in status and comparable to the condition of payment of
just compensation for lawful expropriation. The Tribunal in its Interim Decision issued on 17
January 2017, categorically conveyed this opinion in below paragraphs 138, 145 and 147:
197
ConocoPhillips v. Venezuela Decision on Jurisdiction and the Merits, 03 September 2013 para 350. As the
Tribunal had previously ruled that claims in respect of tax measures do not fall within the scope of FET standard,
ConocoPhillips claim of existence of a repudiated specific undertaking could not be entertained under the FET
standard.
198
ConocoPhillips v. Venezuela Decision on Jurisdiction and the Merits, 03 September 2013 para 404 (d) and (e).
199
ConocoPhillips v. Venezuela Decision on Jurisdiction and the Merits, 03 September 2013 para 340. Venezuela
cited LIAMCO ruling which suggest that in a lawful expropriate where failure to just compensation for expropriated
assets is the only outstanding condition, the compensation should be calculated based on value of asset at the time of
expropriation. Libyan American Oil Company (LIAMCO) v. the Government of the Libyan Arab Republic, Award
dated April 12, 19n, 20 International Legal Materials 1, pp. 34-37, 156-160 (1981). Compañia del Desarrollo de Santa
Elena S.A. v. Republic of Costa Rica ICSID Case No. ARB/96/1 Award 17 February 2000 35, 38 77 and 95.
200
Venezuela challenged Tribunal’s Paragraph 404(d) Finding, on the grounds that same was based on ConocoPhillips
misrepresentation of facts and certain factual, legal and logical error if corrected will changed the tribunal’s conclusion
in Contending that it would adduce further evidence to demonstrate that it negotiated in good faith, Venezuela sought
to invoke the tribunal’s powers to review it decision to avoid what it termed ‘obvious miscarriage of justice’. It is to
be noted that this case is still pending as all other questions, including those concerning the costs and expenses of the
Tribunal and the costs of the parties’ determination were reserved for future determination. ConocoPhillips Petrozuata
B.V. Conocophillips Hamaca B.V. Conocophillips Gulf of Paria B.V. and Bolivarian Republic of Venezuela ICSID
Case No. ARB/07/30 Interim Decision17 January 2017 Para 36 – 37.
125
138. ‘Its letter (c) constitutes one of the “conditions” which must be complied with in order that
the measure constituting or equivalent to an expropriation or nationalization does not constitute a
breach of the obligation to abstain from taking such measure. The question whether the provision
of letter (c) has been complied with is crucial in the instant case, because it is settled that the
Bolivarian Republic of Venezuela had complied with the two other requirements, prescribing that
the measures taken must have been taken in the public interest and in compliance with due process
of law (a) and that they were not discriminatory or contrary to any undertaking binding upon the
Contracting Parties (b)’
145. ‘… If and to the extent that the requirements of Article 6(c) have not been complied with,
one of the three cumulative conditions set out in Article 6 has not been fulfilled, and the effect is
that Article 6 has been breached.’
147. ‘The Tribunal stated that the requirement of compensation was one of the necessary
conditions for an expropriation to be “lawful” (reference omitted). Using the same logic, the finding that
one of these conditions has not been met must be understood as having the effect of rendering the
expropriation in June 2007 unlawful.’
An analysis of these categorical statements of the Tribunal, suggest one possible and plausible
interpretation – If host state’s measure is contrary to any undertaking which the host State gave an
investor-claimant, notwithstanding that said measure is for public purpose, non-discriminatory,
undertaken under due process of the law and made against payment of just payment, the measure
will still be deemed expropriatory. This being the strongest affirmation of the principle of ‘Specific
Commitment’ as the fifth condition for establishing lawful expropriation, by far outshines all other
arbitral decisions or opinion that touch on similar or same points. However, one should be cautious
not to make emphatic deductions based on these findings because observance or fulfilment of prior
undertaking of the host State was not in issue. One can never tell the Tribunal’s leaning if all the
other conditions had been met except the condition that host state’s measure must not be contrary
to undertakings given to the investor.
126
In a similar approach, the SAUR Tribunal while interpreting Article 5 (2), the expropriation
provision of the France – Argentina BIT, held that legitimate expropriations must cumulatively
satisfy four requirements including host State’s measure (i) being for public utility, (ii) not being
discriminatory, (iii) are not "contrary to a particular commitment” and (iv) give rise to the payment
of a "prompt and adequate” compensation. The Tribunal added that it is legitimate for the host
State, in the face of the indisputable deterioration of the public water supply and sanitation service,
to react by exercising the exceptional powers granted to it by its own legislation. However, having
not complied with the ‘specific commitment’ and compensation payment criteria, the Tribunal
found that the measures adopted by the Province could in no way be considered as a legitimate
expropriation.201 The Tribunal conclusively remarked that sovereign states may for public purpose
nationalize or expropriate an essential public utility service but once said nationalization relates to
a protected foreign investor, the state cannot override its international obligation to compensate
the foreign investor, particular where the expropriation was preceded by a clear breach of the
commitments made by the host State vis-à-vis the investor.202 Similar to above ConocoPhillips
Tribunal’s decision, the SAUR v. Argentina too affirmed that the ‘Specific Commitment’
requirement is to a significant extent recognized as a cogent condition for lawful expropriation.
Although it is not certain what specific commitment exactly Argentina failed to comply with, one
can conclude that failure to comply with a Stabilization Clause will elicit similar outcome, all
things being equal. Again, application of caution is imperative. One should however not be overly
persuaded that the Tribunal considers the ‘Specific Commitment’ requirement equal in status and
effect as the other conditions for lawful expropriation as it can be argued that if the compensation
condition had been fulfilled, the Tribunal’s decision might have been different. Notwithstanding
this argument, it is undisputable that the tribunal did at least paid heed to the investor-claimant’s
claims regarding the ‘Specific Commitment’. All other contentions are therefore speculative. On
another note, even based on the limited analysis of this case, the Tribunal award for having openly
acknowledged Argentina’s challenge in dealing with indisputable deterioration of the public water
supply and sanitation service, is open to criticism for eroding Argentina’s policy space thereby
201
SAUR International S.A. v. Argentine Republic, ICSID Case No. ARB/04/4, Decision on Jurisdiction and Liability,
6 June 2012 [French] Paras 407, 411-3. As this Award was written in French, language barrier has prevented the
holistic review of the award. Reliance has been placed on the summary provided Investor State Law Guide and web-
aided translation of the relevant paragraphs of this Award.
202
SAUR v. Argentina para 413.
127
limiting Argentina’s ability to address emergency public health and environmental concerns. The
last has certainly not been heard on this case, particularly as the discourse in international
investment law is on the course of advancing themes related to sustainable development,
environmental protection, human rights goals and initiatives of host states.
6.2 Are Breaches of Stabilization Clauses Decisive for Distinguishing between

Permissible Regulatory Measures and Indirect Expropriation?
There is hardly any investment treaty arbitration involving an expropriation claim that the host
state will not allege in its defence, that its measures were normal exercise of the its sovereign police
powers. Consequently, it is always left to the tribunals to distinguish between host states’ non-
compensable legitimate permissible regulatory measures and expropriatory actions. As earlier
explained, several tests have been developed over the years for this distinguishing task, with the
sole effect test taking the lead as the most prominent. The effect most tribunals deem sufficient to
ground a finding of expropriation is the ‘Substantial Deprivation’ effect which can be
demonstrated or evidenced by a number of variables including loss of control, loss of economic
use and enjoyment, loss of management of day to day operations of the investment, neutralization
of economic benefit of investment etc. Apart from the effect of host states’ measures to gauge if
expropriation has occurred, host states’ intent, the purpose and proportionality of the measure,
frustration of investors’ legitimate expectation and so on, have also been considered by arbitral
tribunals. In the above section, the question whether stabilization clauses or other forms of
Stability Guarantees are legal conditions for establishing lawful expropriation was explored, given
that certain treaty language more else stipulate ‘observance of specific commitment’ as the fifth
legal condition for lawful expropriation. In this section, the query is slightly modified to
investigate if the existence of a breached Stability Guarantee will lead to a finding of indirect
expropriation. In other words, will a breach of Stabilization Clause simpliciter without querying
the effect, purpose or intent of host States’ measures be determinative in finding of indirect
expropriation.
To this question if a breach of stabilization clause is decisive for a finding indirect expropriation,
the Burlington tribunal answered in the negative by affirming the sole effect doctrine when it held
128
that ‘the most important factor to distinguish … is the effect of the tax.’ The tribunal further
underscored this point by asserting that the purpose of the measure may though be an additional
factor taken into consideration but not a decisive factor as intent plays a secondary role.203 A recap
of the facts of this case will aid appreciation of the Tribunal’s position expounding the sole effect
doctrine.
Burlington, a US corporation which invested in Ecuador’s upstream oil and gas Blocks 7 and 21,
considered Ecuador’s introduction of Windfall Profit Tax expropriatory; hence the arbitration.
Burlington’s Production Sharing Contract (PSC) with Ecuador contained Stabilization Clauses
(legal stabilization clauses and tax indemnification) obliging Ecuador to absorb any future
increases in taxes by means of a correction factor. Irrespective of the stabilization clauses, when
oil prices increased tremendously, Ecuador unilaterally increased its participation stake in crude
oil allocation through enactment of Law 42 and Decree 662, taking up initially 50% and later 99%
of non-agreed and unforeseen surpluses. Burlington made the necessary windfall profit payments
under protest and requested that Ecuador absorb the additional tax obligations through the
correction factor as contractually agreed. Ecuador ignored Burlington’s requests, causing
Burlington to stop making the payment prescribed by Law 42. Consequently, Ecuador commenced
legal actions against Burlington, took over Burlington’s interest and seized Burlington’s share of
oil production. Burlington claimed that Ecuador expropriated its investment in violation of the
treaty requirement for expropriation contained in Ecuador – US BIT. Burlington deemed
Ecuador’s measures as expropriatory particularly the enactment of Law 42, seizure and auctioning
of Burlington’s crude below market price, physical takeover of Blocks 7 and 21 and termination
of the PSCs through caducidad process. 204 Burlington averred that Law 42 was a measure
tantamount to expropriation considering that Windfall Profit Tax at the rate of 50% had a
devastating impact on the investment, while at the rate of 99% had a destructive impact on the
investment. More importantly, the thrust of Burlington’s argument relating to Stability Guarantees
is that with the enactment of Law 42, Ecuador was obliged to absorb the impact of the tax increase
by virtue of PSC Stabilization Clauses. Relying on Revere Copper, Benvenuti, and Methanex
tribunal findings, Burlington argued that a tax that is contrary to a tax stabilization provision will
203
Para 401 Decision on Liability
204
Burlington v. Ecuador para 107
129
make the leap from a bona fide government regulation to an expropriatory measure. 205 To
Burlington, these stabilization clauses which required Ecuador to adjust its share of oil production
in order to absorb the effects of tax increases having an impact on the economy of the PSCs, were
inducement to long-term investment because they ensured that the value of Burlington’s share of
oil would not be eroded by future Government action.206 Burlington also contended that Ecuador’s
expropriation of its asserts was unlawful because it failed to meet the requirement of Article III (1)
of BIT requiring payment of compensation and for expropriation not to be in contravention of the
general principles of treatment stipulated in Article II (3) relating to FET, Arbitrary measure, Full
Protection and Security and observance of obligations.207
Ecuador while arguing that Law 42 was not enacted simply to capture a larger share of the revenue
generated by increased oil prices, contended that the law was passed in the wake of the unexpected
and unprecedented increase in oil price. To Ecuador, an unforeseen increase in oil price affected
the economic equilibrium of the contract, hence the need for rebalancing in favour of host State
by way of Windfall Profit Tax. Ecuador also argued that being the owner of the non-renewable
resource, it was entitled to be the main beneficiary of extra revenue resulting from high oil prices.
Still in its defence, Ecuador contended that Clause 3.1 and 22.1 of the PSC were not stabilization
clauses which expressly excluded the application of future laws and regulations but merely a
restatement of pacta sunt servada doctrine.208 Ecuador contended that Law 42 did not expropriate
Burlington's investment, stressing that the Law 42 was a legitimate and bona fide exercise of its
sovereign tax powers with the main goal of remedying the imbalance caused by the massive and
unforeseen increase in oil prices.209
As Burlington’s expropriation claims were based on a number of variables tied to diverse

measures, the tribunal analysed same on a measure by measure basis. In other not to digress from
the main question sought be answered herein, the Tribunal’s determination of whether Law 42 and
Ecuador's breach of the stabilization clauses was a measure tantamount to expropriation will
205
Burlington v. Ecuador para 353.
206
Burlington v. Ecuador para Para 355
207
208
209
Burlington Para 153 and 155
130
mainly be dealt with. The tribunal commenced its analysis by reiterating that taxation is an
essential prerogative of state sovereignty limited by the requirement that such tax measure must
neither be discriminatory nor confiscatory. A confiscatory tax being that which takes too much
from the taxpayer.210 The question what is too much, will forever be relative and remain open.
Reminiscing that both parties attached considerable importance to the effect of the tax for same to
qualify as tantamount to expropriation, the tribunal asserted that the most important factor to
distinguish permissible from confiscatory taxation is the effect of the tax. 211 The tribunal also
opined that international arbitrators have generally applied the sole effects test and focused on
substantial deprivation, citing Pope & Talbot v. Canada and Occidental v. Ecuador tribunal
decisions which postulate that expropriation requires substantial deprivation.
All through its analysis of Burlington’s expropriation claims, the tribunal strenuously emphasised
the effect test as the decisive factor to draw the line between permissible non-compensable measure
and expropriation. This is quite evident in Tribunal’s brief ruling on Burlington’s argument that
Law 42 leaped from a bona fide regulation to expropriatory measure for breaching the PSC
stabilization clauses:
‘Relying on Revere Copper, Burlington has also argued that a tax that is contrary to a tax
stabilization or similar clause amounts to expropriatory. According to Burlington, such a tax would
"make the leap from a bona fide government regulation to an expropriatory measure." It is
unquestionable that such a tax would amount to a breach of contract. However, to determine
whether it constitutes an expropriation, the question remains whether the tax causes a
substantial deprivation of the investment as a whole.’212
What this means in essence is that a tax or measure that breaches a contractual stabilization clause
will merely amount to a breach of contract but is not automatically expropriatory; for to determine
whether a tax or measure constitutes an expropriation, the tax or measure must have occasioned a
substantial deprivation of the investment as a whole. On the premise that intent, purpose and all
210
Burlington Para 391.
211
Burlington Para 395.
212
Para 403 Burlington
131
other factors play a secondary role relative to the effects, in the determination of expropriation
claim. The tribunal’s majority eventually concluded that enactment of Law 42 and all other
Ecuador’s measures save for one, did not substantially deprive Burlington of its investments and
were neither expropriatory nor tantamount to expropriation. The one exception is the Tribunal’s
finding that Ecuador’s entry and taking possession of the Blocks was unjustified and not an
exercise of its police power because its intervention did not prevent serious or significant damages,
it dispossessed Burlington of its oil fields such that Burlington could no longer exercise ‘effective
use and control over its investment’. 213 To the tribunal, the physical takeover of the blocks
constituted unlawful expropriation as no compensation was offered or paid when Ecuador took
over operations of the oil fields.214
Professor Orrego Vicuna wrote a Dissenting Opinion disagreeing with most of the Tribunal’s
findings on expropriation. He aligned with the Majority’s decision that substantial deprivation is
an appropriate standard to determine expropriation under international law but qualified that it is
not the only one. Moreover, to him, Law 42 at both 50% and 99% increase in participation amount
to substantial deprivation of the value of the investment. Reasoning that the concept of substantial
deprivation is not a mathematical exercise but a question of reasonableness, he faulted the
profitability factor introduced by the majority.215 Touching on both the Majority decision and
Orrego Vicuna’s dissenting Opinion which criticised the Majority’s Decision, Arno Gildemeister
contends that these two approaches have some disadvantages. For one, while it is extremely
difficult to establish the casual link between a tax increase and loss of profitability, Orrego
Vicuna’s proposal to apply reasonableness test portends legal uncertainty and unpredictability in
the determination of expropriation claims.216
Continuing in the same pattern, the Oxus Gold v. Uzbekistan Tribunal citing above Methanex
tribunal’s ruling, opined that general regulations, even if having negative effect on an investor’s
property, are not to be considered as expropriatory, except if the general regulation is unreasonable
213
Burlington v. Ecuador Paras 529 and 531
214
Burlington v. Ecuador Para 538. 545.
215
Burlington v. Ecuador Dissenting Opinion of Arbitrator Orrego Vicuña 12 November 2012.
216
Arno Gildemeister, ‘Case Comment: Burlington Resources Inc v. Republic of Ecuador – How Much is Too Much:
When is Taxation Tantamount to Expropriation’ (2014) Vol 29 No. 2 ICSID Review 315 – 320, 318.
132
or if it violates specific commitments given by the State to the investor. The Tribunal added that
for general regulation which is unreasonable or violates specific commitments, to qualify as
expropriatory, the effect of such a general regulation must be equivalent to the effect of a direct
expropriation.217 Oxus Tribunal further buttressed its point by agreeing with El Paso’s tribunal
which emphasised effect test in its holding that:218
‘The Tribunal considers that at least one of the essential components of the property rights must
have disappeared for an expropriation to have occurred. It emphasises that the overwhelming
majority of investment arbitration cases stand for the proposition that an expropriation usually
implies a “removal of the ability of an owner to make use of its economic rights.”[reference omitted] It
is generally accepted that the decisive element in an indirect expropriation is the “loss of control”
of a foreign investment, in the absence of any physical taking.’219
In the above reviewed cases where investor-claimants have based their expropriation claims on
existence of a violated Stability Guarantee, Tribunals have either scantily or dedicated affirmed
the general principle underscoring legitimate expectation doctrine but have all turned to other
testing parameters to determine said expropriation claims. The implication being that a breach of
Stability Guarantee is not decisive element but a secondary factor to be considered in the
determination of indirect expropriation.
To the extent that it touches on the availability of stabilization clause protection, a related matter
is the Ioannis Kardassopoulos and Ron Fuch v. Georgia arbitration. The investor-claimants in two
consolidated arbitrations, Ioannis Kardassopoulos and Ron Fuch were both co-chief executive
officers of Tramex International Inc, a Panamanian incorporated Special Purpose Vehicle, devoted
to the development of an oil pipeline for transport of oil from the Azeri oil fields on the Caspian
sea, through Georgia to the Black Sea. This project was known as the ‘Western Route’. The
investor-claimants invested in Georgia following its independence from Soviet Union in April
1991. At that time Georgia, actively sought foreign investment to develop the Western Route.
217
Oxus Gold plc v. Republic of Uzbekistan, UNCITRAL, Final Award, 17 December 2015 Para 744.
218
219
El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Award 31 October
2011 Para. 245.
133
The investors through their SPV, signed a Joint Venture Agreement (‘JVA’) with SakNavtobi, a
Georgian Government agency for a term of 25 years. JVA with SakNavtobi created GTI Limited.
Parties subsequently obtained a formal Deed of Concession to confirm rights obtained under the
JVA. Deed of Concession granted a 30 year Concession over Georgia’s pipeline. Following
establishment of Georgian International oil Corporation in November 1995, GTI’s rights were
cancelled in February 1996 by virtue of Decree 178 and transferred to GIOC, it therefore brought
to an end Tramex/GTI rights in Georgia.220 Although a Compensation Commission was set up,
compensation was promised for over eight years period but never delivered. Consequently,
Ioannis invoked both the FET and Expropriation provisions of the ECT and Georgia – Greece BIT,
while Ron Fuch invoked the FET provision of the Georgia – Israel BIT.
In the case of Ioannis Kardassopoulos’s expropriation claim, the tribunal was to determine if the
Stabilization Clause contained in the parties’ Joint Venture Agreement and Deed of Concession
constituted an agreement to limit the amount of damages recoverable in the event of an
expropriation or nationalization. In this matter, parties had by the contractual stabilization device
defined the quantum of compensation payable to the investor in the event of an expropriation or
nationalization. The parties’ contractually agreed that the award of compensation shall be equal
to the amount expended or invested with a proviso that ‘additional amounts as reimbursement of
expenses or in respect of lost profits shall be at the discretion of the tribunal. 221 It turned out that
the contractual formula without application of tribunal’s discretion, is lower that the treaty standard
of compensation. While Georgia desired to retain the contractual interpretation, the investor-
claimants’ preference was to rely on the treaty’s standard of compensation.
Recounting that the investor-claimants’ claims were based on the treaty and that it was not
constituted to determine the parties’ contractual dispute, the tribunal eventually found that
Stabilization Clauses did not cap damages nor did they establish a ceiling of compensation beyond
which the claimant could not recover in expropriation cases.222 The tribunal therefore determined
220
Ioannis Kardassopoulos and Ron Fuchs v. The Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15,
Award 03 March 2010 Para 157.
221
Ioannis Kardassopoulos and Ron Fuch v. Georgia Para 483.
222
134
the compensation due by reference to standard of compensation for expropriation applicable under
Article 13 (1) ECT.
Although the stabilization clause argument in this case is in a totally different context and seems
to have little bearing to the point being made, i.e. presence of specific commitments will trigger
finding of indirect expropriation. The point to draw out here is that Stabilization Clause remains
an effective political risk mitigating device available to foreign investors. In this case, the
stabilization clause specifically highlighted the risk of expropriation and sought to prescribe not
only the conditions for expropriation but also the formula for calculating the compensation due to
investors in the event of expropriation. It will though appear as if the tribunal jettisoned the
contractual compensation formula for the treaty provision on compensation calculation on the
basis that the arbitration was treaty-based and not constituted to adjudicate contractual dispute;
this is however superfluous as this tribunal emphasised that the contractual formula would
substantially result in the same outcome as the treaty provision. The tribunal could not fathom a
scenario where a neutral tribunal vested with the authority to award compensation under the JVA
and Deed of Concession will not exercise its discretion to award compensation for the sums
expended by the Claimants together with the loss of profits from the investment. It can be argued
that this is a roundabout way of ensuring that the investor-claimants got the most of the
compensation matrix.
On another note, this case also highlights the fact that the question of what standard of
compensation will apply to unlawful expropriation remains an open question. With the tribunal’s
liability finding due to Georgia’s failure to carry out the expropriation in accordance with due
process of law and persistent failure to pay prompt, adequate and effective compensation, as
required by the terms of Article 13(1) of the ECT, Georgia’s measures had transcending the realm
of lawful expropriation to unlawful expropriation. 223 It therefore became imperative for the
tribunal to determine the appropriate standard of compensation for an unlawful expropriation; i.e.
making a choice between customary international law standard as expressed in Chorzow Factory
Award and applicable treaty standard for lawful expropriation. Thus, regardless of what grounds
the claim of indirect expropriation, whether it’s a breach of stability guarantee or any other
223
Ioannis Kardassopoulos and Ron Fuch v. Georgia Para 408
135
governmental measure, the question as to what compensation standard to apply will indisputably
be subject to intense debate. The usual pattern is as evinced in this case where the investor-
claimant’s argued for entitlement to full reparation in accordance with the Chorzow Factory
principle i.e. compensation that wipes out all of the consequences of the illegal act or acts with
damages calculated as the investment’s Fair Market Value as of the date of the arbitral Award; 224
whilst host States’ preference is to compensate at Fair Market Value of the investment as of the
date of expropriation and in some cases the date immediately before the expropriation became
known.
7. CONCLUDING REMARKS
At the onset, this chapter set out to review investor-state arbitral jurisprudence on Stability
Guarantees in the context of expropriation arguments and to answer key research questions if a
breach of Stability Guarantees will amount to violation of expropriation provisions of investment
treaties or if conformity with stability commitments is a key requirement for establishing lawful
expropriation the same way as non-discrimination and public purpose are. Arbitral tribunals have
consistently maintained that breach of Stability Guarantee coupled with other key and established
elements of expropriation is indicative of unlawful direct and indirect expropriation.225 However,
notwithstanding that there are treaty expropriation provisions explicitly incorporating a ‘Specific
Commitment’ requirement, there is yet no arbitral tribunal that has definitively ruled that a breach
of Stability Guarantee without other expropriation features or conditions necessary for establishing
unlawful expropriation or measures tantamount to expropriation amount to unlawful
expropriation. Meanwhile, going by the textual interpretation in accordance with Articles 31 of
the Vienna Convention on the Law of Treaties (VCLT), these treaties having a ‘Specific
Commitment’ requirement, should ordinarily convincingly imply that host States’ measures are
unlawful expropriation for having not complied with any of the prescribed conditions for
establishing lawful expropriation including non-observance of a specific commitment undertaken
224
225
In the case of direct expropriation, the ‘other elements’ connote the other key requirements for establishing
expropriation while for indirect expropriation ‘other elements refer to established tests developed to draw the line
between permissible and non-compensable host states’ measures and measures tantamount or equivalent to
expropriation.
136
with respect to the investor-claimants’ investments. 226 It should not matter if all the other
conditions are met, once there is non-compliance with a ‘Specific Commitment’ requirement,
expropriation provision of the relevant BIT should be considered breached. The closest assertions
of this principle are the Link Trading v. Moldova and ConocoPhillips v. Venezuela tribunals’
findings which ultimately did not quite deliver a verdict that expropriation had occurred due to
lack of specific commitment. The SAUR v. Argentina equally strongly affirmed the principle that
a pivotal condition for lawful expropriation is conformity of host States’ measures with prior
undertaking to the investors. Unlike in Link Trading v. Moldova and ConocoPhillips v. Venezuela
cases, the Tribunal found that there was a specific commitment which Venezuela had failed to
comply with in addition to its failure to pay compensation and consequently found Argentina to
have unlawfully expropriated SAUR’s investment. One can however not be too sure what these
Tribunal’s postures will be if there was indeed a firm Stabilization Clause or if failure to abide by
prior specific commitment was the only condition for lawful expropriation that was not met.
Earlier referenced Methanex v. USA tribunal’s finding can also be deemed as an affirmation of
the ‘Specific Commitment’ requirement being a key requirement for establishing lawful
expropriation. This Methanex statement which has been quoted by some tribunals, referenced the
‘Specific Commitment’ condition only by way of an obiter and as an indirect way of expounding
the determinants of indirect expropriation.227 Notably, NAFTA Article 1110 on Expropriation,
which was the relevant investment treaty provision does not include a ‘Specific Commitment’
requirement. The tribunal therefore relied on customary international law case of Revere Copper
to buttress its point on expectation of investor-claimants in relation to establishment of
expropriation. In what way the pendulum would have swung had there been a Specific
226
This type of scenario suggests that there was an expropriation, nationalization or some form of seizure of investor-
claimant’s investments, only that the host State did not cumulatively comply with all the stated conditions.
227
The following tribunal decisions have referenced Methanex Tribunal’s statement (Final Award Part IV, Chapter
D, Paragraphs 7-10) in their analysis mostly pertaining to limits to host states’ police power to regulate vis-à-vis
investor-claimants’ expropriation claims based on allegation of discrimination and/or breach of specific commitments:
Copper Mesa Mining Corporation v. Republic of Ecuador, PCA Case No. 2012-2, Award (Redacted), 15 March 2016
para 6.60; Philip Morris Brand Sàrl (Switzerland), Philip Morris Products S.A. (Switzerland) and Abal Hermanos S.A.
(Uruguay) v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award, 8 July 2016 Paras 295 and 298; Oxus
Gold plc v. Republic of Uzbekistan, UNCITRAL, Final Award, 17 December 2015 Para 744; TECO Guatemala
Holdings, LLC v. Republic of Guatemala, ICSID Case No. ARB/10/23, Award, 19 December 2013 Para 491; Glamis
Gold, Ltd. v. The United States of America, UNCITRAL, Final Award, 8 June 2009 para 620; and El Paso Energy
International Company v. Argentine Republic, ICSID Case No. ARB/03/15, Award, 31 October 2011 para 243.
137
Commitment in the form of Stability Guarantee and an expropriation clause like the France –
Uganda BIT expropriation clause reviewed above, remains an issue to be deduced but not
confirmed.
One can deduce that a plausible explanation why observance of Specific Commitment and by
extension, Stability Guarantee, has not been established as the fifth condition for lawful
expropriation, is the way the cases are presented and the factual matrix of cases involving breach
of expropriation provisions. In order to effectively and perhaps, successfully argue that
repudiation of a specific commitment such as a Stabilization Clause can singly invalidate a lawful
expropriation, there should exist a Stabilization Clause in the first instance, preferably a freezing
variant. In addition, there must exist, an enabling treaty expropriation provision in the likes of
Article 5 (1) of the Armenia – Argentina Article BIT and a formal expropriation, taking or asset
seizure must have taken place. Furthermore, all key requirements for establishing lawful
expropriation must have been complied with except the condition that expropriation must not be
contrary to a particular undertaking or specific commitment undertaken with respect to the
investor-claimants’ investment. None of the cases reviewed, presented this formation, for instance
in both Methanex and Total the Specific Commitments arguments were made in relation to indirect
expropriation determination and not to invalidate a supposedly lawful expropriation. The closest
to this factual matrix is the SAUR v. Argentina case where the Tribunal found Argentina’s measures
expropriatory for not complying with the ‘Specific Commitment’ and compensation payment
criteria of the BIT expropriation provision. As earlier asserted, it is doubtful, if this Tribunal
finding will hold true, if the compensation criterion had been fulfilled. In fact, it is indeed doubtful
whether the factual matrix articulated above to facilitate a convincing establishment of the
‘Specific Commitment’ criterion as a condition of lawful expropriation, can emerge. This is
because with payment of compensation and fulfilment of other conditions, the chances are that
there would not be an investment arbitration. Needless to reiterate, that compensation requirement
is the real big ticket issue.
Stepping away from above postulation to undertake a cold-eyed analysis of the scenario painted
above, assuming all these requirements are fulfilled and this conjectured factual matrix does in
fact exist, are investor-state tribunals willing to take a posture that represents a diametrical
138
departure from previously established views? Answering this question necessitates a succinct
reiteration of the established view. The established position is aptly reflected in Mohsen’s
statement that ‘…a taking of contract rights and interests to be lawful, it is not necessarily required
to be in conformity with provisions of the contract, even if they included a stabilization clause.’ 228
According to Mohsen, legislative power cannot be unlimitedly fettered by virtue of a contractual
obligation. Moreover, as arbitral practice points to payment of compensation as the consequence
for breach of Stabilization Clause and not to delegalize host State’s actions, Mohsen concluded
that taking or expropriation of foreign investors’ rights or interests is not unlawful per se just for
non-conformity with contractual terms and conditions.229 The answer therefore is ‘No’ since it
can be argued that investor-state tribunals are still towing same hallowed route followed by the
arbitrators in the classical cases.
Be that as it may, a discernible trend flowing from the awards touching on investor-claimants’
claims that repudiation of a Specific Commitment of stability breached expropriation provisions
of the relevant treaties is a conclusion that ‘Specific Commitments’ did not exist mainly due to the
high level of specificity required to confirm existence of a specific commitment or assurance. 230
Furthermore, another reason for Tribunals’ apparent reluctance to literally interpret expropriation
provisions incorporating the Specific Commitment requirement as a germane condition for lawful
expropriation, equal in status and effect as the condition of compensation payment , due process
and public purpose, is because of the high threshold set for finding expropriation.231 Of the 89 and
359 cases alleging direct and indirect expropriation respectively, only in 26 did the arbitrators find
228
Mohsen Mohebi, The International Law Character of the Iran – United States Claims Tribunal (Kluwer Law
International 1999) 297.
229
Mohsen Mohebi, The International Law Character of the Iran – United States Claims Tribunal (Kluwer Law
230
This is based on tribunals’ decisions regarding host States measures which trigger legitimate expectation subject
to international investment law protection under the fair and equitable treatment standard. For instance, according to
Total v. Argentina Tribunal, the more specific the declaration to the investor is, the more credible the claim that such
a declaration has risen to the level of legitimacy and reasonableness. Total S.A. v. Argentine Republic, ICSID Case
No. ARB/04/01, Decision on Liability, 27 December 2010 Para 121-2. In Frontier Petroleum v. Czech Republic, the
tribunal held that certain statements made by host states did not exhibit the level of specificity necessary to gen erate
legitimate expectations. Frontier Petroleum Services Ltd. v. Czech Republic, UNCITRAL, Final Award, 12
November 2010 Para 468.
231
Lorenzo Cotula, ‘Regulatory Takings, Stabilization Clauses and Sustainable Development’ (OECD Investment
Policy Perspectives 2008) 5.
139
host states liable for unlawful direct and 51 for indirect expropriation.232 In fact, investors have
been less successful in their expropriation claim arguments as compared with other treaty standards
such as FET.233 The Sempra Tribunal’s disposition suggests that tribunals are more amenable to
consider investor-claimants’ breach of Stability Guarantee claims under other protection standards
such as the Fair and Equitable Treatment and Umbrella Clause.234
Another obvious reason for dearth of arbitral rulings specifically pronouncing the Specific
Commitment as a condition for lawful expropriation is that most investor-claimants that have
sought to rely on this treaty provision, did so to buttress their indirect expropriation claims as
opposed to simply delegitimising host states’ lawful expropriatory conducts that have complied
with other conditions of non-discrimination, due process, compensation payment and public
purpose. Even in instances where the claim was to declare unlawful, supposedly lawful
expropriation of host states e.g. ConocoPhillips case, investor-claimants’ claims are typically
styled as an auxiliary claim supporting other strongly canvassed expropriation claims.
With respect to determination of indirect expropriation claims, rather than focusing on conditions
for establishing lawful expropriation, Tribunals look to various tests and indices to determine if
host States’ measures are tantamount or equivalent to expropriation. One test that has evolved
over time is the concept of legitimate expectation. There is enough arbitral authorities recognizing
that Stabilization Clause generates legitimate expectation subject to protection under the fair and
equitable treatment. There aren’t as much authorities advancing the protection of investor-
claimants’ legitimate expectation under the expropriation provisions of investment treaties. This
is notwithstanding, availability of treaties (e.g. ASEAN Comprehensive Investment Agreement
and the Malaysia-Australia Free Trade) that explicitly clarified that in determining indirect
expropriation claims, Tribunals should take into account prior Specific Commitments on which
232
Statistical data obtained from UNCTAD’s Investment Policy Hub available at
http://investmentpolicyhub.unctad.org/ISDS/FilterByBreaches accessed on 01 February 2018.
233
Peter Cameron, International Energy Investment Law: The Pursuit of Stability (Oxford University Press 2010) 220.
234
In this instance the tribunal observed that because the Claimants retain the ownership of their companies and
business, their claim of interference with contractual rights will not amount to direct expropriation, although the
adverse effects of such interference can give rise to compensation under other treaty provisions. The Tribunal likened
this scenario to that of breach of stability clauses under the contract which, ‘while potentially resulting in damage, is
to be protected against and eventually compensated under a separate Treaty guarantee rather than under the heading
of expropriation.’ Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16 Final Award 28
September 2007 Para 281.
140
investor-claimants relied such as Stabilization Clause. Treaty provision is one thing, arbitral
practice is entirely another. Few cases that touch on this issue imply that host States’ measures
that frustrate investor-claimants’ legitimate expectation created by Stability Guarantee, stand a
good stead of being indicative of expropriation but ae not wholly decisive in determining indirect
expropriations. Investor-claimants such as the Burlington and Total have adopted this line of
arguments in their claims and the outcomes were similar. Similar to the extent that the tribunals
ultimately resorted to other testing or distinguishing parameters to determine the investor-
claimants’ claims of indirect expropriation. Thus, a pattern distilled from these cases which had a
Specific Commitment of Stability cum expropriation arguments, is tribunals’ incessant recourse
to the effect of host States’ measures that deprived, dispossessed or occasioned loss of control to
the investor-claimants to determine if expropriation occurred. While some tribunals may have
expressly reiterated the importance of Stabilization Clause or Specific Commitment in relation to
expropriation determination, they all allude to the fact that mere repudiation or breach of a
Stabilization Clause will not amount to expropriation as the effect of the host States’ measures is
what counts the most. A good representation of the popular arbitral thinking and prevalent trend
is Oxus Gold Tribunal’s statement that the effect of the host state measure which contradicts
specific commitment must be must be equivalent to the effect of a direct expropriation in order to
be qualified as expropriatory.235 This contention finds support in El Paso tribunal’s finding that
overwhelming majority of investment arbitration cases subscribe to the proposition that
expropriation usually implies a deprivation of investor’s use of its economic rights. 236 Johnson
and Volkov also share the same view when they asserted that:
‘Generally, tribunals have not deemed changes in the legal and regulatory frameworks interfering
with or abrogating prior government commitments to constitute expropriations of investors’
investments. Instead, expropriation claims based on changes in the applicable legal framework
that impact or interfere with specific commitments seem to have largely failed, and have done so
because the degree of impact or interference on the investment has been inadequately severe.’237
235
236
2011 Para. 245.
237
Lise Johnson & Oleksandr Volkov, ‘Investor-State Contracts, Host-State “Commitments” and The Myth of
Stability In International Law’
<https://warwick.ac.uk/fac/soc/law/research/clusters/international/devconf/participants/papers/johnson_and_volkov_
141
In a nutshell, the sole fact that a measure or a series of measures of a host State breaches a Stability
Guarantee will not ipso facto give rise to a finding that indirect expropriation has occurred as the
decisive element in an indirect expropriation has in majority of the cases been deemed the effect
of the measure. This emphasis on effect-based substantial deprivation test is endorsed by several
tribunals and has been well articulated by the Burlington tribunal, which categorically stated that
‘[W]hen assessing the evidence of an expropriation, international tribunals have generally applied
the sole effects test and focused on substantial deprivation.’238 Even the finding of expropriation
by the Revere Copper tribunal popularly known as having theorized the legitimate expectation
doctrine to establish expropriation, turned on the construction of the OPIC general terms and
conditions which defined expropriation as loss of control. Effect of the stabilization clause breach
ultimately led to the finding and not the mere frustration of Revere Copper’s legitimate expectation
of stability created by the stabilization clause. Interference with distinct investment-backed
expectations was mostly an ancillary claim and not the principal claim of investor-claimants. Does
this suggest lack of conviction on the part of claims profilers of the worth and value of Stability
Guarantees? This needs to be further investigated.
All well said and done, Stability Guarantee plays an important role in the determination of
expropriation claims in investment treaty arbitration. In the first place, host states’ measures that
are contrary to a Stability Guarantee or that breaches same will invalidate and render unlawful any
supposedly lawful direct expropriation or nationalization, where the applicable treaty includes a
‘Specific Commitment’ condition. Secondly, based on the legitimate expectation doctrine, a
breach of Stability Guarantee is a good indication that host sate’ regulatory measures have leaped
over the thin line between permissible non-compensable regulations to measures tantamount to
expropriation. In other words, breach of Stability Guarantee is a decisive element for determining
indirect expropriation claims. This, however, is not the total picture. In the first instance, while it
is established that all conditions for lawful expropriation must be cumulatively fulfilled,
observance of a ‘Specific Commitment’ condition is yet to be established as a pivotal condition
-_investor state_contracts_host_state_commitments_and_the_myth_of_stability_in_international_law.pdf> Accessed

on 08 November, 2017 Page 19.
238
Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability 14 December
2012 Para 396.
142
for lawful expropriation. The current state of case law is, it can certainly not be equated as having
the fundamental status as the conditions of compensation or public purpose for instance. With
regards to the second instance which relates to the determination of indirect expropriation claims,
another delineating criterion, the substantial deprivation test is the popularly adjudged key
elements to justify a finding of indirect expropriation and not simply a breach of Stability
Guarantee without more. At best, what Stability Guarantee does is to bolster investor-claimants’
expropriation claims grounded on other more established conditions and distinguishing
parameters.
A common denominator in all indirect expropriation claims is host States’ attempts to safeguard
their sovereign police power to regulate in the face of investor-claimants’ expropriatory claims.
Needless to state that host states’ interests and those of investor-claimants are at divergent ends of
a pole. The tension between these conflicting interests is rife and is the real issue Tribunals contend
with in adjudicating investment disputes. It is inevitable that this tension will require a weighing-
up and appropriate balancing of interests, not only to be fair to both parties but also to preclude
arbitrators’ subjectivity. Thus, between host States internationally recognized sovereign rights to
expropriate established pursuant by UN Resolution 1803 and investor-claimants’ right to stability
pursuant to international legal principle of Pacta Sunt Servada, arbitrators stand in the middle
armed with a balancing scale ready to reel out a balanced and fair outcome to both host States and
investor-claimants. The balancing scales, Arbitrators utilize must be well suited and appropriate
for the requisite balancing tasks, if not the scales stands a high chance of being unfairly and
erroneously tipped in favour of one of the parties as against the other. The question, what
balancing method will elicit the appropriate and fair balance between investor-claimants and host
states’ divergent rights, is answered in Chapter Six of this thesis. Apart from proposing
Proportionality technique for the needed balancing exercise due to its structured analysis features,
Chapter Six also examines the issue of balancing and standards of review adopted by investor-
state tribunals.
143
CHAPTER FOUR
FULL PROTECTION AND SECURITY AND FAIR AND EQUITABLE TREATMENT

STANDARDS
TABLE OF CONTENTS
1. INTRODUCTION
2. FULL PROTECTION AND SECURITY STANDARD: TO BROADEN OR NOT TO

BROADEN? - AN INTERPRETATION MAZE
2.1 Interpretation Based on Textual Language of Investment Treaties
2.2 Interpretation Based Interrelation with FET
2.3 Concluding Remarks
3. IS FET STANDARD A MECHANISM FOR PROTECTION OF STABILITY

GUARANTEES?
3.1 Stability and Predictability of Host States’ Legal and Business Environment Per se as an Element
of Fair and Equitable Treatment Standard
3.2 Legitimate Expectation of Stability and Predictability
3.2.1 Investor-Claimants’ Expectation of Stability Based on Contractual Undertakings
3.2.2 Investor-Claimants’ Expectation of Stability Based on Informal Representations/Unilateral
Undertakings
3.3 General Legislative and Regulatory Framework
144
Stability Guarantee arguments within the confines of investor-state arbitration system is a common
occurrence with investor-claimants leveraging on one, two, more or all treaty protection standards
simultaneously. The tremendous increase in the number of investor–state arbitrations filed by
investor-claimants in recent years has beamed probing lights on investor-state arbitration
jurisprudence on Stability Guarantees. With heightened awareness of the existence of investor–
state arbitration protections, more and more foreign investors have pursued their claims against
host states pertaining to violation of stability guarantees. 1 In the contemporary international
investment law landscape, recourse to investor–state arbitration mechanism in quest for stability
and predictability of investment terms and conditions have been predicated on substantive treaty
standards of Full Protection and Security, Fair and Equitable Treatment, Umbrella Clause and
Expropriat2ion. This chapter examines two of these substantive standards relevant for stability
guarantee protection and highlights key issues emanating from arbitral decisions on the subject.
Due, to their recognised inter-relationship, Full Protection and Security and Fair and Equitable
Treatment protective standards will be reviewed in this chapter whilst the next chapter will focus
on the Umbrella Clause. Examination of these protective standards is with a view to achieve the
main aim of this chapter to discern arbitral trends on Stability Guarantee protection within the
confines of investor-state arbitration setting. With Full Protection and Security Standard, followed
by Fair and Equitable Treatment Standard being the fulcrum of discussions, this Chapter provides
an overview of the contours of each of afore-mentioned standards with particular focus on salient
arguments pertaining to stability guarantees protection without dwelling on all other contemporary
issues associated with interpretation of these standards within investor-state arbitral arena.
Ensuing analysis will question, the extent to which tribunals interpreting these substantive
standards to give effect to stability commitments have struck a balance between investors’ rights
to stability and predictability and host states’ sovereign regulatory rights. As will be seen in the
following section, protection of stability guarantees is now effected through the mechanisms of
treaty substantive standards and the first to be considered is the Full Protection and Security
Standard.
1
Provide Reference Please?????
2
145
FULL PROTECTION AND SECURITY STANDARD; TO BROADEN OR NOT TO
BROADEN? AN INTERPRETATION MAZE.
International investment arbitration jurisprudence whether host States’ protection and security
obligation encompass a guarantee of regulatory and legal security in addition to the traditional
provision of physical security and protection is presently amorphous in nature. 3 Indeed, Full
Protection & Security (“FP&S”) standard protects and reinforces stability guarantees to the extent
that some tribunals have extended the scope of FP&S obligation to protection of legal and
regulatory framework affecting foreign investment. There is however no singularly defined
pattern in this regard since conflicting views have emerged from tribunals’ awards touching on
this matter. This is vividly demonstrated by the two diametrically opposing views of the different
tribunals in CME v. Czech Republic and Lauder v. Czech Republic.4 As will be gleaned in later
parts of the section, tribunals extending the protection afforded by the Full or Constant Protection
and Security Standard beyond mere physical protection to legal protection and security including
stability of legal, regulatory and investment regime of host States, have either placed enormous
value on textual formulation of the FP&S Standard to broadly construe the standard or deemed the
FP&S as coterminous with the FET standard. On the other hand, are tribunals who believe that
the more traditional interpretation of the standard accords with the ordinary meaning of the
terms.5Saluka Investments v. Czech is flaunted as the leading case that adopts the approach that
the FP&S Standard is limited to physical security since the tribunal held that FP&S standard
applies essentially when the foreign investment has been affected by civil strife and physical
violence and that FP&S is not an obligation spanning protection against any kind of impairment
of an investor’s investment.6
3
Reference to legal protection and security particularly connotes protection and security of the legal, regulatory, fiscal
and investment framework pertaining to the investor’s investment in the host State.
4
These two cases decided by two different arbitral tribunals in 2001 were based on essentially same facts and
substantially between same parties but occasioned conflicting outcomes.
5
According to the Crystallex v. Venezuela tribunal, the more traditional interpretation of the standard accords with
the ordinary meaning of the terms. See Crystallex International Corporation v. Bolivarian Republic of Venezuela,
ICSID Case No. ARB(AF)/11/2, Award 04 April 2016 (hereinafter Crystallex v. Venezuela).
6
See Saluka Investment BV (The Netherlands) v The Czech Republic, UNCITRAL/PCA, Partial Award 17 March
2006 paras 483 and 484 (hereinafter Saluka Investment).
146
Against the background, it is worthwhile reiterating that it is generally acknowledged that FP&S
Standard was historically developed in the context of physical protection and security. 7 To
Tribunals finding that FP&S standard applies exclusively or preponderantly to physical security
and protection, FP&S is not an insurance against all and every risk and not an obligation to protect
foreign investors against any possible loss of value. 8 Consistent with the findings in AAPL, 9
AMT 10 and CME, 11 the investor–claimant in BG v Argentina submitted that the standard of
protection and constant security is one of due diligence, requiring the host state to exercise
reasonable care and actively protect foreign investors’ investments. 12 The investor–claimant
submitted further that the Full Protection and Security standard is infringed if protection and
security previously granted to protect investment is withdrawn, regardless of the nature of the
withdrawal – either by physical destruction or unavailability of judicial remedies.13 The BG v
Argentina tribunal whilst being mindful that some tribunals have found that the protection and
constant security standard encompasses stability of the legal framework applicable to investment,
ultimately held that it was inappropriate to depart from the originally understood standard of
protection and constant security.14 In the light of the fact that BG had not alleged physical violence
or damage, nor had the tribunal thought that such violence or damage had in fact occurred, the
tribunal concluded that the host state had not violated the protection and constant security
standard.15 Whilst BG v Argentina tribunal and some tribunals still retain the traditional approach
to interpreting FP&S Standard, nowadays, broader interpretations have emerged suggesting that
the standard goes beyond physical protection to legal protection and security. Furthermore, the
tribunal in Renee Rose Levy de Levy v Peru implied that the standard of full protection and
security has evolved beyond physical security to more generally the rights of investors. 16 In
7
Enron v Argentina ICSID Case no ARB/01/3, Award 22 May 2007 para 286 (hereinafter Enron).
8
Ronald S. Lauder v Czech Republic, UNCITRAL Final Award, 03 September 2001 para 308 (hereinafter Lauder v.
Czech).
9
Asian Agricultural Products Ltd. v. Republic of Sri Lanka, ICSID Case No. ARB/87/3, Final Award 27 June 1990
(hereinafter AAPL v. Sri Lanka).
10
American Manufacturing & Trading, Inc. v. Republic of Zaire, ICSID Case No. ARB/93/1, Award 21 February 1997
(hereinafter AMT v. Zaire).
11
CME Czech Republic B.V. v. The Czech Republic, UNCITRAL Final Award 14 March 2003 (hereinafter CME v.
Czech).
12
BG Group v Argentina (n 7).
13
Ibid para 314.
14
Ibid para326.
15
Ibid paras 327 and 328.
16
Renée Rose Levy de Levi v. Republic of Peru, ICSID Case No. ARB/10/17, Award 26 February 2014 para 406
(hereinafter Renee Rose).
147
contrast, the Spyridon tribunal 17 postulates that the prevailing approach on the scope of Full
Protection and Security standard seems to be that articulated by the tribunal in Saluka
Investments. 18 In fact a result study suggests that more tribunals are towing the broader
interpretation route. Consequently, it is difficult to determine which of the opposing views forms
the jurisprudence constante or if indeed there is a jurisprudence constante in this regard.
In the light of these opposing contentions on the scope of FP&S Standard, one can reasonably
assert that there is no straight answer to the question whether the obligation to accord Full
protection and Security extends beyond physical security to legal protection. As succinctly put by
the GarantiKoza v. Turkmenistan tribunal, tribunals in investment treaty arbitration are divided on
this issue.19 Indeed, tribunal rulings on this issue are many sided and varied. It is more or less a
question of if the tribunals construed the scope of FP&S broadly or narrowly or relate FP&S to
FET standard. The question then become what factors or contributes to determines the tribunal’s
aptitude in this regards?
Notwithstanding the divergent views on the scope of the protection available to foreign investors
through this standard, certain essential characteristics of the standard have found acceptance with
a majority of tribunals ruling on the standard. In fact, an International Law Association study
report corroborates the fact that this understanding of FP&S standard is shared by many tribunals. 20
In particular, the below findings of the Saluka tribunal aptly distilled two key common
understandings of the FP&S Standard ie the standard imposes a duty of due diligence and not being
a strict liability obligation:
17
Spyridon v Romania ICSID Case No ARB/06/1, Award 01 December 2007 para 320.
18
Saluka Investments (n 25).
19
GarantiKoza LLP v. Turkmenistan, ICSID Case No. ARB/11/20, Award 19 December 2016 para 160 (hereinafter
GarantiKoza).
20
Duncan French and Tim Stephens, ‘ILA Study Group on Due Diligence in International Law’ (First Report, 07
March 2014) Page 7 available at file:///C:/Users/HP/Downloads/due_diligence_-_first_report_2014.pdf accessed 07
January 2017. In the report, the following cases were listed as those supporting this proposition: Lauder v. Czech (n
27), Noble Ventures Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 164, Saluka
Investments (n 25) para. 483; BiwaterGauff (Tanzania) Ltd., v. United Republic of Tanzania, ICSID Case No.
ARB/05/22, Award 24 July 2008 para. 725 (hereinafter Biwater v. Tanzania); Rumeli Telekom A.S and Telsim Mobil
TelekomunikasyonHizmetleri A.S v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award 29 July 2008 para.
668; WaguihElie George Siag& Clorinda Vecchi v. the Arab Republic of Egypt, ICSID Case No. ARB/05/15, Award,
01 June 2009 para. 447, and the joint decisions Suez, Sociedad General de Aguas de Barcelona S.A. and Vivendi
Universal S.A. v The Argentine Republic, ARB/03/19, Decision on Liability, 30 July 2010 and AWG Group Ltd v
The Argentine Republic, ARB/03/19, Decision on Liability, 30 July 2012 para. 161.
148
… the host state’s obligation which is limited to exercise of due diligence and not an imposition
of strict liability obligation upon the state. Nonetheless, the host State must show that it has taken
necessary precautions to protect investor’s investment in the host state.21
Apart from the Saluka Investment case, other leading arbitral authorities on the proposition that
obligation to provide protection and security does not create an absolute or strict liability are the
ICJ ELSI case,22 AAPL v Sri Lanka,23 TECMED v Mexico.24 Hence, K.N.Schefer’s assertion that
the notion that FP&S Standard imposes only an obligation of due diligence on host States as
opposed to strict liability has been widely accepted in recent arbitral decisions.25 On the meaning
of due diligence, one cannot but refer to the often quoted definition proffered by Professor A.V
Freemanin his lecture at the Hague Academy of International Law:
‘The “due diligence” is nothing more nor less than the reasonable measures of prevention which a
well administered government could be expected to exercise under similar circumstances’.26
Beyond making pronouncements on the scope of the FP&S obligation, the level of duty of
diligence imposed on host States has been duly examined or clarified in AAPL v Sri Lanka. The
AAPL v Sri Lanka tribunal labelled FP&S as an objective obligation, necessitating host states to
take reasonable precautionary and preventive actions in protection of foreign investor’s
investment. The tribunal postulated that it is an obligation of good faith efforts to protect foreign
investor’s investment. In addition, it is generally accepted that Full Protection and Security is not
to be construed as an insurance policy against any and every loss due to some form of civil
21
Saluka Investment (n 25) para 483. AMT v. Zaire (n 29).
22
ElettronicaSiculaSpA (ELSI) (International Court of Justice Judgment) ICJ Rep 1989, 15 (hereinafter ELSI).
23
AAPL v Sri Lanka (n 28).
24
TécnicasMedioambientalesTecmed S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award 29 May
2003 (hereinafter TECMED).
25
Krista NadakavukarenSchefer, International Investment Law: Text, Cases and Materials (Edward Elgar Publishing
2013) 321.
26
A.V Freeman, Responsibility of States for the Unlawful Acts of their Armed Forces (1956) 88 Receuil des cours
261 – Quoted by Jeswald W. Salacuse, The Law of Investment Treaties (Oxford University Press 2015). See also
AAPL (n9) para 612
149
strife.27It must be noted that whether the degree of due diligence to be exercised by host states is
to be construed subjectively or objectively has also been subject to intense debate. Equally
controversial in relation to interpretation of the FP&S standard is the issue of applicability of the
minimum standard of customary international law.
Whilst deeming FP&S standard an independent treaty standard, the tribunal in AAPL v. Sri Lanka
which was the first tribunal to rule on FP&S standard rejected Sri Lanka’s contention that the full
protection and security standard did not provide protection beyond what was stated in customary
international law. NAFTA Tribunals on the other hand, following the interpretative statement of
2001 have applied the customary international law standard in construing the FP&S standard.
Another tribunal which has adopted this narrow interpretative approach of NAFTA tribunals, is
the tribunal in Noble v. Romania which found that the full protection and security standard should
be limited to the security for aliens under customary international law when it asserted that:
“With regard to the Claimant’s argument that the Respondent breached Art. II (2)(a) of the BIT
which stipulates that the “Investment shall ... enjoy full protection and security,” the Tribunal
notes: that it seems doubtful whether that provision can be understood as being wider in scope than
the general duty to provide for protection and security of foreign nationals found in the customary
international law of aliens. The latter is not a strict standard, but one requiring due diligence to be
exercised by the State.”28
Granted that there is general acceptance that FP&S standard does not impose a strict or absolute
liability, what is the standard of liability for host states, is still an open question. According to a
study, tribunals have not typically restricted themselves to the standard of customary international
law unless the treaty by reference to customary international law so restricts or caps the obligation.
Meanwhile, the vast majority of treaties do not refer to customary international law leading
Tribunals to assume an independent treaty standard that imposes a high degree of diligence.29
27
UNCTAD, ‘UNCTAD Series on International Investment Policies for Development Investor 2005 – State Dispute
Arising from Investment Treaties: A Review’ (2005) 40. Available at http://unctad.org/en/docs/iteiit20054_en.pdf
accessed on 29 March 2017.
28
Noble Ventures Inc. v. Romania, ICSID Case No. ARB/01/11, Award 12 October 2005 para 164 (hereinafter Noble
Ventures).
29
XXXXXXXXXXX
150
Given the wide acceptance of the principle that FP&S implies a duty of due diligence and vigilance
rather than that of strict liability although there is no consensus on the applicable standard of
liability imposed on host sates, one would have expected that construction or interpretation of the
standard on the nature of protection will entail or occasion little or no controversy or divergence.
As earlier posited, this is not the case as there is also no consensus as to the extent to which FP&S
exceed the obligation to provide over and beyond physical protection and security.30The thrust of
these divergent arguments rest on whether a restrictive or expansive interpretation is ascribed to
the standard. In real terms, the main issue is whether the obligation or duty on host state
encompasses or covers legal security and protection in addition to provision of protection against
physical harm or violence to investors. Investor-claimants are typically inclined to stretch the
protection to cover legal protection and security whereas state-respondents keenly seek to delimit
same. Meanwhile, legal security and protection connotes different things for various investor-
claimants seeking to enforce same in the context of FP&S. For some, stability of the legal and
regulatory framework of the host state is covered under the FP&S obligation, whilst to others
availability of domestic legal system to seek redress of perceived wrongdoings against investors
is the legal security and protection sought.31 The Al-Bahloul v. Tajikistan tribunal created yet
another category of legal security and protection when it asserted that the FP&S standard could
arguably cover a situation where there has been demonstrated miscarriage of justice.32
Of particular relevance to the question being sought to be answered in this study, is whether FP&S
standard contemplates protection of Stability Guarantees to the extent that the abrogation of the
30
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2ndedn, Oxford University Press
2012) 321.
31
In simple terms, FP&S include an obligation to provide adequate mechanism and legal remedies for prosecuting the
state organ or private parties responsible for the injury caused to the investor. See Suez, Sociedad General de Aguas
de Barcelona, S.A and Vivendi Universal, S.A. v. Argentine Republic, ICSID Case No. ARB/03/19, Decision on
Liability 30 July 2010 para 167 (hereinafter Suez & Vivendi v. Argentina). The much quoted ICJ’s decision in the
ELSI case has been interpreted by the Frontier Petroleum v Czech tribunal to support an interpretation of Full
Protection and Security standard to extend to legal protection through domestic legal system. See Frontier Petroleum
Services Ltd. v. The Czech Republic, Final Award 12 November 2010 para 264 (hereinafter Frontier Petroleum). The
Frontier tribunal postulates a Full Protection and Security standard that provides a legal framework that offers legal
protection to investors. The tribunal in Lauder v. Czech also expressed the view that host states have a duty to keep
judicial system available whilst the TECMED tribunal stated that availability of the judicial system was an element
of the FP&S Standard. See Lauder v. Czech (n 27) and TECMED (n 43).
32
Mohammad Ammar Al-Bahloul v. The Republic of Tajikistan, SCC Case No. V (064/2008), Para 246.
151
legal, regulatory and investment regime pertaining to the investor’s investment may be construed
as a violation of treaty protection standard of FP&S. Bearing in mind that Stability Guarantee has
been described for the purpose of this Study to encompass a combination of contractual
stabilization clauses, domesticated stability agreements or national stabilization legislation and
treaty-based stability guarantees. The case of CME is the locus classicus on the proposition
supporting the extension of host States’ obligation of FP&S beyond physical protection and
security to legal protection of investment, in particular more or less guaranteeing stability. 33 The
CME tribunal held that Czech Republic was in breach of its obligation to ensure that neither by
amendments of its laws nor by actions of its administrative bodies is the agreed and approved
security and protection of foreign investor’s investment withdrawn or devalued.34 In this case, the
arbitration was initiated by CME, a Dutch corporation against Czech Republic under the
Netherlands-Czech BIT. Amongst other allegations of multiple violations of the BIT, CME
alleged that Czech Republic had violated Article 3(2) of Treaty guaranteeing in its favour Full
Protection and Security and consequently claimed damages of approximately $500 Million plus
interests. By way of facts summary, CME had 99% equity interest in CNTS its Czech subsidiary
television services company having a business relation with CET 21, a Czech national company
with no foreign capital. In 1993 Czech Media Council (Czech Media Regulatory Authority)
granted CET 21 License for television broadcasting. In accordance with the terms and conditions
of the License whilst CET 21 was the license holder, CNTS was the operator of the broadcasting
station and the exclusive provider of broadcasting services for TV Nova, the first private television
station. Incidentally, both CET 21 and CNTS were headed by Dr Zelezny. The business venture
between CET 21 and CNTS was success and profitable in its early days. However, following
immense pressure exerted by the Media Council for reorganisation of the Service Agreement
between CNTS and CET 21, in 1996, the legal ties between CNTS and CET 21 was weakened
pursuant to changes in License conditions as the Media Council changed its position with respect
to licensing conditions. CET 21 and CNTS relationship was thereafter governed by a newly
concluded Service Agreement allowing CNTS to continue to retain the exclusivity of its
operations. By 1999, the relationship between CNTS and CET 21 had degenerated leading to the
unilateral termination of the Service Agreement by Dr.VladimírZelezny, the owner of CET 21 and
33
CME v. Czech (n. 30) para 613.
34
Ibid.
152
replacement of CNTS by other broadcasting services providers. CNTS eventually went out of
business. CME alleged that the Media Council supported Dr.Zelezny in his dispute with CMES
which dispute was bent on cancellation of the exclusive broadcasting rights of CNTS.
With regards to the Full Protection and Security argument, the main issue in contention was
Czech’s omission or failure to prevent unilateral shutting out of CNTS by Dr.Zelezny and CET 21
and Media Council’s interference which purportedly aided Dr.Zelezny. CME contended that
Article 3 (2) imposes an obligation of vigilance under which the host State must take all measures
necessary to ensure the full enjoyment of protection and security of the foreign investment. CME
further claimed that CNTS’s business, and thus CME’s investment, were totally destroyed due to
actions and omissions of the Media Council. According to CME, the obligation to provide full
protection and security exist regardless of whether or not the threat to the investment arises from
Czech’s own actions or from the actions of private individuals or others.35 Czech Republic on the
other hand argued that the alleged breach must result from the actions of the Czech Republic for
it to constitute a violation of the FP&S Standard of the Treaty. Czech Republic concluded as
absurd, CME’s arguments that Czech had failed to provide full protection and security by
abdicating its obligation to maintain and enforce the contractual arrangement between CNTS and
CET 21. Crucial to current discuss, is Czech’s discountenance of CME’s contention pertaining to
the Media Council’s change of position in 1996 and the ensuing weakening of CME’s legal
standing. In this regard, Czech Republic stressed that “It cannot be argued that investors have
any right to suppose that positions taken by State authorities and provisions of State law are
forever unalterable. Nor can it be argued that every regulatory change made by a State in
accordance with its laws must be accompanied by compensatory payments to anyone whose profits
are adversely altered by the change.”36 The tribunal found that the Media Council’s actions and
inactions were targeted to remove the security and legal protection of the Claimant’s investment
in the Czech Republic. To the Tribunal, the interference by Media Council in the economic and
legal basis of CME’s investment carries the stigma of a treaty violation.37 The tribunal held that
the host State was obligated to ensure that the security and protection of the foreign investor’s
35
Ibid para 159.
36
ibid para 356.
37
Ibid Para 551.
153
investment was not withdrawn or devalued by host State’s amendment of its laws nor by actions
of its administrative bodies. Consequently, the tribunal ruled that Czech Republic was in breach
of the FP&S obligation. This CME tribunal’s award on FP&S in effect guarantees for foreign
investors a high degree of certainty and stability of legal and investment framework existing at the
time the investment was made. Going by the award, if host States are obliged to ensure that
security and protection accorded to investors investment are not withdrawn or affected by
legislative amendments and administrative actions, one may be led to conclude that the legal and
regulatory framework of the host state are to remain immutable. The question is this interpretation
supportable or tenable in the light of host states’ legislative and regulatory sovereignty? The
answer to the question lies in the unsettled and inconsistent jurisprudence on this matter. Thus,
following the prevalent trend in investment treaty system, the CME tribunal’s line of reasoning
has been endorsed by some tribunals and at the same time rejected by others. Tribunals in
Azurix,38 National Grid39 and Biwater v. Tanzania40 adhered to holding in CME v. Czech as they
have all expanded the scope of FP&S to guarantee stability, predictability and certainty of legal
and regulatory framework applicable to the investor-claimants’ investment. The determinants of
the tribunals’ adoption of the broader interpretation of FP&S Standard are mainly twofold:
emphasis on the textual composition of treaties and interplay between the amenable Fair and
Equitable Treatment standard and FP&S standard. Needless to state those tribunals like Saluka
Investment and BG v. Argentina tribunals that rejected CME’s line of reasoning adhered to the
traditional and narrower interpretation of the FP&S to simply mean physical protection and
security. In fact, some tribunals which recognised the possibility of extending FP&S obligation to
legal security and protection, have nonetheless refrained from so doing for a number of reasons.41
For instance, whilst the AES Summit Generation v. Hungary tribunal conceded that FP&S standard
may extend beyond protection of physical security, it emphatically rebutted that such extension
does not connote a protection against a host State’s rights to legislate or regulate with a view to
achieving objectively rational policy goals and acting reasonably.42 In rejecting the Claimant’s
38
Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award 14 July 2006 (hereinafter Azurix v.
Argentina).
39
National Grid Plc v. The Argentine Republic, UNCITRAL, Award 03 November 2008 (hereinafter National Grid).
40
BiwaterGauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award 24 July 2008
(hereinafter Biwater v. Tanzania).
41
Enron (n 26) para 286.
42
AES Summit Generation Limited and AES-Tisza ErömüKft v. The Republic of Hungary, ICSID Case No.
ARB/07/22, Award 23 September 2010 para 1.3.3.2 (hereinafter AES Summit).
154
assertion that the right to constant protection and security imply immutability of legal framework
applicable to the investor’s investment, the tribunal took the view that such an implication would
be tantamount to “recognising the existence of a non-existent stability agreement as a consequence
of the Full Protection and Security standard”.43 Since the re-introduction of regulated pricing or
government measure complained of, was based on rational public policy grounds, the tribunal
found that no breach of FP&S Standard took place.44 The question that comes to mind is, what
was the legal protection or security that the tribunal had recognised existed? It is apt to now
consider the basis for adoption of the expansive approach by the CME-like tribunals.
Interpretation Based on Textual Language of Investment Treaties
Tribunals have adopted expansive interpretations of FP&S Standard based on the textual language
of the treaty in question. The fact that differences in language formulation impact the scope of the
protection to be accorded under BITs cannot be overstated. Azurix tribunal has clearly
demonstrated that differences in formulation are consequential to the interpretation or assessment
of scope of the Full Protection and Security standard.45 The tribunal whilst holding that because
the terms “protection and security” are qualified by the word “full”, it is therefore not only a matter
of physical security but covers protection of “stability afforded by a decent investment
environment.” In all, Full Protection and Security was held to have been violated because the FET
had been deemed to have been breached. The Biwater tribunal supports the proposition of the
Azurix tribunal on the effect of the qualification of the terms “protection and security” by the word
“full”.46 Consistent with the Azurix tribunal’s holding, by qualification with full, the content of
the standard extends to matters beyond physical security.47 The tribunal specifically elaborated
that Full Protection and Security standard implies “a state’s guarantee of stability in a secure
environment, both physical, commercial and legal”. In these two cases, FP&S standard was
interpreted to connote stability guarantees in favour of the investors.
43
Ibid para1.3.3.5.
44
Ibid para 1.3.3.6.
45
Azurix v Argentina (n 57).
46
Biwater v Tanzania (n 59).
47
ibid para 729.
155
Also evidently showing that textual context of applicable treaty is relevant in the delineation of
scope of Full Protection and Security standard is Siemens v Argentina tribunal’s holding.48 In
deciding whether the actions of Argentina constituted a breach of the Full Protection and Security
standard, the Siemens v Argentina tribunal construed the treaty language which qualified the word
“security” by “legal”. The tribunal having defined investments to include both tangible and
intangible assets concluded that only legal security can be afforded intangible assets of the
investor. The tribunal was therefore unequivocal in its finding that FET and Full Protection and
Security standard had been violated after relating its understanding of the interpretation of these
standards and the facts of the case.49
Following the trend distilled above, Reinhard Hans Unglaube v Costa Rica tribunal agrees with
Azurix and Biwater tribunals that the inclusion of the word “full” allows for a broad interpretation
of the Full Protection and Security standard and will in appropriate circumstances extend host
states obligation beyond the traditional standard expressed by the Saluka tribunal.50 Remarkably,
despite the in-principle belief or opinion of the Reinhard tribunal which is in sync with that of the
Azurix and Biwater tribunals as highlighted above, the Reinhard tribunal held that Full Protection
and Security had not been breached by Costa Rica based on the evidence before it. According to
the tribunal, the investor–claimant should have demonstrated a causal connection between host
State’s actions or measures complained of and harm suffered by the investor–claimant. The
investor–claimant’s case failed mainly for not establishing sufficient evidence to support an
alleged failure of host State to provide Full Protection and Security.51 The tribunal in Renee Rose
Levy de Levy v Peruis yet another tribunal which did not find a violation of the FP&S Standard
for lack of sufficient evidence to back claim, but nonetheless implied that the standard of full
protection and security has evolved beyond physical security to more generally the rights of
investors.52
48
Siemens v Argentina, ICSID Case NO ARB 02/8, Award 06 February 2007 (hereinafter Siemens v. Argentina).
49
ibid paras 303 and 309.
50
Reinhard Hans Unglaube v Costa Rica ICSID Case No ARB/09/20, Award 16 May 2012 paras 280 and 281.
51
Ibid paras 283 and 285. The decision in Marion Unglaube v Costa Rica is verbatim with that of Reinhard Hans as
both cases were consolidated. See Marion Unglaube v Costa Rica ICSID Case No ARB/08/1, Award 16 May 2012.
52
Renee Rose Levy (n 35) para 406.
156
Still on the scope of FP&S Standard, in the SergiePaushok v Mongolia arbitration, the treaty
language on Full Protection and Security standard which the tribunal was required to interpret was
more elaborate and verbose than the usual Full Protection and Security provision. 53 In this
particular instance, the Russia - Mongolia BIT provision on Full Protection and Security clearly
provides “full legal protection to investments of investors of the other contracting party”.54 The
investor-claimants argued that Windfall Profit Tax (WPT) promulgated in May 2006 which
negatively affected the claimant’s income yield violated Article 2 of the Treaty to the extent that
it undermined the previously stable and secure investment climate and devalued the advantages
previously granted; thereby failing to provide full legal protection to claimant’s investments.55
Unsurprisingly, the tribunal found that it was inappropriate or not justifiable to limit the protection
to mere physical protection.56 Ascribing an extensive interpretation to the FP&S Standard in this
instance seemed justified on the basis that the words “full legal” had been used to qualify the
protection and security to be accorded to investors’ investment. Further, the tribunal conceded
that undoubtedly the WPT represented a radical change in the taxation of the gold mining industry
in Mongolia which had a severe negative impact upon the industry as a whole and upon investor-
claimant in particular. 57 Notwithstanding this conclusion, the Claimant’s claims seeking
protection of guarantees of stability and predictability of the business and legal framework of
Mongolia failed under both FET and FP&S headings. With regards to the FP&S findings, the
Tribunal’s was disinclined to agree with investor-claimant’s claims as there was no claim of a
negative action taken by third parties that the State was accused of not preventing. The tribunal
also stated that it did not find in relation to the WPT, any reason to conclude that there has been a
breach of FP&S obligation.58
In continuation of the discourse on the weight to be accorded or given to the precise language used
in the treaty in construing FP&S obligation, the Parkerings v Lithuania tribunal’s finding
53
Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. The Government of Mongolia,
Award on Jurisdiction and Liability 28 April 2011 (hereinafter Sergei Paushok v. Mongolia).
54
Article 2.2 Russia – Mongolia BIT.
55
Sergei Paushok v. Mongolia (n 72) para 258.
56
Ibid para 326.
57
Ibid para 305.
58
Ibid para 327.
157
represents arbitral position on the other divide. 59 Unlike the aforementioned perspective, the
Parkerings v. Lithuania tribunal held that variation of language formulations makes no difference
in the level of protection a host state is obliged to provide. Similarly, the Frontier Tribunal opined
that variations in the wordings of the standard in BITs and MITs do not appear to carry any
substantive significance.60 The arbitral tribunal further elaborated that host states are obliged to
take active measures to protect investment from adverse effects that stem from private parties or
from host states and its organs. 61 Meanwhile, the AWG tribunal in construing Argentina’s
obligation under the treaty took cognisance of the wordings of BIT, but did not apply same to
extend FP&S obligation to maintain a stable and secure legal and commercial environment.62 To
the tribunal “an overly extensive interpretation of the FP&S standard may result in an overlap with
other standards of investment protections, which is neither necessary nor desirable”. 63
Consequently, Argentina was held not to have violated FP&S standard.64 Apart from applying the
strict textual interpretation to delimit FP&S’ scope, the AWG tribunal criticized both CME and
Azurix awards as not providing a historical analysis of the concept of Full Protection and Security
and for not adducing clear rationale from departing from the established historical interpretation
of the concept.65 Further support for this position is the Suez tribunal award which considered
both the textual language of the BIT and historical context standard, case law and affirmed its
support for the traditional interpretation given to the term ie host state’s obligation being limited
to the exercise of due diligence to protect investors and investments primarily from physical
injury.66 The tribunal rejected the notion that Argentina’s obligation in this respect extends to
maintenance of a stable legal and commercial environment. Argentina was therefore not held to
have violated the Full Protection and Security Standard.67 This diametrically opposing views of
the Parkerings and Frontier Petroleum’s tribunals as against those of Azurixv. Argentina and
Siemens v Argentina call to question the authentic arbitral jurisprudence in this regard.
59
Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8 Award, 11 September 2007
(hereinafter Parkerings v. Lithuania).
60
Frontier Petroleum (n 50) para 260.
61
Ibid para 261.
62
Ibid para 173 and 176.
63
AWG Group Ltd. v. The Argentine Republic, UNCITRAL, Decision on Liability 30 July 2010 para 174 (hereinafter
AWG v. Argentina).
64
Ibid para 179.
65
Ibid and Suez & Vivendi (n 50) para 171.
66
Suez & Vivendi (n 50) para 173.
67
Ibid.
158
Interpretation Based Interrelation with FET
Tribunals’ choice of either a restrictive or an expansive construction of the FP&S Standard, has
also been hinged on the inter–relationship or interconnection between the FET and Full Protection
and Security. Undoubtedly this has come up principally because in most treaties these two
standards appear as a single standard or in a single clause. The argument will typically go thus:
“An act constitutes a breach of the Full Protection and Security to the extent that the acts also
constitute breach of FET standard.” In support of this contention is the Occidental v. Ecuador
tribunal which having found that FET had been breached, considered the question whether a breach
of FP&S standard had occurred a moot point.68 To the tribunal “… a treatment that is not fair and
equitable automatically entails an absence of full protection and security” 69 The Vivendi v
Argentina II (2007 Award) tribunal’s decision follows the same pattern as the Occidental tribunal’s
finding with regards to the relationship between FP&S and FET standards.70 The claimant in this
case claimed that the principle of Full Protection and Security imposed a general duty to ensure a
stable and predictable business or fiscal environment. Argentina, on the other hand, contended
that the principle was limited to physical interferences. The tribunal elaborated on the case law on
interpretation of the principle of Full Protection and Security and related it to the facts of the case.
The tribunal eventually upheld the claimant’s arguments while rejecting those of the respondent
state. To the tribunal, if contracting parties were desirous of limiting their obligations to physical
interference or violence only, the textual language of the BIT could have been so worded. 71
According to Vivendi’s II tribunal, absence of such restrictions or limitations, the principle of Full
Protection and Security should be broadened or extended to cover any act or measure which
deprives an investor’s investment of protection and full security in so far such acts or measures
68
Occidental Exploration and Production Company v. Ecuador,UNCITRAL/LCIA Case No. UN3467, Award 1 July
2004 para 187 (hereinafter Occidental).
69
Ibid.
70
Compañiá de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No.
ARB/97/3, Award 20 August 2007 (hereinafter Vivendi II v. Argentina).
71
Ibid para 7.4.15. It is instructive to note that the Article 5(1) of the France – Argentina Treaty which provides for
FP&S standard specifically linked FP&S to FET standard since it stipulates that investments shall enjoy “protection
and full security in accordance with the principle of fair and equitable treatment referred to in Article 3 of this
Agreement.” Couched this way, the likelihood of being interpreted as coterminous is high.
159
also breach the FET standard.72 Quoting CME v. Czech, Ceskoslovenska v Slovak Rep73 and
Azurix as international tribunal awards in tandem with its findings, the Vivendi II tribunal
contemplated its own interpretation of tribunal decisions that advocate physical interference or
violence as basis for a finding of violation of Full Protection and Security claiming that the
tribunals did not interpret the obligation as limited to those circumstances.74 Notably, the Vivendi
II tribunal based its decision to extend FP&S scope to legal security and protection on the basis of
the two main grounds ie treaty language and inter-relationship with FET standard. Impregilo
S.p.A. v. Argentina tribunal is yet another exponent of this school of thought when it held that
where “there has been a failure to give an investment fair and equitable treatment, it is not
necessary to examine whether there has also been a failure to ensure full protection and security.75
The recently decided case of Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela further
supports this contention when the tribunal held that since the offending measures of Venezuela did
not amount to a breach of the FET standard, such measures could never imply a breach of the FPS
standard, however widely interpreted.76
Notwithstanding, the prevalence of authorities which tend to equate FP&S with FET standard,
investment treaty arbitration jurisprudence is replete with awards recognising the dichotomy
between the FPS and FET standards. For instance, the Liman Caspian v. Kazakhstan tribunal
stated that the “most constant protection and security” standard which does not extend to any
contractual rights but whose purpose is rather to protect the integrity of an investment against
interference by the use of force and particularly physical damage, has a meaning beyond, and
distinct from FET standard.77 Tribunal was consistent to hold that no breach of FP&S had occurred
since the actions disputed did not involve any interference by use of force or physical damage.
The Electrabel S.A. v. Republic of Hungary Tribunal opined that the FET standard and FP&S
72
Ibid.
73
CeskoslovenskaObchodni Banka, A.S. v. The Slovak Republic, ICSID Case No. ARB/97/4, Award 29 December
2004.
74
Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award 08 December 2000 (hereinafter
Wena Hotels); Eureko B.V v. Republic of Poland, Ad Hoc Tribunal (UNCITRAL), Partial Award, 19 August 2005
12 ICSID Reports (hereinafter Eureko).
75
Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17, Award 21 June 2011 para 334 (hereinafter
Impregilo v. Argentina).
76
Rusoro Mining Ltd. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5, Award 22 August 2016
para 548 (hereinafter Rusoro Mining).
77
Liman Caspian Oil BV and NCL Dutch Investment BV v. Republic of Kazakhstan, ICSID Case No. ARB/07/14,
Excerpts of Award, 22 June 2010 Para 289 (hereinafter Liman Caspian).
160
standards are two distinct standards of protection under the ECT, dealing with two different types
of protection for foreign investors. 78 The tribunal went on to clarify that the FP&S and FET
standards must have, by application of the legal principle of “effet utile”, a different scope and
role. 79 In the same vein, the AES Corporation and Tau Power B.V. v. Kazakhstan tribunal
differentiated the FET from FP&S standards by rejecting the claimants’ claim for failing to
substantiate their claim under the FPS standard and demonstrate that such claim, which is based
‘on adverse effects of regulatory measure or administrative actions on the investment’, is actually
different from the claim raised under the FET standard and the obligation to refrain from
unreasonable and arbitrary impairment. The tribunal concluded that having held that investor-
claimant’s claims under FET standard were unsustainable, no additional element in or aspect of
Kazakhstan’s conduct that constituted a breach of the FPS standard.80
The more recent award of Oxus Gold v Uzbekistan’s tribunal that FET and Full Protection and
Security standard are not coterminous is a well-reasoned approach. 81 Moreover, according to
Newcombe and Paradell the tendency to interpret FP&S obligation as part of the FET guarantee,
makes tribunals’ reasoning unclear.82However when the FP&S obligation is subsumed within the
FET standard as in the Argentina-France BIT, it might be difficult not to deem the two standards
as coterminous.83
Concluding Remarks
78
Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and
Liability, 30 November 2012 para 7.80 (hereinafter Electrabel v. Hungary).
79
Ibid para 7.83.
80
AES Corporation and Tau Power B.V. v. Republic of Kazakhstan, ICSID Case No. ARB/10/16, Award 01 November
2013 para 339 (hereinafter AES Corp v. Kazakhstan).
81
Oxus Gold plc v. Republic of Uzbekistan, the State Committee of Uzbekistan for Geology & Mineral Resources,
and Navoi Mining & Metallurgical Kombinat, UNCITRAL Award, 17 December 2015 (hereinafter Oxus Gold v.
Uzbekistan). Although the principal reason why the investor-claimant’s claims alleging breach of the Full Protection
and Security standard failed was because the claims were deemed to fall outside the scope of Full Protection and
Security standard since they relate to actions or omissions attributable to host state. See para 841.
82
Andrew Paul Newcombe and LluisParadell, Law and Practice of Investment Treaties: Standards of Treatment
(Kluwer Law International 2009) 312.
83
See FRANCE and ARGENTINA, Agreement on the Reciprocal Promotion and Protection of Investments (with
Related Letter); Signed at Paris on 3 July 1991, Article 5 (1), “Investments made by investors of one Contracting Party
shall be fully and completely protected and safeguarded in the territory and maritime zone of the other Contracting
Party, in accordance with the principle of just and equitable treatment mentioned in article 3 of this Agreement.”
161
Flowing from the foregoing, it is discernible that there is no precise formulation of the scope of
the FP&S undertaking neither is there a consensus on whether or not the protection ascribed to
FP&S standards extends beyond physical protection and security to legal protection. Even in cases
where tribunals’ proclivity to broaden the scope of FP&S is high, the precise meaning or variant
of legal protection guaranteed by the FP&S Standard still eludes defined contours. Tribunals that
have been tasked with elucidating on this standard, have mostly done so without a reference guide
as to the standard of liability imposed on host states. On one hand is the debate whether the
obligation should be interpreted as reflecting the minimum standard of treatment for aliens in
customary international law, or whether it represents a higher independent treaty standard.84 On
the other is the controversy on the standard’s scope being limited to Physical protection or
expanded to encompass legal protection and security. The degree of due diligence that is to be
exercised is also another unsettled controversy pertaining to this protective standard. The
uncertainty in the state of affairs has paved the way for increasing number of investor-claimants’
claims brought under various guise and permutations. Expectedly, tribunals have repeatedly held
inconsistently. For instance, whilst the tribunals in National Grid85 and Bogdanovv. Mongolia II86
found that changes in the host states’ regulation and administrative framework violated the FP&S
standard, some other tribunals such as Toto Costruzioniv. Lebanon 87 and AES Corp v.
Kazakhstan88 tribunals held differently. Meanwhile, one is minded to subscribe to Newcombe and
Paradell’s argument, that extension of FP&S standard to encompass legal security and protection
upholding the stability and predictability of the legal, regulatory or investment framework is
somewhat inconsequential to a case’s outcome.89 This is because, most international investment
treaties also provide for FET standard which invariably is more amenable and adaptable to ground
violation of guarantees of stability and predictability of the legal and regulatory regime of host
states. In any case, majority of the cases where investor-claimants filed a claim based on violation
of FP&S due to rescission of stability guarantees, it’s been observed that same basis and facts have
84
Malik Mahnaz, ‘The Full Protection and Security Standard Comes of Age: Yet Another Challenge for States in
Investment Treaty Arbitration?’ (International Institute for Sustainable Development, 2011).
85
National Grid v. Argentina (n 58) – Find the applicable paragraph
86
YuryBogdanov v. Republic of Moldova, SCC Arbitration No. V (114/2009), Final arbitral Award 30 March 2010
paras 84 and 85 (hereinafter Bogdanov v. Moldova II).
87
Toto Costruzioni Generali S.p.A. v. The Republic of Lebanon, ICSID Case No. ARB/07/12, Award 07 June 2012
para 244 and 246 (hereinafter Toto Costruzioni v. Lebanon).
88
AES Corp v. Kazakhstan (n 99) para 339.
89
Andrew Paul Newcombe and LluisParadell, (n 101) 314.
162
been replicated to claim breach of FET standard.90 To the extent that stability of the legal and
regulatory framework is arguable under FET standard and not specific to FP&S standard, Moss
queries the usefulness of broadening FP&S standard in such a way that it clones FET standard.91
The Vivendi II tribunal ruling on Investor-claimants’ FP&S claims amply represents arbitral
thinking on extension of FP&S protection to legal protection and security. This is because the
Vivendi tribunal based its decision on the two previously identified criteria ie. extension based on
the textual formulation of the treaty and extension based on interrelationship of the FP&S standard
with FET standard.92 Notable dictum of the tribunal in this respect is to the effect that if contracting
parties were desirous of limiting the scope of FP&S protection to only protection against physical
harm and damage, same could have been achieved by explicit words in the treaty. However, one
can flip this argument to demonstrate its weakness and argue that if parties wanted to broaden or
extend the scope of the FP&S protection, they would have done so explicitly in clear terms which
would be devoid of any ambiguity causing current interpretative maze.
There is no gainsaying that the interrelationship between FP&S and FET standards have been over-
hyped. The idea that an act that is not fair and equitable automatically entails absence of FP&S is
faulted. For one, some of the recognised elements of FET do not have any correlation or align
with FP&S elements. Secondly, FET is a separate and distinct standard serving a different purpose
and constituted under a different framework. The effect of this automatic transposition of FET to
FPS is to hold them out as identical or synonymous, which they are not. If they were, it can be
argued that the inclusion of FP&S in treaties is redundant or superfluous. This will obviously
negate the rule of non-redundancy applicable to interpretation of treaties as expounded by Hugh
Thirlway:
90
In AES Corp v. Kazakhstan, tribunal agreed with Kazakhstan’s contention that the investor-claimant failed to
substantiate alleged breaches of FP&S Standard which were mere replications of its claims under the FET Standard.
AES Corp v. Kazakhstan (n 99) para 338.
91
Giuditta Cordero Moss, ‘Full Protection and Security’ in August Reinisch (ed), Standards of Investment Protection
131-150. (Oxford University Press 2008) 150.
92
Occidental and Impregillo tribunals are tribunals who share this same conception of the interrelationship between
FP&S and FET standards.
163
“It is a rule that the whole of the text must be presumed to have some significance, so that an
interpretation which would render part of it redundant is to be rejected.”93
Thus, by claiming that because FET has been established, there is no need to review FP&S claim
means that they are considered as synonymous and that the words in the treaty relating to FP&S
are redundant.94 Such interpretation is to be rejected because “a legal text should be interpreted in
such a way that a reason and meaning can be attributed to every word in the text.”95 Similarly,
Rusoro v. Bolivia tribunal’s ruling that every breach of FP&S must bring about a breach of the
FET standard is fallacious on the same basis and should also be rejected.
Needless to say that it is imperative to decouple these two standards in terms of their interpretation
as it is conceivable that an overly extensive interpretation of FP&S standard may result in needless
and undesirable overlap with other standards.96 Beyond that, an overly broaden construction of
the standard does not seem to support the intentions of the drafters of the treaties in the first place.
Reliance on the textual formulation of the treaty to interpret it does not seem to take into
consideration the holistic rules of treaty interpretation which aims to decipher the intentions of the
drafters. It is argued that a better and more consistent interpretation of the notion of FP&S accords
more with the traditional understanding of the concept to address or prevent physical harm or
injuries to investors. Granted that principles of international law evolve; it would however still
maintain the basic tenets. As will be noted below, alluding to stability and predictability of
business environment as an aim of FP&S standard does not conform with present day clarification
of the Standard. This is strong indicator that the meaning of the standard as originally
93
Quoted by Ulf Linderfalk, On the Interpretation of Treaties: The Modern International Law as Expressed in the
1969 Vienna Convention on the Law of Treaties (Vol. 83. Springer Science & Business Media, 2007). – on The rule
on non-redundancy
94
It may be argued that the basis for holding that finding on FP&S becomes moot or irrelevant because violation of
FET has been established was based on the fact that at least one treaty liability has been founded which should suffice
to award adequate compensation to the wronged investor-claimant. In other words, the quantum of damages is not
enhanced by the number of violations found ie whether a single or multiple violation of investment treaty is found
does not impact the quantum of compensation. There is however sufficient reason to suggest that this is not the basis
for such tribunal holdings. For one, tribunals are obliged to review and make a ruling on each of the claimant’s claims.
Secondly, if this were the case, then once any violation of a treaty has been established, would have been no reason to
rule on other treaty claims such as umbrella clause, expropriation – this is definitely not the case as tribunals invariably
touch on all the claims.
95
See Ulf Linderfalk (n 111).
96
AWG v. Argentina (n 82) para 174.
164
conceptualized is the way to go, particularly as the potentials for finding host states liability is
extremely massive if the original interpretation of FP&S were to be jettisoned for a broadened
conception. Furthermore, the expansive approach to interpreting the FP&S standard postulated by
Biwater and CME like tribunals has far reaching significance for investor-state arbitration
jurisprudence. This viewpoint invariably infers that an additional basis beyond those established
under FET standard and Umbrella Clause, is available to investor-claimants to seek protection of
Stability Guarantees. Undoubtedly, this places additional burden on host states, perhaps beyond
their initial contemplation.
Be that as it may and as earlier asserted, recent trends in international investment law setting
suggests that the narrow or traditional construction of FP&S represents the intent and preferred
approach of host states who agreed and signed the enabling treaties in the first place. For one,
newer BITs are narrowing the scope by specifically spelling out that FP&S standard obliges parties
to provide level of police protection required under customary international law. A classic
example is the U.S. and Canadian Model BITs which expressly define the limits of the Full
Protection and Security standard.97 The US Model BIT in particular, emphatically in Article 5
confined the FP&S obligation to the minimum standard of customary international law for the
treatment of aliens and it refers only to the level of police protection. With this type of clarification
and delineation, earlier debates on the standard of liability and scope of the FP&S will be avoided.
Similarly, in the wake of uncertainty occasioned by conflicting awards on the FP&S standard,
NAFTA issued interpretative notes to clarify amongst other standards, the FP&S Standard. 98
Meanwhile, some states have even gone ahead to exclude the FP&S Standard from their newly
concluded investment agreements. Notably is the omission of the FP&S in two recently concluded
regional investment treaties including Annex 1 (Investment) of the Southern African Development
Community Finance and Investment Protocol (SADC)99 and the Investment Agreement for the
Common Market for Eastern and Southern Africa Common Investment Area (COMESA). Perhaps
this deliberate exclusion is as a result of the growing concern over the discretionary powers of
97
See Article 5 of the Canadian Model Foreign Investment Promotion and Protection Agreement (Foreign Affairs and
International Trade Canada, 2004) and
98
See The NAFTA Interpretive Statement of 2001 (NAFTA Free Trade Commission, 2001) The COMESA, was
signed on May 23, 2007 and entered into force on April 16, 2010.
99
The SADC Protocol on Finance and Investment (“the SADC FIP”), was signed on August 18, 2006 and entered
into force on April 16, 2010.
165
arbitrators to impose a high and expanded duty on states to prevent harm to investments.100 One
cannot but agree with Malik who postulated that a solution to the current state of uncertainty is for
host states to issue interpretative notes or amend investment treaties to clarify the scope and content
of FP&S as undertaken by NAFTA and in US Model BITS. He also advocated for incorporation
in new BITs, a reference to the standard of customary international law for the treatment of aliens
to lend some clarity. Although he immediately cautioned that the evolving nature of customary
international law may also lead to diverse interpretation modes. On this issue, customary
international conception of Full Protection and Security remains that of police power protection
which has been reiterated and re-affirmed by afore-mentioned recent clarifications. Malik’s
proposal is a reflection of Suez tribunal’s approach to pay due regard to the historical context of
the standard to decipher the intentions of the drafters of the treaty. Certainly, reference to
customary international law interpretation of the FP&S is fully supportable as same effectively
aligns with rules of treaty interpretation reflected in the combination of Articles 31 and 32 of the
Vienna Convention on the Law of Treaties. In addition, the relevancy and importance of
customary international law rules to fill gaps, aid interpretation and achieve proper construction of
treaties, cannot be over-emphasized in the light of the statement of the Iran -US Claims
Commission tribunal in the case of Amoco v. Islamic Republic of Iran:
“As a lexspecialis, in relations between the two countries, the treaty supersedes the lexgeneralis,
namely customary international law. This does not mean, however, that the latter is irrelevant. On
the contrary, the rules of customary international law may be useful in order to fill in possible
lacunae of the law of the Treaty, to ascertain the meaning of undefined terms in its texts or, more
generally, to aid interpretation and application of its provisions.”101
A good example of introduction of delimited FP&S Standard can be found in Comprehensive

Economic and Trade Agreement (CETA). Chapter 8 of the CETA deals with Investment
Protection; specifically providing for "Fair and Equitable Treatment and Full Protection and
Security" Standards in Article 8.10. Article 8.10 (5) limited FP&S scope as follows: “For greater
100
Malik Mahnaz (n 103).
101
Amoco v. Islamic Republic of Iran (1988) 27 ILM 1316, Para 112 or Amoco International Finance Corporation v.
The Government of the Islamic Republic of Iran &Ors Award No. 310-56-3 14 July 1987.
166
certainty, "full protection and security" refers to the Party's obligations relating to the physical
security of investors and covered investments.102
Be that as it may, it is plausible that some contracting parties intended to include legal protection
as part of the protection offered by the FP&S Standard. A clear illustration is the Argentina-
Germany BIT which specifically provided for “full legal protection and security”. While
distinguishing between tangible and intangible assets and the nature of protection relevant for each,
the Siemens AG tribunal did not hesitate to extend the scope of FP&S protection beyond physical
protection and security to legal protection and security. In consonance with Siemens’ tribunal’s
holding which emphasised the difficulty or impossibility of providing “physical” protection to
intangible assets, only legal protection and security can only be available for intellectual property
rights which are gradually making inroads into international investment arbitration disputes. 103
One must quickly add that as most of IPR infringements are the result of the actions of non-state
actors, the likelihood of success for an investor-claimant claiming IPR violation will largely
depend on host states’ omission to provide adequate enforcement measures or judicial mechanisms
under domestic law to protect IPRs rather than a positive obligation requiring host states to protect
IPR from infringement. More of a function of denial of justice for failure to provide adequate
remedies for IPR violations under domestic law.104
To the question if an arbitral pattern has been established with regards to review of FP&S standard,
the answer is somewhat skewed to the extent that certain core principles are established and widely
accepted by tribunals (e.g. FP&S not being a strict liability standard but that of due diligence,
requires positive actions of host states to provide police power protection), whereas a number of
pivotal issues are still are contested. Whether the protection accorded by the FP&S standard
extends to cover protection of stability guarantees remains one of the keenly contested issues;
thereby negating an assertion that an arbitral pattern exists. Overall, arbitral tribunals’ approach
102 European Parliament voted in favour of

the Comprehensive Economic and Trade Agreement (CETA), a new Free Trade Agreement between Canada and the European Union
on 15 February 2017 and thereby concluding its ratification process at the EU level.
With Canada having signed the CETA on October 2016, most of the provisions can be applied
provisionally from April 2017 whilst the remaining parts of the
agreement are subject to ratification by national legislatures of EU members.
103
Helge Elisabeth Zeitler, ‘Full Protection and Security’ in Stephan W. Schill (ed), International Investment Law and
Comparative Public Law (Oxford University Press 2010) 196.
104
LahraLiberti, ‘Intellectual Property Rights in International Investment Agreements: An Overview’ (OECD Working
Papers on International Investment 2010/01) 17. Available at https://www.oecd.org/daf/inv/investment-policy/WP-
2010_1.pdf accessed 27 March 2017.
167
to interpreting the FP&S Standard depends primarily on tribunals’ aptitude and specificities of
each case. According to Tulip v. Turkey tribunal, a finding of a violation of FP&S is one of fact
and degree responsive to the circumstances of each case. 105 It can be argued that what most
tribunals eventually do is to knowingly or unknowingly weigh competing rights and attempt to
find a right balance thereto. Ultimately, it comes down to balancing of rights and interests and the
Saluka tribunal’s ruling is very apt and instructive in this respect:
“The protection of foreign investments is not the sole aim of the Treaty, but rather a necessary
element alongside the overall aim of encouraging foreign investment and extending and
intensifying the parties’ economic relations. That in turn calls for a balanced approach to the
interpretation of the Treaty’s substantive provisions for the protection of investments, since an
interpretation which exaggerates the protection to be accorded to foreign investments may serve
to dissuade host States from admitting foreign investments and so undermine the overall aim of
extending and intensifying the parties’ mutual economic relations.106
As there is no significant distinction in the parameters deployed in the balancing exercises

undertaken by most tribunals in their analysis of investors’ claims to stability and predictability of
legal, regulatory and investment framework of host states, the issue and techniques of balancing
of conflicting rights will be dealt with in greater details in Chapter Six.
105
Tulip Real Estate and Development Netherlands BV v Turkey ICSID Case No ARB/11/28 paras 430 and 431
(hereinafter Tulip v. Turkey).
106
Saluka Investment (n 25) para 300.
168
IS FET STANDARD A MECHANISM FOR PROTECTION OF STABILITY
GUARANTEES?
For a better understanding of the protection of stability guarantees with reliance on the FET
standard, it is important that a brief overview of the sta ndard be undertaken. A good starting point
is to restate the trite fact that the standard has attracted enormous amount of discussions within
investment arbitration fora. In fact, the most frequently invoked standard in investment disputes
is the fair and equitable treatment standard included in most investment treaties.107 This incessant
recourse to FET standard is perhaps due to the belief that of all the substantive guarantees in
investment treaties, FET Standard is the most likely to generate positive outcome for investor-
claimant.108 More recently the Invesmart v. Czech tribunal observed that in recent years there has
been a growing jurisprudence and case law dealing with the notion of FET. The tribunal further
remarked that the content of FET has been variously and not consistently described to include
different strands of protection.109 In essence, the FET standard is a generic standard of investment
treaties which requires the host state to treat foreign investors fairly and equitably.
Ascertaining what is fair and equitable is not as easy as it seems. There is no general consensus
on the meaning of this phrase, leading to an avalanche of divergent interpretations. The rationale
for such divergence being attributed primarily to the heterogeneous nature of treaty language and
the fact that no singular version or formulation of the FET standard exist. Another contributory
factor for the lack of convergence of minds on the meaning of FET standard is the absence of
precedential system in investor-state arbitration set-up necessary to entrench a principle.
Meanwhile, by way of historical background, the principle of FET was incepted into international
investment law as part of international minimum standard but later became an autonomous
treatment standard over the years. 110 Notably, what is construed as international minimum
standard was formulated by the US-Mexican Claims Commission in the 1926 Neer Claim
commonly referred to as the Neer formula which connotes:
107
108
Jose E. Alvarez and Gustavo Topalian, ‘The Paradoxical Argentina Cases’ (2012) 6 (3) World Arbitration and
Mediation Review 491, 522.
109
Invesmart B.V. v. Czech Republic, UNCITRAL Award 26 June 2009 para 200 (hereinafter Invesmart v. Czech).
110
Ivar Alvik, Contracting with Sovereignty: State Contracts and International Arbitration (Bloomsbury Publishing
2011) 192-3.
169
“The treatment of an alien, in order to constitute an international delinquency should amount to
an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so
far short of international standards that every reasonable and impartial man would readily
recognise its insufficiency”
In contemporary discourse, the concept of FET has been dissociated from Neer Formula’s
definition of international minimum standard. According to Mann, the terms ‘Fair’ and ‘Equitable’
treatment envisages conducts which go far beyond the minimum standard and afford greater
protection on the basis of an objective standard.111 In the same vein, FET as a reflection of the
Neer formula formulation of international minimum standard was in recent times also rejected by
the Mondev v. USA tribunal when it acknowledged that treatment meted to a foreign investor may
be unfair and inequitable in the context of international investment law even in the absence of bad
faith.112 Despite the shift from the Neer Formula formulation or interpretation of the FET standard,
the standard is still not too clear and specific.113 Thus, with no clear definition of the FET standard
proffered by investment treaties, arbitral practice has in the last few years identified notable and
specific components of this standard to include the abuse of authority, harassment or intimidation,
Administrative capriciousness, indifference and negligence, Arbitrariness, inconsistency and
incoherence of State conduct, Continuing legislative changes, Delay in renegotiating a
governmental contract when government commits to it, Denial of justice, Discrimination, Failure
to accord due (or orderly) process, Failure to meet the investor's (legitimate) expectations, Lack of
even-handedness, Lack of propriety, Proportionality, bad faith, obligation to maintain Stable and
predictable legal and business environment and Transparency. 114 Indeed, the various
interpretations accorded the FET standard indicates that standard is evolving and flexible
111
See Mann, British Treaties for the Promotion and Protection of Investments (1982). Cited by Ivar p. 194 footnote
164.
112
Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2, Award 11 October 2002
para 116 (hereinafter Mondev v. USA).
113
Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16, Award 28 September 2007
para 296 (hereinafter Sempra Energy v. Argentina). See also, Newcombe&Paradell (n 101).
114
Most of these headings of FET Standard culled from Investor-State law guide database – Subject Navigator Tool.
Rudolf Dolzer and Christoph Schreuer also list other acclaimed constituents of the flexible and adaptable FET to
include transparency, good faith, procedural propriety and due process, freedom from coercion and harassment. See
Dolzer and Schreuer (n 49) 145-160.
170
depending on the specific circumstances of each case115 and with capabilities to embrace further
and new categories or elements. 116 In summary, despite the desirability of interpreting FET
standard in good faith in accordance with the ordinary meaning to be given to the terms in their
context and in the light of its object and purpose as stipulated by Article 31 (1) of the Vienna
Convention, the LG&E v. Argentina tribunal rightly noted the difficulty in establishing an
unequivocal and static concept of standards of treatment.117
Having laid a conceptual background for the review of stability guarantees under the FET standard,
in relation to the issue under discourse, two of its acclaimed constituents are relevant and key to
addressing the question if indeed the FET standard protects or reinforces stability guarantees and
possibly, query the pattern of arbitral awards, if any. These are (i) obligation to maintain Stable
and predictable legal and business environment and (ii) the doctrine of legitimate expectation. In
this respect, it is apposite to in the first place determine the arbitral practice regarding the issue
whether or not stability and predictability of the legal and business environment is an element of
the FET standard. Following that inquiry, the legitimate expectation jurisprudence will be
analysed with a view to ascertain how stability guarantees have sought to be protected and the
basis of decisions in favour or against investor-claimants’ arguments on this issue.
Stability and Predictability of Host States’ Legal and Business Environment Per se as an
Element of Fair and Equitable Treatment Standard
An issue that has elicited enormous debate within investor-state arbitration setting is whether a
stable legal regulatory and business environment is an element of the FET standard which host
states are more or less automatically obliged to protect. On this issue, the Murphy v. Ecuador
tribunal opined that due to repeated reference in investor-state awards, the FET standard is now
generally accepted as recognisable components including stability predictability and investors’
115
Ivar Alvik (n 128) 192.
116
117
LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc. v. Argentine Republic, ICSID Case No.
ARB/02/1, Decision on Liability 03 October 2006 paras 122 and 123 (hereinafter LG&E Energy v. Argentina).
171
legitimate expectation.118 From this statement it can be inferred that the tribunal considers the
stability of legal and business framework and legitimate expectation as two separate and different
components/elements of FET standard. Thus, what this means is that distinct from legitimate
expectation arguments, there exist an obligation to maintain a stable and predictable legal and
business framework per se by virtue of FET Standard. 119 This view virtually summarizes the
position of a number of arbitrators. For instance, the CMS Gas v. Argentina tribunal in deciding
whether measures adopted by Argentina in 2000 breached the FET standard, concluded that the
standard is to maintain a stable framework for investments and that arbitral practice suggests that
FET is inseparable from stability and predictability.120 The tribunal further concluded that there
can be no iota of doubt that “a stable legal and business environment is an essential element of
FET.”121 Furthermore, the Duke Energy tribunal concurred with the findings of the tribunals in
CMS, LG&E, Tecmed and Occidental which posits that a stable and predictable legal and business
environment is an essential element of FET Standard. 122 Another tribunal that suggested a
differentiation albeit inter-relation between these two elements of FET standard is the Philip
Morris v. Uruguay Tribunal when it decided to consider together the “two additional grounds of
investor-claimant’s claim of breach of FET standard ie legitimate expectation and Uruguay legal
stability.” In short, there is a long list of awards which affirm Duke Energy tribunal’s viewpoint
that a stable legal and business environment is an essential element of FET. On the need to ensure
a stable and predictable business environment for investors to operate, PSEG Global tribunal
contributed that stability cannot exist in a situation where the law kept changing continuously and
endlessly. According to PSEG tribunal, the longer term outlook of the business and investment
climate must not be altered in such a way that will end up being no outlook at all.123 To Sempra
tribunal, FET serves the purpose of justice when an act is not expropriation and the ultimate goal
of the FET standard is to ensure the stability of the law and the observance of legal obligations are
118
Murphy Exploration & Production Company International v. Republic of Ecuador, PCA Case No. 2012-16
(formerly AA 434), Partial Final Award 06 May 2016para 206 (hereinafter Murphy v. Ecuador II).
119
Duke Energy Electroquil Partners &Electroquil S.A. v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award
18 August 2008 para 339 (hereinafter Duke Energy v. Ecuador).
120
CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Award 12 May 2005
para 276 (hereinafter CMS Gas v. Argentina).
121
Ibid para 271.
122
Duke Energy v. Ecuador (n 138) para 339.
123
PSEG Global, Inc., The North American Coal Corporation, and Konya InginElectrikÜretimveTicaret Limited
Sirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Award 19 January 2007 para 254 (hereinafter PSEG v.
Turkey).
172
assured; thereby safeguarding the very object and purpose sought by the treaty. 124 Needless to
interject at this point that there are also tribunal awards that are diametrically opposed to this
viewpoint. Review of awards leaning towards this contrasting position are undertaken in later
parts of this chapter.
Be that as it may, investor-claimants have framed their claims seeking protection of Stability
guarantees via FET standard on the basis of either or both of these two headings or manifestations
of FET standard i.e. stability of legal and business environment per se and legitimate expectation.
A typical example is the couching of the Investor-claimant’s claim in Continental Casualty. In
this instance, Continental Casualty argued that FET standard provision of the BIT obliged
Argentina to provide a stable legal and business environment and to protect investors’ legitimate
expectations.125 Central to Continental’s argument is the idea that FET required as an essential
element, “a stable legal and business environment” and a legitimate expectation that regulations
would remain unchanged.126
Similar to the tribunal’s finding in Continental Casualty, the El Paso tribunal believes that to
determine a violation of the FET, one must take account of circumstances. 127 On whether the
treaty guarantees the stability and predictability of the legal and business environment, the tribunal
was unequivocal in its opinion that it does not considering that it is unconceivable that an investor
will benefit forever because there is a BIT.128 To the tribunal, economic and legal life is by nature
evolutionary and if stability of the legal and business framework were true, legislation could never
change and such a standard is not realistic (para 350 & 353). In any case legitimate expectation
as well as the said violation have to be construed objectively (para 356). The tribunal therefore
124
Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16, Award 28 September 2007
para
300 (hereinafter Sempra Energy v. Argenitina).
125
Continental Casualty Company v. The Argentine Republic, ICSID Case No. ARB/03/9, Award 05 September 2008
para 246 and 258 (hereinafter Continental Casualty v. Argentina. See also the Plasma v. Bulgaria tribunal remark that
the Parties agree that FET standard includes to a certain extent the protection of the investor‘s legitimate expectations
and the provision of a stable legal framework. See Plama Consortium Limited v. Republic of Bulgaria, ICSID Case
No. ARB/03/24, Award 27 August 2008 para 175 (hereinafter Plasma Consortium v. Bulgaria).
126
Continental Casualty v. Argentina para 246 and 258.
127
Ibid.
128
2011 para 354 (hereinafter El Paso v. Argentina).
173
declined to follow the line of cases in which FET was viewed as implying the stability of the legal
and business environment. The Tribunal dissected the preamble of the BIT which had been feebly
relied upon by tribunals in Occidental and CMS cases to hold that the host State is obliged to
stabilise the legal and regulatory framework. Occidental and CMS tribunals relied on the 1969
Vienna Convention on the Law of Treaties which stipulates that a treaty is to be interpreted in
good faith in accordance with the ordinary meaning to be given to the terms of the treaty in the
context and in light of its objects and purpose. To them, by virtue of the BIT Preamble, the object
and purpose of the treaty is to maintain “a stable framework for investment and maximum effective
use of economic resources.” El Paso tribunal criticised this interpretation on the ground that is not
a holistic approach since it only focused on the first limb of the Preamble to the exclusion of the
second part. El Paso tribunal emphasised the second part of the preamble and construed it to
impose an obligation on host States to effect maximum effective use of economic resources. In
determining the object and purposes of the treaty implied for the interpretation of FET, El Paso
tribunal submitted that the goal of the host State to guarantee to its populace maximum effective
use of its economic resources must be taken account of.129
A vital dictum of the Tribunal is that the legitimate expectation of any investor entering the oil and
gas market had to include real possibility of reasonable changes and amendments in the legal
framework made by competent authorities within the limits of the powers conferred on them by
the law.130 If things change drastically, it is reasonably expected that the law will also change
drastically (Para 363) and there can be no legitimate expectation for any investor that the legal
framework will remain unchanged in the face of an extremely severe economic crisis such as that
faced by Argentina.131
Noteworthy is Duke Energy’s tribunal assertion that stability of the legal and business environment
is directly linked to investors’ justified expectations. 132 The tribunal also acknowledged that
legitimate expectations are an important element of FET.133 It would appear that the Duke Energy
129
Ibidpara 369.
130
Ibidpara 400.
131
Ibidpara 374.
132
133
Ibid para 340.
174
tribunal essentially advocate a two pronged approach in seeking protection of stability guarantees
under the FET Standard. The first being argument which considers stability as an integral element
of FET standard reposing treaty enforceable obligations on host states. Secondly, is the argument
seeking protection of investors’ legitimate and reasonable expectations of stability and
predictability.
Whether argued together or separately, it serves little purpose to begin to distinguish the various
modes and formats of tribunal’s awards or investor-claimants’ claim profiling in this regard. The
arguments are mostly analogous, interwoven and not always distinctly clear-cut. Essentially, the
desired end is same whilst the outcome of the arguments is typically uniform. Moreso, investor-
claimants laid claim to stability guarantees not only on the basis of the general legal and regulatory
framework of the host state but also guarantees offered by means of contractual stabilization
clauses/agreements and national stability legislations. Recourse to legitimate expectation doctrine
has being the prevalent approach in seeking protection of these more concrete and specific
guarantees of stability under the FET regime. In any case, since the more popular trend is for
investor-claimants to even base their claim to stability and predictability of the general legislative
and regulatory framework applicable to their investments on expectations they considered
legitimate and reasonable, the ensuing analysis shall proceed on this note. This approach finds
support in Philip Morris v. Uruguay tribunal’s strategy to consider in the same context due to their
interrelation, the investors’ claims based on afore-mentioned two constituents of FET standard.134
It therefore becomes appropriate to undertake an exposé of the concept of legitimate expectation
with the ultimate aim of distilling the stability guarantee arguments relevant to answering the
research question.
Legitimate Expectation of Stability and Predictability
By virtue of the notion of legitimate expectation which can be considered a dominant element of
the FET standard, host states have assumed obligations not to frustrate investors’’ legitimates and
134
Philip Morris Brands Sàrl, Philip Morris Products S.A. and AbalHermanos S.A. v. Oriental Republic of Uruguay,
(formerly FTR Holding SA, Philip Morris Products S.A. and AbalHermanos S.A. v. Oriental Republic of Uruguay)
ICSID Case No. ARB/10/7, Award 08 July 2016 para 421 (hereinafter Philip Morris v. Uruguay).
175
reasonable expectations.135 According to EDF v. Romania tribunal, “one of the major components
of FET is parties legitimate and reasonable expectations with respect to the investments that have
made.” 136In the context of international investment law, the concept of legitimate expectation
entails host States respecting foreign investors’ legitimate expectations created by host States’
explicit or implicit assurances, representations, undertakings and guarantees to the investor upon
which the investor relied to make its investment decisions. An expectation repeatedly argued to
be legitimate and subject to protection of international investment law is that which obliges host
states to maintain a stable and predictable legal, regulatory and business framework. That recourse
to the legitimate expectation is the rave of the moment is not in doubt, what leaves room for further
inquiry is why there is no defined or systematic framework or set of criteria for the consideration
of the doctrine under international investment law despite the recurrent discuss of the topic in
arbitral proceedings.137 All the same, one can glean from arbitral tribunals’ endeavours at defining
the concept of legitimate expectation, the requirements of reliance, 138 reasonableness 139 and
representation 140 amongst other criteria are deemed necessary to establish claims based on
legitimate expectations.141 Indeed, case law on protection of legitimate expectation is plentiful but
the decisions on these cases are however devoid of in-depth analysis, rife with inconsistencies in
135
Saluka Investments tribunal held that the legitimate expectation is the dominant element of the FET Standard.
Saluka Investment v. Czech (n 25) para 302. Notwithstanding that the wide-spread or predominant view is that
legitimate expectation is an integral part of the FET Standard, some commentators believe that it is erroneous to
construe legitimate expectation as a subset of the FET because it is not compatible with the ordinary meaning of the
terms ‘fair and equitable’. See Para 3 of the Separate Opinion of Arbitrator Pedro Nikken in Suez & Vivendi v.
Argentina (n 50).The proponents of the view disassociating legitimate expectation from FET standard are however in
the minority and it is almost certainly a trite fact that legitimate expectation is recognised as a component of FET
standard.
136
EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award 08 October 2009 para 216 (hereinafter
EDF v. Romania).
137
Michele Potesta, ‘The Doctrine of Legitimate Expectations in Investment Treaty Law’ [2012] 1; Paper delivered at
Third Biennial Global Conference, July 12 -14, 2014, Singapore Available
athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2102771 accessed 28 September 2013.
138
There must be reliance in line with the domestic administrative law principle. If the investor does not rely on it or
base its investment decision on the host states’ representation, then claim of frustration of its legitimate expectation
cannot hold.
139
Reasonableness connotes some many sub-elements but key amongst these elements is subjectivity. Hence, several
tribunals have held that investors’ subjective expectation cannot ground a legitimate expectation case. AES Summit
v. Hungary “An investor’s subjective expectations do not give rise to legally protected rights with regards to future
government actions” Decision on Annulment”.
140
Representation is used in the broad sense to mean all governmental conducts, assurances, guarantees, promises,
pledges and commitments which the investor relied on to make its investment decisions and which is now being
rescinded or cancelled.
141
A typical illustration is the Waste Management tribunal finding 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” Para 98.
176
arbitral reasoning leading to avalanche of posers, qualifications and limits introduced into the
concept. Thus, rather than defining and establishing the legitimate expectation jurisprudence, the
popular application of the doctrine has led to a deluge of incompatible interpretations and
construction of the concept. Perhaps this can be attributed to the doctrine’s unstandardized or
uncoordinated launch or introduction into international investment arena.
Talking of legitimate expectations launch into investor-treaty adjudicatory space, it should be

recalled that the doctrine dates back to the early 20th Century with the Expropriated Religious
Properties Arbitration and the diffusion from domestic administrative law principles of Anglo-
European jurisdictions.142 Procedural143 and substantive144 protection of legitimate expectation is
also achievable under international investment law as under domestic administrative law
systems.145 Whichever means the doctrine of legitimate expectation came to being, undeniably, it
has come to stay as it is now well grounded under international investment law as a component of
the FET standard with the tribunal in TécnicasMedioambientalesTecmed S.A. v United Mexican
States being one of the earliest tribunals to imply that the protection of legitimate expectation is a
component of the FET standard. In this regard, the tribunal asserted that “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.”146 The reasoning in this
popularly quoted statement has been followed by many tribunals.147. According to commentators,
the Tecmed award provided the “the most far-reaching exposition of the principle underlying the
developing notion of legitimate expectation as applied to fair and equitable treatment in
142
Expropriates Religious Properties Case, Award rendered on 1 September 1920 cited in Ioana Tudor, The Fair and
Equitable Treatment Standard in the International Law of Foreign Investment (1stedn, Oxford University Press 2012)
163.
143
Procedural protection means that administrative acts or decisions are reviewed and hearing opportunity availed.
144
Entails setting aside the offending administrative decisions or award of damages.
145
Potesta (n 156) 7.
146
TECMED (n 43) para 154.
147
The tribunal in MTD v. Chile relied on the TECMED standard.MTD Equity Sdn. Bhd. and MTD Chile S.A. v.
Republic of Chile, ICSID Case No. ARB/01/7, Award 25 May 2004 paras 114 and 115 (hereinafter MTD v. Chile).
177
investment” 148 A number of scholars 149 and tribunals 150 however criticised the Tecmed’s
tribunal’s definition implying that its standards are too stringent and idealistic.
Subsequent to the Tecmed award, the tribunal in International Thunderbird Gaming Corporation
v. United Mexican States 151 also articulated another often-quoted definition of the concept of
legitimate expectation when it held “where a contracting party’s conduct creates reasonable and
justifiable expectations on the part of an investor host state’s failure to honour those expectations
could cause the investor to suffer damages.”152 Meanwhile, the concept of legitimate expectations
has been deemed a self-standing subcategory which is fast becoming an autonomous concept under
international investment law through arbitral practice.153 The concept has also been subject to the
debate on the appropriateness of equating it to a general principle of law within the context of
Article 38 (10) of the International Court of Justice Statute.154 As a general principle of law it
could be inferred as the applicable law particularly relevant for ascertaining governing law and as
a FET standard interpretation or application tool. 155 More recently the Bogdanov III tribunal
opined that the protection of legitimate expectation is now firmly rooted in arbitral practice156,
148
Campbell McLachlan et al, International Investment Arbitration: Substantive Principles (New York Oxford
University Press 2007) 235. Potesta (n 156) 12.
149
McLachlan, Schill and Sornarajah in their various writings criticised the Tecmed definition for its utopian
tendencies which could not have been the intention of the contracting parties to the treaty. See Campbell McLachlan,
‘Investment Treaties and General International Law’ (2008) 57 INT COMP.L.Q 361 at 377. See also Stephan Schill,
The Multi-lateralization of International Investment Law, Cambridge (Cambridge University Press 2009) 334. See
also M Sornarajah, The International Law on Foreign Investment (3rdedn, Cambridge University Press 2010) 355.
150
The ad hoc annulment committee in MTD v. Chile found the Tecmed’s tribunal reasoning that investor expectation
is a source of host State’s obligation questionable. See MTD Equity Sdn. Bhd. And MTD Chile v. Republic of Chile,
Decision on the Application for Annulment 21 March 2007 para 67.
151
NAFTA/UNCITRAL, Award 26 January 2006 (hereinafter Thunderbird). See also the definition proffered by the
tribunals in Waste Management Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Award 09 January
2003 (hereinafter Waste Management).
152
Ibid Thunderbird para 147.
153
In support of this emerging trend attributing autonomous status to legitimate expectation doctrine, Thomas Walde
his dissenting opinion in the case of Thunderbird stated that there has been a significant growth in the role and scope
of legitimate expectation principle which has caused the metamorphosis of the doctrine to a “self-standing sub-
category” under the FET standard. See Thomas Walde’s Dissenting Opinion in Thunderbird (Separate Opinion of
Thomas Walde (December 2005) para 37). Felipe Mutis Tellez, ‘Conditions and Criteria For The Protection of
Legitimate Expectations Under International Investment Law’ 28 (2012) ICSID Review 432, 432.
154
International, Court of Justice, The Statute of the International Court of Justice (1945), available at <http://www.icj-
cij.org>
155
Elizabeth Snodgrass argues in her work that legitimate expectation can be justified as reflecting a general principle
of law recognized by civilized nations. See Elizabeth Snodgrass, ‘Protecting Investors’ Legitimate Expectations –
Recognizing and Delimiting a General Principle’ 21 (2006) ICSID Review 1, 2.
156
Yuri Bogdanov and YuliaBogdanova v. Republic of Moldova, SCC Case No. V091/2012, Final Award 16 April
2016 para 183 (hereinafter Bogdanov v. Moldova III).
178
whereas the Arif v. Moldova tribunal on the other hand feels that the notion of legitimate
expectation being basis for analysing whether a state has failed to accord FET treatment for a
variety of reasons, remain problematic because it is susceptible to “a certain easy circularity of
argument.”157
Arbitral and scholarly attempts have been made to establish criteria for invoking the protection
afforded by the doctrine of legitimate expectations so as not have investors’ limitless expectations.
(Cite Felipe page 1 and a relevant case). The results of these attempts have also not clearly defined
or delineated the criteria but furthered the debate. There are however a number of notable and
fundamental conditions which have emerged from arbitral practice flowing from majority of the
tribunals and these include:
 Legitimate expectations cannot be determined by the investors subjective expectations, regardless

of whether it formed the basis of the investors’ investment decision. It is clear from some dominant
line of cases such as (cite case) that subjective expectations are excluded from the protection
conferred by international law mechanisms.158
 Equally important is the time when the investors’ legitimate expectation is deemed to have
accrued. On the authority of (Cite an apt case), an investor’s legitimate expectation would be
deemed to have been created based on the legal and business framework or regime existing at the
time when a decisive and significant investment decision was made.159
157
Mr. Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23, Award 08 April 2013 para 533
(hereinafter Arif v. Moldova).
158
See Murphy v. Ecuador (n 137) paras 248 and 249, wherein the tribunal asserted that an investor’s legitimate
expectations are based upon an objective understanding of the legal framework within which the investor has made
its investment and that the Tribunal must make an objective assessment of the investor’s legitimate expectations at the
time that it made its investment in Ecuador, taking into consideration all of the relevant circumstances. Similarly, the
tribunal in Perenco v. Ecuador while quoting the Murphy tribunal and a host of other tribunals sharing same opinion
stated that the Tribunal is required to make an objective determination of investor’s expectations having regard to all
relevant circumstances. See Perenco Ecuador Ltd. v. The Republic of Ecuador and EmpresaEstatalPetróleos del
Ecuador (Petroecuador), ICSID Case No. ARB/08/6, Decision on Remaining Issues of Jurisdiction and on Liability
12 September 2014 para 560 (hereinafter Perenco v. Ecuador).
159
According to MamidoilJetoil v. Albania tribunal, legitimate expectations can only arise at the time the investment
was made as subsequent developments are speculative. The tribunal quoted AES Summit v. Hungary Award which
also confirms arbitral jurisprudence that legitimate expectation is created at time of investment. The tribunal however
acknowledged the difficulty in accurately pinpointing the specific time when an investment is made where there are a
series of transactions and conducts. MamidoilJetoil Greek Petroleum Products Societe S.A. v. Republic of Albania,
179
 One other factor to be taken into account when determining what constitutes investor’s legitimate
expectation relates to governmental conducts and representations which confer benefit to the
investor. Where the host state’s representations, undertakings or assurances do not confer or offer
the investor any benefit or the investor does not derive any benefit therefrom, it goes to say that
there can be no expectation to be protected.
 Furthermore, an expectation will only be protected if there are changes in the host state’s legal or
business regime as a result of legislation or regulatory amendments or enactment or there is a
rescission or reversal of previously given undertakings, representations or guarantees. There can
be no violation of legitimate expectation where the status quo remains the same or is maintained
just as the time of investment.
The host state’s legal and business framework form the basis for the protection of legitimate
expectation under international law. This framework comprises of a whole range of variables
including legislation, regulation, explicit and implicit undertakings, acknowledgements,
representations etc. Hence, to do an appreciable analysis of protection of stability guarantees160
through the corridors of legitimate expectation principle, it is essential to discuss arbitral aptitude
towards the types of host state’s conducts which create expectations in relation to the degree of
expectations. Various tribunals have introduced several criteria to determine governmental actions
or conducts that can frustrate or tarnish investors’ legitimate expectation and therefore be a
violation or breach of the FET standard. These include host state’s conducts in exercise of
sovereign powers as expounded by the Bayindir v. Pakistan tribunal.161In Impregilo v. Pakistan
Decision on Jurisdiction the tribunal postulated that a host states may breach the obligations
assumed under the BIT only when acting in the exercise of its sovereign authority (“puissance
ICSID Case No. ARB/11/24, Award 30 March 2015 paras 695, 696 and 707 (hereinafter MamidoilJetoil v. Albania).
See also Tellez (n 172) 433.
160
Recall that for the purpose of this thesis, Stability Guarantee has been defined as encompassing a wide spectrum of
host State’s undertakings, assurances, pledges, commitments, agreements and covenants whether real or ostensible, to
maintain a stable and predictable legal, regulatory and contractual regime pertaining to foreign investments. Thus, in
the context of this paper, Stability Guarantees include stabilization and renegotiation clauses in state contracts, stability
commitments in national legislations and investment treaties together with all forms of stability promises that foreign
investors can leverage on.
161
BayindirInsaatTurizmTicaretVeSanayi A.Ş v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Award
27 August 2009 para 180 (hereinafter Bayindir v. Pakistan).
180
publique”) and not in a contracting party capacity.162 This in effect means that only conduct
which can be done by sovereign can amount to violation of FET standard. However, generally
speaking, governmental actions or conducts that can frustrate investors’ legitimate expectation and
consequently violate the FET standard can be categorised under 3 broad headings of (i) contractual
undertakings, (ii) informal representations/unilateral undertakings and (iii) general legal and
regulatory framework.163 It is instructive to note that some commentators deem the term “legal
and regulatory framework” to encompass all three broad headings which comprise of a whole
range of variables including legislation, regulation, explicit and implicit undertakings,
acknowledgements, representations, contractual assurances etc. 164 In any case, in terms of
hierarchy, the view expressed by Continental Casualty165 tribunal is consistent with the popular
opinion which holds that legitimate expectation deriving from contract require greater protection
as opposed to expectations arising out of political statements and general legislative assurances.
According to Postesta“ … when a contractual commitment is at stake, the expectation factor
appears to be the strongest”166. Furthermore, the Total SA v. The Argentine Republic Tribunal
suggested that general legal and regulatory framework engenders “reduced expectation” when it
stated that it is only in exceptional cases that protection of legitimate expectation is invoked for
redress of legislative act. 167 Meanwhile, Total v. Argentina tribunal extrapolated the principles
enunciated in the Guiding Principles Applicable to Unilateral Declarations of States Capable of
Creating Legal Obligations168 (“the Guidelines”) to the facts of the case in order to evaluate
Total’s various claims of breach by Argentina.169
Investor-Claimants’ Expectation of Stability Based on Contractual Undertakings
162
Impregilo S.p.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/3, Decision on Jurisdiction 22 April
2005 para 260 (hereinafter Impregilo v. Pakistan).
163
There is no definitive or established categorisation of governmental conducts that generate legitimate expectations
under international investment law. For this purpose of this paper, the author adopts the three-prong approach as it
serves an encompassing purpose.
164
See Tellez (n 172) and Moshe Hirsch, ‘Between Fair and Equitable Treatment and Stabilization Clause: Stable
Legal Environment and Regulatory Change in International Investment Law’ 07-13 (2013) International Law Forum
7. Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2272952 accessed 2 October 2013.
165
Continental C`asualtyv. Argentina para 261.
166
Potesta (n 156) 36.
167
ICSID Case No.ARB/04/1, Award 27 December 2010 para 129 (hereinafter Total SA)
168
Adopted by the International Law Commission at its 58th session in 2006 together with commentaries thereto (ILC
Report, A/61/10, 2006, Chapter IX), based on the analysis of the jurisprudence of the ICJ and pertinent State practice
summarized in the eighth report of the Special Rapporteur (A/CN.4/557).
169
Total v. Argentina Paras 132 and 135.
181
In many cases dealing with protection of legitimate expectation brought before investment treaty
arbitral panels, the expectations frustrated were based on contracts breached by host States.170 It
must quickly be added that the expectations deemed frustrated in these cases, were a whole range
of expectations and not necessarily expectation of stability and predictability. In fact, in the words
of Gehre and Romulo which is also supported by Peter Cameron, there is scarcity of reported
investment disputes that involve stabilization clause. 171 Meanwhile, a breach of legitimate
expectation based on host State’s contractual undertakings was successfully argued in the case of
MTD Equity SdnBhd and MTD Chile SA v Chile.172 In this case, the Chilean Foreign Investment
Commission executed a contract with MTD a Malaysian investor approving MTD’s investment in
the development of an urban real estate project in Chilean municipality of Pirque. The land
acquired for the project had to be rezoned and the Chilean Government had given assurances that
the rezoning was achievable in a timely manner. Subsequent to MTD investing approximately
$17 Million into the project, the governmental agency in charge of rezoning disapproved the
rezoning application claiming that it was inconvenient and inconsistent with Chilean Urban
Development and Environmental Policies. MTD instituted an ICSID arbitral proceeding on the
basis of Chile – Malaysia BIT contending amongst others, that Chile had breached the FET
standard since the contract and other factors had given rise to the expectation that the project would
be successfully completed. The tribunal awarded damages to MTD when it found that indeed
MTD’s legitimate expectation had been frustrated through Chile’s refusal to rezone the land after
having created strong expectations that the project would be implemented.
Needless to say that not every breach of contract will amount to a violation of legitimate
expectation which is protected within investor-state arbitral system as to hold host States liable for
frustrating the investors’ legitimate expectation wherever there is a breach of contractual
obligation will effectively turn the FET standard to the Umbrella Clause.173 Terms such as “mere
170
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2ndedn, Oxford University
Press 2012) 152.
171
Necessarily, there is paucity of claims based on frustration of contractual expectation of stability. See KatjaGehre
and Romulo Brillo, Stabilization Clause: Beyond Balancing page 10. See also Peter Cameron, Pursuit of Stability.
Whilst this statement might hold true as period of publication of these article and book, the situation is not exactly the
same in the light of recently decided cases of Oxus Gold, Bogdanov III etc.
172
MTD v. Chile (n 166) para 154.
173
Dolzerand Schreuer (n 49) 152-3.
182
contractual expectations” have been used to describe contractual expectations which do not qualify
as legitimate expectations under international law and thus unprotected by treaty mechanisms. 174
Top on the list of cases which distinguish between investors’ legitimate expectation protectable
under the treaty and mere contractual expectations is Parkerings — Compagniet AS v Republic of
Lithuania. 175 In this matter, the tribunal observed that contractual relationships involves
expectations from each party that do not necessarily translate to legitimate expectation under
international investment law. The Gustav F W Hamester GmbH & Co KG v. Republic of Ghana176
tribunal also distinguished between the legitimate expectation and contractual rights, alluding to
the reasoning of the Parkering tribunal.
It can be surmised from above, that thwarting investor’s contractual expectations without more
will by itself not amount to a violation of the investor’s legitimate expectation which enjoys
international law protection. The question that begs an answer is what are the requirements for
turning into a legitimate expectation, an expectation deriving from a contract? Breach of
contractual undertaking will amount to frustration of legitimate expectation depending on the
perspective of the arbitrators in search of ‘something further’ as postulated by the tribunal in
Glamis Gold Limited v United States of America when it held:
“a mere contract breach, without “something further” such as denial of justice or discrimination,
normally will not suffice to establish a breach of Article 1105 …”177
Arbitral responses to this search for ‘something further’ as the qualifying elements leaves room
for doubt as no uniform or established case law can be discerned from the uncoordinated and
imprecise criteria postulated by various tribunals. For instance, the Parkerings tribunal introduced
a somewhat contentious criterion when it held that a contractual breach will violate legitimate
expectation only where there is initial recourse to local courts and there is perceived denial of
justice.178 Whereas, the ImpregiloSpAv Islamic Republic of Pakistan179 tribunal put forward the
174
175
Parkerings v. Lithuania (n 78) para 344.
176
ICSID Case No. ARB/07/24, Award 18 June 2010 para 335 (hereinafter Hamester).
177
NAFTA Tribunal, Award 8 June 2009 para 620 hereinafter Glamis Gold).
178
Parkerings (n 78) para 344.
179
Impegilo v. Pakistan (n 181) 2005 para 299.
183
‘misuse of public power’ criterion when it found that breach of contract will amount to breach of
FET where the host State had misused public power. Consortium R.F.C.C. v. The Kingdom of
Moroccotribunal approached this issue from another angle when it suggested that the breach
should involve exercise of sovereign powers as only conducts undertaken by the host State in its
sovereign capacity are capable of breaching the FET standard.180 It can be argued that this view
is not mindful of the difficulty in distinguishing between sovereign and commercial acts of host
States.
In conclusion, although there is arbitral tribunals’ consensus that “expectation of contract

performance is not necessarily an expectation protected by the FET standard” 181 the quest for
‘something further’ or rather qualifying criteria has occasioned a plethora of amorphous
permutations which have provided little clarity or certainty. In consonance with Potesta, this area
demands further refinement and more precise guidance by arbitral tribunals.182
Afore-mentioned search for something further to ground a claim of frustration of legitimate

expectation based on contractual undertaking mostly pertains to expectations including that of
expectation of stability or predictability. In terms of expectation of contractual stability
specifically, the jurisprudence has been developed considerably such that it represents a tangible
protection for foreign investors. Contractual stability in this context include stabilization clauses
in state contracts, legal and stability agreements. In international investment jurisprudence, the
validity of stabilization clause has been implicitly or explicitly recognised as giving rise to a right
to compensation. 183 Apart from the earlier cases alleging compensable nationalization and
expropriation, where legality of stabilization clauses was in issue (with little reliance on treaty
substantive standards protection), stabilization clause has been examined in investor-state
primarily within two main parameters. The first being where stabilization clause was directly the
180
ICSID Case No. ARB/00/6, Award 22 December 2003.
181
Kenneth Vandevelde, A Unified Theory of Fair and Equitable Treatment, 43 (2010) ILP 43, 74
182
Michele Potesta, Legitimate Expectation in Investment Treaty Law: Understanding the Roots and the Limits of a
Controversial Concept 28 ICSID Review 88, 103.
183
KatjaGehne and Romulo Brillo, ‘Stabilization Clauses in International Investment Law: Beyond Balancing and Fair
and Equitable Treatment’ (2014) No. 2013/46 NCCR Trade Regulation Working Paper Page 17. Available at
http://www.nccr-trade.org/fileadmin/user_upload/nccr-trade.ch/wp2/Stab_clauses_final_final.pdf accessed 12
September 2016.
184
main core of the dispute. Secondly, which is the more rampant occurrence is where indirect
references to stabilization clause were deployed to dismiss or reject a claim based on legitimate
expectation. The first category of stabilization clause discourse will be contemplated hereunder
whilst indirect references to stabilization will be discussed in part which focuses on general
legislative and regulatory framework of host states to ground a legitimate expectation claim.The
principles enunciated in MTD v. Chile can by analogy be applied to cases involving contractual
stabilization clauses.
INVESTOR-CLAIMANTS’ EXPECTATION OF STABILITY BASED ON INFORMAL

REPRESENTATIONS/UNILATERAL UNDERTAKINGS
An expectation can be created in the absence of contractual representations and assurances to the
investor in so far as the representations or assurances are specific and devoid of ambiguity. Indeed,
formal assurances are weightier than host States’ informal and unilateral representations and
assurances in triggering the protection of legitimate expectation. All the same, some tribunals
subscribe to the idea that rescission or cancellation of assurances or representations made by the
host State which were reasonably relied on would ground a claim based of violation of FET
standard. 184 Furthermore, the Parkerings’ tribunal in laying down the explicit and implicit
guarantees criterion suggested that expectation can be created in the absence of contractual
representations and assurances to the extent that the circumstances surrounding the agreement’s
conclusion are decisive.185
International investment law scholars such as Newcombe and Paradell have in support of this line
of reasoning asserted that governmental conducts directed at the investor may give rise to
legitimate expectation since “… Typically, the conduct giving rise to the legitimate expectations
will be in form of oral or written representations, undertakings or commitments, ….”186
184
The Waste Management is one of such tribunals that deemed investors’ reliance on host States’ representations as
being consequential to a legitimate expectation claim. See (n 170) para 98.
185
Parkerings (n 78) para 331.
186
Newcombe&Paradell, Law and Practice of Investment Treaties (Kluwer Law International 2009) 280.
185
What is however very crucial is that these informal or unilateral undertakings or assurances must
exhibit high degree of specificity.187 According to Tellez, “There is a trend already reflected in
various arbitral decisions that narrows the applicability of legitimate expectations to strictly to
case where specific representations is made by the host State…”188 In this respect, lack of formal
contractually binding or comparable binding undertaking led the tribunal in Lauder v. Czech to
dismiss the claim based on breach of FET standard. Where a state does not substantially commit
itself, a claim for violation of legitimate expectation will most likely fail. This was the case in
Lauder v. Czech where the tribunal found that the licence did not amount to specific undertaking
of the host state and consequently dismissed the claimant’s claim.
Specific representations should ordinarily have two essential elements; the first is that the promise
must be specific and not ambiguous, the second being that it must be specifically addressed to the
investor and not to the generality of the people.189 In the words of Elizabeth Snodgrass, “legitimate
expectations can only, or can at least more readily, be based on acts directed at one individual or
a small group rather than acts or rules addressed more generally.”190
Having secured requisite permits from the federal and state authorities, denial of municipal’s
permit for the construction of a hazardous waste landfill, led the tribunal in Metalclad Corp v.
Mexico,191 to hold in favour of the investor. To the tribunal, the assurances given by the federal
and state authorities to the investor were sufficiently unambiguous, definite and specific for the
investor to justifiably have expectations that the project will proceed.
In Frontier Petroleum v. Czech the tribunal was of the opinion that certain letters written by a
Czech Ministry to the claimant were not representations, assurances or promises to be relied upon
by the Claimant. Hence, the claimant’s case seeking the protection of its legitimate expectation
failed due to the fact that the supposed undertaking or representations statements did not exhibit
187
For a detailed analysis of unilateral states acts, statements and declarations of host states in domestic or national
foreign investment laws and unilateral assumption of obligations under international law, see Makane Moïse
Mbengue, ‘National Legislation and Unilateral Acts of States’ in Tarcisio Gazzini and Eric De Brabandere (eds),
International Investment Law. The Sources of Rights and Obligations (Martinus Nijhoff Publishers 2012).
188
Tellez (n 172) 441.
189
El Paso v. Argentina (n 147).
190
Snodgrass (n 174) 36.
191
ICSID Case No. ARB(AF)/97/1, Award, 30 August 2000 para 89.
186
the level of specificity necessary to generate legitimate expectations.192 Also the tribunal in White
industries v. India held that the statement of the Indian governmental official did not qualify as
specific undertaking for the purpose of triggering the protection of the investor’s legitimate
expectation.193Meanwhile,194Thomas Walde in Thunderbirdarbitration adopted a broad protection
of legitimate expectation when he expressed that “a legitimate expectation is assumed more readily
if an individual investor receives specifically formal assurances that display visibly an official
character”.195
Stabilization clauses contained in domestic legislations fall into this category of

“specific”governmental conducts that generate legitimate expectation which will trigger the treaty
protection of FET standard. As noted by a scholar on this subject Prof Peter Cameron, there exist
“substantive provisions in certain legislative acts that set out more or less [specific guarantees]
for the stabilization of a category of investments.”196A case in line is the Oxus Gold v. Uzbekistan
arbitration involving a UK registered investor which commenced mining operations through its
wholly-owned subsidiaries ORC and Marakand in Uzbekistan. Oxus Gold initiated an investment
arbitration under the United Kingdom-Uzbekistan BIT claiming multiple breaches of the BIT in
respect of two business operations it was involved in Uzbekistan; Khandiza Project and AGF
Project. In 1996, the claimant entered into a Primary Exploration Agreement with an agency of
Uzbekistan Government for the development of Khandiza Deposits and was reposed with an
obligation to develop the initial framework of feasibility study. Meanwhile, the claimant acquired
an interest in the AGF Project after one of the joint venture partners withdrew from the commercial
arrangement. Prior to acquisition of Oxus Gold’s interest in AGF Project, the host State had
granted the AGF Joint Venture certain tax and accounting rights and incentives regarding the
192
Frontier Petroleum v. Czech (n 50) para 468.
193
White Industries Australia Limited v. The Republic of India, UNCITRAL Final Award 20 November 2011 para
10.3.17 (hereinafter White Industries v. India).
194194
Arbitral jurisprudence on the concept of legitimate expectations has identified that certain actions do not create
investors’ legitimate expectation and will consequently not be protected under international investment law. These
include Host State policy to encourage investment i.e. General Investment encouragement policy. see PSEG v. Turkey
(n 142); Reliance on public statement on currency convertibility. See Continental v. Argentina; Political Statements
was not equated to specific commitment to foreign investor and could therefore not have created legitimate
expectation. See El Paso v. Argentina; Investment Promotion Roadshow.
195
International Thunderbird Gaming Corporation v. The United Mexican States, UNCITRAL Separate Opinion of
Thomas Wälde01 December 2005 para 32 (hereinafter Thunderbird – Thomas Walde Separate Opinion).
196
Cameron (n 2) 62.
187
exploration and development of the Amantaytau goldfield.197 Article 7 of Decree No. 477198 is
particularly relevant to the current discuss because it provides a tax stabilization clause in the
freezing format:
“In the event of changes during the next ten years in the tax law of the Republic of Uzbekistan
which adversely affect the activities of the Joint Venture, to provide the application of legal and
other normative acts valid at the time of signing of the statute documentation for the Joint
Venture.”
Furthermore, Uzbekistan in 1996 issued Decree No. 127-20199 which exempted AGF from certain
taxes including VAT on materials and equipment. Also, in protection of investors generally,
Uzbekistan issued Law 609-1 200 wherein further assurances and guarantees were provided to
protect the rights of foreign investors who execute investment activities in country. There
assurances were available for Oxus Gold’s protection notwithstanding that they pre-dated its
acquisition of interest in AGF project in 1999. In any case in year 2000, the Government of
Uzbekistan issued Decree No 266 201 which re-affirmed guarantees and assurances previously
granted to AGF Project JV by confirming certain tax privileges and extending the tax stabilization
clause for another 10 years.
On the Khandiza project, a dispute arose over denial of development rights to Oxus Gold following
the expiration of the exploration phase and the successful completion of the Preliminary Feasibility
Study. Amongst other claims, Oxus Gold contended that Uzbekistan breached the FET standard
by failing to honour its legitimate expectation of being granted development rights of Khandiza
197
Oxus Gold v. Uzbekistan (n 100) para 39.
198
On 22 September 1994, Uzbekistan issued Decree No. 477 ‘On the Formation of the AGF Joint Venture and on
Matters Ensuring its Effective Functioning’ (hereinafter “Decree No. 477”).
199
On Additional Measures to Ensure the Effective Functioning of the AGF Joint Venture.
200
The stability provision of Law 609-1 of 30th April 1998 stipulated that “If the subsequent legislation of the Republic
of Uzbekistan makes worse investment conditions, than legislation current on the date of investment is applied to
foreign investments within ten years of the date of investment. The foreign investor has the right at his own discretion
to apply those provisions of a new legislation which make better conditions of his investment. Worsening conditions
of investments refer to changes and amendments to the legislation current on the date of investment or adoption of the
new legal acts, providing: - increase in the rate of tax on incomes, received as dividends, paid to the foreign investor.”
201
Decree No. 266 of 11th July 2000 ‘On Additional Measures to Organize the Operation of the Joint Venture
“Amantaytau Goldfields”’
188
Project. 202 The legitimate expectations arguments and issues in contention pertaining to the
Khandiza Project are not particularly applicable in the context of legitimate expectation of stability
and will not be dwelled on herein. Suffice to state that the tribunal rejected and dismissed all the
claims concerning the Khandiza Project when it held that the investor-claimant had no
unconditional or unsecured right to exclusively develop the Khandiza Deposit when it signed the
Primary Exploration Agreement in 1996.203
Emerging from the AGF Project is also a dispute which is on all fours with the current discourse
i.e. legitimate expectation of stability based on unilateral or specific commitment of the host state.
In this regard, there were a number of actions and inactions of Uzbekistan which Oxus Gold
considered basis for filing an investment arbitration. Top amongst these conducts is the change in
the tax regime effected via Decree No 74 and 133 in 2006, despite stabilization commitments
proffered by Decree Nos 477, 127-20 and Law 609-1 enunciated above.204 Oxus Gold claimed
amongst other infringements, a violation of FET standard stipulated in Article 2 (2) of the BIT for
having frustrated its expectation of stability reasonably relied on to invest in the AGF Project. 205
By way of defence, Uzbekistan asserted that AGF tax Privileges and benefits including the
stabilization guarantees were conditional on compliance with Uzbek law and proper
implementation of the Project.206 The tribunal was consequently tasked with determining if the
revocation of the tax privileges and changes to the VAT regime were breaches of the FET Standard
guaranteed under the BIT.
The tribunal commenced its analysis on the premise that a state may modify its tax regime but
must honour stabilization clauses and specific privileges that it grants to investors.207 The tribunal
found further that when investor-claimant made its decision to acquire a stake in the AGF Project,
it undoubtedly relied on various tax privileges granted by afore-mentioned decrees and laws. The
202
Oxus Gold v. Uzbekistan (n 100) para 306.
203
Ibidparas 268 and 347.
204
In 2006, these privileges and necessarily the stabilization clauses were revoked particularly by Decree No. 74 of
1st May 2006 ‘On Additional Measures to Increase an Incentive Role of Privileges Granted to Companies with Foreign
Investments” and Decree No. 133 of 7th July 2006 ‘On Entering of Amendments and Invalidations of Some
Resolutions of the Government of the Republic of Uzbekistan’. Ibid para 479 and 823.
205
Oxus Gold v. Uzbekistan (n 100) para 686 (iv)
206
Ibidpara 691 (ii)
207
Ibid para 824.
189
tribunal failed to accept Uzbekistan’s argument that the privileges were justifiably revoked due to
investor-claimant’s deficient performance and non-compliance with Uzbek’s laws; moreover, the
stabilization clause was re-confirmed twice.208 Finally, the tribunal found that for changing and
modifying the tax regime despite the stabilization guarantees, Uzbekistan had frustrated the
Investor-claimant’s legitimate expectation which was contrary to the FET Standard under Article
2 (2) of the BIT.209 Save for this particular claim of the investor-claimant, all other claims were
rejected and dismissed by the tribunal including that based on rescission of VAT framework vis-
à-vis the VAT stabilization commitment.210 On this issue, the tribunal discountenanced Oxus Gold
claim to legitimate expectation of stability as the changes were permissible since the stabilization
clause duration had lapsed. According to the Tribunal, in this regard, no breach of FET Standard
occurred. The tribunal ultimately granted the investor-claimant a compensation of $10,299,572
plus interests for the damages caused by Uzbekistan’s violation of the BIT FET Standard.211
Another case in which the issue of specific and unilateral undertaking of the host state was argued
to create a legitimate expectation of stability is the Bogdanov v. Moldova III matter. In this case,
Russian national investors brought a claim under the Russian-Moldova BIT against Moldova
alleging amongst other things the violation of their legitimate expectation. The investor-claimants
owned Grand-Torg, a paint and varnish production and sale company registered in Moldova and
granted licence to operate in the free-economic zone called Expo-Business Chisinau (“EBC”).
Meanwhile companies licenced to operate in the EBC were subject to special customs and tax
incentives, privileges and benefits. Grand-Torg had a business/commercial arrangement with
Midgard Terra another Moldova registered company owned by the investor-claimant but not
operating within the EBC.
In the quest to encourage investment inflow into the EBC, Moldova granted to foreign investors
in general and EBC resident companies in particular, stabilization guarantees through Law 998212
208
Ibid para 825.
209
Ibid.
210
It is instructive to note that Uzbekistan’s counterclaim did not succeed as the tribunal declined to assume
jurisdiction to hear same. Ibid para 959.
211
Ibid para 890.
212
On Foreign Investments of 1st April 1992 provides in Article 43 (3) Continuation on original terms and conditions,
the commercial agreements involving a foreign investor notwithstanding enactment of any subsequent laws which
worsen the economic position of the parties to the agreement.
190
and Law 625 respectively. Article 7 of Law 625 in particular provided a stability guarantee as
follows:
“Should new laws be adopted deteriorating the conditions of Free Zone residents' activities with
regard to the customs and tax regimes stipulated by the present law, the residents shall be entitled
to rely, for a period of ten years as of the date of the enactment of the new law, on the legislation
of the Republic of Moldova in force on the date of the registration of the residents in the Economic
Free Zone.”213
In 1998, after the investor-claimants acquired their interests in Moldova, Law 1540-XIII was
enacted and subsequently modified in 2002, 2007 and 2008 to introduce environmental charges on
imports of raw materials used to manufacture paints and varnishes and finished products. The
custom regime was re-defined such that goods sold by Grand Torg which were previously tax free
were subject to environmental charges. Consequently, the Claimants contended that said
environmental charges were concealed VAT which they were exempted from paying on the basis
of the stabilization clauses. The investor-claimants claimed that they had been denied their
legitimate expectation created by Article 7, an explicit promise that no unfavourable charges would
be made in the customs and tax regulations in force at the time of the investment214 which therefor
constituted a breach of Article 3 (1) of the BIT. To the investor-claimant’s claim to a legitimate
expectation that the custom rules exempting Grand Torg from custom duties and taxes will stay
unaltered for at least 10 years from 2nd March 2001, Moldova countered that the measures adopted
were not part of the stabilization guarantees offered since they were environmental charges and
not custom duties.
According to the tribunal, Article 7 stabilization commitments indeed created a legitimate

expectation with respect to customs and tax regime and Moldova was obliged to respect the
claimants’ legitimate expectation. Despite the enunciation of the principle, the tribunal found that
no legitimate expectation was frustrated in this case because the new legislation and it amendments
did not fall within the scope of the stabilization obligation of the host State. In simple terms, the
213
It should be noted that Article 6 (2) Law 625 exempted goods originating from EBC from VAT payments.
214
Bogdanov v. Moldova III (n 175) para 118.
191
tribunal affirmed the defence of Moldova by restating that Law 625 related to specific customs
and VAT privileges for residents of EBC but did not extend to legislation in other fields. 215 The
sole arbitrator went on to justify this position, by buttressing that the protection of the environment
is a legitimate aim and any legislation to that effect, has an objective and reasonable justification
imposition of which can no way violate the FET Standard.216 Moreover, the investor-claimant had
mentioned that they had no objection in principle to imposition of environmental charges on raw
materials rather than finished goods. The arbitrator saw no reason to find in favour of the investor-
claimants with respect to the claims based on Law 998 stabilization clauses. In fact, the tribunal
failed to see the correlation between the introduction of the environmental charges and Grand
Torg/Midgard Terra’s commercial arrangements.217
From the above, it can be seen that there is enough authority in investor-state arbitral jurisprudence
advancing the position that investors reliance on host States’ informal or unilateral representations,
assurances or guarantees can generate legitimate expectation subject to protection under
international investment law. 218 Unrested however is the debate on the degree of specificity
required to ground a legitimate expectation claim in this regard.
General Legislative and Regulatory Framework
As earlier noted, general legal and regulatory framework of the host State can generate investor’s
legitimate expectation. In this scenario, the main issue for determination often before tribunals is
investor’s expectation of stability of legal framework and continuity of investment terms and
condition as determined by laws and regulations prevailing at the time investments were made.
The issue of stability becomes relevant to the legitimate expectation doctrine when foreign
investors argue that expectations have been legitimately and reasonably created on the basis of
host State’s legal and regulatory framework existing at the time of investment. These arguments
tend to contend that for having created expectations which were relied upon by the investors, host
215
Ibid para 188.
216
Ibid para 193.
217
Ibid para 210. This is to dispel investor-claimants’ assertion that the commercial arrangement between Grand Torg
and Midgard Terra were protected by Law 998 stabilization clause and that imposition of custom duties was an
infringement of
218
Potesta (n 156) 19.
192
States are obliged to maintain the stability and immutability of the legal and business environment
in place at the time of making their investments. Thus, any subsequent unilateral changes in
legislations or regulations will be a violation of FET standard.On this issue, the pattern of arbitral
awards present two partially opposed views. A group of “pro-investor” tribunals219 recognise the
need to protect investors’ legitimate expectation based on existing legislative and regulatory
framework because the host State is deemed to have a duty to maintain a stable legal and business
framework.
Following the Argentine’s government’s adoption of several economic and regulatory measures
between 2001 and 2002 to address the severe financial crisis in the country, several investor-state
arbitral proceedings were instituted against Argentina. In most of these cases, Argentina was
accused of frustrating the investors’ legitimate expectations amongst other claims. The tribunals
in the earlier cases were proponents of the viewpoint that host States’ legal and regulatory
framework must foster stability; hence any amendment or modification thereof will violate
investors’ legitimate expectations. Thus, the tribunals in Azurix Corp v. The Argentine
Republic, 220 BG Group Plc v. Argentina, 221 CMS Gas Transmission Company v.
Argentina, 222 Enron CorpPonderosa Assets L.P v Argentina, 223 Sempra Energy International v
Argentina224 all followed this line of award although with differing opinions on the acceptability
of the necessity defence canvassed by Argentina.225 In particular, the LG&E Energy Corporation
and ors v Argentina tribunal found that the investor’s legitimate expectation was frustrated due to
Argentina’s abrogation of the relevant laws and regulations in the gas sector which initially had
been deployed to attract investment.226 While the tribunal in Enron v. Argentina held that a stable
framework is a key element of the fair and equitable treatment and consequently found Argentina
219
Pro-investor to the extent that they held in favour of the investor.
220
ICSID Case No. ARB/01/12, Award 14 th July 2006 (hereinafter Azurix)
221
UNCITRAL Award 24 December 2007 (hereinafter BG).
222
ICSID Case No. ARB/01/08 Award 12th May 2005 (hereinafter CMS Gas)
223
ICSID Case No. ARB/01/2, Award, 22 May 2007 (hereinafter Enron).
224
ICSID Case No. ARB/02/16, Award 28 September 2007 (hereinafter Sempra).
225
Out of the over 40 cases against Argentina (12 have been concluded by January 2012), following the measures
taken to address the Argentine 2000 – 2002, only the tribunals in LG&E and Continental Casualty accepted
Argentina’s reliance on the necessity defence. See Christina Binder, ‘Stability and Change in Times of Fragmentation:
The Limits of PactaSuntServadaRevisisted’ 25 (2012) Leiden Journal of International Law 909 - 934
226
ICSID Case No ARB/02/1, Award 25 July 2007 paras 132- 139 (hereinafter LG & E).
193
in breach of the FET standard for failing to provide a stable framework by the dismantling of the
regulatory framework reasonably relied on by the investor.227
EurekoB.V.v. Republic of Poland 228 and Occidental Exploration and Production Company v.
Ecuador 229 are two non-Argentine cases which are in sync with the position in the earlier
Argentina cases. The Occidental tribunal went further to hold that the host State is obliged not to
alter the legal and business environment in which the investment was made because such
amendment and revolutionalization of the legal and business regime is a violation of the FET
standard for having frustrated the investor’s legitimate expectation. The Occidental tribunal like
some other tribunals referred to and based its reasoning on the textual language of the BITs’
preamble to assert that “stability of the legal and business framework is ... an essential element of
FET”230A counter-argument to reliance on BIT preamble text is that of the Continental Casualty
tribunal which posited that the stability of the legal framework although mentioned in the preamble
of the BIT is not a legal obligation in itself for contracting parties nor can it be defined as an object
of the treaty.231 The tribunal deems it as a pre-condition for only one of the two objects of the
treaty i.e. promotion of investment flow rather than protection of investment. The tribunal further
buttressed that such an implication as to stability in the BIT’s preamble would be contrary to an
effective interpretation of the treaty.232
The Micula v. Romania tribunal endorsed in principle, the contention of the LG v. Argentina
tribunal that the stability of the legal and business framework in the host state is an essential
element of fair and equitable treatment standard and same is an emerging standard of fair and
227
Enron (n 53) para 251 -268.
228
Partial Award, 19 August 2005 12 ICSID Reports (hereinafter Eureko)
229
UNCITRAL/LCIA Case No. UN3467, Award 1 July 2004 (hereinafter Occidental).
230
Ibid para 183. See also Potesta (n 4) 25. For instance, the preamble of the BIT interpreted in Duke Energy v.
stipulates that “fair and equitable treatment of investments is desirable in order to maintain a stable framework for
investments and maximum effective utilization of economic resources.”
231
Continental Casualty, Para 258.
232
Continental Casualty, Para 258.This view is contrast to the one postulated Occidental type tribunals which relied
on the texts of the treaty preamble in construing the meaning of FET and ultimately holding that the preamble texts
enable an understanding of the FET standard to oblige host States to maintain a stable and predictable business
environment.
194
equitable treatment in international law.233 The Micula v. Romania tribunal however subsequently
rebutted that:
“the fair and equitable treatment obligation is not an unqualified guarantee that regulations will
never change. Investors must expect that the legislation will change from time to time, absent a
stabilization clause or other specific assurances giving rise to a legitimate expectation of
stabilization. The BIT’s protection of the stability of the legal and business environment cannot be
interpreted as the equivalent of a stabilization clause.”234
The Micula et al. v. Romania arbitration involved investment in food and beverage industry of
Romania and grant of certain tax incentives for companies’ investment in regions deemed
disadvantaged. A special regulatory regime for disfavored regions comprised of tax exemptions
and other incentives for a 10-year tenure. The investor-claimants on the basis of these incentives
and special regulatory regime, invested in Ştei-Nucet which was designated a disfavored region.
Four years before the incentives were scheduled to expire, Romania changed its legislation and
withdrew most of the EGO 24 incentives. Consequently, the investor-claimants contended that
Romania failed to provide a stable and predictable legal and business environment for their
investment, and undermined their legitimate expectations with respect to the regulatory
framework. Furthermore, the investor-claimants argued that the premature revocation of the EGO
24 incentives frustrated the investor-claimants’ legitimate expectations that the special regulatory
regime would remain in place during the 10-year period guaranteed.235The tribunal in its analysis
elaborated on the notable core conditions to ground a legitimate expectation claim including
reasonableness, reliance and representation. 236 On the long run, the tribunal found that the
Claimants’ expectations were legitimate and reasonable as the legislative framework instilled in
the Claimant a legitimate expectation237 (paras 677 & 712). Consequently, Romania was held to
have violated the Investor-claimants’ legitimate expectations with respect to the availability of the
EGO 24 incentives.238
233
Micula v. Romania Para 528.
234
Micula v. Romania Para 529.
235
Micula Para 536.
236
Micula v. Romania Pare 669.
237
Ibid paras 677 and 712.
238
Ibid para 725.
195
In the more recent case of LESI &Astaldi v. Algeria, the tribunal cited both MTD v. Chile and
Tecmed v. Mexico to find that a state’s obligation to undertake fair and equitable treatment infers
amongst other things, maintenance of a sufficiently stable investment climate so as to allow a
reasonable diligent investor the opportunity to adopt then implement their commercial strategy.239
It would appear that these cases which seem to combine expectation with stability have equated
the FET standard to a stabilization clause. In effect this means that FET has the potentials to freeze
host States’ legal and regulatory regime. To use the words of Sornarajah, “it is as if stabilization
clause is read into every contract”.240 This is erroneous to the extent that stabilization clauses are
unequivocal individualized guarantees of host States to refrain effecting unilateral legislative or
regulatory changes that will impact the investor’s investment. Except renunciation of host State’s
inalienable sovereign legislative and regulatory rights is more concrete and unequivocal, it might
place unrealistic and inconceivable obligations on the host State. One cannot but agree with the
EDF (Services) Ltd v Romania tribunal’s statement that “vague representations may be unfair
burden on the state … such expectations would be neither legitimate nor reasonable.”241
It can also be argued that the FET standard entails taking cognizance of not only investors’
legitimate expectation but also host States’ legitimate legislative and regulatory rights. In the
exercise of these rights by effecting regulatory and legislative changes, host States’ should not be
held accountable to foreign investors in so far as they are acting in the public’s interest and there
are no unequivocal personalized assurances to foreign investors.
That being said, its apt to look at the opposing contentions in this regard. Thus , on the issue of
whether general legal and regulatory framework of the host State can give rise to investor’s
legitimate expectation, another school of thought argue that legitimate expectation is created only
by specific representations because of the difficulties and challenges of justifying legitimate
239
LESI &Astaldi v. Algeria Para 151 – a French award – holding obtained from investor-state law guide subject
navigator tool on 14th March 2017.
240
M Sornarajah, The International Law on Foreign Investment (3rdedn, Cambridge University Press 2010) 355.
241
ICSID Case No. ARB/05/13, Award October 8, 2009 para 217 (hereinafter EDF).
196
expectations on the basis of the pre-existing legal regime per se. 242 Here, there is a general
reluctance to interfere in host States’ administrative acts or actions which may frustrate
expectations if they are of general policy and not a rescission of individualised assurances or
undertakings such as stabilization clause. 243 This view has been confirmed in the recently
concluded case of Philip Morris v. Uruguay when the tribunal found that Legitimate expectation
depends on specific undertakings whilst general legislation applicable to a plurality of persons do
not create legitimate expectations of stability and immutability.244 Furthermore, tribunals such as
Saluka 245 and Parkerings 246 tribunals also argue that legitimate expectation is created only by
specific representations and typically uphold host States’ sovereign regulatory rights
notwithstanding the existence of treaties’ commitments which encourage stability of legal and
business regime or framework. 247 The Continental Casualty 248 , Total SA 249 and El Paso 250
tribunals in support of this approach hinged their arguments on the view that investors must
reasonably anticipate changes in the host States’ regulatory regimes and should be poised to
absolve whatever effect those future changes herald. This set of tribunals more often than not
make indirect reference to the importance of stabilization clause to secure host states’ commitment
to stability and predictability. This school of thought, by making copious references to the
significance and implication of stabilization clauses, have intrinsically enhanced its relevance.
They further contend that investors are expected to take on ordinary business risks including
regulatory changes, knowing fully well that BITs are not insurance policies.251In fact, the El Paso
tribunal specifically acknowledged that “economic and legal life is by nature
evolutionary.”252Moreover, the Parkering tribunal stated that host State has the right to exercise its
sovereign legislative powers as deemed fit. It held further that “… Save for the existence of an
agreement, in the form of a stabilisation clause or otherwise, there is nothing objectionable about
242
Tellez (n 17) 438 which cited footnoted Pandaya& Moody p.96.
243
Potesta (n 4) 9.
244
Philip Morrisv. Uruguay (n 153) para 426.
245
Saluka Investment BV (The Netherlands) v The Czech Republic, UNCITRAL/PCA, Partial Award 17 March 2006.
246
Parkerings (n 78).
247
Potesta (n 201) 112.
248
Continental Casualty (n 25)
249
Total SA (n 27)
250
El Paso (n 147).
251
The Maffezini tribunal emphasized the protection afforded by the legitimate expectation doctrine does not relieve
investors of business risks inherent in any investment. See Ioana Tudor (n 5) 167.
252
El Paso (n 44) para 352.
197
the amendment brought to the regulatory framework existing at the time an investor made its
investment.”253
This is in tandem with Total SA tribunal’s reiteration of the value of explicitly assumed obligations
of stabilization clause to buttress other implicit or non-specific host state’s undertaking. In this
regard, the tribunal noted that
“The expectation of the investor is undoubtedly “legitimate”, and hence subject to protection under
the fair and equitable treatment clause, if the host State has explicitly assumed a specific legal
obligation for the future, such as by contracts, concessions of stabilization clauses on which the
investor is therefore entitled to rely as a matter of law”254
It is thus, well established that there is no absolute certainty to stability as expounded by the AES
tribunal. In this case, AES a United Kingdom investor brought ICSID administered arbitration
under the Energy Charter Treaty against the Republic of Hungary. AES an energy company
invested in Hungarian power sector and executed Power Purchase Agreements with Hungary.
Hungary introduced Price Decrees in 2006 and 2007 which imposed price caps on energy
generated by AES and consequently reduced AES’ profitability. Thus, AES instituted arbitration
contending that ECT FET standard entailed the honouring of contractual obligations reasonably
relied upon by itself. AES further contended that by virtue of its 2001 agreements (Settlement
Agreement and Power Purchase Agreement) with Hungary, it had a legitimate expectation that
administrative pricing would not be re-introduced having been phased out by the end of 2003.
Consequently, AES sought for the protection of its legitimate expectation with its $30 Million
damages demand. In its September 2010 award, the tribunal agreed with Hungary that
expectations if any must have been created in 1996 and not in 2001 as claimed by AES. The
consequence of this is that the 1996 agreements expressly provided for price caps indefinitely into
the future while the 2001 agreements did not. The tribunal also emphasised that the 2001
agreements had explicitly provided for change in law which is indicative of the investor’s
knowledge and acquiesce that Hungarian laws including the pricing regime could change over the
253
Parkerings (n 32) para 332. Emphasis mine.
254
Total SA (n 27) para 117. Emphasis mine.
198
course of the long term agreement. In any case, the 2001 Settlement Agreement did not include
stabilization clause which would have signified parties’ unequivocal agreement that the law will
not be amended.255 The tribunal in its finding stated that “..there was a great probability that there
would be no administrative pricing after 2004, but this does not equate to absolute certainty,
giving rise to internationally protected legitimate expectations.”256
Consequently, the Tribunal found that from the available evidence, Hungary could not have made
any representation or assurance that administrative pricing would not be re-introduced after 2003
since:
“… no specific commitments were made by Hungary that could limit its sovereign right to change
its law (such as a stability clause) or that could legitimately have made the investor believe that
no change in the law would occur.”257
The tribunal concluded that Hungary did not breach the FET standard based on Hungary’s alleged
failure to provide a stable legal and business framework because:
“…, absent a specific commitment from Hungary that it would not reintroduce administrative
pricing during the term of the 2001 PPA, Claimants cannot properly rely on an alleged breach of
Hungary’s Treaty obligation to provide a stable legal environment based on the passage of Act
XXXV and the Price Decrees. This is because any reasonably informed business person or investor
knows that laws can evolve in accordance with the perceived political or policy dictates of the
times.”258
Being displeased or unsatisfied with the outcome of the arbitration, AES filed Annulment
proceedings and the decision of the Annulment ad hoc committee which was issued on 29th June
255
AES (n 1) para 9.3.25. Emphasis mine.
256
Ibid
257
Ibid para 9.3.31.
258
Ibid para 9.3.34
199
2012 more or less affirmed the tribunal’s decision while rejecting AES’s contentions of Tribunal’s
exercise of excessive powers.259
What can be gleaned from the above is the notion that stabilization clause is necessary to buttress
legitimate expectation of stability is shared by increasing number of tribunals. In Sergei Paushok,
CJSC Golden East Company and CJSC Vostokneftegaz Company v The Government of
Mongolia260 the tribunal also underscored the importance of the stabilization clause in the context
of the legitimate expectation doctrine when it held that investor’s failure to obtain appropriate
guarantees by way of stability agreement to mitigate against the risk of significant modification of
tax regime, caused its claim for protection of its legitimate expectation to fail.261 In this regard,
the tribunal stated that:
“…in the absence of such stability agreementin favour of GEM, Claimants have not succeeded in
establishing that they had legitimate expectations that they would not be exposed to significant tax
increases in the future.”262
The tribunals in EDF v. Romania263 and Ulysseas, Inc. v. The Republic of Ecuador264 reached the
similar conclusions that in the absence of host State’s specific promises or representations to the
investor, the investor cannot have a legitimate expectation that there will be no changes in the host
State’s legal and economic framework. Notably though, in the Ulysseas v. Ecuador case, the
contract forming the subject matter of the dispute contained a variant of stabilization clause which
allowed for restoration of the investment’s equilibrium in the event of legislative or regulatory
changes. This fact to the tribunal evinced the investor’s knowledge and acceptance that the law
could change. Ulysseas’ claim was though dismissed on the strength of another cogent reason.
259
AES Summit Generation Limited and et al v. The Republic of Hungary, ICSID Case No. ARB/07/22 Decision of
the ad hoc Committee on Annulment 29 June 2012.
260
UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011 (hereinafter Sergei Paushok)
261
Potesta (n 4) 27.
262
Ibid para 302
263
EDF (n 61)
264
UNCITRAL Final Award, 12 June 2012 (hereinafter Ulysseas).
200
Philip Morris v. Uruguay tribunal decision mirrored that of the El Paso &Impregilo tribunals to
the extent that it repeated the core findings that changes in general legislation except when a
stabilization clause exist are not prevented by FET if they do not exceed the exercise of the host
states normal regulatory power in the pursuance of a public interest and do not modify the
regulatory framework relied upon by the investor at the time of its investment outside of the
acceptable margin of change.265 This view on “acceptable margin of change” is reminiscent of the
one expressed by the El Paso tribunal when it stated that “The Tribunal will thus consider whether
any of the measures complained of by El Paso can be considered as adopted outside the acceptable
margin of change that must be taken into account by any investor and therefore be characterised
as unfair and inequitable treatment …”266 The question is how can a tribunal discern the “margin
of change” that is acceptable to and expected by investors? This obviously, is an open question.
Essentially these tribunals by diverse formulations and crafting styles, expressed that in the
absence of stabilization clause, investor cannot be said to have a legitimate expectation that the
host State will not change its laws and regulations during the life time of the investors’ investment.
By implication, this means that had the investors obtained a stability agreement or possessed
contractual stabilization clause, the tribunals’ verdicts would have been different. This has
consequently heightened the importance of stabilization clause to the legitimate expectation
jurisprudence. The tribunals’ reasoning in this respect, can be deemed tenable as stabilization
clauses are specific commitments or assurances individually granted to the investor by the host
State and as such should afford the investor a high pedestal of protection to stability over and above
general legislative and regulatory framework simpliciter. This is bearing in mind that where the
host State assumes specific commitments towards the investor, it has to be an unequivocal act for
it to ground or form the basis of investor’s legitimate expectation.267
In any case, it is necessary to be availed of the risk management tool of stabilization clause to
mitigate political risk of host State’s unilateral and discriminate regulatory amendments. Thus, in
consonance with one of the dicta in Parkerings v. Lithonia it is imperative for a prudent
265
Para 423 Philip Morris.
266
El Paso Para 402.
267
Potesta (n 4) 27.
201
businessman to employ the contractual risk management tool of stabilization clause to protect its
legitimate expectation of stability.268
Flowing from the last section wherein it appears that arbitral practice present stabilization clauses
or stability agreements as exceptions to the rule prohibiting investors’ reliance on general
legislative and regulatory framework of the host state per se as a basis of their legitimate
expectations. According to a scholar269, the aim of stabilization clause270 is to ensure that host
State's subsequent or future legislation do not bring about changes in the terms of the contract
between the host State and the investor after the entry of the investment agreement. 271 This is in
accord with the definition proffered in Brownlie’s which holds that stabilization clause is an
agreement between host State and foreign investor whereby the host State undertakes neither to
annul the agreement nor to modify its terms either by legislation or by administrative measures.272
The Amoco tribunal also described stabilization clause as a clause which freezes the provisions of
a national system of law such that future alterations in the system of laws will not be applicable to
the contract.273
Concluding Remarks
The deduction from emerging jurisprudence that more assurances in the form of stabilization
clause is required for investors’ legitimate expectation to be deemed based on host state’s
legislative and regulatory framework requires further query. As this deduction necessarily
suggests that armed with stabilization clause or stability agreement, the investor can be rest assured
that it has an internationally protectable legitimate expectation. In fact, excerpts of awards on
268
Parkerings (n 32) para 335-336.
269
Mustafa Erkan, International Energy Investment Law: Stability through Contractual Clauses (Kluwer Law
270
Various types of stabilization clauses exist broadly classified into traditional clause and modern clauses. Whilst the
traditional variant is that which freezes the host state's law or fiscal regime or other relevant investment conditions.
Erkan (n 88) 104, the modern stabilization clause which is akin to renegotiation clause provides for restoration of the
investments' equilibrium or passes the risk of future regulatory changes to the host State.
271
Erkan (n 88) 103.
272
James Crawford ed, Brownlie’s Principles of Public International Law, (6thedn Oxford University Press) 526 cited
in Erkan (n 88) 103.
273
Amoco International Finance Corporation v. The Government of The Islamic Republic of Iran &ors Award No.
310-56-3 14 July 1987. See also Erkan (n 88) 103.
202
“absence of stabilization” by AES and other like-minded tribunals, if read in isolation will mean
that host States’ laws and regulations would be unaltered ad infinitum once there is a stabilization
clause or stability agreement. One should however not be too hasty to make such a conclusion
because although stabilization clause is consequential to the invocation of the protection afforded
by the legitimate expectation doctrine, it is however not sacrosanct or inviolable. This is because
apart from the contestable issues arising from the protection of legitimate expectation doctrine,
underpinning the concept of stabilization clause are deep rooted controversies which undermine
the concept beyond certainty. In the first place, stabilization clauses by seeking to guarantee the
immutability of the contract tenure or legal regime create a challenge for host states because of its
restrictive and impeding tendencies. 274 M. Sornarajah rationalized foreign investor's need to
neutralize host state's sovereign legislative powers to alter or abrogate the agreements during the
lifespan of the contract as the key basis for including stabilization clauses in state contracts.275
This has consequently brought about the prevalent debate whether stabilization clauses are valid
to the extent that they imply a waiver of the host states’ sovereign rights constitutionally
conferred.276 Whether those sovereign powers can be limited by contractual mechanisms is also a
subject of contemporary debate. These must have led Al Faruque to remark: “Arbitral
jurisprudence on stabilization clause is inconsistent and fraught with ideological conflicts…”277
Thus, one should however pause for a while and consider this supposed emerging proposition
ascribing stabilization clause a sine qua non status to legitimate expectation doctrine, in the light
internationally recognized host States’ inalienable sovereign legislative and regulatory rights. All
things being equal, will an investor nevertheless have protectable legitimate expectation of stability
of legal and business framework without stabilization clause or stability agreement? The answer
to this inquiry is interestingly in the affirmative; meaning that general legislative and regulatory
framework can arouse legitimate expectation of stable framework whether or not there is a
stabilization clause or specific assurance. For example, despite the in-principle view of the Toto
Costruzioni Generali S.p.A. v. The Republic of Lebanon tribunal that stabilization clause is
274
Abdullah Al Faruque, ‘Validity and Efficacy of Stabilisation Clauses: Legal Protection vs. Functional Value’
[2006] Journal of International Arbitration 321.
275
276
Peter Cameron, International Energy Investment Law: The Pursuit of Stability (1stedn Oxford University Press
2010).
277
Al Faruque (n 93) 335.
203
necessary to confer legitimacy on investors’ expectations; in the absence of stabilization clause or
similar commitment, regulatory changes would only be deemed violation of the Full Protection
and FET standards “only in case of a drastic or discriminatory change in the essential features of
the transaction.”278 The tribunal’s response to the question is undeniably in the affirmative to the
extent that the regime upon which the investor’s legitimate expectations is based, if amended
drastically and discriminatorily would be a breach of the FET standard; drastic and discriminatory
changes being the exceptions in this regard. The tribunal eventually found that there was no
violation of Articles 2 or 3 of the Treaty by Lebanon with respect to the increase of taxes and
customs duties because the investor-claimant had failed to establish that Lebanon, in changing
taxes and customs duties, brought about a drastic or discriminatory consequence.279
Also crucial to the topic under discourse is the approach of the Total’s 280 tribunal which was
mandated to decide Total’s claims of violation of US-Argentina BIT by series of measures taken
by Argentina affecting Total’s investments in the gas, power generation and hydrocarbon
exploration and production sectors. The tribunal by its majority decision whilst in one breath
espousing the value of stabilization clause to the legitimate expectation concept, on the other
detracted from its worth by the introduction of the “economic rationality, public interest,
reasonableness and proportionality” exceptions and found that the fair and equitable treatment had
been violated when it stated:
“The fair and equitable treatment standard of the BIT has been objectively breached by Argentina’s
actions, in view of their negative impact on the investment and their incompatibility with the
criteria of economic rationality, public interest … reasonableness and proportionality. A foreign
investor is entitled to expect that a host state will follow those basic principles … Expectations
based on such principles are reasonable and hence legitimate, even in the absence of specific
promises by the government.”281
278
ICSID Case No.ARB/07/12, Award 7 June 2012 para 244 (hereinafter Toto v. Lebanon).
279
Toto v. Lebanon Para 244 and 246.
280
Total (n 27)
281
Total (n 27) para 333.
204
It is worth pointing out that tribunals in BP, El Paso, Sempra, Enron and others (also styled ‘pro-
investor’ tribunals) which did not expressly flaunt stabilization clause as a mandatory requirement,
have also come up with a plethora of criteria to buffer investors’ expectation of stability of legal
and business regime. These criteria include continuous and endless changes of the law – roller
coaster effect, 282 unreasonable modification of the legal system, 283 total alteration of legal
framework284 etc.
Investment tribunals consciously or otherwise, have used varied approaches, methods, arguments
and reasoning all in the bid to balance conflicting interests. It is indeed a scenario of deploring
various means to achieve the same end of balancing or reconciling competing rights of foreign
investors to stability of legal and business framework and host State’s autonomy over its economic
affairs through regulatory changes as circumstances dictate. Whether the ends justify the means is
another open question.
Having counteracted the viewpoint that “absence of stabilization clause” legitimate expectation of
stability cannot arise, does this imply a diminution in the value ascribed to stabilization clause by
the AES and co tribunals? It can be argued yes to some extent, since stabilization as a legal
technique is not only innately limited by host States’ sovereign legislative and regulatory powers,
but also violable in the context of the FET standard because tribunals by formulating exceptions
to the rule recognise that the FET standard involves balancing of conflicting rights.285
One cannot but agree with the Parkering tribunal when it held that it is each state’s inalienable
right and privilege to exercise its sovereign legislative power in a fair, reasonable and equitable
manner.286 This is in the light of various UN Resolutions and international instruments asserting
the rights of Host States over their natural resources and economic affairs. 287 In particular, the UN
General Assembly Resolution 1803 confirms the host States’ right to regulate and exercise control
282
PSEG Global Inc. and ors v Republic of Turkey, ICSID Case No. ARB/02/5, Award 19 January 2007 (hereinafter
PSEG).
283
Impregilo (n 36)
284
El Paso (n 44).
285
286
Parkering (n 32) para 332.
287
Nico Schrijver, Sovereignty Over Natural Resources: Balancing Rights and Duties (Cambridge University Press
2008) 283.
205
over activities of foreign investors within their territories in accordance with their own objectives
and development plans.288
The ElectrabelS.A. v. Republic of Hungary 289 tribunal whilst embracing the protection of the
investor’s reasonable and legitimate expectations as a crucial function of the FET standard,
recognised more importantly, the need for host State “to maintain a reasonable degree of
regulatory flexibility to respond to changing circumstances in the public interest.” This position
has received confirmation in other cases and so does the Electrabel tribunal’s other dictum, that
“specific assurances may reinforce investor’s expectations, such assurance is not always
indispensable”. It is hereby contended that the “exceptions” and “criteria” as highlighted above
which were proffered by the various tribunals are subtle affirmations of the perspective that
specific assurances such as stabilization clause are in certain instances expendable due to balancing
requirements.
On the non-absolute protection afforded by doctrine of legitimate expectation, the Total tribunal
opined that legitimate expectation does not amount to a requirement for the host State to freeze its
legal system for the investor’s benefit as a general stabilization requirement would go beyond what
the investor can legitimately expect.290 The tribunal contributed to the balancing of competing
rights topic when it stated that:
“The balance between these competing requirements and hence the limits of the proper invocation
of “legitimate expectations” in the face of legislative or regulatory changes (assuming that they
are not contrary to a contractual, bilateral or similar undertaking, binding in its own right) has been
based on a weighing of various elements pointing in opposite directions.”291
Jan Oostergelel v. Slovak Republic tribunal concurred with El Paso’s tribunal which expatiated
that legitimate expectation was a function of a balancing of interests and rights. The tribunal
furthered that stability of the legal and business environment does not equate to immutability of
288
Ibid 279.
289
ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability 30 November 2012.
290
Total v. Argentina Para 120.
291
Total v. Argentina Para 121.
206
the legal framework and that legitimate expectation must be measured through “a balancing test
taking account of specific circumstances.292
The germane question “How can investor-state arbitrators ruling on violation of FET protective
standard arising from a breach of a Stability Guarantee, strike an appropriate balance between
investors right to stability and predictability vis-à-vis host states sovereign regulatory and
legislative rights?” is dealt with in Chapter Six.
292
Jan Oostergelel v. Slovak Para 224.
207
CHAPTER FIVE
PUTTING STABILITY GUARANTEES UNDER THE PROTECTIVE UMBRELLA OF
INTERNATIONAL INVESTMENT ARBITRATION
TABLE OF CONTENTS
1. INTRODUCTION
2. UMBRELLA CLAUSE AS A SUBSTANTIVE TREATY STANDARD

2.1 Historical Perspective
2.2 Umbrella Clause and its Variety of Formulations
2.3 Functions and Key Principles Relevant for Interpretation of Umbrella Clause
3. DETERMINING HOST STATES’ OBLIGATIONS

3.1. Obligations Emerging from a Contract – Contract Claim v. Treaty Claim Debate
3.1.1 Purposes of the Umbrella Clause
3.1.2 SGS v. Pakistan – Contract Claims not within Umbrella Clause Scope
3.1.3 SGS v. Philippines – Contract Claims Elevated to Treaty Claim but Inadmissible
3.1.4 SGS v. Paraguay – Pro-Investor Approach to Umbrella Clause Interpretation
3.2. Unilateral Commitments/Undertakings: A Source of International Obligation
3.2.2 Mohammed Al Bahloui v. Tajikistan
3.2.1 Khan Resources v. Mongolia
3.2.3 OIEG v. Venezuela
4. HOST STATES’ LIABILITY BY REASON OF REPUDIATION OR REVERSAL OF

STABILITY GUARANTEES
4.1 Burlington v. Ecuador
4.1.1 Factual Background
4.1.2 The Dispute over Law 42 Enactment – Windfall Profit Tax
4.1.3 Parties’ Arguments and Tribunals’ Findings on Umbrella Clause
208
4.2 Argentina’s Breach or Excused Breach of Stability Guarantees Embedded in the Gas
Transportation and Distribution Legal and Statutory Regime
4.2.1 CMS Gas v. Argentina
4.2.1.1 Legal and Statutory Framework of the Gas Transportation and Distribution Sector
4.2.1.2 Repudiatory Measures
4.2.1.3 Are Licence’s Clauses 9.8 and 18.2 Stabilization Clauses Commitments within the Scope of
Article II (2) (c) Umbrella Clause?
4.2.2 Sempra v. Argentina
4.2.3 LG&E v. Argentina
4.2.4 BG v. Argentina and Enron v. Argentina
4.2.5 Argentina’s State of Necessity or Emergency Defence and its Implications for Tribunals’ Umbrella
Clause Findings
209
1. INTRODUCTION
Under the current international investment dispensation, host states typically assume a variety of
obligations or undertaking towards foreign investors, including undertakings of stability of legal,
business and investment framework. Failure to observe stability commitments can give rise to
host states liability under the Umbrella Clause which is a treaty provision requiring host states to
honour commitments and undertakings made to foreign investors. Umbrella Clause also referred
to as “Observance of Undertakings/Commitment Clause”, “Respect Clause” “Mirror Effect”
“Parallel Effect” “Sanctity of Contracts” “Pacta Sunt Servada” is essentially geared towards
making host states accountable for non-observance or repudiation of commitments and
undertakings earlier granted to foreign investors. This treaty provision is so called “Umbrella
Clause” because it brings host states’ obligations assumed vis-à-vis foreign investors under the
protective umbrella of an investment treaty by creating an international law obligation.1As the aim
of this paper is to analyses arbitral tribunals’ interpretation of the Umbrella Clause in protection
of stability guarantees, of particular interest and relevance, is host states’ undertakings or
obligations of stability and predictability of business and investment framework granted to foreign
investors contractually and/or unilaterally.
As previously noted, stability guarantees can emanate from contracts, national legislations and by
operation of investment treaties. A relevant and important question is whether these stability
guarantees are obligations which host states have undertaken to observe by virtue of investment
treaties. This chapter queries whether in the event host states fail to observe or fulfil these stability
guarantees or repudiate previously granted guarantees, will this failure give rise to host states’
liability under the Umbrella Clause? The extent to which these stability undertakings in their
diverse dimensions are considered obligations or commitments failing within the scope of
obligations covered under the Umbrella Clause is the main thrust of this Chapter. Unlike the Fair
and Equitable Treatment and Full Protection and Security Standards, there has not been a lot of
reliance on the Umbrella Clause protections to enforce stability guarantees. A review of all cases
touching on Umbrella Clause protection revealed that of the 115 allegations of violations of
1
Stephan W. Schill, ‘Umbrella Clause as a Public Law Concept’ in Stephan W. Schill (ed), International Investment
Law and Comparative Public Law page 317.
210
Umbrella Clause,2 less than 10 pertain to obligations of stability and predictability. Of the few
cases from which one can decipher if a repudiation or abrogation of stability guarantees will incur
international liability for host states based on Umbrella Clause protection, worthy of note are
Burlington v. Ecuador and five cases against Argentina by gas transportation and distribution
sector investors including CMS Gas v. Argentina, LG&E v. Argentina, Sempra Energy v.
Argentina, Enron v. Argentina and BG v. Argentina. These cases have been identified for analysis
because they all involve Umbrella Clause claims of breach of one stability guarantees. Whilst
these cases will be analysed to distil the key principles and ideas emanating therefrom, other cases
not particularly related to obligations or undertakings of stability will also be discussed to lay the
conceptual background. This is because issues arising from these cases are analogously applicable
to stability guarantee arguments and are often cited to establish points and principles relied upon.
Meanwhile, beyond contractual commitments, statutory and unilaterally granted commitments of
host states have also been put under said “protective umbrella” as the case of LG&E clearly
demonstrates; hence, discussions in this chapter will be based on only these two variants of stability
guarantees ie contractual stability clause and domestic legislation stability provisions leaving out
treaty based stability guarantees. Treaty-based stability guarantees as defined in Chapter Two are
excluded from the scope of discussion because the Umbrella Clause address host State’s
obligations arising out of instruments other than the treaty itself. In summation, whilst the
2. UMBRELLA CLAUSE AS A SUBSTANTIVE TREATY STANDARD
2
Investment Policy Hub database on investment cases listed 109 cases involving allegations of breach of the Umbrella
Clause.
211
According to a Study conducted to review all publicly available arbitral decisions that addressed
Umbrella Clause, ‘Function’3, ‘Scope’4, ‘Jurisdictional Precedence’ 5 and ‘Privity’6 are the key
four considerations in the operation of the Umbrella Clause.7 The Study concluded that although
there are divergent interpretations and rulings regarding each of these considerations, general
consensuses appeared to have been reached on these key considerations save for the fourth one i.e.
Privity. The Study revealed that on the issue of Privity, arbitrators are evenly divided in
determining whether Umbrella Clause may cover obligations not directly entered into by the host
state to the Claimant and conversely not assumed directly by the investor. With regards to the
other three key considerations, it must however be noted that these general consensuses are not
sacrosanctas there are few strands of deviations from the so-called general consensus every now
and then since there is no system of precedence in investment arbitration. Be that as it may, these
four interpretive variables, each of which is a matter of one form of debate or the other, are relevant
to the analysis of protection of stability guarantees with the Umbrella Clause mechanisms just as
every other hosts state’s undertaking or obligation. More importantly, on the issue of stability
guarantees of host States being deemed obligations subject to the Umbrella Clause protective
cover, it is difficult to categorically infer that a jurisprudence constante has been established. This
is as a result of the inconsistent approaches applied by tribunals in the construction of these key
considerations pertaining to Umbrella Clause. Nonetheless, one can decipher a consensus in
certain respect such as scope of obligations. While a detailed discussion of the identified four
considerations and necessarily a critique of the Umbrella Clause goes beyond the scope of this
paper, cases where any of the afore-mentioned key considerations are in contention when
reviewing stability guarantee protections under the Umbrella Clause, will also be discussed.
3
The author defines Functions to mean the effect or consequence of an Umbrella Clause and went on to identify four
main functions of the Umbrella Clause. Jude Antony Page 614.
4
Scope in this context relates to the delineation of obligations covered under the Umbrella Clause. Jude Antony page
620.
5
Jurisdictional Precedence pertains to Umbrella Clause claims based on non-observance of contractual obligations. In
most instances the underlying contract will contain a dispute resolution forum selection clause and thereby vesting on
the tribunal an additional task of determining the effect of the contractual forum selection clause on its jurisdiction.
Majority of the tribunals faced with a forum selection clause question either declined jurisdiction on the basis of the
contractual forum selection clause e.g. SGS v. Philippines or assumed jurisdiction notwithstanding the contractual
forum selection clause e.g. SGS v. Paraguay.
6
Privity becomes an issue for determination when the obligation purportedly owed to the investor was not entered into
directly by the host State to the Claimant. Jude Antony page 628.
7
Jude Antony, ‘Umbrella Clauses Since SGS v. Pakistan and SGS v. Philippines – A Developing Consensus’ (2013)
Vol 29 No. 4 Arbitration International 607 – 639.
212
Meanwhile, it is essential to first proffer an overview of Umbrella Clause standard of protection
before delving into a discussion on arbitral responses accepting obligations, commitment or
undertakings of stability under the protective umbrella of international investment treaty.
2.1 Historical Perspective
An overview of the Umbrella Clause to lay a conceptual background is necessary for analysis of
stability guarantee protection via Umbrella Clause machinery to be complete. At the core of the
Umbrella Clause debate is the issue of subject matter jurisdiction which is the main bone of
contention in most arbitration involving the Umbrella Clause (rationae materiae). The application
of Umbrella Clause has turned out to be one of the most contentious issues in investment treaty
arbitration, occasioning unilateral interpretation by contracting state and total exclusion in notable
investment treaties.8 Some BITs restrict the Umbrella Clause protection to only claims based on
BITs violation due to the treaty Umbrella Clause wordings which covers disputes relating to an
“obligation under the agreement”.9 Whereas some BITS Umbrella Clauses are broadly worded to
cover “any dispute relating to investments”.10 Another Umbrella Clause variant and a prevalent
one at that, obliges host states to observe “any obligation it may have entered into”
simpliciter.11This disparity in language results in question of scope and implications of Umbrella
Clause.12 Nonetheless, it is generally acknowledged that Umbrella Clause reinforces the principle
of pacta sunt servada whilst granting access to investment arbitration following a violation of an
undertaking or commitment.
By way of history, Umbrella Clause derives its origin long before the advent of modern-day
investment treaty arbitration as it can be traced as far back as a 1953-1954 Advice and then to the
1956-1959 Abs Draft International Convention for the Mutual Protection of Private Property
Rights in Foreign Countries.13 The 1959 Abs-Shawcross Draft Convention Foreign Investment
8
See leading investment law scholars’ comments that the proper interpretation of Umbrella Clause is one of the most
contentious issues in international investment law. Christopher Dugan Investor State Arbitration page.544
9
Find reference.
10
Find Reference.
11
Find Reference
12
Katia Y-Small page 9.
13
Write up on the Abs Draft
213
Protection (Article II) provides that “Each Party shall at all times ensure the observance of any
undertakings which it may have given in relation to investments made by nationals of any other
party”. Another pre-modern day investment treaty formulation of Umbrella Clause is Article 2 of
the 1967 OECD Draft Convention on the Protection of Foreign Property.14 Anthony Sinclair an
expert in the field of international investment law, presented the chronological origin of the
Umbrella Clause as follows:15
 1953-1954 Advice of Mr. Elihu Lauterpacht to the Anglo-Iranian Oil Company in connection with
the settlement of the Iranian oil nationalisation dispute.
 1956-57 Advice of Mr. Lauterpacht to a group of oil companies contemplating a trunk pipeline
from Iraq in the Persian Gulf through Syria and Turkey to the Eastern Mediterranean.
 1956-59 Abs Draft International Convention for the Mutual Protection of Private Property Rights
in Foreign Countries ('the Abs Draft').
 1958-59 Shawcross Draft Convention on Foreign Investments ('Shawcross Draft').
 1959 Abs-Shawcross Draft Convention on Foreign Investment (“Abs-Shawcross Draft”).
 1962 and 1967 OECD Draft Conventions on the Protection of Foreign Property.
Umbrella Clause entered into the realm of investment treaties with the first BIT ie Germany and
Pakistan as Article 7 of the treaty provides that: ‘Either Party shall observe any other obligation it
may have entered into with regard to investments by nationals or companies of the other
Party.’16Meanwhile. the first known ICSID case that touched on Umbrella clause is FEDAX NV
v. Venezuela17 whilst the SGS v. Pakistan and SGS v. Philippine cases popularized the Umbrella
14
See OECD Interpretation of Umbrella Clause page 125.
15
Anthony C. Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’ – A
Paper presented at the British Institute of International and Comparative Law Third Conference of the Investment
Treaty Forum; Theme: "THE RELATIONSHIP BETWEEN LOCAL COURTS AND INVESTMENT TREATY
ARBITRATION" on 10 September 2004. Available at <http://www.biicl.org/files/930_lt-%23921337-v1-
powerpoint_presentation_-_sinclair.ppt> accessed 11 April 2017. The tribunal in Eureko v. Poland, quoted Anthony
Sinclair’s narrative, in its elaboration of the origin and meaning of the Umbrella Clause. See Eureko v. Poland, Partial
Award 19 August 2005 para 251.
16
Treaty for the Promotion and Protection of Investments (with Protocol and Exchange of Notes), Germany and
Pakistan, 25 November 1959, 457 U.N.T.S. 24 (entered into force 28 November 1962).
17
Fedax N.V. v. Republic of Venezuela, ICSID Case No. ARB/96/3, Award 09 March 1998 para 29. Here, the tribunal
having found that purchase of promissory note was an investment within the context of ICSID Convention, held that
Venezuela was obliged to honour precisely the terms and conditions the investment as well as honour specific
payments obligations contained in the promissory notes.
214
Clause Standard by reason of their controversial and conflicting awards and intervening
interpretative clarification by Switzerland, the home state of SGS. Needless to say that there has
been more reliance on the Umbrella Clause protection in recent times because lots of investment
treaties contain an umbrella clause in one form or the other. At least 1109 representing 43%, out
of the 2577 International Investment Agreements mapped by UNCTAD Mapping Project team
contained Umbrella Clauses.18
2.2 Umbrella Clause and its Variety of Formulations
Notwithstanding the disparity in treaty language, Umbrella Clausesgenerally have common

features such as relating to obligations assumed or entered into by host States. There are various
formulations of the Umbrella Clause leading to diverse interpretations bordering on scope,
function and effect of the treaty standard. Gazzini and Tanzi while acknowledging that there is no
generally accepted classification of the Umbrella Clause, postulated a three categorization module
with the first category being the most common and worded: ‘Each party shall observe any
obligation it has entered into”.19 A typical example can be found in Article 4 (2) of the Netherland-
Argentina BIT which states as follows:
‘Each Contracting Party shall observe any obligation it may have entered into with regards to
investment of investors of the other Contracting party.’
The second category which is less common but prevalent in Mexico’s BIT, imposes on host states
the observance of obligations stemming from external instruments while maintaining the dispute
settlement mechanism of the underlying external instrument. An example of the second category
of Umbrella Clause can be found in Article 10 (2) France – Mexico BIT which states that:
‘Each Contracting Party shall respect any undertaking it has made in writing in connection with
investments made in its territory by investors of the other Contracting Party. Disputes concerning
18
United Nations Conference on Trade and Development (UNCTAD) IIA Mapping Project – An initiative to map
content of IIA using a mapping structure consisting of a detailed set of parameters against which each individual IIA
is mapped. Available at <http://investmentpolicyhub.unctad.org/IIA/mappedContent> accessed 14 May 2017.
19
Gazzinni and Tanzi, (n 22) page 985.
215
such undertakings shall be settled in accordance with the terms of the contracts governing those
undertakings.’20
The third category identified by Gazzinni and Tanzi is a peculiar variant of Umbrella Clause which
on cursory review may not be regarded as an Umbrella Clause. This type of Umbrella Clause is
contained in Article 24 (1) (a) 2012 US Model BIT does not on its face guarantee the observance
of any obligation or undertaking of host States but nonetheless grants to foreign investors access
to investment arbitration in the event host States breach not only substantive provisions of the
treaty but also investment authorizations and investment agreements. The Article states that an
investor may submit to arbitration a claim that the host state has breached:
‘(A) an obligation under Articles 3 through 10, (B) an investment authorization, or (C) an
investment agreement’.
As can be seen, this clause will naturally obviate the controversy over the admissibility of claims
emanating from investment agreements and significance of contractual forum selection clause.
Additionally, this clause will also preclude from umbrella clause protective scope, unilateral
obligations of host states as may be contained in domestic legislation. It is worth noting that this
variant of the Umbrella Clause in the US Model BIT represents a clear change of treaty practice
as it is a distinct departure from the Umbrella Clause contained in its former Model upon which
most of its extant BITS were based.21
Apart from the taxonomy suggested by Gazzinni and Tanzi, Umbrella Clauses come in various
forms and textual permutations leading to divergent interpretations. Some treaty wordings on
Umbrella Clause clearly delimiting the scope to written obligations, others making reference to
‘specific obligations or undertakings’, most treaties refer to ‘any obligation’ 22 thereby leaving it to
the subjective decision of the tribunal to construe the meaning of ‘any obligation’. Article II (2)
20
21
Yannaca-Small page 6.
22
Similar to the above referenced Australia-China Umbrella Clause, the last paragraph of Article 10 (1) Energy
Charter Treaty is equally broadly worded and wider in scope with no explicit limitation. Article 10 (1) Umbrella
Clause states: ‘Each Contracting Party shall observe any obligations it has entered into with an investor or investment
of an investor of any Contracting Party.’
216
(c) of the Argentina-US BIT interpreted in the CMS Gas, Sempra, Enron and LG&E cases is a
good illustration of this type of broadly worded Umbrella Clause.23
One of the fundamental issues touching on the subject of the Umbrella Clause is that relating to
the scope and nature of obligations, undertakings or commitments undertaken or assumed by host
states. Mostly on the basis of the wording of the relevant treaties, Umbrella Clauses have been
subjected to a variety of interpretative approaches, either broadened, restricted or somewhere in
between. Besides the wordings which has formed the main basis of tribunals’ interpretation of the
Umbrella Clause, the placement or location of Umbrella Clause within the structure of BIT
provisions has also been relied on by some tribunal to construe the value or purpose of the
Umbrella Clause.24To SGS v. Pakistan tribunal, the placement of the umbrella clause towards the
end of the BIT was suggestive of the drafters’ intentions to exclude it from substantive obligations
of the contracting parties. While, to the SGS v. Philippines tribunal,it wasn’t a decisive factor as
the tribunal didn’t give a weighty credence to the placement of the clause within the treaty.25
It is essential to note that there are some investment treaties that exclude Umbrella Clause. Notable
amongst the investment treaties that do not provide for an Umbrella Clause is NAFTA. 26 Also,
Canada does not include Umbrella Clauses in its BITs.27While no attempt is made herein to second
guess the intentions of Canada to exclude Umbrella Clause from the range of protections offered
to foreign investors, it can be imagined that the far-reaching consequences of the standard is
perhaps the main rationale for its exclusion. Indeed, the Umbrella Clause has its far-reaching
consequences considering that by transforming contract breaches to violation of the treaty, host
States’ commitments are considerably broadened thereby exposing them all the more to investor-
23
See page 47 on CMS Gas v. Argentina.
24
The location of Umbrella Clauses within the treaty vary from one treaty to another.
25
SGS v. Philippines para 124.
26 The tribunal in Waste Management v. Mexico noted that “… unlike many bilateral and regional investment
treaties—NAFTA Chapter 11 does not give jurisdiction in respect of breaches of investment contracts such as the
Concession Agreement. Nor does it contain an “umbrella clause” committing the host State to comply with its
contractual commitments.” See Waste Management Inc. v. United Mexican States [II], ICSID Case No.
ARB(AF)/00/3, Final Award, 30 April 2004 Para 73. Notably, Canada does not include umbrella clauses in its BITs.
Katia page 6.
27 Katia Y-Small page 6.
217
state arbitration claims.28Even for ill-defined and ambiguous Umbrella Clauses, investor-claimants
were permitted to rely on Umbrella Clause provisions in other treaties by virtue of Most Favoured
National Clauses to ground violation of the treaty.29 The tribunals in EDF v. Argentina and Arif
v. Moldova accepted investor-claimants’ deployment of MFN clause to admit and apply Umbrella
Clauses in BITs with third states.30
The Government of India in 2016 circulated to the counterparties to its existing BITs, a proposal
for the Joint Interpretative Statement in order to align these extant treaties with its 2015 Model
BIT. Although India’s new Model BIT preserves investor-state arbitration as the dispute
settlement mechanism, it contains more restrictive definitions and interpretative scope geared
towards reducing the exposure of the Indian government to future claims. 31 One of the
clarifications included in the proposed Joint Interpretative (JIS) Statement is that regarding the
Umbrella Clause’s scope and jurisdictional precedence in relation to contract forum selection
clause. The JIS whilst excluding obligations deriving from acts by governmental, administrative
or judicial authority, confined the Umbrella Clause scope to specific obligations entered in a
written contract.32 The JIS further clarified that an investor must have recourse to the contractual
dispute resolution mechanism to enforce its specific obligation claim. It is only when there is a
lacuna in the contract with regards to dispute resolution mechanism that the protection under BITs’
Umbrella Clause can be triggered. Needless to state that the value of the Umbrella Clause has
been significantly diminished by this interpretative initiative. It leaves to be seen if the Umbrella
Clause is not rendered redundant by the interpretation. On the plus side, what the drafters intend
is explicit enough and should ordinarily obviate ambiguity in interpretation.
28
Nathalie Bernasconi-Osterwalder, ‘The Draft Investment Chapter of the Canada-EU Comprehensive Economic and
Trade Agreement: A Step Backwards for the EU and Canada?’ 26 June 2013. Available at
<https://www.iisd.org/itn/2013/06/26/the-draft-investment-chapter-of-canada-eu-comprehensive-economic-and-
trade-agreement-a-step-backwards-for-the-eu-and-canada/> accessed 03 May 2017.
29
EDF International S.A. et al. v. Argentina and Mr. Franck Charles Arif v. Moldova.
30
This is because France’s BIT contain a very peculiar Umbrella Clause formulation on “special commitments”.
Tarcisio Gazzini and Attila Tanzi, ‘Handle with Care: Umbrella Clauses and MFN Treatment in Investment
Arbitration’ 14 (2013) The Journal of World Investment & Trade) 978–994, 979.
31
Nicholas Peacock and Nihal Joseph - Herbert Smith Freehills, ‘Mixed Messages to Investors as India Quietly
Terminates Bilateral Investment Treaties with 58 Countries’, 16 March 2017 Available at
<http://hsfnotes.com/arbitration/2017/03/16/mixed-messages-to-investors-as-india-quietly-terminates-bilateral-
investment-treaties-with-58-countries/> accessed 21 April 2017.
32
Sarthak Malhotra, ‘India’s Joint Interpretive Statement for BITs: An Attempt to Slay the Ghosts of the Past’
Available at <https://www.iisd.org/itn/2016/12/12/indias-joint-interpretive-statement-for-bits-an-attempt-to-slay-the-
ghosts-of-the-past-sarthak-malhotra/> accessed 21 April 2017.
218
2.3 Functions and Key Principles Relevant for Interpretation of Umbrella Clause
In terms of its function or purpose, the Umbrella Clause allows investors to initiate investment
arbitration to enforce investment related promises. 33 According to Katja Gehne and Romulo
Brillo, “The purpose of such clause is to put contractual commitments entered into by state with
foreign investors under the protective “umbrella” of the international investment agreement”34 The
Umbrella Clause as will be seen in cases discussed below, cover not only contractual commitments
or undertakings of host States but also unilateral and non-contractual obligations of host states.
For an investor-claimant to successfully trigger the protection afforded by the Umbrella Clause,
the investor-claimant must at least convince the tribunal of the existence of three basic criteria
according to Duke v. Ecuador Tribunal.35 These key principles underpinning Umbrella Clause
include:
 There must be an obligation;

 Host state must have assumed an obligation or entered into an undertaking with regard to
investments; and
 There must be a failure to observe said obligation/undertaking.
This paper does not intend to provide a detailed treatment of Umbrella Clauses but to focus on
arbitral decisions which have dealt with stability guarantees as obligations subject to Umbrella
Clause protection. Nonetheless, a discussion on the type of obligations covered by Umbrella
Clause will provide valuable insight necessary to decipher stability guarantee and umbrella clause
coalition.
3. DETERMINING HOST STATES’ OBLIGATIONS
33
Stephan Schill (ed) page 320.
34
Katja Gehne & Romulo Brillo – Stabilization Clauses in international Investment Law – NCCR Trade Regulation.
35
Duke Energy v. Ecuador Award 18 August 2008 para 318.
219
Flowing from the above, it is apt that a consideration of the types of obligations or undertakings
that will trigger the protection of the Umbrella Clause is undertaken. Under the Umbrella Clause,
host States assume obligations by way of contracts and through unilateral undertakings. The nature
of the obligation covered under the Umbrella Clause turns onthe issue of “Scope”of Umbrella
Clause. Most BITs are silent on the type or nature of host States’ obligations, undertakings or
commitments that are covered under the Umbrella Clause. Hence, most tribunals have had to rely
on the treaty language/text, second-guessing the intentions of the drafters, reliance on the historical
context of the standard and a variety of parameters to determine which host States’obligations are
to be accorded protection pursuant to the Umbrella Clause. It is worth noting that some BITs
specify the nature of the obligations covered under theUmbrella Clause. For instance, Australia –
China BIT defined the obligations host state are required to observe as “written undertakings”.36
Similarly, Umbrella Clause of Austria – Croatia BIT pertains to “contractual obligations”.37 These
two instances have intrinsically ousted obligations supposedly deriving from host States’ non-
written undertakings such as public declarations in the case of Australia-China BIT and unilateral
acts of host states in the case of Austria-Croatia BIT. This style will naturally obviate the
ambiguity and interpretation uncertainty besetting the interpretation of most BIT Umbrella Clause
provisions.
In the absence of unequivocal delineation of Umbrella Clause’s scope as highlighted above,

divergent opinions exist on the type of host states’ undertakings, guarantees, obligations or
commitments the Umbrella clause will cover. The debate typically resolves round determination
of whether obligations assumed by host states entail or encompass contractual obligations and/or
unilateral obligations of host States. This controversy is more of a function of imprecise or broadly
drafted Umbrella Clauses, like the first category variant postulated by Gazzinni and Tanzi. For
instance, Eureko v. Poland tribunal when tasked with interpreting Netherlands – Poland BIT
36
Article XI of Australia – China BIT titled “Undertakings Given to Investors” states as follows: ‘A Contracting Party
shall, subject to its laws, adhere to any written undertaking given by a competent authority to a national of the other
Contracting Party with regard to an investment in accordance with its laws and the provision of this Agreement.’
(Emphasis added). See Agreement between the Government of Australia and the Government of the People’s Republic
of China on Reciprocal Encouragement and Protection of Investments. Signed 11 July 1988, Entered into force 11
July 1988.
37
Article 8 (2) of Austria – Croatia BIT provides that ‘Each Contracting Party shall observe any contractual obligations
it may have entered into towards an investor of the other Contracting Party with regards to investments approved by
it in its territory.’(Emphasis added). See Agreement between the Republic of Austria and the Republic of Croatia for
the Promotion and Protection of Investments. Signed 26 August 1999. Entered into force on 01 November 1999.
220
Article 3 (5) Umbrella Clause which states that ‘Each Contracting Party shall observe any
obligations it may have entered into with regard to investments of investors of the other
Contracting Party.’, gave an in-depth definition or elaboration on the meaning of the phrase “any
obligations” included in the clause. According to the tribunal “any obligations” is capacious; it
means not only obligations of a certain type but any, that is to say all obligations.38 This is a very
expansive perspective of host states’ obligations under the Umbrella Clause, connoting both
contractual and non-contractual obligations are covered under the Umbrella Clause. This
expansive construction fings support in other arbitral tribunals’ decision on the subject. A good
example is the Enron tribunal which assumed same posture with Eureko’s tribunal’s interpretation
of ‘any obligation’. According to Enron tribunal, the ordinary meaning of the phrase ‘any
obligation’ refers to obligations regardless of their nature and therefore cover both contractual
obligations as well as obligations assumed through law or regulation.39This of course, is not the
total picture as some other tribunals in their bid to interpret similar or identical Umbrella Clauses,
have deployed various or divergent formulas to construe obligations or undertakings binding on
host States as restricted to purely contractual obligations. An example is the CMS Gas v. Argentina
Ad hoc Committee on Annulment which interpreted similar Umbrella Clause 40 by focusing on
another phrase within the clause i.e. ‘entered into’ as opposed to ‘any obligation’.41 To the Ad
hocCommittee, host states’ obligations ‘entered into’ connotes and is limited to consensual or
bilateral obligationsarising independently of the treaty and not deriving from host states law
generally. 42 Although the Ad hocCommittee annulled the tribunal’s findings on the Umbrella
Clause mainly because of significant lacuna in the Award and failure to state reasons, 43 it is
apparent that the tribunal and Committee have divergent views on the nature of obligations covered
under the Umbrella Clause. As will be deciphered in later parts of this chapter which extensively
38
Partial Award 19 August 2005 para 246
39
Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa Assets, L.P. v. Argentine
Republic, ICSID Case No. ARB/01/3, Award 22 May 2007 para 274. The tribunal however qualified that the
Obligations albeit created are nevertheless limited by their object: ‘with regard to investments’. In other words, the
Obligations must be assumed with regards to investments and not just freestanding obligations.
40
Treaty Between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement
and Protection of Investment: Signed 14 November 1991; Entered into Force 20 October 1994. Article II (2) (c) states
‘Each Party shall observe any obligation it may have entered into with regard to investments.’
41
CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Decision of the ad
hoc Committee on the Application for Annulment of the Argentine Republic 25 September 2007.
42
Ibid CMS v. Argentina para 95 (a) (b) and (d). Notably the Ad hoc Committee annulled the tribunal’s decision on
Umbrella Clause award for failure to state reasons.
43
CMS ad hoc Committee Decisions para 97.
221
reviewed the CMS Gas tribunal’s Umbrella Clause decision, the tribunal more or less endorsed
both contractual and unilaterally assumed obligations of Argentina as obligations within the range
protected under the Umbrella Clause.44Meanwhile, similar to CMS Gas Annulment committee
position, the tribunal in Noble Venture v. Romania, construed the phrase “entered into” as
reference to investments contracts,relating to specific commitments and not general commitments.
Noble Venture tribunal concluded that the obligations must derive from contracts for it to fall
under the radar of umbrella clause protection.45Quite a number of other tribunals like the Plasma
tribunal did not take one position or the other basically because it was only contractual obligations
that were in issue.46 `
Jude Antony expressed that three scenarios have emerged from tribunals’ decisions on scope of
Umbrella Clause. These three scenarios are reflected in the cases mentioned above and better
distilled below:47
 1st Category: Umbrella Clause extends to only contractual, consensual or bilateral obligationse.g.
CMS Gas Ad hoc Annulment Committee.
 2nd Category: Umbrella Clause extends to contractual or consensual obligation but no discussion
or decision on whether or not it extends to Unilateral obligationse.g.Plasma Tribunal.
 3rd Category: Umbrella Clause embraces all and every obligations including contractual,
consensual, bilateral, unilateral obligations and undertakings of host statese.g. Enron tribunal.
For the purpose of this ensuinganalysis, two headings or categories of obligations are adopted.
The first is contractual obligations/undertakings while the second is non-contractual
obligations/undertakings. As the name implies, the non-contractual undertakings in the context of
the Umbrella Clause interpretation entail unilateral obligations of stability such as stability
44
María Cristina Gritón Salias, ‘Do Umbrella Clauses Apply to Unilateral Undertakings?’ in Christina Binder et al
(ed), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (2009 OUP) 5.
45
Noble Ventures v. Romania para 51.
46
Jude Antony, Umbrella Clause Since SGS v. Pakistan and SGS v. Philippines – A Developing Consensus page 620
and 621.
47
Jude Antony, Umbrella Clause Since SGS v. Pakistan and SGS v. Philippines – A Developing Consensus page 620
and 621.
222
provisions included in national/domestic legislation.48 The reason behind this categorisation is not
farfetched; for one, the issues arising from contractual obligations are different from those
emanating from non-contractual obligations, albeit there are areas of commonality that they share
such as the basic principles guiding the applicability of the clause.
3.1. Obligations Emerging from a Contract – Contract Claim v. Treaty Claim Debate
Beyond tribunals’ task to determine the existence and dimension of the obligation covered under
the Umbrella Clause, tribunals are also reposed with the responsibility of determining their
jurisdictional competence and admissibility of contract claims brought pursuant to Umbrella
Clause standard of protection. As distilled above, there is apparent consensus that obligations
deriving from contractual instruments receive extra protection by virtue of their consideration
under bilateral treaty. 49 Nonetheless, invocation of the Umbrella Clause has led to the highly
controversial debate over the admissibility of contract based claims. The main contention has been
not only whether host states contractual obligations and commitments fall within the scope of the
Umbrella Clause protection but also the appropriateness of tribunals’ acceptance of such claims
within the ambit of treaty arbitration given that host States’ consent to arbitration relates to claims
based on violation of treaty provisions.It must be recalled that investor-state tribunals derive their
jurisdiction from parties’ consent granted separately hence the notion of “Arbitration without
Privity”50or jointly through investment contracts.51The issue of jurisdiction comes to fore where
investment contracts between host state and investor-claimant stipulate a dispute resolution
mechanism distinct from investor-state arbitration. Thus, before assuming jurisdiction to
determine the dispute, the tribunal must be satisfied that investor-claimants claims are those which
the host State had given its consent to have arbitrated under investor-state arbitral system. In the
absence of such clear and unequivocal expression of host State’s consent, the investor’s challenge
is to prove that the host state’s consent to investor-state arbitration is not limited to only
48
In the context of Umbrella Clause, stability obligation assumed or created by virtue of investment treaties i.e. treaty-
based stability guarantees is inexistence as Umbrella Clause assumes treaty extraneous obligations.
49
LG&E para 169- 175 Decision on liability 03 October 2006.
50
See Chapter 2 page --- which provided useful insight into the concept of “Arbitration without Privity”
51
Host States’ consent to arbitrate treaty claims are mostly contained in treaties, whilst it is only in exceptional cases
that Parties contractually agree to have disputes emanating from investment agreements subjected to investor-state
arbitration jurisdictional scope.
223
international claims arising out of the treaty but also includes claims stemming from the investment
agreements.Of course with the aid of the Umbrella Clause being the vehicular medium by which
contract breaches are translocated to treaty breaches.
Most tribunals’ decisions are in accord that claims grounded on the violation of the treaty arising
from an investment contract are admissible irrespective of a contractual forum selection
clause. 52Although, it is sometime not that obvious or clear cut what exactly constitutes treaty
claims since same act or conduct can either or both be a violation of the relevant treaty and breach
of the investment agreement. Certain acts of the host state which are breaches of the contract have
been deemed violation of the treaties thereby bringing the investor’s claim within the realm of
investment arbitration. While in some others the tribunals have refused to exercise jurisdiction
over contract claims. Thus, investor-state jurisprudence on the admissibility of contract claim vis-
a-vis treaty claim is yet unsettled and rife with inconsistent tribunal decisions as the cases
mentioned below will show. The pervading uncertainty in the current state of affairs is further
compounded by the fact that there is no doctrine of precedence in Investor-State arbitration system
since tribunals may take cognizance of previous decisions or awards but are not bond to follow
them. Thus, there are indeed no guarantees or assurances that a particular line of argument,
jurisprudence or award will be adopted or followed by subsequent Tribunals. To set the tone for
the discussion of some topical tribunal decisions on the issue of admissibility of contract claims in
investment arbitration, reference is hereby made to the very apt opinion of August Reinisch, which
succinctly describes the current state of affairs in this regard:
‘… no real authority arises from tribunals’ decisions with respect to their jurisdiction over contract
claims. What is worse, since no clear line of reasoning has so far been found, the arguments used
have caused considerable confusion regarding the role of the umbrella clause’53
52
Compañía de Aguas del Aconquija, S.A. & Vivendi Universal (formerly Compagnie Générale des Eaux)
v.Argentine Republic (Decision on Annulment) ICSID Case No. ARB/97/3 (ICSID, 2000)
53
Although this observation was made in 2006/2007, it still remains relevant and holds true as at 2017. Reinisch A,
‘Umbrella Clauses: Seminar on International Investment Protection’ 14, available at
http://intlaw.univie.ac.at/fileadmin/user_upload/int_beziehungen/Internetpubl/weissenfels.pdf
224
Be that as it may, in the last few years, learned scholars in the field of international investment
law54, arbitration counsel and various tribunals have engendered the development of certain criteria
for the determination of admissible contract claims by reference to:
(1) Interpretation of the scope of the treaty’s Dispute Resolution Clause;

(2) Construction of the purpose, meaning and intent of the treaty Umbrella Clause/Observance of
Commitment Clause; and
(3) Critique of the Investment Agreements’ Forum Selection Clause.
3.1.1 Purposes of the Umbrella Clause
In terms of consequence and to facilitate admissibility of contract claims, the Umbrella Clause has
been canvassed to elevate contractual breaches to treaty breaches which makes them subject to
Investor-State jurisdictional scope. This widespread strand of thoughtstransforming or elevating
contract claims into treaty claims, effectively enables the investor-claimantsto allege violation of
the treaty standard of Umbrella Clause. Apart from this particular viewpoint, there is in existence
at least another theory on the effect and implication of the Umbrella Clause;e.g. that the Umbrella
Clause does not elevate or transform a contract claim to the level of violation of a treaty but works
to offer the investor an additional legal basis for bringing a claim under the treaty. 55 Meanwhile,
three SGS cases are very insightful in the discussion on the admissibility of contract claim within
the investment arbitration system and have played a pivotal role in developing the evolving
jurisprudences on this issue.
3.1.2 SGS v. Pakistan – Contract Claims not within Umbrella Clause Scope
The first in line of these SGS cases is the one in which Pakistan 56 as the Respondent was alleged
to have breached its contractual obligation to make payment for pre-shipment inspection services
54
Christoph Schre
55
Reinisch A, ‘Umbrella Clauses: Seminar on International Investment Protection’ 14, available at
http://intlaw.univie.ac.at/fileadmin/user_upload/int_beziehungen/Internetpubl/weissenfels.pdf
56
SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan (Objections to Jurisdiction) ICSID Case
No. ARB/01/13 (ICSID, 2003) August 6, 2003
225
rendered by SGS. To arrive at its decision concerning the admissibility of SGS’s claims grounded
on the breach of certain provisions of the PSI Agreement, the tribunal reviewed and discussed
Articles 9 and 11 of the Swiss-Pakistan BIT and was not convinced that Article 9 (Dispute
Resolution Provision) was intended to cover both BIT and Contractual claims or override parties’
forum selection clauses in the investment agreement. The tribunal therefore declined jurisdiction
with respect to claims based on alleged breach of the investment agreement.
The Tribunal was also compelled to rule on Parties arguments relating to Article 11 of the BIT
(Umbrella Clause) and its effect, consequent upon SGS’ argument that by virtue of this provision,
Pakistan’s breach of its contractual obligation equated to a violation of the BIT. Due to the far-
reaching implications and burdensome potential impact of interpreting the Umbrella Clause
broadly as argued by SGS, the Tribunal declined jurisdiction because it could not fathom a clear
and convincing evidence of the BIT Contracting parties’ intentions in support of SGS’ contentions.
The tribunal further expatiated that a broad interpretation of the umbrella clause will render it
susceptible to almost indefinite expansion.57 Ultimately, SGS v. Pakistan did not elevate contract
breaches to treaty breaches. Joy Mining v. Egypt tribunal similarly interpreted the Umbrella
Clause restrictively or narrowly.58Needless to say that the SGS v. Pakistan tribunal’s decision has
elicited significant amount of academic and arbitral debate. As rightly noted by the Pan America
tribunal quoting Emmanuel Gaillard, “this question has divided practitioners and legal
commentators and remains unsettled in the international arbitral case law.”59 The reasoning of the
SGS v. Pakistan tribunal not elevating contractual claims to the level of claims capable of
breaching the treaty was considered as “more than conclusive” in both Pan America Energy v.
Argentina60 and El Paso v. Argentina.61Obviously, the qualification “more than convincing” by
both Pan America and El Paso’s tribunal was in reaction to the extensive criticism by SGS v.
Philippine tribunal which contended that ‘Not only are the reasons given by the Tribunal in SGS
v. Pakistan unconvincing;…’ 62 SGS v. Pakistan tribunal’s reasoning was also rejected by the
57
SGS v. Pakistan Decision on Jurisdiction para 166.
58
Award on Jurisdiction 06 August 2004.
59
Pan America Energy LLC and BP Argentina Exploration Company v. Argentine Republic, ICSID Case No.
ARB/03/13, Decision on Preliminary Objections, 27 July 2006.para 99.
60
Pan America Energy LLC and BP Argentina Exploration Company v. Argentine Republic, ICSID Case No.
ARB/03/13, Decision on Preliminary Objections, 27 July 2006.para 100.
61
El Paso v. Argentina, Decision on Jurisdiction 27 April 2006 para 71.
62
SGS v. Philippine Decision on Jurisdiction 29 January 2004 para 125.
226
Eureko v. Poland tribunal whilst subscribing to what it considered as “cogent and convincing”
reasoning of the SGS v. Philippine tribunal.63
3.1.3 SGS v. Philippines – Contract Claims Elevated to Treaty Claim but Inadmissible
In the second SGS case involving Philippines64, the tribunal which was tasked with interpreting
BIT clauses similar but slightly different to that interpreted by the SGS v. Pakistan tribunal, took
a somewhat opposing posture to SGS v. Pakistan Tribunal. TheSGS v. Philippines tribunal did
not adopt a restrictive interpretative approach as it held that the host state’s failure to observe
binding commitments, including contractual commitments which had been assumed with respect
to an investment, was a violation of the BIT and therefore was subject to investment arbitration
protection. It further held that save for exclusive dispute resolution clause in the investment
agreement, the investor was at liberty to bring its contractual claim before investment arbitral panel
for resolution of disputes with respect to an investment. The Tribunal therefore ruled that although
on the basis of the broadly construed dispute resolution clause of the BIT, it had competence to
hear the investor’s contractual claims it however preferred to refer the parties to the contractual
dispute resolution mechanism because of its belief that “... tribunal should not exercise its
jurisdiction over a contractual claim when the parties have already agreed on how such a claim is
to be resolved, and have done so exclusively.”65To the tribunal it was more of an admissibility
constraint rather than a jurisdictional constraint that impeded it from resolving the dispute, hence
the statement ‘…this principle is one concerning the admissibility of the claim, not jurisdiction in
the strict sense.’66
The Tribunal’s decision in this instance have been variously criticized as being inconsistent in its
reasoning for accepting jurisdiction over contract claim on the basis of the Umbrella Clause and
yet deciding to give effect to the forum selection clause in the investment agreement irrespective
of the jurisdiction assumed.One of such criticism bordered on the uncertainty associated with the
63
Eureko v. Poland Partial Award and Dissenting Opinion 19 August 2005 para 257.
64
SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (Objections to Jurisdiction) ICSID Case
No ARB/02/6 (ICSID, 2004); January 29, 2004
65
SGS v. Philippines Para 155
66
SGS v. Philippines Para 154. The tribunal in this instance differentiated between jurisdiction and admissibility.
227
tribunal’s deferment of the arbitral proceedings pending resolution by domestic courts.67It has been
argued that despite the vigorous criticism of the SGS v. Pakistan tribunal’s award by the SGS v.
Philippines, a more critical inspection revealed that the substance and outcome of these two
tribunals’ findings on Umbrella Clause are fairly similar. 68Notwithstanding these criticisms, a
number of tribunals, still give jurisdictional precedence to contractual forum selection clauses,
thereby declining jurisdiction to determine investor-claimants’ contractual claims. One of such
tribunals which toed this same route is the Bosh International v. Ukraine tribunal. Although the
central plank of Bosh tribunal’s decision to decline jurisdiction over the investor-claimant’s
Umbrella Clause claim in Bosh International v. Ukraine69 borders on lack of privity, the tribunal
held that where a contractual claim is asserted under an Umbrella Clause, the claimant must
comply with any dispute settlement provision included in the contract, which in that instance was
resolution by Ukrainian Courts.70
3.1.4 SGS v. Paraguay – Pro-Investor Approach to Umbrella Clause Interpretation
Subsequent to the SGS v. Philippines case, another Tribunal called upon to contribute to the debate
on the admissibility of contract claims via Umbrella Clause was the SGS v. Paraguay 71 tribunal.
The case presents a scenario similar to the other two SGS cases in terms of facts and variant of
Umbrella Clause. The Claimant asserted that failure to pay invoices under the investment
agreement was in violation of the BIT’s Umbrella Clause which required state parties to constantly
guarantee the observance of the commitments entered into. Paraguay on the other hand contended
that it was an anomaly to uphold SGS’s labelling of its purely contractual claims as a treaty claim
67
In this respect, the tribunal did not stipulate the conditions to be fulfilled before the investor-claimant can have
recourse to investment arbitration such as stipulating a waiting period for the investor-claimant to return to the tribunal
failing final resolution by domestic tribunal. Thomas Walde, ‘The “Umbrella” Clause page 228.
68
Thomas Walde, ‘The “Umbrella” Clause page 228.
69
Bosh International, Inc. and B&P Ltd. Foreign Investments Enterprise v. Ukraine, ICSID Case No. ARB/08/11,
Award 25 October 2012.
70
Malik M, ‘The Expanding Jurisdiction of Investment-State Tribunals: Lessons for Treaty Negotiators’ Issues in
International Investment Law: Background Papers for the Developing Country Investment Negotiators’ Forum;
Singapore, October 1-2, 2007 available at http://www.iisd.org/pdf/2007/inv_expanding_jursidiction.pdf accessed on
24 February 2013
71
SGS Société Générale de Surveillance S.A. v. The Republic of Paraguay (2010: ICSID Case No. ARB/07/29)
(Swiss/Paraguay BIT) Decision on Jurisdiction of 10 February 2010. This is case is less popular that the first two
SGS case which were one of the earliest cases on Umbrella Clause and involved the controversial contract claims
versus treaty claims debate. This case has been highlighted as the tribunal findings represent divergent outcome from
the other two SGS cases.
228
considering that non-performance of a contract could only occasion a violation of treaty where
there is sovereign interference. The Tribunal in its landmark 2010 jurisdictional decision rejected
Paraguay’s argument pertaining to sovereign interference being a basis for transforming
contractual breaches to BIT violation. Additionally, the Tribunal rejected all of Paraguay’s
arguments particularly the arguments relating to the effect of the Umbrella Clause. By giving
effect to the ordinary meaning of the Umbrella Clause in line with the guidance of Article 31 (1)
of the Vienna Convention on the Law of Treaties, the Tribunal assumed jurisdiction to entertain
SGS’s contract claims for a variety of reasons including belief that the interpretation accorded to
the Umbrella Clause was in tandem with the intentions of Switzerland and Paraguay when the BIT
was negotiated and any interpretation to the contrary will divest the Umbrella Clause of its core
purpose and effect. 72 In contrast to the other two SGS decisions, the Tribunal held that the
existence of a forum selection clause stipulating the recourse to local courts for adjudication of
disputes did not bar or foreclose the tribunal’s jurisdiction or render inadmissible SGS’ claims.
The Tribunal therefore assumed jurisdiction over the contract claims and did indeed hear the
parties’ arguments on the merit. Considering that after the SGS v. Pakistan award, Switzerland
had issued a unilateral interpretative statement clarifying
Thus, it is clear from the above that the three SGS cases present three scenarios below:
1. SGS v. Pakistan – Contract claims inadmissible causing tribunal to decline jurisdiction.

2. SGS v. Philippines – Tribunal assuming jurisdiction but deferring to contractual dispute resolution
mechanism;
3. SGS v. Paraguay – Tribunal assuming jurisdiction to determine dispute irrespective of contractual
dispute resolution mechanism of parties.
El Paso tribunal in its Decision on Jurisdiction considerably discussed the first two SGS tribunals’
findings on Umbrella Clause, favouring the SGS v. Pakistan approach. In its conclusion that an
Umbrella Clause cannot transform any contract claim into a treaty claim, El Paso tribunal
emphatically decried expansive interpretation of the Umbrella Clause when it stated that the clause
will occasion “far reaching consequences, quite destructive of the distinction between national
72
SGS. v. Paraguay Decision on Jurisdiction para 176.
229
legal order and the international legal order”.73 The tribunal highlighted the potentials for abuse
of the Umbrella Clause protections as enunciated by SGS v. Pakistan tribunal and renowned
scholar Christoph Schreuer.74 The fear being if the overly broadened interpretation of Umbrella
Clause’s scope were to be adopted, it has capacity to transform every trivial disputes or minor
disagreement into an issue for which international arbitration is available. In other words, the fear
of “opening of the floodgates” as coined by Prof Walde.75 The tribunal expressed the view that
Christoph Schreuer’s call for investor-claimants’ to invoke the Umbrella Clause with appropriate
restraint will most likely be ignored by investor-claimants, whereas tribunals should be reposed
with responsibility for showing appropriate restraint.76 The tribunal subscribed to the view that
the Umbrella Clause will not extend to purely contractual claims, which do not amount to a
violation of the standards of protection of the BIT such as National Treatment, MFN Clause, Fair
and Equitable Treatment, Full Protection and Security, Protection against Arbitrary and
Discriminatory Measures and Expropriation. The tribunal also shared the opinion that a violation
of an investment agreement entered into by host States as a sovereign and an investor-claimant can
give rise to a treaty claim.77
Another supporter of this line of argument is Prof Thomas Walde, whose contribution to this
discourse was more from the historical perspective angle when he asserted that it wasn’t within
the contemplation of the originators of the investment treaty arbitration for “private commercial
contract claims to appearsubsumable under the now-existing combination of the pacta sunt
servanda clause (Umbrella Clause – emphasis added)”.78 Prof Walde alluded that the Umbrella
Clause was developed originally to manage the risk of expropriatory action of host
Statesabrogating a long-term-mostly concession-like-agreement.79He continued that there was no
evidence of Umbrella Clause’s original framers’ intentions to create a treaty-based forum for
73
El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Decision on
Jurisdiction, 27 April 2006 (“El Paso v. Argentina”) para 82. Pan American Energy v. Argentina tribunal followed
El Paso’s tribunal’s approach on this issues.
74
Christoph Schreuer, ‘Travelling the BIT Route: Of Waiting Periods, Umbrella Clauses and Forks in the Road’ (2004)
Vol 5 J. World Investment & Trade 231.
75
Thomas Walde, The “Umbrella” Clause page 215.
76
El Paso v. Argentina, Decision on Jurisdiction 27 April 2006 Para 82.
77
El Paso v. Argentina, Decision on Jurisdiction 27 April 2006 Para 84 and 85.
78
Thomas W. Walde. ‘The “Umbrella” Clause in Investment Arbitration: A Comment on Original Intentions and
Recent Cases’ 194.
79
Walde (n 1) 193.
230
adjudicating all contractual disputes between State entitiesand foreigners, since the clause as then
formulated did not target purely commercial interaction without any distinct feature of
governmental powers and prerogatives present.80 In a nutshell, the view expressed by Prof Walde
can be succinctly summarized as that arguing for elevation of contract claims to treaty claims but
not purely commercial contracts.
Other noteworthy cases that have contributed to the evolvement of the contract claims
jurisdictional debate within investor-state arbitration setting include Lanco v. Argentina,81 Salini
v. Morocco,82Azurix v. Argentina.83As noted above, a crucial principle emerging from the El Paso
tribunal’s ruling in the context of admissibility of contract claim through umbrella clause
protection, relates to the dichotomy between purely commercial contract vis-à-vis contracts
entered into by the state as a sovereign. To El Paso and other tribunals upholding this
stance,84Umbrella Clause protections will not extend to breaches of obligations assumed by host
state in its capacity as a merchant but will be available for host state’s obligations assumed in its
sovereign capacity or when there is palpable exercise of sovereign authority.85 Thus, breaches of
ordinary or purely commercial contracts between host state and investors will not incur liability
under the umbrella clause. Needless to point out that there are tribunals opinions on the other side
of the divide. The Burlington tribunal for instance, sees no reason why a distinction should be
made between host states commercial acts and sovereign acts in this context 86 while SGS v.
Paraguay Tribunal noted the impracticality and challenge of differentiating between an ordinary
commercial breach of contract and acts of sovereign interference.87
80
Walde (n 1) 205.
81
Lanco v. Argentina81 (1998: ICSID Case No. ARB/97/6); In this case, the Tribunal held that the requirement for
both parties to consent to the arbitration was present.
82
Salini v. Morocco (2001: ICSID Case No. ARB/00/4); The tribunal held that the phrase “all disputes or differences
... between a Contracting party and an investor of the other Contracting party concerning an investment ...” was very
general and broadly worded as to be construed to deem admissible a claim based on contract. The tribunal in
interpreting the said Article 8 opined that the Article compels the contracting parties to subject to ICSID arbitration
system any dispute over violation of the BIT and a breach of contract by the state parties.
83
Azurix v. Argentina (2003: ICSID Case No. ARB/01/12).
84
Other tribunals in support of this contention include Joy Mining v. Egypt, Pan American v. Argentina Decision on
Preliminary Objection 27 July 2006 para 112; Sempra Energy v. Argentina Award 18 September 2007 para 310.
85
El Paso Decision on Jurisdiction para 79.
86
Burlington v. Ecuador Decision on Jurisdiction para 190.
87
SGS v. Paraguay Award 10 February 2012 para 135.
231
It is discernible from reading through the above and other relevant cases that some tribunals have
accepted as admissible, investors’ contractual claims on the basis of broadly interpreted investment
treaties’ Dispute Resolution Provisions and Umbrella Clauses whilst some others have rejected
said contractual claimsdue to narrowly interpretedDispute Resolution Provisions and Umbrella
Clauses. The rationales for the divergent reasoning are varied depending on a number of variables
including the facts of the cases, the language of the BITs, the wordings of the investment
agreements, arguments of the parties or mere arbitrators’ disposition. However, uncertainty is still
the order of the day in this regard as the Bosh International tribunal in its October 2012 Award,
opted for the restrictive approach regardless of the earlier pro-investor SGS v. Paraguay position.
Meanwhile, in that same year ie 2012, eight investor-state arbitration decisions on Umbrella
Clauses weredecided with 3 of the tribunals not addressing the controversial aspects of Umbrella
Clauses.88 Two tribunals out of the remaining five ascribed a broad and unconditional meaning to
the umbrella clause whilst the remaining three tribunals favoured a conditional meaning in line
with the decision in SGS v. Philippines. In summary, Prof Walde’s comments, aptly represent the
current position in the interpretation of the Umbrella Clause, particularly as it relates to obligations
emanating from contractual instruments:
‘The precise scope of such coverage and the specific meaning of the now numerous, if not
pervasive, umbrella clauses in modern investment treaties has as yet not been authoritatively
determined. Tribunals will often prefer to decide for reasons of judicial economy and, to avoid
more assailable decisions, rather on established grounds (discrimination, fair and equitable
treatment, indirect expropriation) than on the grounds of the umbrella clause.’89
3.2. UNILATERAL COMMITMENTS/UNDERTAKINGS: A SOURCE OF

INTERNATIONAL OBLIGATION
88
Patricio Grané, ‘Umbrella Clause Decisions: The Class of 2012 and a Remapping of the Jurisprudence’ available at
http://kluwer.practicesource.com/blog/tag/umbrella-clause/ accessed 27 February 2013.
89
Thomas Walde page 209.
232
Outside of the Umbrella Clause debate, host states can by virtue of unilateral undertaking incur
legal obligation or responsibility. In this regard, the International Court of Justice in the Nuclear
Tests cases held:
‘It is well recognized that declarations made by way of unilateral acts, concerning legal or factual
situations, may have the effect of creating legal obligations. Declarations of this kind may be, and
often are, very specific. When it is the intention of the State making the declaration that it should
become bound according to its terms, that intention confers on the declaration the character of a
legal undertaking, the State being thenceforth legally required to follow a course of conduct
consistent with the declaration. An undertaking of this kind, if given publicly, and with an intent
to be bound, even though not made within the context of international negotiations, isbinding. In
these circumstances, nothing in the nature of a quid pro quo nor any subsequent acceptance of the
declaration, nor even a reply or reaction from other States, is required for the declaration to take
effect, since such a requirement would be inconsistent with the strictly unilateral nature of the
juridical act by which the pronouncement by the State was made.’90
Also relevant is the International Law Commission principles applicable to unilateral declaration
of states which is reads as follows:
‘Declarations publicly made and manifesting the will to be bound may have the effect of creating
legal obligations. When the conditions for this are met, the binding character of such declarations
is based on good faith; States concerned may then take them into consideration and rely on them;
such States are entitled to require that such obligations be respected.’91
In the context of Umbrella Clause, there are in fact divergent views on whether the scope of
Umbrella Clause Obligations include unilaterally assumed obligations under domestic legislation
90
Nuclear Tests Cases (Australia/New Zealand v. France) Judgment 20 December 1974, 1974 ICJ Reports 253.
91
International Law Commission, ‘Guiding Principles applicable to Unilateral Declarations of States Capable of
Creating Legal Obligations, with Commentaries Thereto 2006’ Available at
<http://legal.un.org/ilc/texts/instruments/english/commentaries/9_9_2006.pdf> accessed 20 April 2017. This is the
first of the ILC Principles.
233
or regulatory framework.92As stated in Jude Antony’s review of Umbrella Clause cases, most of
the tribunals which determined Umbrella Clauses claims didn’t categorically take a position on
whether or not unilateral undertakings/obligations of host States were covered under Umbrella
Clause protection.93 One can though surmise from some of these tribunals’ expansive definition
of the phrase ‘any obligations’ that they would have been willing to include unilateral obligations
within the ambit of Umbrella Clause protection if same were relevant to the issues being
determined.94
Be that as it may, some tribunals took emphatic positions affirming the coverage of unilateral
undertakings under Umbrella Clause protection. A good starting point is the SGS v. Philippines
tribunal which inferred that Umbrella Clause covers a wide range of host states commitments
including unilateral undertakings/acts such as legislative commitments. The SGS v. Philippines
tribunal however qualified with that Umbrella Clause’s scope will encompass host state’s legal
obligation of a general character. SGS v. Philippines contributed that host states obligations must
be assumed vis-à-vis a specific investment for Umbrella Clause to be applicable.95 In essence,
SGS v. Philippines tribunal generally endorsed unilateral acts but disqualified general legislation
from the operation of the Umbrella Clause.
A keen assertion of this positions can be deciphered in the LG&E v. Argentina tribunal’s ruling
that certain Argentina’s laws and regulations transformed to ‘… obligations within the meaning of
Article II (2) (c), by virtue of targeting foreign investors and specifically to their investments that
gave rise to liability under the Umbrella Clause.’ 96 The case pertained to abrogation of rights
previously granted under Argentina’s gas legal and regulatory framework. To the tribunal, the fact
that Argentina had promoted its gas laws and regulations to induce and attract foreign investments,
such acts caused the regulations to become obligations entered into with regards to investments.
92
LG&E Energy Corp. v. Argentine Republic 30 April 2004, ICSID Case No.ARB021 (“LG&E v. Argentine”). The
Tribunal held that the Gas Law being regulation of a specific type are obligations which gave rise to liability under
the umbrella clause.
93
It was noted that the Umbrella Clause claims in these cases were hinged on contractual obligations. It therefore
wasn’t necessary to decide if unilateral obligations or undertakings of host states were covered under the Umbrella
Clause. Eureko v. Poland tribunal’s statement that ‘any obligation is capacious and meaning all obligations, is a good
example of expansive interpretation referenced herein. See Jude Antony page 623.
94
Jude Antony page 623.
95
SGS v. Philippines para 121.
96
LG&E v. Argentina – Decision on Liability Para 175.
234
In consonance with SGS v. Philippines tribunal’s condition of specificity, LG&E v. Argentina
emphasised that obligations emanating form Argentina’s statutory and regulatory provisions were
not legal obligations of a general nature but specific to LG&E’s investments. LG&E v. Argentina
is further discussed in Section 4 of this Chapter.
Reiterating its earlier stance expressed in the Decision on Jurisdiction, the SGS v. Paraguay
tribunal posited that ‘Article 11 “creates an obligation for the State to constantly guarantee
observance of its commitments entered into with respect to investments of investors of the other
Party. The obligation has no limitations on its face—it apparently applies to all such commitments,
whether established by contract or by law, unilaterally or bilaterally, etc.” Oral and written
representations outside the Contract could, therefore, be enforceable under Article 11 in certain
circumstances.’ The tribunal however found it irrelevant and unnecessary to expatiate the ‘certain
circumstances’ under which non-contractual representation could be enforceable under the
Umbrella Clause.97 Perhaps this was because it wasn’t non-contractual obligation in contention
and its remarks extending the umbrella clause to unilateral acts were passing comments.98
3.2.1 Khan Resources v. Mongolia
A more recent case endorsing a broadened interpretation of obligation to encompass unilateral

obligations is Khan Resources v. Mongolia. The dispute in this case centred on Mongolia’s
cancellation of investor-claimant's mining and exploration licenses for uranium extraction. In
1997, Kahn Resources Inc. (Kahn Resources), a Canadian mining company entered into a joint
venture with a Russian state-owned company and a Mongolian state-owned company through it
Mongolian registered wholly-owned subsidiaries for the purpose of developing a uranium
exploration and extraction project in DornodProvince in North-Eastern Mongolia. Mining and
exploration licences (License 237A and License 9282X) were issued to Khan Resources for the
project. In furtherance of its Nuclear Energy Reform, Mongolia enacted a Nuclear Energy Law
(NEL) and established a Nuclear Energy Agency (Agency) in August 2009. Pursuant to the NEL,
Mongolia’s share in the joint venture was unilaterally increased without payment of compensation
97
SGS v. Paraguay Award para 77.
98
Maria Salias page 3.
235
to Khan Resources or other co-joint venturers. Meanwhile the newly established regulator,
subsequently suspended all exploration and exploitation licenses including those held by Khan
Resources. The Agency ultimately cancelled Khan Resources’ mining licences leading to the
commencement of investment arbitration. Regarding its Umbrella Clause claim, Khan Resources
submitted that the permanent invalidation and cancellation of the Mining and Exploration Licenses
violated provisions of the Mongolia Constitution and Foreign Investment Law which requires
investments to be afforded the legal protection guaranteed by the Constitution, the Foreign
Investment Law and other legislation, consistent with those laws and international treaties to which
Mongolia is a party.99 Khan resources further contended that a breach of the Foreign Investment
Law constituted a violation of the Article 10(1) of the ECT (Umbrella Clause) which reads as
follows: ‘Each Contracting Party shall observe any obligations it has entered into with an Investor
or an Investment of an Investor of any other Contracting Party.’
In its Decision on Jurisdiction, the tribunal interpreted this ECT Umbrella Clause very broadly to
encompass unilateral undertakings of host states when it held that:
‘The Claimants submit that the terms “any obligations” encompass the statutory obligations of the
host state and in this case, Mongolia’s obligations under the Foreign Investment Law. Given the
ordinary meaning of the term “any” and the fact that the Respondents have not submitted any
arguments or authorities to the contrary, the Tribunal accepts the Claimants’ interpretation of
Article 10(1) of the ECT.’100
In summary, the tribunal in the Award after review of the dispute on merit, found a breach of
Article 8.2 of the Foreign Investment leading to a finding of breach of ECT Umbrella Clause
particularly as in its Decision on Jurisdiction, the tribunal had ruled that if a violation of the Foreign
Investment Law was found, then Umbrella Clause violation would be deemed to have occurred.101
99
Khan Resources v. Mongolia Award para 191.
100
Khan Resources Inc., Khan Resources B.V. and CAUC Holding Company Ltd. V. v. The Government of Mongolia,
Decision on Jurisdiction 25 July 2012 para 438.
101
Khan Resources Inc., Khan Resources B.V. and CAUC Holding Company Ltd. V. v. The Government of Mongolia,
Decision on Jurisdiction 25 July 2012 para 438.; Award paras 295, 296 and 366.
236
3.2.2 Mohammed Al Bahloui v. Tajikistan
Still recently, another case that subscribes to the extension of host states’ obligations under the
Umbrella Clause beyond contractual and consensual obligations to unilaterally assumed
obligations isMohammed Al Bahloui v. Tajikistan. The tribunal which had to construe the same
Article 10 (1) ECT Umbrella Clause formulation as with the Khan Resources v. Mongolia tribunal
i.e. ‘any obligation entered into’ mode, also subscribed to a broadened interpretive approach. The
tribunal’s support for the position that unilateral (statutory) undertakings or commitments of host
states can create obligations covered under the Umbrella Clause is reflected in its statement that
‘This protection is broadly stated, referring as it does to "any obligation"and, as such, by the
ordinary meaning of the words, includes both statutoryand contractual obligations.’ The tribunal
though referred to the opposing restrictive position enunciated by CMS Gas v. Argentina Ad
hocAnnulment Committee. It must be noted that the Umbrella Clause claim in this matter
concerned breach of contractual obligation to ensure licence issuance to the investor-
claimant.102The Mohammed Al Bahloui v. Tajikistan tribunal was unequivocal in its view that
Umbrella Clause provision does not apply to general obligations of the State arising as a matter of
law because of the notion that the obligation must have been entered into "with" an Investor or an
Investment of an Investor.103Nonetheless, the tribunal’s above-quoted affirmative statement lends
credence to the viewpoint that had there been a unilateral or non-contractual obligation in issue,
the tribunal won’t have hesitated to endorse same as an obligation covered under Umbrella Clause
protection.
3.2.3 OIEG v. Venezuela
102
Ibid para 257. The Claimant asserted failure of Tajikistan to observe contractual obligations. The tribunal found
a breach of the contract containing Tajikistan’s clear and unconditional obligation to ensure license issuance to the
investor-claimant. As the licenses were not issued, investor-claimant was deemed to have established a prima facie
case of breach of contract and consequently a breach of Tajikistan’s duty under the treaty’s Umbrella Clause. Partial
Award paras 263-5.
103
Mohammad Ammar Al-Bahloul v. The Republic of Tajikistan, SCC Case No. V (064/2008), Partial Award on
Jurisdiction and Liability 02 September 2009 para 257.
237
Still on the issue of extension of Umbrella Clause’s scope to statutory and unilateral commitments
of host states, the tribunal’s holding in OIEG v. Venezuela is equally relevant and instructive to
the current discuss. In this case, the investor-claimant contended that Venezuela had violated the
Umbrella Clause contained in Netherlands - Venezuela BIT 104 to the extent that obligations
assumed by Venezuela under its Investment Law were unobserved. Notably, Articles 6, 8, 11,
12and 15 of the referenced Venezuelan Investment Law made copious provisions for foreign
investment protection analogous to the protection afforded by the BIT.105 The investor-claimant
argued for a broadened interpretation of the treaty’s Umbrella Clause containing the phrase ‘any
obligation’.106 Expectedly, Venezuela canvassed for a restrictive interpretation contending that
the Investment Law relied on by the investor-claimant did not refer to any specific investment but
established generic regulatory framework and therefore inapplicable as a basis of Venezuela’s
Umbrella Clause obligation.107The tribunal in its analysis of the Umbrella Clause claim agreed
with the investor-claimant and other tribunal’s (SGS v. Pakistan and Enron v. Argentina)
interpretation of the Umbrella Clause that the clause being broadly worded includes obligations
entered into by law.108 The tribunal ultimately held that non-compliance with the Venezuelan
Investment Law effectively became non-compliance with the BIT. 109 Meanwhile, the tribunal
having previously found breach of FET and Expropriation under the BIT, preferred to have the
investor-claimant’s substantive rights proceed from the BIT, rather than the Investment Law. In a
nutshell, the Claimant’s umbrella Clause claim although meritorious and upheld, proffered no
greater protection and consequence that than already established under the treaty.110
In conclusion, the above summation suggests that only two cases vehemently rejected the notion
that obligations deriving from host states unilateral acts and measures are covered under Umbrella
104
and the Republic of Venezuela, Signed 22October 1991, Effective 01 November 1993; Article 3 (4) ‘Each Contracting
Party shall observe any obligation it may have entered into with regard to the treatment of investments of nationals of
the other Contracting Party. …’
105
OI European Group B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/25, Award 10 March 2015
para 584 (hereinafter OIEG v. Venezuela).
106
OIEG v. Venezuela Award para 585-6.
107
OIEG v. Venezuela Award para 587.
108
109
110
OIEG v. Venezuela Award para 593-4.
238
Clause protection.111 On the other hand, there is plethora ofsupport (explicitly and implicitly) for
the view that the Umbrella Clause covered not only contractual obligations but also obligations
assumed through unilateral acts e.g. domestic legislation and regulation. Apart from those
highlighted above, other notable tribunals’ findingsin support of this interpretative approach
include those of Enron Corp v. Argentina,112 Noble Energy v. Ecuador,113Continental Casualty v.
Argentina114and Siemens v. Argentina.115 The tribunal in Enron v. Argentina in particular, clearly
subscribed to the idea that unilateral obligations were binding and enforceable obligations within
the scope of Umbrella Clause protection when it asserted that ‘any obligations’ referred to
obligations regardless of their nature.116 Consequently, the tribunal wasn’t diffident in finding a
violation of Umbrella Clause due to Argentina’s breach of obligations undertaken both under the
contract, the law and regulation (unilateral/non-contractual obligations) in respect of
investment.117
Overall, the position that both contractual and non-contractual obligations of host states can trigger
Umbrella Clause protection has been given recognition by most tribunals.One must quickly add
though that this is a generalized statement which requires some qualifications to the extent that
various criteria and requirements have been introduced to facilitate the assimilation of both
contractual and non-contractual obligations under the Umbrella Clause. For instance, regarding
obligations emerging from contractual instruments, as noted earlier, some tribunals draw a
distinction between purely commercial contracts118 and contracts with a flavour of host states’
sovereignty while some deem such a redundant exercise.119 In the same vein, with respect to
unilateral undertakings or obligations of host states, topmost amongst these pre-qualifying criteria
111
CMS Annulment Committee and Noble Ventures v. Romania.
112
Enron v. Argentina Award 22 May 2007 para 269-77.
113
See Noble Energy v. Ecuador Decision on Jurisdiction 05 March 2008 para 157, wherein the tribunal stated that
the host state’s obligation stemmed not only from contract but also from laws and regulations
114
Continental Casualty v. Argentina Award para 301.
115
Siemens v. Argentina Award para 205.
116
Enron v. Argentina Award para 274.
117
Enron v. Argentina Award para 277.
118
CMS Gas v. Argentina allowed contract claim but contributed that Umbrella Clause would cover only contracts
entered into with the host state acting as a sovereign as opposed to purely commercial contracts. 118.
119
The SGS v. Paraguay tribunal rejected the contention of Paraguay that pure commercial contracts are excluded from
the scope of Umbrella clause protection. SGS v. Paraguay, Decision on Jurisdiction para 168. Meanwhile, the
__________ tribunal deemed the distinction as consequential and the basis for declining jurisdiction over claims it
deemed emanated from purely or ordinary commercial contracts between the investor and the host state.
239
is the requirement of specificity to investment. In simple terms, some tribunals insist that the
unilateral obligations must be assumed in respect of specific investments. Whether baseless or
not, this seems to be resonating within treaty practice concerning unilateral obligations of host
states as a basis for international liability under the Umbrella Clause. The strongest affirmation
for this specificity rule finds expression in the SGS v. Philippines tribunal’s decision that
obligation must be assumed with respect to a specific investment. Rightly so as the textual
formulation of SGS v. Philippines BIT – Philippines-Switzerland BIT includes a phrase “with
regards to specific investments.” Other tribunals that have followed this line of thinking may have
done so with or without any concrete basis. ‘Without concrete basis’ in this context means when
the relevant treaty Umbrella Clause does not mandate a specificity requirement. A good example
is the Link Trading v. Moldova tribunal which for the purpose of determining the investor-
claimant’s Umbrella Clause Claims including one based on the stability guarantees contained in
the Foreign Investment Law, had to interpret Article II (3) (C) of the Moldova-US BIT which
simply reads ‘Each Party shall observe any obligation it may have entered into with regard to
investments.’ After proffering cogent reasons why each of Link-Trading’s Umbrella Clause
claims were untenable and unsubstantiated, the tribunal still went ahead to rule that “We therefore
conclude that the State had not assumed any specific obligation towards Claimant to maintain
unchanged the customs and tax regimes applicable to Claimant's customers…”120 As it is, the BIT
does not prescribe a specificity requirement but the tribunal was minded to all the same find that
unilateral obligations must be assumed with respect to specific investment. One can thus argue
that due consideration to SGSv. Philippine’s Umbrella Clause textual variant, might have led to
non-adoption of the specificity criterion requiring that the state should have assumed a specific
obligation towards the investor-claimants.
Notwithstanding the above highlighted divergence and inconsistency, the cases and positions
distilled above makes it conceivable to draw a generalized conclusion that it is now established in
investor-state arbitration system that host States’ contractual obligations as well as obligations
assumed by host states’ statutory and regulatory framework can give rise to liability under the
Umbrella Clause. Largely, the requirements formulated to pre-qualify both contractual and
This argument is of course premised on the notion that ‘specific obligations’ will naturally arise from ‘specific
120
investments’.
240
unilateral obligations of stability will typically not apply to disqualify stability guarantees. For
one, it is established in treaty practice and under international law generally that stabilizations
clauses are granted as a function of host state’s sovereignty. Moreso, stabilization clauses
particularly contractual stabilization clauses are specific to investors and/or investments and are
recognised as acts of sovereign. Consequently, that takes any claim based on non-observance of
contractual stability obligation out of the remit of purely or ordinary contractual breach.According
to El Paso’s tribunal, the Umbrella Clause will not cover or extend treaty protection to breaches of
an ordinary commercial contract entered into by host states but will extend or encompass
protection of additional contractually agreed obligations of the state as a sovereign such as
stabilization clause.121More often than not, unilaterally granted stability guarantees are directed at
specific sectors or industry and will therefore fall within the ambit of the Umbrella Clause
protection as delineated in treaty practice. Notably, the stability obligations in a generalized
foreign investment law was held not to qualify for protection under the umbrella clause. The
conclusion being, sector-specific stability guarantees embedded in host States’ statutory and
regulatory framework will typically make the cut save for other extraneous factors impeding
absolute and total investment protection under the Umbrella Clause.
It is important to note that the jurisprudence on Umbrella Clause and stability guarantee coalition
is very limited. From the few cases that concerned stability commitments or obligations of host
states, the scope of the obligation assumed was not the determinant factor but rather other
considerations such as privity, jurisdictional precedence took prominence in the award of the
tribunals and resulting follow-on decisions. Majority of the tribunals that adjudicated over
Umbrella Clause claims pertaining to stability undertakings subscribed in principle to the notion
that both contractual and unilaterally assumed obligations are within Umbrella Clause’s scope.
The conclusion to be drawn therefore is similar to one already drawn above that generally speaking
umbrella clause protection extend to both contractual and non-contractual obligations assumed by
host states with certain qualifiers. In the next section, the cases on host states stability obligations
are considered in greater details.
121
El Paso v. Argentina – Decision on Jurisdiction 27 April 2006 para 81.
241
4. HOST STATES’ LIABILITY BY REASON OF REPUDIATION OR REVERSAL OF
STABILITY GUARANTEES
Against the backdrop of the preceding discussion on the nature of host states obligations that may
incur international liability under the Umbrella Clause, this section analyses cases where investor-
claimants have alleged violation of Umbrella Clauses on the basis of non-observance or breach of
diverse forms of Stability Guarantees or obligations deriving from both contractual and non-
contractual instruments such as domestic legislations and regulations. This section’s discussion is
not intended to touch on all the issues pertaining to Umbrella Clauses claims in the cases
highlighted but only those that relate to parties’ arguments and tribunals’ findings on the breach
of stability obligations will be analysed. Considering that no “formidable consensus”122 has been
reached on the extent or apposite interpretation of the Umbrella Clause’s obligations, this section
will highlight main issues arising from investor-claimants’ invocation of Umbrella Clause
protection to cover stability guarantees or undertakings. On this premise, below commentators’
statement is an appropriate starting point for stability guarantee/umbrella clause relationship:
‘The state’s treaty obligation e.g. to “observe any obligation it has entered into with an investor”
– may not directly apply to a particular state/investment contract. Nevertheless, if both parties
have negotiated a stabilization clause before the known background of such treaty obligation, then
one should assume that the treaty’s obligation to respect contractual commitment reinforces the
contractual mirror-image.’123
In simple terms, Waelde and Ngi in the above quotation, articulated that Umbrella Clause
strengthens or buttresses contractual stabilization clause which they described as the “contractual
mirror-image” of Umbrella Clause. Meanwhile Prof Walde had in a previous publication likened
Stabilization clause’s rationale to that of the Umbrella Clause, which was to prevent the host State
from relying on its sovereign powers to extricate itself from prior commitments subsequently
deemed too onerous. 124 He further contended that Umbrella Clause not only incorporates the
122
Formidable to the extent of being established and uncontested.
123
Thomas Waelde and George Ndi, ‘Stabilizing International Investment Commitments: International Law versus
Contract Interpretation’ 31 (1996): Tex. Int'l LJ 215, 254.
124
Thomas Walde (n ---) 200.
242
intention and strategy of contractual stabilization clauses but also elevates them to the higher level
of a treaty commitment.
Going by conclusions drawn in the analysis undertaken in Sections 2 and 3 of this Chapter, there
is great probability that (all things being equal) above opinion of renowned scholars, Waelde and
Ngi will be shared by majority of tribunals required to determining the availability of Umbrella
Clause protection for investor-claimant claiming breach of contractual stabilization clause. One
should however emphasise that the allusion to majority position herein, is with reference to
potentials of Umbrella Clause to reinforce “contractual stabilization clauses”. The question then
becomes; will this statement about majority of the arbitrators having a common understanding,
hold true if unilaterally granted stabilization provisions were involved? The answer as earlier
conclusions suggested and ensuing discussions will reveal, is in the affirmative with some
qualifications.
It is worth noting that the cases that are based on host states’ obligation to maintain stability and
predictability of investment terms and conditions are far in between. In the few cases highlighted
below, the general principles enunciated on nature of obligations and scope of umbrella clause can
be seen running through them. Discussions on other key considerations in the discussion of
Umbrella Clause as highlighted by Jude Antony e.g. function, privity and jurisdictional precedence
will be limited to the impact they have on tribunals’ ruling on Stability Guarantee enforcement.
Where these issues have a significant bearing on the success or failure of the investor-claimants’
Umbrella Clause claims, this will be indicated and its effect on the tribunal’s ruling clarified. As
a result, this section will now narrow the review down to arbitral findings on Umbrella Clause
coverage of obligation or undertaking of stability and predictability granted contractually or
through host States’ statutory or regulatory framework. The few cases discussed in this section
are those that have Stability Guarantees or undertakings underpinning the investor-claimants’
Umbrella Clause claims.
4.1 Burlington v. Ecuador
243
The first of these stability guarantee cases to be considered is the high profile Burlington v.
Ecuador arbitration which has elicited enormous discussions within investment treaty arbitration
realm. Burlington v. Ecuador arbitration has received significant attention being one of ‘The Law
42 Arbitrations’ involving the controversial Ecuadorean "windfall tax" measure known as "Law
42,125 coupled with the recent successful advancement of counterclaim by Ecuador leading to the
February 2017 Award. By this rarity i.e. successful counterclaim, Burlington was ordered to pay
Ecuador $41.7 Million for breach of Ecuadorian environmental law and contractual obligations
asper Ecuador’s counterclaim.126
4.1.1 Factual Background
By way of fact summary, Burlington Resources Inc, a US based corporation invested in Ecuador’s
hydrocarbon industry by acquiring ownership interests inOil Blocks 7, 21, 23 and 24 located in
the Ecuadorian Amazon. Burlington Resources’ interests ranging from 42.5% to 100%, were
acquired between 2000 and 2006 through its three wholly-owned local subsidiaries which entered
into Production Sharing Contracts(PSC) with Ecuador containingStabilization Clauses. The PSCs
guaranteed for Burlington, a legal stabilization clause127 and a Tax Indemnification Clause (TIC).
There was contention on the correct or appropriate description of the TIC which reads as follows:
Clause 11.12: ‘Modification to the tax system: In the event of a modification to the tax system or
the creation or elimination of new taxes not foreseen in this Contract, which have an impact on the
economics of this Contract, a correction factor will be included in the production sharing
percentages to absorb the impact of the increase or decrease in the tax.’
125
Perenco Ecuador Ltd. v. Ecuador, Occidental Petroleum v. Ecuador and Murphy v. Ecuador are the other cases
wherein Ecuador’s enactment of Law 42 was the subject matter of the dispute. See Julie Bédard,David Herlihyet al,
‘The 'Law 42' Arbitrations against Ecuador and the Importance of BIT Language’ Available at
<https://www.skadden.com/insights/law-42-arbitrations-against-ecuador-and-importance-bit-language> accessed 04
May 2017.
126
Christian Leathley and Louise Barber - Herbert Smith Freehills, ‘Urbaser v. Argentina and Burlington v. Ecuador:
Investment Arbitration is not Over the Counterclaims Yet’ 14 March 2017 Available at
<http://hsfnotes.com/arbitration/2017/03/14/urbaser-v-argentina-and-burlington-v-ecuador-investment-arbitration-
is-not-over-the-counterclaims-yet/> accessed 24 April 2017.
127
Clause 22.1 of the PSC provided for a Legal Stabilization Clause to the extent that it stipulates that Ecuadorian law
in force at the time the contracts were executed governs the contractual relationship. Clause 22.1 states as follows:
‘Applicable Legislation: This Contract is governed exclusively by Ecuadorian legislation, and laws in force at the time
of its signature are understood to be incorporated by reference.’
244
To Burlington the clause was “Tax Stabilization Clause” whilst Ecuador’s preference was to regard
it as a “Renegotiation Clause”. In the light of the disagreement, the tribunal adopted it is own
description and called it a “Tax Indemnification Clause”. 128 Regardless of the nomenclature
adopted, the literal effect of the TIC was to make Ecuador responsible for absorbing the
consequence or impact of any resultant changes in the economics of the PSCs following increases
in tax rates and/or creation of new taxes. Beyond the guarantees proffered by the TIC, there were
two other tax guarantees included in the PSCs. One of which assures a precise ceiling on
applicable taxes129 and the second relates to Ecuador’s commitment to exempt Burlington from
payment of royalties, entry fees, surface rights, royalties, contributions to compensation and all
such related fees.130
4.1.2 The Dispute over Law 42 Enactment – Windfall Profit Tax
The dispute arose over Ecuadorian Government’s unilateral amendment of its participatory stake
in the crude oil allocation pursuant to its enactment of Hydrocarbon Law 2006-42 (Law 42) in
April 2006. This Law-42 enacted with the main aim of increasing Government take overall by
attaching 50% of so-called non-agreed or unforeseen surplus from oil sale sold over oil price ($15)
applicable as at when the PSCs were executed. To Ecuador, the unprecedented increase in the
price of oil impacted the economic equilibrium of the PSC which necessitated renegotiations to
effect rebalancing and enable Ecuador obtain better economic rent from it finite natural resources.
With the failure of the renegotiation initiatives between Ecuador and PSC operators, Ecuador
resorted to the enactment of Law-42 and later Decree No. 662131 when Law-42 did not deliver to
Ecuador what is considered as sufficient equilibrium.
128
Burlington v. Ecuador, Decision on Jurisdiction para 18. The proper description of this clause is important as it
has a bearing on the admissibility or otherwise of Burlington’s claim under the Umbrella Clause. For one, if tagged
as a renegotiation clause, Ecuador would have obviated liability for breach of agreement as it contended that an
obligation to negotiate cannot be equated with an obligation to agree. Since renegotiation initiatives had failed,
Argentina would have been absorbed of breach of the TIC.
129
Burling v. Ecuador Decision on Jurisdiction para 23 and 24.
130
Burling v. Ecuador Decision on Jurisdiction para 25.
131
In October 2007, Ecuadorian government enacted yet another law (Decree No. 662) which upped its stake from
50% to 99% in what it deemed as non-agreed and unforeseen surpluses.
245
In pursuance of the TIC, Burlington’s calls for Ecuador to absorb the adverse effect of Law-42 and
Decree No. 662 were discountenanced. Burlington protested but continued to make the payments
whilst calling on Ecuador to abide by the terms of the PSC tax indemnification provision. 132Due
to Burlington failure to continue payment as prescribed by Law-42 and Decree No. 662, Ecuador
commenced legal actions against Burlington, eventually took over Burlington’s interests and
seized Burlington’s share of oil production from Blocks 7 and 21. Burlington thereafter
commenced investment arbitration against Ecuador on the ground of multiple violations of the US-
Ecuador BIT including three Umbrella Clause claims which had to first and foremost scale
jurisdictional hurdles.
4.1.3 Parties’ Arguments and Tribunals’ Findings on Burlington Umbrella Clause Claims
At the jurisdictional phase, Ecuador objected to Burlington’s Umbrella Clause claims on the basis
that issues surrounding the enactment and implementation of Law-42 were ‘matters of taxation’
which fall outside the purview of the arbitral tribunal by virtue of the treaty’s tax-carve out
provisions. Pursuant to Article X of the US-Argentina BIT, save for expropriation claims, all other
BIT claims touching on matters of taxation were excluded from the jurisdictional scope of
investor-state arbitral tribunals. Hence, the tribunal had to first determine if Burlington’s Law-42
non-expropriation claims involved matters of taxation. After analysing parties’ arguments and
counter-arguments in this regard, the tribunal deemed Law-42a tax as it imposed tax on
extraordinary profits for increases in oil prices. Consequently, the tribunal declined jurisdiction
over Burlington’s first Umbrella Clause claim for being based on matters of taxation and excluded
by virtue of Article X of the treaty. Nonetheless, the tribunal assumed jurisdiction over one out of
the three Umbrella Clause claims canvassed by Burlington during the jurisdictional phase of the
arbitration. Thus, as only one of the three Burlington Umbrella Clause claims survived the
jurisdiction stage, at the merit stage of the arbitration, Burlington contended that Ecuador breached
Article II (3) (c) of the US-Ecuador BIT for failing to observe its obligations assumed with regards
to Burlington’s investments. 133 These obligations Burlington asserted, derived from both
132
Burlington on its Blocks 7 and 21 operations paid to Ecuador approximately $396.5 Million as additional surpluses
before it stopped paying to Ecuador and commenced making payments of the additional participation surpluses into a
segregated escrow account in June 2008. See para 49 and 50 Decision on Jurisdiction.
133
Para 97 of Decision on Liability.
246
contractual and non-contractual instruments i.e. the PSCs and the Ecuadorian Hydrocarbon Law,
particularly the stabilization commitments in the PSC. Burlington emphasised that pursuant to
Article 16 Decree No. 1417 and Article 4 Law No. 1993-44, Ecuador entered into obligations that
it would absorb effect of any tax increases and that Burlington will receive a fixed participation of
monthly crude allocation.
Meanwhile, Ecuador’s main argument to counter Burlington’s claims was that no obligation was
assumed towards Burlington as it wasn’t privy to the contract between its local subsidiaries and
Ecuador.134 Furthermore, Ecuador contested the argument that it assumed obligations towards
Burlington via Ecuadorian Hydrocarbon Law since the Ecuadorian Hydrocarbon Law was general
in nature and not related to any specific investment. With regards to Burlington’s Umbrella Clause
claim based on breach of stabilization clauses of the PSC, Ecuador argued that since Burlington
had withdrawn its Contract claim ‘with prejudice’ at the jurisdiction stage, a waiver of all
underlying rights and obligations under the PSC can be inferred. Ecuador’s argument on this issue
was rejected as the tribunal agreed with Burlington that it did not wave its rights to pursue its treaty
claim.135
With regards to Burlington’s claim founded on breach of the Ecuadorean Hydrocarbon Law, the
tribunal held that the guarantees and undertakings in the law were not obligations independent of
the PSC. In fact that they effectively niled out when the PSCs were executed including the same
obligations. 136 Consequently, Burlington’s claim based on Ecuadorian Hydrocarbon Legal
framework failed. On Burlington’s Umbrella Clause claim based on contractual obligations
purportedly assumed by Ecuador, the tribunal also found in favour of Ecuador on the basis that the
Umbrella Clause required privity of contract. Very much in line with the view expressed by CMS
Gas Annulment Committee, the tribunal argued that the words ‘entered in’ can be regarded as
reinforcing the idea of privity.137
134
Burlington’s local subsidiaries were the parties to the PSC and not Burlington. Implicit premise that Umbrella
Clause requires privity.
135
Para 199. On this issue the tribunal saw no reason to conclude that withdrawal of the contractual claims ‘with
prejudice’ signaled a waiver of contractual rights and obligations under the contract.
136
Decision on Liability para 206 and 207.
137
Para 216.
247
Overall, all the arguments canvassed by Burlington to counter Ecuador’s objection based on lack
of privity were refuted by the tribunal which posited that Burlington may not rely on the BIT’s
Umbrella Clause to enforce against Ecuador, its subsidiary’s contract rights under Blocks 7 and
21’s PSCs.138 As it happened, it was not a unanimous decision as there was a dissenting opinion
on this issue by Arbitrator Orrego Vicuna who disagreed with the majority’s findings.139In his
dissenting opinion, Arbitrator Vicuna argued that the treaty expressly provides protection for both
direct and indirect investments and no distinction is made between direct and indirect investments
for availability of substantive standards’ protection. He therefore opined that the conclusion
should have been one where privity requirement was not read into the scope of Umbrella Clause
protection or else it would lead to a negation of the protection of the clause depriving the treaty of
all meaning in this context.Arbitrator Vicuna also took an approach different from the tribunal’s
majority on the exhaustion or extinguishment of rights under the Ecuadorean Hydrocarbon Law
by reason of the PSC’s execution. According to him, notwithstanding that the PSC had come into
existence, the rights under the law were preserved and could serves as basis for the Umbrella
Clause claim, particularly as contractual enforcement of the rights failed.140
The fact that the tribunal’s majority took one approach and the dissenting arbitrator took another,
underscores the viewpoint that an arbitral consensus is yet to be achieved on the construction or
interpretation of the Umbrella Clause. As the tribunal ultimately declined jurisdiction over
Burlington’s Umbrella Clause claim for lack of privity, 141 it was precluded from making
categorical statements on the effect of the TIC. In fact, Burlington’s Umbrella Clause claims were
reviewed and analysed in the context of jurisdictional matters and didn’t qualify for review on
merit. On this basis, no categorical conclusion can be drawn from the tribunal’s decision on
Burlington’s claim that Ecuador breached the TIC save for that pertaining to generalized issue
relating to Umbrella Clause ie privity requirement. One can only imagine that had Arbitrator
Vicuna’s dissenting opinion being the majority position, the TIC would have been deemed
obligation not observed by reason of Law-42 enactment, leading to a finding of breach of Article
II (3) (c) Umbrella Clause.
138
Para 229
139
Para 220.
140
Burlington v. Ecuador, Dissenting Opinion of Arbitrator Orrego Vicuna 08 November 2012 para 17.
141
Para 234.
248
4.2 Argentina’s Breach or “Excused” Breach of Stability Guarantees Embedded in the Gas
Transportation and Distribution Legal and Statutory Regime
It is trite that incessant appearance of Argentina as respondent-state in recent investor-state

arbitrations has aided the development of this very important international dispute resolution
system due the wide ranging issues raised and decisions on previously untouched or negligibly
deliberated issues eg necessity and non-precluded measures defence. If nothing at all, the cases
against Argentina based on violation of Umbrella Clause have contributed to changes immensely
to Umbrella Clause discourse within international investment regime. Between the decisions on
jurisdiction, decisions on liability, awards and follow-on proceedings e.g. decisions of Ad hoc
committee on Annulment applications and judicial review by national courts, it would appear that
the scene has been set exacerbating the risk of inconsistency and instability of investor-state
jurisprudence.142 However, beyond the general façade of inconsistency or divergence, underneath
lies a consensus between tribunals that adjudicated the claims filed by US investors that invested
in the Argentine the gas transportation and distribution sector. One reason for the congruence is
the crop of arbitrators repeatedly serving as members of the arbitral panels constituted to decide
these cases. Of the over 50 cases filed by various investor-claimants which had investments in
diverse and varied sectors and industries in Argentina, 5 were claims emanated exclusively from
the gas transportation and distribution sector of the economy.143 Four out of these five cases were
by US investors who commenced investment arbitration under the auspices of ICSID against
Argentina claiming multiple breaches of the Argentina-US BIT. The fifth case was by a UK
investor, which relied on protections contained in the Argentina-UK BIT to file a UNCITRAL
investment arbitration.144 These five cases are important to the current discourse because of the
contribution to Umbrella Clause vis-à-vis stabilization clauses discourse within investor-state
142
The Paradoxical Argentina Cases page 494.
143
Reference to cases emanating from gas transportation and distribution sector herein excluded Total v. Argentina
because it involved claims arising from its diverse investments in gas transportation, hydrocarbon E & P, power
generation sectors. Enersis v. Argentina and Gas Natural v. Argentina also excluded from this review because they
are pending cases. In a nutshell only known concluded case pertaining mainly to investment in gas transportation and
distribution sector is the subject of present review.
144
The Umbrella Clauses of the US-Argentina and UK-Argentina are more or less identical as Article II (2) (c) of US-
Argentina BIT provides “Each Party shall observe any obligation it may have entered into with regards to
investments.” Whereas Article 2 (2) of UK-Argentina BIT provides that “Each Contracting Party shall observe any
obligation it may have entered into with regards to investments of investors of the other Contracting Party.”
249
arbitration. They all had same variant of stabilization clause which Argentina had failed to observe
as the legal and regulatory regime within which these investors invested presented them with both
contractual and statutory Stability Guarantees. Importantly, at least two of these investor-
claimants in these five cases framed their Umbrella Clause claim in the context of breaches of
stabilization mechanisms. For those investor-claimants which did not expressly frame or describe
their Umbrella Clause claims in terms of breaches of stabilization guarantees, it is can be implicitly
inferred that the claims contended breaches of stabilization clauses anyway.145 These Argentina
cases present a very good picture of the current state of affairs in the context of pervading
divergence on the rulings regarding Umbrella Clause claims. Notably in all of these five cases,
the Umbrella Clause claims succeeded at the tribunal level, leading to a tenable assertion that some
form of consensus or pattern of awards has been established. However, four of these cases had
follow–on proceedings by way of review by Ad hoc Annulment Committees or judicial review by
national court of petition for vacation or modification of tribunal’s award; this is where the
divergence or incoherence comes in. At the follow-on proceedings phases, the tribunals’ Umbrella
Clause findings were either annulled or upheld but nonetheless rendered ineffectual to guarantee
payment of the award sums ordered by the tribunals due to annulment of entire Awards for reasons
such as failure of tribunal to accept Argentina’s state of Necessity defence. For instance, in CMS
v. Gas, the Annulment Committee annulled the decision of the tribunal relating to Umbrella Clause
for failure of the tribunal to give reasons. Beyond, annulling the tribunal’s Umbrella Clause
finding because of the tribunal’s failure to state reasons, 146 the Annulment Committee took a
diametrically opposite posture on the issue of nature of obligation which falls within the scope of
the Umbrella Clause and has since been cited as the leading authority for the position that only
consensual or bilateral obligations are covered under the protection of the Umbrella Clause. The
CMS Annulment Committee can also be regarded as a foremost authority supporting the privity
requirement to ground Umbrella Clause violation, by its landmark obligor/obligee postulations.
This evidently was in direct contradiction to the CMS tribunal’s stance on same issue. Meanwhile,
145
It was only in CMS and LG&E that it was categorically stated that a stabilization clause was in issue. The other
cases imprecisely presented similar arguments without expressly deeming these guarantees as stabilization clauses.
Meanwhile, at issue were contractual stabilization clause and stability guarantees arising from statutory framework.
146
Being an ICSID arbitration, Argentina leveraged on Article 52 ICSID ground of annulment to seek annulment of
the Umbrella Clause finding for failure of the tribunal to state reasons for its findings. Whilst the Ad hoc Annulment
Committee upheld this ground of annulment, the other grounds of annulments canvassed by Argentina were dismissed,
thereby effectively preserving the Award of the tribunal. In fact, the Tribunal expressly noted that annulment of the
tribunal’s Umbrella Clause findings does not affect the validity of the entire award.
250
in Enron v. Argentina annulment proceedings, the Umbrella Clause finding against Argentina was
also contested basically for the same reasons as canvassed in CMS Gas Annulment Proceedings
i.e. failure of the tribunal to state reasons and manifest excess of powers. Unlike CMS Gas Ad hoc
committee, Enron’s Ad hoc Committee upheld the Umbrella Clause finding, stating that it was
satisfied that the tribunal adduced sufficient reasons for its conclusions and did not exceed the
powers conferred on it. 147 Despite the rejection of Argentina, grounds of annulment of the
Umbrella Clause findings, the Ad hoc Committee ultimately annulled the entire tribunal’s Decision
on the basis that the finding of the tribunal and associated reasons precluding Argentina from
relying on Article XI BIT and the principle of necessity under customary international law (which
would have excluded Argentina from international law liability) was tantamount to the Tribunal
manifestly exceeding its powers.
As the main focus is how arbitral tribunals have decided on stability guarantees, emphasis will be
on the tribunals’ rulings rather than the follow-on proceedings which merely touched on the
tribunals’ modus operandi at arriving at the findings rather than restating the principles. The issues
involved in these five cases are very similar with minute differences regarding to the Umbrella
Clause claims. Moreover, save for addressing peculiarity or particularity of each case, Argentina
advanced very similar arguments in its defence in these five cases. Therefore, it serves little
purpose to begin to discuss each of these cases one after the other.
Against this background, the ensuing analysis will be based on the CMS Gas v. Argentina case,
whilst the main Umbrella Clause findings emerging from these other cases, whether similar or
divergent to the CMS tribunal’s finding, will be also undertaken. It should be borne in mind that
a holistic critique of the tribunal’s findings in the CMS Gas case is outside the scope of the present
exercise. What is in contemplated, is a distillation of the principles emerging from the tribunal’s
finding as it relates to the obligation of stability guaranteed to CMS within the investment
framework.
4.2.1 CMS Gas v. Argentina
147
Paras 332, 333, 344 and 346 Enron Annulment Decision. Grounds of Annulment as stipulated in Article 52 (1)
includes Manifest excess of powers (Article 52(1)(b)) and Failure to state reasons (Article 52(1)(e)).
251
4.2.1.1 Legal and Statutory Framework of the Gas Transportation and Distribution Sector
First and foremost, it is essential that the investment framework and the ensued economic crisis
leading to the dispute is brought to fore, prior to review of the CMS Gas arbitration. Thus, in order
to attract FDI, achieve currency stability, reduce public deficit and eliminate inflation Argentina
starting with the enactment of Law 23.696 of 17th August 1989 implemented a number of economic
measures including carrying out general and across-board privatization of states owned public
service entities. 148 To facilitate its economic recovery plans, with regards to the gas sector,
Argentine government restructured the sector primarily by privatizing Gas del Estado S.E., the
national natural gas transportation and distribution monopoly. At the end of the exercise Gas del
Estado was split into 2 transportation companies 149 and eight distribution companies each
responsible for a geographic region of the country. 150 In furtherance of its goals for the gas sector,
Argentina embarked on series of legislation and regulation enactment and created a legal and
regulatory framework comprised of:
 Currency Convertibility Law of 27 March 1991 (Law No. 23,928)and Decree 2128 of 10 October
1991;151
 Ley del Gas or Gas Law of June 1992 (Law No. 24,076);152
 Gas Law Regulations of 28 September 1992 (Decree No. 1738/92, also described as Gas Decree);
 Reglas Básicas de la Licencia (Basic Rules of the License) of 7 December 1992, (Decree No.
2255/92);153and
148
BG v. Argentina Award Para 17.
149
The two transportation resulting from the restructuring in the gas sector are Transportadora de Gas del Sur (“TGS”)
and Transportadora de Gas del Norte (“TGN”). Enron’s investment in TGS formed the basis of its investment
arbitration against Argentina while CMS’ investment in TGN led to the arbitration against Argentina.
150
Pursuant to Decree No. 1189/92 of 17th July 1992, the transportation and distribution companies were incorporated
and were to operate with a license under the legal framework in force.
151
Notably, Currency Convertibility Law and Decree 2128 were not applicable exclusively to the gas transportation
and distribution sector but was of general application pertaining to all sectors of the economy. It is however
noteworthy as it provided guarantees which most of the investor-claimants relied on based on their claims against
Argentina. These enactments established the convertibility and parity of Argentine Republic’s peso (previously
known as Austral) with the US Dollar such that one Argentine peso equally one US Dollars and dollars and peso were
freely exchangeable.
152
The Gas Law created a public agency called Ente National Regulator de Gas (ENARGAS), the industry regulator
vested with the duty of implementing the new legal and regulatory framework for the privatized gas transportation
and distribution sector.
153
Basic Rules of the License supplemented the Gas Law and the Gas Regulation/Decree and approved model licenses
for natural-gas transport and distribution.
252
 Licenses154
Argentina actively promoted both locally and internationally, its privatization program by issuing
Information Memorandum outlining investors’ benefits and guarantees coupled with attractive
rules defining the gas sector legal and regulatory regime. Privatization scheme targeted foreign
investors because of foreign capital’s importance to the successful operation of the government’s
economic recovery plans.155 The main promises and guarantees which the afore-mentioned legal
and regulatory framework availed investors in the gas transportation and distribution sector
include:
 The Convertibility Law which ordered a fixed exchange rate pegging the Argentine Peso to UD
Dollars.
 Calculation of tariffs in US dollars which shall be expressed in peso at prevailing exchange rate. 156
 A schedule of maximum tariffs for the first five years was included in the Model License and
tariffs were to be comprehensively reviewed and adjusted every five years.
 Argentine Government obligated by virtue of the License157 to compensate licensees fully for any
losses resulting from changes to the guaranteed tariff system.158
 The licensees also had a right of bi-annual (in January and June) tariff adjustment or review based
on US Producers Price Index (PPI Adjustment).
154
By virtue of Decree No. 2255/92 (Basic Rules of the License, Argentine Government approved model license for
gas transportation and distribution licensees. The Model License when executed by licensee and the Argentine
Government, it is legitimized by virtue of individualized Decrees. For instance, by virtue of Decree 2459/92,
MetroGas’ predecessor was granted License to distribute natural gas in the City of Buenos and some other areas – this
relates to BG’s investment in Argentine gas sector. Another example relates to Enron’s investment in the gas sector.
The License signed by TGS and the Government of Argentina was approved by Decree No 2458/92. TGN’s license
was granted by Decree No. 2457/92. Other licenses include: Centro – Decree 2454/92, Gas Ban – Decree 2460/92,
Cuyana – Decree 2553/92. Essentially the successful bidders flowing from the highly publicized and successful
privatization program executed the Model license with the Argentine Government and their individualized licenses
were backed up by respective Decrees. The main provisions of the Licenses, particularly the stability guarantees
remain the same for all of them.
155
Para 49 Decision on Liability LG&E. Argentina distributed information memorandum in foreign markets which
summarized the legal and regulatory framework of the privatization program.
156
Article 41 of Gas Decree stipulates that tariffs for transportation and distribution shall be calculated in dollars. See
CMG Gas v. Argentina Award para 128, BG v. Argentina Award para 32.
157
The Licensees typically comprised on 8 Articles over 6 pages plus three annexes, the first annex being the Basic
Rules containing most of the guarantees/commitments relied on by the investors. BG v. Argentina award para 39.
158
LG&E Decision on Liability para 42.
253
 Argentine government could not rescind or modify the licenses without the consent of the
licensees.159
 A commitment that there would be no price freeze or further regulation applicable to the tariff
system.160
4.2.1.2 Repudiatory Measures
Against this background, CMS acquired 29.42% interest in TGN (Transportadora de Gas Norte)
an Argentine incorporated company licensed to transport gas. 161Between year 2000 and 2002,
Argentina being faced with a major economic and financial crisis implemented a number of
reforms and measures which negatively impacted and adversely affected CMS’s business.
Argentine Government by enacting the Public Emergency and Foreign Exchange System Reform
Law (Emergency Law) 162effected changes in the exchange and monetary policy, abrogated and
repudiated the rights of licensees in the regulated public sector, eliminated the right to calculate
tariff in dollars and ordered renegotiation of public utilities contracts and financial obligations
etc.163Argentina's enactment of the Emergency Law and other measures undertaken to curtail the
country's economic crisis of 2001-2002 affected investments in practically all economic sectors as
convertibility regime and pesification of contracts applied to the Argentine economic system as a
whole. 164 Unsurprisingly, these measures triggered an avalanche of claims against Argentina
including that of CMS Gas, an ICSID investment arbitration, filed on the basis of the US-Argentina
BIT. CMS claimed breaches of guarantees that protected its investment on the grounds of
Argentine Government measures including:
 Argentine Government’s Unilateral Modification of License;
159
LG&E Decision on Liability Para 41. Article 4.5 of the Gas Decree where in the licensees are re-assured that their
licenses may not be modified without their consent. See BG v. Argentina Award para 35.
160
Sempra Energy v. Argentina Award para 85.
161
CMS Gas, Decision on Jurisdiction para 18 and 19.
162
Law 222.561 of 06 January 2002.
163
Enron v. Argentina Award para 72 and 73.
164
Presidential Decree No 214 of 03 February 2002 adopted a currency conversion scheme under which all obligations
payable in dollars would be converted into peso at the fixed one to one exchange rate – this approach was styled
pesification.
254
 Termination of CMS’ right to semi-annual PPI adjustment of tariffs and general adjustment of
tariffs every five years;
 Derogation from calculation of tariff in dollars;165
 Derogation from commitments not to freeze tariffs structure, not to subject it to further regulations
or price controls
 Redenomination of rates and tariffs into peso at the exchange rate of one peso per dollar.
 commitments not to freeze tariffs structure, not to subject it to further regulations or price controls
4.2.1.3 Are Licence’s Clauses 9.8 and 18.2 Stabilization Clauses Commitments within the Scope of
Article II (2) (c) Umbrella Clause
According to CMS, Argentina’s measures violated all major investment protections owed to CMS
under the treaty including the Umbrella Clause provided for in Article II (2) (c) as Argentina had
failed to observe the many obligations entered into.166CMS asserted that by reasons of the various
measures adopted by Argentina, all the commitments made by Argentina towards its investments,
whether under the legislation in force or by contractual arrangements had been breached resulting
in the violation of the Umbrella Clause of the treaty.167More importantly and relevant to the current
discuss is CMS’ contention that it had rights under the governing legal framework to additional
stabilization clauses. 168 At the core of the dispute are CMS’s reliance on two Stabilization
commitments purportedly in Clauses 9.8 and Clause 18.2 of the Licence. Clause 9.8 provided that
the tariff structure would not be frozen or subject to further regulation or price control and that in
the event that a price control mechanism compelled the licensee to adjust to a lower level of tariff,
the licensee shall be entitled to equivalent amount in compensation.169 In the same vein, Clause
18.2 stipulated that the Basic Rules Governing the License would not be amended totally or
partially without the Licensee’s written consent.170
165
Sempra Energy para 93.
166
According to CMS, measure adopted by Argentina are in violation of the commitments made to foreign investors
in the offering memorandum, relevant laws, regulations and license. Para 84 Award.
167
Para 297 Award.
168
CMS Award para 145,
169
Para 145 award
170
Para 146 Award. Here CMS conceded that consent was earlier given for the rescheduling of PPI Adjustments,
albeit involuntarily.
255
Particularly contesting its alleged obligation of stability, Argentina asserted that ‘Government
powers could not be subject to a freeze as this would be equivalent to a renunciation prohibited
under the law and constitutional concept of public service.’171Argentina denied having made any
commitments to CMS under the law whilst commitments made under the License, were purely
contractualin nature and therefore outside the scope of Umbrella Clause protection.172Argentina
further contested that no commitment could have been made to maintain a certain economic and
exchange rate policy and that the state always retained its unfettered rights to freely to change its
policies. It argued further that CMS could hardly have ignored the public law of Argentinaor the
risk of investing in Argentina.173Another of Argentina’s defence was that the Licenses did not
contemplate that the convertibility regime would remain static and unchanged. 174 Moreso, no
obligation was assumed with respect to CMS but with only TGN. Notwithstanding, the afore-
mentioned points canvased to obviate liability, Argentinaultimatelyargued that its measures were
necessary to address the normalization of the country and continuous operation of public utilities
services. Hence, Argentina invoked existence of a state of necessity under international law and
National Emergency as a defence for exemption of liability under international law and the
treaty.175
In determining if Argentina made a commitment or undertaking to CMS necessary to trigger the

operation of the Umbrella Clause protection, the tribunal noted that one of the key elements in
attracting foreign investment and in overcoming the economic and financial crisis of the late 1980s
was to provide stability.176
The tribunal shared Argentina’s in-principle belief that not all contractual breaches result in
breaches of the treaty but was quick to qualify that standard of protection will be engaged when
there is specific breach of treaty or a violation of contract rights protected under the treaty
171
CMS Award para 148.
172
Para 298 Award. Citing previous cases such as SGS v. Pakistan subscribing to the same school of thoughts.
173
Para 94 Award.
174
Para 96 Award.
175
Para 99 Award.
176
Para 134. Additionally, the tribunal opined that the calculations in dollars was instrumental to the success of the
privatization program. This findings apparently aided the tribunal’s conviction that CMS had a right to a tariff
calculated in dollars and converted to peso at the time of billing, coupled with a right to adjustment of tariffs in
accordance with US PPI. The tribunal equally held that CMS had successfully established that it had a right to
adjustment of tariffs in accordance with US PPI. See Paras 137, 138 and 144.
256
protection. The tribunal averred that protection will be available “when there is significant
interference by government or public agencies with the right of the investor.”177
Since CMS invoked two stabilization clauses under the license, the tribunal was tasked to ascertain
if CMS had a right to the stabilization mechanisms under the license. On CMS’ right to leverage
on the protection afforded by the License’s Stabilization Clauses, the tribunal found that to the
extent that the dispute concerned the simultaneous operation of the license and protection under
the treaty, the stabilization ensured a right that CMS could properly invoke.178The tribunal agreed
that there were two stabilization clauses contained in the license which had significant effect with
regards to protection extended to them under the Umbrella Clause: 1st obligation – not to freeze
tariff regime179 and 2nd obligation not to alter the Basic Rules of the License without TGN’s written
consent. The tribunal concluded that the obligations undertaken by Argentina under the Umbrella
Clause were not observed for the legal and contractual obligations breaches. 180 Overall,
commitments under the legislation in force and contractual arrangements were held to have been
breached by reason of the measures adopted by Argentina particularly the dismantling of the tariff
regime and related matters.181
Going by the tribunal’s analysis, stabilization commitments in the License transformed the License
from pure contractual arrangements to a contract protected under the treaty protection. In addition,
the presence of stability clauses in the license coupled with the fact that Argentina’s interferences
and breaches are closely related to other standards of protection under the treaty, took the dispute
from the realm of purely inadmissible contractual claims to admissible treaty
claims.182Undoubtedly the CMS tribunal subscribed to the notion that either contractual or non-
contractual or unilaterally assumed obligations/undertakings of host states can ground claims
based on violation of Umbrella Clause. Flowing from this in-principle belief of the tribunal, it is
clear that the tribunal deemed stability guarantees as valid and enforceable undertakings under the
177
Para 299 Award,
178
Para 151.
179
Para 302
180
Para 303.
181
Para 297.
182
Pare 299-302 Award. See Jonathan B. Potts, ‘Stabilizing the Role of Umbrella Clause in Bilateral Investment
Treaties: Intent, Reliance, and Internationalization’ 51 (2010-2011) Virginia Journal of International Law 1005, 1023.
257
Umbrella Clause.183As previously noted, at the Annulment phase, the tribunal’s Umbrella Clause
finding was annulled for failure to state reasons whilst the Annulment Committee made acclaimed
pronouncement on its belief that only consensual or Bilateral (naturally contractual) obligations
are within the scope of Umbrella Clause obligations.
4.2.2 Sempra v. Argentina
This case is based on facts very similar with the CMS and unsurprisingly the findings of the
tribunal follow the similar pattern. Unsurprising as, the facts and claims are not only similar, this
arbitration shares two of the three arbitrators that decided the CMS v. Argentina arbitration. The
investor-claimants in both Sempra Energy and CMS Gas were indirect investors in the gas
transportation and distribution sector operating under the same legal and regulatory framework.
Consequently, their similar rights and privileges were abrogated by same measures undertaken by
Argentina to stem the economic crisis which affected the country. One main difference between
the CMS Award and the Sempra Award is that the tribunal deliberated more extensively on its
decision on the Umbrella Clause than the CMS tribunal did. The change in style may be due to
the fact that the main challenge against the CMS Gas tribunal’s Umbrella Clause ruling being
tribunal’s failure to state reasons was upheld by the Ad hocAnnulment Committee that presided
over the Argentina’s application for annulment. Interestingly, the Ad hocCommittee’s decision
was issued two days before the Sempra’s tribunal’s award was released, it is unclear whether the
Annulment committee’s decision had any bearing on Sempra Energy’ Award; it certainly wasn’t
referred to in the award.
Similar to CMS’ claims, Sempra alleged that the measures adopted by Government of Argentina
in the period 2000 to 2002 resulted in the permanent abrogation and repudiation of most of its
rights under the regulatory framework and the License and that said Argentina’s measures violated
183
Katja Gehne and Romulo Brillo, Stabilization Clauses in International Investment Law: Beyond Balancing and
Fair and Equitable Treatment.
258
specific commitments and guarantees made to it.184 In particular, Sempra argued a breach of the
License’s Stability Clauses 9.8 and 18.2 (just as in CMS Gas mentioned above) being violation of
the observance of obligations which Argentina entered into with respect to investments under
Article II (2) (c) of the Argentina-US BIT.185These obligations, which stemmed from contractual
instruments and broader undertakings contained in Argentina’ laws (Gas Law, Gas Decree,
License) were covered under Umbrella Clause protection scope. 186 Essentially, Sempra’s
arguments were tailored in the same format as the CMS Gas’ and as can be expected, Argentina
put forward the same genre of defence with an interesting addition seeking to distinguish the acts
of the Argentine Parliament from those of the Argentine Executive Arm. However, the tribunal
rejected the distinction holding that the matter at hand primarily concerned if investors’ rights
under a state contract have crystallized due to actions of any arm of government, be it executive,
judicial or legislative.187
The tribunal recognised the significance of stability commitments and reiterated its functional
value when it stated that “Guarantees and stabilization are meant to operate specifically when
problems arise, not when business continues as usual.”188Starting with the premise that various
recent decisions on the meaning and extent of the Umbrella Clause has led to the gradual
demystification of the standard, the tribunal repeated the thinking expressed in CMS Gas Award
that contractual breach will metamorphose to treaty breach when a contract breach is at the same
time a violation of a right protected under the Treaty.189In its concluding statements, the Tribunal
whilst not expressly referring to the License’s Clauses 9.8 and 18.2 as Stabilization Clauses, 190
qualified them as “Specific Obligations” that typically come under the protection of the Umbrella
Clause and ultimately ruled that the breach of these obligations undertaken with respect of the
184
Para 93 and 94 Sempra Award.
185
Para 170 Sempra Energy Award.
186
Para 306 Sempra Award.
187
Para 172-3 Sempra Award.
188
Notably the tribunal made this statement in the context of Argentina’s argument that the regulatory framework was
incomplete and did not foresee the abandonment of the Convertibility regime leading to the adoption of measures to
adapt to the new situation. Argentina basically asserted a lacuna in the regulatory space led to its adoption of measures
complained of. The tribunal was unpersuaded by this argument and categorically held that the regulatory and
contractual arrangements were not incomplete. Sempra Award Paras 137 and 151.
189
Para 309 Sempra Award.
190
The tribunal did repeat the guarantees though i.e. undertaking not to freeze the tariffs or subject them to price
controls, to compensate for any resulting differences if such actions were in fat taken and obligation not to amend the
license without the consent of licensee.
259
investment resulted in a breach of the protection provided by the Umbrella Clause of Article II (2)
(c).191
4.2.3 LG&E v. Argentina
The CMS Gas v. Argentina and LG&E v. Argentina arbitrations entail identical factual background
relating to the gas transportation and distribution legal and regulatory regime, differences in
interest holdings and applicable local Argentine companies, divergent arbitral tribunal save for a
common arbitrator (Judge Francisco Rezek, Arbitrator), slight differences in claims profiling and
corresponding defence. All of these culminated in similar arbitral outcomes with regards to the
Umbrella Clause claim. Similar to CMS, LG&E asserted that Argentina assumed certain
fundamental obligations with regards to investment in its gas distribution sector and then
repudiated each and every of these commitments and obligations. Amongst other treaty violation
claims, LG&E asserted that Argentina had breached its obligations under Article II (2) (c) of the
US-Argentina by failing to observe obligations it entered into with regards to LG&E’s
investments. 192 Moreover, LG&E’s arguments seeking compensation for breach of stability
guarantees were more strongly canvassed under the Fair and Equitable Treatment sub-element of
Legitimate Expectation as opposed to the Umbrella Clause. Even though LG&E had Umbrella
Clause claims, breach of stability guarantees were not distinctively articulated as was done in the
case of CMS Gas. A notable distinction between this case and the other two discussed above is
the fact that the tribunal did not consider that a contractual relationship existed between Argentina
and LG&E which would have resulted in a holding of breach of contractual stabilization clauses.
Given that LG&E operated within the same parameters and under the same regulatory space as
CMS and Sempra, one would have expected that LG&E’s claims profiling would follow the same
pattern as CMS and Sempra i.e. assertion of non-observance of both contractual and unilateral
obligations of Argentina. This was however not the case as LG&E basically argued that Argentina
had failed to observe obligations and commitments undertaken under its statutory framework. As
previously noted, LG&E profiled its Umbrella Clause claims as non-observance of obligations
191
Para 313 and 314 Sempra Award.
192
Para 72
260
embodied in legislations and regulations and specifically alleged breach of guarantees contained
in the License’s Clauses 9.8 and 18.2 as violation of Umbrella Clause.193
In its defence, Argentina contested LG&E’s claims that these so-called legal obligations emanated
from general legislation relating to the natural gas distribution and transportation industry did not
fall within umbrella Clause Article II (2) (c) parameters as they did not qualify as specific
representation that make Umbrella Clause effective.194 Argentina considered LG&E’s claims as
contractual claim breaches which should be adjudicated in accordance with the contractual forum
selection clause and not resolved by international forum under the application or operation of the
Umbrella clause.195
The tribunal noted that in many cases it has been considered that Umbrella clause is activated not
by obligations set forth in municipal laws but in contracts between the state and the investor. It is
must be noted that this does not represent the tribunal’s viewpoint but more of an obiter dictum
while determining if the Gas Law and it implementing regulations constituted obligations within
the context of Umbrella Clause such that abrogation of the guarantees set forth in the Gas law and
regulations gave rise to a violation of the treaty. The tribunal concluded that the guarantees were
not legal obligations of a general nature but specific in relation to LG&E’s investment in
Argentina. 196 The tribunal rationalized that Argentina made specific obligations to foreign
investors by enacting the gas Law and other regulations – these laws and regulations became
obligations within the meaning of Article II (2) (c) by virtue of targeting foreign investors and
applying specifically to their investments. 197 In conclusion, the tribunal held that Argentina’s
abrogation of guarantee under the statutory framework breached its obligations to LG&E’s
investment and consequently gave rise to liability under the treaty’s Umbrella Clause. Despite this
finding of violation of treaty’s Umbrella Clause, Argentina was predominantly excluded from
liability on the strength of its necessity defence which was upheld.
193
Para 165 and 166.
194
Para 167 LG&E
195
Para 168 Lg&E
196
Para 174 LG&E
197
Para 175 LG&E
261
4.2.4 BG v. Argentina and Enron v. Argentina
BG v. Argentina and Enron v. Argentina cases are based on the facts similar to CMS, Sempra and
LG&E being claims resulting from abrogation or repudiation of guarantees undertaken by
Argentina with regards to BG and Enron’s investments in gas transportation and distribution
sector. As Enron v. Argentina, an ICSID arbitration was filed on the basis of the Argentina-US
BIT, the arbitration was more in line with the three cases earlier discussed i.e. CMS, Sempra,
LG&E. BG v. Argentina on the other hand, being an UNCITRAL arbitration brought pursuant to
the Argentina-UKBIT, presented slight variations in style and procedure but effectively the same
outcome i.e. finding of breach of Umbrella Clause. As a result, instead of an Annulment
proceedings presided over by an ICSID constituted Ad Hoc Committee, the follow-on proceedings
in the BG case was a Petition for Modification or Vacation of the Arbitration Award filed at the
US District Court for the District of Columbia. 198 Prior to considering the details of the annulment
or petition, it is apt to first recap the arbitral tribunals’ findings on Umbrella Clause claims of
Enron and BG, particularly claims hinged on breaches of stability guarantees or stabilization
clauses.
Having operated within the same industry and on the basis of an identical legal and regulatory
framework, Enron and BG leveraged on their respective Licences’ Clauses 9.8 and 18.2 to
strengthen their Umbrella Clause claims against Argentina. Enron claimed violation of obligations
arising from a contract and broader Argentina’s laws and regulations when it asserted that
Argentina’s measures breached “every commitment made in the Gas Law, the Gas Decree and the
License, with particular reference to the tariff regime and the commitment not to amend the
License without TGS’s consent.”199Enron’s tribunal held that Argentina assumed obligations with
regard to Enron’s investment through its statutory and regulatory framework, in addition to
obligation undertaken under the Licence. According to the tribunal, Argentina’s obliteration of
these commitments assumed with regard to Enron’s investment constituted a breach of obligations
198
The parties had agreed that Washington DC would be the seat of the Arbitration and of the final award. Moreover,
the Arbitral hearing was conducted within New York and Washington DC pursuant to UNCITRAL Arbitration Rule.
Hence, Washington DC was a natural choice for filing of follow u proceedings.
199
Para 270 Enron Award. In this case, License Clauses 9.8 and 18.2 were specifically recognised and referred to as
stability guarantees which Argentina by its measures had repudiated. See para 151 Enron Award.
262
undertaken under the contract, law and regulation in respect of Enron’s investment resulting in a
finding of violation of Umbrella Clause Article II (2) (c) of the treaty.200
On the other hand, BG’s contention that Argentina had breached the Argentina-UK BIT on the
ground of violation of the applicable License, failed as the tribunal had earlier ruled that privity of
contract was a necessary for operation of the Umbrella Clause.201This in essence is a departure
from the other four like-cases constituted under ICSID wherein the tribunals’ affirmed the
investor-claimants’ right to contractual obligations assumed indirectly through their respective
Licenses. Nonetheless, BG tribunal having assumed jurisdiction over claims not tied to the
License, was minded to accept BG’s arguments that sameprinciples contained in the License were
incorporated in the legal and regulatory framework (Gas Law, Gas Decree and Bidding Rules).
The tribunal ultimately concluded that the adoption of measures by Argentina which destroyed the
key elements of the regulatory framework constituted a breach of the fair and equitable treatment
and also breach of the Umbrella Clause.202
In all the cases, unilaterally assumed obligations stemming from Argentina’s statutory and
regulatory framework were held to have been abrogated constituting non-observance of
obligations assumed with regards to investments, hence a finding of violation of treaty’s Umbrella
Clause. All the investor-claimants explicitly or implicitly laid claim to rights of stability
guarantees embedded in the contractual and/or non-contractual instruments operative in
Argentina’s gas transportation and distribution sector. Needless to say that they each successfully
argued at least one of their Umbrella Clause claims seeking compensation for violation of these
stability guarantees. This obviously is regardless of Argentina’s varied, multi-faceted and copious
defences repeatedly and similarly canvassed to negate the investor-claimants’ right to stability
guarantees which if indeed existed, were the exclusive preserve of licensees and deemed
unenforceable due to the state of emergency Argentina was contending with at the time.
200
Paras 275-7 Enron Award.
201
The tribunal previously found that UK-Argentina BIT did not provide a mechanism for BG to bring claims derived
from the License on behalf of MetroGAS, the licensee. BG not being a party to the MetroGAS License could in the
opinion of the tribunal not establish that it had a right to directly assert claims. Consequently, BG was not entitled to
assert rights based on the License. See Paras 213 -7 and 363 BG’s Award.
202
Para 366.The tribunal seemed to have conditioned violation of the Umbrella Clause on violation of a substantive
obligation under the treaty.
263
Of particular importance is Argentina’s defence of necessity and state of national emergency.
Argentina had fervently argued as an alternative defence in the event the tribunals came to the
conclusion that treaty breaches had occurred, exemption from international liability upon reliance
on Necessity defence under customary international law which is aptly reflected in Article 25 of
International Law Commission Articles on State Responsibility.203
Argentina also relied on its treaties’ liability exemption clauses under Article XI of the US-
Argentina BIT204 and Article 4 of the UK-Argentina BIT; contending that the state of the political,
social, economic crisis that befell the country exonerated it from liability for taking measures
contrary to the obligations assumed with respect to the gas transportation and distribution sector.205
These arguments apparently were not sold out to all tribunals (except the LG&E tribunal) which
having found breaches of the treaties’ substantive standards including Umbrella Clause, didn’t
excuse Argentina from liability regardless of both the treaty defence and customary international
law defence.206
4.2.5 Argentina’s State of Necessity or Emergency Defence and its Implications for Tribunals’
Umbrella Clause Findings
As earlier noted, the tribunal in LG&E was the only out of these five tribunals which held that
protection under Article XI was triggered, sufficient to excuse Argentina from liability. To the
203
Article 25:
1. Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act in conformity
with an international obligation of that State unless the act:
(a) is the only way for the State to safeguard an essential interest against a grave and imminent peril; and
(b) does not seriously impair an essential interest of the State or States towards which the obligation exists, or of
the international community as a whole.
2 In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if:
(a) the international law obligation in question excludes the possibility of invoking necessity; or
(b) the State has contributed to the situation of necessity,
204
The Argentina-US BIT included a Non-Precluded Measure Clause in Article XI which states as follows:
‘This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public
order, the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security,
or the protection of its own essential security interests.’
205
Para 389 BG Award, Para 288 Enron Award, Para 325 Sempra Award, Para 201 LG&E Decision on Liability, Para
304-5 CMS Gas Award.
206
As earlier mentioned, BG tribunal recused itself from deciding BG’s Umbrella Clause claims linked to the License
but generally assumed jurisdiction to determine the dispute.
264
LG&E tribunal, the conditions as of December 2001 constituted the highest degree of public
disorder which threatened Argentina’s essential security interests due to the fact that the extreme
crises in the economic, political, and social sectors reached the apex, threatening the collapse of
the Argentine state.207 Argentina should however have re-established the tariff scheme after the
period of emergency or should have compensated the investor for losses incurred on account of
the measures adopted before and after the emergency period, but didn’t. 208 On that basis,
Argentina was thus excused under Article XI from liability for all breaches of the treaty between
1st December 2001 and 26th April 2003 being the beginning and end, respectively of the period of
extreme crisis. For the period, Argentina was not in a state of necessity, Argentina was held liable
to pay damages to LG&E for the treaty’s Fair and Equitable Treaty and Umbrella Clause
violations.209
Without piercing the veil of the tribunals’ composition, one may be quick to hold that a trend or
pattern has emerged leaning towards an established jurisprudence. The follow-on proceedings
however suggest otherwise. The CMS Gas Ad hocAnnulment committee in particular took an
opposing position on the nature of obligations within Umbrella Clause’s scope and ultimately
annulled the tribunal’s Umbrella Clause finding for the tribunal’s failure to state reasons for its
decision. 210 Whilst the Umbrella Clause violation findings were maintained in both Sempra
Energy and Enron, the Ad hoc Annulment Committees in these cases annulled the tribunals’
awards, thereby exempting Argentina from payment of compensation awarded by the tribunal.
The annulments were grounded on divergent reasons; Sempra Annulment Committee annulled the
tribunal’s award for the tribunal’s failure to apply the applicable law as the tribunal did not interpret
and apply the different elements of Article XI of the treaty.211 The Enron Annulment Committee
on the other hand, based its annulment of the tribunal’s award on grounds relating to the customary
international law defence which Argentina was precluded from relying on.212
207
LG&E v. Argentina Decision on Liability Para 231.
208
Para 265.
209
LG&E Decision on Liability, Para 267. The sum of $57.4 Million plus interest was subsequently awarded in favour
of LG&E. See LG&E v. Argentina Award Para 115.
210
Other treaty breaches were not annulled so compensation payment was still due to CMS flowing from committee’s
decision.
211
Sempra Energy International v. Argentina Republic, ICSID Case No. ARB/02/16, Decision on the Argentine
Republic’s Application for Annulment of the Award, 29 June 2010, para 186 – 204.
212
Enron Creditors Recovery Copr v. Argentine Republic, ICSID Case No. ARB/01/3, Decision on the Application
for Annulment of the Argentine Republic, 30 July 2010 para 405.
265
Indeed, the tribunals adopted different approaches to construe Argentina’s necessity defence. The
CMS, Sempra and Enron tribunals considered the Non-Precluded Measures provision under
Article XI of the Argentina-US BIT too vague and consequently relied on the customary
international law necessity defence standards as codified in Article 25 ILC Articles. The tribunals
eventually held that Argentina had failed to meet the strict requirements stipulated in Article 25
especially the one requiring the measures taken to be the “only way” for Argentina to cope with
the crisis and the one prohibiting Argentina’s contribution to the emergency situation.213It has been
argued that these tribunals based their review of Argentina’s necessity defence on standards stricter
than prescribed by Article XI. Meanwhile Article XI exceptions are broader in scope than the
customary international law necessity defence.214The Ad hoc Annulment Committee CMS Gas
tribunal was criticised for not properly distinguishing between the BIT Article XI defence and
customarily international law defence of necessity was criticised by the Ad hoc Annulment
Committee which held the view that the were to have been independently interpreted.215All of
these may have swayed the Ad hoc Committees in both Sempra and Enron to annul the two
tribunals’ awards due to non-application of Article XI.
Being a UNCITRAL, the follow-on proceedings in BG v. Argentina was judicial review by

national court in United States. This review by national court culminated in the final decision of
the Supreme Court after parties had litigated (from District Court through Court of Appeals),
commencing with Argentina’s petition to modify or vacate the tribunal’s award on five grounds
including failure of BG to comply with the BIT’s Article 8 mandating pre-arbitration exhaustion
of local remedies and 18 months waiting time. The Supreme Court of United States affirmed the
decision of the tribunal finding breach of treaty obligations’ and also asserted that Argentina’s
conducts had excused BG Compliance with Article 8 requirement.216
213
Gebhard Bucheler, Proportionality in Investor-State Arbitration (Oxford University Press 2015) 25.
214
Felerica Cristani, ‘The Sempra Annulment’ Page 247.
215
The Committee stated that the tribunal made an error of law by treating Article XI asCMS Gas v. Argentina, Ad
Hoc Committee Decision para
216
BG Supreme Court Decision of 05 March 2014.
266
In summary, flowing from the above, the LG&E tribunals’ Award remains intact as the follow-on
proceeding initiated was subsequently discontinued; 217 CMS Gas Award was not annulled but
finding of liability relating to Umbrella Clause claim annulled; Enron and Sempra tribunals had
their Umbrella Clause findings upheld but their entire awards were annulled for reasons
highlighted above; 218 and finally, BG tribunal’s award was ultimately upheld by the Supreme
Court after it had initially been annulled by the Court of Appeals. So technically speaking, only
LG&E and BG Umbrella Clause claims can be deemed successfully canvassed.219
4.3. CONCLUDING REMARKS
A relevant and important question is can one assume that a trend or pattern of award exist flowing
from these Argentina cases or will such claim to a trend be easily diffused owing to the follow-on
proceedings which “practically” annulled all the Umbrella Clause findings of liability against
Argentina, save for LG&E and BG? The answer is in the affirmative; yes, one can assume
existence of a trend or pattern notwithstanding contradictory outcomes flowing from the follow-
on proceedings. This is because, except the CMS Gas annulment committee which took a
diametrically opposite approach to that expounded by the tribunal, all the other Umbrella Clause
claims were somewhat preserved and upheld. This of course leads to another question, what in
practical terms is the trend? In concrete terms, this pattern suggests that Argentina cases’
arbitrators more readily acknowledged both contractual and unilaterally assumed obligations of
Argentina’s obligations that gave rise to violation of the Umbrella Clause. In particular, all the
tribunals in these five Argentina cases recognised that Argentina assumed obligations deriving
from its statutory and regulatory framework. Indeed, these five cases also present a proposition
where obligations can emerge from contractual instruments. A divide though exist as to whether
an indirect investor can leverage on Umbrella Clause protection to redress contractual breaches.
217
Both LG&E and Argentina in September and December 2008 respectively, filed Applications for partial annulment
of the Award in accordance with Article 52 of ICSID Convention. Parties later suspended the proceedings and
discontinued same in January and February 2015. See LG&E Energy Corp, LG&E Capital Corp & LG&E
International Inc v. The Argentine Republic, ICSID Case No. ARB/02/1, Order of the Secretary-General Taking Note
of the Discontinuance of the Proceedings 20 February 2015 paras 3-6.
218
In fact, the Enron Annulment Committee fully supported the tribunal’s holdings on the Umbrella Clause. The
Committee expressed that it was satisfied that the tribunal adduced sufficient reasons for its findings
219
It is essential to point out that the Sempra and BG follow-on proceedings didn’t challenge the tribunals’ Umbrella
Clause findings particularly.
267
One must quickly interject that this claim to consensus is with regards to the five Argentina cases
discussed herein.
As to the rationale for the apparent consensus, one can clearly discern in all of this mix, the
commonality in tribunals’ composition which underscores the significance of an arbitral panel’s
membership. Deeper reflection indicate that this consensus is more of a function of arbitrators’
recycling coupled with the fact that the tribunals were presented with similar facts and investment
treaty provisions.
Arbitrators
Cases &
President Investor's Appointee Argentina's Appointee
A. Dates
CMS Gas
Professor Francisco Orrego Vicuña Honorable Marc Lalonde P.C., O.C., Q.C. H.E. Judge Francisco Rezek
08-Sep-05
LG&E
Doctor Tatiana B. de Maekelt Professor Albert Jan van den Berg H.E. Judge Francisco Rezek
03-Oct-06
Enron
Professor Francisco Orrego Vicuña Mr. Pierre-Yves Tschanz Professor Albert Jan van den Berg220
22-May-07
Sempra
Professor Francisco Orrego Vicuña Honorable Marc Lalonde P.C., O.C., Q.C. Dr. Sandra Morelli Rico
28-Sep-07
It is apt to note that Argentina’s initial appointee at the inception of the arbitration was Mr. Hector Gros Espiell
220
whose resignation on 26 May 2006 led to the appointment of Professor Albert by the Chairman of the Administrative
Council in accordance with Article 11 (2) (a) of ICSID Arbitration Rules.
268
BG
Guillermo Aguilar Alvarez C. Professor Albert Jan van den Berg Professor Alejandro M. Garro
24-Dec-07
The matrix displayed above suggests that who the arbitrator is matters a whole lot in outcome of
the arbitration. Notwithstanding the hallowed arbitration rule mandating arbitrators’ impartiality,
independence and unbiased disposition to decide each case objectively, it is conceivable and
logical to hold that decisions are highly influenced by the panels’ strongest link(s), often times in
the person of the Chairman of the tribunal. A close scrutiny of the Sempra and Enron awards will
reveal similarities beyond writing styles to almost verbatim repetitious statements, making it
almost challenging to distinguish between the awards. 221 Professor Vicuna being the tribunals’
President and common denominator in CMS, Sempra and Enron arbitrations can be considered a
major contributor to the tribunals’ line of reasoning. This point is further buttressed by the fact
that the position expounded in CMS Gas formed the crux of Professor Vicuna’s dissenting opinion
in Burlington v. Ecuador, a case where he served as a member of the Panel but not as the President.
In a nutshell, when Arbitrators form an opinion, it more or less resonates in all their subsequent
holdings, hence a trend or pattern is discernible. It would appear that arbitrators’ subjectivity has
reared its head in this setup; but why not if the decisions are not only well reasoned and written
but also deliver a balanced and fair outcome. Between the investor-claimants and Argentina,
determination of what is indeed a “balanced and fair outcome” will depend significantly on where
the pendulum swung. Going by the spate of follow-on proceedings following award/decisions
221
For instance see: Enron v. Argentina, Award Para 137 ‘The distinction made by the Respondent between the
modification of the convertibility regime and its abandonment is not persuasive. Guarantees and stability are meant
precisely to operate when problems arise, not when business continues as usual. The tariff regime approved was
devised as a permanent feature of the privatization, not a transitory one, and if it was intended to be transitory it should
have also been clearly advised to prospective investors, but again nothing of the sort was done. The regulatory and
contractual arrangements were thus not incomplete, as argued, and if such were the case it would certainly not have
passed unnoticed to competent officials, businessmen and counsel and advisors.’ Sempra v. Argentina, Award Para
151‘The distinction drawn by the Respondent between the modification of the convertibility regime and its
abandonment is unpersuasive. Guarantees and stabilization are meant to operate specifically when problems arise,
not when business continues as usual. The tariff regime approved was devised as a permanent feature of the
privatization, not a transitory one. If a temporary duration was actually intended, it should have been clearly indicated
to prospective investors. Again, however, nothing of the sort was done. The regulatory and contractual arrangements
were thus not incomplete, as has been argued. If such were the case, it would certainly not have passed unnotice d by
competent officials, businessmen and lawyers.’
269
issuance, it isn’t out of place to conclude that Argentina perceived that it got imbalanced and unfair
outcomes in the cases. Moreover, Argentina obviously recognising the possibility of the odds
being stacked against it with Professor Albert Jan van den Berg being a member of the BG tribunal,
fervently but unsuccessfully challenged him after the Enron’s award was issued in May 2007. 222
Being relentless, one of its five grounds in its Petition seeking modification or vacation of the
Award was failure of International Court of Arbitration Court (ICC) to disqualify Professor Albert
van den Berg. Needless to say, this ground of appeal/review went to no effect as the Supreme
Court ultimately upheld the tribunal’s award. It can though be argued that the concerns of
Argentina in seeking to have Professor Albert van den Berg disqualified were legitimate and
tenable to the extent that the arbitrator had sat on both LG&E and Enron Panels and concurred to
diametrically opposite decisions on Argentina’s reliance on the Article XI Non-Precluded
Measures defence.223 Two divergent positions based on almost identical facts – same facts, same
issues, same crisis, same measures, same time period, same treaty but contradictory decisions on
the State of necessity defence of Argentine.224 Considering that the issue at stake was significant
enough to exempt Argentina from liability, the least expected of the arbitrator was the issuance of
a Dissenting or Separate Opinion clarifying his change of position. As none of these were issued,
one can only continue to imagine what might have swayed Prof Berg to exhibit such “arbitrary
and abrupt change of mind”.225
To the specific question of how the tribunals have interpreted or construed stability guarantee with
reference to the Umbrella Clause, there is no doubt that each of the tribunals considered it as
obligation specific and sufficiently weighty to be put under the protective cover of international
law. There are however other extraneous considerations concerning the construction of the
Umbrella Clause in general (such as the issue of privity, relevance of contractual forum selection
clauses, specificity to investment/investor) impeding the full realizations of the protection to be
afforded stability guarantees under Umbrella Clause. According to Alisher Umirdinov substantive
treatments have a significant potential to contribute towards the reinforcement of the legal value
222
BG v. Argentina Award Paras 8 - 11
223
Refer to page 47 for notes on Article XI defence.
224
BG v. Argentina, United States District Court for the District of Columbia Case No. 08-0485 (RBW), Petition to
Vacate or Modify Arbitration Award, para 73.
225
Argentina’s contention leading to the presumption of impartiality and subjectivity.
270
of stabilization clauses. 226 No doubt, from the foregoing analysis, one can conclude that the
Umbrella Clause being a substantive treaty standard indeed has significant potentials towards
enhancing the legal value of contractual stabilization clauses and non-contractual stability
guarantees.
Alisher Umirdinov, ‘The End of Hibernation of Stabilization Clause in Investment Arbitration: Reassessing its
226
Contribution to Sustainable Development’ 43 (2014) Denv. J. Int'l L. & Pol'y 455, 480.
271
CHAPTER SIX
INVESTORS’ RIGHT TO STABILITY V. HOST STATES’ RIGHT TO REGULATORY

AUTONOMY: DEPLOYING PROPORTIONALITY ANALYSIS
TABLE OF CONTENTS
1. Introduction
2. Balancing Conflicting Interests
2.1. In Search of Balanced Approach to Interpretation of Investment Treaties

2.2 The Nature of Contemporary Foreign Investment Protections – Legal Principles Applicable to
Stability Guarantees
2.3 Preservation of Host States’ Regulatory Space
2.4 Perception of Imbalance: A Catalyst of the Legitimacy Crisis
2.5 Dealing with Regulatory Chill Dilemma
3. Reviewing Host States Conducts
3.1 Standard of Review

3.1.1 Between De novo and Complete Deference
3.1.2 An Acceptable or Inacceptable Margin
4. Achieving the Desired Balance with Proportionality Technique

4.1 The Three/Four Prong Approach to Proportionality Analysis
4.1.1 Legitimacy
4.1.2 Suitability
4.1.3 Necessity
4.1.4 Proportionality Stricto Sensu
4.2 Proportionality as a Balancing Scale in the Hands of Investor-State Tribunals
272
4.3 Why Proportionality is an Appropriate Balancing Tool to Determine Breach of Stability
Guarantees Claims
273
INTRODUCTION
Stability Guarantees by seeking to secure the immutability of the contract tenures, legal,
regulatory, fiscal, business or investment regimes create a challenge for host States because of
their restrictive tendencies.1 Restrictive to the extent that these Stability Guarantees challenge host
states’ sovereign legislative and regulatory powers by curtailing the right to freely and
uninhibitedly regulate without incurring a liability to pay compensation. Save for legislating and
regulating within host states’ Police Power regulatory space, giving effect to the tenets of the
Stability Guarantees for all intents and purposes limit host States from freely exercising powers or
prerogative to legislate or regulate in the interest of their people. Determining what is within host
states police power is not without some arguments. Meanwhile, host States’ regulatory flexibility
and autonomy is desirable because imposition of “excessive limitations on host States’ freedom of
action may significantly undermine their capacity to fulfil their fundamental commitment to
promoting the general welfare of their inhabitants.” 2 More so, in the light of international
instruments recognizing host States’ inalienable sovereign legislative and regulatory rights, the
right to exercise sovereign authority to legislate in order to adapt laws and regulations to changing
circumstances or due to public interest imperatives is preserved notwithstanding stability
guarantees previously and supposedly granted to foreign investors. This of course, naturally
triggers a conflict of interests’ scenario entailing investors’ right to stability versus host states’
right to regulatory flexibility and autonomy. Neither rights of foreign investors and host states are
absolute as each is limited by host states sovereign powers and international investment obligations
undertaken respectively. Consequently, it is essential that a middle ground be found between these
two competing interests of host state’s sovereign regulatory interests and foreign investor’s right
to stability of legal and business regime pertaining to its investment. Thus, this Chapter furthers
the analysis of protection of Stability Guarantees through the four substantive standards of
Umbrella Clause, Full Protection and Security, Fair and Equitable Treatment and Expropriation.
It should be recalled that previous chapters all concluded by highlighting the need for balancing
1
Abdullah Al Faruque, ‘Validity and Efficacy of Stabilisation Clauses: Legal Protection vs. Functional Value’ [2006]
Journal of International Arbitration 321.
2
Moshe Hirsch, ‘Between Fair and Equitable Treatment and Stabilization Clause: Stable Legal Environment and
Regulatory Change in International Investment Law’ (2011) 12 Journal of World Investment and Trade 1.
274
of referenced conflicting rights. This Chapter commences by recounting calls for adoption of a
balanced approach to interpretation of treaty standards with emphasis on interpretation of the fair
and equitable treatment and expropriation standards.
As claims alleging breaches of Stability Guarantees presuppose host states’ affirmative actions or
measures to change, amend, repudiate or abrogate laws, regulations, existing legal or regulatory
regimes pertaining to foreign investment, tribunals are inevitably required to undertake a review
of relevant host states’ conducts, measures and/or actions. This review which seeks to assess the
validity of a legislative executive or administrative action vis-à-vis obligations undertaken under
investment treaties can be on varied degrees of deferential basis depending on tribunals’
disposition. Each tribunal adopts its preferred standard of review because there is no established
standard of review under international investment law; just as there is no standardized balancing
technique commonly deployed by tribunals to find the appropriate balance between stated
opposing rights and interests. Proportionality analysis has been frequently proposed as the most
suitable and adaptable option to deal out a fair and balanced outcome for both foreign investor and
host state. This is because true proportionality contemplates vigorous stages of review. Arguably,
proportionality has some downsides; it nonetheless affords investment tribunals some level of
flexibility and proffers safeguards to prevent potential abuse of arbitral discretion ultimately
obviating arbitrators’ subjectivity in decision making. The Chapter examines the deployment of
the proportionality analysis in key investment arbitrations dealing with Stability Guarantees claims
with a view to determine the viability of the technique in the protection of the legitimate interests
of both foreign investors and host states linked to investors’ right to stability versus host states’
right to regulate. In summary:
‘The guarantees afforded to foreign investors, must not jeopardize the state’s right to legitimate
regulation … The task of international investment law is to find an appropriate balance between
these potentially conflicting interests.’3
3
Christoph Schreuer, ‘Investment International Protection’ Available at
<http://www.univie.ac.at/intlaw/wordpress/pdf/investments_Int_Protection.pdf> accessed 27 July 2016.
275
The above statement of Christoph Schreuer underscores the real purport of investor state arbitral
tribunals’ tasks as underpinning every argument in support or against protection of foreign
investors’ rights is this issue of conflicting interests. The statement, in a nutshell summarises the
purport of this Chapter that is, acknowledgement of competing rights and arbitral tribunals’ role
to appropriately balance these conflicting interests with a suitable balancing tool/technique.
2. BALANCING CONFLICTING INTERESTS
2.1. In Search of a Balanced Approach to Interpretation of Investment Treaties
The main function of Investor-state arbitration tribunals is to determine host States’ liability
following an allegation of violation of investment treaties’ obligations or protection standards. In
determining host States’ liability in investor-state arbitration dispute, tribunals are required to pay
due consideration to interests of both foreign investors and host states. According to an OECD
working paper, there is a vigorous debate about the balance between the right to regulate and
investor protection considering that Investment treaty provisions offer foreign investors some
leverage in their dealing with host government.4 Balancing of interests which involves different
processes and institutions remains a key issue and central subject of current public debate.5 In the
bid to revise the previously “one-sided” regime supposedly committed to unfettered investment
protection and liberalization, more and more tribunals are opting for a “balanced” approach to
treaty interpretation. 6 There is increasingly a call for adoption of a balanced approach in the
determination of investment disputes. Notable amongst the tribunals which have propounded a
balanced approach is the Saluka Investment tribunal when it stated that:
‘This is a more subtle and balanced statement of the Treaty’s aims than is sometimes appreciated.
The protection of foreign investments is not the sole aim of the Treaty, but rather a necessary
4
David Gaukrodger, ‘The Balance Between Investor Problem and The Right to Regulate in Investment Treaties’
OECD Working Papers 3.
5
6
Wenhua Shan, ‘Towards a Balanced Liberal Investment Regime: General Report on the Protection of Foreign
Investment’ (2010) 25.2 ICSID Review 421, 471.
276
element alongside the overall aim of encouraging foreign investment and extending and
intensifying the parties’ economic relations. That in turn calls for a balanced approach to the
interpretation of the Treaty’s substantive provisions for the protection of investments, since an
interpretation which exaggerates the protection to be accorded to foreign investments may serve
to dissuade host States from admitting foreign investments and so undermine the overall aim of
extending and intensifying the parties’ mutual economic relations.’7
This often-quoted finding of the Saluka tribunal succinctly captures the position of the like-minded
tribunals who propound a balanced approach to interpretation of investment treaties. Thus, a
balanced approach is considering the totality of investment treaty’s purposes of protection of
foreign investment together with the promotion of the economic development cooperation between
the state parties.8 The tribunals’ supporting balanced approach to interpretation of the treaty, often
times rely on Article 31 of the VCLT which prescribes interpretation in good faith in accordance
with the ordinary meaning to be given to the terms of the treaty in their context and in light of its
object and purpose.9 To these crop of tribunals Article 31 VCLT will ensure a well-balanced
regime when tribunals undertake even-handed, objective, well-reasoned and tempered balanced
interpretation of the treaty, which is neither restrictive nor expansive, and also without any
presumption either in favour or against foreign investor.10 In this regard, Kingsbury and Schill
contributed that ‘… good faith reading of the text of the applicable treaty in context and in the light
of the object and purpose of the treaty may well indicate that interpretation calls for a balance to
7
Saluka Investments BV (The Netherlands) v The Czech Republic, UNCITRAL, Partial Award, 17 March 2006; Para
300.
8
Attila Tanzi, ‘On Balancing Foreign Investment Interests with Public Interests in Recent Arbitration Case Law in
the Public Utilities Sector’ (2012) 11 The Law and Practice of International Courts and Tribunals 47, 74.
9
Azurix Corp v The Argentine Republic, ICSID Case No. ARB/01/12, Award 14 July 2006 Para 307.
10
See also RoslinvestCo UK Ltd. V. Russian Federation SCC Case No. Abr. V 079/2005, Award on Jurisdiction 05
October 2007; Para 44 and Quasar de Valors SICAV S.A. et al. (Formerly Renta 4 S.V.S.A et al.) v. Russian
Federation, SCC Case No. 24/2007; Award on Preliminary Objections, 20 March 2009; Para 55. Other tribunals that
postulate a balanced approach to interpretation of treaty include: Noble Ventures v. Romania, Award 12 October 2005
Para 52; Urbaser v. Argentina Decision on Jurisdiction 19 December 2012 Para 53; ST-AD GmbH v. Republic of
Bulgaria, PCA Case No. 2011-06 (ST-BG), Award on Jurisdiction, 18 July 2013 Para 382-384; Continental Casualty
Company v. Argentine Republic, ICSID Case No. ARB/03/9, Award, 5 September 2008 Para 181; Plama Consortium
Limited v. Republic of Bulgaria, ICSID Case No ARB/03/24, Award 27 August 2008 Para 167; Bureau Veritas,
Inspection, Valuation, Assessment and Control, BIVAC B.V. v. Republic of Paraguay, ICSID Case No.ARB/07/9,
Decision on Jurisdiction, 29 May 2009 Para 58;Pan American Sur SRL, Pan American Fueguina, SRL and Pan
American Continental SRL v. Argentine Republic, ICSID Case No. ARB/03/13 & ARB/04/8, Decision on Preliminary
Objections, 27 July 2006 Para 99; and Joseph C. Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on
Jurisdiction and Liability, 21 January 2010 Para 273.
277
be struck between investors’ protection and State regulatory powers.’ 11 Similarly, to Brigitte
Stern, arbitrators need not look to far in order to adopt a balanced approach as same is achievable
within the framework of existing international investment arbitration system by paying cognizance
to the fact that investment treaties are reciprocal agreements with dimensional objectives.12
The call for adoption of a balanced approach is against the backdrop of two other lopsided positions
shaping arbitrators’ interpretation of BIT standards. The respondent-state argument as
recapitulated by the tribunal in Methanex v. USA is a typical illustration of the first set of tribunals
postulating the idea that investment treaties should be interpreted to favour state sovereignty.
According to Methanex’ tribunal, ‘The USA contends that … where there is ambiguity in clauses
granting jurisdiction over disputes between states and private persons, such ambiguity is always
to be resolved in favour of maintaining state sovereignty.’ 13 To counter USA’s arguments,
Methanex argued that a liberal rather than a restrictive interpretation of NAFTA is appropriate in
order to favour investors. 14 The tribunal rejected both contentions and stated that the treaty
provisions should be interpreted in good faith in accordance with Article 31 (1) VCLT. 15 On the
other divide is SGS v. Philippine tribunal (and like-minded tribunals), which contended that “it is
legitimate to resolve uncertainties in its interpretation so as to favour the provision of covered
investment”.16
Beyond the call for balanced interpretation of investment treaties in general, in adjudicating
investors’ claim of breaches of treaty standards, many tribunals reiterated the need for balancing
of interests in the construction of specific treaty treatment standards such as the Fair and Equitable
11
Benedict Kingsbury and Stephan Schill, ‘Investor-State Arbitration as Governance: Fair and Equitable Treatment,
Proportionality and the Emerging Global Administrative Law’ (2009) Paper 146 New York University Public Law
and Legal Theory Working Papers 23.
12
Brigitte Stern, ‘The Future of International Investment Law: A Balance Between the Protection of Investors and the
States’ Capacity to Regulate’ in Jose E Alvarez, Karl P Sauvant, Kamil Girard Ahmed and Gabriela P Vizcaino (eds),
The Evolving International Investment Regime: Expectations, Realities, Options (Oxford University Press 2011) 189.
13
Methanex Corporation v. United States of America, UNCITRAL Partial Award on Jurisdiction 07 August 2002
Para 103.
14
Para 104.
15
Para 105.
16
SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6 Decision on
Objection to Jurisdiction 09 January 2004; Para 116.
278
Treatment, Umbrella Clause and Expropriation. Indeed, balancing of investors’ interest against
host state rights is needed to stem the increasing pervasiveness of certain treaty obligations such
as FET.17 A typical example is the Arif v. Moldova tribunal which supported the call for balancing
of rights with regards to the Fair and Equitable Treatment interpretation when it asserted that “The
fair and equitable treatment standard also involved a balancing exercise that might take into
account “the host states legitimate right subsequently to regulate domestic matters in the public
interest.”’18 It is therefore not surprising that the issue of interests balancing seems to be at the
current focal point of debates as to the content of FET.19 For this reason, finding the right balance
between investors’ rights on one hand and host states’ sovereign regulatory powers on another,
has become very pertinent. This position was expressed by the Tribunal in Total SA v. The
Argentine Republic which specifically stated that “…The balance between these competing
requirements and hence the limits of the proper invocation of “legitimate expectations” in the face
of legislative or regulatory changes … has been based on a weighing of various elements pointing
in opposite directions.”20
In the same vein, the Electrabel S.A. v. Republic of Hungary 21 tribunal whilst embracing the
protection of the investor’s reasonable and legitimate expectations as a crucial function of the FET
standard cited both Saluka Investment tribunal and Arif v. Moldova tribunal reiterating the need
for balancing of interests in the construction of the fair and equitable treatment standard. The
Electrabel tribunal on the other had vested the responsibility for undertaking the balancing exercise
on the host state which should weigh the investor’s interest against other considerations.22
17
Jason Haynes, ‘The Evolving Nature of the Fair and Equitable Treatment (FET)Standard: Challenging Its Increasing
Pervasiveness in Light of Developing Countries' Concerns - The Case for Regulatory Rebalancing’ (2013) 14 The
Journal of World Investment & Trade114, 142.
18
Franck Charles Arif v. Republic of Moldova, Award 08 April 2013 Para 537.
19
Michele Potesta, ‘The Doctrine of Legitimate Expectations in Investment Treaty Law’ [2012] 1; Paper delivered at
Third Biennial Global Conference, 12 – 14 July 2014, Singapore 26
<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2102771> accessed 28 September 2017.
20
Total SA v. The Argentine Republic ICSID Case No. ARB/04/1, Award 27 December 2010; Para 121 (hereinafter
Total SA).
21
Electrabel S.A. v. Republic of Hungary ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and
Liability 30 November 2012.
22
Ibid Para 165.
279
Enough tribunals acknowledge that legitimate expectation which is now widely acknowledged as
an element of the FET is a result of a balancing operation of competing interests. One of such is
that of Toto Costruzioni v. Lebanon. 23 Similarly, the tribunal in Jan Oostergetel and Anor v.
Slovak 24 recounted the case law subscribing to balancing approach in the determination of
enforceable investors’ legitimate expectation and submitted in agreement that “stability of the legal
and business environment does not equate immutability of the legal framework and that legitimate
expectations must be measured through a balancing test taking account of specific
circumstances”.25
In the context of expropriation, a line of cases suggest that evaluation of the expropriation claim
should pay due consideration to host state’s right to regulate and to exercise its police power in the
interest of the public as asserted by AWG v. Argentina tribunal.26 Meanwhile, El Paso tribunals
often quoted finding on balanced interpretation imperatives, were made in the context of Umbrella
Clause arguments. El Paso’s tribunal when required to determine if a breach of contractual
undertakings had been transformed to treaty breach by operation of the Umbrella Clause
commented that:
‘This Tribunal considers that a balanced interpretation is needed, taking into account both State
sovereignty and the State's responsibility to create an adapted and evolutionary framework for the
development of economic activities, and the necessity to protect foreign investment and its
23
In relation to the Toto’s claim that its legitimate expectation of a consistent and consequential delivery of the parcels
of land to construct road for the highway projects linking Beirut to the Syrian border, had been frustrated due to
Lebanon’s failure evacuate Syrian Armed forces to enable Toto could complete the works in eighteen months, as
provided for in the Contract., the Tribunal found that legitimate expectations which go beyond the investor’s subjective
expectation, are recognised as ‘the result of a balancing operation of the different interests at stake, taking into account
all circumstances, including the political and socioeconomic conditions prevailing in the host State.’ Toto Costruzioni
Generali S.p.A. v. Republic of Lebanon ICSID Case No. ARB/07/12 Award 07 June 2012 Para 165.
24
Jan Oostergetel and Anor v. Slovak UNCITRAL, Final Award 23 April 2012; Para 224
25
Ibid Para 224.
26
The AWG v. Argentina tribunal while reiterating the need for tribunals evaluating expropriation claims to recognise
host States’ legitimate right to regulate and to exercise police powers in the interests of public welfare, cited the
American Law Institute’s Third Restatement, Methanex v. United States and Saluka v. the Czech Republic tribunal
findings which all attested to the fact that regulations within the police power of States are not compensable
expropriations. AWG Group Ltd. v. The Argentine Republic, ICSID Case No. ARB/03/19 Tribunal Decision on
Liability 30 July 2010; Para 139.
280
continuing flow. It is bearing this in mind that the Tribunal will deal with the controversial
question of the so-called "umbrella clause”.’27
Apart from tribunals duty to be generally fair to both foreign investors and host states while
determining investment disputes, the fact that protection of Stability Guarantee naturally involves
a clash of interests make it even more imperative for tribunals deciding on breaches of Stability
Guarantee claims to adopt an objective and well-balanced approach in adjudicating stability
guarantee related disputes. As above discourse suggests, Saluka Investment, El Paso, Arif v.
Moldova and like-minded tribunals have rightly endorsed a balanced approach to treaty
interpretation either generally or in specific instances. This endorsement although majorly driven
by arbitral tribunals’ obligation to properly apply treaty interpretation rules as stipulated by Article
31 VCLT, other factors contributing to the adoption of balanced interpretive approach include the
innate nature of foreign investment protection under investment treaty system, preservation of host
States’ regulatory space, the desire to tackle the perception of imbalance and legitimacy crisis and
dealing with regulatory chill dilemma. These factors are succinctly discussed below for contextual
understanding.
2.2 The Nature of Contemporary Foreign Investment Protections – Legal Principles

Applicable to Stability Guarantees
With the proliferation of investment disputes stemming from international investment agreements,
it is now generally acknowledged that investment agreements entail ‘significant obligations and
consequences impeding host states’ “sovereign freedom of action” or regulatory flexibility needed
or required to react and respond to future challenges. This is against the backdrop of foreign
investors’ entitlement to a level of international protection against acts and conducts of host states,
which might undermine their investments in the host States. By entering into investment treaties
which grant foreign investors’ direct access to international arbitration for resolution of investment
disputes, host States have not only created treaty-based rights in favour of foreign investors but
also intrinsically accepted a diminution in their sovereign legislative and regulatory autonomy.
27
EI Paso Energy International Company v The Argentine Republic, Decision on Jurisdiction ICSID Case No.
ARB/03/15, 27 April 2006; Para 70.
281
Notwithstanding said foreign investors’ treaty-based rights protected under international
investment law regime, there exist internationally recognised and acceptable avenues available to
host States for detracting from assurances, guarantees and rights conferred on foreign investors via
investment treaty protections. Consequently, host states are permitted under certain circumstances
to renege on commitments and obligations undertaken under investment treaties. Needless to state
that this creates a tension between foreign investors rights to these assurances and guarantees
granted against host States’ retained rights. It therefore behoves on investor-state arbitral tribunals
to weigh these competing rights and interests and strike a balance that will deal out a fair and
objective outcome.
Beyond internationalisation of host States’ obligations to confer rights on foreign investors and
the consequent conflict of interests emanating from same, Stability Guarantees by their very nature
pose significant restrictions and constraint on host states’ sovereign right to exercise legislative
prerogatives.28 Whereas there are number of international instruments enunciating host states’
inalienable rights and privileges to exercise sovereign legislative powers. Top amongst these
international instruments is UN General Assembly Resolution 180329 which not only asserts the
rights of Host States over their natural resources and economic affairs but also confirms the host
States’ right to regulate and exercise control over activities of foreign investors within their
territories in accordance with their own objectives and development plans.30
Still on international law doctrines and principles, one principle deemed relevant which buttresses
Stability Guarantee protection is Pacta Sunt Servada doctrine as applicable in the context of
international investment law. This is because just as the purpose and functions of Stability
Guarantee, Pacta Sunt Servada doctrine seeks to hold host States bound to agreements,
commitments, assurances, guarantees, contractual terms and conditions previously made or
conferred in favour of foreign investors. Consequently, the principle underpinning Stability
Guarantees run contrary to principles enunciated by Permanent Sovereignty over Natural
Resources Provisions. This scenario inevitably gives rise to conflict and tension between foreign
28
Tarcisio. Gazzini and Eric De Brabandere (ed), International Investment Law. The Sources of Rights and
Obligations (Martinus Nijhoff Publishers 2012) 221.
29
UNGA, "Permanent Sovereignty Over Natural Resources “Resolution 1803 (14 December 1962)
30
Nico Schrijver, Sovereignty Over Natural Resources: Balancing Rights and Duties (Cambridge University Press
2008) 279, 283.
282
investors’ rights to stability of legal, regulatory and investment framework vis-à-vis host States’
right to exercise autonomy over its economic affairs through legislative and regulatory changes as
circumstances dictate. Tribunals when faced with this conflict between foreign investors’ rights
to Stability Guarantees on one hand and host States’ rights to exercise their full and free inalienable
sovereign regulatory powers guaranteed by Permanent Sovereignty Over Natural Resources
Principle on the other, must necessarily undertake a balancing exercise.
2.3 Preservation of Host States’ Regulatory Space
There is increasing focus on the right to regulate within international investment law setting
because of a variety of factors including perception of loss of policy space, regulatory chill factors,
dynamism associated with international investment law landscape.31The right to regulate which is
a basic attribute of sovereignty under international law denotes the legal right exceptionally
permitting the host states to regulate in derogation of international commitments undertaken by
means of investment agreements without incurring a duty to compensate.32 Host state’s exercise
of right under international law to regulate its domestic economic and legal affairs is limited given
binding commitments or obligations undertaken under investment treaties. One of such
obligations that naturally has the effect of curtailing or limiting host states’ right to regulate is
stability obligations or guarantee in favour of foreign investors. Host States having significantly
confined or restricted their regulatory space in their efforts to attract foreign investment through
investment treaty mechanisms are now exploring different means of safeguarding their regulatory
power. Delimiting the interpretative freedom of arbitral tribunals is one means by which host
States attempt to preserve their regulatory space. In support of the call for unfettered right to
regulate, Joseph Stiglitz argued that the purpose of international investment agreements has now
metamorphosed from protection of foreign investors’ property right and promotion of FDI to
means or weapon of fighting regulation.33 Moreover, the fact that the right to regulate has been
subjected to arbitral ruling to some extent connotes a transfer of power from public authorities to
31
Aikaterini Titi, The Right to Regulate in International Investment Law (2014) 20.
32
Ibid 32, 33.
33
Joseph Stiglitz, ‘The Secret Corporate Takeover’ Project Syndicate 13 May 2015 <
https://www.economics.utoronto.ca/gindart/2015-05-13%20-%20The%20secret%20corporate%20takeover.pdf>
accessed 12 January 2018.
283
arbitral panels.34 This power transfer can not only be expensive but can also be excessive as the
investor-claimant’s claim of € 4.7 Billion in Vattenfall v. Germany illustrates.35
Be that as it may, many tribunals subscribe to the viewpoint that the legitimate interests of host
states to pass laws and adopt measures considered necessary for the protection of its public interest,
must be recognized and preserved. 36 The idea being, notwithstanding commitments under
international investment agreements, host states retain the flexibility and power to respond to
changing circumstances by exercising regulatory powers to take actions or measures aimed at the
maintenance of public order. In such a situation, host States are not liable to pay compensation to
the extent that measures taken are not discriminatory. This aligns with the Harvard Draft
Convention (on the International Responsibility of States for Injuries to Aliens) on non-
compensable takings.37 Even when economic loss or injury occurs due to bona fide regulation
within the police powers of a state, compensation is deemed not due or payable according to the
tribunal in Methanex Corp. V. USA.38. Saluka tribunal acknowledged the existence of a lacuna in
international law to comprehensively identify permissible and commonly accepted regulations
falling within the remit of police or regulatory powers of host States.39 Consequently, since there
is no clear parameter to draw the line between compensable and non-compensable regulations of
host states, it behoves tribunals to draw the necessary dividing line. 40 In view of this lacuna,
challenge of public welfare legislation and regulation under investor-state arbitration system,
raises concerns about finding an appropriate balance between host state legitimate regulatory
34
Martti Kosekenniemi comment on page 6.
35
The investor-claimants, Swedish nationals, commenced the investment arbitration proceeding under the Energy
Charter Treaty claiming €4.7 billion as compensation for losses allegedly suffered as a result of Germany’s enactment
of legislation to phase out all nuclear power plants. Meanwhile, the investor-claimants had committed significant
investments toward nuclear energy production in Germany based on certain guarantees and legal framework. This
matter is currently pending before an ICSID constituted tribunal. The Investor-claimant successfully challenged the
same legislation before the German Federal Constitutional Court which held in December 2016 that Germany
breached Article 14 (1) of the German Constitutional Law (the domestic German equivalent of the protection of
legitimate expectations). Vattenfall AB and others v. Federal Republic of Germany (II) ICSID Case No. ARB/12/12;
See Laura Yvonne Zielinski ‘Legitimate Expectations” in the Vattenfall Case: At the Heart of the Debate over
ISDS’ Kluwer Arbitration Blog http://arbitrationblog.kluwerarbitration.com/2017/01/10/legitimate-expectations-in-
the-vattenfall-case-at-the-heart-of-the-debate-over-isds/ accessed 05 January 2018.
36
See Joseph Lemire v. Ukraine – Decision Jurisdiction and Liability Para 273; ADC V. Hungary Award of 02
October 2006 Para 423; Saluka Investment Partial Award Para 254.
37
Saluka (n. 4) Para 256
38
Methanex Corp. V. USA Award 03 Aug. 2005 Para 410.
39
ibid para 263
40
ibid para 264
284
interest and investor’s interest. It is usually a question of preservation of host state’s right to
regulate vis-à-vis protection of foreign investment.
In the case of Stati and Ascom Group v. Kazakhstan, the tribunal was required to determine the
investor-claimant’s expropriation claim inter alia vis-à-vis host State’s defence of regulatory rights
within its sovereign police power. Investor-claimant argued that Kazakhstan did not comply with
any of the requirements for lawful expropriation stipulated in ECT Article 13. The Investor-
claimant asserted that Kazakhstan assessed $62 Million in back taxes and penalties in disregard of
stabilization guarantees in its Subsoil Use Contract.41 Kazakhstan, on the other hand, contended
that the four criteria or requirements are irrelevant as no expropriation occurred.42 Kazakhstan
further argued that its measures were carried out pursuant to its rights to regulate and were a proper
exercise of its regulatory powers. Kazakhstan in its submissions, quoted prominent scholars in
field of international law to assert that legitimate regulatory actions do not constitute compensable
expropriation. Kazakhstan in addition, rehashed Multilateral Investment Guarantee Agency
definition of expropriation excluding ‘non-discriminatory measures of general application which
the government normally take for the purpose of regulating economic activities in their
territories.’43 Kazakhstan further buttressed its arguments by recounting Article 1 of the Protocol
1 to the European Convention of Human Rights (1952), which states that the enforcement of laws,
necessary to control the use of property in accordance with the general interest cannot constitute a
compensable taking.44 Arguing that the Tribunal should give it a wide margin of discretion in
determining public interest and the measures in pursuance of those interests as is the practice of
the ECtHR. The tribunal ultimately held that having found that Kazakhstan had breached Article
10 (1) ECT on FET,45 resulting in award of damages, it was not necessary to examine whether
same relief would have been granted on the basis of expropriation provision of ECT. 46
41
Anatolie Stati, Gabriel Stati, Ascom Group S.A. and Terra Raf Trans Traiding Ltd v. Republic of Kazakhstan, SCC
Case No. V116/2010, Award, 19 December 2013 Para 651.
42
Para 1096.
43
Para 927-932.
44
Para 1166.
45
The Tribunal concluded that Kazakhstan measures cumulatively constituted a string of measures of coordinated
harassment by various Kazakhstan’s institutions, leading to a finding of breach of the fair and equitable treatment
standard, Article 10 (1) ECT. Para 1095.
46
Para 1205 and 1207.
285
Kazakhstan’s arguments in this case is a good illustration of host states’ fervent attempts at
safeguarding their sovereign regulatory powers.
On a similar note, having reviewed some of provisions of international investment agreements for
their potentials to allow for regulatory freedom, Markert concluded that international investment
agreements do not provide sufficient legal certainty with regards to host states’ right to regulate in
the public interest.47 According to Markert, this obviously is the rationale for the emerging trend
of incorporating regulatory interest in international investment agreements. Needless to state that
investment tribunal’s tasks will be much easier with this evolving trend of incorporating in
investment treaties, the right to regulate as an exception to protections accorded investors or
justification for breach. An exception is well illustrated by Article 10 titled ‘General Exceptions’
of the 2004 Canadian Model BIT which obviates the obligation to compensate and liability for
host States measures ‘necessary: (a) to protect human, animal or plant life or health; (b) to ensure
compliance with laws and regulations that are not inconsistent with the provisions of this
Agreement; or (c) for the conservation of living or non-living exhaustible natural resources.’48
Inclusion of these general exceptions in the 2004 Model BIT is believed to raise the issue of the
significance of its omission in earlier treaties.49
It should be noted that various types of regulatory interests are typically incorporated in investment
treaties by way of exception also known as Non-Precluded Measures. Non-Precluded Measures
clauses allow state to take actions otherwise inconsistent with treaty obligations by limiting the
applicability of investor protections under the BIT in exceptional circumstances. 50 These
47
Markert Lars, ‘The Crucial Question of Future Investment Treaties: Balancing Investors’ Rights and Regulatory
Interests of Host States’ in Bungenberg M., Griebel J., Hindelang S. (eds) International Investment Law and EU Law.
European Yearbook of International Economic Law (Springer 2011) 155.
48
Canadian Model Foreign Investment Protection and Promotion Agreement: Agreement between Canada and -------
for the Promotion and Protection of Investments < https://www.italaw.com/documents/Canadian2004-FIPA-model-
en.pdf> accessed 06 June 2017.
49
Andrew Newcombe, ‘Canada’s New Model Foreign Investment Protection Agreement’ <
https://www.italaw.com/documents/CanadianFIPA.pdf> accessed 06 June 2017.
50
Burke White and Andreas von Staden, ‘Investment Protection in Extraordinary Times: The Interpretation and
Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties’ (2008)48 VA. J. Int'l L. 307,
311. The consequence of successfully invocation of treaty exception is not all together settled with regard to duty to
compensate. However, the popular view is that for legitimate host state’s regulation in the public interest, the host
state will not incur a duty to pay compensation. Meanwhile, some commentators postulate that treaty exceptions
merely provide host state “with an excuse” without obliterating the duty to compensate. Aikaterini Titi quoted Alvarez
J.E and Khamsik (2009) 457. As indicated by Feldman tribunal, obligation to compensate aggrieved foreign investor
286
exceptions which are often deemed insufficient to guarantee host states regulatory autonomy are
more inclined to apply to specific protective treaty standards and can also be generally applicable
to the entire treaty. Markert similarly concluded that host states’ regulatory freedom safeguarded
regarding the necessity doctrine under public international law is not sufficiently guaranteed with
legal certainty by public international law apparatus.51 Thus, based on Markert’s submission, it
can be argued that existing international investment agreements’ provisions and public
international law allow for some measure of regulatory discretion but not sufficient to safeguard
or guarantee with legal certainty, host states’ regulatory freedom. It is therefore imperative to
augment host state’s regulatory space and the right to regulate. In this regard, host States can be
assisted by some elements such as elimination of umbrella clause,52 exclusion of investor state
dispute settlement, reliance on tribunals exercise of their discretion to defer to host state policy
decisions, clarifications in treaties, formulation of interpretive statements, introduction of treaty
exceptions and reservations.53
UNCTAD reported that newer BITs have provisions in form of general exceptions.54 A good
illustration is the US 2004 Model BIT which now preserves host states’ regulatory space in the
realm of public interest subject matters such as health, safety, environment, labour, human rights.
In fact, Annex B, paragraph 4(b) US Model specifically states that save for exceptional
circumstances, host states non-discriminatory regulatory actions designed and applied to protect
due to reasonable governmental regulation in the public interest will hamper’s the regulation’s implementation.
Feldman v Mexico, Award, 16 December 2002; Para 103. Former President of International Court of Justice, Judge
Rosalyn Higgins in her 1982 Hague Lectures argued that there was no justification for distinguishing compensable
taking for a public purpose and non-compensable bona fide host state measures considering that the state in both
instances, purports to act for the common good while an investor who has suffered loss of property is entitled to just
compensation. Rosalyn Higgins, The Taking of Property by the State: Recent Developments in International Law
(1982 Martinus Nijhoff) 331.
51
To the extent that Article 27(b) ILC Articles, prescribes payment of compensation notwithstanding the invocation
of State of Necessity. See Markert (n. 46) 157.
52
Due to Umbrella Clause’s potential to impact host states’ right to regulate and corollary policy space, it elimination
or exclusion from investment treaties has been seen. Although, the Umbrella Clause does not per se by itself constitute
a constriction on host state regulatory capacity but considering that its functions to bring under the protective umbrella
of international law and the jurisdiction of investment arbitral tribunals, host state’s contractual and unilaterally
assumed obligations, umbrella clauses have been excluded from treaties generally considered concertedly focused on
safeguarding host states’ Policy space. Apt illustrations are US 2012 Model BIT, 2012 Canadian Model BIT and 2007
Norwegian Draft Model BIT. In fact, Canada, Australia and Norway opted out of ISDS in relation to Umbrella Clauses
of ECT.
53
Aikaterini (n. 30) 52.
54
UNCTAD World Investment Report 2015 < http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf> accessed 12
August 2017.
287
legitimate public welfare objectives such as public health, safety and environment do not constitute
indirect expropriation. The 2004 US Model BIT also contains other provisions guaranteeing host
states regulatory rights for the maintenance or restoration of international peace or security, or the
host state’s essential security interests. In the same spirit, the 2012 Model US BIT further clarified
provisions relating to the exercise of host state’s regulatory powers in relation to environmental
and labour matters.55
Inspired by provisions of Article XX GATT, Canada also in its 2004 BIT Model included
provisions for protection of public good which states: ‘nothing in the treaty is to be interpreted as
a way to prevent Government from adopting measures to protect the life and health of humans,
animals and plants…’ Likewise, GATT Article XX also inspired similar provisions incorporated
in Transatlantic Trade and Investment Partnership (TTIP)56 involving not less than 80 Nations.57
Furthermore, a review of the Trans-Pacific Partnership Agreement (TTPA) 58 and negotiation
related thereto indicate more attention is devoted to negotiations or issues bordering on protection
of TPP countries’ right to regulate in the public interest on one hand and striking an appropriate
balance between investor protection and protection of the right to regulate.59.
On the other divide are those that nurse the fear that enshrining the right to regulate may be grossly
abused and exercised to the detriment of investors. In this regard, EFILA whilst criticising TTIP
model or approach on the right to regulate, argued that promoting the right to regulate has
potentials to create avenues for abuse by contracting parties, limit investors’ property rights, and
impede arbitrators’ freedom of interpretation. Consequently, EFILA calls for safeguards of
55
Marilda Ribeiro, ‘Global Governance and Investment Treaty Arbitration: The Importance of the Argentine Crisis
for Future Disputes’ (2015) 14 The Law and Practice of International Courts and Tribunals 417, 434. The 2012 US
Model BIT Article 12 and 13 strengthened provisions on protection of the Environment and Labour rights respectively.
56
The Transatlantic Trade and Investment Partnership(TTIP) is a proposed comprehensive trade and investment
agreement being negotiated between the European Unionand the United States, with the goal of promoting trade and
multilateral economic growth. See Transatlantic Trade and Investment Partnership Available at
<https://en.wikipedia.org/wiki/Transatlantic_Trade_and_Investment_Partnership> accessed 27 June 2017.
57
Marilda (n. 54) 435.
58
The Trans Pacific Partnership Agreement(TPPA), is a trade agreementbetween twelve countries including Australia,
Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United Statesand Vietnam. Prior
to 23rd January 2017 when the President Donald Trump led administration withdrew USA from the TPP, the TPP was
deemed a companion agreement to the proposed Transatlantic Trade and Investment Partnership(TTIP). See Trans-
Pacific Partnership Available at <https://en.wikipedia.org/wiki/Trans-Pacific_Partnership> accessed 27 June 2017
59
Federica Cristani, ‘Book review: The Right to Regulate in International Investment Law by Aikaterini Titi’ 3
288
arbitral tribunal’s freedom of interpretation as undue limitation or constraint on tribunal’s freedom
of interpretation is deemed unnecessary.60 Additionally, according to EFILA, in order for ISDS to
serve its purpose, instead of the TTIP’s proposed approach of explicitly guaranteeing host states’
right to regulate EFILA recommended for:
i. Safeguards of tribunals’ freedom of interpretation;

ii. Clarification of the relationship between the protection of investments and the right to regulate,
elucidating the rights and obligations of contracting parties; and
iii. Non-inclusion of explicit provisions on the right to regulate as the desired goal can be carefully
achieved through careful drafting of the protection standards and exceptions.61
Like EFILA’s viewpoint, some commentators share the opinion that the current state of affairs
adequately guarantees the right to regulate. In fact, Charles N. Brower & Sadie argued that the
notion that IIA constrain policy space is misleading as the authority to regulate remains intact.
Other opinions and commentators that hold the investment treaties as they currently exist achieve
a proper balance, include; United State Council on International Business (USCIB).62
From the foregoing, it will be observed that a pertinent question that begs an answer is if host
States have negotiated away their right to regulate in the public interest by entering into
International Investment Agreement or does the right to regulate remain intact notwithstanding
investment treaties’ obligations? There is indeed, no clear or distinct answer to this question.
Needless to say, that these divergent views lend credence to the fact that the current debate on the
right to regulate is multi-faceted and all the more topical. It is however not out of place to assert
that the right to regulate will feature more in future treaty negotiations because of the prevalent
view that incorporating in explicit terms, host State’s right to regulate in international investment
treaties has potentials to enable the appropriate balancing of foreign investors’ interests against
host states interests. Codification of the right to regulate will also afford tribunals better guidance
60
Gaukrodger (n 4) 7.
61
European Federation for Investment Law and Arbitration (EFILA), TTIP Consultation Submission. Available at
http://efila.org/wp-content/uploads/2014/07/EFILA_TTIP_final_submission.pdf accessed 27 September 2017.
62
Gaukrodger (n 4) 8.
289
on dealing with host state regulatory rights coupled with the preventing host states’ adoption of
treaty exit and rescission options.
It should however be borne in mind that codified right to regulate might be a potential source of
divergence in interpretation and equally be subject to controversial debate. For one, the pre-
conditions for exercise of right to regulate will still call for tribunals’ determination. Another
potentially contentious issue is who defines or what is “public interest”? As rightly noted by Kyla
Tienhaara, opinions on what qualifies as “bona fide” regulatory measure will undoubtedly vary
amongst host states, investors, arbitrators and others.63 Meanwhile, it can be argued that unfettered
right to regulate in furtherance of public interests, renders international investment agreements’
protections futile or redundant since host states could easily claim that all measures are permitted
by the general exemption clauses or the codified right to regulate. To prevent this potential abuse
of exception clauses or right to regulate, it is advised that specific examples of public interests and
rules on their implementation be incorporated in investment treaties rather than open-ended
exception clauses and blanket right to regulate.64
2.4 Perception of Imbalance: A Catalyst of the Legitimacy Crisis
Investor-State Dispute System (ISDS) has in recent times become an object of criticism due to
several reasons such as arguments that investment arbitration is pro-investor to the detriment of
host states. The state of investment arbitration as currently existing repose many features
contributing to the legitimacy crisis that the dispute settlement system is plagued with. The
perception of bias also stems from the idea that ISDS has not taken due account of host state
regulatory interests. Beyond this, the prevailing concerns and challenges of current ISDS border
on inconsistency, unpredictability and uncertainty, non-accountability, perceived unfairness,
unwillingness to use and be bound by outcome of arbitral process, tribunal’s unfettered interpretive
discretion and impartiality, absence of arbitrators’ independence, increasing costs of ISDS, lack of
63
Tienhaara Kyla, ‘Regulatory Chill and the Threat of Arbitration: A View from Political Science’ in Evolution In
Investment Treaty Law and Arbitration, Chester Brown, Kate Miles(eds) (Cambridge University Press, 2011) 608;
Available at SSRN: <https://ssrn.com/abstract=2065706> accessed 20 May 2017.
64
Markert (n.46) 163; See Article 10 Canadian Model BIT 2003 Exception is well illustrated by Article 10 Canadian
Model BIT and obviates the obligation to compensate.
290
appeal mechanism, inadequate standards of review, difficulties in correcting erroneous arbitral
decisions and a host of other reasons.65 It can be argued that abundance of novel legal problems
and of differently worded international investment agreements caused the initial inconsistencies
of the investor state arbitration case law.66 This legitimacy crisis in investor-state arbitration has
also been blamed partially on the vague provisions that make up most IIAs.67With the proliferation
of investment treaties and resultant investment disputes, the state of uncertainty of arbitral awards
remains notwithstanding. Depicting a perception of ISDS, David Gau quoted Tony Landau as
having said that “it’s an area where there is no system of precedent, where the rules are very
vaguely, broadly drafted, where there have been many inconsistent decisions already on the same
issue, and it depends on who the arbitrators (Judges) are …”68
Although publicly available arbitral awards statistics do not support the notion that ISDS is an
investor-friendly or tilted dispute settlement system, the perception of bias which is however very
strong, has triggered significant host states’ actions seeking redress of what is considered as
systemic deficiencies in the regime.69 Appropriate balance of conflicting interests of host states
vis-à-vis foreign investors is in the first place required to correct this perception of bias in favour
of investors. In fact, the problem associated with balancing of conflicting interests is described in
terms of “legitimacy crisis of international investment law”. This balancing requirement according
to Leonhardsen, goes to the root of legitimacy of the investor-state system since negligible
65
Stephan W. Schill, ‘Reforming Investor-State Dispute Settlement (ISDS): Conceptual Framework and Options for
the Way Forward’, A paper produced under The E15 Initiative, Themed: Strengthening the Global Trade and
Investment System for Sustainable Development; Implemented jointly by the International Centre for Trade and
Sustainable Development (ICTSD) and the World Economic Forum’, Available at <http://e15initiative.org/wp-
content/uploads/2015/07/E15-Investment-Schill-FINAL.pdf> accessed 21 July 2017
66
Markert Lars, ‘The Crucial Question of Future Investment Treaties: Balancing Investors’ Rights and Regulatory
Interests of Host States’ in Bungenberg M., Griebel J., Hindelang S. (eds) International Investment Law and EU Law.
European Yearbook of International Economic Law (Springer, Berlin, Heidelberg 2011) 154.
67
Julia Hueckel, ‘Rebalancing Legitimacy and Sovereignty in International Investment Agreements’, (2012) 61
Emory L.J. 601, 610
68
Arbitration Broadcasting Corporation, Background briefing, ISDS: The devil in the trade deal (26 July 2015)
(transcript of 14 September 2014 Broadcast) – in Gaukrodger (n 4) 25.
69
The Investment arbitration statistics available on UNCTAD’s Investment Policy Hub suggest that investment
arbitration outcomes have been more in favour of host States than investors’ favour. 193 arbitrations decided in favour
of State representing 36.6% of Concluded Original Arbitration Proceedings; 142 arbitrations decided in favour of
investor representing 26.9% of Concluded Original Arbitration Proceedings; 13 arbitrations decided in favour of
neither party representing 2.5% of Concluded Original Arbitration Proceedings; 124 arbitrations settled representing
23.5% of Concluded Original Arbitration Proceedings; and 56 arbitrations discontinued representing 10.6% of
Concluded Original Arbitration Proceedings. Investment Policy Hub - Investment Dispute Settlement Navigator
<http://investmentpolicyhub.unctad.org/ISDS> accessed 12 February 2018.
291
attention paid by tribunals in the wake of Argentine 2000 to 2002 economic crisis occasioned a
perceived lack of legitimacy of the regime that culminated in host States’ renunciation of
investment treaty commitments.70 He surmised that “A balancing approach by treaty tribunals
might help mitigate this legitimacy deficit …”71 Markert also shares the same opinion that striking
a balance is necessary and imminent in order to forestall the future weakening or abandonment of
the ISDS.72 With a view to cure perceived imbalance and also retain the maximum amount of
regulatory freedom to enact laws and regulations for its public welfare, host states have majorly
utilized three devices of treaty exceptions, treaty modifications and treaty termination.73 In fact,
certain host States have reacted to what they perceive as imbalance of current ISDS in the
following manners;
 Bolivia denounced the Washington Convention in May 2007;

 Ecuador denounced the Washington Convention in July 2009;
 Venezuela did the same in January 2012. These three countries have expressed the wish to
renegotiate or terminate their investment treaties;
 Argentina has denied direct recognition of ICSID Award;
 Australia excluded arbitration from some of its BIT e.g. with Japan;74
 India Model BIT stipulates an exhaustion of local remedies before submission of dispute to
international tribunal. Leaving Regulatory Space Required to Act in the public interest; and
 Denunciation of bilateral investment treaties by South Africa.75
Apart from Australia, other states that have attempted to extricate themselves from ISDS due to
the fear that it may constrain them from enacting laws on social, environmental and economic
70
Erlend M. Leonhardsen, ‘Looking for Legitimacy: Exploring Proportionality Analysis in Investment Treaty
Arbitration’ Journal of International Dispute Settlement 3(1) (2012) 95-136. See also Benedict Kingsbury and Stephan
Schill, ‘Public Law Concepts to Balance Investors' Rights with State Regulatory Actions in the Public Interest - the
Concept of Proportionality’ in Stephan Schill (ed), International Investment Law And Comparative Public Law (2010
Oxford University Press) 79
71
Ibid.
72
Markert (n. 46) 147.
73
Salacuse Jeswald, The Law of Investment Treaties (Oxford University Press 2010) 340.
74
The 2004 Australia-US BIT conspicuously excluded investor state dispute settlement system hereby confirming the
opinion Australia’s antipathy toward investor state dispute settlement system.
75
South Africa seeks to change its Treaty policy due to perception of lack of balance in its existing Treaties. To South
Africa, international arbitration pose unacceptable (likewise India) high risk curtailing government’s right to regulate
in the public interest.
292
matters in a non-discriminatory manner include the Japan – Philippines EPA. Even for those not
pushing to dispense with ISDS clauses altogether in future investment treaties, the backlash against
the ISDS has resulted in intense debates at the national, regional, and international levels about
ways to reform the dispute system. UNCTAD in 2013, outlined five main reform paths to
include:76
 Promoting alternative dispute resolution;

 Tailoring the existing system through individual IIAs;
 Limiting investor access to ISDS;
 Introducing an appeals facility; and
 Creating a standing international investment court.
One must hasten to add that total extrication from ISDS may be impracticable or not quickly
achieved as a lot of International Investment agreements will remain in force for several years and
it may prove unfeasible to re-negotiate the terms of these International Investment Agreements,
particularly for countries having over 100 subsisting international investment agreements such as
Germany, China, and Switzerland.77 Instead, interpretative rules should be adopted.
Whilst a detailed discussion of the challenges and proposed reforms of the current ISDS system
goes beyond the scope of this paper it is worth mentioning that although there is growing consensus
calling for ISDS reform, there is no agreement on the scope and modalities of, and strategies for
such reform. A prominent reform strategy is EU’s proposal for the replacement of the current
ISDS regime with a two-tier system of adjudication where the appellate tribunal can “uphold,
modify or revise a tribunal Award”. The European Union having characterized the current ISDS
as outdated model, adopted on 12 November 2015, the final text of the proposal to establish the
International Court System with appeal mechanism for the Transatlantic Trade and Investment
76
United Nations Conference on Trade and Development, ‘Reform of Investor-State Dispute Settlement: In Search of
a Roadmap: Updated for the Launching of the World Investment Report (WIR)’ IIA Issue Note 2, 26 June 2013.
Available at <http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d4_en.pdf> accessed 21 July 2017
77
Vid Prislan ‘Non-Investment Obligations in Investment Treaty Arbitration – Towards a Greater Role for States’ in
Freya Baetens (ed), Investment Law within International Law: Integrationist Perspectives (Cambridge University
Press 2013) 477.
293
Partnership (TTIP) dispute resolution. 78 Additionally, EU negotiated the inclusion of its new
approach to investment protection and investment dispute settlement in Canada-EU
Comprehensive Economic and Trade Agreement (CETA). CETA which provides for a two-
layered court system with pre-elected tribunal members contains features of an investment court-
like dispute settlement institution.79 Canada and EU’s CETA represent a scenario clearly different
from and a “drastic departure from a well experimented method of investment dispute settlement.
It is essential to note that there are those who hold the viewpoint that that ISDS has proved “to
work with a reasonably level of efficiency, … striking progressively a balance between the
interests of the disputing parties…” 80 Whilst not disputing that ISDS is fraught with a few
challenges, Piero further argued that the ISDS has inbuilt mechanisms for correcting the concerns
or problems associated with the system and pervading inconsistency of arbitral decisions which is
a major concern, can be reduced or minimized by rigorous definitions of substantive protection
standards which will reduce the margin of disagreement appreciably.
Before the major needed overhauls of the ISDS, arbitral tribunals have a significant role to play in
inspiring general confidence of the stakeholders in the dispute settlement system by weighing
competing interests of host states and foreign investors in their adjudicatory endeavours. Apart
from ensuring appropriate balancing of competing interests, appropriate review of host states’
actions or measures by arbitral tribunals can enhance the legitimacy of investment arbitration.81
2.5 Dealing with Regulatory Chill Dilemma
Directly related to the topic of right to regulate is regulatory chill phenomenon. As earlier stated,
host States’ freedom to enact laws and regulations is an expression of sovereignty widely
acknowledged pursuant to Article 2 (1) and 2 (7) of the UN Charter and other international law
78
European Commission, EU Finalises Proposal for Investment Protection and Court System for TTIP, Available at
http://europa.eu/rapid/press-release_IP-15-6059_en.htm accessed 12 July 2017.
79
CETA Article 8.28.
80
Piero Bernardini, ‘Reforming Investor–State Dispute Settlement: The Need to Balance Both Parties’ Interests’ Vol.
32, No. 1 (2017) 38, 55
81
Valentina Vadi and Lukasz Gruszazynski, ‘Standard of Review in International Investment Law and Arbitration
Multilevel Governance and the Common Weal’ (2013) 16 (3) Journal of International Economic Law 613, 622.
294
instruments. 82 Notwithstanding that host states possess the inherent right to enact legislative
measures in a variety of disciplines; these sovereign rights have been restricted by IIAs
commitments to the extent that ISDS affords investors the opportunity to challenge host states’
right to regulate by instituting arbitration proceedings.83 The possibility of arbitration culminating
in obligation to compensate may lead to Regulatory Chill. In simple terms, the prospect of paying
compensation or defending international arbitration may prevent host state from taking actions or
enacting new regulations. Furthermore, the phenomenon known as “chilling effect” or
“Regulatory Chill” entails a scenario where host state hesitate or are unwilling to legislate or adopt
new measures to satisfy public interest or for the social welfare of the public for fear of being sued
by foreign investors or internationally tagged as an anti-foreign investors government.84
Understood not as a purely legal concept, but more of social and political science than law concept,
Regulatory chill’s definition is not clear or precisely articulated. 85 Although as a concept,
Regulatory Chill has been referred to commonly in the context of investor-state dispute settlement.
The phenomenon presupposes that investment arbitration has potentials to influence the course of
policy development and in the same vein does not suggest or imply complete cessation of new
regulation adoption. Some commentators will favour the broadened connotation of regulatory
chill suggesting that regulatory progress is tempered or dampened across board. Another
conceptualization of regulatory chill which is common entails the chilling or tempering of specific
regulatory measures that have been proposed or adopted by the host state. On the basis that a
definition is not clear, Kyla hypothesized regulatory chill as:
“In some circumstance, government will respond to a high (perceived) threat of investment
arbitration by failing to enact or enforce bona fide regulatory measures (or by modifying measures
82
Article 2 (1) declared that the United Nations is based on the ‘principle of the sovereign equality of all its Members’,
while Article 2 (7) preserves members’ states’ right to non-interference in matters which are essentially within the
domestic jurisdiction of member states. Charter of the United Nations <http://www.un.org/en/sections/un-
charter/chapter-i/index.html> accessed 12 February 2018.
83
Satwik Shekha,’ Regulatory Chill: Taking Right to Regulate for A Spin’ (Research Thesis, Centre for WTO Studies,
Indian Institute of Foreign Trade, New Delhi 2016) 10
84
Marilda (n. 36) 132,133
85
Satwik Shekha,’ Regulatory Chill: Taking Right to Regulate for A Spin’ (Research Thesis, Centre for WTO Studies,
Indian Institute of Foreign Trade, New Delhi 2016) 32.
295
to such extent that their original intent is undermined or their effectiveness is severely
diminished.”86
Apart from the challenge of imprecisely defining regulatory chill phenomenon, regulatory chill’s
effect is also hard to gauge or determine. Indeed, it is difficult to prove that International IIA in
reality cause regulatory chill but there are certain scenarios which convey strong signals that
Regulatory Chill does in actual fact occur as a result of threat of arbitration. Indonesia open-pit
mining case is a typical illustration suggesting that IIA cause Regulatory Chill. In this instance,
Indonesia enacted Forestry Law 1974/41 which prohibited open pit mining in protected forests
contrary to investors’ exploration rights in the protected forests. When Indonesia government
moved to implement the Forestry Law amidst public outcry, foreign investors threatened to resort
to international arbitration. In response, Indonesia enacted a new law reversing the prohibition of
open-pit mining in protected forests and made exceptions to give effect to the commitment
previously granted to foreign investors. Meanwhile, El Salvador faced similar threats as faced by
Indonesia but did not bulge in its commitments not to issue extraction mining permits or change
its policy, notwithstanding immense pressure exerted by mining companies in the Pac Rim case.
At issue in these two cases (ie Indonesia and El Salvador cases) were environmental sensitive
legislation/regulations which negatively affected foreign investors’ investment. The two case
studies are diametrically different in approach, while one government seemingly succumbed to
threats of arbitration thereby giving credence to the notion that regulatory chill phenomenon exist.
In the other country’s scenario, El Salvador resisted immense pressure to amend its policy
notwithstanding the threats of arbitration which eventually turned to real arbitration and
notwithstanding the possibility of loss at arbitration and the resultant compensation payment.
In an attempt at second guessing the rationale behind Indonesia’s strategy, Julia Brown, surmised
that the fear of arbitration combined with other factors led to Indonesia’s change of stance.87 In
agreement with Brown, it does appear that the threat of arbitration played a significant role in
Indonesia’s decision to reverse the prohibition of open-pit mining in protected forests. Considering
86
Kyla (n.41) 610
Julia Brown, ‘International Investment Agreement: Regulatory Chill in the Face of Litigious Heat’ (2013) 3
87
Western Journal of Legal Studies 1, 11
296
that the threat of arbitration is not a threat to be taken lightly. Moreover, it is not out of place for
economically vulnerable host states to loath to face and therefore easily succumb to threat of
international arbitration. Whilst the Indonesia case study more or less confirms the direct effect
of regulatory chill theory, arbitration initiated by Phillip Morris Asia Limited against Australia
over Tobacco Plain Packaging had an indirect chilling effect, not on Australia but on New Zealand
which waited for the outcome of the Phillip Morris v. Australia arbitration before deciding whether
or not to enact similar law on tobacco plain packaging.88
It can be argued that there is a relationship between the notion of regulatory chill and investment
arbitrators’ balancing obligation. For one, with the consciousness that a fair and balanced deal
will be ditched out to both parties, it is expected that host states’ aversion to international
arbitration will lessen thereby curing the supposed regulatory chill dilemma. Thus, by balancing
investors’ interest vis-a-vis host states’ interests, tribunals implicitly prevent regulatory chill
occurrences. Convincing is Brown’s assertion that ‘[W]hen considering what is the best
alternative is in the face of angry, litigious investors with deep pockets, it is a bold and self-assured
government that chooses not to settle and/or amend its laws.’ Although Brown’s statement holds
true, one can add that conviction that a balanced and objective treatment will be meted by
investment arbitration tribunals will imbue in most host states the boldness and self-assurance to
tackle even the angriest, wealthiest and most litigious investor.
3. Reviewing Host States Conducts
3.1 Standard of Review
At the heart of every investment arbitration are host states’ affirmative measures, actions or
inaction which unavoidably are subject to review by arbitral tribunals’ vis-à-vis foreign investors’
claims and investment treaty obligations. Needless to say, that investment arbitrations mostly call
to question the validity or authenticity of host states’ actions or measures taken in pursuit of their
sovereign powers for the general interest of the public. Thus, arbitrators being tasked with the
duty of adjudicating disputes between foreign investors and host States, will necessarily review,
88
Satwik (n.54) 32
297
scrutinize and assess the validity of the “offending” host states’ measures or actions.
Consequently, host states’ measures and actions are subject to varying degrees or levels of review
or scrutiny ranging from deep to cursory review and tribunals are inevitably granted considerable
powers to review host States’ conducts. 89 What standards are deployed in these compulsory
review sessions can either be strict (interventionist) or deferential. 90 With adoption of strict
interventionist Standard of Review, an adjudicator substitutes itself for the primary decision maker
and it undertakes a de novo review of relevant measure and its rationale.91 The adjudicator may
also create an entirely new factual record. Deferential approach on the other hand entails an
exercise of restraint and deference to primary decision maker. This, in a nutshell is what the topical
issue of standard of review seeks to address. On this note, a description of standard of review is
apt. Standard of Review can be described as the level of scrutiny or review of governmental
measure adopted by adjudicators. 92 It can also be described as the criterion by which an
adjudicative entity assesses the validity of a legislative, executive or administrative action.
Standard of Review which is a function of a variety of factors, can either be based on textual
formulation (in a statute or treaty) or by creation of a court or tribunal. Another description of
standard of review is that which relates it to the authority or scope of deference or discretion
accorded to host states by international adjudicators. It may also be deemed as the scope of
interference into host states’ decision making process.93
Despite the varied description of what Standard of Review connotes in international investment
law setting, most of the literatures on this topic have been based on Standard of Review to gauge
host states’ actions or measures to address public interest subject matters such as access to water
health, environment, human right national emergency, state of emergency. There is paucity of
literature concerning applicable Standard of Review of governmental measures taken in the
ordinary course of governance without any obvious public interest or general welfare objective
89
Stefan Schill, ‘Deference in Investment Treaty Arbitration: Re-conceptualizing the Standard of Review through
Comparative Public Law’ SIEL Working Paper No 33/2012, 2.
90
Ibid page 31
91
Ibid page 31
92
Caroline Henckels, Proportionality and Deference in Investor-State Arbitration – Balancing Investment Protection
and Regulatory Autonomy (Cambridge University Press 2015) 199.
93
Srikath Hariharan, ‘Standard of Review and Burden of Proof in WTO Jurisprudence’ (2012) 13.5 The Journal of
World Investment & Trade 795, 797.
298
underpinning same. In the light of the concerns that investment tribunals’ decisions have had an
overly intrusive effect on the regulatory autonomy of host states, it is imperative that tribunals
employ an appropriate standard of review while carrying out their adjudicatory functions.
Unfortunately, a coherent and consensual standard of review is far from established in international
investment law. Meanwhile, without a harmonized Standard of Review, investor – state arbitration
tribunals may not be well or properly guided regarding the level of scrutiny to utilize. Lack of
established standard of review also suggests absence of level playing field. Considering that
treaties generally do not incorporate Standards of Review (except for Antidumping Agreements
under WTO), most international courts and tribunals develop or postulate applicable Standards of
Review. It is noteworthy that the concept of Standard of Review is more developed and comprised
of consistent approach in international trade law as compared with international investment law.94
According to Valentine and Lukasz, reasons why there is no established Standard of Review under
international investment law include:
i. Generally, investment treaties are short and concise;

ii. Investment arbitration boom is relatively recent and therefore represents a novel jurisprudence;
iii. Arbitral composition on ad hoc basis and lack of precedence leading to possible fragmentation
results in different tribunals adopting varied Standards of Review; and
iv. Diverse and multifarious characters of stakeholders making up the investment arbitral community
eg arbitrators with varied legal backgrounds, adjudicative expertise and experience.
As the issue of Standard of Review touches on legitimacy concerns pertaining to international

investment law, to bring about objectivity of the investor state dispute settlement system and in
the same vein limit the adjudicative discretion of international arbitrators, the right type of
Standard of Review should be adopted. There is therefore an imperative to develop a defined
Standard of Review specifically for review of host states’ measures under international investment
law. Meanwhile, due to the absence of specific treaty–stipulated Standard of Review, there is
increasing number of literature on Standard of Review from other national and international legal
systems being adapted into investment law. Both European Court of Human Rights & WTO
system have developed Standards of Review. ECtHR applies Margin of Appreciation, while WTO
94
Valentine and Lukasz page 615.
299
Appellant Body rely mostly on Least Restrictive Means and proportionality analysis to determine
the lawfulness of host states’ actions which impact on foreign investors’ business. To the extent
that certain minimum treatment standards are expected of host States under these three
international Law regimes, jurisprudence from these Courts and tribunals can provide useful
guidance to investment tribunals in the development of standardized balancing technique that will
deliver a fair and balanced outcome for both foreign investors and Host States.95 Nonetheless, a
cogent question that continues to beg an answer is, do these borrowed or transplanted approaches
adapt very well in investment arbitration setting? This of course is an open question but some
commentators have shared their thoughts on this issue. For instance Henckels subscribes to the
viewpoint that review doctrines from other international law regimes can be transplanted into
international investment law system because amongst other reasons, investor – State tribunals,
WTO tribunals and ECtHR deal with similar institutional limitations such as lack of embeddedness
in the relevant polity, weak evidence gathering capacities and democracy legitimacy issues.96 She
however cautioned that importing balancing techniques or approaches from different legal regime
such as WTO should take in consideration fundamental differences in the two legal systems. For
instance, WTO entails a State to State Dispute Settlement Mechanism which are fewer than
Investor – State dispute System. More importantly, WTO claims result in withdrawal of a WTO
inconsistent measure as opposed to payment of money damages or compensation in investor-state
arbitration.97 In the same vein, Valentine and Lukasz while indicating their preference for adapting
WTO approaches, have canvassed the following as the logic for borrowing from WTO
adjudicatory system:
i. International Investment Law and WTO are constituent of the same branch of international law
i.e. international economic law;
95
and Regulatory Autonomy (Cambridge University Press 2015) 200. See also Federico Ortino, ‘Investment Treaties,
Sustainable Development and Reasonableness Review: A Case Against Strict Proportionality Balancing’ (2017) 30
Leiden Journal of International Law 71, 74. Noting that many commentators have pointed to proportionality analysis
as a mechanism to (re)balance the need for foreign investment protection vis-à-vis the need to guarantee host state’s
right to regulate in the public interest.
96
Caroline Henckels, Proportionality and Deference 13.
97
300
ii. ISDS tribunals and WTO panels are typically vested with the task of assessing national regulatory
measures;
iii. WTO and international investment law are inter-linked. This interrelationship is evident in the fact
that some aspects of WTO agreements are governed by international investment law;
iv. WTO’s jurisprudence on Standard of Review is very well developed and advanced, thereby
offering a prolific practical reference for analysis and comparison.98
In support of Valentine and Lukasz approach is Vid Prislan argument that there are a number of
avenues permitting Investment tribunals to consider and apply non-investment obligations of host
State in the determination of investor-State disputes. He further asserted that investment tribunals
enjoy some latitude with regards to the scope of legal rules they are entitled to apply. Notable
amongst the mechanisms granting tribunals such latitude is Article 31(3) (c)99 of the VCLT which
allows for systematic integration – “a means of harmonizing the disparage and ever fragmenting
field of international law”. He sees it as a form of codification of Customary International Law
which has capacity to promote coherence between investment and non-investment obligations in
investment treaty arbitration.100
William Burke-White and Andreas von Staden suggest that development of standards of review
grounded in public law can imbue ISDS with new legitimacy which is presently at stake.101 To
them, public law approaches provide more space for balancing of divergent interests of investors
versus host states.102 Contending that there exist a range of standards of review in public law arena
that can be adapted as model towards the development of a coherent jurisprudential approach to
standard of review under ISDS, Burke-White and Staden identified (i) WTO Least Restrictive
Alternative Test, (ii) Margin of Appreciation and (iii) Good Faith Review as adoptable standards
because they deal with implications of public-law-type disputes. 103 Burke-White and Staden
98
Valentina Vadi and Lukasz Gruszazynski – Standard of Review in International Investment Law and Arbitration
Multilevel Governance and the Common Weal page 617.
99
Prislan (n 75) 466. Recourse to other rules of International Law for Treaty interpretation.
100
Prislan (n 75) 466.
101
William Burke White and Andreas von Staden, ‘The Need for Public Law Standards of Review in Investor-State
Arbitrations’ (Oxford University Press 2010) 698.
102
William Burke White and Andreas von Staden, page 699.
103
William Burke White and Andreas von Staden, page 699.
301
contend that good faith principle can serve as a standard for reviewing host states measures and
consequently balancing irreconcilable interests.104
A divergent opinion on the topic of importing or transplanting principles and concepts from other
legal systems, is that of the tribunal in Pezold V. Zimbabwe which opined that due caution should
be applied in importing concepts from other legal regimes without a solid basis for doing so. The
tribunal further contended that although the Margin of Appreciation doctrine is well entrenched in
human rights adjudicatory system, there is little evidence to support that this doctrine has found
support in international investment law. 105 The tribunal’s comments were made to address
Zimbabwe’s arguments that it should be given a wide margin in the determination of what
constitutes public interest; in other words, the tribunals, comments were made in response to the
host states attempt to transplant the margin of appreciation doctrine. To the tribunal, the
circumstance under which the margin of appreciation is deployed is different from that presented
by the case. Zimbabwe’s arguments relating to margin of appreciation were consequently
dismissed.106
Regardless of the arguments for and against the diffusion of theories and concepts from other
international and national legal systems into international investment law space, the fact is to
provide balanced protection for both foreign investors and host States, tribunals must rely on
standards of review in weighing these competing interests. Due to exigency dictates, public law
concepts have been used to address the tension between investment protection and regulatory
rights of host States. Crucial to the current discourse is the concept of deference which is a
standard of review well developed and operative in the WTO dispute settlement system. Deference
has been regarded as an applicable standard of review under international investment law, although
tribunals attribute different meanings to it and the conceptual foundations of its application remain
unclear. 107 Deference entails exercise of restraint by an adjudicator where the adjudicator’s
104
William Burke-White and Staden page 706.
105
Bernhard von Pezold and Others v. Republic of Zimbabwe, ICSID Case No. ARB/10/15 Award 28 July 2015 Paras
465 - 466.
106
Bernhard von Pezold and Others v. Republic of Zimbabwe, ICSID Case No. ARB/10/15 Award 28 July 2015 Paras
467-8.
107
Stephan W. Schill, ‘Deference in Investment Treaty Arbitration: Re-conceptualizing the Standard of Review’
(2012) 3(3) Journal of International Dispute Settlement 577, 580.
302
judgment and that of the primary decision maker do not align. In this sense, the adjudicator, accepts
to rely on the judgment or opinion of another to concertize its own assessment. In other words,
more or less deferring to the superior knowledge and expertise of the decision-maker. The degree
of deference to accord is another ball game, as it can be absolute or partial.108 Different approaches
have been adopted by arbitral tribunals ranging from low degree of deference to high degree of
deference. Factors guiding decision on level of scrutiny to apply are numerous including (i) Nature
of rights at issue, (ii) The purpose of host states measure, and (iii) Relative expertise of primary
decision – maker and reviewing adjudicator. Meanwhile, underpinning the notion of deference is
the idea that adjudicators should not assume the role of law makers basically because decisions
about what is in the public interest are primarily political decisions outside the purview or area of
the competence of adjudicators. While a detailed discussion of Deference would go beyond the
scope of this study, a succinct note is required to enable proper conceptualization of deference as
a standard of review under international investment law and also to appreciate it relevance in
balancing of conflicting interests.
Between De Novo and Complete Deference
Protection of host state domestic policy space against control by international law and international
tribunal is the underlying purpose of the principle of deference under international dispute
settlement system.109 A distinction has been drawn between host State’s right to regulate and
deference to host state based on arbitral tribunal’s discretion. Deference in this regard being
tribunal’s preference to defer to host state’s policy decisions taking in derogation of international
obligations.110 Deference is conditional or subject to the discretion of the arbitrator to grant host
state its policy state whereas a right to regulate is a concrete legal right of entitlement to act. 111
Tribunals’ adoption of deferential approach is to some extent an acknowledgement of host states’
institutional competence and expertise and recognition of the fact that national authorities are
better positioned to determine their public interests. Although according Host States a high level
108
109
Stephan Schill – Deference in Investment Law p.583.
110
AikateriniTiti (n 48) Page 40.
111
AikateriniTiti (n 48) Page 40.
303
of deference has potentials to undermine investor protection, deference has been relied on to
reinforce host states’ desirability of regulatory autonomy and to shield their regulatory actions
from tribunal scrutiny.112
The degree of deference that an international adjudicator grants to national decision makers ranges
between Total deference and De Novo deference. Total or complete deference entails decision
makers’ determination not been questioned while arbitral review focuses on procedural
compliance. 113 De novo review on the other hand, contemplates a new or re-trial entailing
reprocessing and revaluation of evidence. In another sense, the reviewer adopts the role and
function of de facto decision maker. Controversial is the idea that any level of Deference should
be accorded to host States’ at all to the extent it negates a fundamental principle of International
arbitration that is, Equality of parties. 114 The doctrine of subsidiarity is another rationale for
affording deference to Host States. This concept considers Host States being better positioned and
more equipped to determine the line between a qualified right and its exceptions.115
The Standard of Review specified in Anti-Dumping Agreement within WTO adjudicatory

framework contemplates a deferential approach requiring procedural review and not substantive
review of factual determination made during the domestic or national Anti-dumping proceeding.
The Appellate body in EC hormones identified Article 11 of the Understanding on Rules
&Procedure Governing the Settlement of Dispute as laying down the Standard of Review for the
entire WTO system.116 Article 11 Rule requires panels to undertake an objective assessment of the
facts. Consequently, WTO Panels have exercised either de novo or total deference in reviewing
contracting parties’ measures. In the context of international trade law, a totally deferential
approach has been argued will invest enormous power in the state to interfere with or impact global
112
Thomas Waelde, ‘Interpreting Investment Treaties: Experiences and Examples in Christina Binder and Christoph
Schreuer (eds), International Investment Law for the 21 st Century – Essays in Honour of Christoph Schreuer (Oxford
University Press 2009) 724, 732. See also Caroline Henckels, ‘Balancing Investment Protection and the Public
Interest: The Role of the Standard of Review and the Importance of Deference in Investor-State Arbitration’ (2013)
4(1) Journal of International Dispute Settlement 197, 198.
113
Valentine and Lukasz p.622
114
Julian Arato, ‘The Margin of Appreciation in International Investment Law’ (2014) 54: 1. Virginia Journal of
International Law 555.
115
Arato (n 113) 567.
116
Understanding on Rules and Procedures Governing the Settlement of Disputes, Annex 2 of the WTO Agreement.
304
trade.117 If analogously applied to investment law setting, one can equally argue that a totally
deferential approach will permit host states’ interference with foreign investors’ investments. In
fact, complete or total deference renders investment treaty guarantees and protections almost
unless and redundant.
On the other divide is De Novo deference approach which has also received its fair share of
criticism. The Chemtura and Glamis Gold tribunals while exercising restraint from undertaking
review of host states conducts indicated unwillingness to second-guess the correctness of the
science based decision making of highly specialized national regulatory agencies or supplant their
own judgment of underlying factual material and support for that of qualified domestic agency. It
can be observed that there is recognition of the expertise, competence and qualification of these
domestic or national regulatory agencies to make the necessary informed and often time’s
specialized decision.118 The point that arbitral panels are devoid of the mandate to second-guess
government decision making was also reiterated by the S.D. Myers v. Canada tribunal. 119 The
Gemplus, S.A v. Mexico Tribunal quoting S.D. Myers tribunal ruling agreed that it was not meant
to not exercise “an open-ended mandate to second-guess government decision-making” and
therefore accorded Mexico a ‘generous measure of appreciation’. 120 Similarly, the Achmea v.
Slovak Republic II tribunal adopted a fully deferential approach in its determination of the
investor-claimant’s expropriation claims. The tribunal affirmed that it lacked the capacity or
mandate to intervene in the democratic process of a sovereign State, while the design and
implementation of its public healthcare policy was exclusively with the purview of the host State
to assess. The Tribunal added that the host State must balance the different and sometimes
competing interests of host states and foreign investors.121 To S.D. Myers v. Canada, Achmea v.
Slovak Republic and like-minded tribunals, De novo deference approach connotes overly intrusive
117
Srikanth Hariharan ‘Standard of Review and Burden of Proof in WTO Jurisprudence’ (2012) 13.5 The Journal of
World Investment & Trade 795, 798.
118
Chemtura Corporation v. Government of Canada, UNCITRAL Award 02 August 2010 Para 134 and Glamis Gold,
Ltd. v. The United States of America, UNCITRAL Award 08 June 2009 Para 799.
119
S.D. Myers, Inc. v. Government of Canada, UNCITRAL Partial Award 13 November 2000 Para 261. See also
Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability 14 January
2010 Para 283.
120
Gemplus, S.A., SLP, S.A. and Gemplus Industrial, S.A. de C.V. v. United Mexican States, ICSID Case No.
ARB(AF)/04/3 & ARB(AF)/04/4, Award, 16 June 2010 Para 6.26.
121
Achmea B.V. v. Slovak Republic [II], PCA Case No. 2013-12, Award on Jurisdiction and Admissibility, 20 May
2014 Para 250-1.
305
interpretation and application of treaty standards and thereby questioning the legitimacy of host
States’ conducts. It also discountenances the obviously limited competence of international
tribunals to review complex factual determination made by domestic decision makers.122
Be that as it may, there is the school of thought propounding the notion that treaty standards already
provide appropriate level of deference. For instance, Glamis Gold tribunal found that “the standard
of deference to already be present in the standard as stated rather than being additive to that
standard”.123 This in other words means that treaty standards’ textual formulations inherently
provide sufficient guidance to arbitrator for according some degree of deference to host states’
right to regulate with the principal aim of addressing some legitimate public interest. Similar to
Glamis Gold and Chemtura tribunals’ viewpoint on deference being inherent in treaty standards,
Rahim and Justin argue that it is unnecessary and inappropriate for tribunals to adopt an additional
deferential Standard of Review as a general matter (ie. To govern the overall application of treaty).
Their argument is based on the belief that treaty standards “all contain aspects and terms which
involve principles requiring the weighing of different interest…” They postulate further that since
host state have not substantially abridged their ability to engage in bona fide regulatory conduct,
additional deference is therefore not required to give effect to or respect host states’ sovereign right
to regulate in the public interest. They however conceded that protection from indirect
expropriation is an exception capable of creating a conflict between two competing interests. To
them, indirect expropriation’s defect is easily cured as proportionality standard is innately built in.
Whilst arbitral tribunals are not supposed to undertake de novo review of government decision,
they should also not be deterred from scrutinizing host states regulatory measures vis-à-vis
obligations undertaken under investment treaties. They should not simply accept national
regulators’ decision as final but should objectively assess compliance with international law
obligations. Consequently, adoption of a “qualified standard or review” is the preferred approach.
In this wise, tribunals should accord host state measures due deference with regards to its public
policy interests and also examine the reasonability of the measures in relation to their goals and
122
Caroline Henckels, ‘Balancing Investment Protection and the Public Interest: The Role of the Standard of Review
and the Importance of Deference in Investor-State Arbitration’ (2013) 4(1) Journal of International Dispute Settlement
197, 203.
123
Glamis Gold, Ltd. v. The United States of America, UNCITRAL, Award 08 June 2009 Para 617.
306
the deprivation of economic right occasioned as a result of the measures. Tribunals should be
satisfied that regulations are to achieve legitimate public goals and due process was followed.
What is genuinely “public interest” as the state can always assert public interest for all the measures
it takes. As rightly noted by ADC tribunals ‘If mere reference to “public interest” can magically
put such interest in existence and therefore satisfy this requirement, then such requirement would
be rendered meaningless since the Tribunal can imagine no solution where this requirement would
not have been met.’124 One should be wary of misconstruing “acts of protectionism and foreign
investors maltreat or mistreatment camouflage in much more palatable clothes of sacred
environmental causes. 125 To limit the subjectivism associated with host state assessing their
measures and deeming them public interest measures, Attila Tanzi advocates evaluation on a case
by case basis against the yardstick of legal framework provided by the international human rights
obligation.126
In conclusion, Standard of Review should strike a reasonable balance between host states’
regulatory autonomy and foreign investment protection. The balance can be achieved by middle
level approach to deference – neither complete nor de novo.127 Standard of Review adopted should
be neither too lenient nor be too strict or else the purpose of achieving an appropriate balance of
right and obligation will be defeated. One cannot but subscribe to Caroline’s opinion that
‘Intrusive Standards of Review adopted by international adjudications not only give more power
to adjudicators, but also give greater authority to international over domestic governance.’ 128
Equating deference to judicial restraint, Anthea expressed that the concept of deference has direct
impact on the balance of governance powers between States and tribunals as the greater the degree
of deference, the more latitude States retain to exercise their governance roles. 129 Given that the
124
ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary, ICSID Case No.
ARB/03/16, Award 02 October 2006 Para 432.
125
Thomas Walde and Kolo, Environmental Regulation Investment Protection Regulatory Taking. page 820.
126
Attila Tanzi, ‘On Balancing Foreign Investment Interests with Public Interests in Recent Arbitration Case Law in
the Public Utilities Sector’ (2012) 11 The Law and Practice of International Courts and Tribunals 50 and 51.
127
Valentine and Lukasz, P.623
128
Caroline Henckel, ‘Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the
Standard of Review in Investor-State Arbitration: Revisiting Proportionality Analysis in Investor-State Arbitration’ J
Int Economic Law (2012) 15 (1) 199.
129
Anthea Roberts, ‘The Next Battleground: Standards of Review in Investment Treaty Arbitration’ (2011) 16
International Council for Commercial Arbitration Congress Series 170. <https://ssrn.com/abstract=2186208>
accessed 12 July 2017.
307
legitimacy crisis currently besetting ISDS has to a considerable extent been fuelled by failure of
some arbitral tribunals to recognize the public nature of investment treaty arbitration and accord
host States a sufficient space for maneuver, within which their measures are exempt from fully
fledged review, more attention needs to be paid to standards of review to enable the calibration of
the balance of governance powers between hots States and tribunals.130
3.1.2 An Acceptable or Inacceptable Margin
As earlier asserted, Investment Treaties are typically silent on the appropriate Standard of Review
necessary to determine liability in Investor – State arbitrations. It is therefore necessary to develop
a unified approach of review due to innumerable ways Tribunals have dealt with the lacuna in
investment Treaties. Apart from the general concept of deference as outlined above, different
arbitral panels have relied on diverse standards of review drawn from international and national
orders or regimes ranging from standards which entail minimum review or analysis of impugned
or challenged Host States’ actions or conducts to those that contemplate a de dovo interventionist
review of challenged measures. The Margin of Appreciation doctrine a judge – made doctrine of
deference131 popularly known as a creation of ECtHR,132 is one of such standards extrapolated
from another international law regime. Margin of Appreciation derives from the French term
“marge d’appréciation” which literally translated means “margin of
assessment/appraisal/estimation”. 133 Margin of Appreciation connotes States ‘entitlement to
certain “space for manoeuvre” within which its measures are excluded from full-fledged review.134
130
Anthea Roberts, ‘The Next Battleground: Standards of Review in Investment Treaty Arbitration’ (2011) 16
International Council for Commercial Arbitration Congress Series 170. <https://ssrn.com/abstract=2186208>
accessed 12 July 2017.
131 Arato
(n 111) 547.
132
It seems that the first international tribunal to have recourse to the margin of appreciation in its jurisprudence is the
European Court of Human Rights. The Margin of Appreciation doctrine was first used by the Commission in cases
involving derogations by governments, in terms of Article 15. In the Greece v. UK case the Commission, in relation
to an emergency arising on the island of Cyprus, noted that the UK authorities ‘should be able to exercise a certain
measure of discretion in assessing the extent strictly required by the exigencies of the situation’.
133
Steven Greer, The Margin of Appreciation: Interpretation and Discretion under the European Convention on
Human Rights (2000) 5.
134 Arato
(n 111) 550.
308
Margin of Appreciation has been said to embody ‘two principles: judicial deference, meaning that
international tribunals should exercise a certain degree of judicial restraint when evaluating the
actions of national authorities, giving some deference to their decisions rather than undertaking
full, de novo evaluations; and normative flexibility, meaning that some international norms are
sufficiently open-ended or uncertain that they can be met in a variety of ways, giving States a
certain “zone of legality” in which they are free to act.’.135
The Margin of Appreciation doctrine as established by the European Court of Human Rights
(ECtHR)136 case law, creates opportunities for balancing the common good of society against the
interests of the individual. The principle which finds expression in European Convention of
Human Rights Articles 8 – 11 Limitation or Saving Clauses, 137 assumes that for appropriate
application of the Convention, State authorities are better positioned ‘to give an opinion on the
exact content as well as on the ‘necessity’ of a restriction or penalty.’138 Underpinning the doctrine
of Margin of Appreciation under ECtHR is the principle of subsidiarity, which in effect assumes
that ECtHR offers a supplementary and subsidiary protection to that offered by contracting parties
at their respective national levels. Thus, the machinery of protection provided by ECtHR will
typically only be triggered through contentious proceedings or upon exhaustion of domestic
remedies.139 It is a function of showing proper respect for the objectives pursued by the contracting
state. The rationale driving the adoption of Margin of Appreciation doctrine is the idea that
national decision makers are in principle better placed to make relevant decisions due to the
proximity and continuous contact with the vital forces of their nations. By operation of the Margin
135
Anthea Roberts, ‘The Next Battleground: Standards of Review in Investment Treaty Arbitration’ 16 International
Council for Commercial Arbitration Congress Series 170 (2011), p. 175.
136
European Convention on Human Rights (ECHR) is an international treaty drafted in 1950 to protect human rights
and fundamental freedoms in European Countries. The Convention which entered into force on 03 September 1953
established the European Court of Human Rights (ECtHR), a Court that enforces the Convention. ECtHR is charged
with the responsibility of resolving human rights dispute between private individuals and 47 State parties to the
Convention. Over 100,000 cases have been lodged and the number is increasing. Council of Europe Press Division,
Fact Sheet, available online. European Convention for the Protection of Human Rights and Fundamental Freedom.
137
Articles 8, 9, 10 and 11 which make provision for various rights including right to respect for private and family
life, all have incorporated in their paragraph 2, a limitation or exception which permits Member States’ interference
with stated rights. For instance, Article 8 provides ‘There shall be no interference by a public authority with the
exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the
interests of national security, public safety or the economic well-being of the country, for the prevention of disorder
or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others.’
138
Handyside v. United Kingdom, Judgement of 7 December 1976, Series A No.24 (1979-80) 1 EHRR 737 para.48
139
Murat Tumay, The European Convention on Human Rights: Restricting Rights in a Democratic Society with
Special Reference to Turkish Political Party Cases, (PhD Thesis University of Leicester 2006) 73-4.
309
of Appreciation doctrine under ECtHR, Members states are accorded the latitude to make initial
assessment of what they consider necessary in their society. The determination of the applicable
margin to grant, depends on diverse factors including the specific right in issue, purpose of the
measure adopted and degree of interference with rights.140
In investor-state arbitration setting, Respondent – States’ reliance on Margin of Appreciation

doctrine with direct reference to ECtHR case law has been seen in recent times increasingly. This
in essence, is simply recourse to ECtHR’s jurisprudence to find authority for deferential review of
host States’ conducts and to argue for entitlement to some degree of deference in principle.
“Judicial Borrowing” according to Julian Arato is possible because both ECtHR & Investment
Law regimes offer private individuals cause of action against sovereign states. Julian Arato
however questions the propriety of adoption of the Margin of Appreciation concept in the context
of ad hoc arbitration system like ISDS as the doctrine tends to obscure the reasoning of Arbitrators.
To Julian, key difference between ECtHR system and ISDS is responsible for the margin’s success
on the part of ECtHR and counter–productivity on the part of international investment Law.141 On
the appropriateness of exporting ECtHR concept of Margin of Appreciation, Gary Bonn who
delivered a concurring and dissenting opinion in Philip Morris’ case criticized the doctrine for
presupposing an “all – purpose principle of Deference” in favour of Host States142 Also criticizing
the Margin of Appreciation doctrine is another renowned scholar in the subject of international
investment law, Alvarez, who asserted that the jurisprudential basis of Margin of Appreciation is
regime specific, perform specific functions that are specific and peculiar to ECtHR, therefore
unsuited for export into ISDS space. 143 In further criticizing the concept of Margin of
140
141
Arato, (n 111) 550. To Julian Arato, the ad hoc nature of Investment arbitration tribunals as opposed to the standing court style of the ECtHR is one of the key
differences impacting the success of the margin of appreciation doctrine. He contends
that margin of appreciation poorly fits International Investment regime – unstable and
unsuitable in the context of ad hoc dispute settlement system like investor – State Arbitration.
142
According to Gary Born the “Margin of Appreciation” which is a specific legal rule, developed and applied in a
particular context, cannot properly be transplanted to the BIT (or to questions of fair and equitable treatment more
generally) and neither mandated or permitted by the BIT or applicable international law. He also contended there
exist ‘well-considered legal rules, already applicable to questions of fair and equitable treatment, which serve similar
purposes to those of the “margin of appreciation,” but in a more nuanced and balanced manner.’ 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, Concurring and Dissenting Opinion Mr. Gary Born 08 July 2016 Para 87.
143
The use (and misuse) of European Human Rights Law in Investor – State Dispute Settlement. – Jose E. Alvarez p.
66.
310
Appreciation, Julian argues that the Margin of Appreciation concept does not entail any standard
or specific test and is therefore contentless.144 This scepticism is though cured with the argument
that Margin of Appreciation as practised by ECtHR is not an independent standard as same works
hand in hand with proportionality analysis to fine-tune the necessity and proportionality stricto
sensu phases on a case by case basis.145
Explaining that the term Margin of Appreciation has been variously described in the domestic legal
setting of the United Kingdom as ‘‘margin of discretion,’’ ‘‘discretionary area of judgement,’’ or
‘‘judicial deference’’, Julian Rivers opined that it is generally accepted that judicial deference,
which he considers as another name for Margin of Appreciation, plays a part in testing for
proportionality. What part in precise terms the Margin of Appreciation plays, is not defined and
will largely depend on the intensity of review approach adopted by an adjudicator. 146
Propounding the idea of variable intensity of review within Proportionality, Rivers submitted that
apposite intensity of review should be set by the seriousness of the rights-infringement in each
case such that the seriousness of any rights-infringement is to be matched by corresponding degree
of review. For instance, where the limitation of rights is substantial, the right is important and the
gain to the public interest is equally also substantial, the review will also be more intense.147
Criticised as affording too much deference to Respondent State148 it nonetheless provides greater
scope for host States to regulate and grants National agencies greater leeway to deal with public
health matters.149 This perhaps is the rationale for its adoption and/or invocation in the following
investor-state arbitration cases:
i. Continental casualty v. Argentina –Award

ii. Frontier Petroleum v. Czech Republic – Award
144
Arato (n 111) 558.
145
Andreas Kulick, Global Public Interest in International Investment Law (Cambridge University Press 2012) 194.
146
Julian Rivers, ‘Proportionality and Variable Intensity of Review’ (2006) 65(1) Cambridge Law Journal 176
147
Julian Rivers, ‘Proportionality and Variable Intensity of Review’ (2006) 65(1) Cambridge Law Journal 177 and
207.
148
Jose E Alvarez, ‘The Use (and Misuse) of European Human Rights Law in Investor – State Dispute Settlement’ in
Franco Ferrari (ed.), The Impact of EU Law on International Commercial Arbitration (Juris 2017)
<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2875089> 69 accessed 29 November 2017.
149
Quotation on Margin of Appreciation Uruguay paras 398 – 9. Award of July 8, 2016.
311
iii. Electrabel v. Hungary – Decision on liability.
iv. Saluka investment v. Czech (2006)
v. Micula v. Romania (2008) – Decision on jurisdiction.
These Tribunals have employed the Margin of Appreciation doctrine either upon invocation of
Respondent-State or on their own initiative or volition in assessing States conduct. 150 The
Tribunals in these cases held that the Host States’ were entitled to margin of appreciation
necessitating adoption of deferential approach with respect to certain Host States’ measures. In
particular, the tribunal in Micula v. Romania granted a Margin of appreciation to a non-party State
(Sweden) in the determination of the Claimant’s foreign national claim. In this instance, the
Tribunal adopted a highly deferential approach in determining or assessing Sweden’s grant of
Nationality to the Claimant as Sweden’s reasoning was neither questioned nor deeply reviewed.151
Similarly, in Philips Morris v. Uruguay the tribunal granted Uruguay a considerable margin of
appreciation in the determination of investor-claimant’s claim challenging Uruguay’s tobacco
control measures. In response, Uruguay argued that said measures and regulations were in tandem
with its other international obligations e.g. Framework Convention on Tobacco Control (FCTC).
Uruguay measures were deemed a valid exercise of States police powers.
Meanwhile, there has been no consistent approach to tribunals’ consideration of Respondent –

States’ reliance on Margin of Appreciation. For instance, contrary to the adoption and intrinsic
endorsement of the doctrine by both the Micula v. Romania and Philip Morris v. Uruguay
tribunals, the Siemens v. Argentina tribunal opined that the doctrine is not found in customary
150
Reliance by host State – Continental Casualty Company v. The Argentine Republic, ICSID Case No. ARB/03/9
Award 05 September 2008 Para 181; Upon Tribunals’ initiative (Sua- Sponte) – Deciding that it was unnecessary to
determine if the Czech court’s finding is consistent with applicable standard of international public policy, the Frontier
Tribunal opined that ‘States enjoy a certain margin of appreciation in determining what their own conception of
international public policy is.’ Frontier Petroleum Services Ltd. v. The Czech Republic, UNCITRAL, Final Award
12 November 2012 Para 527. The Tribunal stated that Hungary was entitled to a modest margin of appreciation in
arriving at its own discretionary decision on whether or not to challenge the European Commission’s Final Decision
on State Aid. Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Award 25 November 2015 Para
6.92.
151
Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania,
ICSID Case No. ARB/05/20, Decision on Jurisdiction and Admissibility 28 September 2008 Para 94.
312
International law. 152 In addition, the Biwater v. Tanzania Tribunal did not make any finding on
Tanzania’s invocation of Margin of Appreciation doctrine 153
As put succinctly by the ECtHR154 in Buckley v. United Kingdom, a decision on whether to give
a wider or narrow margin is dependent on “relevant factors including the nature of the Convention
right in issue, its importance for the individual and the nature of the activities concerned.”155 A
crucial question is how much deference is appropriate? The question will forever remain open if
there is no established or unified standard of review adopted by investor-state arbitrators.
3.4 Achieving the Desired Balance with Proportionality Analysis
Investor state tribunals required to decide if host States have violated substantive protections of
international investment agreements, are meant to undertake objective assessments of the rights
vis-a-vis obligations of host States and foreign investors respectively. The need to find a proper
balance between the protection of foreign investors’ rights and the rights of host States to bona
fide exercise of their police power to regulate, has occasioned the diffusion of the Proportionality
Analysis from other international and domestic legal regimes. Apart from Article 31 (3)(c) of
VCLT which permits said diffusion of Proportionality Analysis from other international law orders
into international investment law sphere, Article 42 (1) Second Sentence ICSID Convention which
allows Tribunals’ application of such ‘rules of international law as may be applicable’ in the
absence of an agreement between contracting parties on the applicable rules of law, has been
argued as paving the way for adoption of Proportionality Analysis by investment arbitration
tribunals. 156 Ingress of Proportionality Analysis with reference to Article 42 (1) ICSID
152
Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Award 17 January 2007 Para 354.
153
Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award 24 July 2008
Paras 434 – 436.
154 ECtHR is charged with the responsibility of resolving human rights dispute between private individuals and 47
State parties to the Convention. Over 100,000 cases have been lodged and the number is increasing. Council of Europe
Press Division, Fact Sheet, available online. European Convention for the Protection of Human Rights and
Fundamental Freedom.
155
Buckley v. United Kingdom, European Court of Human Rights, Judgment of 25 September 1996, 1996-I Eur. Ct.
HR, Para 74.
156
Notably, wordings similar to that of Article 42 (1) are contained in most investment treaties, therefore, non-ICSID
tribunals where the relevant treaty adopts wordings similar in effect to that of Article 42 (1), can also apply
proportionality analysis by drawing on jurisprudence from other international legal systems.
313
Convention however presupposes that ‘Proportionality Analysis’ has been established as a general
principle of international law.
With its German administrative and constitutional law origins, Proportionality Analysis, as an
adjudicative technique for managing disputes between rights involving an alleged conflict between
two rights claims, is a common feature of international dispute settlement mechanisms, especially
of the European legal order. Being an interpretative tool for reconciling conflicting interests,
Proportionality Analysis entails striking a proportionate balance between the means employed and
the aim pursued.157 Proportionality Analysis also involves the deployment of the least interfering
measure to secure the legitimate aim of the measure. 158 In simple terms, the main essence of
Proportionality Analysis is centred on the opinion that governments’ measures must be
proportionate to the aim or objective to be achieved. Proportionality which is now employed as a
method of review 159 and balancing tool in a variety of contexts and in diverse areas of law
including human rights, armed conflict, maritime determination, international trade law,
international investment law and self-defence, is basically used to determine the justification for
interference with a right or interest.160
157
Yutaka Arai-Takahashi, The Margin of Appreciation Doctrine and the Principle of Proportionality in the
Jurisprudence of the ECHR (Intersentia 2002) 14.
158
Tumay (n 136) 73.
159
There is a tendency amongst scholars and tribunals to conflate the concept of standard of review with that of method
of review. Whereas, the concepts of Deference and Margin of Appreciation can be regarded as ‘Standards of Review’
which signifies the level of scrutiny or depth of review of host States measures. Proportionality on the other hand, is
a method or style of review comprising of three/four structured phases. At some point in the course of Proportionality
Analysis, an adjudicator will have to adopt a standard of review to carry out the analysis. For instance, in the course
of assessing the suitability or necessity of governmental measures, governments may be accorded a wide or narrow
margin of appreciation or adjudicators may choose to fully or partially defer to government’s determination or
interpretation.
160
and Regulatory Autonomy (Cambridge University Press 2015) 23 and 24.
314
At the international level, Proportionality features as an integral part of jurisprudence of ICJ,161
ECJ, 162 ECtHR, and WTO.163 Public International Law application of Proportionality Analysis
has been employed to limit both the means and scope of countermeasure in reaction to a state’s
breach of international obligation by another state. Under the WTO dispute settlement systems
what is obtainable is strands of proportionality doctrine (e.g. “necessity” and “least trade
restrictive”) being applied or incorporated by reference to balance and weigh competing interests
rather than explicit reference to the doctrine. Article XX General Agreement on Tariffs and Trade
(GATT) and Article XIV General Agreement on Trade in Services (GATS) relating to general
exceptions for public policy and security purposes are one of those provisions permitting the
deployment of Proportionality doctrine under WTO dispute settlement system. Steven Greer noted
that the principle of Proportionality which had a pervasive influence throughout the ECtHR case-
law despite not being mentioned in the ECHR at all, is undeniably ‘an entirely legitimate judicial
creation.’164 He argued that proportionality in principle, limits the scope for national discretion
pursuant to the Margin of Appreciation doctrine, however factual matrix of any given case and the
circumstances prevailing in the given country at the time, may broaden it in practice.165
161
Public International Law application of Proportionality Analysis has been employed to limit both the means and
scope of countermeasure in reaction to a state’s breach of international obligation by another state. An apt example
is the Nicaragua case decided by International Court of Justice regarding military and paramilitary activities in and
against Nicaragua by USA. According to the World Court ‘[T]he acts of which Nicaragua is accused, even assuming
them to have been established and imputable to that State, could only have justified proportionate counter-measures
… they could not justify … intervention involving the use of force.’ ICJ Merit Para 249. The ICJ equally relied on
the principle of Proportionality in relation to counter-measures in the 2005 case of Case Concerning Armed Activities
on the Territory of the Congo (Democratic Republic of the Congo v. Uganda) Judgment of 19 December 2005 and
Gabcikovo-Nagymaros Project (Hungary/Slovakia) 1997 I.C.J. 7, reprinted in 37 I.L.M. 162 (1998).
162 The ECJ in Fedesa’s case referred to the principle of Proportionality as a general principle of community law and
extoled the three – step approach for application of the principle C – 331/88, R v. Minister of Agriculture, Fisheries
and Food exparte Fedesa, 1990 ECR I – 4023 Para 13.
163
Proportionality is employed in deciding disputes relating to the general exception clause in Article XX GATT
under WTO adjudicatory system. Although not applied explicitly by WTO Panels, elements of Proportionality are
deployed to resolve or determine whether a certain measure is necessary just as the exercise undertaken during the
necessity phase of the proportionality analysis. Illustration of WTO Appellate Body adoption of or reliance on the
least restrictive means is the case of Korea Beef which approach was confirmed in subsequent WTO cases. WTO
Appellant Body in the b case decided the claims against Korea for its measures on labelling and sale of beef based on
its origins. In its defence, Korea argued that its measures were for the purpose of protecting its public health. Both
the WTO Panel and Appellant Body relied on constituent elements of Proportionality analysis, particularly the
necessity element to determine the case.
164
165
315
Furthermore, a significant number of domestic legal systems apply Proportionality Technique in
variety of different settings whenever there is a conflict between two rights or interests.166 As a
legal concept, Proportionality has been employed (or a similar concept) in civil law, common law
and mixed jurisdiction countries such that it has nearly earned itself a status of general principle
of law within the meaning of Article 38 (1) (c) ICJ Statute. 167 The diverse use of proportionality
analysis in various domestic and international law setting provides wide-ranging and instructive
basis which investor-state tribunals can draw on to develop proportionality practice in investor-
state arbitration. Some domestic legal systems that have applied Proportionality Analysis include
Canada in the case of Regina v. Oakey and South Africa in the case of State v. Makwanyane.
Notably, US is not known to favour proportionality analysis.168
Closely related to Proportionality Analysis is Wednesbury Unreasonableness judicial review

standard prevalent in the United Kingdom. In simple terms, Wednesbury test/reasonableness
standard looks at the reasoning behind or rationale driving an administrative action or measure and
consequently determines whether such an action or measure is unreasonable that no reasonable
person acting reasonably could have made it. On its relationship with Wednesbury Unreasonable
test, Proportionality has been described as a branch of the reasonableness test, a different way of
answering the same question Wednesbury test addresses and essentially similar save for degree of
review.169
166
Gebhard Bucheler, Proportionality in Investor-State Arbitration (Oxford University Press 2015) 62.
167
Gebhard Bucheler, Proportionality in Investor-State Arbitration (Oxford University Press 2015) 61. This issue has
elicited enormous debate, that is, the categorization of proportionality as a general principle of Law. These domestic
legal orders committed to the concept of proportionality may qualify as general principles of Law notwithstanding US
Courts’ jurisprudence which considers proportionality irrelevant for Fundamental Rights issues. According to Justice
Scalia in Columbia v. Heller, proportionality is a “free standing interest – balancing approach” while arguing against
and dismissing Justice Breyer’s reliance on proportionality test to determine a conflict between private individual’s
fundamental right to use and own Handguns against the District of Columbia’s public safety concerns. Breyer
propounded resolution of these apparent conflicts with proportionality analysis.
168
Benedict Kingsbury and Stephan Schill, ‘Public Law Concepts to Balance Investors' Rights with State Regulatory
Actions in the Public Interest - the Concept of Proportionality’ in Stephan Schill (ed), International Investment Law
and Comparative Public Law (Oxford University Press 2010) 79.
169
Alan Brady differentiating between the two review styles quoted Elliot and Kavanagh. To Elliot, the difference
between reasonableness and proportionality is one of degree not type as the two review styles are very similar and
not, as is often suggested, competing. M Elliot, ‘The Human Rights Act 1998 and the Standard of Substantive Review’
(2001) 60 CLJ 301.; Kavanagh whilst endorsing a reasonableness conception of proportionality, argued that both
Wednesbury reasonableness theory and proportionality are different ways of asking the question whether an
infringement of a right is justifiable in a given case. A Kavanagh, Constitutional Review under the UK Human Rights
Act (Cambridge University Press, 2009) 240. See Alan. D P Brady, Proportionality and Deference Under the UK
Human Rights Act: An Institutionally Sensitive Approach (Cambridge University Press 2012) 9 and 10.
316
Proportionality Analysis as understood today goes beyond merely inquiring whether an offending
measure is proportionate. Although recognised as providing a structured mechanism for dealing
with the balancing of rights and competing considerations, there are indications that the
proportionality Stricto sensu stage has not been well embraced in international and supranational
legal settings. 170 Also, inconvertible, is the fact that despite its increasing popularity,
Proportionality Analysis has enjoyed it fair share of criticisms based on some of its inherent
features. For instance, it has been argued that proportionality test is an ideal balancing tool only
within a constitutional framework where there is a shared value system and not ideal on the
international plane where there are diverse, incommensurable and non-comparable values. 171
Considering the lack of a consensual and commonly acknowledged value system, arbitrariness in
the balancing or weighing exercises will most likely ensue. Proportionality has also been criticised
as leaning towards overly protective of the rights of private individuals and constitute
encroachment upon regulatory discretion of government.172 Equally, considered a key drawback
is the fact that application of proportionality is subject to and limited by Limitation Clauses
included in the Treaties which enumerates a concrete list of public interests.173
Furthermore, proportionality portends the risk of judicial law making and circumscribes the
principle of separation of powers entrenched under the most domestic legal order.174 It represents
a threat to parliamentary decision – making powers which constitutionally are not the province of
judicial or adjudicators.175 Separation of powers argument if analogous related to international
context makes Host States the primary Law maker. Proportionality is a subtle endorsement of
judicial law making.176 This judicial law-making criticism, is well depicted by Kulick’s statement
170
171
Burke White and Von Staden, ‘The Need for the Public Law Standard of Review’ in Stephan W Schill (ed),
International Investment Law and Comparative Public Law (Oxford University Press 2010) 717.
172
Han Xiuli ‘The Application of the Principle of Proportionality in Tecmed v. Mexico (2007) 6(3) Chinese JIL 635.
173
Gebhard Bucheler, Proportionality in Investor-State Arbitration (Oxford University Press 2015) 62 & 63
174
Proportionality portends the risk of judicial law making and circumscribes the principle of separation of powers
entrenched under the most domestic legal order. A threat to parliamentary decision- making powers which is outside
the province of judiciary or adjudicators. Separation of powers argument if analogous related to international context
makes Host States the primary Law maker. Gebhard Bucheler, Proportionality in Investor-State Arbitration (Oxford
175
Gebhard Bucheler, Proportionality in Investor-State Arbitration (Oxford University Press 2015) 62 63 Gebhard
176
Gebhard Bucheler, Proportionality in Investor-State Arbitration (Oxford University Press 2015) 64
317
that ‘the judge reviewing political decisions enshrined in laws, who is called upon to reconcile
conflicting interests cannot ignore that his or her functions is also a law-making one.’177 Closely
related to the judicial law making criticism is the argument that proportionality represents or
portends a threat to the rule of law. According to the proponents of this theory, judicial balancing
run counter to certain established characteristics of rule of law. For one, there are uncertainty
potentials due to varied adjudicators and facts.178 Granted that the outcome of the proportionality
stricto sensu phase largely depends on the level of scrutiny adopted and allocation of values by the
tribunal, arbitrators are therefore, availed the opportunity of adopting a standard of review that
suits their preferred purpose. Thus, this flexibility Proportionality Analysis offers, may ironically
be disadvantageous since it creates opportunities for arbitrariness. Critiquing Barak’s exaltation
of Proportionality Analysis as the best approach to determine if the limitations on the exercise of
rights are justified within the framework of constitutional law, Huscroft argued that Proportionality
Analysis gives rise to a unique range of problems and suffers from the same basic problem as all
other approaches to judicial review which intrinsically are problematic no matter the approach to
rights analysis adopted.179
Notwithstanding these criticisms, proportionality has increasingly been embraced by investor-state

tribunals because of the perception that it reposes the potentials to ensure a fair and reasonable
balance is attained between the two countervailing interests of investors and host States. For with
Proportionality, a tribunal is afforded the flexibility of considering alternative solutions or even
formulating new ones.180 Notwithstanding its disadvantages or potentials for arbitral subjectivity
and uncertainty, Andreas Kulick concluded that its advantages outweigh its disadvantages as
certain sub-principles of proportionality analysis guarantee a certain level of predictability.181 For
a better understanding of the application of proportionality technique by investor-state tribunals, a
succinct overview of the phases of Proportionality analysis is necessary.
The Three/Four Prong Approach to Proportionality Analysis
177
178
Gebhard Bucheler, (n 165) For a detailed review of criticism of proportionality analysis).
179
Grant Huscroft, ‘Proportionality and Pretense’ – Book Review of Aharon Barak’s Proportionality: Constitutional
Rights and Their Limitations (Cambridge University Press 2012), (2013-2014) 29 Constitutional Commentary 232.
180
181
318
The plethora of literatures on Proportionality Principle, cutting across different strata of law and
legal systems, are not altogether sync on the number of steps or phases that Proportionality
Analysis entails. While some commentators like Gebhard favour the three stage approach others
like Caroline put forward a four-phase approach.182 Although there is alignment on the last three
phases of Proportionality Analysis, the dividing line lies in the first stage i.e. the legitimacy phase
which is skipped by those endorsing a three-phase proportionality theory. It should however be
noted that even where the three-phase test is put forward, the legitimacy phases is typically
subsumed within the suitability phase, which analysis necessarily includes a determination of
whether the measure adopted serves a legitimate purpose before determining if it is generally
suitable to achieve this purpose. Kulick specifically acknowledged this when he asserted that the
Suitability test of the three-pronged Proportionality test, consists of two interrelated subtests of (i)
legitimacy – whether the measure serves a legitimate purpose and (ii) suitability - whether the
measure is generally suitable to achieve the purpose.183 Kingsbury and Schills also posit a two-
fold Suitability phase of the Proportionality Analysis to include inquiry ‘whether the measure
adopted by the state or government agency serves a legitimate government purpose and is
generally suitable to achieve this purpose.’184 Notwithstanding that the more popular view is that
the doctrine involves a three-tier test, for the purpose of this thesis, the four-phase approach is
adopted as it presupposes a more encompassing analysis. Thus, to determine if a proportionate
balance has been struck, a number of criteria have been developed consisting of four phases of
legitimacy, suitability,185 necessity186 and proportionality in the strict sense (stricto sensu).187 The
balancing aspect of Proportionality Analysis mostly takes place at the fourth stage i.e. the
Proportionality Stricto Sensu phase which involves some degree of arbitrators’ subjectivism.
Whereas other stages of Proportionality analysis for example, the suitability and necessity phases
182
Alan Brady implies that the UK Human Rights Model of Proportionality Application adopts a four-phase approach.
183
184
and Comparative Public Law (Oxford University Press 2010) 86.
185
This stage entails determining if the state measure is suitable to achieve the stated objectives.
186
At this stage, it will be assessed if the measure was necessary to the extent that the same objective cannot be
achieved through a less restrictive alternative measure.
187
Oystein Kværner-Svendsen, Proportionality in International Investment Law: Are We There Yet? (Master Thesis
University of Oslo 2011) <https://www.duo.uio.no/handle/10852/19200> accessed 15 October 2016.
319
are objectively inclined and are less problematic. The main purport of each of these phases are
highlighted below:
Legitimacy: This involves the assessment of the legitimacy of the measure with the principal goal
of distilling the legitimate objectives driving adoption of the challenged measure. The
determination of legitimacy of a measure and its objective may be based on statutorily listed
permissible objects or prevailing societal standards in the event there is no statutory provision
stipulating permissible objectives. The essential question usually answered at this point is if the
measure is of such sufficient importance to warrant the interference with the private rights? In
other words, whether the government’s measure aims at a legitimate purpose is the main bone of
contention during the phase of Proportionality Analysis. Thus, any measure incapable of pursuing
a legitimate aim is patently unreasonable. 188 In determining whether the measure serves a
legitimate purpose, governments are often accorded a margin of discretion to determine the
purpose they aim to pursue. 189 This phase is deemed an undemanding easy to pass test as
government measures are adjudged illegitimate only in marginal cases in international investment
law realm.190
Suitability: This is the stage when examination of the relationship of the offending measure and
stated objectives is undertaken. Questions such as whether the challenged measure can achieve
stated objective will be answered at this stage. This test requires that there must be a rational
connection between the legitimate objective and the measure challenged.191 Indeed, Suitability
requires a causal link between the measure and its purpose identified at the legitimacy stage. For
the measure to pass the suitability test, the measure must further the legitimate purpose.
Necessity: This phase is often time referred to as Least Restrictive Measure analysis which entails
a review of alternative measures or means of achieving same objective. After juxtaposing other
188
Julian Rivers, ‘Proportionality and Variable Intensity of Review’ (2006) 65(1) Cambridge Law Journal 196.
189
190
and Comparative Public Law (Oxford University Press) 86. Andreas Kulick, Global Public 186.
191
Alan. D P Brady, Proportionality and Deference Under the UK Human Rights Act: An Institutionally Sensitive
Approach (Cambridge University Press 2012) 8.
320
measures that can achieve desired goals with the measure adopted, the measure that least interferes
with investor’s rights must be selected. If challenged measure is not the least restrictive that will
achieve same objective, then such a challenged measure is unlawful. The Necessity test does not
mean that there is no least restrictive alternation, but there must be no restrictive means that is
‘equally effective’. The test is of effectiveness of the other measure. Thus, a measure maybe
adopted if there is no ‘relatively less restrictive measure’ available.192 This is a very crucial phase
of the proportionality analysis in the context of ECtHR, WTO, CJEU193 legal systems. In essence,
necessity stage is all about inquiring how the objective can be achieved with minimal impairment
or impact on private rights and interests and which ultimately prevent governments from
implementing extreme measures to address public interests’ imperatives.
Proportionality Stricto Sensu: Involves weighing of competing rights and interests by

adjudicators and determining if the overall balance is appropriate.194 Proportionality stricto sensu
requires the determination of the value of the competing interests and thereafter balancing these
interests. Adjudicators must first ascribe values to the divergent interests and balance thereafter.
Non-comparable and immeasurable interests are challenging to balance in this format due to the
difficulty of weighing their respective importance and the risk of adjudicator’s subjectivism and
arbitrariness. On this basis, critics have condemned Proportionality analysis as availing
adjudicators too much discretion in making value judgments which creates opportunities for
interfering in Host States’ policy or decision making arena. To cure this manifest flaw of the
proportionality stricto sensu, Caroline promotes adoption of appropriately deferential approach to
proportionality analysis at the legitimacy and proportionality stricto sensu phases.195 Considering
that with proportionality analysis, adjudicators can decide to be non-deferential or more deferential
in their scrutiny of the value-judgment phases of legitimacy and proportionality stricto sensu, she
further argued that a degree of deference to host States by adjudicators, is essential to reflect an
appropriate allocation of authority between tribunals and host States. 196 Furthermore, in
192
Andrea Kulick Page 187.
193
Court of Justice of the European Union
194
Alan Brady Page 8.
195
and Regulatory Autonomy (Cambridge University Press 2015) 29 – 30.
196
Other stages of Proportionality analysis for example, the suitability and necessity phases are objectively inclined
and are less problematic. Page 31.
321
recognition of the subjective traits of the proportionality stricto sensu phase, Andrea Kulick has
presented few factors to be considered while balancing competing interests during the
proportionality stricto sensu phase including gravity of the infringement, importance of public
interest, complicity of Host state in the infringement of the public interests, importance of investor
right and intentional or incidental infringement.197 Considered as a staunch proponent of judicial
review and a proponent of proportionality principle, 198 Aharon Barak’s contribution to
Proportionality and Deference coalition discourse is entirely opposed to that of Henckels when
opined that ‘[Deference] has no place when the question is the proportionality of a limitation on a
constitutional right … [T]here is no room to argue that there are certain categories of cases, like
national security or emergencies, where the judge should exercise deference to the legislative or
executive authority … The approach that a judge should defer to the legislative or executive
branches does not fit a constitutional democracy.’199 Notably, Barak’s comments was made in the
context of applicability of proportionality within the framework of constitutional law. Whether or
not deference as a concept has a place and is applicable in the Proportionality, it is indisputable
and rightly noted by Kumm that “The fact that a court engages in proportionality analysis does not
imply anything about the degree of deference it should accord political actors . . . [A] court can
inquire more or less searchingly whether the relevant prongs of the test are satisfied.”200
Proportionality as a Balancing Scale in the Hands of Investor-State Tribunals
Investor-state tribunals are increasingly embracing Proportionality Analysis as a review method,

although methodology and versions of Proportionality Analysis adopted differ from tribunal to
tribunal. As a method of review within the framework of investor-state arbitration, Proportionality
Analysis presupposes reconciling competing rights based on specific procedural framework while
seeking the optimal solution for both host States and foreign investors. In Investor – State
arbitration, the principle of proportionality has been argued in a variety of contexts, although its
197
For discussion on the phases of proportionality and factors to be considered during the Stricto Sensu phase, see
Andrea Kulick pages 178 to 201.
198
Grant Huscroft, ‘Proportionality and Pretense’ (2013-2014) 29 Constitutional Commentary 229.
199
Aharon Barak, Proportionality: Constitutional Rights and Their Limitations (Cambridge University Press 2012)
399.
200
Mattias Kumm, ‘The Idea of Socratic Contestation and the Right to Justification: The Point of Rights-Based
Proportionality Review’ (2010) 4(2) Law & Ethics of Human Rights.
322
application by investor-state arbitration tribunals have typically revolved around review of host
states’ conducts and measures pertaining to expropriation claims, fair and equitable treatment
standard breaches and to construe on Non-Precluded Measures (NPM) provisions of investment
treaties or general necessity exceptions under customary international law. 201 Since the Tecmed
tribunal’s finding on Proportionality Principle, tribunals, Investor-Claimants and Respondents
have started adopting Proportionality Analysis in three distinct set of cases including: (i)
delineating between compensable indirect expropriation and non-compensable regulation; (ii)
construing legitimate expectation of investors to stability and immutability of legal and regulatory
framework under the FET standard; and (iii) towards the interpretation of Non-Precluded Measure
clause or necessity defence. Proportionality Analysis has been more frequently deployed as an
analytical tool to determine if host State’s exercise of its Police Power is a reflection of an
appropriate balance between host State and investor’s interests.202
Apart from determination of host states’ culpability for treaty breaches, other contexts in which
the principle of Proportionality Analysis has been embraced in investor-state arbitration include
Ecuador’s request to the Annulment Committee to apply a proportionality test to justify the
continuance of the Stay of Execution after weighing the relative prejudice each party would face
regarding the Stay of Enforcement order previously granted in favour of Ecuador. 203 In relation
to Award of Costs, the principle of Proportionality was deployed in Eastern Sugar v. Czech
Republic (Partial Award), to apportion costs in proportion to the outcome. 204 Furthermore,
application of Proportionality principle was stated as one of the factors to be considered in
conjunction with other mitigating factors, which will reduce host States obligation to make full
201
NPM clauses are treaty provisions that preclude liability for state actions adopted in reaction to exceptional
situations. NPM clauses effectively transfer to investors, the risk of and costs associated with state actions taken in
response to exceptional circumstances. William W. Burke-White and Andreas von Staden, ‘Investment Protection in
Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral
Investment Treaties’ (2008) 48 VA. J. Int'l L. 307.
202
Caroline Henckels, ‘Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the
Standard of Review in Investor-State Arbitration: Revisiting Proportionality Analysis in Investor-State Arbitration’ J
Int Economic Law (2012) 15 (1): 223
203
See Burlington Resources Inc v. Ecuador ICSID No Arb/08/5 Decision on Stay of Enforcement of the Award, 31
August 2017 Paras 73, 77 and 78. In essence, requesting the Committee to balance Ecuador’s interest of continuance
of the Stay of Execution vis-à-vis Burlington’s interest of having the Stay lifted. Unsurprisingly, Burlington opposed
the application of the Proportionality test in this context whilst the Committee rejected the application of
Proportionality analysis in this instance. Para 78.
204
Eastern Sugar v. Czech Republic, SCC Case No 088/2004, Partial Award 27 March 2007 Paras 379 & 380.
323
reparation in Quiborax S.A v Bolivia.205 In this case, the Tribunal after generally restating its
conception of the general principles relating to compensatory damages, concluded that in the
circumstances of the breach expropriation found, there wasn’t any justification such as e.g.
contributory negligence, intervening or concurrent causes, that would necessitate a reduction in
compensation.
Similarly, Proportionality Analysis has been argued to be relevant for the assessment of damages
in Siemens v. Argentina. Although the Tribunal rejected this contention when argued by Argentina
seeking the Tribunal’s consideration of Tecmed tribunal’s approach to consider the purpose and
proportionality of the measures taken. Argentina sought to have the Tribunal discountenance
damage assessment for Expropriation on a fair market value basis since it contended that the
Expropriation was for social or economic reasons. The Tribunal rejected this deployment of
Proportionality principle, holding that the principle is simply relevant for the determination of
whether expropriation had occurred and not the determination of compensation.206
As earlier stated there are various permutations seeking reliance on proportionality doctrine in
investor-state arbitration, the focus herein is with regards to determination of breach or violation
of Substantive Treaty treatments with Proportionality Analysis being utilized as an analytical tool
to balance contending interests. Meanwhile, extolling the worth of proportionality analysis in
international investment law arena, Benedict argued that Proportionality has proven to be
‘methodologically workable and more coherent; than reasoning approach adopted by Investor –
State tribunals, in construing the FET and Indirect Expropriation Claims.207 In the same vein, by
way of an advantage, Proportionality Technique provides safeguards to prevent potential abuse;
substantially through the least restrictive – measure test, consideration of the gravity of interest
and seriousness in pursuing the interest. It involves a consideration of whether the measure is
proportionate to the gain or benefit sought to be achieved.208 UNCTAD Series concludes that “the
205
Quiborax S.A v Bolivia ICSID case no. ARB/06/2 Award 16 September 2015 para 330
206
Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8 Award 06 February 2007 Para 534
207
208
and Regulatory Autonomy (Cambridge University Press 2015) 25 – 26.
324
appropriateness of the proportionality principle and balancing through partial compensation could
be explored as possible tools to help in this process.”209 Alec Stone Sweet signified his preference
for Proportionality Analysis for its potentials to “inject a measure of analytic, or procedural,
determinacy to the balancing exercise.” 210
Andrea Kulick lending his voice to others propounding the need to utilize proportionality analysis
to balance conflicting rights, opined that the best tool for balancing is Proportionality Analysis;
which result will impact the assessment of compensation and damages.211 Andreas Kulick argues
that Proportionality Analysis is an emerging general principle of law to implement needed
balancing between Global Public Defense of host States and investors’ interests. He added that
despite the scepticism about Proportionality Analysis, it remains the most suitable tool to find
optimal solution for reconciling conflicting interests. 212 He contends that public interest
considerations are though typically rejected during merits stages; they quietly re-surface and are
often upheld during compensation and damages stage. While the precise contour of the concept
is yet to be established due to lack of consistency in the application of proportionality analysis by
investor-state tribunals, the legal interpretation style which Proportionality analysis occasions,
makes it potentially suitable in situations of collisions or conflicts of interests of investors and of
public policy objectives and can be used to address the legitimacy crisis currently besetting
ISDS.213 This is because most investment arbitration claims have public law elements which make
them suitable for application of proportionality doctrine.
Similarly, a commentator expressing his support for the deployment of the doctrine of
proportionality to balance the competing interests of host States and foreign investors, asserted
that the similarities between investment law and human rights law, make Proportionality
Technique well-suited for the settlement of disputes in relation to investment protection. Attesting
209
This process being balancing conflicting rights. See UNCTAD Series (n 120) 77.
210
Alec Stone Sweet, ‘Investor-State Arbitration: Proportionality’s New Frontier’ [2010] Yale Law School Legal
Scholarship Repository 14.
211
Andreas Kulick, ‘Sneaking Through the Backdoor—Reflections on Public Interest in International Investment
Arbitration’ (2013) 29.3 Arbitration International 435-452, 452.
212
213
Thomas Cottier, Roberto Echandi et al, ‘The Principle of Proportionality in International Law’ NCCR Trade
Working Paper No. 2012/38| December 2012, 24 <http://www.nccr-trade.org/fileadmin/user_upload/nccr-
trade.ch/wp3/publications/Proportionality_final_29102012_with_NCCR_coversheet.pdf> accessed 19 October 2017.
325
that the doctrine of proportionality and of the “margin of appreciation”, which have withstood the
test of time and now resonate beyond European borders, have been primarily designed as
innovative tools by European Courts to ‘to strike a fair balance between the competing interests of
the community and of the individual.’214
On the other divide are those contend that Proportionality Principle does not integrate properly
and consequently not suitable for adoption by investor-state arbitration tribunals. Arguing that the
structure of ISDS as it exist, does not support the adoption of a Proportionality Analysis or its
variant, in the adjudication of investment disputes, Prabhash Ranjan implied that proportionality
Analysis has been applied in a ‘flawed and often truncated’ manner in investment treaty arbitration
setting.215 Other scholars have equally inferred that application of Proportionality technique by
investor-sate tribunals has been inconsistent and mostly devoid of a structured and rigorous step-
by-step analysis as practiced by the originators of the doctrine.216 Without specifically delineating
those unsuitable aspects, Thomas Cottier & co equally stated that not all aspects of investment
treaty agreements are suitable for Proportionality Analysis. Nonetheless, Thomas Cottier & co
went ahead to identify, FET and Expropriation Standards as the areas of investor-state arbitration
to which Proportionality Analysis apply.217
Indeed, in investor-state arbitration, Proportionality is invoked in instances where there is a clear

host State–individual paradigm, which makes an individual subject to exercise of State power.218
214
Ioana Petculescu, ‘CETA and Fundamental Rights in the European Union: Invitation to a Dialogue between Courts’
EFILA BLOG < https://efilablog.org/2016/11/08/ceta-and-fundamental-rights-in-the-european-union-invitation-to-a-
dialogue-between-courts/> accessed 01 April 2018.
215
Noting that absence in investor-state arbitration of key features of domestic legal system including institutional
safeguards, judiciary independence, appellate review, separation of powers, a written constitution which empowers
domestic judges to weigh and decide which compelling interest should prevail, makes investor-state tribunals less
suitable to adopt a method of review that would require them to weigh and balance complex value-laden regulatory
interests against foreign investors interests. Moreover, investor-state tribunals with their ad hoc characteristics, are
not embedded in the political and social system of the respondent-states, lack sufficient knowledge of the overall legal,
political and social context of the dispute and are therefore ill-equipped to make judgments calls on host states’
measure in furtherance of its public policy objectives. Prabhash Ranjan, ‘Using the Public Law Concept of
Proportionality to Balance Investment Protection with Regulation in International Investment Law: A Critical
Appraisal’ (2014) 3 Cambridge J. Int'l & Comp. L 853, 862.
216
217
Thomas Cottier, Roberto Echandi et al, The Principle of Proportionality in International Law, 2012 page 24.
218
Borzu Sabahi and Kabir Duggal, ‘Case Comment: Occidental Petroleum v Ecuador (2012) – Observations on
Proportionality, Assessment of Damages and Contributory Fault’ ICSID Review, (2013) Vol. 28, No. 2, pp. 279–290,
282.
326
More tribunals are referring to the doctrine and are applying same in balancing host states’
regulatory interests vis-à-vis investment protections afforded foreign investors by investment
treaties. A good illustration is Tecmed tribunal’s explicit reference to and application of
Proportionality Analysis in the determination of Tecmed’s indirect expropriation claims.
Considered as the leading ICSID holding on Proportionality Analysis, Tecmed tribunal declared
the proportionality test as relevant to construction of expropriation when it asserted that:
‘After establishing that regulatory actions and measures will not be initially excluded from the
definition of expropriatory acts, in addition to the negative financial impact of such actions or
measures, the Arbitral Tribunal will consider, in order to determine if they are to be characterized
as expropriatory, whether such actions or measures are proportional to the public interest
presumably protected thereby and to the protection legally granted to investments, taking into
account that the significance of such impact has a key role upon deciding the proportionality ...
There must be a reasonable relationship of proportionality between the charge or weight imposed
to the foreign investor and the aim sought to be realized by any expropriatory measure.’219
Thus, Tecmed tribunal introduced a balancing approach to determination of host states’ culpability
for indirect expropriation claims. The tribunal relied extensively on the European Court of Human
Rights jurisprudence and cited notable cases such as In the case of Mellacher and Others v.
Austria, 220 In the case of Pressos Compañía Naviera and Others v. Belgium,221 In the case of
James and Others, 222 wherein it was held that “there must be reasonable relationship of
proportionality between the means employed and the aim sought to be realised”. Be that as it may,
Tecmed tribunal was said to have merely paid lip-service to application of the principle as it failed
to apply proportionality test in a manner that the weighing and balancing attributes could be
useful. 223 Similarly, Henckels considers Tecmed Tribunals’ application of Proportionality
219
Tecnicas Medioambientales Tecmed S.A. v. The United Mexican States ICSID Case No. ARB (AF)/00/2, Award
29 May 2003 Para 122.
220
Judgment of December 19, 1989, 48, p.24
221
Judgment of November 20, 1995, 38, p. 19, <http://hudoc.echr.coe.int> accessed 12 November 2017.
222
Judgment of February 21, 1986, 50 pp 19 – 20.
223
Legesse Tigabu Mengie, ‘Host States’ Police Power and the Proportionality Test in International Investment Law’
(2016) 8 Jimma U.J.L 81, 86.
327
technique, a flawed approach for delving straight into proportionality stricto sensu analysis without
going through the preceding phases of legitimacy cum suitability and necessity.224
While the Tecmed tribunal has been criticised for its flawed approach to Proportionality Analysis,
it has paradoxically received considerable accolades for being the leading case to transfer ECtHR
Proportionality and Expropriation jurisprudence to the realm of Investor–State arbitration. 225
Hence, in determination of indirect expropriation claims, other tribunals like LG&E,226 Azurix,227
El Paso 228 tribunals endorsed and adopted Tecmed tribunal’s approach. In the same vein,
recognizing that a few tribunals such as Tecmed, LG&E and Azurix tribunals have adopted a
proportionality requirement in relation to expropriatory treatment, the Deutsche v Sri Lanka
tribunal disagreed with the Respondent State, that it had “extremely broad discretion to interfere
with investments in the exercise of “legitimate regulatory authority”.229 The tribunal opined that
Proportionality prevents host States from taking measures which severely impact investors unless
such measures are justified by a substantial public interest. Having found that Sri Lanka’s
measures were not legitimate regulatory actions, the Tribunal considered Sri Lanka’s measures as
illegitimate regulatory expropriation.230
Apart from application of proportionality principle to determine whether an indirect expropriation

has taken place, the principle has also enjoyed prominence in the construction of fair and equitable
treatment breaches. In fact, there has been some correlation or inter-relationship between the
224
Caroline Henckels, 'Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the
Standard of Review in Investor-State Arbitration' (2012) 15 JIEL 223, 232-3.
225
Gebhard Bücheler, Proportionality in Investor-State Arbitration (Oxford University Press 2015) 144.
226
LG & E v. Argentina quoted Tecmed tribunal’s observation that actions and measures of host States are to be
Proportional to the public interest presumably protected and the protection legally granted to investments. LG & E v
Argentina ICSID case no ARB /02/1, Decision on Liability 3 October 2006, Para 195.
227
The Azurix v. Argentina tribunal restated parties’ arguments touching on Tecmed’s findings that Host States
measures must serve a legitimate aim in the public interest and bear a reasonable relationship of proportionality
between the means employed and aim sought to be realized. The Azurix tribunal ultimately agreed that these two
elements i.e legitimate aim and proportionality relationship are useful guidance for purposes of determining
compensable expropriatory regulatory actions. Azurix Corp v. Argentina Award 14 July 2006 paras 311 and 312.
228
El Paso tribunal alluding that discriminatory or disproportionate general regulations have the potential to be deemed
expropriatory if there is a sufficient interference with the investor’s rights, quoted Tecmed Tribunal in its finding that
proportionality must exist between the public purpose fostered by the regulation and the interference with investors’
property rights. El Paso Energy International Company v. Argentine Republic, ICSID Case No. ARB/03/15, Award,
31 October 2011 Para 243.
229
Deutsche Bank A.G v Sri Lanka ICSID Case No. ARB /09/ Award 31 October 2012 Para 522.
230
Deutsche Bank A.G v Sri Lanka Para 523-4.
328
principle of proportionality and the FET as a treaty standard. For instance, the El Paso tribunal
defined the FET as a standard entailing reasonableness and proportionality.231 Additionally, the
FET was inferred to import an obligation of proportionality in MTD Equity v Chile when the
Tribunal described the FET standard as” a broad and widely – accepted standard encompassing
such fundamental standards as good faith, due process, non – discrimination and
Proportionality”.232 It is essential to quickly add that proportionality does not by any stretch enjoy
same popularity as a constituent of FET like other acclaimed elements of FET such as legitimate
expectation, good faith, transparency, denial of justice etc.
In any discussion of FET and proportionality principle, one case that resonates, which necessarily
forms part of the discourse is the Occidental v. Ecuador arbitration. To Occidental’s arguments
that Ecuador’s measures were manifestly disproportionate even assuming, that Ecuador had a
legitimate contractual ground to terminate the contract, the tribunal recognized that Proportionality
Analysis is applied in variety of international law setting and undertook to apply same. 233 The
tribunal discussed previous tribunal findings that adopted a Proportionality approach in the
determination of expropriation claims; highlighting MTD equity, Tecmed, Azurix and LG&E
cases. Occidental tribunal first found that proportionality is established not only under
international law but also under Ecuadorian domestic law because the strand of proportionality
analysis applied in Tecmed & Azurix is analogous to Ecuadorian law conception of proportionality
as set out in the Regulation for the Control of Discretion in the Acts of Public Administration.234
The main crux of the Proportionality Analysis in Occidental centred on whether the sanction of
Caducidad declaration was a proportionate response to Occidental’s violation of the Ecuadorian
Hydrocarbon Law’s transfer of interest provisions. The tribunal found that Occidental breached
the provisions of Hydrocarbon Law of Ecuador for failure to obtain requisite governmental
approval prior to assigning title or interest under the contract to third parties. 235 The tribunal
231
El Paso v. Argentina Award 31 October 2011 Para 373.
232
MTD Equity v. Chile ICSID Case No ARB/01/7 Award 25 May 2004 Para 109. It is noteworthy that MTD tribunal
merely reiterated or repeated the Investor – Claimant’s expert Judge Schwebel’s definition of FET. The tribunal
subsequently endorsed and affirmed support for TECMED tribunal’s description of the concept of FET. MTD v. Chile
Award Para 114 and 115.
233
Occidental v. Ecuador ICSID Case No. ARB/06/11 Award 5 October 2012 Para 402 and 403
234
Occidental Award Para 409.
235
Award paras 340 – 383.
329
considered in details, Ecuador’s argument that declaration of Caducidad was appropriate and
proportionate in relation to breaches by Occidental – unauthorized transfer of rights.236 In the
course of its analysis, the tribunal determined if there were other means available to Ecuador apart
from declaration of Caducidad.237 In the final analysis, the Tribunal held that Ecuador had violated
the FET and its measures were tantamount to expropriation because the Caducidad was not a
proportionate response to the Claimant’s unlawful assignment of interests.238 This in other words
means that the tribunal deemed Ecuador’s actions as being too drastic than is required to achieve
the desired goal and consequently awarded the sum of US$1.76 billion plus interest as damages.239
In the course of the tribunal’s determination of the fair and equitable treatment claim with reference
to Proportionality Analysis, the tribunal skipped the first two phases of legitimacy and suitability
and proceeded to examine Ecuador’s measures from the necessity and proportionality stricto sensu
angles. The tribunal ultimately found that there were alternative measures Ecuador could have
implemented, in addition to concluding that the measures were not proportional. This omission or
failure to undertake the step-by-step proportionality analysis has been described as an incorrect
style considering that the last test of proportionality stricto sensu need not be embarked upon with
the failure of the Necessity test.240 Notwithstanding that the tribunal did not go through the whole
hog of Proportionality Analysis as practiced in the originating legal systems, the tribunal ruling on
proportionality has its values for bringing into limelight several critical issues that warrant further
236
Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador
(II) ICSID Case No. ARB/06/11 Award 05 October 2012 Para 410.
237
238
239
Agnes Harriet Lindberg, Striking a Fair Balance between Foreign Investor Protection and Host States’ Right to
Regulate – A Review of the International Investment Law Awards of 2016 through the lens of the Principle of
Proportionality (Master Thesis University of Oslo 2017) 40. The tribunal’s award which is said to be the largest
award in the history of Investor-State Arbitration, had taken into consideration and netted off 25% of sum which
should have been due to Occidental because of Occidental’s Contributory Negligence pertaining to its violation of
Ecuadorian law in entering the Farmout Agreement without ministerial approval. Tai-Heng Cheng & Lucas Bento,
‘ICSID’s Largest Award in History: An Overview of Occidental Petroleum Corporation v the Republic of Ecuador’
Kluwer Arbitration Blog (19 December 2012)<http://arbitrationblog.kluwerarbitration.com/2012/12/19/icsids-
largest-award-in-history-an-overview-of-occidental-petroleum-corporation-v-the-republic-of-ecuador/> accessed 10
January 2018.
240
Prabhash Ranjan, ‘Using the Public Law Concept of Proportionality to Balance Investment Protection with
Regulation in International Investment Law: A Critical Appraisal’ (2014) 3 Cambridge J. Int'l & Comp. L 853, 866.
330
analysis to develop the law, especially in the areas of rights balancing and the application of the
proportionality test.241
In a related context, by way of contribution to the Proportionality discourse, the Electrabel v.

Hungary tribunal stated that “there needs to be an appropriate correlation between the Sates public
policy objective and the means adopted to achieve it.”242 The Tribunal further opined that the
impact of the measure on the investor must be proportional to the policy objective sought.243 The
Tribunal outlined the Proportionality Test to include suitability, necessity and Proportionality
Sticto Sensu phases and concluded that “[O]nce a measure meets the test articulated above, a State
has a wide scope of discretion to determine the exact contours of the measure.”244
Another case evincing the opinion that there exists a correlation between the principle of
proportionality and the FET as a treaty standard is the Caratube v. Kazakhstan 2017 case. In this
case, the tribunal recounted the Investor-Claimants’ FET claim as having identified six principles
encompassed by the fair and equitable treatment standard, including the principle that there must
be ‘… a reasonable relationship of proportionality between the charge or weight imposed on the
foreign investor and the aim sought to be realized by any expropriatory measure.’ 245 Kazakhstan
in its submission, countered this viewpoint and asserted that the investor-claimants misstate the
scope and nature of the duty of FET as the principle of proportionality does not inform the FET
standard.246 The Tribunal did not address the parties’ arguments (albeit minute), on proportionality
because it held that having concluded that Kazakhstan unlawful termination necessary to further
examine or decide the investor-claimants’ claims bordering on breaches of FET and other
treatment standards.247
241
Borzu Sabahi and Kabir Duggal, ‘Case Comment: Occidental Petroleum v. Ecuador (2012) – Observations on
Proportionality, Assessment of Damages and Contributory Fault’ ICSID Review, (2013) Vol. 28, No. 2, pp. 279–290,
290.
242
Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19 Award 25 November 2015 179.
243
Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19 Award 25 November 2015 Para 179.
244
Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19 Award 25 November 2015 Para 180.
245
Caratube International Oil Company LLP and Mr. Devincci Salah Hourani v. Republic of Kazakhstan, ICSID Case
No. ARB/13/13, Award 27 September 2017 Para 714.
246
247
331
To buttress its FET claim, the Investor-Claimant in Tamimi v. Oman particularly relying on the
Occidental v. Ecuador tribunal’s award, contended that the principle of proportionality is a
principle of customary international law falling within the set of international law principles that
protect the economic rights and interests of aliens. 248 Oman on the other hand although not
contesting the fact that the doctrine of proportionality has been endorsed by international tribunals,
disputed the fact that the doctrine of proportionality has become an element of the minimum of
standard of treatment under customary international law as tribunals’ endorsement simpliciter, is
insufficient proof that the doctrine has attained the status of customary international law. 249 In this
matter, United States of America being the home State of the Investor-Claimant, exercised its right
to file submissions as a non-disputing party under Article 10.19.2 of the US–Oman FTA and
limited its Submission to address two issues: (i) the burden to establish the content of customary
international law; and (ii) the governing law clause in Article 10.21.250 US submitted that the
minimum standard of treatment under customary international law, does not include a general
obligation of proportionality and that Proportionality is not a self-standing obligation.251 As to the
content of the minimum standard of treatment under the US–Oman FTA which refers to the
customary international law standard and was a significant point of contention between the parties,
the tribunal did not have to rule on the issue if the concept of proportionality was a standalone
criterion under the minimum standard of treatment. This is because the tribunal had earlier found
that the first measure thought to be disproportionate was not attributable to the host State whilst
there was no nexus between the second measure the investor-claimant considered to be
disproportionate and the loss it suffered.252 Whilst the tribunal might not have contributed to the
investor-state arbitration application of proportionality analysis discourse and necessarily further
or belittle, the development of the concept as investor-state arbitration principle, one clear message
the proportionality discourse in this case, projects is that the issue if it has assumed a customary
international law status, remains a highly debatable topic such that it warranted the intervention of
a non-disputing State party.
248
Adel A Hamadi Al Tamimi v. Sultanate of Oman, ICSID Case No ARB/11/33, Award 3 November 2015 Para 185.
249
250
251
252
Adel A Hamadi Al Tamimi v. Sultanate of Oman, ICSID Case No ARB/11/33, Award 3 November 2015 Para 392-
3.
332
As defence against foreign investors’ claims of treaty breaches, host States rely on general
exception clauses included in the treaties or embedded in customary international law e.g.
necessity defence. The obviously creates a situation calling on tribunals’ determination of whether
these defences are available to the host States for measures taken for public purposes and security.
According to Alec Sweet, Proportionality Analysis is the best tool to deal with the conflicts this
scenario presents.253 In the wake of Argentina’s 2001 -2002 economic crisis, Argentina took a
number of measures which led to institution of an avalanche of investor-state arbitrations against
it by foreign investors operating in diverse sectors of the economy. Argentina in most of these
cases relied on its Non-Precluded Measures defence and the customary international law necessity
defence.254 This defence however did not avail it as most of the tribunals found Argentina liable
for losses suffered by the foreign investors despite the necessity pleas. Continental Casualty
tribunal in construing Argentina’s necessity and general exception defence, undertook an explicit
application of proportionality analysis, extensively quoting from WTO jurisprudence. 255 The
tribunal eventually arrived at an outcome different from those tribunals that did not utilize
proportionality balancing tools. Akin to the Continental Casualty approach, Luke Engan
recommends that Investor-State tribunals should adopt a framework modelled after WTO
Appellant Body in the consideration of host States’ necessity defence.256
253
Sweet (n 203) 2. Save for Argentina cases where the NPM and necessity defences of Argentina were argued and
ruled on, tribunals have engaged less with a review of the necessity phase of proportionality. A commentator remarked
that necessity interpretation by arbitral tribunals ‘has generally been devoid of a properly systematic approach and has
frequently been undertaken cursorily and superficially such that a law student would be marked failed if the student
had done so in his final exam. See Andreas von Staden ‘Towards Greater Clarity in Investor-State Arbitration, Czech
YB In’l (2011) 207, 211. Majority of Argentina cases tribunal focused on Article 25 ILC Necessity test of ‘only
means’ to react to the economic crisis. For case law on Argentina cases and tribunals ruling on Argentina’s necessity
and NPM defences, see Jürgen Kurtz, ‘Adjudging the Exceptional at International Investment Law: Security, Public
Order and Financial Crisis’ (2010) 59 (2), International and Comparative Law Quarterly 325-371.
254
The World Investment Report of UNCTAD (Year 2015) highlighted the NPM Clause as an important inclusion
needed or necessary to safeguard Host States regulatory autonomy, Balance the protection of investors rights,
protection of national public interests and to achieve sustainable development. UNCTAD Report Page 124, 140 – 2.
255
There are inferences that extensive reliance on WTO Appellant Body jurisprudence on the interpretation of Article
XX GATT exceptions to determine Argentina’s defence hinged on NPM Clause, Article XI Argentina – US BIT, was
a function of the tribunal’s composition. The President, of the tribunal Giorgio Sacerdoti, who served as a member of
the WTO Appellant Body brought his experience and expertise to bear in determining Argentina’s defence. Article
XX GATT test defined by Korea Beef case was cited by Continental Casualty tribunal in Paragraph 193 of the Award.
Another example is the quotation of the WTO Panel finding in Brazil-Retreaded Tyres. See Continental Casualty
Award Para 194. Kingsbury and Schill Page 99.
256
Luke Engan, ‘In Search of Necessity: Congruence, Proportionality, and the Least-Restrictive Means in Investor-
State Dispute Settlement’ (2011) 43 Geo. J. Int'l L. 495, 520.
333
The criticism of lack of thorough deployment of Proportionality Analysis by investor-state
tribunals appears to have been addressed in the recent case of PL Holding v. Poland.257 In this
case, the Investor-Claimant, the Respondent-State and Tribunal extensively relied on the
Proportionality Principle in their arguments and findings. One of the issues the tribunal had to
determine was whether Poland’s measures comport with the principle of proportionality. 258 The
Investor-Claimant a national of Luxembourg, acquired majority shareholding interest in a Polish
Bank resulting from merger of two other banks. Alleging that the Investor-Claimant engaged in
irregularities which threatened the Bank’s security and prudent management and that the Bank’s
stability was at risk, Poland implemented certain measures against the Investor-Claimant pursuant
to its Banking Act. Said measures include directing the Investor-Claimant to deal with its shares
in certain manners, compelling sale of the Investor-Claimant’s shares and constraining its voting
rights. The Investor-Claimant complied with the directives and eventually disposed of its shares
in the Bank having lost substantial value. The Investor-Claimant subsequently initiated the
arbitration alleging inter alia, that Poland’s measures amounted to expropriation which did not
pursue any legitimate public policy and were manifestly disproportionate.259 Contending that the
order depriving it of its voting rights and order forcing it to sell its shares did not satisfy the
conditions for lawful expropriation and therefore constituted illegal expropriation. 260 The
Investor-Claimant further argued that Poland’s measures were ‘arbitrary, inappropriate, out of
proportion with the public purpose allegedly served and not taken in good faith.’261 The Investor-
Claimant particularly relied on the principle of proportionality by profiling its claim, on a step by
step proportionality analysis basis whilst submitting that ‘[T]o meet the Proportionality test, an
adverse measure must be suitable for achieving a legitimate aim, must be the least restrictive of
available sanctions and must present benefits that outweigh its costs.’ To the Investor-Claimant,
Poland’s measures did not meet these requirements.262
257
PL Holdings S.a.r.l. v. Republic of Poland, SCC Case No. V 2014/163, 28 June 2017.
258
PL Holdings S.a.r.l. v. Republic of Poland Para 295 (B) (ii).
259
PL Holdings S.a.r.l. v. Poland, SCC Case No. 2014/163, 28 June 2017 Para 15.
260
PL Holdings S.a.r.l. v. Poland Para 252.
261
Ibid Para 256.
262
Ibid Para 256.
334
In its defence, Poland averred that its measures were ‘legitimate exercise of its right to regulate in
the public interest fully consistent with the principle of proportionality and not otherwise arbitrary,
unreasonable or discriminatory.’263 Poland describing as undisputable, Tecmed tribunal’s finding
that “the principle that the State’s exercise of its sovereign powers within the framework of its
police power may cause economic damage to those subject to its powers as administrator without
entitling them to any compensation whatsoever.”264 Poland also articulated that “To satisfy the
proportionality principle, a measure must be suitable for achieving a legitimate government
purpose, necessary for doing so, and justifiable in terms of costs and benefits.” 265 Poland
submitted that the measures were reasonable and in conformity with the principle of
proportionality and it was at all times guided by Polish laws.266
Noting that all the requirements of the proportionality principle must be satisfied, the tribunal
considered parties’ arguments with reference to the structured prongs of proportionality principle.
Tribunal examined whether Investor-Claimant engaged in serious misconduct and if Poland’s
measures addressed the Investor-Claimant’s alleged wrongdoing proportionately. Whilst
undertaking the proportionality analysis, the tribunal acknowledged the contentious nature of the
doctrine when it asserted that “Whether the measure taken by the KNF vis-à-vis Claimant were
taken in violation of the principle of proportionality is indeed one of the most highly contested
issues in this case.” 267 In addition, the Tribunal recognised that Proportionality Principle
inevitably entails an exercise in judgment on the part of a court or tribunal.268 The tribunal in its
bid to balance the competing rights of the host state to exercise its police power to regulate against
investor-claimant’s right to investment protection, the tribunal was undertook a phased and
detailed proportionality analysis entailing determining whether Poland had less draconian means
for achieving the legitimate public interest or could have chosen less restrictive measure than
compelling the Investor-Claimant to sell its shares. In the final analysis, the Tribunal found
263
Ibid Para 20.
264
Ibid Para 277; Tecnicas Medioambientales Tecmed S.A. v. The United Mexican States ICSID Case No. ARB
(AF)/00/2, Award 29 May 2003 Para 119.
265
Ibid Para 279.
266
Ibid Para 284.
267
Ibid Para 354.
268
Ibid Para 355.
335
Poland’s measures to be exceptionally harsh, unjustified, unsuitable and excessive in relation to
the public interest to be served.269
The tribunal copiously outlined why it found Poland’s measures inappropriate and unsuitable to
achieve its legitimate aim but did not end the proportionality analysis at that stage. The tribunal
went on to examine the necessity of the measures and ultimately concluded after extensive review
of the factual matrix of the case, that the measures were unwarranted considering that the Investor-
Claimant had promptly and adequately remedied the noted irregularities and other lesser measures
than deprivation of voting rights or a forced sale could readily be imagined.270 Notwithstanding
having found that the measures were unsuitable and unnecessary, the tribunal continued to the
proportionality stricto sensu phase, with a view to determine whether the exceptionally harsh
measures were justified and not excessive in light of the magnitude of the public interest said to
be at stake. The tribunal’s approach in completely undertaking proportionality analysis when the
suitability and necessity phases failed is like the Continental Casualty tribunal’s approach which
has been criticised as a flawed approach. Continuing with the next stage of the analysis when the
preceding stage is not scaled is deemed needless and inconsistent with the application of
proportionality analysis in the legal orders from which it was adapted. On a positive note, the
tribunal’s approach seems to have remedied the criticism concerning tribunals’ findings lacking in
depth and thoroughness in the application of proportionality principle. It can be argued that an
extensive step-by-step proportionality analysis undertaken by the tribunal demonstrates if nothing
at all but an awareness of the need to carry out a structured and thorough analysis.
Indeed, the process of proportionality is as important as the outcome being a structured test
comprised of various stages. Alan D Brady postulates that by developing a proportionality
approach that takes into account institutional differences, proportionality will be better understood
and applied, allowing deference on specific issues and specific stages of the process. 271 On
applying deference in specific stages of Proportionality, Caroline advocates for adoption of
appropriately deferential approach to proportionality analysis, basically to address issues arising
269
Ibid Paras 374
270
Para 372 and 375
271
Alan. D. P. Brady, Proportionality and Deference under the UK Human Rights Act: An Institutionally Sensitive
Page 2.
336
from the value-oriented stages of Proportionality i.e. Legitimacy and Proportionality stricto sensu
phases.272 To Henckels, according a degree of deference to host States, will reflect an appropriate
allocation of authority between tribunals and host states is essential.273
Why Proportionality is an Appropriate Balancing Tool to Determine Breach of Stability

Guarantees Claims
Beyond the various reasons adduced by scholars having the opinion that Proportionality Analysis
is an adaptable tool useful for balancing divergent interests of host States and foreign investors,
the peculiar nature of Stability Guarantee as a protectable interest, makes Proportionality Analysis
an apt device for determination of Stability Guarantee claims of investor-claimants. As earlier
expressed in Chapter 2 of this thesis, Pacta Sunt Servada which is an internationally recognised
legal principles relevant to Stability Guarantee, runs counter to another widely recognised principle
of international law in favour of host States’ sovereign regulatory autonomy i.e. PSNR UN
Resolution 1803. While investors-claimants argue for stability, predictability and often-times
immutability of legal and regulatory regimes affecting their investments, host States counteract
these arguments by insisting on an unfettered inalienable sovereign right to legislate, amend laws
and regulations in furtherance of their police power. Balancing these divergent interests is
therefore imperative just as in other instances where investment tribunals have applied
Proportionality Analysis to balance competing interests involving private – type interests on one
hand and public interests on the other.274
The appropriateness of deploying Proportionality Analysis for the requisite balancing is further
underscored due to the profiling of investor-claimants’ Stability Guarantee claims and host States’
reliance police power to regulate and available defences exculpating liability to compensate.
Investor-claimants have profiled their breach of Stability Guarantee claims as violations of two of
the acclaimed protective standards through which Proportionality Analysis has diffused into
international investment law regime i.e. FET and Indirect Expropriation. Meanwhile, the FET and
272
Caroline Henckels, Proportionality and Deference in Investor-State Arbitration (Cambridge University Press
2015) 29-30.
273
Caroline Ibid 31.
274
Kingsbury and Schill Page 102.
337
Indirect Expropriation are two of the four substantive protections provided by investment treaties
which are relevant and have been employed to seek redress for multifarious breaches of Stability
Guarantees. It is observed that the analysis in Chapters 3, 4 and 5 distilling the various
argumentation approaches that have emerged within investor-state arbitration setting in
furtherance of investor-claimants’ quest for Stability Guarantees’ protection aligns with
application of Proportionality in investor-state arbitration. In specific terms, Proportionality
Analysis have been applied to determine some sub-elements of FET standard, including stability
and predictability of legal framework and legitimate expectation. Investor-claimants have sought
tribunals’ declarations that legitimate expectation of stability and predictability of legal,
regulatory, fiscal or investment framework have been frustrated thereby constituting a breach of
the treaty substantive standard of fair and equitable treatment. Proportionality analysis is a
veritable tool for assessing if these sub-elements of FET are alleged to have been breached.275
Proportionality Analysis critiques the legitimacy, suitability, necessity of host States’ measures
repudiating the Stability Guarantee before actually weighing the competing interests. In any case,
the fair and equitable treatment standard naturally requires a balancing of interests because the
question whether an investor has been treated fairly and equitably must be relative to any opposing
norm or interest or value.276 In the same vein, Proportionality Analysis which has been applied in
international investment law realm in assessing indirect expropriation claims; particularly to draw
the dividing line between permissible host States’ regulatory measures and measures tantamount
to expropriation has implications for Stability Guarantee claims. It would though appear that the
functionality of proportionality in this regard, is at par with that of Stability Guarantee since
Stability Guarantee is equally an indicator of or device for distinguishing the thin dividing line
between indirect expropriation and legitimate regulatory measures.
The fact that Full Protection and Security and Umbrella Clause are not directly or overtly sync
with Proportionality Analysis does not imply that Proportionality Analysis is inapplicable in the
determination of investor-claimants’ claims alleging their breaches. Granted that Proportionality
275
To balance the rights of host states’ regulatory rights and investors’ expectation of stability, Saluka Investment
tribunal’s ruling points to a need for balancing to determine investors’ legitimate expectation. Saluka Investment Para
304.
276
Oystein Kværner-Svendsen, Proportionality in International Investment Law: Are We There Yet? (Master Thesis
University of Oslo 2011) 48 <https://www.duo.uio.no/handle/10852/19200> accessed 15 October 2016.
338
Analysis has not so far featured in the consideration of Umbrella Clause claims in investor-state
arbitration, the Argentina cases discussed in Chapter Five however show the interplay between the
Umbrella Clause and Proportionality Analysis by virtue of the NPM and necessity defences raised
by Argentina. The Continental Casualty tribunal did in fact deploy at least two phases of
Proportionality testing module to review Argentina’s defence of NPM and necessity and that
impacted the Umbrella Clause claim. In a nutshell, whilst Proportionality Analysis may not be
directly applicable to reviewing Stability Guarantee claims profiled or presented as breaches of
Umbrella Clauses, it will however become relevant and applicable once necessity defence or NPM
defence is raised. To the extent that international investment law is continuously evolving and
possess a propensity to absorb future ingenuous and innovative arguments and thought processes,
it won’t be surprising if Proportionality analysis surfaces in arguments seeking relief for breach of
the Umbrella Clause. For one, the Investor-Claimant in Tamimi v. Oman suggested that the
doctrine of Proportionality is relevant to claims of denial of national treatment when it argued that
it was treated with disproportionate harshness compared to domestic investors. 277 This position
also holds true for Full Protection &Security Standard which on the face of it does not seem to
have any correlation with Proportionality Technique. Investor-claimants argue for a broadened
scope of the Full Protection and Security standard to encompass stability of the legal framework
applicable to investment, whilst host States argue for a restrictive interpretation of the standard,
contending that the traditional view of physical or police protection is the appropriate scope of
protection. Proportionality Analysis might not be directly applicable in this regard, because the
fulcrum of host states responses are not reinforcement of their police power to regulate but rather
to confine the FP&S protection to physical protection and security available in the customary
international law of aliens. Invariably, Proportionality Analysis will become useful if a NPM or
necessity defence is raised in response to investor-claimants’ claims.
In any case, the fact that Proportionality Analysis does not directly correlate with Full Protection
and Security becomes irrelevant, as the amenable FET protection standard will ultimately cause
proportionality to be applicable. That FET is wider in scope and more malleable is given, so also
is the fact that there exist an interplay between Fair and Equitable Treatment and Full Protection
and Security. It should be recalled that CME, Biwater v. Tanzania and like-minded tribunals’
277
339
subscribing to an expansive scope of FP&S and therefore implying that the legal and regulatory
framework of the host States are to remain immutable, have so held because of the textual
composition of the relevant treaties and the interplay between the Fair and Equitable Treatment
standard and FP&S standard. The interplay plays out more glaringly when tribunals such as
Impregilo v. Argentina tribunal rule that having found breach of FET provision, it was no longer
necessary to examine whether there was a failure to ensure Full Protection and Security. 278
Similarly, Occidental Exploration v. Ecuador tribunal finding that any treatment that is not fair
and equitable automatically occasions an absence of Full Protection and Security is another clear
assertion of the interplay and overlap between Fair and Equitable Treatment and Full Protection
and Security.279 This overlap or interrelationship between Fair and Equitable Treatment and Full
Protection and Security has potentials to make Proportionality Analysis applicable in the
determination of Stability Guarantee claims brought as breach of Full Protection and Security
standard. This is not to equate FP&S protection to that of FET, but merely a reiteration of the
current realities. More importantly or directly, in all the cases highlighted or discussed in Chapter
4 where investor-claimants have sought to broaden the scope of the FP&S to include legal
protection and obtain protection or relief for their breach of Stability Guarantee, these investor-
claimants have equally claimed or alleged breach of FET based on similar facts. It will only be in
rare instances as in the Germany – Pakistan BIT, where the BIT will not provide for FET standard
and yet have a FP&S clause.280 As the scope of protection is wider under FET and it has more
extensive case law indications are that Stability Guarantee scope of protection offered by FET is
278
Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17, Award, 21 June 2011 Para 334.
279
Occidental Exploration and Production Company v. Republic of Ecuador, LCIA Case No. UN3467, Final Award,
1 July 2004 Para 187. The interrelationship transcends tribunals’ ruling to investor-claimants’ claims presentation.
It’s only in six cases out of the 213 cases where investor claimants have alleged breach of -FP&S, that a FET claim
was not made. As the Argentina cases reviewed in Chapter Five indicate, same facts and basis are used to argue for
breaches of FET and FP&S. The six cases include: Louis Dreyfus Armateurs SAS v. The Republic of India
(hereinafter LDA v. India) (PCA Case No. 2014-26) Pending; European Media Ventures SA v. The Czech Republic
(hereinafter EMV v. Czech) UNCITRAL Partial Award on Liability dated 8 July 2009; Cementownia “Nowa Huta”
S.A. v. Republic of Turkey (I) (hereinafter Cementownia v. Turkey) ICSID Case No. ARB(AF)/06/2 Award 17
September 2009; Tokios Tokelés v. Ukraine (hereinafter Tokios v. Ukraine) ICSID Case No. ARB/02/18 Award dated
26 July 2007; Asian Agricultural Products Ltd. (AAPL) v. Republic of Sri Lanka ICSID Case No. ARB/87/3 Award
dated 27 June 1990; American Manufacturing & Trading, Inc. v. Republic of Zaire (hereinafter AMT v. Zaire) ICSID
Case No. ARB/93/1 Award 21 February 1997. See Investment Dispute Settlement Navigator, Investment Policy Hub
<http://investmentpolicyhub.unctad.org/ISDS/FilterByBreaches> accessed 10 March 2018.
280
Of the over 3,000 BIT and Treaties with Investment Provisions mapped by UNCTAD’s Investment Policy Hub,
only 126 do not include Fair and Equitable Treatment Provision. Many of these 126 Investment Agreements also do
not include Full Protection and Security.
<http://investmentpolicyhub.unctad.org/IIA/mappedContent#iiaInnerMenu> accessed 01 April 2018.
340
wider than any of the other substantive standards. In fact, certain tribunals have explicitly declared
that review and a finding of liability for breach of Stability Guarantee are better addressed through
the FET standard.
More and more tribunals are turning to Proportionality Analysis in their determination of
investment claims, while new dimensions of arguments are contemporaneously emerging. For
instance, Proportionality Analysis has been argued to support Ecuador’s justification for the
continuance of the stay of execution in Burlington v. Ecuador’s argument. 281 Despite
Proportionality Analysis’ criticism of legitimizing judicial law making and creating potentials
(albeit limited) for arbitral subjectivity, it’s considered more robust than other alternatives for
addressing the balancing exercise required of investor-state arbitrators. For one, it prevents
tribunals from determining indirect expropriation without proper rationalization and curtails their
subjective assessment of what is fair and equitable.282 In the absence of any other intelligible or
structured technique of weighing and balancing, recourse to Proportionality Analysis is a
preferable balancing tool in situation of conflict of divergent principles.
281
Burlington v. Ecuador – Decision on Stay of Enforcement 31 August 2017 Para 77.
282
Kingsbury and Stephan Schill, ‘Public Law Concepts to Balance Investors' Rights with State Regulatory Actions
in the Public Interest - the Concept of Proportionality’ in Stephan Schill (ed), International Investment Law And
Comparative Public Law (2010 Oxford University Press) 103.
341

Stability Guarantees through Investment Treaty Arbitration

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Stability Guarantees through Investment Treaty Arbitration

Hochgeladen von

Copyright:

Verfügbare Formate

Research Title: Protection of Stability Guarantees through Investment Treaty Formatted: Font: (Default) Times New Roman

1. Chapter One – Introduction

1.1 Research Overview

created or deemed granted. Formatted: Font: Times New Roman, 10 pt

23 Formatted: Font: (Default) Times New Roman, 10 pt

Investor claimants’ multifarious claims of breach or repudiation of Stability Guarantee as a

Formatted: Font: (Default) Times New Roman

1.3 Research Hypothesis and Questions

3. Is Proportionality Technique as appropriate and suitable analytical tool to deploy in balancing

1. Direct Expropriation 89 26 44 Formatted: Font: (Default) Times New Roman

Formatted: Font: Times New Roman

Formatted: Font: (Default) Times New Roman

1.5 Structure of the Research

Formatted: Font: Times New Roman

2.2 REGULATING FOREIGN DIRECT INVESTMENT

2.3 THE ROLE OF INVESTMENT TREATIES IN PROTECTING OF FOREIGN

2.4 STABILITY GUARANTEES – IN CONTRACTS, NATIONAL LEGISLATIONS

2.5 LEGAL PRINCIPLES PTTING FOREIGN INVESTORS’ RIGHTS AGAINST

2.2 REGULATING FOREIGN DIRECT INVESTMENT

Energy Charter provision on definition of investment concludes by stating that ‘“Investment”

What is an investment subject to protection of international investment law is indeed a study on

2.2.2 Mitigating Political Risks and Regulating to Protect FDI

Notwithstanding the divergent and multifarious approaches or perspectives to defining risk, an

2.3.1 Treatification of Investment Protection in Furtherance of Foreign Investors’ Substantive Rights

International Law’ <http://www.britannica.com/topic/Calvo-Doctrine> accessed 22nd October 2017; M Belén Olmos

2.3.2 Investor-State Arbitration – Effective Protection of Foreign Investment

International investment arbitration and international commercial arbitration share procedural

In the absence of express provision for international commercial arbitration in investment

As laudable and promising as investment treaty arbitration is in protection of foreign investors’

[P]erceived deficit of legitimacy and transparency; contradictions between arbitral awards;

2.4 STABILITY GUARANTEES – IN CONTRACTS, NATIONAL LEGISLATIONS

2.4.1 Contractual Stabilization Clauses

Special Representative of the Secretary-General on Business and Human Rights

In terms of scope, contract stabilization may be achieved by a number of means. Scope of

2.4.2 Stability Provisions in Domestic Legislation

2.4.3 Treaty Based Stability Guarantee

LAWFULNESS OF EXPROPRIATION IN BREACH OF STABILITY GUARANTEES

2. CLASSIC CASES ON STABILIZATION CLAUSE

3. INTERNATIONAL LAW RULES ON EXPROPRIATION AND INVESTMENT

4. LEGAL REQUIREMENT FOR LAWFUL EXPROPRIATION

4.1 Compensating Over and Beyond Treaty Compensation Standard

5. FALLING WITHIN THE EXPROPRIATION SPHERE OR NOT – INDIRECT

6. STABILIZATION CLAUSE AS CONDITION AND INDICATOR OF

LAWFULNESS OF EXPROPRIATION IN BREACH OF STABILITY GUARANTEES

A key substantive protection afforded to foreign investors by international investment treaties is

2. CLASSIC CASES ON STABILIZATION CLAUSES

‘… as illustrated by Revere Copper and Brass, Inc. v. Overseas Private-Investment

Formatted: Font: Italic, No underline, Font color: Auto

‘The exercise of the national sovereignty to nationalize is regarded as the

‘Expropriation, which can be defined as a compulsory transfer of property rights,

3. INTERNATIONAL LAW RULES ON EXPROPRIATION AND INVESTMENT

Indirect expropriation is most often generally referred to without further illumination or

(a) Expropriation requires a taking (which may include destruction) by a government-type

(d) The taking must be permanent, and not ephemeral or temporary;

(g) The taking may be de jure or de facto;

(h) The taking may be “direct” or “indirect.”;

(j) To distinguish between a compensable expropriation and a non-compensable regulation by

(k) The investor’s reasonable ‘“investment-backed expectations’” may be a relevant factor

Formatted: Font: Italic

4. LEGAL REQUIREMENT FOR LAWFUL EXPROPRIATION

‘acts of a government in depriving an alien of his property without compensation

‘Nationalization, expropriation or requisitioning shall be based on grounds or

74 Formatted: Not Superscript/ Subscript