Scottish Centre for International Law

Working Paper Series

Climate Compatible Investment Treaty Law: The Role of Legitimate Expectations

Laura Isotalo

Working Paper No. 6

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Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author

Climate Compatible Investment Treaty Law: The Role of Legitimate Expectations

Laura Isotalo*

Abstract: This paper considers the interplay between investment treaty law and climate change regulation, recognising both the need to allow sufficient space for States to take measures against climate change as well as the role investment law has in protecting low- carbon investment. A particular point of focus is the principle of legitimate expectations as it appears in the standard of fair and equitable treatment. An attempt will be made to provide a coherent and suitable framework for the application of this principle, which also promotes compatibility with climate law.

1. Introduction It has been a growing concern for a while that the legal instruments adopted for the purpose of climate change mitigation are in tension with certain other areas of international law.1 International investment law is one such an area of tension, as the economic interests of investors may be affected by measures taken in an effort to reduce greenhouse gas emissions. One aspect that makes the tension with investment law particularly prevalent is the practice of investor-State arbitration which allows individual investors to protect their interests at the international level by challenging the treatment they have received in the hands of capital- importing states. There is a wealth of literature concerning the potential for foreign investors to challenge domestic climate laws in investment treaty tribunals and thus severely undermine the battle against climate change. 2 Sometimes this concern has resulted in recommendations that investment protection should be scaled back.3

* LL.M (Law School, University of Edinburgh); LL.B (University of Hull). This working paper is based upon a dissertation written for the LLM in Law and Chinese at the University of Edinburgh School of Law. Contact email: [email protected]. 1 See e.g. T. Cottier et al (eds), International Trade Regulation and the Mitigation of Climate Change (Cambridge University Press, 2009); R. Leal-Arcas, Climate Change and International Trade (Edward Elgar, 2013); S. Humphreys (ed.), Human Rights and Climate Change (Cambridge University Press, 2009). 2 See e.g. K. Miles, 'Arbitrating Climate Change: Regulatory Regimes and Investor-State Disputes' (2010) 1 Climate Law 63; Freya Baetens, 'Foreign Investment Law and Climate Change: Legal Conflicts Arising from Implementing the Kyoto Protocol through Private Investment,' Sustainable Development Law on Climate Change Legal Working Paper Series 01 (December 2010). 3 See e.g. F. Marshall, 'Climate Change and International Investment Agreements: Obstacles or Opportunities?,' IISD Trade, Investment and Climate Change Series (March 2010) 66.

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On the other hand, some commentators have recognised the role of investment treaty law in protecting climate friendly investment.4 The current investment climate for low-carbon projects is not always stable and transparent but may be subject to high levels of uncertainty and risks of policy changes. Many climate friendly investments also operate in the field of energy production or may involve other long-term, high-risk projects such as carbon capture and storage. Investors are likely to rely on government incentives and favourable policies when making calculations of risks and profit and deciding to invest. International investment law certainly has an important role to play in increasing investor confidence. This paper looks into one particular principle of international investment law that has been the subject of much controversy: the doctrine of legitimate expectations. This principle is generally seen as the dominant element of one of the most widely invoked treaty provisions: the standard of fair and equitable treatment (FET). Whilst the exact contents of FET are not completely clear, it is a provision that could potentially be applied to a vast number of situations.5 In addition to legitimate expectations, it is frequently interpreted as encompassing other elements such as stability, transparency, due process, prohibition on denial of justice, arbitrariness and abusive treatment.6 The view adopted in this paper is that legitimate expectations are the key element of fair and equitable treatment and perform an important role in the balancing of investor and host State interests. Yet its application in current arbitral practice suffers from incoherence, resulting in legal uncertainty. At the same time, the whole institution of investor-State arbitration is said to suffer from a legitimacy crisis, resulting from the failure of tribunals to take into account non-investment related political and social goals of host States.7 In the light of the dual function of climate change law in both introducing legal constraints on carbon-intensive industries, as well as incentivising low-carbon investment, it is submitted that the best way for international investment law to support the achievement of these goals is to adopt a balanced, consistent and predictable interpretation of the relevant investment treaty provisions. To this end, the aim of this paper is to clarify the functioning of

4 A. Boute, 'Combating Climate Change Through Investment Arbitration,' Fordham International Law Journal 35 (2012 2011): 613; A. Boute, 'Combating Climate Change and Securing Electricity Supply: The Role of Investment Protection Law,' 16(8) European Environmental Law Review (September 2007) 227. 5 In general, see e.g. R. Klaeger, Fair and Equitable Treatment in International Investment Law (Cambridge University Press, 2011); I. Tudor, The Fair and Equitable Treatment Standard in International Investment Law (Oxford University Press, 2008); M. Paparinskis, The International Minimum Standard and Fair and Equitable Treatment (Oxford University Press, 2014). 6 United Nations Conference on Trade and Development, 'Fair and Equitable Treatment,' UNCTAD Series on Issues in International Investment Agreements II (2012) xvi; Tudor (n5) 154-180. 7 See e.g. discussion in E. M. Leonhardsen, 'Looking for Legitimacy: Exploring Proportionality Analysis in Investment Treaty Arbitration,' 3(1) Journal of International Dispute Settlement (March 1, 2012) 95, 110.

3 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author the principle of legitimate expectations under the FET standard, so that it may be used to protect low-carbon investments from undue interference but still maintain sufficient regulatory space for governments to adopt suitable climate legislation to control greenhouse gas emissions. Section 2 will justify the use of legitimate expectations in the interpretation of FET. For the purpose of separating investor expectations deserving of judicial protection from those that are merely subjective and unjustified, section 3 will then highlight the conditions required for expectations to be considered ‘legitimate’. In light of the deference due to sovereign regulatory powers of States and the balance required by the goals of climate change laws, section 4 will discuss a suitable balancing method, taking some inspiration from the common law treatment of legitimate expectations. It will be suggested that proportionality analysis is the best and most analytically sound option. Finally, this paper will suggest some ways to improve the application of proportionality analysis by investment treaty tribunals, with a particular regard to the climate change context.

2. Legal basis for legitimate expectations in FET 2.1 Preliminary issue: FET and the international minimum standard This paper is primarily concerned with fair and equitable treatment as an independent treaty standard. However, as a preliminary matter, the connection between fair and equitable treatment and the ‘customary international law minimum standard of treatment of aliens’ must be clarified. FET clauses appear in investment treaties in a number of different formulations. Most treaties merely provide for an obligation of fair and equitable treatment without further guidance.8 Some include that this treatment must be in accordance with ‘the principles of international law’9 and some further refer to ‘customary international law.’10 According to an OECD summary, 11 the debate on the meaning of these formulations concentrates mainly on whether the conduct of the host State is measured against: i) FET as an autonomous treaty standard;

8 See e.g. Article IV(1) of the Spain-Argentina BIT; Article 2 of the United Kingdom-Argentina BIT. 9 E.g. Article 5 of the France-Argentina BIT; Article 1105 of the North American Free Trade Agreement. 10 A number of recent Free Trade Agreements signed by the US: e.g. Article 11.5 of the US-Australia Free Trade Agreement; Article 10.5 of the US-Central America Free Trade Agreement (CAFTA); Article 10.4 of the US-Chile Free Trade Agreement; Article 10.5 of the US-Morocco Free Trade Agreement; Article 15.5 of the US-Singapore Free Trade Agreement. 11 OECD, 'FAIR AND EQUITABLE TREATMENT STANDARD IN INTERNATIONAL INVESTMENT LAW,' Working Papers on International Investment Number 2004/3 (September 2004) 8.

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ii) FET interpreted in light of international law including all sources; iii) the customary international law minimum standard.12 Whilst the reference to customary international law clearly ties the interpretation of FET to the minimum standard, there is some scope for disagreement on how clauses with a reference to ‘principles of international law’ or those without any such reference should be interpreted. It has become apparent that ‘principles of international law’ must also in some cases be interpreted as limiting the scope of the provision to the international minimum standard – this is the case with NAFTA Article 1105, for example, due to the binding interpretation issued by the Free Trade Commission.13 The results of this debate have relevance to the main discussion of this paper; the status and protection of legitimate expectations may well be different under FET as an independent treaty standard and the customary law international minimum standard. The latter is likely to offer a significantly lower standard of protection. From the perspective of climate law it is also interesting that there have been calls for new investment treaties to be explicitly tied to the international minimum standard – because the latter purportedly has less potential to undermine climate change regulation.14 Taking into account the needs of low- carbon investors, however, it will be shown through the discussion that FET as an independent treaty standard can provide an appropriate balance. As long as it follows the framework presented below, it is an appropriate way to support both climate friendly investment and other types of climate change legislation.

2.2 Fair and equitable treatment as an autonomous treaty standard: no clear legal basis for legitimate expectations Despite their long-term presence in investment treaties, the textual meaning of ‘fair and equitable treatment’ clauses is still subject to a considerable amount of uncertainty. The terms ‘fair’ and ‘equitable’ are highly subjective. While according to some commentators this may be intentional,15 others have also expressed concerns that it may give tribunals too much

12 The most commonly cited formulation of the international minimum standard can be found in the case of U.S.A. (L.F. Neer) v. United Mexican States, (1926), RIAA iv. 60, 61-2. 13 NAFTA Free Trade Commission, ‘North American Free Trade Agreement: Notes of Interpretation of Certain Chapter 11 Provisions’ (31 July 2001), available at http://www.sice.oas.org/tpd/nafta/Commission/CH11understanding_e.asp. 14 Marshall (n3). 15 K. Yannaca-Small, 'Fair and Equitable Treatment in International Investment Law,' in International Investment Law: A Changing Landscape (OECD, 2005); Katia Yannaca-Small, 'Fair and Equitable Treatment Standard: Recent Developments', in A. Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 111, 116.

5 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author interpretative discretion.16 Through arbitral jurisprudence, some common elements have emerged, such as stability and predictability of the investment framework, 17 non- discrimination,18 due process (including prohibition of denial of justice)19 and prohibition of arbitrariness.20 Most of these elements have appeared both in awards interpreting FET as part of the international minimum standard as well as a self-contained treaty provision. The principle of legitimate expectations is, however, frequently recognised as a major component if not the dominant aspect of FET.21 While the relationship between the different elements of FET is not clear and different arbitral tribunals have sometimes weighed them differently in the finding of unfair and inequitable treatment, it is submitted that legitimate expectations have the potential of being used as a key consideration that underlies the other elements and separates investor interests worthy of protection from frivolous claims. Legitimate expectations are rarely mentioned in the language of bilateral or multilateral treaties governing foreign investment.22 Nevertheless, the doctrine has entered the jurisprudence of investor-state arbitral tribunals and its presence seems, at least for the foreseeable future, likely to continue. Although mainly associated with the FET clauses, legitimate expectations occasionally also feature in the arbitral analysis on indirect expropriation.23 This discussion will, however, only focus on FET. The first arbitral award to expressly refer to legitimate expectations as part of its analysis of the fair and equitable treatment standard was Tecmed. In a frequently quoted paragraph, the Tribunal expressed the view that the 'provision of the Agreement … requires

16 C. Schreuer, 'Fair and Equitable Treatment,' 2(5) Transnational Dispute Management (2005); C. Schreuer, 'Fair and Equitable Treatment (FET): Interaction with Other Standards,' 4(5) Transnational Dispute Management (2007); S. Schill, 'Fair and Equitable Treatment under Investment Treaties as an Embodiment of the Rule of Law,' 3(5) Transnational Dispute Management (2006); as cited by Yannaca-Small, (n15) 118. 17 Occidental Exploration and Production Company v. The Republic of Ecuador, Case No. UN3467 LCIA (UNCITRAL 2004) para. 183; Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, Case No. ARB (AF)/00/2 ICSID (2003) para. 154; Metalclad Corporation v. The United Mexican States, Case No. ARB(AF)/97/1 ICSID (ICSID Additional Facility 2000) para. 99. 18 CME Czech Republic B.V. v. The Czech Republic (Partial Award), UNCITRAL 1976 (2001) para. 611; M. Polasek and S. Puig, Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8 (2007) para. 280. 19 Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2 (ICSID Additional Facility 2002) paras. 126-7; Waste Management, Inc. v. United Mexican States (No. 2), Case N° ARB(AF)/00/3 ICSID (2004) para. 98. 20 S.D. Myers, Inc. v. Government of Canada (Partial Award), UNCITRAL 1976 (2000) at para. 263; Eureko B.V. v. Republic of Poland (Partial Award) (2005) para. 233. 21 EDF (Services) Limited v. Romania, Case No. ARB/05/13 ICSID (2009) para. 216; Saluka Investments BV (The Netherlands) v. The Czech Republic (Partial Award), UNCITRAL Arbitration (2006) para. 302. 22 For a rare example, see Canada-European Union Comprehensive Economic and Trade Agreement (CETA), Article X.9(4): ‘When applying the above fair and equitable treatment obligation, a tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated.’ 23 Tecmed (n17) para. 122.

6 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author 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.'24 The claim of violation of the fair and equitable treatment standard was based on the refusal of the host State authorities to renew the licence of a landfill operator while the authorities were looking for another location for the landfill due to environmental concerns. On the basis of the above statement, the Tribunal was able to find that the investor’s legitimate expectations had been infringed and that the investment had thus been subjected to unfair and inequitable treatment. The Tecmed award has since faced a great deal of criticism but it has also been cited with approval.25 It is notable that, apart from the ‘good faith principle’, Tecmed did not refer to any other authority in support of interpreting the fair and equitable treatment standard as including an obligation to respect the ‘basic expectations’ of investors. Later awards have formed a trend of simply referring to the reasoning of previous tribunals that used legitimate expectations, thus creating a chain of similar decisions without an express reference to external authority. The attempt to use the principle of good faith as the legal basis has been discredited, with commentators noting that '[d]espite being ‘one of the basic principles governing the creation and performance of legal obligations’, good faith may not provide a source of obligation in itself.' 26 This would leave the adjudication of investor expectations in Tecmed without justification. The failure of tribunals to articulate a legal basis for their use of the doctrine has been severely criticised by some commentators and resulted in claims that the doctrine has been essentially 'invented' by some arbitrators and then merely copied by others, thus forming an unstable basis similar to a ‘house of cards.’27 In order to justify future application of the principle, it is therefore important that a sufficient legal basis be found. As to the treaty provision itself, as was noted earlier, the language gives no explicit indication of legitimate expectations. In fact, Pedro Nikken argued in his dissenting opinion on Suez that '[t]he assertion that fair and equitable treatment includes an obligation to satisfy or not to frustrate the legitimate expectations of the investor at the time of his/her investment

24 Ibid., para. 154. 25 See e.g. MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, Case No. ARB/01/7 ICSID (2004), paras. 114-5. 26 M. Potesta, 'Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept,' 28 ICSID Review (2013): 88, 5; Border and Transborder Armed Actions (Nicaragua v. Honduras), ICJ Reports (1988) 105; Re-introduction of the Death Penalty in Peru, 16 Human Rights Law Journal (1995) 9 and 13. 27 C. Campbell, 'House of Cards: The Relevance of Legitimate Expectations under Fair and Equitable Treatment Provisions in Investment Treaty Law,' 30(4) Journal of International Arbitration (2013) 361.

7 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author does not correspond, in any language, to the ordinary meaning to be given to the terms ‘fair and equitable.’' 28 Although I would like to qualify this statement by saying that legitimate expectations and the concept of fairness frequently appear together at least in some domestic jurisdictions,29 it is accepted that further justification would still be very helpful. If the ordinary meaning of the treaty provision leaves it ridden with ambiguity, the context of the terms and the object and purpose of the treaty must then be considered. According to Article 31 of the VCLT, treaty interpreters, in addition to the ‘context’ of the terms of the treaty used for their interpretation, may take into account 'any relevant rules of international law applicable in the relations between the parties.'30 Recognised sources of international law, in addition to treaties, include customary international law and 'general principles of law recognized by civilized nations.' 31 Therefore the following discussion on whether legitimate expectations might be recognised either as an independent customary law or as part of the international minimum standard is also relevant for autonomous treaty clauses.

2.3 Fair and equitable treatment in customary international law: the international minimum standard Customary international law is created through state practice combined with opinio juris.32 As to whether this might help in the interpretation of FET, the customary law status of legitimate expectations leaves plenty of room for doubt. As it stands, there certainly is no clear recognition for legitimate expectations as an independent customary rule of international law. It could be worth considering whether such a custom might be in the process of being created, as the prominence of the principle seems to increase in investor- state arbitration. It has been said that the line of jurisprudence in arbitral awards, whilst not capable of creating law in itself, has an impact on the expectations of the international community of States and investors towards how treaty standards will be applied.33 It is possible that the persistent application of the principle, even if incorrect in the beginning,

28 See Suez v. Argentina, ICSID Case No. ARB/03/19 (Separate Opinion of Arbitrator Pedro Nikken) para. 3. 29 Regina (Bancoult) v Secretary of State for Foreign and Commonwealth A›airs (No 2), [2008] UKHL 61 (House of Lords 2008), para. 135; Regina v. Secretary of State for Education and Employment, ex parte Begbie, 1 W.L.R 1115 (Court of Appeal 1999) 1127. 30 Article 31(3)(c) of the Vienna Convention on the Law of Treaties. 31 Article 38(1)(c) of the Statute of the ICJ. 32 Continental Shelf (Libya v. Malta), 1985 I.C.J. 13 (June 3) para. 27. 33 S. Schill, 'Fair and Equitable Treatment, the Rule of Law, and Comparative Public Law,' in International Investment Law and Comparative Public Law (2010) 151, 156-7.

8 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author could be seen as having started a new form of state practice combined with the belief of its legality. In any event, it has been suggested that arguing for the existence of such a customary rule is premature at this point.34 The insufficiency of proof is unsurprising, considering that most of the parties with an interest in proving the existence of such a custom are likely to be investor claimants purporting to establish a favourable interpretation of relevant treaty provisions. It has been noted that gathering evidence of state practice and opinio juris is an immense task that is well beyond the capacities of individual claimants, and thus calls have been made for an international body such as the International Law Commission to take on the work of clarifying the status of customary international law related to investment protection.35 At this point it is also relevant to consider whether legitimate expectations could be part of the customary law international minimum standard. Assuming that it is, that would justify its application not only under the FET provisions tied to the minimum standard but also under other types of FET provisions, based on the influence of ‘other rules of international law’ in the process of treaty interpretation.36 However, this would still not mean that the protection under independent FET clauses would be limited by the minimum standard, as there remains plenty of room to argue that ‘fair and equitable’ signifies a higher level of protection than a minimum standard. It would simply mean that, due to the presence of similar elements in both standards, the incorporation of some form of legitimate expectations would be justified in the case of independent FET standards as well. This paper supports the view that legitimate expectations may be part of the international minimum standard. While has been argued that, due to the bare minimum level of protection offered by this standard, legitimate expectations would go beyond its scope,37 ‘legitimate’ is a flexible attribute and it is likely that at least some reasonable and objective expectations of the investor are deserving of protection, even under such a basic standard. This position is also supported by a number of NAFTA tribunals who have considered such expectations to be relevant in the finding of a breach of the minimum standard of FET, even if the application of the principle has been incredibly deferential and subject to stringent

34 Yannaca-Small (n15) 130. 35 See e.g. J. Harrison, 'The International Law Commission and the Development of International Investment Law,' 45(3) George Washington International Law Review (2013) 413. 36 See discussion at n30-31. 37 P. Dumberry, The Protection of Investors’ Legitimate Expectations and the Fair and Equitable Treatment Standard under NAFTA Article 1105,' 31(1) Journal of International Arbitration 31 (2014) 47, 59; see also the Neer formulation (n12).

9 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author criteria.38 Moreover, the CMS tribunal, whilst refusing to decide whether the applicable treaty provision should be limited to the minimum standard of treatment or not, stated that the requirement of 'stability and predictability of the business environment, founded on solemn legal and contractual commitments' is 'not different' from the international minimum standard. 39 Yannaca-Small has attempted to use this comment as justification for the possibility that stability, i.e. legitimate expectations, could already be said to have acquired customary nature.40 Although the credibility of this statement may be somewhat undermined by the fact that the tribunal was not necessarily interpreting a minimum standard clause – and, as some have pointed out, NAFTA tribunals have never construed FET as requiring a stable and predictable business environment41 – it may still be seen as adding support. Dumberry has argued that the NAFTA case law merely provides for legitimate expectations as a ‘factor’ to take into account but does not support an obligation to protect them as such.42 It is submitted that this view is based on an artificial distinction; as will be shown later, even where legitimate expectations are recognised and deemed worthy of protection, their frustration may still be justified on the basis of a legitimate public purpose. As seen, whilst they do not conclusively establish state practice and opinio juris, both case law and some commentators support the view that legitimate expectations are indeed part of the minimum standard of treatment. Assuming that this is the case, however, the criteria for recognition of such expectations and the applicable balancing test would probably be different under the minimum standard and under FET in a self-contained treaty clause – their frustration would need to be particularly outrageous before a breach of the minimum standard would be found. However, considering the uncertainties highlighted in this section, as well as the difficulties of clearly recognising that an international custom has been formed, it is to the ‘general principles of law’ that we may potentially look in order to provide a stronger legal basis for legitimate expectations within the duty to provide fair and equitable treatment.

38 International Thunderbird Gaming Corporation v. The United Mexican States, UNCITRAL (1976) (2006) paras. 147 and 194; Glamis Gold, Ltd. v. The United States of America, UNCITRAL (1976) (2009) paras. 616 and 766. 39 CMS Gas Transmission Company v. The Republic of Argentina, Case No. ARB/01/8 ICSID (2005), para. 284. 40 Yannaca-Small (n15) 124. 41 Dumberry (n37) 73; see however Thunderbird, (n38) Separate Opinion of Thomas Wälde, para. 36. 42 Dumberry (n37).

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2.4. Legitimate Expectations as a General Principle of Law Principles of law recognised in domestic legal systems can be used for filling the gaps left in international law by treaty and custom. 43 A general principle of protecting legitimate expectations could therefore be used as an aide in the interpretation of FET. A large amount of uncertainty exists in the process of recognising general principles of law and it is not clear how consistent the protection of legitimate expectations in domestic legal systems would need to be in order to justify their use in the international context.44 It is submitted that in the absence of clear rules about recognising general principles of law, the methodology used by Snodgrass seems quite justifiable.45 Her contribution addresses the key issues of ‘how much consensus is enough’ and what degree of similarity one should expect to find in comparing legal systems. According to her findings, ‘almost all authors’ emphasise that instead of looking for universal application of a given principle, an analysis of representative systems of municipal law is sufficient. Superficial differences in the relevant laws should also not be decisive, the key issue being whether the same principle is supported.46 Academic opinion on legitimate expectations varies: some commentators have argued that the principle does not enjoy sufficient support in national legal systems in order to justify its recognition as a general principle in international law.47 Others have responded by saying that unanimous support is not necessary for this purpose and that the protection of legitimate expectations in the major legal systems of the world is enough.48 There have also been claims that only procedural expectations enjoy sufficiently wide support but substantive expectations do not.49 The findings made by Snodgrass indicate recognition of legitimate expectations in most major legal systems: Germany, the Netherlands, Australia, Canada, New Zealand, South Africa and the United Kingdom. France, on the other hand, 'effectively protects legitimate expectations as ‘vested rights’ … and imposes restrictions on the revocation of certain

43 M.N. Shaw, International Law, 6th ed (Cambridge, UK ; New York: Cambridge University Press, 2008) 98; see further Effect of Awards of Compensation Made by the United Nations Administrative Tribunal, ICJ Reports (1954) 47. 44 E. Snodgrass, 'Protecting Investors’ Legitimate Expectations - Recognizing and Delimiting a General Principle,' 21(1) ICSID Review (2006) 1. 45 Ibid. 46 Ibid, 22. 47 Campbell (n27). 48 Snodgrass (n44) 21. 49 See e.g. T. Zeyl, 'Charting the Wrong Course: The Doctrine of Legitimate Expectations in Investment Treaty Law, 49(1) Alberta Law Review (July 1, 2011) 203.

11 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author administrative acts.'50 On this basis, it certainly appears that the principle is widely supported in municipal systems. Yet some commentators have argued that, even if legitimate expectations are recognised in international law, they should only include procedural expectations, as there is insufficient support for substantive expectations in municipal systems. These commentators have usually referred to common law systems.51 With regard to English law, it is certainly incorrect to claim that substantive expectations are not recognised – they are, ever since the decision in Coughlan.52 Snodgrass also identifies another important criterion for recognising a particular general principle of law: its ‘appropriateness’. In addition to the level of recognition, she finds as relevant whether the principle of municipal law would work a ‘substantial justice’, assist in the effective judicial resolution of international disputes and fill gaps in primary norms.53 The question of appropriateness turns the focus on what role the principle of legitimate expectations is performing as part of the fair and equitable treatment analysis and whether it is helpful. In defence of not only appropriateness but necessity of recognising legitimate expectations, it has been said that they are 'inseparable from the concept of private property rights.'54 It has also been suggested that legitimate expectations are necessarily connected to the rule of law.55 As was mentioned above, the doctrine also frequently appears together with the concept of fairness, thus supporting the connection with FET. Moreover, stability and predictability are often recognised as elements of FET,56 as well as mentioned in the preambles of investment treaties,57 thus highlighting them as part of the object and purpose. Yet the vast majority of authors and tribunals have recognised that the required levels of stability should not amount to a ‘freezing’ of the regulatory framework

50 Snodgrass (n44) 27. 51 Zeyl (n49) 211-214; A. P.G. Pandya and A. Moody, 'Legitimate Expectations in Investment Treaty Arbitration: An Unclear Future,' 15 Tilburg Law Review (2011 2010) 93, 97-104. 52 R v North and East Devon Health Authority, ex parte Coughlan, [2001] QB 213 (Court of Appeal, Civil Division 1999). 53 Snodgrass (n44) 23-4. 54 L. Y. Fortier and S. L. Drymer, 'Indirect Expropriation in the Law of International Investment: I Know It When I See It, or Caveat Investor,' 19(2) ICSID Review (2004) 293, 306. 55 S.J. Schønberg, Legitimate Expectations in Administrative Law (Oxford [England] ; New York: Oxford University Press, 2000) 9-11; as cited in Potesta (n26) 7. 56 Occidental v. Ecuador (n17) para. 183; Metalclad (n17) para. 99. 57 See e.g. the US-Czech Republic BIT; the North American Free Trade Agreement; see also Article 10(1) of the Energy Charter Treaty.

12 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author of host States.58 Legitimate expectations are particularly suitable as tools for determining appropriate levels of stability. Depending on the definition of ‘legitimate’, the effect of the doctrine will fall far short of ‘freezing’. Instead, it merely requires stability of those parts of the framework that the investor has reasonably relied on. It seems that the only arguments against the ‘appropriateness’ of using legitimate expectations as an aide for the interpretation of treaty standards would be the frequently expressed concerns that protecting investors’ expectations would subject host States to excessive obligations and suppress their regulatory space. This is also the concern of those who claim that allowing tribunals to review decisions of domestic authorities on the basis of substantive rather than procedural expectations would display an insufficient level of deference.59 On the issue of substantive expectations, the reason for the English law developments towards protecting them was recognition that in some situations procedural rights are simply not sufficient to prevent a manifestly unfair outcome.60 The reasons for protecting substantive expectations of foreign investors are the same. Moreover, the use of only procedural legitimate expectations in the international context could create a standard very minimal indeed, as capital-importing countries may have incredibly varying levels of administrative transparency and stakeholder involvement. A more general concern has also been expressed, to the effect that any obligation to protect legitimate expectations would subject host States to undue hardship and go well beyond their intentions when ratifying investment treaties.61 However, it would be hard to argue that no expectations deserving of protection exist. Any concern about intrusiveness can be alleviated by adopting a suitable set of criteria for the ‘legitimacy’ of expectations. This will be discussed in the next section.

3. Conditions and criteria for legitimacy To start off the discussion of the circumstances in which investor expectations can be regarded as ‘legitimate’ and worthy of protection, I will consider some examples of the ways in which arbitral tribunals have defined these situations. Here, it is possible to see further

58 See e.g. EDF (n21) para. 217; Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3 (Award of 22 May 2007) para. 261; Continental Casualty Company v. The Argentine Republic, ICSID Case No. ARB/03/9 (2008); R. Dolzer and C. Schreuer, Principles of International Investment Law, Second edition (Oxford, United Kingdom: Oxford University Press, 2012), para. 148. 59 Zeyl (n49). 60 Coughlan (n52) 242. 61 Suez v. Argentina, (Separate Opinion) (n28) para. 2.

13 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author evidence of divergence between awards interpreting FET clauses tied to the minimum standard and those interpreting independent FET clauses. Perhaps the broadest expression given to the principle can be found in the Tecmed award, where it was held that the Contracting parties are obliged 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. The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor…' 62 This formulation includes the consistency, unambiguity and transparency of host State behaviour as subjects of the ‘basic’ expectations of the investor, and reliance on those elements as a further criterion. Further, Tecmed also sets an example that would allow investors to rely on a potentially very wide range of government conduct; in the same paragraph it is stated that these requirements apply to '[a]ny and all state actions'. In the particular circumstances, the investor was regarded as having a legitimate expectation to be allowed to continue operating a landfill, pending its relocation. The expectation was regarded as established by implication in the relocation agreement which had been concluded between the investor and the authorities – even though the agreement was in fact silent on the issue of what would happen until relocation – and the fact that the authorities displayed a lack of transparency in not clearly communicating the possibility of non-renewal of the operating permit to the investor beforehand.63 Unsurprisingly, the Tecmed formulation has later been criticised as too broad and the requirements of consistency, unambiguity and transparency as being more apt to describe a regulatory ideal than an achievable treaty standard.64 Later tribunals, even those applying independent FET clauses, have been somewhat more conservative in their definition of what an investor may legitimately expect.65 Glamis Gold is an example of the more restrictive approach seen in cases involving FET tied to the minimum standard. According to the view of the Glamis tribunal, expectations that an investor tries to rely on must be 'reasonable' and 'investment-backed' as well as involving 'as a threshold circumstance, at least a quasi-contractual relationship

62 Tecmed (n17) para. 154. 63 Ibid, para. 153. 64 Z. Douglas, ‘Nothing if Not Critical for Investment Treaty Arbitration: Occidental, Eureko and Methanex’ (2006) 22(1) International Arbitration 27; as cited in O. Osasu, 'Legitimate Expectations and Political Risk: Lessons from Investment Arbitration for Energy Investors,' 6 International Energy Law Review (2013): 249, 255. 65 Parkerings v. Lithuania (n18) para. 331; Saluka (n21) paras. 304-7; EDF (n21) paras. 217-219.

14 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author between the State and the investor, whereby the State has purposely and specifically induced the investment.'66 Although these criteria make it somewhat more difficult for an investor to establish the legitimacy of their expectations, they are not the main reason for why it has been so difficult for investors to successfully claim a breach of FET under clauses similar to Article 1105. The real obstacle lies in the balancing test applied by NAFTA tribunals, which will be discussed in the next section. For now it is sufficient to say that these cases demonstrate the possibility of construing ‘legitimacy’ broadly or narrowly. Some conditions that investor expectations must fulfil are relatively well-established and uncontroversial. These include the following:

i) The expectations must be based on conditions offered by the host State.67 It is widely recognised that mere subjective expectations of the investor are not sufficient. Expectations that are ‘objective’ have a basis in the reality of the investment environment of the host State.68 It seems fair to say that an attempt to conclusively list different forms of state conduct that can give rise to investor expectations would be completely futile. There appears to be an unlimited range of behaviour that a State could engage in, from different types of contractual undertakings to all kinds of promises and representations featuring in oral comments, letters, memorials etc. Judging from the comments made in literature and by tribunals, requirements as to the form of government conduct have hardly made an appearance at all.69 Instead, what matters is to whom the conduct is addressed to and how specific and unambiguous it is. Different types of situations can be roughly organised in three categories: firstly, formal, legally binding and possibly contractual undertakings entered into with regard to the relevant investor specifically; secondly, informal promises or representations made individually to an investor or a small group; and thirdly, the regulatory framework in general as far as it is relied on by foreign investors. Contractual undertakings are the strongest type of representation and most likely to generate legitimate expectations. They are individualised and, normally, unambiguous as to what type of expectations they may generate. However, many tribunals have recognised that

66 Glamis v. USA (n38) paras. 314 and 766. 67 LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc .v. Argentine Republic (Decision on Liability), Case No. ARB/02/1 ICSID (2006) para. 130; Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador, Case No. ARB/04/19 ICSID (2008) para. 340; Saluka (n22) para. 329. 68 Suez v Argentina (n28) para. 228; Dolzer and Schreuer (n58) 148. 69 Snodgrass (n44).

15 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author the existence of a breach of contract does not automatically mean a breach of treaty.70 If contractual obligations automatically created legitimate expectations, that could, in effect, transform the FET provision into an umbrella clause.71 There needs to be a way to distinguish between breaches of contract which are outside arbitral jurisdiction and expectations protected under the treaty. One method that is often suggested is to distinguish between the sovereign and the commercial conduct of the state – only the former being capable of creating legitimate expectations.72 This distinction has, however, been criticised as unhelpful and difficult to apply in the context of the discussion related to umbrella clauses.73 It is possible that the best way to prevent investment arbitration from stepping into the sphere of contractual disputes would be to effectively disregard the contractual nature of expectations and merely to regard the existence of a contract as an indication of unambiguous and individualised representations that a reasonable investor would be entitled to rely on. The ‘reasonableness’ element, which is discussed further below, is also relevant in judging whether a contract provision is capable of creating legitimate expectations: normally, the presence of a contractual obligation combined with the above criteria would indicate that an expectation is legitimate. Yet, in the case of foreseeable industrial practice, e.g. disregarding stipulated time limits, even the contractual nature of such terms would not justify reliance on them. The second category of state conduct consists of informal promises and representations. These have normally been seen as capable of creating legitimate expectations, as long as they are sufficiently unambiguous.74 The investor’s due diligence obligation should also be taken into account: if the investor knows or could reasonably be expected to know of a reason not to rely on the representation, no expectation can be created.75 There are no obvious problems with this approach and it appears to be supported

70 Impregilo S.p.A. v. Argentine Republic, Case No. ARB/07/17 ICSID (2011), 292. 71 Dolzer and Schreuer (n58) 152. 72 Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, Case No. ARB/03/29 ICSID (2009) para. 180; Potesta (n26) 18. 73 SGS Société Générale de Surveillance S.A. v. The Republic of Paraguay (Decision on Jurisdiction), Case No. ARB/07/29 ICSID (2010), para. 135; Heikki Marjosola, 'Public/Private Conflict in Investment Treaty Arbitration - A Study on Umbrella Clauses,' Helsinki Law Review (2009) 103, 119. 74 Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt (Award and Dissenting Opinion), ICSID Case No. ARB/84/3 (1992), paras. 82-3; Parkerings v Lithuania, (n21) para. 331. 75 Bayindir v. Pakistan (n72), para. 195.

16 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author by the majority academic opinion as well as the domestic legal systems that recognise legitimate expectations.76 It should be noted, however, that tribunals applying the international minimum standard may have a narrower approach to informal representations. At least some awards have required the existence of a 'quasi-contractual relationship' as a minimum requirement.77 The most contentious source of expectations is the regulatory framework of the State in general. Whilst some tribunals appear to have been willing to protect such expectations at least in some circumstances,78 many have emphatically refused to do so.79 It is easy to see why recognising the legitimacy of these expectations could trigger concerns about ‘freezing’ the legal framework. It has also been said that the role of legitimate expectations cannot be to function as a de facto stabilisation clause, which some investors specifically negotiate into their investment agreements.80 However, this paper takes the view that in some circumstances it is feasible to say that parts of the regulatory framework may create legitimate expectations – mainly where policies are adopted specifically to attract investors, especially those of a particular kind. This is likely to be the case with many low-carbon investment projects. In these circumstances, the State can be expected to foresee that investors would rely on such laws or policies. As has been noted, many low-carbon projects, such as those related to energy production, may have a lifespan of years or decades and thereby be subject to significant risk of regulatory interference. 81 It is feasible to say that any preferential policies form part of the investor’s risk-profit assessment and may have the impact of inducing investment in a project that would otherwise not be considered worthwhile.82 In some cases the return on investment may be delayed by a long time, and thus a change in relevant policies could deprive the investor of much of their profit. It is submitted that, while it may be advisable for investors to try to secure more specific assurances, it is sometimes reasonable to rely on the relevant regulatory framework as such – mainly so, where the laws or policies are adopted with the intention of attracting

76 See e.g. discussion of domestic law in Snodgrass (n44). 77 See above.. 78 El Paso Energy International Company v. The Argentine Republic, Case No. ARB/03/15 ICSID (2011), para. 374; Toto Costruzioni Generali S.p.A. v. The Republic of Lebanon, ICSID Case No. ARB/07/12 (2012), para. 244. 79 Methanex Corporation v. United States of America, UNCITRAL (2005), part IV Chapter D para. 7; Parkerings v Lithuania (n21) para. 337 80 Snodgrass (n44) 38. 81 See e.g. discussion in A. Boute, 'Challenging the Re-Regulation of Liberalized Electricity Prices under Investment Arbitration,' 32 Energy Law Journal (2011) 497. 82 See e.g. the comments made in Boute (n4) 637.

17 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author investment.83 It is further submitted that investor expectations should enjoy higher legitimacy if the relevant framework is targeted to a specific industry, and particularly where the effect of the policy was to render high-risk or long-term projects capable of realisation.84

ii) The conditions and expectations must exist at the time of the investment. 85 This point is not as straightforward as it seems. As has been argued by Schreuer and Kriebaum, it may well be incredibly hard if not impossible to identify one point in time when the investment is made.86

iii) The investor must rely on the conditions in making the investment. 87 Although frequently mentioned, reliance has not received a great deal of attention in arbitral jurisprudence. Most tribunals merely require the investor to 'have relied upon them when deciding to invest' without further elaboration.88 The Suez tribunal specifically emphasised the importance of the investor having 'acted in reliance upon those laws and regulations and changed their economic position as a result'89 but did not, for example, mention the need for the investor to have suffered any harm. This is somewhat surprising, as legitimate expectations in municipal law often specifically require ‘detrimental reliance’. 90 This requirement should be present as a general rule of thumb in international law as well, in order to weed out claims that are manifestly undeserving.

iv) The expectations must be ‘reasonable’.91 This element is present in most awards on legitimate expectations and it is arguably one of the key issues in establishing ‘legitimacy’. There have been a number of statements considering that the determination of ‘reasonable’ in this context must take account 'all the

83 See the comment in Suez v. Argentina (n28) para. 234. 84 Some support for this can be found in Total S.A. v. The Argentine Republic, ICSID Case No. ARB/04/01 (2010) para. 122. 85 See above. 86 C. Schreuer and U. Kriebaum, 'At What Time Must Legitimate Expectations Exist?,' in A Liber Amicorum: Thomas Walde - Law Beyond Conventional Thoughts (Cameron, 2009). 87 Duke Energy v. Ecuador (n67) para. 340; Tecmed, (n17) para. 262; Enron v. Argentina (n58). 88 See e.g. Duke Energy v. Ecuador (n58) para. 340. 89 Suez v. Argentina (n28) para. 226. (italics in the original text) 90 P. Craig, Administrative Law, 4th ed. (London: Sweet & Maxwell, 1999) 619; cited in Regina (Bibi) v Newham London Borough Council, [2002] 1 W.L.R 237 (2001), 246. 91 National Grid plc v. The Argentine Republic, UNCITRAL 1976 (2008) para. 173; Duke Energy v. Ecuador (n67).

18 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author circumstances'. 92 As mentioned in Duke, these circumstances also include 'the political, socioeconomic, cultural and historical conditions prevailing in the host State.' 93 The lawfulness or unlawfulness of the state behaviour the investor is purporting to rely on must also be a part of this consideration – arguably it would be much harder for an investor to reasonably rely on an unlawful promise.94 In this context it is also important to note the increasing attention that has been placed on investor conduct. Many tribunals have noted that investment treaties may not be used as insurance against business risk95 - this would place unreasonable demands on host States as well as reduce the incentive to manage investments in an economically efficient way.96 Investors have their own duties of due diligence, and legitimate expectations cannot be created in a situation where a reasonably prudent investor could have foreseen the detrimental change in circumstances.97 This is also important from the point of view of climate law: in the light of all the recent developments at the international level and the fact that there is a growing political concern and scientific urgency to take action against climate change, is it really reasonable for an investor to expect that such action will not be taken? This is an issue that tribunals should openly consider in cases involving challenges against climate regulation. In summary, this section concludes that whether a particular type of state conduct is capable of creating legitimate expectation depends on the circumstances of the case and particularly on whether it is reasonable for the investor to rely on it. In any case, the expectation must fulfil the above four conditions. It is also submitted that expectations based on different circumstances may have a higher or lower level of legitimacy, depending on the specificity and unambiguity of state conduct in question and the justifications for reliance. However, even if an expectation is reasonable and it has been relied upon, it does not automatically follow that it must be protected. As will be seen below, it is also important to take into account the motivations of the state in disappointing the expectations of the investor.

92 Ibid.; Parkerings (n21) para. 331; Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24 (2008) para. 176. 93 Ibid. 94 Snodgrass (n44) 40. 95 LG&E v Argentina (n67) para. 130; Glamis v USA (n38) para. 767. 96 J. Bonnitcha, 'The Problem of Moral Hazard and Its Implications for the Protection of ‘legitimate Expectations’ under the Fair and Equitable Treatment Standard,' Investment Treaty News, April 7, 2011, http://www.iisd.org/itn/2011/04/07/the-problem-of-moral-hazard/. 97 P. Muchlinski, ''Caveat Investor’? The Relevance of the Conduct of the Investor Under the Fair and Equitable Treatment Standard,' 55(3) International & Comparative Law Quarterly (2006); J. E. Viñuales, Foreign Investment and the Environment in International Law, 94 Cambridge Studies in International and Comparative Law (Cambridge: Cambridge University Press, 2012) 354, commenting on Plama v Bulgaria (n92).

19 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author

4. Balancing test for legitimate expectations and public interest values 4.1 The need for a balancing test The ‘legitimacy’ of investor’s expectations amounts to a recognition that, in the circumstances, their reliance on a promise or representation by the authorities was justified in the eyes of the law and deserving of at least prima facie protection from being frustrated. Yet, it is submitted that the correct understanding of legitimacy does not rule out the possibility that the expectation could still be outweighed by a legitimate public interest. In response to expansive interpretations of FET such as that in Tecmed, many tribunals have made a point of saying that the requirement of stability in investment treaties does 'not affect the state’s right to exercise its sovereign power to legislate and to adapt its legal system to changing circumstances.'98 It has also been recognised that even legitimate expectations should not interfere too much with the regulatory powers of the host State.99 As rightly noted, they should not amount to a freezing of the regulatory framework, nor should investment treaties be used as insurance against business risk or as an equivalent of a stabilisation clause in the investment agreement.100 The recent withdrawal of a number of states from investment treaties101 has also been attributed to expansive interpretations of treaty obligations and to the way this has allowed tribunals to assume more power to interfere with the decisions of domestic authorities. 102 This is a phenomenon that should be taken seriously by arbitral tribunals, as well as the allegations that the whole system of investor-State arbitration is suffering from a ‘legitimacy crisis’.103 There are important reasons for investment treaty tribunals to show deference to the decisions of national authorities. Some of these include the higher legitimacy of national

98 Dolzer and Schreuer (n58) 148; see also e.g. Parkerings v. Lithuania (n21) para. 332. 99 EDF (n21) para. 217. 100 Ibid. para. 218; Emilio Agustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7 (2000) para. 64; MTD v. Chile (n25) para. 178. 101 Leonhardsen (n7) 107 102 L. Y. Fortier, 'Expectations of Governments and Investors vs. Practice: A View from the Bench,' 24(2) ICSID Review (September 1, 2009) 350–62, 357 103 C. N. Brower, 'A Crisis of Legitimacy,' The National Law Journal, October 7, 2002; O. Chung, 'The Lopsided International Investment Law Regime and Its Effect on the Future of Investor-State Arbitration,' 47 Virginia Journal of International Law (2007) 953; M. Sornarajah, 'A Coming Crisis: Expansionary Trends in Investment Treaty Arbitration,' in Appeals Mechanism in International Investment Disputes, K. P. Sauvant (ed.), 2008; cited in Benedict Kingsbury and Stephan W. Schill, 'Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality and the Emerging Global Administrative Law,' NYU School of Law, Public Law Research Paper No. 09-46 (2009) 3 fn 7; and further S. D. Franck, 'The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions,' 73 Fordham Law Review (2005) 1521; cited in Leonhardsen (n7).

20 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author decision-makers, their better accountability and the principle of separation of powers. National authorities are also most likely in a better position to act according to the will of the people they represent, to make assessments of relevant facts including scientific evidence,104 and to choose measures suitable for domestic circumstances. As noted, intrusive interpretation of treaty obligations is also seen as potentially undermining municipal climate change laws. 105 Tribunals should therefore tread carefully and make sure that, while upholding the object and purpose of the investment treaties, they produce awards of good quality and sound reasoning and refrain from going beyond their institutional capacity.106 In many situations this means showing an appropriate level of deference to national decision- makers. The aim of this section is to find a suitable balancing test that can be used to weigh legitimate expectations against the relevant public interest aims.

4.2 Balancing tests in English law In light of the above, it is crucial that the balancing test may be applied with sound and transparent reasoning as well as due deference. In the context of the discussion on legitimate expectations as a general principle of law, some have argued that international tribunals should adhere to the doctrines of judicial deference as found in common law.107 This is an interesting comment and it is true that common law jurisdictions have long traditions of judicial restraint.108 On this basis, this section will look at some of the academic debate on legitimate expectations in English law and, more specifically, how the issue of adopting a suitable balancing test has been approached. I hope to demonstrate that the views expressed in this context provide an interesting and valuable addition to the discussion on FET. There are two main types of test – or standards of review – that have been contemplated in English public law as applying to legitimate expectations: reasonableness and proportionality. In fact, both of these are also familiar in the context of investor-State arbitration where some form of proportionality in particular has often been applied by

104 See e.g. comments made in Glamis Gold v USA (n38) paras. 594 and 617; Chemtura Corporation v. Government of Canada, UNCITRAL (2010) paras. 134 and 153; for further discussion see J. Harrison, 'Addressing the Procedural Challenges of Environmental Litigation in the Context of Investor-State Arbitration' (presented at the Bridging the Gap between International Investment Law and the Environment, The Hague, 2013). 105 Miles (n2). 106 For comments on the institutional capacity of arbitral tribunals, see e.g. C. Henckels, 'Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the Standard of Review in Investor-State Arbitration,' 15(1) Journal of International Economic Law (March 1, 2012) 223, 252. 107 See e.g. Pandya and Moody (n51) 95. 108 See e.g. the discussion in P. O’Connell, '‘Anxious Scrutiny’ in the Irish Courts: Too Little, Too Late?,' 8 Hibernian Law Journal (2009-2008) 75.

21 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author tribunals interpreting FET.109 Even more interestingly, it seems that self-contained FET clauses are usually associated with proportionality, while FET clauses connected to the international minimum standard of treatment have been applied in a somewhat similar manner to the most deferential forms of reasonableness. A breach of the minimum standard is often seen as requiring elements such as 'manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons…'110 The English law standard of Wednesbury unreasonableness, as correctly understood, also requires such a level of unreasonableness that it is objectively clear and could be seen as almost amounting to bad faith.111 In the hopes of informing the discussion related to FET clauses and for the purpose of finding the appropriate balancing test, I will have a look at the views expressed on the issue of which standard English courts should apply to legitimate expectations. The reasonableness standard has a long history in English law. It may be expressed in a number of different formulations but in English public law the settled formulation is the highly deferential standard of review known as Wednesbury (un)reasonableness, derived from a case by the same name.112 To breach this standard, the public authority would have to act in a way that is 'so unreasonable that no reasonable authority' would adopt the same course of action.113 This standard is an example of the extreme reluctance of English courts to interfere with decisions of public authorities. Conversely, what is significant about the landmark decision in Coughlan includes not only the recognition of legitimate expectations with substantive content but also the fact that the court expressly refused to apply the reasonableness test in the context of these expectations. Instead of Wednesbury, it reviewed the decision of the public authority on the basis of ‘fairness’.114 The application of Wednesbury to legitimate expectations would, according to the Court, 'constitute the public authority judge in its own cause, for a decision to prioritise a policy change over legitimate expectations will almost always be rational from where the authority stands, even if objectively it is arbitrary or unfair.'115 This case started the

109 Tecmed (n17); Total (n84); MTD v. Chile (n25). 110 Glamis v. USA (n38) para. 22. 111 See Lord Greene’s judgment in Associated Provincial Picture Houses, Limited v Wednesbury Corporation, [1948] 1 K.B. 223 (Court of Appeal 1947), esp 229. 112 Ibid. 113 See e.g. P. Craig and S. Schonberg, 'Substantive Legitimate Expectations after Coughlan,' Public Law (2000) 684, 695. 114 Coughlan (n52) 246. 115 Ibid., para. 66.

22 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author shift away from reasonableness in the context of legitimate expectations, and later courts have openly applied proportionality analysis instead of Wednesbury.116 The decision in Coughlan has led to substantial discussion on the appropriate standard of review and on the flaws of the Wednesbury unreasonableness formulation.117 Similar debate also occurred in England and other common law jurisdictions in the context of human rights protection where proportionality analysis has largely subsumed the reasonableness test.118 Although legitimate expectations are not wholly equivalent to fundamental rights, their judicial protection from excessive governmental interference evokes very similar issues: whilst expectations may have differing levels of legitimacy, fundamental rights claims may also deserve differing levels of protection depending on the facts. Both may also be subject to differing levels of interference and must be balanced against public interest considerations of differing levels of importance. I believe that important lessons can be learned from these debates. The argument made in this paper is that proportionality is the appropriate standard of review for weighing legitimate expectations in investor-State arbitration. Its benefits compared to reasonableness include, most importantly, a clearer and more transparent structure that requires tribunals to be explicit about their reasoning and thus produce better quality awards.119 In the interests of compatibility with climate change measures, it is desirable to create arbitral practice that explicitly takes this legitimate purpose into account and to avoid awards which lack transparency and are open to the challenge of not considering all the relevant circumstances. The reasonableness standard has occasionally resulted in judgments that include a list of facts but little to no analysis or explicit balancing.120 The fact that the court’s reasoning is not explained means that its quality cannot be scrutinised and any political motivations can pass unnoticed. Two arbitrators may have different views on the relative weight of economic

116 See e.g. R. (on the application of Nadarajah) v Secretary of State for the Home Department, [2005] EWCA Civ 1363 (2005). 117 See e.g. Craig and Schonberg (n113); I. Steele, 'Substantive Legitimate Expectations: Striking the Right Balance?,' Law Quarterly Review (2005) 300; Mark Elliott, 'Coughlan: Substantive Protection of Legitimate Expectations Revisited,' 5(1) Judicial Review (2000) 27; M. Elliott, 'Case Comment - Legitimate Expectation: The Substantive Dimension,' Cambridge Law Journal (2000) 421. 118 Michael Taggart, 'Proportionality, Deference, Wednesbury,' New Zealand Law Review (2008) 423; J. Rivers, 'PROPORTIONALITY AND VARIABLE INTENSITY OF REVIEW,' 65(1) The Cambridge Law Journal (2006) 174; T.R. Hickman, 'The Reasonableness Principle: Reassessing Its Place in the Public Sphere,' 63 Cambridge Law Journal (2004) 166; O’Connell (n108). 119 R (Daly) v Secretary of State for the Home Department, [2001] 2 AC 532 (2001) Lord Steyn, 547; P. P Craig, Administrative Law (London: Sweet & Maxwell, 2012), 22-018; See also Leonhardsen (n7). 120 See e.g. Pope & Talbot Inc. v. The Government of Canada, Award on the Merits of Phase 2, UNCITRAL 1976 (2001).; Slaight Communications Inc v Davidson, [1989] 1 SCR 1038 (SCC) (1989), 1049; see also Craig (n120) 21-037.

23 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author interests and the prevention of climate change but under a test of reasonableness they are at risk of staying hidden, creating legal uncertainty as well as compromising the compatibility of the two regimes. Moreover, reasonableness would in most situations be too weak a standard to protect legitimate expectations. As noted in Coughlan, the vast majority of interfering measures would probably pass this test, as long as the authority claims to have taken the expectations into consideration – even if the authority did not actually place any weight on them.121 The recognised inadequacy of reasonableness for human rights protection122 is also relevant. With regard to low-carbon investment, adopting the reasonableness standard would most likely deny investors any protection against unforeseeable policy changes. The main arguments against proportionality relate to its alleged inappropriateness outside the context of fundamental rights, legal uncertainty and intrusion into merits.123 As to the first criticism, interests other than human rights do deserve legal protection – a recognition that is inherent in the ‘legitimacy’ of legitimate expectations. Craig notes that the characterisation of certain interests as ‘rights’ in a particular legal system does not mean that the applicable balancing process is any more straightforward or unproblematic than that related to any other interests worthy of protection.124 Craig also debunks allegations of legal uncertainty as ‘striking’ and refers to a sample of 200 non-rights cases purportedly decided on the basis of the Wednesbury test which, in reality, go far beyond the requirements of that test.125 In any case, proportionality has a much more elaborate structure and the potential to produce more transparent decisions. This would appear to add to legal certainty. As to the intrusiveness of the test, proportionality analysis does not amount to a substitution of judgment on merits.126 One important realisation that can be derived from the common law discussion is that both reasonableness and proportionality can be applied at different intensities. With regard to reasonableness, the highly deferential and thus low-intensity Wednesbury test was recognised as inadequate in the context of fundamental rights

121 Coughlan (n52) 244. 122 Smith and Grady v United Kingdom (1999) 29 EHRR 493. 123 Daly (n119) 21-035 – 21-038. 124 Ibid, 21-036 125 Craig (n120). 126 Daly (n119) 21-035

24 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author protection.127 Thus, at one point in time, English courts would apply the test in a more intense form, including ‘anxious scrutiny’.128 However, even the ‘anxious scrutiny’ test was deemed as inadequate by the European Court of Human Rights and eventually it was subsumed by proportionality analysis.129 Another formulation that also has a slightly lower threshold for breach than Wednesbury is that suggested by Lord Cooke: 'whether the decision in question was one which a reasonable authority could reach.'130 This formulation is quite similar to the test applied by the Pope & Talbot tribunal in refusing to find a breach of fair and equitable treatment.131 Proportionality analysis likewise appears in a number of different formulations, the most comprehensive one including four analytical steps:132 1. Whether the measure serves a legitimate purpose. 2. Whether the measure is suitable for achieving that purpose. 3. Whether the measure is necessary for achieving the purpose to the desired level – this step is often applied as a query for whether any other, less restrictive but equally effective measures were available. 4. Balancing or proportionality stricto sensu – i.e. whether the level of interference is disproportionate to the benefit obtained. The structure of proportionality analysis is institutionally neutral and leaves it up to the relevant court to apply the steps with appropriate intensity.133 Review intensity can be adjusted in each of the steps134 and can mean that the court will e.g. accept more easily the authority’s definition of a ‘legitimate purpose’ or investigate the existence of alternative measures as part of the necessity test with more or less vigour. It could be said that reasonableness is inherently a more deferential standard of review than proportionality, and this view would be supported by the requirement of the ECtHR that proportionality be used as the balancing test for human rights, as well as by a number of

127 A. Lester and J. Jowell, 'Beyond Wednesbury: Substantive Principles of Administrative Law,' Public Law (1987) 368. 128 See Lord Bridge in Bugdaycay v Secretary of State for the Home Department, [1987] A.C. 514 (1987) 531; R v Lord Saville, ex parte A, [2000] 1 W.L.R. 1855 (1999) 1867. 129See e.g. Smith and Grady (n122). 130 Regina v Chief Constable of Sussex, Ex p. International Trader’s Ferry Ltd, [1999] 2 A.C. 418 (House of Lords 1998) 452. 131 Pope & Talbot (n121) paras. 123, 125 and 128. 132 Alec Stone Sweet and Jud Mathews, 'Proportionality Balancing and Global Constitutionalism,' 47 Columbia Journal of Transnational Law (2009 2008) 72, 75. 133Rivers (n119) 181. 134 Ibid, 195-206.

25 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author commentators.135 However, since proportionality can also be applied at different intensities it is possible that in some circumstances a high-intensity reasonableness test and a very deferential proportionality standard could lead to similar conclusions. In fact, it has been argued that judicial review is a sliding scale that ranges from complete non-justiciability to review on merits, and that reasonableness and proportionality occupy perhaps slightly overlapping sections of the same scale.136 On this basis it is possible to refute the concerns about any inherent intrusiveness of proportionality review. This paper concludes that it is up to the relevant court or tribunal to apply a suitably deferential application of the analysis. The tricky part is defining exactly how much deference is due in each case, and this is a concern that must also be addressed in the investor-State arbitration context.

4.3 Appropriate review intensity The judgment in Coughlan articulated a different standard of review for three types of situation: a change of policy would under normal circumstances be subject to the traditional Wednesbury test; in the case of procedural expectations the court would engage in full review; and in the case of substantive expectations a review on the basis of fairness. While it is submitted that proportionality test is the appropriate standard for legitimate expectations under FET, the Coughlan categorisation rightly indicates that different circumstances warrant different levels of scrutiny. Many commentators have recognised that a formulating a one- size-fits-all approach to review intensity may be impossible.137 Furthermore, instead of adhering to the three Coughlan categories it has been argued that an even more sophisticated and flexible approach is necessary – and that the best method would be to adjust review intensity on a sliding scale.138 This is surely correct, in light of all the circumstances that can have a bearing on the appropriate level of deference. The correct intensity of review is a fact-based judgement that must be determined on a case-by-case basis.139 Thus, the only possible way to provide guidance to investment treaty tribunals is to list some factors that they should look out for. Inspired by the factors found in

135 Taggart (n119); Lord Steyn in Daly (n120) 547. 136 Taggart (n119) 137 Begbie (n29). 138 Ibid,; Steele (n118) 317-8. 139 Begbie (n29).

26 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author the literature on English law,140 the following considerations are suggested as a non- exhaustive list for the investment treaty context: i) Greater deference should be paid when evaluation of the measures requires complex factual assessments related to matters such as science, macro-economic policy etc. which tend to go beyond the institutional capacity of judicial bodies. ii) Decisions based on a robust and transparent procedure warrant greater deference. iii) Expectations that have a higher level of legitimacy warrant greater scrutiny of the interfering measures. iv) Wide-ranging international recognition of a given public purpose warrants greater deference. v) Interference that is particularly great warrants greater scrutiny. The determination of review intensity should be an explicit part of arbitral awards so that future tribunals could benefit from the reasoning on deference and thus a more consistent line of jurisprudence could be created. To date, this aspect of arbitral reasoning has been very lacking. This paper will next examine the way proportionality has been applied by investment treaty tribunals and further demonstrate how deference can be adjusted in each step of the proportionality test. Some suggestions will also be made for including climate change considerations in the analysis.

4.4 Proportionality in investment treaty arbitration – some suggestions Thus far, the way proportionality analysis has been applied in investor-State arbitration has received some criticism. Unsurprisingly, the treatment in Tecmed award has been highlighted as one example.141 The analysis in Tecmed was conducted in order to find out whether the challenged measures amounted to an expropriation but it is also relevant to the FET discussion as an example of early proportionality analysis in investment treaty arbitration. Notably, the way proportionality analysis was used by the tribunal did not come particularly close to the 4-step structure – instead, the tribunal merely required that the measures have a 'reasonable relationship of proportionality.'142 The analysis includes discussion of the purpose of the measures but appears to have skipped the suitability and necessity stages in order to assess proportionality stricto sensu directly.143 It is submitted that this kind of approach may not add much more to the quality of the reasoning than a simple reasonableness test. Another

140 R. Clayton, 'Principles for Judicial Deference,' 11(2) Judicial Review (2006) 109, 129-130. 141 Leonhardsen (n7). 142 Tecmed (n17) para. 122 143 Ibid.

27 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author gaping hole in the award is located where there should be deference; although deference was mentioned as a starting point of the analysis,144 it did not receive any visible consideration in what was arguably one of the most intrusive awards in the history of investment treaty arbitration. Although later tribunals have displayed much greater deference in their interpretation of FET, a comprehensive, step-by-step application of proportionality analysis that also explicitly addresses review intensity is yet to be seen. It has been said that the best application of proportionality to date by an arbitral tribunal was made in Total v Argentina.145 The tribunal held that it was appropriate to consider 'the purposes, nature and objectives of the measures challenged' and evaluate 'whether they are proportional, reasonable and not discriminatory.'146 This can be seen as a version of proportionality incorporating steps 1, 2 and 4. It has been suggested that the necessity test could have been added as well.147 In fact, the tribunal did briefly consider and dismiss an alternative measure put forward by Total148 but did not actively search for any other options. In many circumstances it would be appropriate to defer to the views of the national authority who is likely to have a better understanding of domestic conditions; however, while having due regard to the considerations in favour of deference mentioned above, if manifestly better alternatives exist it would be wrong to leave them out of consideration. While Total is a clear step to the right direction, it also appears not to consider the issue of review intensity to a large extent. The gaps in the reasoning of investment treaty tribunals may be responsible for at least some of the recent legitimacy-related backlash. Overall, there is still room for improvement in terms of tribunals explicitly applying each step of proportionality analysis. It is curious that in many awards where proportionality is applied, some references to reasonableness are still retained.149 One possible explanation for this is a reluctance to apply the proportionality test in full force or an attempt to pay at least lip service to the lower- intensity test. Either way, if proportionality is to be applied, like it has been argued that it should, the review of the challenged measures could be more explicit. The awards should also spell out clearly at the outset what factors are used to determine the correct review intensity and how it will affect each step of the analysis.

144 Ibid. 145 Leonhardsen (n7). 146 Total (n84) para. 162 147 Leonhardsen (n7) 134. 148 Total (n84) para. 160. 149 Ibid., para. 162; Tecmed (n17) para. 122.

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5. Applying the proportionality analysis to climate change measures As a final point in the discussion, I will walk through the steps of proportionality analysis. The purpose of this exercise is to show how it might be applied where the tribunal is adjudicating a claim of legitimate expectations by a low-carbon investor, or a challenge to climate change regulation. i) Legitimate purpose The first step of the analysis does not require much elaboration. Environmental and public health reasons are normally recognised as a legitimate public purpose150 and thus any measure adopted for climate change mitigation or adaptation will most likely pass through to the next stage without much discussion. When it comes to frustrating expectations of low-carbon investors, naturally a legitimate purpose is also needed. Investor-State tribunals should look for guidance in the jurisprudence of other institutions applying proportionality and other relevant rules of international law. Arguably the test for legitimate purpose in this context should be more lenient than in the context of derogations from human rights,151 but it is essential to place some limits on the framing as it will have a bearing on the later proportionality stages. As was shown in an English case, if ‘deportation’ is accepted as a public purpose, then nothing short of deportation can achieve it.152 Similarly, if ‘withdrawing solar energy subsidies’ was accepted as a public purpose in investor-State arbitration, this would significantly weaken a case brought by an aggrieved solar energy investor. ii) Suitability This stage involves a query into whether the challenged measures are capable of achieving their legitimate purpose as accepted in the first step. An analysis of facts is necessary, thus opening the question of how deeply the tribunal should scrutinise the evidence of e.g. the suitability of a climate change measure. It has been suggested that under normal circumstances tribunals should defer to the State’s choice of scientific evidence, as well as

150 Uncontested in e.g. Chemtura v Canada (n104), where only scientific connection was disputed, see paras. 251 and 254; see further e.g. the OECD study on environmental concerns in investment treaty language, K. Gordon and J. Pohl, 'Environmental Concerns in International Investment Agreements: A Survey,' OECD Working Papers on International Investment No. 2011/1 (May 2011). 151 See further e.g. A. D. P. Brady, Proportionality and Deference under the UK Human Rights Act: An Institutionally Sensitive Approach (Cambridge ; New York: Cambridge University Press, 2012) 43. 152 B v. Secretary of State for the Home Department, Unreported (Court of Appeal 2000); as cited in Brady (n152) 48.

29 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author the evaluation of what measures may be taken in response.153 With regard to climate change measures, this approach is further supported by the precautionary approach.154 A low-carbon investor would also have to overcome the evidential obstacle. However, in both situations the deference afforded to the state may decrease in light of the criteria mentioned above in this paper.155 Decreased deference may warrant e.g. the appointment of independent experts by the tribunal.156 iii) Necessity The necessity test has been considered extensively in WTO jurisprudence and it is suggested that investment treaty tribunals could refer to this for guidance. According to the Appellate Body in Korea – Beef, it should be examined whether the defending party could reasonably be expected to employ an alternative measure that is less WTO inconsistent but would still achieve the objectives pursued by the measure at issue to the desired level. According to the Appellate Body, the burden of proof is on the defending party to demonstrate that its chosen measure is ‘necessary’.157 Many of the issues relating to this step in investment arbitration are fairly similar to the suitability inquiry: the tribunal may face complex questions of scientific evidence or economic policy. It is submitted that these questions should again be approached with the appropriate level of deference in mind. Moreover, in circumstances warranting high levels of deference, it is suggested that the burden of proof could also be reversed and the onus placed on the claimant to demonstrate that the defendant’s choice of measures is not ‘necessary’. Such would probably be the situation with e.g. a carbon tax which is adopted in accordance with a transparent and legally sound procedure. iv) Proportionality stricto sensu The final proportionality stage is also arguably the least straightforward, as it involves an evaluation of whether the importance of satisfying the legitimate purpose justifies the level of interference.158 Unlike fundamental rights, the legitimate expectations of an investor are inevitably financial in nature. This makes them tricky to balance against a public purpose that cannot be measured in money.

153 See Harrison (n104) 14. 154 Ibid,; see further Principle 15 of the Rio Declaration. 155 See above. 156 Harrison (n104) 8; Article 29(1) of the UNCITRAL Arbitration Rules. 157 Korea – Various Measures on Beef, WTO Appellate Body Report, 11 December 2000. 158 Brady (n152) 58.

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It is submitted that in this final stage of the analysis, all the elements discussed above that have an impact on the level of legitimacy of investor expectations come into play, as do any relevant factors which influence the legitimacy of the State’s motivations. This means that while the threshold for an acceptable public purpose at stage 1 may be fairly lenient, the legitimacy of this purpose is increased by corresponding legal obligations and recognition at the international level. In considering the legitimacy of measures taken for the purpose of reducing GHG emissions, it is important to note that various States have undertaken legally binding commitments to make such reductions, and that these obligations are owed under a multilateral treaty to which most countries in the world are parties.159 Preventing dangerous climate change has also received wide recognition as a public policy objective by various international and regional organisations, as well as international relations generally.160 These elements, combined with the fact that climate change is likely to pose a physical threat to certain countries, thus arguably making it akin to a national security issue, should weigh heavily in a tribunal’s assessment. In addition to these considerations, the appropriate level of deference will also affect the outcome of the balancing exercise. Deference has been described as a ‘rational response to uncertainty’,161 which could mean that in the absence of clear imbalance tribunals should defer to the host State’s policy choice. The presence of elements that justify a high level of deference, such as a robust and transparent decision-making procedure, would give further support to this conclusion. In the case of an investor challenging e.g. a newly-introduced emissions trading scheme, it is likely that, in light of the above considerations and difficulty of accurate balancing, even a significant interference with profits would not lead to a finding of disproportionality. It should also be relevant in this inquiry whether the investor has been

159 See United Nations Framework Convention on Climate Change (UNFCCC) (adopted 5 September 1992, entered into force 21 March 1994) 1771 UNTS 107; as amended by the Kyoto Protocol (adopted 11 December 1997, entered into force 16 February 2005) 37 ILM 22 (1998); and status of ratification, available at https://unfccc.int/essential_background/convention/status_of_ratification/items/2631.php. 160 See e.g. UNGA Resolution of 26 November 2008, Doc A/RES/63/32 (3 April 2009) http://www.un.org/en/ga/search/view_doc.asp?symbol=A/RES/63/32; the EU at http://ec.europa.eu/clima/policies/package/index_en.htm; OECD at http://www.oecd.org/mcm/MCM-2014- Statement-Climate-Change.pdf; and US-China bilateral relations at https://www.whitehouse.gov/the-press- office/2014/11/11/fact-sheet-us-china-joint-announcement-climate-change-and-clean-energy-c. 161 A. Kavanagh, ‘Deference or Defiance? The Limits of the Judicial Role in Constitutional Adjudication’ in G. Huscrot (ed.), Expounding the Constitution: Essays in Constitutional Theory (Cambridge University Press, 2008) 186; as cited in Brady (n152), 21, fn 60.

31 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author given a ‘grace period’ of any sort, in order to prepare for the effects of the policy change or new legislation. As to low-carbon investors challenging an adverse change in policy, in many cases the change may be motivated by economic considerations. It is suggested that in these instances investors – especially those involved in long-term and high-risk projects – may have a stronger chance of establishing disproportionality than when facing a purpose such as public health or security. In the hypothetical case of a carbon capture and storage (CCS) investor challenging the withdrawal of a support scheme, where the motivations of the host State relate to health, safety or environmental concerns, a similar uncertainty could occur as in the previous example. This could again lead to deference to the host State’s assessment of the proper balance. Where the actions leading to frustration of legitimate expectations are economically motivated, however, evaluation of the proper balance could be much easier. An imbalance could be found e.g. where the withdrawal of the support scheme substantially harms the investment but only amounts to a relatively minor benefit to the host State, keeping in mind the increased scrutiny warranted by greater interferences.

6. Conclusions This paper was motivated, on the one hand, by the recent concern that FET clauses might be seriously undermining climate regulation and, on the other hand, by the recognised need to protect low-carbon investments from political and regulatory interference. I have argued that in order for investment law to be truly climate-compatible, both sides must be addressed and FET clauses should be interpreted in a way that allows the interests of investors and States to be balanced. This paper has attempted to provide a coherent and suitable framework for the application of legitimate expectations – the dominant element of the FET standard. The discussion has included a legal justification for using legitimate expectations in the interpretation of FET and the conditions the investor’s expectations must fulfil in order to be recognised as legitimate. Finally, I have attempted to demonstrate that proportionality analysis is both the best way to balance the legitimate interests of the investor against those of the host State as well as a tool tribunals can use to improve the legitimacy of their decisions. The discussion has shown proportionality to be a flexible standard whose intensity may be adjusted to be higher or lower as appropriate. I have also made suggestions on how tribunals can make sure that climate change considerations are given due weight in the arbitral analysis.

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As one final point that has emerged a number of times in the discussion, it is submitted that investment protection available under independent FET clauses and the international minimum standard of treatment may differ drastically. The latter may require that expectations be based on a quasi-contractual relationship in order to be considered legitimate. Moreover, the threshold for breach under the minimum standard also appears to be very high, indicating that the balancing test used is very deferential, possibly something similar to Wednesbury unreasonableness in English law. It is submitted that limiting investment protection to this standard would not increase compatibility with climate law but rather undermine the protection for low-carbon investments.

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