Does international investment law sometimes make governments pay compensation when they rethink policy? As a sequel to this post, here is an excerpt from Gary Born's dissent in the Wirtgen & JSW Solar arbitration (the Investment Arbitration Reporter summary of this case, which involved government subsidies to the renewable energy sector, is here), in which he offers his perspective on the fair and equitable treatment obligation:
8. Nonetheless, it is equally well-established that a commitment to accord fair and equitable treatment provides investors with protections for their legal rights and legitimate expectations, including a right to compensation where a state's exercise of its legislative or regulatory authority frustrates those rights or expectations:
"where the investor has acquired rights, or where the state has acted in such a way so as to generate a legitimate expectation in the investor and that investor has relied on that expectation to make its investment, action by the state that reverses or destroys those legitimate expectations will be in breach of the fair and equitable treatment standard and thus give rise to compensation."
Other awards are to the same effect, holding in multiple circumstances that a state's frustration of an investor's legitimate expectations gives rise to liability under a fair and equitable treatment obligation.
9. It is well-settled that these principles apply even where a state has not expressly provided assurances of stability or other treatment to an investor: "there is an obligation not to alter the legal and business environment in which the investment has been made," and "stable and equitable conditions are clearly part of the fair and equitable treatment standard under the ECT." Or, in the words of another tribunal, "the Claimant's reasonable expectations to be entitled to protection under the Treaty need not be based on an explicit assurance [by a state]."
10. Of course, however, these principles necessarily apply even more emphatically where a state provides express or implied assurances of particular treatment or guarantees of particular rights to an investor or a defined category of investors. In these circumstances, the state's failure to honor its undertakings to an investor (or category of investors) constitutes a denial of fair and equitable treatment, giving rise to liability for compensation under international law. Thus, authorities recognizing a state's freedom to revise or alter its legislative or regulatory regime also declare that a state may nonetheless make commitments to particular investors (or categories of investors) not to alter aspects of the relevant legal regime, and that the violation of these commitments will constitute a breach of obligations to accord investors fair and equitable treatment. Indeed, the Czech Republic correctly recognizes that "a 'stabilization clause' creates an exception to the general rule that a State is free to amend or pass new laws without incurring BIT responsibility."
11. As the majority acknowledges, it is also clear that a stabilization undertaking or assurance can arise either from a specific undertaking to an individual investor (for example, in a contract or similar instrument) or from a more general legislative or regulatory instrument (for example, a statute applicable to a class of investors). Thus, it is well-settled that a state may, under international law, make a binding commitment to foreign investors in its legislation, rather than in individual contracts or specific representations to individual investors. The Czech Republic itself recognizes this well-settled principle: "What we're saying is that [legislation providing a stabilization guarantee] has to be very clear and explicit in terms of constituting a commitment of stabilization. So, if the Legislature says we're going to stabilize this legal regime, then, of course, that would apply, certainly. We're just saying that was not the case here at all." This concession was repeated on numerous other occasions.
12. This conclusion is compelled by the nature of fair and equitable treatment analysis, which focuses on the legal framework of a state, which seeks to ensure "fair," "equitable," and "just" conduct by states, and which serves to protect the legitimate expectations of investors. The decisive issue is not whether a state's undertaking is "specific" or "general," or statutory or contractual, but whether the statements and actions of the state provide a sufficiently clear commitment to give rise under international law to legitimate expectations or legal rights on the part of an investor.
13. Thus, long-settled international authority makes it clear that a state is fully entitled to make binding commitments to foreign investors by way of statutes or other legislative acts.
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14. Similarly, the very basis for this investment arbitration - a standing offer to arbitrate by the Czech Republic in the Treaty- confirms that states may make binding commitments, and investors may acquire protected international rights, from "general" legislative provisions. The Treaty's arbitration provisions apply to, and protect, all German investors, notwithstanding the absence of any contractual arbitration agreement or other "specific" commitment to arbitrate with the Claimants. Precisely the same principles and logic apply to other types of guarantees provided by the Czech Republic, including guarantees in its domestic legislation.
15. In contemporary market economies, operating under the rule of law, it is both commonplace and essential for states to be able to provide undertakings to private parties by way of "general" legislative or regulatory instruments. In many circumstances, modern states cannot as a practical matter negotiate contracts with large numbers of parties, but must instead regulate the conduct of private parties through legislation and regulations. Indeed, this is a distinguishing feature of a system founded on the rule of law, where legislative and regulatory provisions, rather than individual governmental directions, govern private conduct. It would seriously impede the task of governance and regulation, and contradict aspirations for the rule of law, to deny states the ability to make commitments to private parties, including foreign investors, in the form of legislative (or regulatory) guarantees.
16. Put simply, and unsurprisingly, the Tribunal is in agreement that international law recognizes and gives effect to the power of states to make binding, internationally enforceable commitments to private parties. Where a state undertakes, by contract, legislation or otherwise, to provide specified treatment to a foreign investor, that undertaking will be given effect under international law, and violations of that undertaking will give rise to claims for compensation by the investor under commitments to provide fair and equitable treatment. In doing so, international law does not constrain the autonomy of states, but rather gives effect to it, by enabling states to provide reliable and enforceable commitments to private parties, in order to obtain necessary investments or other benefits from those parties.
(footnotes omitted)
A key part of the reasoning comes in para. 16: "Where a state undertakes, by ... legislation ... to provide specified treatment to a foreign investor, that undertaking will be given effect under international law, and violations of that undertaking will give rise to claims for compensation by the investor under commitments to provide fair and equitable treatment."
This view of fair and equitable treatment seems quite broad, with important implications. If special interests -- say, oil companies -- lobby a government for subsidies, and that lobbying results in a statute providing for subsidies to the oil companies (an "undertaking" for "specified treatment"), would this interpretation mean that the government cannot later rethink its decision to give subsidies to the special interests without paying compensation? That is, once those subsidies have been promised, do they have to be paid? On its face, it seems to me that this is the direction the interpretation takes us.
One obvious problem is that it would seem to reinforce crony capitalism, by making it binding once undertaken. After the special interests have lobbied for their subsidies, there's no way to avoid paying them.
Beyond crony capitalism, there is also the more general issue of governments changing course on policy. Taking the environmental policies at issue here as an example, governments may, over time, reconsider whether solar, wind, nuclear or something else is the most effective way to address climate change. But if this interpretation of FET is followed, and governments have to pay to change policies, they may end up locking in a policy that no longer makes sense.
More generally, governments regularly take action to give tax or regulatory advantages to private parties (e.g., real estate investors, steel companies, solar or fossil fuel companies, agriculture producers). Sometimes they even have a public policy purpose in mind, and the benefits to the specific private parties are not the only consideration. But anyone who follows politics and public policy knows that governments' priorities can change. New elections mean new politicians. Or policy failures cause a rethink. Or special interests influence the process. Or internal political battles reach a different result. Or governments just arbitrarily change course. Thus, is it really ever reasonable to expect that government policies will remain constant, and that promised subsidies must be paid no matter what? And should there be an international remedy when governments do change their mind on policy?
With all that in mind, it is difficult to understand why any government would support an interpretation like the one here.
Will governments start drafting agreements in a way that precludes this view? The TPP has the following provisions:
4. For greater certainty, the mere fact that a Party takes or fails to take an action that may be inconsistent with an investor’s expectations does not constitute a breach of this Article, even if there is loss or damage to the covered investment as a result.
5. For greater certainty, the mere fact that a subsidy or grant has not been issued, renewed or maintained, or has been modified or reduced, by a Party, does not constitute a breach of this Article, even if there is loss or damage to the covered investment as a result.
Does this solve the problem? I'm not sure it does. The way the provisions are phrased seems too narrow. They state that "the mere fact" that something has happened is not enough for a breach. But I'm sure that the claimants in these cases can easily explain why it is not just "the mere fact" of X that concerns them, as there is some broader context at issue as well. So if governments want to avoid losing cases of this kind at some point, they may have to be a little more clear in the drafting.