Energy investment protection: precision scaling between states and fair & equitable claims

Energy investments usually involve hyper-complex contracts and an ingredient that is unique to them; an almost direct involvement of the legislator. The subject matter, usually the extraction of energy resources, is what the state expects to profit from and what is considered to be ‘public goods.’ Equally, investors expect to profit, and they are relentless when enforcing promises of favourable treatment by the state. That is why more often than not, disputes arise regarding the extent to which the state has acted in a ‘fair and equitable’ manner towards the investor.

Image: wind turbines on hill

The Fair and Equitable Treatment ('FET') is a customary international investment rule that requires host states to treat foreign investors fairly. The multitude of FET clause versions indicates its vitality as an overarching principle in treaties and international investment agreements ('IIAs') but also its complexity, as no 'single frozen version exists.' [i] Although vagueness is generally not a shortcoming in the international arena but rather a much-needed flexibility, the investment treaty practice has repeatedly insinuated that FET is blurred, especially when juxtaposed with the state's right to regulate.[ii]

The majority of modern Bilateral Investment Treaties ('BITs') and the Energy Charter Treaty ('ECT') contain clauses which expressly entrench the FET into the investor-state relationship. According to Art. 10, states are under an express obligation to provide 'stable, equitable, favourable and transparent conditions' for investors to make their investments. A breach of FET, which is one of the most popular claims in energy disputes, heavily depends on facts and interpretation, and this is something that is at least imprecise.[iii] Claims usually pertain to assertions about the state's transparency and often the introduction or abolition of measures that affect the investor's legitimate expectations (aka the investor's expected profitability).[iv] Ultimately, investor claims for FET breaches become a battle between the investor's right for legitimate expectations and the state's right to regulate. This debate is present in numerous ECT awards and indicates that FET is a serious consideration, but arguably an unattainable solution in investment treaty practice.

Tribunals dealing with FET claims are generally understanding that legal evolution is inevitable and therefore, the states' right to regulate is balanced against the FET standard. In the AES Summit, the Tribunal recognised that assessing FET's breaches is 'a complex task,' which will remain heavily fact-specific and that legal frameworks must adapt to changes over time, whilst the regulation of this change is the right of the state.[v]

In Mamidoil v Albania, Albania, following the overthrowing of a stringent regime and in the context of modernisation, decided to re-zone the port of Durres, affecting Mamidoil's investment in the area. The Tribunal found that, especially regarding Albania's political change, 'legal circumstances are by their nature dynamic and bound to change.' [vi] According to the Tribunal, which followed the AES Summit decision, a state cannot continue to provide investor-friendly conditions without evolving, while change is paramount for 'successful public infrastructure.' [vii] Similarly, in Plama v. Bulgaria, the Tribunal found that states retain their right to regulate and Tribunals should be mindful of its importance when considering FET claims. In Electrabel v. Hungary, it was found that FET does not preclude regulatory change but rather, that the manner of the change should observe due process. Accordingly, in both Eiser v. Spain and Bulsun v. Italy, FET was not mutually exclusive with regulatory changes.

The balancing of FET and state's right to regulate becomes of significant importance in the energy sector context, as its subject matter concerns public goods, whose management is closely linked to public health, economic prosperity and human rights in general. There is no clear-cut formula in balancing the states' right to regulate and FET, but Tribunals have focused on two parameters; the purpose and context of the disputed measure, and the extent to which the measure interferes with legitimate expectations of the investor – especially in terms of profitability.

Purpose and context of the disputed measure

The approach of looking at the context of the disputed measure was first expressed in AES Summit (applied it in relation to a different standard) and focused on whether the measure affecting the investment was a product of a rational public policy objective and a reasonable effort to substantiate that policy. The test concentrates on the measure itself rather than its effect on the investment and determines the outcome in a somewhat mechanistic way since the investment itself is not the centre of attention. The same or similar tests were followed in subsequent decisions.

In Electrabel, the EU Commission directed that Hungary's agreement with the investor became illegal under EU law. In response, Hungary terminated Electrabel's contract. According to the Tribunal, Hungary had responded proportionally in response to a public policy objective. In Mercuria Energy v Poland, Poland implemented an EU directive that affected the minimum cap of energy reserves the investor could maintain in the country. Mercuria’s claim was also dismissed. Combined with Electrabel, these decisions point that legal changes, especially at an EU level, have a particular gravity, especially when considering the unquestionable public policy objectives behind them. Following this track record, it is likely that only in exceptional cases the state's legal change to comply with EU laws will be found in breach of FET under the ECT.

Another significant case is Mamidoil v. Albania, where the Tribunal clarified critical points in the state's right to regulate and the FET. Applying the Electrabel test, the Tribunal found that the measure's context had to include factors such as Albania's radical change of political regime and attempt to modernise. In this context, the Tribunal found that re-zoning a port was 'a legitimate public policy.' [viii] In assessing whether the measure was proportional the Tribunal observed that Albania had followed due process by discussing the change with the Mamidoil and other investors before implementation. It was significant that the measure did not reflect an erratic decision-making but demonstrated a long-term perspective for advancing the port. Mamidoil shows the intricate relationship between FET and the right to regulate. Although not expressly the same, in Charanne v Spain the Tribunal followed a similar test.

Interference with investor's legitimate expectations

The departure from the AES Summit approach is evident in the Charanne v Spain and Eiser decisions. In the context of Spain's attempt to control the increasing electricity prices, a limit on the feed-in tariff of energy was placed on Charanne, contrary to the investor's beliefs, emanating from certain promotional documents. The Tribunal held that the limit was proportional because it was not a sudden and unpredictable change from the status quo. Spain's changes also sparked in Eiser v. Spain, where the Tribunal approached the matter differently, focusing on the considerable loss of value of Eiser's investment. The Tribunal found that although the States should be able to regulate, legal regimes cannot be radically and abruptly altered so that the investment's value is destroyed, and that in the particular case the measures had breached the FET.

Charanne and Eiser are essential because of the special consideration by the Tribunal on the investors' legitimate expectations. Legitimate expectations are the investor's expectations, arising from a valid representation made by the state and usually concerning the preservation of favourable regulatory conditions. Legitimate expectations may occur from specific assurances or generic assurances by the state. While Tribunals will most likely uphold a particular arrangement between an investor and a state, the decisions so far show much uncertainty this will bring to the case for generic assurances such as those arising from a specific favourable law, even if that is in place to attract investors.

In Charanne, the investors argued that the investment promotion documents emphasising the high yields of the photovoltaic sector in Spain created the legitimate expectation that the favourable legal environment would not change. However, the Tribunal rejected the argument, holding that it would be against the public interest and an excess restriction to equate a particular measure to a state's specific commitment. Notably, one of the arbitrators dissented to this interpretation, arguing that where a measure is in place to attract investments and concerns a particular class of investors, it should form part of the investor's legitimate expectations and be upheld when a dispute arises. Charanne effectively provided two different equilibriums between the state's right to regulate and the FET when ECT cases and especially against Spain were surging, causing significant ambiguity.

Although neither approach provides legal predictability for investors, the dissenting arbitrator's approach signifies an underlying problem balancing the right to regulate and the FET. Charanne, and a stream of investor claims that followed, had initiated investments in Spain precisely because of a public policy objective: to reduce reliance on environmentally unfriendly resources and increase renewable energy production. Accordingly, when Spain changed the fostering legal environment - making the investments less profitable - it was arguably preventing the investors from fulfilling the public policy objective in the first place. Applying the AES Summit test could then place excessive focus on the new public policy objective and disregard another, which can be equally valid.

Eiser confirmed Charanne: that states are not restricted to preserve a measure unless they have specifically committed to doing so. However, there is a significant difference in the approach which interprets the investor's legitimate expectation in Art 10 of the ECT standard: to exist in a 'stable' and 'transparent' legal environment. According to the Eiser Tribunal, FET means 'no unreasonable change', affecting the investment. The shift of focus to the impact of the measure on the investment essentially endorsed the dissenting arbitrator's evaluation in Charanne. Similarly, in Blusun v. Italy, the Tribunal refused to equate laws to specific commitments and declared that a measure itself could not give rise to legitimate expectations unless accompanied by state representations regarding its preservation.

In Plama v. Bulgaria, the investor argued that an amendment of environmental laws that placed retroactive liability on it breached the investor's legitimate expectation that the law would not change. The law in question was ambiguous on whether further changes would be made, and the Tribunal found that such ambiguity shall not be interpreted in favour of the investor, who has to act in due diligence and perform proper legal analysis before investing.

Lessons learned

States retain a certain degree of control over their legal regimes, and the threshold investors are called to prove for FET claims is high. Tribunals have so far been strict to investors in that a legitimate expectation will rarely arise without specific assurance by the state, while without a significant diminution of the investment's value, it is unlikely that a FET claim will succeed. While all cases involved an analysis of the deprivation caused on the investor by the measures wholly or partly reducing the value of the investment, a 'mere reduction in profits' in the context of likely regulatory changes for the public good was not enough to trigger a breach of the FET.

From the above analysis, it appears that the difference between successful and unsuccessful claims lies in the investment's profitability. Ultimately, determining FET breaches remains heavily fact-specific and depends upon a series of factors. Although Tribunals have attempted to strike a balance between the states' crucial right to regulate and the FET, the task has proven highly complex.


[i] R. Dolzer, "Fair and Equitable Treatment: A Key Standard in Investment Treaties" International Lawyer (2005) 87, p. 90

[ii] Schwenzer advances this argument in the context of inconsistent interpretations of the CISG, in response to criticism that several legal concepts, such as good faith, are not adequately defined. Ingeborg Schwenzer, 'The CISG - Successes and Pitfalls,' 57 Am. J. Comp. L. 457, 2009, 468.

[iii] United Nations Conference on Trade and Development (UNCTAD), Investor-State Disputes Arising from Investment Treaties: A Review 2005, p. 3. Available at

[iv] For an overview of issues, see United Nations Conference on Trade and Development, 'Expropriation: A Sequel' UNCTAD Series on Issues in International Investment Agreements II (2012, United Nations)

[v] Award at [9.3.30]

[vi] At [617]

[vii] ibid

[viii] ibid

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