In this respect, the wto Appellate Body and the International Court of Justice remind us of the principle of effectiveness in treaty interpretation. 21 It is not

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permitted, under the applicable rules of treaty interpretation in customary international law, to accord an interpretation to treaty text that renders portions of the text redundant, absurd, or inutile. This principle is why the focus of an expropriation analysis must stay on the question of whether substantial interference exists. If the interference involved is less than an actual or de facto taking, other treaty standards should be applied instead (whether the absolute kind, or the comparative). The difficulty arises because these various other standards can be construed in such a way as to overlap significantly, particularly in cases where the most appropriate provision just so happens to be missing from the subject treaty. For example, the tribunal in Saluka appears to have attempted to shoehorn what would typically be a national treatment fact pattern into a fair and equitable treatment standard treaty provision. This is not a problem, however, of claimants or tribunals necessarily stretching the ambit of investment protection provisions beyond a meaning reasonably borne by their terms. It is rather a problem of textual indeterminacy and excessive drafting overlap (which, in turn, is the likely by-product of intended redundancy on the part of cautious treaty drafters).

The solution to this potential interpretative quandary is not to construe investment treaty provisions so as to require only a minimal level of governmental responsibility, placing them in distinct and separate silos, thereby attempting to reduce the potential overlap. Nor should the solution be to adopt a malleable, subjective approach to the construction of treaty provisions so as to meet the facts of any seemingly ‘deserving’ case. The solution would better lie in the recognition that all of these provisions are essentially aimed at the same type of regulatory mischief, regardless of whether one adopts a comparative or absolute analysis of the regulatory fairness that should be achieved.

With respect to the various variations of minimum standard provisions found in investment treaties today, it is not particularly helpful to construe ‘fair and equitable treatment’ as merely a euphemism for an obligation that imposes state responsibility only for certain types of conduct that violate arcane norms of customary international law concerning the ‘treatment of aliens’. 22 Neither is it helpful to simply confirm that ‘fair and equitable treatment’ is simultaneously both a treaty standard and a customary international law standard. These approaches do little to elaborate

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upon the breadth and depth of the obligation, in application in any individual case. At best, where the treaty standard is linked by government officials to custom, whether before or after the launch of an arbitration, the signal being transmitted is that the one making the link believes that a level of deference to government decision-making is owed by the tribunal. 23

There are various ways to express inclusion of the minimum standard within the scope of a free trade or investment protection treaty, 24 and the frequency of such expression has indeed led some commentators and tribunals to conclude that its ubiquity demonstrates state practice establishing the current shape and form of the customary norm. 25 While each treaty provision must certainly be analysed with respect to its specific terms, in good faith and within the context of the particular treaty in question, the best way to encapsulate the general meaning of the minimum standard is to note that it requires ‘fair and equitable treatment’ of states vis-?-vis covered investments. Principles of international law and international law doctrine (including the work of the most highly qualified publicists and jurists—both in reasons for decision and in drawing general conclusions about customary law and treaty law) will continue to inform the analysis of such provisions, 26 as required under Article 31(3)(c) of the Vienna Convention on the Law of Treaties (‘Vienna Convention’).

Terms such as ‘discriminatory’ and ‘arbitrary’ impairment, or ‘due process’—when found in a minimum standard provision—may assist in providing context for what that standard requires in any given treaty (whether the provision includes the magic words ‘fair and equitable treatment’ or otherwise). These terms may also

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demonstrate, on a more systematic basis, the kind of conduct that treaty parties now acknowledge as being covered under the customary international law minimum standard. So too can doctrinal developments (found in the work of learned commentators and the reasons for decision of respected international tribunals involving similar provisions) assist tribunals in their interpretative duties when dealing with any one particular minimum standard provision.

As Professor Weil has written, ‘the standard of “fair and equitable treatment” is certainly no less operative than was the standard of “due process of law,” and it will be for future practice, jurisprudence and commentary to impart specific content to it’. 27 The NAFTA Tribunal in ADF Group v United States of America explained that the requirement to accord fair and equitable treatment does not allow a tribunal to adopt its own idiosyncratic standard but ‘must be disciplined by being based upon State practice and judicial or arbitral case law or other sources of customary or general international law’. 28 Perhaps the tribunal in Waste Management encapsulated the process of interpretation best, in articulating a minimum standard, when it stated:

The search here is for the Article 1105 standard of review, and it is not necessary to consider the specific results reached in the cases discussed above. But as this survey shows, despite certain differences of emphasis a general standard for Article 1105 is emerging. Taken together, the S.D. Myers , Mondev,ADF and Loewen cases suggest that the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety—as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process. In applying this standard it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant. 29

Of course, the project of applying a minimum standard provision in any given case will, of necessity, be highly contextual. 30 We have not reached the point at which it could be confidently stated that sufficient jurisprudence exists to explicate the gamut of factual situations for which the obligation may be relevant. As such, all that can be said with any degree of certainty about the application of the minimum standard in any given case is that the same adjudicatory exercise will likely be performed—regardless of whether the provision is formulated as a customary or treaty standard. The question is what kind of treatment a reasonable investor was entitled to expect

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from the state and its designates, recalling that international law recognizes the autonomous right of a state to regulate in the interests of domestic public policy.

(3) The Minimum Standard of Treatment and the Principle of Good Faith

As recognized by commentators and recent tribunals, a unifying theme in understanding the regulatory floor available to all foreign investors under the minimum standard of fair and equitable treatment is the international law principle of good faith. 31 From this fundamental principle of international law, three theories of liability emerge—all of which can be seen in the major legal systems of the world, but none of which appears to be integrated wholesale from any particular domestic one. The three theories of liability are: (1) detrimental reliance upon legitimate expectation; (2) regulatory transparency; and (3) freedom from arbitrariness or caprice in discretionary decision-making, or in short, ‘abuse of authority’.

As an elemental principle in the ordering of relations between states, good faith provides the glue that holds the international order together. Section 711 of the Third Restatement of the Foreign Relations Law of the United States grounds the principle of good faith in state responsibility, providing that ‘a state is responsible under international law for injury to a national of another state caused by an official act or omission that violates … a personal right that, under international law, a state is obligated to respect for individuals of foreign nationality’. 32 And as the ICJ noted in the Anglo-Norwegian Fisheries case:

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The principle of good faith requires that every right be exercised honestly and loyally. Any fictitious exercise of a right for the purpose of evading either a rule of law or a contractual obligation will not be tolerated. Such an exercise constitutes an abuse of the right, prohibited by law. 33

In its Merits Award, the ICSID tribunal in AMCO Asia v Indonesia went so far as to determine that good faith is a substantive principle upon which an investor could base its claim. The tribunal concluded that an investor should be entitled: … ‘to realize the investment, to operate it with a reasonable expectation to make profit and to have the benefit of the incentives provided by law without suffering the arbitrary exercise of a right which would prevent such enjoyment’. 34

NAFTA and investment treaty tribunals have consistently determined that the ‘applicable rules of international law’ are the customary international law rules of treaty interpretation, which have been codified in Articles 31 and 32 of the Vienna Convention. Similar language can be found in numerous other BITs and bilateral trade treaties. Professor Schreuer has added that, regardless of whether the contract or treaty is silent as to choice of law or provides a mixed choice of law clause, ICSID tribunals have inevitably employed the customary international law rules of interpretation and substantive international law principles when rendering their awards. 35 In fact, he goes as far as to state that international law principles can find their way into a tribunal's deliberations even when the contract or compromis contains a clause purporting to oust international law as being applicable to any given dispute. Moreover, it is common for both treaties and internationalized contracts between states and individuals to include ‘international law’ (or some textual variant thereof) as part of the applicable law (possibly substantive but at least almost always interpretative).

Sir Eli Lauterpacht has remarked that tribunals, owing to their very nature as international bodies, are entitled to dispose of matters on the basis of the applicable rules of international law. 36 Others have agreed, although they have not gone so far as to suggest that substantive international law should ‘trump’ domestic law in the event of a conflict between them. 37 Nonetheless, a more recent tribunal, of

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which Professor Lauterpacht was a member, has concluded that ‘international law must prevail’ to the extent that there may be some inconsistency between applicable domestic and international norms. 38

Relying upon the negotiating history of the ICSID Convention, Schreuer concludes that its reference to ‘applicable international law’ was intended by its drafters to mean the relevant principles and rules to be derived from Article 38(1) of the Statute of the ICJ, with ‘allowance being made for the fact that Article 38 was designed to apply to inter-State disputes’. 39 Such ‘international law’ could obviously be derived from the fundamental principles of international law set out in Article 38(1)(c), 40 customary international law, or ‘the large and rapidly growing numbers of BITs and multilateral treaties dealing with investment … .’ 41 Of course, any such principles may play only an interpretative role when specific treaty standards were in dispute, but both in their absence and in cases where the treaty norm is rather amorphous (as are most minimum standard provisions), international law principles would arguably remain relevant as substantive norms to be applied to the specific facts of the case at hand.

As noted by the NAFTA tribunal in GAMI Investments , the role of a tribunal in applying a minimum standard provision is:

… to appraise whether and how pre-existing laws and regulations are applied to the foreign investor. It is no excuse that regulation is costly. Nor does a dearth of able administrators or a deficient culture of compliance provide a defence. Such is the challenge of governance that confronts every country. Breaches of NAFTA are assuredly not to be excused on the grounds that a government's compliance with its own law may be difficult. Each NAFTA Party must to the contrary accept liability if its officials fail to implement or implement regulations in a discriminatory or arbitrary fashion. 42

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(a) Detrimental Reliance upon Legitimate Expectation

Detrimental reliance may be understood as the ‘flip side’ of the equitable maxim that one should not be permitted to profit from one's own wrongdoing. It is also a corollary principle of good faith. ‘Detrimental reliance' reflects the perspective of the claimant, as alleged victim, while the maxim represents the kind of finding that the respondent must avoid. Of course, the nature and scope of this concept will be much better defined in the domestic context, in which a sufficient number of cases have been brought so as to permit such clarity to take hold. Nonetheless, an ever-growing number of investment treaty claims promise to fill that void, 43 including International Thunderbird Gaming v Mexico , 44LG&E v Argentina , 45 and Saluka v Czech Republic . 46

In his monograph on the principle of good faith, JF O'Connor discusses how the concept of detrimental reliance (as embodied in the estoppel rule) has arisen in PCIJ cases such as Case Concerning the Temple of Preah Vihear ( Cambodia v Thailand ) and the ICJ's North Sea Continental Shelf cases, demonstrating how state responsibility could attach where a state of affairs, later repudiated, results in detrimental

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reliance. 47 Professor Cheng has even more clearly articulated how the principle of good faith operates to avoid circumstances of detrimental reliance:

The protection of good faith extends equally to the confidence and reliance that can reasonably be placed not only in agreements but also in communications or other conclusive acts from another State. If State A has knowingly led State B to believe that it will pursue a certain policy, and State B acts upon this belief, as soon as State A decides to change its policy—although it is at perfect liberty to do so—it is under a duty to inform State B of this proposed change. Failure to do so, when it knows or should have known that State B would continue to act upon this belief, gives rise to a duty to indemnify State B for any damage it may incur. What the principle of good faith protects is the confidence that State B may reasonably place in State A. 48

While not finding such a breach in the case before it, the ADF tribunal noted that detrimental reliance is a legitimate ground of complaint under Article 1105, by stating that ‘any expectations that the Investor had with respect to the relevancy or applicability of the case law it cited were not created by any misleading representations made by authorized officials …’ 49 And in the case of Wena Hotels v Egypt , the tribunal similarly held that senior government officials breached the standard of fair and equitable treatment by providing assurances to the investor purporting to safeguard its investment and then failed to act upon them when it became imperilled—thus leaving the investor in the lurch. 50 Dr Mann similarly concluded that a state fails to accord fair and equitable treatment when it does not observe an obligation it undertook with respect to that investor or its investment. 51

In its Award, the LG&E tribunal usefully summarized the features of the legitimate expectation element of fair and equitable treatment as follows:

It can be said that the investor's fair expectations have the following characteristics: they are based on the conditions offered by the host State at the time of the investment; they may not be established unilaterally by one of the parties; they must exist and be enforceable by law; in the event of infringement by the host State, a duty to compensate the investor for damages arises except for those caused in the event of state of necessity; however, the investor's fair expectations cannot fail to consider parameters such as business risk or industry's regular patterns. 52

What future tribunals must do with this growing group of cases and opinions on detrimental reliance is to articulate exactly how the concept should work going forward. Should it be sufficient for an investor to prove that its reliance on an official statement is enough to establish state responsibility, so long as there is merely some

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loss tied to it? That reliance must be adjudged reasonable in the circumstances and causally connected to the alleged loss. It should also be based upon a specific statement made to the alleged victim. Absent other indicia of a state's failure to provide a transparent and predictable regulatory and investment climate, as described below, reliance upon an official statement made in the abstract might not be deemed to have been ‘reasonable’ upon objective review.

(b) Regulatory Fairness

States do not merely owe the obligation to honour their treaty obligations in perfect good faith to each other, they owe this obligation generally, as members of the international community, to any individuals who derive rights or benefits from the international legal order they have created. Without the promise of good faith, the international legal order would be little more than a house of cards, upon which no certainty of individual economic activity could be built. This is what the WTO Appellate Body meant when it spoke of the legitimate expectations created in that particular legal order by its members. However, as the Panel in US—Section 301 WTO case so eloquently noted, these treaty obligations are not undertaken solely by states for the direct benefit of states; they are undertaken by states for the benefit of their nationals—both individually and through communal undertakings such as corporations, partnerships, and other business associations. 53

The principle of good faith thus operates to mandate regulatory fairness and transparency in a manner not dissimilar from the way in which it mandates responsibility for detrimental reliance. Rather than involving responsibility for a specific promise to a specific investment, the obligation to provide a transparent and predictable regulatory environment is a general promise made to international investors at large. It is as deserving of protection as the specific promise because it is a foundational element of the investment decision, and thus a fundamental precursor of national economic development. 54 Thus, the concept of detrimental reliance can be seen to be operating in virtually any investment treaty, whether its provisions promise ‘fair and equitable treatment’ or merely treatment in accordance with ‘international law’ or ‘the customary international law minimum standard of treatment for the treatment of aliens’ or even just ‘the principles of international law’. 55 This is because it

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flows from basic norms of equity and fair dealing that are common to international law and to most domestic legal systems.

Although a more thorough examination is beyond the scope of this chapter, there is certainly support for the proposition that regulatory transparency is now a requirement of customary international law. It appears in both the preambular and substantive language of most international economic treaties, including the WTO Agreements to which a critical mass of the world's states have agreed. The principle of transparency has also been addressed by the WTO Appellate Body. In US—Underwear , the Appellate Body described how the principle of transparency finds expression in GATT Article X:2, 56 in which it noted that the principle of transparency is also related to the fundamental international law principle of due process. The transparency principle also appears in the soft law of regulatory codes promulgated by such organizations as the OECD and APEC. 57

It would accordingly not be difficult to conclude that the customary international law requirement of ‘fair and equitable treatment’, taken within the context of an impugned regulatory action which has allegedly harmed an individual economic actor, involves ensuring the presence of a transparent and predictable regulatory environment. This kind of thinking can be seen in the award in Occidental Exploration and Production Company v Ecuador :

Although fair and equitable treatment is not defined by the Treaty, the Preamble clearly records the agreement of the parties that such treatment ‘is desirable in order to maintain a stable framework for investment and maximum effective utilization of economic resources.’ The stability of the legal and business framework is thus an essential element of fair and equitable treatment.

The Tribunal must note in this context that the framework under which the investment was made and operates has been changed in an important manner by the actions adopted by the SRI. It was explained above that the Contract has been interpreted by the SRI in a manner that ended up being manifestly wrong as there is no evidence that VAT reimbursement was ever built in to Factor X. The clarifications that OEPC sought on the applicability of VAT by means of the ‘consulta’ made to the SRI received a wholly unsatisfactory and thoroughly vague answer. The tax law was changed without providing any clarity about its meaning and extent and the practice and regulations were also inconsistent with such changes.

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Various arbitral tribunals have recently insisted on the need for this stability. The Tribunal in Metalclad held that the Respondent ‘failed to ensure a transparent and predictable framework for Metalclad's business planning and investment. The totality of these circumstances demonstrate a lack of orderly process and timely disposition in relation to an investor of a Party acting in the expectation that it would be treated fairly and justly …’ It is quite clear from the record of this case and from the events discussed in this Final Award that such requirements were not met by Ecuador. Moreover, this is an objective requirement that does not depend on whether the Respondent has proceeded in good faith or not. 58

The Tecmed tribunal similarly made no secret of the connection it saw between the principle of good faith and a state's obligation to provide foreign nationals with a transparent regulatory environment. Its elucidation of that connection was impressive, and therefore deserving of full recital:

The Arbitral Tribunal considers that [the Treaty's minimum standard provision], in light of the good faith principle established by international law, requires 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. 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, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations. Any and all State actions conforming to such criteria should relate not only to the guidelines, directives or requirements issued, or the resolutions approved thereunder, but also to the goals underlying such regulations. The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities. The investor also expects the State to use the legal instruments that govern the actions of the investor or the investment in conformity with the function usually assigned to such instruments, and not to deprive the investor of its investment without the required compensation. In fact, failure by the host State to comply with such pattern of conduct with respect to the foreign investor or its investments affects the investor's ability to measure the treatment and protection awarded by the host State and to determine whether the actions of the host State conform to the fair and equitable treatment principle. Therefore, compliance by the host State with such pattern of conduct is closely related to the above-mentioned principle, to the actual chances of enforcing such principle, and to excluding the possibility that state action be characterized as arbitrary; i.e. as presenting insufficiencies that would be recognized ‘… by any reasonable and impartial man,’ or, although not in violation of specific regulations, as being contrary to the law because: … (it) shocks, or at least surprises, a sense of juridical propriety.

The Arbitral Tribunal understands that the scope of the undertaking of fair and equitable treatment under Article 4(1) of the Agreement described above is that resulting from an autonomous interpretation, taking into account the text of Article 4(1) of the Agreement according to its ordinary meaning (Article 31(1) of the Vienna Convention), or from

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international law and the good faith principle, on the basis of which the scope of the obligation assumed under the Agreement and the actions related to compliance therewith are to be assessed.

If the above were not its intended scope, Article 4(1) of the Agreement would be deprived of any semantic content or practical utility of its own, which would surely be against the intention of the Contracting Parties upon executing and ratifying the Agreement since, by including this provision in the Agreement, the parties intended to strengthen and increase the security and trust of foreign investors that invest in the member States, thus maximizing the use of the economic resources of each Contracting Party by facilitating the economic contributions of their economic operators. This is the goal of such undertaking in light of the Agreement’s preambular paragraphs which express the will and intention of the member States to ‘ … intensify economic cooperation for the benefit of both countries …’ and the resolve of the member States, within such framework, ‘ . …to create favorable conditions for investments made by each of the Contracting Parties in the territory of the other …’. 59

Similarly, as the Occidental tribunal noted within the context of its case:

The Tribunal is of the opinion that in the instant case the Treaty standard is not different from that required under international law concerning both the stability and predictability of the legal and business framework of the investment. To this extent the Treaty standard can be equated with that under international law as evidenced by the opinions of the various tribunals cited above. It is also quite evident that the Respondent's treatment of the investment falls below such standards.

The relevant question for international law in this discussion is not whether there is an obligation to refund VAT, which is the point on which the parties have argued most intensely, but rather the legal and business framework meets requirements of stability and predictability under international law. It was earlier concluded that there is not a VAT refund obligation under international law, except in the specific case of the Andean Community law … but there is certainly an obligation not to alter the legal and business environment in which the investment has been made. In this case it is the latter question that triggers a treatment that is not fair and equitable. 60

In comparison with the awards in Tecmed and Occidental , the earlier Metalclad tribunal was much less discursive in making its finding on regulatory transparency. On the other hand, only the Metalclad tribunal was dealing with a treaty that explicitly included ‘transparency’ as one of the ‘principles and rules’ which must guide the interpretation of its provisions. 61 The tribunal appropriately discussed transparency in its analysis of the NAFTA's minimum standard provision, and commented upon manifestation of the transparency principle elsewhere in the NAFTA text. 62 Its conclusions were accordingly very similar to those quoted above:

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Prominent in the statement of principles and rules that introduces the Agreement is the reference to ‘Transparency’ (NAFTA Article 102(1) ). The Tribunal understands this to include the idea that all relevant legal requirements for the purpose of initiating, completing and successfully operating investments made, or intended to be made, under the Agreement should be capable of being readily known to all affected investors of another Party. There should be no room for doubt of uncertainty on such matters. Once the authorities of the central government of any Party … become aware of any scope for misunderstanding or confusion in this connection, it is their duty to ensure that the correct position is promptly determined and clearly stated so that investors can proceed with all appropriate expedition in the confident belief that they are acting in accordance with all relevant laws. 63

The investment experience of Metalclad clearly did not meet this rather unassuming standard. One can choose not to accept the testimony provided by Metalclad's witnesses about whether they were provided with specific assurances about the regulation of their facility by the three levels of Mexican government. One can assume that no assurances were given at all and still conclude that minimum international law standards of fairness and equity were not met in this case. The reason is simple: even in the absence of any abuse of authority on the part of municipal officials and the (apparently) improper assurances of federal officials, the fact remains that Metalclad demonstrated prudence and caution in establishing and attempting to expand its investment in Mexico. Its reasonableness was met with a litany of unforeseen (and reasonably unforeseeable) regulatory impediments. It obtained federal and state permits, but discovered new opposition. It entered into lengthy negotiations and finally agreed upon the terms of a convenio with federal officials, only to find further state and municipal intransigence. In sum, the tribunal concluded:

In addition, Metalclad asserted that federal officials told it that if it submitted an application for a municipal construction permit, the Municipality would have no legal basis for denying the permit and that it would be issued as a matter of course. The absence of a clear rule as to the requirement or not of a municipal construction permit, as well as the absence of any established practice or procedure as to the manner of handling applications for a municipal construction permit, amounts to a failure on the part of Mexico to ensure the transparency required by [the] NAFTA. 64

Such transparency was owed by Mexico to Metalclad and COTERIN, as a positive obligation, because it is a manifestation of the principle of good faith, which plays a major part in the ‘international law’ that NAFTA Article 1131(1) mandates shall be part of the governing law of the Agreement. Mexico and the other NAFTA parties actually agreed, as set out in NAFTA Article 102(1), to have the principle of transparency guide the interpretation of provisions such as its minimum standard of treatment provision. They also agreed to be bound by transparency-enhancing provisions

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elsewhere in the NAFTA and in other international economic agreements, as well as in soft law generated in such fora as the OECD and APEC. Accordingly, it should have come as no surprise that Mexico was held accountable for failing to provide the kind of transparent regulatory environment that Metalclad was entitled to expect.

The concept of legitimate expectation appears to be moving from its more narrow application, in detrimental reliance cases involving a specific promise by state officials not honoured with damages resulting, to an application regarding the entirety of the regulatory experience, where transparency, predictability, the rule of law and non-discrimination are the promise that induces reasonable reliance. A recent example of this approach can be found in the award of the Tribunal in Saluka :

301. Seen in this light, the ‘fair and equitable treatment’ standard prescribed in the Treaty should therefore be understood to be treatment which, if not proactively stimulating the inflow of foreign investment capital, does at least not deter foreign capital by providing disincentives to foreign investors. An investor's decision to make an investment is based on an assessment of the state of the law and the totality of the business environment at the time of the investment as well as on the investor's expectation that the conduct of the host State subsequent to the investment will be fair and equitable.

302. The standard of ‘fair and equitable treatment’ is therefore closely tied to the notion of legitimate expectations which is the dominant element of that standard. By virtue of the ‘fair and equitable treatment’ standard included in Article 3.1 the Czech Republic must therefore be regarded as having assumed an obligation to treat foreign investors so as to avoid the frustration of investors’ legitimate and reasonable expectations. As the tribunal in Tecmed stated, the obligation to provide ‘fair and equitable treatment’ means:

‘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.’

Also, in CME, the tribunal concluded that the Czech authority breached its obligation of fair and equitable treatment by evisceration of the arrangements in reliance upon which the foreign investor was induced to invest.

The tribunal in Waste Management equally stated that:

‘In applying [the fair and equitable treatment] standard it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant.’

303. The expectations of foreign investors certainly include the observation by the host State of such well-established fundamental standards as good faith, due process, and non- discrimination. And the tribunal in OEPC went even as far as stating that ‘[t]he stability of the legal and business framework is thus an essential element of fair and equitable treatment.’ … [however] …

305. No investor may reasonably expect that the circumstances prevailing at the time the investment is made remain totally unchanged. In order to determine whether frustration of the foreign investor's expectations was justified and reasonable, the host State's legitimate right subsequently to regulate domestic matters in the public interest must be taken into consideration as well. As the S.D. Myers tribunal has stated, the determination of a breach of the obligation of ‘fair and equitable treatment’ by the host State ‘must be made in the light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders.’

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306. The determination of a breach of Article 3.1 by the Czech Republic therefore requires a weighing of the Claimant's legitimate and reasonable expectations on the one hand and the Respondent's legitimate regulatory interests on the other. 65

In other words, legitimate expectation, closely tied with the principles of transparency and predictability, has become the centrepiece of legal analyses under investment protection treaties. As noted by the LG&E tribunal:

… the stability of the legal and business framework in the State party is an essential element in the standard of what is fair and equitable treatment. As such, the Tribunal considers this interpretation to be an emerging standard of fair and equitable treatment in international law. 66

This statement is as true for the ‘fair and equitable treatment’ obligation as it is for any other BIT provision. To be sure, the Saluka tribunal qualified its analysis as being directed to a ‘fair and equitable treatment’ treaty standard, rather than the customary international law version of the standard. 67 However, it also noted that the difference between the two expressions of this standard ‘may be more apparent than real’, affecting no more than the tipping point at which conduct is considered unfair or inequitable (where the tribunal suggests that violation of the customary norm may require worse treatment than that which would breach the treaty-based version). 68

The CME tribunal stated that the relationship between fair and equitable treatment and regime stability ‘is not different from the [customary] international law minimum standard’. 69 The CMS tribunal came to the same conclusion, in respect to both an investor's expectation of legal stability being based upon fair and equitable treatment and to the notion of that standard being required under customary international law. 70 Most recently, the same view was reflected by the Azurix tribunal:

… the minimum requirement to satisfy [the fair and equitable treatment standard] has evolved and the Tribunal considers that its content is substantially similar whether the terms are interpreted in their ordinary meaning, as required by the Vienna Convention, or in accordance with customary international law. 71

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(c) Abuse of Authority

From the perspective of the investor, the promise of ‘fair and equitable treatment’, or the prohibition found in some BITs against discriminatory or arbitrary interference, also amounts to a guarantee of freedom from arbitrariness or caprice in discretionary decision-making. A customary international law formulation of the same freedom, conferred as a right in the treaty context, is the prohibition against abuse of authority (or abus de droit). Professor Bin Cheng devoted an entire chapter of his renowned treatise on the principles of international law to the manner in which the doctrine of abuse of rights rises, as understood in international law generally, from the general international law principle of good faith. He summarized his view of the doctrine as follows:

[D]iscretion must be exercised in good faith, and the law will intervene in all cases where this discretion is abused. … Whenever, therefore, the owner of a right enjoys a certain discretionary power, this must be exercised in good faith, which means that is must be exercised reasonably, honestly, in conformity with the spirit of the law and with due regard to the interest of others … .The exercise of a right—or a supposed right, since the right no longer exists—for the sole purpose of causing injury to another in thus prohibited. Every right is the legal protection of a legitimate interest. An alleged exercise of a right not in furtherance of such interest, but with the malicious purpose of injuring others can no longer claim protection of the law. 72

Georg Schwarzenberger alternatively argued that since the theory of abuse of rights was so well-ensconced in the principle of good faith and in the customary international law minimum standard of treatment of aliens, it was not even necessary to refer to it as a separate standard—except for the ‘hard core’ of the theory. He considered the hard core to include: ‘the arbitrary or unreasonable exercise of rights or powers within the exclusive jurisdiction of States’. Schwarzenberger accordingly stated that arbitrariness in any form is—or ought to be—abhorrent to homo juridicus; his whole professional outlook is dominated by the attitude that, in the eyes of the law, equal situations require equal remedies. 73 In other words, whether one refers to the concept as ‘abuse of right’, ‘abuse of authority’, ‘abuse of discretion’, or a failure to provide ‘fair and equitable treatment’, international law prohibits state officials from exercising their authority in an abusive, arbitrary, or discriminatory manner. The tell-tale sign of the kind of state conduct which attracts such liability is an apparently arbitrary, capricious, and/or overtly discriminatory governmental action which causes damage to a foreign investment. If state officials can demonstrate that the decision was actually made in an objective and rational (ie reasoned)

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manner, they will defeat any claim made under this standard. If they cannot, the arbitrary conduct must be remedied. 74

The award in Occidental v Ecuador demonstrates how evidence of arbitrariness often becomes proof of a breach of the international minimum standard itself, rather than proof of the kind of improper state conduct which actually underlies the breach:

The Tribunal in Lauder , interpreting an equivalent but differently drafted provision of the pertinent investment treaty, resorted to the definition of ‘arbitrary’ in Black's Law Dictionary, where it is held to mean ‘depending on individual discretion; … founded on prejudice or preference rather than reason or fact . … In the context of the present dispute, the decisions taken by [the Internal Revenue Service] SRI do not appear to have been founded on prejudice or preference rather than on reason or fact.’ … the SRI was confronted with a variety of practices, regulations and rules dealing with the question of VAT. It has been explained above that this resulted in a confusing situation into which the SRI had the task of bringing some semblance of order. However, it is that very confusion and lack of clarity that resulted in some form of arbitrariness, even if not intended by the SRI. 75

In fact, the Occidental tribunal accepted that that there was likely no intent to discriminate against the claimant, observing that officials were acting in a very ‘professional’ and ‘good faith’ manner. 76 As the tribunal observed in Loewen v USA , the law has advanced such that it is no longer necessary to establish ‘bad faith’ or discriminatory intent, on the part of state officials, in order to prove breach of the international law minimum standard of treatment. 77 Of course, one way to guard against arbitrariness and discrimination in governmental decision-making is to promote transparency. The principles work hand in glove to improve the quality of regulatory decision-making, as was noted by the tribunal in Waste Management v Mexico . 78

The Metalclad award is one of two NAFTA awards to have included a finding of state responsibility for a breach of the international minimum standard based upon what was arguably a theory of abuse of rights. In other words, both tribunals determined that the arbitrariness that met the investors and their investments was intentional—although neither of them was explicit in making the finding. 79 In the other award, Pope & Talbot v Canada , the tribunal chastised Canada for the actions

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of an official who appeared to have misrepresented his regulatory authority in order to harass and harm a foreign investment, stating:

Briefly, the Tribunal found that when the Investor instituted the claim in these proceedings, Canada's Softwood Lumber Division changed its previous relationship with the Investor and the Investment from one of cooperation in running the softwood lumber regime to one of threats and misrepresentation. Figuring in this new attitude were assertions of non-existent policy reasons for forcing them to comply with very burdensome demands for documents, refusals to provide them with promised information, threats of reductions and even termination of the Investment's export quotas, serious misrepresentations of fact in memoranda to the Minister concerning the Investor's and the Investment's actions and even suggestions of criminal investigation of the Investment's conduct. The Tribunal also concluded that these actions were not caused by any behaviour of the Investor or the Investment, which remained cooperative until the overreaching of the SLD became too burdensome and confrontational. One would hope that these actions by the SLD would shock and outrage every reasonable citizen of Canada as they did shock and outrage this Tribunal. 80

Similarly, the Metalclad tribunal found that the minimum standard contained within NAFTA Article 1105 (which, as explained above, is arguably representative of the minimum standard provisions contained within almost 2,500 other investment protection treaties) was breached by the unacceptable conduct of the Municipality of Guadalcazar:

The denial [of the construction permit] was issued well after construction was virtually complete and immediately following the announcement of the Convenio providing for the operation of the landfill. Moreover, the permit was denied at a meeting of the Municipal Town Council of which Metalclad received no notice, to which it received no invitation, and at which it was given no opportunity to appear.

…

The Tribunal therefore finds that the construction permit was denied without consideration of, or specific reference to, construction aspects or flaws of the physical facility. Moreover, the Tribunal cannot disregard the fact that immediately after the Municipality's denial of the permit it filed an administrative complaint challenging the Convenio. The Tribunal infers from this that the Municipality lacked confidence in its right to deny permission for the landfill solely on the basis of the absence of a municipal construction permit.

…

The actions of the Municipality following its denial of the municipal construction permit, coupled with the procedural and substantive deficiencies of the denial, support the Tribunal's finding, for the reasons stated above, that the Municipality's insistence upon and denial of the construction permit in this instance was improper. 81

The tribunal's finding of liability appears to have been premised on a finding of arbitrary and capricious conduct for which Mexico was unable to provide a

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plausible explanation (other than to argue that the municipality was acting within its jurisdictional discretion). However, there is a sense that the tribunal saw the municipality as exercising its authority for an improper purpose, and not merely in an ultra vires manner. As the ICJ noted in the ELSI case, while a determination that state conduct was unlawful under local law can be a ‘valuable indication’ of a breach of treaty prohibitions against arbitrariness or unreasonableness, such a determination ‘without more’ will not attract state responsibility. 82 That ‘something more’ was obviously found in the Metalclad case; where the municipality was found to have gone out of its way to shut COTERIN down, even though it appeared to know that it was acting beyond its legal authority in doing so.

(d) Sowing Seeds of Convergence?

The more interesting question arising from this is—how is one able to prove that elusive ‘something more’, in the absence of harmful intent, or some sort of threshold of egregiousness? Given that tribunals have acknowledged that bad faith and intent to harm are not required to establish a breach of the fair and equitable treatment standard, it may well be that the test will evolve as follows: (1) claimant establishes a prima facie case of apparent arbitrariness or discriminatory conduct with serious consequences; and (2) respondent provides evidence which mitigates or explains the conduct which resulted in such arbitrariness or discrimination. If a prima facie abuse of authority has been established, as was arguably the case in Metalclad , the strategic burden on the respondent will be high.

This kind of approach was adopted by the Tribunals in Nykomb v Latvia , Saluka , and LG&E . The Nykomb tribunal concluded that the claimant established a prima facie case that the Polish government was honouring its obligations to pay a certain tariff rate to local energy companies but not to Nykomb, despite the similarities of their contracts. It also established that the respondent failed to prove its argument that its decision to pay different tariffs was justified, concluding that the decisions were made in a manner that violated the treaty's ‘fair and equitable treatment’ and ‘discriminatory impairment’ standards. 83

The Saluka tribunal similarly found that the claimant established a prima facie case that a local bank, which it controlled, was not given as favourable treatment as other similarly situated banks because its bank did not receive a bail-out package for its bad debts, as the others had. It found that: ‘State conduct is discriminatory [in the sense of it breaching “fair and equitable treatment” and “discriminatory

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