1. Introduction
In recent decades, investor–state dispute settlement (ISDS) has experienced significant fluctuations. Initially celebrated as a more legalized alternative to diplomatic protection,Footnote 1 international investment arbitration gained momentum, with numerous investment treaties proliferating across the globe.Footnote 2 In its early days, driven by neoliberal principles, the ISDS mechanism was seen as a champion of efficiency and investor interests.Footnote 3 However, this positive outlook was short-lived, as developing countries soon realized that they were gaining little and facing significant adverse effects from foreign investment.Footnote 4 Nationalism began to rise, prompting a focus on the societal impacts of foreign investment. During this period, regulatory power started to assert itself through exception clauses in arbitral practice, enabling host states to regain control over social order.Footnote 5 This shift in power dynamics led to heightened tensions and fierce debates, bringing key provisions, particularly the concept of ‘legitimate expectations’ into sharp focus.Footnote 6
To reduce the regulatory power of the host state after investors had injected assets into the host state as the bilateral investment treaty (BIT) prescribed, the doctrine of legitimate expectation was transposed, for further protection of stability as well as certainty, from domestic law by circumscribing the regulatory space.Footnote 7 Any governmental adjustments, ranging from legislative amendments to policy shifts, could fall within the purview of scrutinization.Footnote 8 As a result, a barrage of protest and criticism, alleging the excessive interference of the domestic legal system and social configuration due to the overly broad interpretation of the ambit of legitimate expectations, could occur.Footnote 9 The frequently filed expropriation claims in the name of frustration with legitimate expectations offered a graphical example of how the recognition of this norm could exert an unignorable influence on the host state.Footnote 10 Except for the risk of looming lawsuits, the nearly all-encompassing radiating range of investors’ legitimate expectations has imposed tremendous chilling effects on governmental management, as the elasticity of the regulation revision and policy adjustment was afftected.Footnote 11
Meanwhile, widespread application may not obliterate the fact that the nature and source of the legitimate expectations are riddled with ambiguity. Whether ‘the legitimate expectations’ could be identified as binding conceptions after transplanting from the domestic legal forum remains skeptical.Footnote 12 Owing tovariations in different domestic legal frameworks, the unified and unanimous definition and associated metrics are ultimately elusive.Footnote 13 Thus, it is arduous to describe the panorama and contour of the landscape in international investment arbitration. Moreover, the applicability of the landscape to international investment arbitration is controversial. Wildly recognized as the general principle in the domestic judicial realm, a couple of tribunals echoed this conclusion, asserting that the protection of legitimate expectations serves as a general principle of international law but fails to provide concrete explanations.Footnote 14 Besides, the alternative argumentative strategy adopted is the adhesion of legitimate expectations to the existing rules in BIT such as Fair and Equitable Treatment (hereinafter ‘FET’). In this vein, the tribunal is of the view that the frustration of legitimate expectations is tantamount to the violation of FET, which vindicates its application.Footnote 15 Moreover, the tribunal was inclined to adhere to the previous conclusion with regard to the validity of legitimate expectations, as confirmed in Oostergetel v. Slovakia.Footnote 16 Although numerous precedents tacitly integrated the protection of legitimate expectations into FET as an essential segment, none of them expositioned the rationale and the suspicion perpetuated until several tribunals vehemently contradicted its reliability.Footnote 17 The elision between FET and legitimate expectations exacerbated the fact that an increasing number of states insisted that the distinction should be clarified between the frustration of legitimate expectations and the violation of FET.Footnote 18 The latest arbitral practice, such as Interconexión Eléctrica v. Chile, maintained this variation. The tribunal opined that the state’s failure to respect an investor’s legitimate expectations should be simply considered as one element in the broader assessment of FET.Footnote 19 Some recent treaty practice also echoes this trend, for example, chapter 2 of the investment protection part in EU–Singapore FTA explicitly provides that legitimate expectations shall be treated as a factor to be taken into account when evaluating the violation of FET.Footnote 20
This article challenges the traditional opinion by highlighting that legitimate expectations were generated exactly from the interaction as well as discourse between investors and the host state; it is appropriate to consider it as an element of FET, but the content of legitimate expectations was constructed by social interaction. Through the lens of Fuller’s interactional theory, the article tries to underscore the difference between the ‘expectations’, categorized as social norms based on the common understanding, and the ‘legitimate expectations’, that emerge from the former but obtain the binding force through the repetitive practice of interaction. Hence, legitimate expectations do not remain stable once confirmed; on the contrary, their content depends mainly on mutual discourse. The concretization of common understanding and the extent of interaction are two elements of vital significance to consider. Section 2 of this article recalls the origin and development of ‘legitimate expectations’, combining the precedents of ISDS concerning its application and revealing the controversies and corresponding solutions from various schools of thought. Section 3 tries to explore the deficiencies of current explanations of legitimate expectations by reconceptualizing ‘expectations’ from the perspective of sociology and clarifying their nature as a social norm without compulsory effect. However, there still exists a distance between ‘expectations’ and ‘legitimate expectations’, calling for the explicit metrics theoretically and practically. Thus, Section 4 uses Fuller’s interactional theory to assist in drawing the line. In comparison to other rationales, Fuller’s framework could provide a refreshing angle to assuage the plight caused by the confusion and vagueness of legitimate expectations, as it illustrates a lucid and convincing procedure for the transformation of the social norm into legal norms as well as the associated metrics, which better dovetail the essence of recognizing legitimate expectations. Section 5 reappraises the typical scenarios where legitimate expectations are applied frequently through Fuller’s interactional theory, and finally concludes the paper.
2. Current Study and Controversies of the Legitimate Expectations
2.1 The Origin and the Development of Legitimate Expectations in ISDS
As corroborated both in scholarly research and arbitral awards, the doctrine of legitimate expectations could trace its root in domestic administrative law, which was designed to prevent citizens from the harm caused by a public authority resulting from a previous publicly stated position.Footnote 21 Although enshrined in all types of legal systems, the ambit of legitimate expectations varies from country to country.Footnote 22 For instance, in Canada, the court views it as ‘a part of the rules of procedural fairness that can govern administrative bodies’, which comes into play only when the frustration of procedure guarantee occurs.Footnote 23 In Germany, by contrast, it is the substantive protection of legitimate expectations that is explicitly recognized.Footnote 24 Additionally, there are countries where legitimate expectations encompass both substantive and procedural aspects.Footnote 25
When it turns to the ISDS, it seems that the tribunal intended not to make such a distinction. The tribunal in Tecmed v. United Mexican States, for the first time, cast light on the protection of legitimate expectations when scrutinizing the behavior of the host state. It held that the state should act in compliance with investors’ expectations in terms of consistency and transparency.Footnote 26 Then in Thunderbird v. Mexico, the tribunal officially applied the expression ‘legitimate expectations’, which was defined as ‘a situation where the host state’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct’.Footnote 27 Since then, a universal consensus has found its way to nearly every tribunal where ‘legitimate expectations’ are a mandatory norm imposing on the host state. The other problem emerges as to its legal basis if the tribunal is requested to entertain the related issue; hence, it is necessary to locate its bedrock in the BIT, while the wide-ranging FET clause serves as the best option. The tribunal in Saluka v. Czech Republic led the vanguard through identifying legitimate expectations as the ‘dominant element’ of FET,Footnote 28 followed by Electrabel v. Hungary underscoring it as ‘the most important function’ of FET.Footnote 29 With the accumulation of jurisprudence, this trend was steadily entrenched. However, the absence of a cogent reason for such involvement still gives rise to a dissenting voice. One camp radically resisted the overlap between the two. Like arbitrator Pedro Nikken enunciated in his dissenting opinion in Vivendi v. Argentina, the assertion that FET encompasses legitimate expectations does not align with the results from treaty interpretations.Footnote 30 The other did not deny the relevance, but turned to suspect its importance as an element to evaluate under the FET. The tribunal in Arif v. Moldova contended that a breach of an investor’s legitimate expectations does not ipso facto amount to a breach of a fair and equitable treatment obligation.Footnote 31 In the same vein, MTD v Chile held the view that ‘[t]he obligations of the host State towards foreign investors derive from the terms of the applicable investment treaty and not from any set of expectations investors may have or claim to have’.Footnote 32 Most recently, Red Eagle Exploration v. Colombia echoed the conclusion, holding that the failure to protect legitimate expectations may breach the minimum standard of treatment – the equivalent of FET in this case – only when the state’s actions fall below the usual standard.Footnote 33 In other words, a possible breach of an investor’s legitimate expectations is merely one of several considerations to be considered when reviewing an alleged breach of the FET, but not the direct and sole cause of finding a denial of FET. Therefore, consideration of the compliance of FET requires a comprehensive investigation.
The other issue stretching through nearly every dispute is the definition and identification of ‘legitimate’. Despite the broad gamut, in recent years some tribunals have realized that it is overly imprudent to frame every interest related to investment on the list of legitimate expectations. Not every expectation should be protected because some expectations are ‘too minor’ or ‘misplaced’ or are the ‘result of fanciful optimism’.Footnote 34 The crux rests upon the recognition of ‘legitimate’. As opposed to a vague description like ‘reasonable’,Footnote 35 ‘non-arbitrary’,Footnote 36 or ‘stable’,Footnote 37 the tribunal is more inclined to classify the expectations in accordance with the behavior and status of the representative then analyze under a specific situation. For example, an equivocal commitment ought to be identified as ‘legitimate’ prima facie, while an ambiguous expression is less likely to engender reliance in terms of any legal interest.Footnote 38 Similarly, a political statement is more convincing to evince the concerns about the investment than an informal declaration.Footnote 39 Besides, the identity of the promisor, the form of promise, and the details of the decision – all of them weigh differently.Footnote 40
2.2 The Discussions Regarding the Theoretical Basis of Legitimate Expectations
For the sake of reinforcing its legitimacy as the conception transplanted from the domestic plane, discussions of the theoretical foundation of legitimate expectations never lost attention. Multiple theories are in the spotlight concurrently, none of which could prevail in arbitration. The one most referred to is ‘the reliance theory’. Similar to the prohibition of the estoppel principle, the reliance theory of promises asserts that if a promisor encourages the promisee to depend on their assurance and the promisee indeed relies on it to their disadvantage, the promisor becomes accountable for addressing any resulting harm.Footnote 41 The kernel of this theory is to prevent the detriment of investors, who have suffered from reasonable reliance on the state’s promise. Some tribunals accept this idea, for example, In AWG v. Argentina, the tribunal, is of the view that ‘investors, deriving their expectations from the laws and regulations adopted by the host country, relied on those laws and regulations and changed their economic positions as a result.’Footnote 42
The second school of thought is the ‘The will-based (voluntarism) theory of promise’ which concentrates on the intention of promisors. It attributes the binding force of legitimate expectations to the voluntary acts of the state.Footnote 43 As the owner of sovereignty, it is eligible and feasible for the host state to restrain its power by assuming its obligations, as evidenced by the Lotus case. The will-based theory could trace its inception from the nature law. Pursuant to Grotius, the compulsory nature of legitimate expectations derives from the act of the promisor alone, and the form of obligation is inward self-consistency.Footnote 44 Later, Vattel made a further step towards the origin of legitimate expectations. He characterized it in a dynamic way that when someone made a promise to others, he transferred the right to them at the same time, and the breach of promise would give rise to the violation of legitimate expectations.Footnote 45 Several precedents have resonated with this belief. Total v. Argentina is a direct illustration, indicating that ‘The expectation of the investor is undoubtedly “legitimate”, and hence subject to protection under the fair and equitable treatment clause if the host State has explicitly assumed a specific legal obligation for the future.’Footnote 46
The last theory is named as ‘assurance theory’, a revised version of the last two. It centers on the one who creates the expectations for the other person and subjects the former to achieve those expectations. What distinguishes assurance theory from reliance theory is the object of proof. The latter is grounded in the vindication of ‘detrimental reliance,’ whereas the former only requires real assurance from the promisor.Footnote 47 In addition, disparate from the will-based theory, assurance theory acquires the obligation from the intention to extend an expectation rather than the willingness to undertake the obligation.Footnote 48 A couple of precedents shared this view. In Duke Energy v. Ecuador, the tribunal explicitly mentioned that this expectation could only have been deemed reasonable if it had been based on clear assurances from the government.Footnote 49
Moreover, there exist theories other than the guarantee of predictability, the protection of good faith, and the restraint of abuse of rights etc.,Footnote 50 but actually it is obvious that they are no more than an extension or further interpretation of the foregoing three theories – thus it is not necessary to elaborate more.
2.3 Reflection of Current Perception and Methodology
The recollection of previous cases demonstrates that two problems exist in front of the tribunal. The first regards the legal basis for the protection of legitimate expectations within ISDS, the second concerns the verification of legitimate expectations, particularly the confirmation of the circumstances in which investors’ expectations are qualified as ‘legitimate’. The precedents manifested a unified paradigm in which tribunals and scholars relied on tackling the issues associated with legitimate expectations. First, a certain rationale was put forward to justify the transplantation of legitimate expectations from internal law, as well as the legitimacy to support the claims of investors. Secondly, since it is premature to identify the protection of legitimate expectations as customary international law or general principle independently,Footnote 51 tribunals tend to measure the defiance of legitimate expectations under the framework of FET.
Regardless of practical convenience, both stages are fraught with significant deficiencies. The first step involves the perception and recognition of legitimate expectations. Although the three theories rest on various reasoning structures, they share the same perspective, namely ‘the legitimate expectations’ is a unilateral norm stemming from investors, and its content could be anchored through the promise. No matter for detrimental reliance, willingness to shoulder the duty or the assurance of the promise, they solely shed light on the single side. The reliance theory posits that if a promisor induces a promisee to depend on their assurance, and the promisee subsequently relies on it to their detriment, the promisor becomes liable for any resulting harm. On the surface, there is a connection between the two parties – namely, the promisor’s ‘inducement’ and the promisee’s ‘reliance’. However, the theory’s triggering point lies exclusively in proving the promisee’s reliance, with less emphasis on the promisor’s actions. Similarly, the voluntarist theory focuses on the promiser’s real intention, while disregarding the promisee’s reaction to the promise.
They ascribe the legal effects generating the legitimate expectations totally to one party and fail to take into account the interaction between the two, which directly brings about the elusiveness of common understanding as to the ‘legitimate expectations’. Furthermore, the three theories above fall short of sketching a clear line between ‘legitimate expectations’ and ‘non-legitimate expectations’ or ‘common expectations’. Put differently, these theories only give a brief outline as to why some promises are binding and subject to legal protection but none of them respond to the key issues by which they could be described as ‘legitimate’. For example, pursuant to the reliance theory, legitimate expectations play a role when detrimental reliance occurs. It is still unclear as to what extent reliance is sufficient to trigger legitimate expectations. To alleviate this vagueness, the tribunal sought to classify the source of expectations, mainly encompassing the bilateral agreement (e.g. the contract, the negotiation memorandum), the unilateral commission (e.g. administrative decisions, official announcements), and implicit promises (e.g. domestic rules and policies).Footnote 52 The tribunal may choose distinct yardsticks for different groups. In general, a specific document provides more evidence than the abstract, an official document, is more convincing than informal text.Footnote 53 Such measures can lead to a paradox when various factors are combined. Suppose that an authoritative agency provides a cursory declaration. How could the tribunal evaluate the existing formula? What if the parties sign the contract prescribing only some general principles? Now, it is obvious that the dependence on static metrics, solely qualifying one of the parties, is untenable. Ultimately, the deficiencies of contemporary arbitral practice are due to the application of the three theories that perceive legitimate expectations as a static status to be discovered and proved in one shot instead of a consequence of a dynamic procedure. The culprit for such backlash concerns at the same time the unilateral and static perspective. In other words, within the perception of numerous tribunals as well as some researchers, the legitimate expectations were created primarily in foreign investors’ minds. All the expressions and behaviors are used to be inspected, no matter whether subjective-oriented or objective-oriented, only from the eyes of investors, and thus the connotation, is totally determined by the one-way cognition rather than the common understanding from the two parties.
The unilateral perspective and the resulting absence of shared comprehension did not obstruct and impair the rigorous domestic legal order established based on explicit stipulation and a large amount of judicial practice, so both the citizen and the administrative agency are well aware of their roles and responsibilities. Nonetheless, the international investment system features a non-unitary hierarchy and fragmented spread of norms, which could explain why contentions over the adjustment of policy and amendment of laws took place in almost every case, even if the theoretical foundation had been illustrated in concrete terms.Footnote 54 Moreover, the legal relationship of domestic administrative law diverges from that of ISDS. The former is composed of trust in public authority and the recognition of identity within the same social context. In contrast, the bonds of investors and the host state are not robust. On the one hand, the basis of the ISDS lies in the economic ties surrounding investment assets. It is rather common for foreign investors to feel perturbed after entering the market because of potential arbitrariness and reneging. On the other hand, the investors and the host state hold different social narratives; it is somewhat unrealistic to assume that the two could trust each other just by means of identity. On the contrary, as some commentators point out, much of international investment law is premised on a distrust of the public authority of the host state.Footnote 55 Therefore, all the aforementioned theories restrain themselves into the perception of legitimate expectations as a one-way street instead of an interactive channel. Hence, the methodology of analysis in domestic law cannot agree well with the requirements and environment of the ISDS. The migration of theories, by extension, could be misconceived and backfire.
The second step, which attaches legitimate expectations to FET in substance, eclipses the original nature of the former. Admittedly, it is commendable for the efforts taken by the tribunal to ensure that ‘the legitimate expectations’ refers to the norm and is not conjured out of thin air but attached closely to the BIT. It is also conceivable that the attempt to circumvent the allegation of legitimacy crisis engendered from the vacuum of legal authority. If the legitimate expectations are considered as part of FET, that tribunal will have good reason to determine its content with reference to the latter in accordance with the basic rules of treaty interpretation.Footnote 56 Due to the requirement regarding the protection of investors’ interests, the clause in BIT unquestionably becomes the most available and reliable authority.Footnote 57 This reference in turn reinforces the viewpoint that ‘legitimate expectations’ are a steady norm immunizing the evolution, which could be nailed into the four corners of FET. However, the analogy is not easy to draw. FET was drafted and designed between the host and home states to draw the bottom line for foreign investors’ rights. In virtue of the existing generally accepted consensus, such as the International Minimum Standard of Treatment, the generic and abstract description could also reach the point where both parties share a common understanding.Footnote 58 Therefore, the ambit of the FET remains comparatively clear and consistent. To save time and resources from repetitive discourse, FET provision was created as a catch-all clause to envelope all necessary treatments from the government under all circumstances. However, the story is different in terms of legitimate expectations. First, although the protection of legitimate expectations could locate its inception not only from the BIT but also from the international community, there are no unified opinions concerning its landscape. As previously discussed, even in domestic areas, the content of legitimate expectations shows great diversity, let alone in international investment law. Consequently, it is not possible to delimit the boundaries of legitimate expectations using a general approach. The coordination of legitimate expectations into FET overlooks the opportunity to reflect the distinction between these two norms.
More significantly, the situations giving rise to a violation of FET, like denial of justice, the lack of transparency could offer a comparatively clear guidance about a state’s behavior without the need for specific reaction and negotiation. While the protection of legitimate expectations is too vague to make a textual comprehension, both the scope of ‘expectations’ and the characterization of ‘legitimate’ are out of reach. In other words, it is not possible to preordain the content of legitimate expectations from investors, which can only be confirmed under the specific discourse elaborating along with a substantial relationship between the investors and the host government.Footnote 59 This idea could gain support from all the aforementioned theories, as they share the same view that legitimate expectations must be assessed on a case-by-case basis, given that communication and negotiation may vary from one party to another. The combination of legitimate expectations and FET will, as a matter of fact, spawn the camouflage that the legitimate expectations will be construed the same way as the other prongs of FET, hence obliterating their uniqueness of formation. The case-by-case evaluation at the same time proves that the legitimate expectations are not crystallized as legal norms. It is therefore preferable to focus on the “expectations” between the two parties and, with the aid of external standards, evaluate whether they qualify as legitimate. In other words, the ‘expectations’ will be anatomized independently so that the conditions to legitimize the expectations can be better illustrated.
2.4 Interim Summary
As aforementioned, although several theories were quoted to corroborate the normative status of legitimate expectations, the controversies remain unassuaged and even portend a new wave of collision between the investors and host states, be it the exact content of legitimate expectations or the approach for application. Scrutiny of relevant awards before reveals the paradigms of the tribunals to tackle these intractable issues. Firstly, the tribunal is predisposed to eschew the textual interpretation while listing out a bundle of abstract hallmarks akin to the description of legitimate expectations in the domestic sphere (including but not limited to the expectations of ‘consistent manner’,Footnote 60 ‘free from ambiguity’Footnote 61 etc.). Second, in order to seek for the standards to evaluate the justifiability of legitimate expectations, the method lies in the assortment of the promises from the host state, including alteration of legislation, contractual undertakings etc.Footnote 62 Last but not least, it is also apparent that the majority of the tribunals believe the legitimate expectations acquire the binding effect from the FET provision, which functions as the gauge to calibrate the infringement.Footnote 63 These approaches, to some extent, cater to the requirement of arbitral practice; however, they could not belie the persistent analytical problems. On one side, tribunals failed to take a precautionary view to the structural disparity between the domestic administrative framework and ISDS when it hinged on the type of ‘promise’ from host state and its agency. Legitimate expectations are primarily invoked in domestic legal systems within a hierarchical (vertical) relationship, typically between the government and private individuals or entities. In contrast, investment arbitration generally applies the concept of legitimate expectations to disputes between two equal parties—a foreign investor and a host state—often tied by a contractual or treaty-based relationship.Footnote 64 Hence, the slavish analogy is infeasible. Meanwhile, the negligence of different platforms could blur the line between the ‘normal expectations’ and ‘legitimate expectations’; the default of the contract does not necessarily transgress the obligation in BIT.Footnote 65 On the other side, the tribunal always stared at the written words of BIT,Footnote 66 which were designed and drafted on most occasions without the participation of investors.Footnote 67 Nevertheless, the evaluation of legitimate expectations definitely surrounds the connection between the investors and the agency of the host state, leading to great confliction and unreasonableness. Most significantly, the tribunal began by identifying a violation of FET through an investigation into whether legitimate expectations were fulfilled. However, it then proceeded to assess legitimate expectations based on the constitutive factors of FET itself. This oft-applied process essentially results in circular reasoning.Footnote 68
These downsides boil down to the misconception of ‘legitimate expectations’ and the miscomprehension of the mechanism and theories that uphold its application. Therefore, in order to ameliorate the mode of analysis, the following sections will start with reconceptualization of ‘legitimate expectations’ from the perspective of sociology and then seek to introduce Fuller’s theory to illustrate its transition from social norms to legal norms with binding force before the tribunal.
3. Reconceptualization of Legitimate Expectations
3.1 Expectations as an Indispensable Component of Social Norm
Social norms are considered as a kind of grammar of social interactions to promote the welfare of the society as a whole.Footnote 69 They were generated as the outcome of individual’s interactions.Footnote 70 It is noteworthy that social norms do not constrain themselves to normative beliefs; the elements connecting the thoughts and behavior also play a role. Since the existence of beliefs does not lead to compliance with the norm, only when every member of the society is capable of fathoming the actual and specific social rules and the corresponding effects could they observe the certain norms.Footnote 71 Therefore, a bridge is required to link the two sides, and expectations are well suited for this task because of the bridge’s unique capacity to traverse the description to prescription, thus occupying an irreplaceable position in the social operation.
Though rarely discussed in literacy regarding legitimate expectations, research on expectations always appears in many sociological and jurisprudent works. According to Hart, the expectations mean the creation of moral relationship.Footnote 72 Finnis argued in his seminal work that the structure of expectations and reliance are essential to the well-being of the society.Footnote 73 Raz believed the promise is competent enough to establish the social bond and the alliance with certain people, thus suggesting that the expectations sit at the other side of a complete connection.Footnote 74 Likewise, Humes held the view that the promise is an ‘artificial virtue’ developed from a social convention for the benefit of people living in a society.Footnote 75 In addition, Rawls viewed as promising any action governed by a system of rules that defines offices, roles, moves, penalties, and defenses, thereby providing structure to the activity. At the same time, he demonstrated that expectations—the counterpart of a promise—cannot function independently of the broader context of social norms.Footnote 76 Pound also pointed out the expectations that come from the values of civilized society or the moral sentiment of the community.Footnote 77 Despite the difference in focus points and interpretative modes, it could be assertive to conclude that expectations as a pivotal part of social norms could deliver results only based on the social context. They regulate the behavior of the actors through the construction of a bond between ideational reference and real action.
In addition to the comments from jurist scholars, the development of sociology provides richer views on the comprehension of expectations. Some researchers juxtaposed social norms and expectations as respective roles to maintain and stabilize social order; the latter promotes the smooth functioning of the former under existing social networks. A typical statement asserts that norms refer to actions over which people have control and are supported by shared expectations about what should or should not be done in different types of social situations,Footnote 78 However, this should not exclude expectations from social norms. These arguments simply emphasize the conspicuous effects of expectations. Indeed, unlike the other substantial social norms that contain the operative guidance for the behavior, the expectations mainly highlight the predication of the practice under the common understanding,Footnote 79 providing nothing concerning the details of the norms. It is not reasonable to underestimate their value in facilitating social interaction and promoting observance of other norms. Most essentially, the expectations themselves have the capacity to regulate social behavior amid all the members, which was praised as ‘the force of expectations’.Footnote 80 Some enlightenment could be gained from game theory, as previously analyzed in several works, that the frustration of expectations from one side will be sanctioned by the other side with the same defiance.Footnote 81 Therefore, regarding mutual reliance on accomplishment, expectations can modulate social behavior in the same way as other social norms. This explains why more and more sociology studies have altered their viewpoint towards a more holistic approach, laying more stress on the unique contribution of expectations within the ambit of social norms.Footnote 82 An influential view construes the social norms as clusters of self-fulfilling expectations.Footnote 83 Particularly, in accordance with the interpretation from Bicchieri, the motivation deriving from expectations for conformity to social norms would be divided into two parts.Footnote 84 The first part is called ‘empirical expectations’,’, which refer to those beliefs that a certain behavior will be followed; the second means ‘normative expectations’, representing the beliefs that ought to be followed. Due to the combined work of these two types of expectations, social norms can fulfill their role and evolve with social interaction and reality.
For the discussion mentioned above, which angle is better to make sociology research stay out of the scope of this article, but at least it is rather clear that ‘expectations’ constitute an inseparable segment of social norms. In international investment arbitration, some tribunals have made such indications in the award, even though they do not shed light on its sociological nature. For instance, in El Paso Energy International Company v. Argentine, when evaluating the investor’s expectations, the tribunal firmly held the view that the economic, social, and other natures are indispensable to assessing the existence of legitimate expectations.Footnote 85
3.2 The Content of Expectations Stems from the Social Interactions
After establishing that expectations function as the inextricable pillar for the construction of society, the next question is how to ascertain their content. The common view depicted them from a unilateral perspective, believing that expectations are no more than the thoughts derived from one party, regardless of the others’ opinions. This article aims to reconsider this viewpoint and proposes that the details of the expectations are not inherently predetermined; they could be crystallized from vague to specific through the interactions among all the members.
It is quite common to envisage a scenario in a society where everyone is completely strange and unknown to each other; at this juncture, if one just wants to achieve expectations, then several obstacles could hinder the requirement. First, from whom would he or she draw expectations? Second, what to anticipate is still uncertain because of the unconsciousness of the basic information about the other involved, and, finally, whether someone’s anticipation could be identified as a real expectation and that no one else is able to offer a response expect for himself or herself. In this respect, the crux seems apparent: none of the expectations would be vindicated if the communication and interaction were missed.Footnote 86 To make expectations meaningful, actors must assume others comprehend and follow them, while others are also entailed to verify the expectations through the extrapolation from their recognition and then take the ensuing step.Footnote 87
Several explanations have been proposed to explain this phenomenon. In Parson’s view, interactional review is essential to construct a common value system through the expectations that the socialization procedure of every member takes effect.Footnote 88 In accordance with Tajfel, people’s recognition is closely connected with social identity, which is inextricably linked to subsequent behavior. In other words, the membership of a social group could by large determine one’s logical paradigm, and perception for one hand could shape one’s expectations of the others for the other hand.Footnote 89 No matter which theory prevails, there is one undeniable thing: the expectations are elaborated due to the interaction. When an expectation starts, one needs to primarily accept some external signs within their perception, then the key lies in whether others could effectively respond to that expectation.Footnote 90 To render it possible, the mutual discourse proves to be the most reliable.Footnote 91 During this process, two parties become aware of the basic requirement of each other, and then the common understanding occurs concerning the content of expectations, which in turn instructs the interaction.Footnote 92 Hence, it is more common for us to perceive the expectations determined by the assurances and engagements that we receive from others, thus ignoring the procedure of mutual adjustment and the foundation of the shared understandings.
Investment arbitration practices gradually embrace the interactional perspective. Interpretation always centers on the distinction between the subjective approach (unilateral perspective) and objective approach (objective perspective). In Edf (Services) Limited v. Romania, the tribunal is of the view that legitimate expectations cannot be solely the subjective expectations, which require the examination of all the circumstances, including the economic situation and regulation in the host state.Footnote 93 Later, the tribunal in Toto Construzioni Generali SpA v. Republic of Lebanon explained that legitimate expectations are more than investors’ subjective expectations.Footnote 94
4. Fuller’s Interactional Theory as a Vantage Point
The re-conceptualization of expectations demonstrates the deficiencies of existing theories, and a novel perspective is necessary to redress miscomprehension and satisfy the need for international investment arbitration. The following section aims to use Fuller’s interactional theory to renovate the current model concerning the assessment of legitimate expectations.
4.1 The Cardinal Canon and General Paradigm of Interactional Theory
Fuller’s legal theory elucidates law as a purposeful construction influenced by human interactions and is designed to steer them in specific directions.Footnote 95 To underpin his cardinal canon, further elaboration is provided. At the beginning, Fuller endeavored to break the mold of the deeply entrenched idea that law only dwells on the hierarchy, proposing that the law is formed and persists due to the struggles and repetition of social practice.Footnote 96 From his perspective, all the participants, ranging from official agencies to civilians, contribute to the erection of the institutional framework where social order can be kept stable.Footnote 97 The traditional understanding is that the vertical relationship between authority and subordination fails to recognize its horizontal features since the enforcement of legislation hinges on reciprocity.Footnote 98 As in Postema’s words, legal norms and authoritative directives can guide self-directed social interaction only if they are broadly congruent with the practices and patterns of interaction extant in the society generally.Footnote 99 On one side, the legislators codify and apply the law with the anticipation that the citizens would observe the rules; on the other side, citizens also expect the governments to apply the rules in accordance with the law.
Fuller also portrayed law as a dynamic procedure, except for the bilateral nature of law. In the preliminary step, the two parties communicate with each other, and gradually some consensus in terms of the details of the rules can be reached, which lays the foundation of the ‘shared understanding’.Footnote 100 Based on this, some norms can be confirmed, facilitating subsequent interactions. In light of these arguments, we can conclude that the law depends on the interaction between lawmakers and citizens.Footnote 101 However, under these circumstances, one may suspect a distinction between social and legal norms for the resemblance of formation. Indeed, pursuant to Fuller, the law itself has its roots in social norms, but that does not mean that the former just comprises social understanding.Footnote 102 Only when shared understandings are entitled to distinctive qualities are the related norms considered as the law. Fuller summarized these as eight criteria. That is: (1) law must be general and used to regulate social behavior; (2) law must be accessible for the public; (3) law should be prospective and not be applied retroactively; (4) laws should be clear; (5) laws should avoid contradictions; (6) laws should be feasible for citizens; (7) laws should not be changed frequently so that the legal system provides stability; and (8) there has to be a congruence between official actions and declared rules.Footnote 103 After constant construction and reconstruction through mutual practice, common understanding will not become legal norms until these eight points are met. That is what Fuller called ‘the morality of law”.
Before concluding, it is worthwhile to clarify some controversies concerning legal positivism against interactional theory. The main dissenting voice comes from Hart, who resisted Fuller’s thought of morality as an internal factor in the law. In Hart’s theory, this is more of a method to evaluate the effectiveness of the law than the metrics to validate the existence of the law, and any rules of the law gain the binding force from their positions in the hierarchy.Footnote 104 These debates have perpetuated for a long time, but many works in recent decades have turned to a middle path. In other words, Hartian positivism does not stand on the opposite side to Fuller’s interactional theory. They can reconcile with each other. Just as Fuller wrote in another seminal work, Anatomy of Law, the whole normative system should be divided as made rules and implicit rules: the former concerns those conceptions based on authority, while the latter derives from conduct and practice during social relationships.Footnote 105 The two sorts do not collide; on the contrary, they can complement each other and promote development. As Postema argued, implicit rules are the by-product of rational interaction, which is virtually unavoidable for the application of any made rules, and enforcement entails rational communication and cooperation. In this way, the rules can be transferred from abstract norms to specific standards of behavior. Meanwhile, implicit rules emerge from the interaction and common understandings formed during this period, later reinforcing the comprehension of the rules and enriching their content. The mode of mutual improvement could shed light on these controversies. For a well-developed legal system, hierarchy-style legislation would be the most comprehensive approach to exert the value of the law and to govern society. However, it is indisputable that positivism is unable to capture the dynamic change in normal life and fails to grasp a bilateral perspective. In an interactive society, every member can attain ideal results only if relatively stable mutual expectations of behavior are available. Therefore, there is no need to draw a clear line between positivism and interactional theory; both serve independent roles in societal governance. The positive law endows the rules of formal authority, while their details ought to correspond with the shared understandings from social interactions; thus, Fuller’s theory could assist the interpretations of a given law.Footnote 106
Fuller’s interactional theory can be recapitulated as follows: first, legal norms share the same origin with social norms and as such they are connected to social practice; second, consistent social interaction leads to shared understanding, setting the foundation of the basic conception of social norms, which concomitantly foster the ensuing interactions; finally, when the social norms are sufficiently mature that the eight criteria proposed by Fuller are met, it is viable to apply them as legal norms.
4.2 The Advantages of Interactional Theory as the Rationale in Support of Legitimate Expectations Protection
Albeit that Fuller’s interactional theory illuminates a new perspective of mutual comprehension in the dynamic process, few arbitral tribunals adopted it in judicial practice. Among academic research, Fuller’s international theory has only been invoked by researchers in order to clarify the legitimacy and institutionalization of international investment arbitration.Footnote 107 However, except for the relation concerning the tribunal and the host state or the investor, they did not notice that the interaction between the latter two could bring more effects in terms of the interpretation of investment treaties and reform of ISDS. This section will explain why it is appropriate to introduce interactional theory into international investment arbitration and its advantages over other theories in dealing with the assessment of legitimate expectations.
First, despite its domestic source, Fuller’s international theory could fit the mechanism of ISDS. The traditional theories mentioned above fix vertical administrative relationships. The actors behave under the instruction of internal law with a solid foundation; however, within the parameters of ISDS, foreign investors connect the government of the host state through the ties between investment treaties and investment contracts. The host state is obliged to offer specific treatment to investors, not because of its authoritative status, but because of the exchange for investment. Therefore, the investor and host state perform more like equal commercial parties than the governor and subordination.Footnote 108 In addition, as opposed to domestic law, the international investment legal system appears more fragmented;Footnote 109 although investment treaties provide explicit references, they are often designed through the direct transplantation of model BITs, which tend to be general and vague, leaving clarification to be made in later practice.Footnote 110 In addition, the investment treaties stipulate the rights and obligations regarding the investor and host state, which would not be covered without the straightforward communication. The reality of ISDS mirrors Fuller’s interactional theory. For one, it concentrates on analysis of legal norms from a horizontal point of view instead of a vertical one, aligning with the basic legal structure of ISDS. For another, it prioritizes the dynamic interaction rather than the static provisions on appraising the scope of the social norms, which also coincide with the current situation of ISDS, where bargaining and negotiations between the investor and host state matter most.
Second, in comparison with other rationales, interactional theory offers an unequivocal balance between the stipulation of BIT and the conclusion from interactions. More specifically, the rationales mentioned above (including reliance theory) are dedicated to finding an independent source of legitimacy but neglecting the effects of BIT. For example, reliance theory requires proof of detrimental reliance and regards it as the sole source of the protection of legitimate expectation; doubts emerge regarding the role of BIT and why the tribunal is incumbent on the application of these theories. In contrast, Fuller’s theory does not deny the significance of positive law and excludes their consideration; contrarily, the implicit rules stemming from social interaction could complement the made rules.Footnote 111 In the context of ISDS, interactional theory admits the dominant position of BIT as a rule that verifies the protection of legitimate expectations.Footnote 112 The purview of expectations and the standard to assure their ‘legitimacy, nonetheless, shall be determined via the interpretation supported by the implicit rules. In this way, Fuller’s theory in fact functions to assist the tribunal to obtain a more reasonable comprehension and grasp the critical factors for evaluation.
Third, interactional theory is in line with the requirement of arbitral practice regarding the issue of recognition and interpretation of legitimate expectations. The previous introduction has demonstrated that the demand of the tribunal is not to confirm whether legitimate expectations shall be protected, but what the expectations contain and whether they are legitimate. Expectations, as part of social norms, are created through interactions among social members. Any analysis surrounding this would be better made from the viewpoint of a specific discourse. Fuller’s theory is an ideal theoretical tool that does not meet current needs. It provides an analytical framework centering on communication concerning the investor and host states, underscoring the core value of shared understandings as to the formation of expectations. It also expositions the avenue for the transformation from social norms to legal norms, responding to inquiries on what kinds of expectations could be deemed legitimate.
5. Reappraise the Interpretation of Legitimate Expectations through the Lens of Fuller’s Interactional Theory
5.1 Reconstruction of the Assessment of Legitimate Expectations
As mentioned in section 2, the previous paradigm of assessment of legitimate expectations mainly commences from the classification of the situations and warrants different methods. If investors base their expectations on the representations made by the host state, the tribunal would scrutinize only the representer’s authority and the specificity of the representations, but not the nature of their communication or the existence of mutual consensus.
This section aims to reconstruct a way to assess legitimate expectations based on Fuller’s interactional theory. Above all, it is necessary to clarify that the article does not advocate for a purely interactional approach. Consistent with Fuller’s opinion, the implicit rules of social interaction could not capture the entire image of the legal system. On most occasions, especially under the framework of international law, the BIT has more direct and rapid legal effects, and motivates the two parties to communicate and interact.Footnote 113 Hence, this article, as discussed before, would not radically refute the idea that the validity of the protection of legitimate expectations shall be attributed to FET, regardless of whether it is an independent element or a factor that constitutes the other elements. Before the related customary international law or general principle is proved, it is the most feasible approach to safeguard legitimate expectations under the framework of ISDS. Nevertheless, it is not reasonable for the tribunal to extend the interpretation of legitimate expectations in the same way as the other elements of FET due to its unique sociological nature. Hence, case-by-case analysis is necessary to ensure accurate compliance. Furthermore, although Fuller’s interactional theory, in comparison to traditional domestic theories, exhibits several advantages in interpretation, it cannot be completely applied in the context of ISDS. Especially for the eight criteria to prove legal norms, they were originally designed to measure universal legal norms as a whole system in domestic areas, but not those solely applied among certain members. Consequently, it is imperative to assess whether it is appropriate before transposing the relevant criteria into the framework of international investment law. First, Fuller positions his theory as the foundation of the legal system, illustrating it through a hypothetical law-making process in a society. He concludes that ‘a total failure in any one of these eight directions does not simply result in a bad system of law; it results in something that is not properly called a legal system at all’. Hence, the eight elements are not aimed at creating a single legal norm, but rather at establishing a comprehensive system designed to govern society consistently and enduringly. This naturally requires coordination and harmonization among all rules, which could explain why the non-retrospective requirement and publicity are included. However, the legitimate expectations function only as one norm within the broader system. Therefore, only the correlated criteria within the same hierarchy can be utilized to measure its legitimacy. Secondly, the eight elements are not achieved simultaneously; instead, they substantively reflect the entire process of transforming social norms into legal norms. Put differently, this transformation can be characterized as a two-step process. The first step involves the transition from non-law to law, and the second entails the shift from bare law to law imbued with legality. Fuller’s explanations for each element also align with this trend. For instance, he described the ‘generality of law’ as ‘the first desideratum of a system’,Footnote 114 while he referred to promulgation as adhering to the ‘marginal utility principle’. Thus, the eight principles collectively depict the full operation of the law-making process.Footnote 115 The evaluation of legitimate expectations, however, necessitates only a partial reference to these principles, as the focus – consistent with Fuller’s first step – lies in their creation. Therefore, it is not logical to consider all eight criteria for assessing legitimate expectations in international investment disputes. What seems a justifiable way is to discover the core – the norms must be stable and consistent enough to reflect real common comprehension. As such, the related parties in a particular relationship can apply or accept them inward.
A paradigm can be extracted from Fuller’s explanation. First, two parties connect with each other through discourse, negotiation, and bargaining. With more and more interaction, it turns to the second stage, the crystallization of common understanding, which at the same time set the basic parameter of expectations.Footnote 116 Then, the interactional practice proceeds until the common understanding becomes sufficiently clear and stable, accessible to negotiating parties in a way that convinces both to be willing to regard it as binding. In light of this paradigm, to judge certain expectations ‘legitimate’, the tribunal is entailed to scrutinize principally two factors: first, whether the investor and the host state interact with each other and reach a common understanding, which could be expressed in multiple forms such as the draft, the note of conference, the memorandum and so on;Footnote 117 second, whether the two parties carry on the interactional practice to reinforce the common standing and make further clarification and stabilization. In a nutshell, the more interactions they take, the more unambiguous the shared understanding becomes, and, finally, the more legitimate the expectations could be presumed unless any party could adduce the contrary evidence.Footnote 118
Before delving into the specific context, it is essential to provide further clarification. The interaction that serves as a channel for the intentions of different parties can take various forms, including direct expression or indirect implication. However, this does not imply the absence of thresholds. As Fuller noted, the law is realized through purposive efforts.Footnote 119 Thus, only effective interactions, grounded in genuine thought and deliberation, can serve as a meaningful foundation. In other words, one should engage with others with the intention of expressing oneself and seeking mutual understanding. A discourse lacking the purpose of mutual comprehension cannot be considered ‘effective interaction’.Footnote 120
Secondly, common understandings refer to mutual comprehension regarding a certain issue. According to Fuller, there is no fixed or quantifiable standard; however, common shared understandings should at least be granted normative force.Footnote 121 More specifically, subsequent behavior ought to be practiced with a sense of obligation. The most intricate question is how we can justify their existence. Indeed, inner motivations cannot be explored directly but can only be inferred from external behavior, i.e., practice. Both the quality and quantity of interactions are important. On the one hand, different practices clearly reflect diverse intentions. For instance, an official agreement in principle demonstrates more shared understanding than a simple unofficial conversation. On the other hand, in accordance with Fuller’s theory, the formation of legitimate legal norms requires prolonged interaction and the gradual establishment of common understandings.Footnote 122 Generally, the more interactions that occur, the greater will be the opportunity for parties to exchange ideas and reach mutual agreement, resulting in norms that more closely reflect their inherent values. Consequently, adherence to these rules is more likely to arise from genuine acceptance, enhancing the respect for autonomy and the legitimacy of the outcomesFootnote 123 unless there is clear evidence to the contrary. Therefore, it is neither possible nor the intention of this article to draw a definitive line regarding the degree of practice and the shared understandings required to validate the legitimate expectations. A comprehensive assessment of all forms of interactional practices is necessary to determine whether a shared understanding has been sufficiently crystallized to support a claim of legitimate expectations. The next section will provide a more concrete analysis based on specific circumstances.
5.2 Reevaluation of the Typical Models Triggering Legitimate Expectations
In accordance with previous awards, disputes regarding legitimate expectations always arise under certain circumstances in which some typical models originated. Although Section 2 criticized the treatment related to assortments, this never means that the classification per se is unreasonable, which indeed provides a thorough overview. Thus, the following section will reevaluate the identification of legitimate expectations with the guidance of typical models.
5.2.1 Bilateral Agreement
A bilateral agreement, especially a contract, is always considered a more reliable model engendering legitimate expectations. As the tribunal in Continental Casualty v. Argentine Republic asserted, the contract undertakings function as the legal rules, therefore generating the legitimate expectations of compliance.Footnote 124 For the same reason, the tribunal of MTD v. Chile is of the view that since the host state entered into the contract, it should assume the obligation to protect the legitimate expectations from investors.Footnote 125 However, some conclusions were drawn disparately, and determining the violation of contract does not necessarily frustrate legitimate expectations due to the distinction between domestic law and international law. Like Hamester v. Ghana, the tribunal underlined the existence of legitimate expectations and the existence of contractual rights are two separate issues,Footnote 126 Parkerings v. Lithuania put it more directly that ‘The expectation a party to an agreement may have of the regular fulfillment of the obligation by the other party is not necessarily an expectation protected by international law. In other words, contracts involve intrinsic expectations from each party that do not amount to expectations as understood in international law.’Footnote 127 Doubtlessly, it is a well-established principle that contract breaches are not equivalent to a breach of treaty.Footnote 128 However, what needs to be emphasized here is that when the tribunal makes the distinction as to the violation of national law or BIT, the logical precondition must be substantiated that the expectations are really ‘legitimate’. From the precedents, the tribunal seems accustomed to the presumption that once the contract is established, the expectations automatically feature as legitimate. Admittedly, in the vast majority of cases, the investment contract is not settled before a series of strenuous bargains and negotiations. During this procedure, the investor and government can fully engage in discussion, and the incessant interaction offers abundant opportunities for shared understanding as an interim agreement. After that, the discourse will continue, with the draft papers paving the way for the final versions. Therefore, Fuller’s interactional theory is reflected perfectly in the context of contractual undertaking. This also explains why tribunals tend to associate the contract with legitimate expectations. However, this assumption remains indisputable. In other words, not all contracts definitely lead to expectations that deserve the protection of the BIT. It is still imperative for the tribunal to scrutinize each case. For instance, In Walter Bau v. Thailand, the two parties signed a preliminary contract in the belief of a reasonable return but without a clear guarantee later, the Ministry of Finance promised that it would be 14%, but until the MoA2 agreement was made, the amount of return became blurry again. Despite this, the tribunal held that even though there was no guarantee by the respondent of an explicit rate of return, reasonable expectations of investment returns were still generated.Footnote 129 From the viewpoint of interactional theory, the conclusion is untenable due to the scarcity of an explicit common understanding and ample interactions. Therefore, the tribunal should not offer absolute but inappropriate weight when considering legitimate expectations arising from bilateral agreements.
5.2.2 Unilateral Commission
The unilateral commission, by and large, refers to the administrative representation, which could appear as the form of a promise, an undertaking, a statement, or information.Footnote 130 In Glamis Gold v. United States of America, the tribunal was of the view that the State may be tied to the objective expectations that it creates in order to induce the foreign investment and such representations possess the nature of a quasi-contract.Footnote 131 Similarly, the tribunal in Sempra v. Argentine Republic was of the view that the requirement to protect legitimate expectations became particularly meaningful when the investment was attracted and induced by means of assurances and representations.Footnote 132 In addition, there are moments when the tribunal dismissed claims based on the protection of legitimate expectations based on the unilateral commission. Taking White Industries v. India as an example, the tribunal resisted recognizing investors’ expectations as legitimate because they originated from a short representation on an informal occasion and could not meet the standard. In the same vein, in El Paso v. Argentina the tribunal declined to honor a political declaration made by the President of the Republic, despite the possibility that such a statement could encourage prospective investors to venture into the relevant sector. The tribunal emphasized that while political suggestions may influence economic decisions, they do not equate to asserting legal assurances.Footnote 133 The arbitrator Thomas Wälde offered a concise and precise remark in his Separate Opinion of Thunderbird v. Mexico case, which confirms that ‘a legitimate expectation is assumed more readily if an individual investor receives specifically formal assurances that display visibly an official character’Footnote 134. Therefore, precedents dwell on the scrutiny of the authority and specificity of the unilateral commission. Under Fuller’s interactional theory, the essential element is not authority or specificity. On the one hand, these two factors are too obscure to support a lucid conclusion; none of the awards has ever given a definitive yardstick regarding what is sufficiently authoritative and specific. On the other hand, as previously mentioned, when they coexist in one situation, there is no unified hierarchy to determine which one dominates.
To evaluate whether a unilateral commission could lead to legitimate expectations, the first step is the investigation of the process during which the interactions give rise to the preliminary common understanding, which may include the treatment regarding the investment, special guarantee of the policy, etc. In the international investment relationship, the interaction asks investors to positively connect with the host state and find opportunities to exchange their views before the commission promulgates. For example, in the PSEG v. Turkey case, the tribunal took into consideration the fact that the two high-ranking corporate executives of the investor company travelled to Turkey for a meeting with the senior officials in order to discuss the investment project.Footnote 135 Then comes to the second stage where the continuing practice concerning communication and discourse is still required to enhance and ameliorate the common understanding until it is stable. This entailed the tribunal determining whether investors continued to interact with the host state after an initial consensus. A benchmark could be set in the Metalclad v. United Mexican States case; after the investors acquired permission from the federal government, they further attained authorization from the state level and asked for advice from the officials, which occupied a dominant position for the later evaluation.Footnote 136 In comparison with the contract, the unilateral commission involves less common understandings and interactions, which is the reason why a number of tribunals laid less weight on it. However, this is not a completely correct conclusion; total scrutinization for each case is always necessary.
The other problem probably surfaces with regard to the unilateral commission, that is, the participation of investors and the host state. Interaction theory concentrates on interactional practice; compared to bilateral agreement, the chance and motivation to negotiate becomes less solid for unilateral commission. However, if the lack of practice is imputed to ignorance or omission, how can the tribunal render a reasonable award? Under these circumstances, the rule of due diligence could assist in resolving this dilemma. When the host government has offered ample opportunities for negotiation, and the investor fails to proactively enter into an agreement, the negative consequence of denying legitimate expectations falls on the investor. It is widely recognized that investors who are endowed with special treatment under BIT at the same time are obliged to fulfill their duty and keep acute about the market and economic situation in the host state, which was interpreted as the investigation and awareness of the rules and policies concerning investment. In Mamidoil v. Albania, the tribunal pointed out that the investor’s reasonable expectations regarding the stability of the legal framework were based on the prerequisite diligent inquiry and information.Footnote 137 In Unglaube v. Costa Rica, the tribunal further explained the requirement that investors should be familiar with the related rehosting state.Footnote 138 All precedents attest to the effects of due diligence. Furthermore, if it is the host state that fails to respond to the negotiation requirement properly, the void of legitimate expectations caused by the lack of adequate interaction cannot be attributed to investors. One of the best proofs is the separate opinion of Arbitrator Pedro Nikken, who stated that the due diligence standard should be assessed by reference to the canons of good governance and the propriety of the government, which is also a part of FET.Footnote 139 Hence, if the host state refuses the request of discourse from investors or does not provide the necessary conditions, even though the protection of legitimate expectations will not be triggered, the inaction itself infringes on the FET. However, investors still have a remedy.
5.2.3 Implicit Promise
Finally, legitimate expectations can arise from implicit promises. Investors assert that they make investment decisions by relying on the prevailing legislative and regulatory framework of the host state. Although the host state never mentions an unequivocal promise, numerous awards and researchers believe the regulation system could yield an implicit promise; if the host state modified these regulations, their initial expectations would be frustrated.Footnote 140
In Enron v. Argentine Republic, the Tribunal held that a key element of fair and equitable treatment is the requirement of a ‘stable framework for the investment’ along with the requirement to protect legitimate expectations.Footnote 141 Nonetheless, the tribunal of Continental Casualty v. Argentine Republic clarifies that the legal framework shall not always be the basis for legitimate expectations, and it would be unconscionable for a country to promise not to change its legislation as time and needs change.Footnote 142 The tribunal in Impregilo v. Argentina held the same opinion, deciding that the legitimate expectations of foreign investors cannot be that the State will never modify the legal framework, especially in times of crisis, but certainly investors must be protected from unreasonable modifications of that legal framework.Footnote 143 But what is ‘unreasonable’ is unexplained in the award. The later cases such as the El Paso v. Argentina and Toto v. Lebanon defined the standard as ‘total alteration of the legal framework’Footnote 144 or ‘drastic or discriminatory change’.Footnote 145 The tribunal relies on the extent of change to distinguish legitimate expectations from normal expectations in the context of implicit promises. However, the same problem occurs as to how to draw a clear line regarding the change. Fuller’s theory can assist the tribunal in circumventing this intractable issue and provide a better paradigm.
Pursuant to Fuller’s interactional theory, the first part, like the other two models, requires the tribunal to investigate whether interactional practice has promoted the formation of shared understandings. Subsequently, the second state determines whether the proceeding interaction consolidates common standings. Since investors rely on the stability of the regulation system, but not a specific instrument or undertaking, fewer opportunities are reserved for the two parties to interact. The most feasible way is to stare at the development of certain policies or rules, ask for some advisory opinions from official agencies, and swap thoughts and seek verification from the government; some precedents could corroborate this viewpoint. In Mamidoil v. Albania, the tribunal refuted legitimate expectations, as the claimant failed to find any professional interpretations of domestic law.Footnote 146 In addition, in Stadtwerke v. Spain, the tribunal believed it not to be sufficient to trigger legitimate expectations for consulting agencies only, and later official confirmation is essential.Footnote 147 Besides, in accordance with the recent research about various tribunals’ interpretations as well as their attitudes towards the stability of the regulatory framework and the legitimate expectations, the specific commitment has always been accorded significant weight.Footnote 148
In summary, the traditional experience of the weight of the source of legitimate expectations always prioritizes the contract, the regulatory framework could engender reduced expectations, and the abstract political statement was entitled to the least value. Although this sequence appeared in numerous awards, the tribunal did not offer an explicit explanation. Through the lens of Fuller’s interactional theory, a reasonable answer is that the establishment of the contract entails the most interaction to find and solidify shared understandings, the implicit promise arising from the legal system, and the unilateral commission requires less in general. On the one hand, the analytical paradigm from interactional theory vindicates a large portion of precedents, improving the legitimacy of ISDS at the same time; on the other hand, it also demurs stiff and slavish adherence to the value hierarchy, shedding light on the significance of specific reflection for each case.
6. Conclusion
Legitimate expectations have never been an uncommon conception in both domestic and international areas. Perhaps, just because it is frequently argued, tribunals were accustomed to tackling the controversies with a formulaic and static view, thus ignoring its sociological and dynamic nature. As an integral part of social norms, expectations are closely associated with social interactions; thus, it is necessary to make a specific verification every time. Legitimate expectations demand that the tribunal decides whether the ‘expectation’ deserves the protection of BIT. Thus, a theory capable of bridging social and legal norms is needed. Fuller’s interactional theory remains at its vintage point. It provides a comprehensive paradigm to evaluate the circumstances in which expectations could be recognized as ‘legitimate expectations’. It requires the tribunal to investigate interactional practice and shared understanding in a holistic approach, not only focusing on a single point. In this vein, there is no need for the tribunal to hinge their verdict on floating factors such as authority and specificity; all kinds of sources evoking expectations can be assessed with a unified method. This not only contributes to promoting the legitimacy of ISDS but also brings some enlightenment for future reform.
Data availability statement
The data that support the findings of this study are available from the corresponding author upon reasonable request.
