The application of the fair and equitable treatment (‘FET’) standard – i.e. the host State’s promise contained in almost all modern international investment agreements (‘IIAs’) to accord to the investor’s investment a fair and equitable treatment – frequently leads to problems in relation to the host State’s right to regulate. It is undisputed that, under international law, the sovereign State has a right to regulate. On the other hand, it is clear that the right to regulate cannot free the host State from its obligations voluntarily entered into under IIAs concluded by it, to the extent the State’s freedom to legislate is compromised in some way by international law instruments (i.e., a stabilization clause). A rigid application of the FET standard could reduce the legislator’s leeway to nil if it had to fear that all later changes of legislation could violate investors’ legitimate expectations.
The arbitral tribunal in Eiser Infrastructure Ltd. et al v. Kingdom of Spain constituted under the ICSID Rules was tasked to strike a balance between Spain’s right to regulate and the claimant investors’ right to be treated fairly and equitably. The underlying dispute arose from Spanish legislation guaranteeing operators of solar power plants a fixed remuneration for produced energy (i.e. it subsidized solar power plants). The respective laws were later amended when the tariff deficit (the difference between the subsidy paid to the producer and the revenues generated from the customers) became unbearable for Spain. Similar disputes about Spanish renewable energy legislation and its amendments have arisen in recent years.
In my opinion, the tribunal did not manage to strike the balance. The arbitrators came to the conclusion that Spain breached its obligation to treat the claimant investors in a fair and equitable manner. They referred to other awards that considered the stability of the legal framework a part of the FET standard. The tribunal acknowledged host States’ right ‘to modify their regulatory regimes to meet evolving circumstances and public needs’ as well as Spain’s ‘legitimate public policy problem with its tariff deficit’. According to the tribunal, Spain was entitled to adopt ‘reasonable measures to address the situation’. However, tribunal stressed that ‘regulatory regimes cannot be altered as applied to existing investments in ways that deprive investors who invested in reliance on those regimes of their investment’s value’. After these few abstract legal remarks, the tribunal discusses the effects the new legislation had on the claimant companies, and it questions the methodology used by the new law for calculating guaranteed remuneration. It concludes that the new law ‘deprived Claimants of essentially all of the value of their investment. Doing so violated Respondent’s obligation to accord fair and equitable treatment’.
When reading the award, I cannot escape the impression that the tribunal mainly based its finding (i.e. that Spain breached the FET standard) on the effects the legislative changes had on the claimants’ investments. The arbitrators criticize heavily the way the remuneration is calculated under the new regime because the basis (a ‘hypothetical efficient plant’) does not take into account the claimants’ investment’s specificities. They also question the methodology used to calculate the remuneration on the basis of a hypothetical plant. However, it seems that the tribunal’s elaborations on inconsistencies in respondent’s conduct were not a ground for the tribunal to come to its conclusion; they are rather mere obiter dicta. Instead, the tribunal’s central argument is the effect the new legislation had on the claimants’ investment.
The effect should not be the sole factor to be considered when deciding whether a change of legislation is a breach of the FET standard or not. The so-called sole effects doctrine has been used to determine whether measures taken by a State constitute an indirect expropriation or not. However, as far as general regulatory measures are concerned, the application of the sole effects doctrine has been heavily criticized recently, and rightly so. Instead, arbitral tribunals and legal scholars have argued in favor of the application of a proportionality test, in order to take into account the legitimate regulatory interest of the State. The reasoning applied by the tribunal in Eiser Infrastructure Ltd. et al v. Kingdom of Spain concerning FET, however, would undermine the attempts to strike a balance between the States’ legitimate regulatory interests and the protection from indirect expropriation. The reasoning also completely overlooks that the objective legitimate expectations of the investors must necessarily incorporate an appreciation that in the absence of stabilizing language, legislation is implemented with a clear likelihood of change. The Eiser decision seems to ignore this legal and practical reality, which undermines its coherence.]
Instead of focusing on the effects on the investment, a proportionality test is warranted where the host State’s right to regulate and the claimant investors’ right to be treated fairly and equitably are to be balanced. This does not mean that the outcome of the dispute would have been different. Indeed, it was the very purpose of the royal decree, which offered the remuneration, to provide investors a long-term certainty that the decree would not be changed. On the other hand, there is an industry generated its revenue solely on the basis of subsidies. The capital markets and the interpretation of what constitutes a reasonable return changed dramatically during the financial crisis. I therefore wonder whether it was feasible for the government to react in a way that, on the one hand, allowed it to reduce the (allegedly unbearable) fiscal burdens for the State (and hence the community) and, on the other hand, secured the individual financial interests of companies investing in renewable energies. This balancing of interests would have been the task of the tribunal; it is deplorable that it refrained from doing so.
Dr. Jan Asmus Bischoff studied law at Hamburg University from 2000 to 2005. After his graduation, he worked as a researcher at the Max Planck Institute for Comparative and International Private Law until 2010. In 2008, he completed his Master Degree in International Legal Studies at NYU, School of Law as a Hauser Global Scholar. In 2009, he completed his doctoral thesis on “The European Community and the Uniform Private Law Conventions” under the supervision of Prof. Dr. Dr. hc. Jürgen Basedow. In 2010, he passed the Second State Examination at the Hanseatic Regional Appelate Court, Hamburg. He is currently working as inhouse legal counsel at the privately-owned bank M.M.Warburg & CO, Hamburg.
 See e.g. AES Summit Generation Limited and AES-Tisza Emrömü Kft. V. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010, para.9.3.29; Marc Jacob and Stephan W.Schill, ‘Fair and Equitable Treatment: Content, Practice and Method’ in: Marc Bungenberg and others (eds.), International Investment Law, (Nomos/Hart 2015) 730 seq.
 Cf. Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. The Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011, para. 298; ADC Affiliate Ltd. et al. v. Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006, para. 423.
 Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Award, 4 May 2017.
 Cf. Charanne and Construction Investments v. Spain, SCC Case No. V 062/2012, Award, January 21, 2016, arguing that the legal framework did not create legitimate expectations that it would remain unchanged (para. 504); cf. also Isolux Netherlands, BV v. Kingdom of Spain, SCC Case V2013/153, Final Award, July 17, 2016, para. 807, arguing that there was not a guaranteed rate of return; Portigon AG v. Kingdom of Spain, ICSID Case No. ARB/17/15 (not public).
 Eiser Infrastructure Ltd. et al v. Kingdom of Spain (supra n. 3) para. 381 seq.
 Id., para. 362.
 Id., para. 371.
 Id., para. 382.
 Id., para. 418.
 Id., para. 398 seqq.
 Id., para. 392.
 See Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, 2nd edition, Oxford University Press, Oxford 2012, 112-115.
Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12,Award,14 July 2006, 311 seq.; LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc .v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, para. 195.
 See Eiser Infrastructure Ltd. et al v. Kingdom of Spain (supra n. 3) para. 112.