Keywords

Introduction

The doctrine of legitimate expectations provides individuals with a legal remedy in certain circumstances when the conduct of a public authority generates promises, which, in turn, creates an assurance that an investor will receive (or continue to receive) a substantive benefit or commodity of some kind; after some time, the public authority subsequently acts inconsistently with this prior conduct (Craig, 2012). In international investment arbitration, the term ‘legitimate expectation’ appeared in the decision of Tecmed v. Mexico. This was the first case in which a tribunal linked fair and equitable treatment provisions with the protection of legitimate expectations. Alongside bilateral investment treaties (BITs), a domestic legal system may also protect the legitimate expectations of a foreign investor. The legitimate expectations of investors can include both procedural and substantive law. Historically, the common law legal system covered only procedural protections of expectations in the past, providing the opportunity to individuals to refile their case by allowing a hearing or giving them adequate notice (Mairal, 2010). Later, a case decided by the English Court of Appeal recognised that legitimate expectations also include substantive legal protections.Footnote 1

Considering the aforementioned case law and based on the premise that legitimate expectation cases directly stemmed from fair and equitable treatment (FET) provisions, the question arises whether and how FET provisions can protect foreign investors’ rights in post-Soviet countries like Uzbekistan. With this in mind, in this chapter I aim to analyse the current model of FET provisions in Uzbekistan’s investment treaties, specifically exploring whether FET provisions can serve as the source of legitimate expectations in future investment arbitration cases.

The chapter proceeds as follows. In the first part, I present a literature review and summary of case law focusing on protecting legitimate expectations under the FET provisions of BITs where the interpretation (and scope) of legal expectations may vary. The FET standard has usually been drafted rather vaguely, which does not explicitly describe the relationship between investment protection and the host state’s regulatory right. After analysing the cases in international investment arbitration institutions, I then provide an overview of legitimate expectations in domestic law and regulations in order to show how the post-establishment phase of investment heavily depends upon the stability of the regulatory legal framework. In exploring legitimate expectations, I also rely on a qualitative study in Uzbekistan consisting of interviews and focus group discussions. These qualitative data focus on the role of local investment law and regulations in building legal expectations vis-à-vis the perceptions of investment market participants. In this chapter, I attempt to contribute to scholarly debates within business and investment law by analysing the role of legal expectations within international and domestic investment instruments. The final section of this chapter outlines practical suggestions and policy recommendations to the host state—in this case, Uzbekistan—on building trust between foreign investors and the host country by increasing awareness of legitimate expectations which lie at both ends of the divide.

Literature Review

In the last ten years, leading international investment and trade law scholars have widely discussed the term ‘legitimate expectations’. One of the first scholars interested in the origin and limits of legitimate expectations in investment arbitration was Michele Potestà (2013). Potestà’s research included cases primarily from investment arbitration, in which he criticised the inconsistency in the interpretation and application of legitimate expectations as the component of fair and equitable treatment (FET) provisions in investment treaties (Potestà, 2013). He also included an analysis of national administrative law systems and the European Union (EU) framework, intending to capture the shared features of the protection of expectations under those systems. A recent publication by Wongkaew (2019) challenged the theory of legitimate expectations and outlined an alternative approach, called reliance theory, suggesting that promissory obligations lead to a different understanding of legitimate expectations. The proposed analytical framework is based on three conceptions. First, a promise as a wilful act to undertake an obligation leads to a restrictive, state-centric view of legitimate expectations. Second, a promise is employed as an intention to create expectations allowing the non-binding, voluntary conduct of the state to serve as the basis of an obligation. Third, a promise is conduct which induces reliance and offers a flexible framework for balancing the investor’s conduct and the investor’s expectations. In addition, several other scholars examined legitimate expectations as part of the rule of law (Henckels, 2019). The latest publication on this topic also discussed the disadvantages of legitimate expectations to host states and how they might limit the application of legitimate expectations, comparing host state’s citizens to the expectations of investors (Laryea, 2021). In most cases, citizen’s expectations from their own state extend beyond those of investors’ (Laryea, 2021). In addition, some researchers focused on legitimate expectations in a specific sector of investment (Krzykowski et al., 2020). One study provided an overview of the evolution of the concept of legitimate expectations in renewable energy cases and analysed both types of legitimate expectations, comparing specific commitments to domestic regulatory frameworks (Ilie, 2021). Thus, this analysis of the latest publications in the field reveals that legitimate expectations work differently from one country to the next, where legal institutions are at different stages of development. The scope of this research, however, does not extend beyond the practice of legitimate expectations in different cases, and instead aims to identify what forms of legitimate expectations might suit the chosen host country, in this case, Uzbekistan.

More specifically, an analysis of recent publications on investment law and policy in Central Asia indicates that little attention has been placed on the legitimate expectations of investors (Gore et al., 2022). For example, one prominent scholar of international investment law in the Central Asian context, Sattorova (2018), analysed the domestic investment legal framework in the region. In her work, Sattorova analysed the responses of government officials who experienced investment arbitration as the respondent country. In her book, Sattorova (2018) also examined the impact of investment treaties on good governance. She highlighted how treaty rules and remedies could have a transformative effect on the behaviour of governmental agencies and officials in host states. However, Sattorova’s work does not directly address the question of legitimate expectations, instead providing adequate background information on the domestic investment legal framework for subsequent studies.

Legitimate expectations can also be understood as a ‘culture of promise’ from a socio-legal perspective. For example, a study by Hogg (2011) highlights the following main elements of a promise: (a) a promise is more than a mere internal mental process; promises as speech acts represent (b) a commitment to the performance of the promissor; (c) a promise must manifest more than an illusory commitment or one which the promissor is patently unable to fulfil; (d) a promise must relate to the future; and (e) a promise must state a commitment that favours another party.

Interestingly, a review of decisions from investment tribunals shows that tribunals used the term ‘promise’ or other similar terms without defining the constitutive conditions for liability. Wongkaew (2019) suggested three conceptions of legitimate expectations. According to his research, the voluntarist’s conception of a promise attributes liability to the promissor’s will to undertake an obligation. Furthermore, the voluntarist conception differs from the assurance conception, whereby the state requires the promissor’s intention to create an expectation. In the third understanding, the reliance conception grounds a promissory obligation in the promisee’s act of reliance. These three conceptions of legitimate expectations are perceived differently in the domestic legal system given cultural differences across host states. For example, any voluntary action of a host state in Central Asia could be understood as an assurance promise or an action of the host with the intention to create expectations. However, as a literature review indicates, there is limited research on legitimate expectations in the Central Asian context, particularly those which explore the interconnections between legitimate expectations and the host state’s business culture and the specific legal environment. In this chapter, I specifically focus on the case of Uzbekistan to examine the role of fair and equitable provisions in local foreign direct investment (FDI) law and regulations in generating legitimate expectations.

Research Questions

The literature review revealed that expectations are only legitimate and legally protected if they arise from a legal commitment. This commitment or promise may be embedded in the investment laws of the host country or in investment contracts. The central aim of this chapter is to analyse the fair and equitable treatment (FET) provisions in Uzbek bilateral investment treaties (BITs) and assess the strength of local investment law and regulations in establishing legitimate expectations. From this perspective, this chapter aims to address the following questions:

  • What are the possibilities for increasing awareness of the reasonable, legitimate expectations of investors in the host country’s legal system, namely, in the specific case of Uzbekistan?

  • What form of legitimate expectations suits Uzbekistan?

  • How are legitimate expectations perceived by participants in the investment environment of the host country?

Building an analytical framework begins with providing an overview of the current interpretation of legitimate expectations in investment arbitration cases since there is no substantive source of law in which the doctrine of legitimate expectations is defined. Then, I focus on incorporating investment arbitration practice into new BIT models and the host country’s regulatory framework. I also assess the country's—that is, Uzbekistan’s—investment framework through interviews and focus group discussions.

Methodology

The methodological approach in this chapter relies on triangulation, which includes (1) case law research, (2) qualitative data collection through interviews, and (3) an analysis of relevant secondary data. I employed the legal positivistic/doctrinal method, which presents a review of case precedent in investment arbitration in order to understand the rationale underlying the issue in question and to provide appropriate answers. I also conducted an analysis of secondary materials, such as reports, journals, articles, and books, to obtain a more holistic understanding of the topic. Online databases such as Jus Mundi and Kluwer Arbitration were also used. Here, I used investment arbitration cases as a lens via which to analyse interviews. The investment case law also served as a methodological guideline for designing questions for a qualitative study (in-depth interviews and focus group discussions). The main objective of the interview and focus group discussions was to understand how legitimate expectations are perceived by participants, what forms those expectations they had took and how they built their expectations, and, finally, whether their expectations were met in real-life experiences. The interview questions were formulated based on the analysis of previous investment arbitration cases in which legitimate expectations were divided into two categories: direct and legitimate indirect expectations. Focus group discussions and semi-structured in-depth interviews were conducted with two groups of key informants—namely, public sector authorities and lawyers who typically advise foreign investors and businessmen in the Uzbek investment market. Focus group discussions enabled me to access informal practices, real-life and experience-based knowledge, and opinions that would lead to the recognition of previously ignored factors and informal norms in assessing expectations. All of the focus group participants were selected through a researcher-driven method (Peek & Fothergill, 2009). I recruited research participants through telephone calls, emails, letters, study leaflets, or personal contacts and scheduled the group discussion time and location based on the preferences of the research participants.

In the second stage of the qualitative fieldwork, I conducted in-depth, semi-structured interviews. Participants provided their informed consent before I conducted the interviews, and questions were shared with participants in advance. Interview questions primarily focused on the expectations of investors, the types of expectations, and the expectations of the public sector towards foreign investors. Questions were iterative, but framed more broadly. The rationale behind this approach was once again to allow interviewees space to express their views freely, in this instance on an individual level.

On average, interviews lasted 30 minutes and were not tape-recorded due to informants’ concerns regarding confidentiality and in order to encourage them to speak freely. Concise notes were taken during the interview. Participants’ identities were anonymised, such that no specific individual participant is identifiable from the details provided in this chapter.

Legitimate Expectations

Legitimate Expectations in Recent Investment Arbitration

In this section, I analyse the contemporary practice of legitimate expectations in arbitration. Most tribunals linked legitimate expectations with the violation of FET provisions in BITs. The FET standard defines the nature of the relationship between the host state and the investment, both of which are under the protection of investment treaties. This standard also establishes a set of norms applicable to every instance of the host state’s treatment of investments covered under BITs. Moreover, the FET standard is the most common general absolute standard of treatment in BITs and energy charter treaties (ECTs). The most typical formulation requires that the host state accord covers investments as fair and equitable. Sometimes, the standard appears alone in a sentence, and sometimes it appears in the same sentence as one or both of two other general absolute standards of protection: as full protection and a security standard, and as the prohibition of unreasonable or discriminatory measures. These other standards explicitly articulate principles of security, reasonableness, and non-discrimination which lie at the core of the FET standard. Some BITs refer to FET in conjunction with national or most-favoured nation (MFN) treatment. The most common formulation requires FET, which in no case shall be less than national or MFN treatment. That is, national and MFN treatment establishes a minimum standard, below which FET may not fall. However, FET may require more than national or MFN treatment. Thus, some BITs explicitly link FET with the principle of non-discrimination, although this also suggests that FET requires more than non-discrimination. Alternatively, some BITs refer to FET in conjunction with customary international law. This formulation requires each party to provide a covered investment with FET that, in no case, shall be less than that required by customary international law. Thus, in this formulation, international law establishes a minimum standard below which FET may not fall. However, FET may require more than customary law. The scope of this chapter does not extend to debates about where legitimate expectations should stand in the text of substantive international investment law or foreign direct investment (FDI) law and regulations. Instead, the research focuses on the interpretation of legitimate expectations in recent investment arbitration in order to drawing distinct boundaries. The latest case, Pawlowski AG and Project Sever s.r.o. v. Czech Republic, distinguished between two different types of legitimate expectations. In the first distinction, the state makes specific representations by generating assurances or commitments directly to the investor (or to a narrow class of investors or potential investors, as direct legitimate expectations). In the second distinction, legal expectations can also be created in some cases by the state’s general legislative and regulatory framework. In this case, an investor may make an investment with a reasonable reliance upon the stability of that framework, such that in certain circumstances a reform of the framework may breach the investor’s regulatory legitimate expectations. Both types of legitimate expectations linked the violation of expectations to FET provisions in international investment agreements. In the sections that follow, both forms of legitimate expectations are analysed separately.

Direct Legitimate Expectations

The latest case, Infracapital Solar B.V. v. Kingdom of Spain, summarises the criteria for identifying direct legitimate expectations in which competent representatives of a state made clear promises to a group of investors. Here, the tribunal uses several casesFootnote 2 to assess the direct legitimate expectations of a host state. As such, the tribunal stated that the commitments promised must be written in the law. Promotional activities conducted to attract investors are not part of an assurance or inducement. To rely on representatives of an authority, the person should have the competency to assure or to generate legitimate expectations to a particular investor. When a competent authority provides assurance, it should be clear and specific. The presentation of an authority can be different from country to country, and the circumstances in the host market should be taken into account. In every state’s representation, state policy should be taken into account. Furthermore, the tribunal stated:

…[T]he tribunal is required to conduct an objective examination of the legislation and the facts surrounding the making of the investment to assess whether a prudent and experienced investor could have reasonably formed a legitimate and justifiable expectation of the immutability of such legislation. For such an expectation to be reasonable, it must also arise from a rigorous due diligence process carried out by the investor. (Stadtwerke München GmbH and others v Kingdom of Spain, para 264)

Practice shows that different members of the relevant ministry provide presentations to investors in order to attract them to a market. Importantly, such presentations carry no legal or regulatory power within the legal regime in the host state.

Around twenty cases mentioned direct legal legitimate expectations and situations where it can be generated by a competent authority and an investor relied on an assurance at the time an investment was made. Thus, the tribunal in Infracapital F1 S.à r.l. and Infracapital Solar B.V. v. Kingdom of Spain listed the following criteria based on other cases:

  • a commitment must be grounded in the law;

  • a specific commitment must be made by a competent authority;

  • any assurance or representation must be clear;

  • other circumstances must be taken into account; and

  • the state’s policy interests must also be considered.

After discussing legitimate expectations with reference to the other cases, the tribunal further stated that specific commitments creating legitimate expectations cannot be ambiguous or simply implied. As already noted, for expectations to be reasonable and legitimate, the undertaking by the state to an investor must be clear and specific. Given that the provision is unclear, it also cannot give rise to a stabilisation commitment. At a later stage, the tribunal concluded that the host state’s actions did not generate legitimate expectations.

The recent application of direct legitimate expectations test reveals that tribunals have already formulated the analytical framework necessary for distinguishing between the specific commitments (assurances) of the host country’s government and the general investment climate. The distinction between the two must be clearly communicated to investors when enticing investors to make investments. That is, the general investment climate cannot generate direct commitments to investors.

The Regulatory Framework for Indirect Legitimate Expectation and the General Application of the Law

This section analyses indirect legitimate expectations, which can be based on the host state’s regulatory framework. The general legal and regulatory framework typically includes investment policies, market access, tariffs, and quota restrictions, all of which might impact the investment climate at the time an investment is made or play a major role in the decision-making related to investment in a host state. In Hydro Energy 1 S.à r.l. and Hydroxana Sweden AB v. Kingdom of Spain, the tribunal summarised the criteria for assessing indirect legitimate expectations which can arise from the law and regulations when an investment was made. In this case, the tribunal relied on several cases to define each criterion. In the assessment framework, the tribunal in EDF (Services Limited v. Republic of Romania focused on the state’s right to regulate, mentioning its sovereign authority to legislate and adapt its legal system to changing circumstances, indicating that states cannot in essence freeze the legal regulation of economic activities. More specifically, investors cannot rely on such a freeze. Furthermore, the tribunal stated that investment treaties and general laws cannot function as an insurance policy or promise against the risk of any change in the host state’s legislative and economic frameworks. Third, the central premise of the analyses stated that FET does not bind states to change laws and regulations according to public need. Such changes do not exceed the acceptable margin of change when the host state exercises its normal regulatory power in pursuance of the public interest. The indirect legitimate exception framework in the Hydro case has relied on several casesFootnote 3 to establish the boundaries of indirect legitimate expectations, which can be based on the legal framework of the host state.

In contrast to the abovementioned cases, legitimate expectations based on a general legal framework have been successfully employed in several instances.Footnote 4 In such cases, the tribunal paid special attention to only drastic (sudden) and unreasonable modifications to the legal framework. In the Mamidoil v. Republic of Albania case, the tribunal stated that, in this sense even when legislative changes seem legitimate, they must not have the character of continuous oscillation and unpredictability. According to this case, the state should not suddenly change the regulatory framework. If a state wants to amend its law and regulations, the state should meet the goal intended through changes to the law according to Eco Oro Minerals Corp v. Republic of Columbia. The resulting discussion also recalls the application of general exceptions in international trade law. As such, the state should prove it is necessary to show the correlation between the goal or legitimate objectives of the state (for example, necessary to protect the health and environment and ensure compliance with other laws and regulations in the country) and changes to the laws and regulations.

To summarise, recent cases indicate that states have the power to change their laws and regulations, but such changes should comply with specific criteria concerning the investment regulatory framework.

Legitimate Expectations in Uzbekistan

Current Foreign Direct Investment law and Regulations in Uzbekistan

Since 2017, Uzbekistan has actively engaged in modifying laws and regulations in order to attract foreign direct investment (FDI) in the country. As such, the government opened new agencies and ministries to support FDI inflows to the country. On 25 December 2019, the President of Uzbekistan signed into law ‘On Investments and Investment Activities’ (or the Investment Law, LRU 598). The enactment of the law was envisaged by Presidential decree no. UP-5495, ‘On Measures for Improving the Investment Climate in the Republic of Uzbekistan’, dated 1 August 2018. The Ministry of Investment and Foreign Trade of the Republic of Uzbekistan also launched the Investment Promotion Agency. The key responsibility of this agency consists of providing information, legal help, and aid to international investors for organising relations between government entities and organisations.

Another innovation established within the investment law is the so-called ‘one-stop shop’, which allows investors to communicate with fewer state agencies. The Ministry of Investment and Foreign Trade and its territorial entities serve as the one-stop shop for investors under the Investment Law. The ministry provides consultation services and support for document preparation and filing.

Moreover, the Investment Law outlines in detail the functions of the business ombudsman, who is accountable only to the President of the Republic of Uzbekistan. In addition, one of the main roles of the business ombudsman revolves around coordinating inspections related to the activities of business entities and to control the legality of such inspections.

Finally, the Investment Law establishes a new multi-tiered dispute settlement framework for investor–state conflicts stemming from investments. During the first stage, both parties must attempt to resolve the problem via negotiation. If the parties cannot reach an amicable agreement, mediation is the next step. Moreover, the local investment framework and international investment agreements play an important role in generating legitimate expectations and encouraging FDI to the host country.

Legitimate Expectations in Bilateral Investment Treaties (BITs)

Since 1991, Uzbekistan has signed fifty-four bilateral investment treaties (BITs). An overview of the standard provisions within Uzbek BITs reveals a gradual policy change towards stronger and more comprehensive substantive and procedural investment protections in the treaties. This indicates that the country is increasingly adhering to international standards surrounding the legal protection of FDI. On balance, BITs with developed countries provide slightly higher, more substantive investment protection levels than BITs with developing countries. From the perspective of a host country, in most cases, Uzbekistan as the host state accepts the proposed model agreements put forward by developed countries.

Like other developing countries, Uzbekistan has signed BITs since the early 1990s. In most cases, the primary motivation for entering into a BIT is to attract FDI from developed countries. In theory, a BIT should offer a secure investment legal framework for investors and their investments, encouraging foreign investors. As mentioned above, many countries enacted economic liberalisation policies within their economies and believed that concluding such investment treaties could create an attractive investment environment for investors from developed countries. Developed countries compete for markets and natural resources, whilst developing countries compete to receive a large amount of FDI by signing BITs. In this respect, Uzbekistan announced its second ‘open door’ policy in 2017 and signed numerous BITs, thereby signalling its willingness to grant guarantees of investment protection.

The FET standard is one BIT clause lying at the core of today’s debate on BIT reform. This standard is designed to protect foreign investors from government misconduct not covered by other protection standards. At times, the FET standard may also serve to foster good governance in host states. In actual practice, owing to its open-ended and largely undefined nature, the FET standard, especially as drafted in traditional BITs, has become an all-encompassing provision investors have used to challenge any type of governmental conduct they deem unfair (Gallagher & Shan, 2019). According to research by the United Nations Conference on Trade and Development (UNCTD, 2012), FET provisions fall into four main types:

  1. 1

    FET without any reference to international law or any further criteria (referred to as an unqualified, autonomous, or self-standing FET standard);

  2. 2

    FET linked to international law;

  3. 3

    FET linked to the minimum standard of treatment of aliens under customary international law; and

  4. 4

    FET with additional substantive content (denial of justice, unreasonable/discriminatory measures, breach of other treaty obligations, and accounting for the level of development) (UNCTD, 2012).

When we examine the latest FET provisions in the Uzbekistan–Turkey BIT, the text of Article 2 is a free-standing standard without reference to international law, and combines with other substantive provisions of the BIT. Specifically, Article 3.2 of the Uzbekistan–Turkey BIT (2017) includes the following provision:

Each Contracting Party shall accord, in accordance with its laws and regulations, full protection and security, and fair and equitable treatment on its territory, to investments made by investors of the other Contracting Party.

When we compare this text to the older BIT model signed in 1993 with the UK, the FET clauses were not updated (UK–Uzbekistan 1993).Most Uzbek BITs provide only unqualified FET provisions in the first paragraph of Article 3, with another group of BITs included in the same line with full protection and security appearing in Articles 2 and 3 (Uzbekistan–China BIT 1993).The primary issue with a freestanding FET provision is that a great deal of uncertainty concerns the precise meaning of FET. This results from the fact that the notions of ‘fairness’ and ‘equity’ do not provide a clear set of legal prescriptions and, thus, are open to subjective interpretations. A case study shows that most of the claimants link the alleged violation of legitimate expectations to the substantive provisions of FET, indicative that a clear line in an FET clause only helps respondents to define the application of legitimate expectations. The simple clause ‘shall ensure fair and equitable treatment of the investments of nationals of the other Contracting Party’ cannot elaborate upon the use of legitimate expectations. Thus, an analysis of current FET clauses in Uzbek BITs indicates that updating FET provisions in the current BIT model is critical.

Uzbekistan Cases in Investment Arbitration

In this section, I discuss cases in which Uzbekistan was the primary respondent in investment arbitration. These cases are analysed in chronological order. Not all of Uzbekistan’s investment cases moving towards investment arbitration touched upon the issue of legitimate expectations, although an analysis of case law helps us shed light on the application of Uzbekistan’s BITs in investment arbitration. The first case, Romak S.A. v. The Republic of Uzbekistan, involves a company with several businesses specialised in the trading of grain. According to this case, the company initiated arbitration proceedings against its Uzbek counterpart pursuant to contracts under the auspices of the Grain and Feed Trade Association, unsuccessfully attempting to enforce the resulting award in several countries, including Uzbekistan. Arbitration relied on the Salini test to define investment, concluding that Romak did not own an ‘investment’ according to the meaning outlined in Article 1 of the BIT. Romak’s rights were embodied in and arise out of a sales contract, a one-off commercial transaction, pursuant to which Romak undertook the delivery of wheat against a price to be paid by Uzbek parties.

In the next case, Metal-Tech Ltd. v. The Republic of Uzbekistan, the tribunal concluded that corruption was established to such an extent that local law was violated in connection with the establishment of the claimant’s investment in the host country, which was inconsistent with Article 1 (1) of the BIT. Yet, the tribunal concluded that it lacked jurisdiction over the claim and the counterclaim. In Vladislav Kim and others v. The Republic of Uzbekistan, a dispute arose involving two cement plants in Uzbekistan, based on the Uzbekistan–Kazakhstan BIT (1997). In this case, the tribunal denied four preliminary objections regarding the jurisdiction and admissibility of the claimants. The dispute relates to the claimants’ interest in two cement plants located in Uzbekistan.

The details of other casesFootnote 5 have not yet been made public. The majority, however, did not reach the award stage. In addition, in the Güneş case related to the Uzbekistan–Turkey BIT (1992), the award was not released to the public. As a claimant, Uzbekistan has only one case (JSC Tashkent Mechanical Plant and others v. Kyrgyz Republic)in which an investor invested in the accommodation and food service sector. This dispute is based on a BIT signed in 1996 (Kyrgyzstan–Uzbekistan BIT 1996).

The only Uzbek case in which legitimate expectations are mentioned is Oxus Gold plc v. The Republic of Uzbekistan. First, the tribunal stated:

Considering the lack of a specific definition in the relevant BIT, the FET standard as contemplated by Article 2(2), must be understood as a means to guarantee justice to foreign investors, and when doing so, for the states’ actions to give due regard to an investor’s legitimate expectations by refraining from taking measures which are not justified under the circumstances, that is, unreasonable, disproportionate, or discriminatory. (Oxus Gold plc v. The Republic of Uzbekistan)

Moreover, the tribunal argued that states should refrain from taking unreasonable and disproportionate measures in the application of national regulations and standards (Oxus Gold plc, para 819). When we examine those cases involving Kazakhstan, only a few consisted of legitimate expectations. In the Rumeli Telekom case, the tribunal stated that:

…[T]he Investment Committee terminated the Investment Contract with the utmost lack of good faith and in clear violation of the international obligations of the Respondent contained in the Bilateral Investment Treaty. The termination was unreasonable, arbitrary, grossly unfair, unjust, idiosyncratic, and violated the legitimate expectation of the Claimants. (Rumeli Telekom A. S. and others v. The Republic of Kazakhstan)

In Ascom, Stati and others, the tribunal began its analysis with the context of the FET, subsequently stating that the decision of the export commission carried the power only to make a recommendation and that the translation was misunderstood by the investor. Thus, the decision only carried a recommendatory character.

Uzbekistan has limited the arbitral practice of legitimate expectations as the respondent in international investment arbitration. This does not mean that the state should not consider legitimate expectation arbitral experience from other countries. In fact, sufficient case studies exist in order to form clear and detailed FET provisions and to establish direct and indirect expectations, primarily based on reliance theory. The investment arbitration practice always serves as a compass for future possible cases against the host country. Those who draft Uzbek BITs and investment-related laws must consider the results found in investment case law.

Socio-Legal Analysis of Legitimate Expectations

From March to September 2022, I conducted twenty in-depth interviews with key informants from both the public and private sectors who are directly and indirectly involved in investment activities in Uzbekistan. These interviews aimed at gaining an understanding of the legitimate expectations of foreign investors and public regulators involved in international trade and investment commitments in the field. At the same time, I aimed to understand how expectations were established before and after making an investment in the country. Another equally important purpose to the interviews revolved around identifying the shared legitimate expectations of reasonable investors in Uzbekistan before and after investing in the country. As stated in the previous section, in-depth interviews and focus group discussions were conducted to understand what forms of expectations (direct or indirect) were formed and communicated to investors. This analysis reflects the findings from those interviews, which I present in two parts. The first part focuses on categorised expectations, whilst the second focuses on three conceptions of legitimate expectations and the perceptions of investors and public officials. According to arbitration cases and a literature review, we can identify the most widely shared legitimate expectations, which I have categorised as falling into seven primary expectations. I present the interview data and analysis based on this categorisation, showing how legitimate expectations are practiced by investors and the public in the country.

  • Expectation 1: Fair competition and treatment provided according to investment treatiesFootnote 6

Based on this first category, the majority of public officials know the context of FET and investment treatment provisions in investment treaties. However, in regions of Uzbekistan, it is difficult to find lawyers and public officials who have practical experience in and a command of investment treaties. The majority of investors did not previously experience discrimination when accessing a market. But, some have experienced various obstacles following an investment. During the operation and management related to an investment, investors have also experienced pressure from local and regional regulators.

  • Expectation 2: Transparency (all laws and regulations published and accessible to investors)

The interview results also show that laws and regulations are published in the local languages in a timely manner, but the English-language version of the updated law or new decree is difficult to obtain within the first three months of its publication. Investors with large capacities have lawyers and translators in their offices. Investors rely on country reports from international organisations and accounts from other foreign investors in the region before investing in the country. The updated statistical data are not available or are not immediately accessible when needed.

  • Expectation 3: Specific commitment (the specific commitment stated in regulations are kept)

Specific commitments are normally provided in special economic zones (SEZs) in the form of tax and tariff reductions. In most cases, such commitments are outlined in the regulations. A customs duty reduction is also applicable to selected sectors in the economy. Normally, low or zero custom duties allow for new technology to be brought to the production line. Some investors prefer to have a company (production line) situated near the capital due to the logistics and infrastructure level in the city of Tashkent and the Tashkent region. By ‘infrastructure’, they refer to access to electricity, water, and roads. Companies with production lines in the regions find it difficult to employ highly qualified locals because many qualified locals prefer to work and live in the capitol and capitol region. Generally, specific commitments granted to a group of investors are kept and followed after making an investment.

  • Expectation 4: Local dispute settlement system (the state provides a compelling local dispute settlement system)

The interviews revealed that some of the disputes resulted from a partnership with a local partner, with cases submitted to a local economic court. Economic courts deal with foreign investors (founders), although at times the expected results are difficult to obtain within a short time period. Many foreign companies have local lawyers who have both local and international experience. Investors in the property business normally encounter disputes with residents who live in the same neighbourhood in which a building will be erected. Such cases normally end up in court, and if the construction permit was secured lawfully, the dispute is normally decided in the investor’s favour. We must not forget that the state can take land for public purposes after adequately compensating an owner. Furthermore, economic courts usually take some time before settling an issue. Such decisions also depend upon the region in which a dispute takes place. For instance, economic courts in the capitol region work more efficiently for many reasons. Investors who invested in a small- or medium-sized enterprise (SME) prefer to have an effective local dispute settlement system since submitting a case for international arbitration can cost millions of dollars.

  • Expectation 5: Sector regulator (stable and predictable regulations within the sector)

Based on the interview data, it appears that investors and foreign entrepreneurs are familiar with regulations, but at times such familiarity can become complicated given the hierarchy of regulations and laws in practice. Thus, investors expect regulations to remain stable when assurance was provided in written form to investors and when investors took detrimental actions based on the state’s conduct. In practice, investors also remain cautious in terms of not violating the requirements of the primary operating licence granted by the regulator. In the past, this has led to the licence revocation of some private banks and mobile operators in Uzbekistan. Regulators also consider a substantial and unpredictable change to the legal and business framework akin to a violation of the agreement between investors and the state.

  • Expectation 6: Contractual commitments of both parties respected

Interestingly, many investors consider a violation of contractual rights akin to a violation of legitimate expectations in investment treaties as well. As case law shows, a tribunal must consider investors’ expectations arising from contractual arrangements within the framework of FET standards. The interviews revealed that when investors have power purchase agreements (PPAs) or other contractual arrangements with the state, both parties expect that it will be followed and executed as stipulated in the contract. Thus, the non-fulfilment of a contractual obligation also equates with a violation to investment treaties. In most cases involving investors, contractual obligations within projects in the energy sector are respected given the importance of the project to the host state.

  • Expectations 7: Remedy and compensation

When it comes to compensation for the property of SMEs, the interview data vary. In most cases, they received compensation, albeit following delays. Some preferred to sell their shares to a local partner in order to avoid lengthy legal proceedings. Lawyers who usually provide advice on investment contracts stated that investors in large-scale projects in the renewable energy and road construction sectors want investment contracts with investment arbitration clauses.

  • Expectations of the state

The interviews also focused on the expectations of the state, namely, the views of public officers, and their perceptions of reasonable foreign investors. The interview data reveal that the views of state officials align with the findings from the investment arbitration cases in which we find the most important attributes of reasonable investors (Wongkaew, 2019). Reasonable investors should recognise the power of the state when the state uses its power at times of financial crises for the public interest, and investors should assess the financial risk. The primary expectation of the state toward foreign investors normally revolves around new technologies and creating new job opportunities in a market. Foreign investors are also expected to follow all dimensions of corporate social responsibility in the host state.

To summarise, we can conclude that investors in Uzbekistan rely on both direct and indirect legitimate expectations and take the necessary precautionary measures to mitigate the consequences of any unforeseen non-fulfilment of the conduct promised by regulators.

Three Conceptions from the Focus Groups Discussions

The literature from the investment field has already provided three conceptions (voluntary commitment, assurance of state, and reliance) of legitimate expectations. The focus group discussions and interviews also revealed how three conceptions of legitimate expectations work in the business environment in the host country. The primary aim of the focus group discussions was to identify what types of expectations were provided to investors and how they understood the expectations communicated to them. In some examples, representatives from public bodies did not intend to entice investors to do so, but investors embarked on a detrimental action based on the presentation of investment opportunities in some regions. Before presenting the participants’ stories, I tactfully revisit the principles of the three conceptions and indicate how they differ from each other. First, in the voluntarist approach, the state voluntarily undertakes an obligation or demonstrates an intention to perform an act, an intention communicated to the investor. Second, the assurance approach is based on a promise made to investors, which involves an intentional creation of assurance expectations in that promise. The expectations promised involve the future conduct of the state in that specific field. Third, the reliance concept refers to the state intentionally enticing an investor to invest in a host country, whereby investors engage in detrimental acts based on a promised action from the state (Wongkaew, 2019).

In what follows, I provide some expectation stories provided from investors and state representatives (that is, public officers).

  • Story 1: Voluntarist conception

  • During the interview and focus group discussions, public officials shared some experiences during which state authorities expressed their intention to undertake an obligation (e.g., providing land and buildings), thereby creating expectations. These intentions were clearly communicated to specific investors. In most cases, investors did not encounter any issues obtaining the land or buildings promised to them, but they did experience problems with contracts with local suppliers. In particular, the contracts were not renewed. This recalls the case of Alpha v. Ukraine, in which a tribunal rejected the initial expectations of the claimant to continue working with a hotel following a contract termination because the state did not promise to renew the contract, as shown by the absence of a stipulation to that effect in the contract. But, that tribunal supported the claimant’s argument that the investor had an expectation that the government would not interfere with the contractual relationship between the claimant and the hotel, which was not part of the investment agreement. This then resulted in a violation of legal obligations, which were stated in the contract between two parties and could amount to a violation of investment treaty obligations. Similar experiences emerged as rather common amongst participants of the focus groups and in a review of arbitration cases.

  • Story 2: Assurance conception

A legitimate expectations claim arises from the general legislative framework because it is unlikely to meet various criteria. For example, one investor cannot rely on the general framework of an investment treatment unless it is assured to him by the state. As such, specific assurances should be clearly indicated, specifically that the state will or will not undertake some actions. As one participant stated:

I have been working in Uzbekistan since 2002. My main business is in the transportation and logistics service now. I had different experiences before 2016 compared with now in operating my business. When I came to Uzbekistan for the first time, I collected information about the informal practices and norms in the market from my compatriots who operated in a similar sector. But, such treatment was not extended to my business because the specific assurance was given only to them. (Kevin, founder of a Logistics Company)

In this story, we see that, at the beginning of his investment project, the investor relied on the experience of other investors in the country in order to establish reasonable, legitimate expectations. Moreover, other investors engaged in business in other sectors, not transportation. Thus, an assurance from the state was not extended to his business.

  • Story 3: Reliance on the actions of investors based on promises

Interview and focus group discussions revealed that some new incentives from the state can induce them to invest in a particular project. The primary question is the duration of a specific preference for any particular sector. Investors do not want to face substantial changes in state preferences in the middle of a project. Discussions revealed that participants have similar expectations in arbitration cases. In one case, National Grid v. Argentina, a tribunal held that there was a breach to the FET standard because ‘it fundamentally changed the legal framework on the basis of which the Respondent itself had solicited investments and the Claimant had made them’ (para 179). Thus, the claimant relied on key elements of the regulatory framework in its decision to invest in Argentina.

  • Story 4: Representation of investment opportunities

The common element in the three conceptions above is representation. Commitments and communication should be delivered to investors by a competent member with state authority. Over the last six years, Uzbek authorities have made many efforts to attract foreign investment by organising investment forums. One of the participants of the forums stated, ‘It was interesting to see the will of the state, that they are open to investors. But, again it depends on which sector you want to invest in and how all these promises will be translated to the investment contract between the state-owned enterprise and investors.’ The focus group discussion also revealed that statements from the speeches of public officials function as signals to investors. But, they expect these statements to serve as a beginning to a new law or regulation in future. Thus, investors will not take any detrimental actions based purely on the representation of investment opportunities in a country.

To summarise, the focus group discussions revealed that all three types of legitimate expectations are practiced in the business environment. The expectations of investors and business operators in the country align with recent arbitration cases. Investors want to trust the promises made when all preferences are outlined in the law alongside any stability clauses. When it comes to compensation or the execution of court decisions, they have already considered the level of development of the legal and financial institutions in a host country.

Recommendations

Recommendations for Generating Legitimate Indirect Expectations

Based on the case studies on legitimate expectations presented in the previous sections, here I provide recommendations for improving the generation of indirect legitimate expectations based on the investment regulatory framework at the time an investment is made.

First, FET provisions play a crucial role in both direct and indirect legitimate expectations since each arbitration case begins with an analysis of the text of the FET clauses. Uzbekistan’s current FET clauses are outdated, and only provide unqualified FET provisions. FET provisions should be linked to customary international law in the new BIT model. In order to clarify the application of FET provisions and the boundaries of expectations, my research suggests that the host country should include reference to international law in its future BITs, even if the other contracting party is a developing country. Research on the history of negotiations demonstrates that developed countries normally provide their model BIT for signing. It is also important to include clauses such as ‘for greater certainty’. It is sufficient to assume that an FET references international law or, in another way, we can state that a qualified FET provision can improve the commitment resulting from BITs. Previous studies on FETs also recommended several options to amend FET clauses in BITs (Gallagher & Shan, 2009). Improving FET provisions will generate reasonable, legitimate expectations for potential investors and can provide directions for subsequent arbitration when it comes to explaining the scope of legitimate expectations based on a violation of FET provisions. Interviews with stakeholders who actively participate in drafting the text of BITs also revealed that Uzbek authorities are currently working on improving the substantive provisions included in the current BIT model.

The next section focuses on recommendations for generating direct legitimate expectations.

Recommendations for Generating Direct Legitimate Expectations

Direct legitimate expectations play a crucial role in attracting investors. Uzbekistan should generate direct and clear legitimate expectations for potential foreign investors and take concrete actions within the local investment legal framework. From the case studies summarised above, we can see that foreign investors heavily rely on a country’s direct assurance and representations before deciding to invest. The interview data also demonstrate that a gap exists between the assurance policy and regulations in practice.

Government representatives should be aware of the outcome of legitimate expectation cases in international investment arbitration fora. Thus, a state’s commitments must be written into the law, and specific commitments must be made by the competent authority. Interview and focus group discussions also indicated that investors and other business participants prefer written promises rather than oral promises made during fora or official meetings. There is no one-size-fits-all approach for all sectors of the economy. Thus, the state should grant preference to certain sectors, a preference clearly presented and assured to a potential investor before signing on to a project. The host state policy should also be considered.

This analysis also suggests that the relevant authorities should develop guidelines for representing the investment climate in the country and for generating direct legal expectations when presenting investment opportunities in various sectors based on the case studies presented here and intended for multiple governmental departments and agencies. The competent state authority which makes direct promises to an investor or group of investors in a specific sector should also be familiar with the gravity of their direct promises.

Conclusions

In this chapter, I show that legitimate expectations based on local foreign direct investment legal frameworks and investment treaties can be clearly constructed in FET provisions. The current Uzbek investment law remains dynamic and cannot be frozen to attract foreign direct investment. Therefore, the results from arbitration cases should guide the generation of direct legitimate expectations. Yet, reasonable state goals aimed at solving environmental and social issues should also be considered by investors. A socio-legal analysis of expectations also revealed that both public authorities and investors are unaware of the type of legitimate expectations (direct or indirect) represented or the consequences of their inducement to future investment arbitration.