In this article, the fair and equitable treatment standard behind foreign investors and their potential disputes with the host state in which they invest and the place of this standard in arbitration will be discussed.


Investment terminology is a concept that is often confused with trading in practice. Investing is not an area with immediate results like trading, but it is an area where longer-term plans are in question. In short, investment is the use of a certain resource or capital in a long-term plan to generate income.

There are many characteristic distinctions of investment, for example;

* Direct-Indirect Investment,

* Public-Private Sector Investment,

* Energy-Food Investment,

* Infrastructure-Portfolio,

Another distinction, which is also the subject of our article, can be given as an example, which will be the “Domestic Investment-Foreign Investment” distinction.

The cornerstone of this distinction is who actually makes the investment. At this point, we can define the investments made by a foreign legal or real person as foreign investment. In simpler terms, the presence of a foreign investor is essential in order to talk about foreign investment.

Foreign investment can very well be included in the distinctions exemplified above. For example, the purchase of a share by a foreign natural person in a company traded on Borsa Istanbul is an example of an indirect investment. The risk of such investments is very low because a foreign person can sell the purchased shares at any time. Since no procedure is required and even this process takes place within seconds, the risk is minimal.

On the other hand, foreign investment can also be direct investment. Investments that are infrastucture projects, power plants and mining with whom foreign investors can bring employment, capital, physical veriables  to the country can be given as an example. The risk of these investments is much higher because the host state is sovereign over its territory and can impose regulations, law changes and “invisible barriers” to waste the investment.


In such foreign investments, it is more difficult for the labor force and capital to come back into the country compared to the other. Because of this risk, foreign investors have very strong protections in the context of international investment arbitration.

The investment which is made by foreign investor is hampered by invisible barriers and any attempt which is contrary to expectations of foreign investors before coming to country can give opportunity to foreign investors to take this to international investment arbitration.


As briefly mentioned above, a foreign investor is a real or legal person investing in the host state.

Especially in the energy sector, we see that legal entities play an important role in the field of investment. It is seen that large consortiums such as BP and SHELL can invest worldwide, as well as state-based companies such as GAZPROM.

For this reason, the foreign investor party in investment disputes is generally a legal person. However, in certain disputes, it can be seen that real persons are also a party to international investment arbitration. Currently, the best example of this is Uzan vs. The Republic of Turkey case opened in SCC (Stocholm Chamber of Commerce).

In addition, the motivation behind foreign investors’ investment in different countries was mentioned in our article named ENERGY ARBITRATION AND IZMIR POTENTIAL, you can read that article for detailed information. To briefly mention here, the reason behind a foreign investor’s investment in the host state is to maximize the profit margin. This can be explained by the cheap labor in the host state, the proximity of the host state to the energy fields, or the low cost of raw materials.


Bilateral Investment Agreements (BITs) are investment agreements signed between the country of origin of a foreign investor and the host state. These agreements can also be understood as the internationally manifested dimension of the promises in the national legislation of the host state.

These agreements, which contain provisions such as the responsibilities of the host state, definitions of the foreign investor, and what the investment will be, are the main source of arbitration, especially when international investment arbitration is made.


As stated above, the most important function of bilateral agreements is to protect the rights and investments of foreign investors.

Foreign investment should be evaluated in two stages. These stages are: the stage before and after the foreign investor invests in the host state. The foreign investor is completely dependent on the regulations of the host state before investing. So much so that the host state can use its sovereign authority to the extreme at this point.

Indeed, the host state has the sole say in important items such as the way the investor brings his/her investment and the area in which he/she will invest.This situation is very relevant to the perspective of the host state towards foreign investors, and its policies on this issue are important.

For example, the host state may have made many regulations to encourage foreign investors. Some host states may have adopted the “permit system”. The host states that adopt this system are the states that make certain permits and regulations before the foreign investment enters the country. Another group of states is the states that adopt the “registration system” and allow all kinds of foreign investments to enter their borders by registering them.

The last group of states which has more investor-friendly point of view are those that have adopted the free investment system, which gives foreign investors a completely free entry. Such host states allow all kinds of foreign investors to enter as they wish through the borders of the country.Turkey is a host state belonging to this last group.

The pointer runs in the opposite way in the time period before and after the investment enters the country. Indeed, while the entire will is the host state in the process before the foreign investor enters the country, the foreign investor is in a more advantageous position with all its international protection from the time the investment enters the country.

At the forefront of this international protection is the bilateral investment agreements. In case of violation of these agreements, the foreign investor will be able to use all kinds of international legal protection.

In order to use international legal protection, the foreign investor may go to international arbitration based on the relevant articles of bilateral agreements. The relevant articles are, in general, the articles containing the provisions regulating the responsibilities of the host state, which is a party to the bilateral agreement.

The most important of these responsibilities is the responsibility to act in a fair and equitable treatment, which constitutes the basic component of all disputes.


The obligation to fair and equitable treatment was regulated for the first time in Article 11/2 of the Havana Charter, which was issued by the International Trade Organization in 1948. Since then, it has been used very frequently in bilateral agreements, mutual promotion and protection of investments.

This obligation is also frequently encountered in bilateral investment agreements to which Turkey is a party. In fact, it is seen that this obligation is almost always included in the BITs made with the home state of the foreign investor, and even Turkey, as the country of origin, adds this annotation to the bilateral investment agreements with other states.

Perhaps the biggest negative aspect of this standard is the lack of a specific definition. Namely, any factor that negatively affects the expectation of the foreign investor before coming to the country can be included in the scope of this standard. However, this obligation may vary from case to case, depending on the practices of the host states.

The most concrete interpretation of the said obligation will be possible under article 31 of the Vienna Convention on the Law of Treaties. According to this; Any treaty must be interpreted in good faith, in accordance with the ordinary meaning to be given to its terms in the whole of the treaty and in the light of its subject and even purpose.

Accordingly, any circumstance and event that undermines expectation cannot be a reason for resource arbitration in this standard.


As mentioned above; There are plans in which the investor adjusts his expectations and defines the organization of action accordingly, before investing in the host state. These plans vary depending on the nature and duration of the investment as short, medium and long term. In general, especially energy investments are long-term investments where the foreign investor has a long stay in the country. Of course, the host state’s policies and major regulations will change during the investor’s stay in the country. At this point, the main question is whether any regulation that creates negative effects will cause investment arbitration.

In this regard, it is necessary to classify the factors affecting the expectation of the investor according to certain criteria. Namely, the arrangements or changes made must meet certain criterias as following:

  1. Being stable,
  2. Being predictable,
  3. Ensuring that the right is duly fulfilled,
  4. Not containing attack and coercion.

As long as these criteria are met, the host state will be able to make all kinds of changes and regulations as long as it has a justifiable reason.

For example, PSEG vs. The TURKEY case can be given, which is the first ICSID arbitration Turkey has faced. As a matter of fact, it has contributed to the development of a fair and equitable treatment standard for ICSID case law.

Based on the BIT signed between the USA and Turkey, Turkey, as the host state, has undertaken to treat US investors fairly and equitably. The investment subject to arbitration is an investment for the construction and operation of the Konya-Ilgın power plant. In this case, which includes many factors such as legal changes, the company’s application and negotiation processes, the Council of State has become an authority to carry out all kinds of audits at the first stage.PSEG Global, on the other hand, made an expectation management and adjusted company policies accordingly.

An implementation agreement has been made between the Ministry of Energy and Natural Resources of the Republic of Turkey and PSEG, and this company has been granted a privilege.

However, since 1995, there have been a lot of changes especially in the energy regulation system in Turkey, and these changes have created differences in the approvals and audits, thus the expense item of PSEG has increased.

At this point, the neglect of fair and equitable treatment was not entirely due to the increase in costs. Multiple and successive amendments to the law have also resulted in a breach of this obligation.

The most important of these can be shown as the conversion of the nature of the contract into a private law contract with a law amendment, although the expropriation contract was signed from the beginning. Likewise, as mentioned above, the investment, which was subject to the approval of the Council of State at first, was then subjected to many approval procedures and the position of the Council of State was made only to express its opinion.

On the PSEG side, all these caused the PSEG’s expectations to be met incorrectly and the plans before coming to the country were disrupted. In this context, ICSID found the foreign investor justified and found the changes in the law that are constantly changing, unpredictable and unstable, and that would prevent the duly fulfillment of the right, contrary to the fair and equitable treatment standard. As a result, it sentenced Turkey to pay the compensation amounting to 9.000.000 USD.

As can be seen, the violation of this treatment, which has very serious consequences, plays a very important role in international investment arbitration.


In short; of course, attracting foreign investors to the country is an invaluable opportunity for most host states. However, certain obligations and standards in Bilateral Investment Agreements can give foreign investors extraordinary international protection, the most important of which is fair and equitable treatment. In violation of this obligation, international investment arbitration can generally make investor-friendly decisions. As a result, countries may have to pay huge amounts of compensation.

For our other articles, you can click on this link;

Legal Intern Ömer Faruk KILIÇ 

Att. Muhittin KURNAZ

Follow us on social media:




Son Yazılar

Hukuki Yardım Al

Danışmak istediğiniz her konuda bize ulaşın!