Lost in conversion: rethinking investment treaty protection against retroactive regulation in the wake of the ‘Francogeddon’**

Abstract

The Swiss National Bank’s abrupt abandonment of the Franc–Euro (CHF–EUR) exchange rate peg in 2015 unleashed a financial shockwave—dubbed ‘Francogeddon’—that continues to reverberate a decade later. While the immediate crisis has subsided, its aftermath continues to affect hundreds of thousands of mortgage holders with CHF-denominated loans and several of their home States. In response to that fallout, countries such as Croatia and Montenegro mandated the retroactive conversion of CHF loans into local currency, prompting however a series investment claims by foreign banks. Using these disputes as an entry point, this article examines the treatment of currency and exchange rate interventions under international investment law, and canvasses two relatively underexplored dimensions of regulatory interference within the fair and equitable treatment standard: the retroactive nature of financial restructurings and the due diligence obligations of investors marketing complex financial products. It contextualizes these issues within the broader debates over the concept of stability in investment law, and presents a typology of the different approaches, probing into their content and normative justifications. The article ultimately reflects on the implications of these controversial issues for adjudicating disputes in a world increasingly shaped by financial (and other) crises.

Introduction

A decade has passed since the Swiss National Bank (SNB)’s abrupt decision to discard the Franc–Euro (CHF–EUR) exchange rate peg sent ripples, or rather a tsunami, through financial markets, earning it the moniker ‘Francogeddon’.¹ It dealt a blow to several—primarily Central and Eastern European (CEE)—countries with significant currency mismatches and heavy exposures to foreign currency loans. At a time when the repercussions of the global financial crisis had yet to subside, this shockwave thrust large portions of these societies into a CHF debt crisis. While the collective memory of ‘Francogeddon’ may have faded, its lingering effects continue to burden hundreds of thousands of unhedged mortgage holders and consumers whose loans were indexed or denominated in CHF (hereinafter ‘CHF loans’).² Their home States, some of which intervened through regulation to mitigate the crisis (like Croatia) and some that did not (like Poland), remain entangled in its aftermath.

Countries like Croatia and Montenegro, which implemented regulatory measures by mandating the conversion of CHF loans into euros or local currency at historical exchange rates, have faced a wave of investment claims filed by foreign banks over the past decade. These disputes were added to the rising tide of investment claims related to financial regulatory measures, financial institutions, and financial products.³ Following—most notably—the Argentine and global financial crises, international investment tribunals have increasingly been called upon to navigate the ‘high drama’ of the relationship between international investment law and the global financial architecture,⁴ and tread on the complexities of assessing financial regulation in times of crisis,⁵ with diffuse interests often pulling in different directions.

The CHF loan conversion cases have largely stayed under the radar of investment law commentators. This relative oversight is perhaps understandable, given the peripheral and less disruptive nature of the underlying debt crisis when compared to the Argentine or the global financial crises.⁶ Nevertheless, the CHF loan crisis and ensuing investment cases offer a unique springboard to scrutinize two critical yet not-so-ventilated aspects of evaluating regulatory changes under investment protection standards. These are (i) the retroactive nature of financial restructurings and (ii) the due diligence obligations of investors offering complex financial products to consumers. Both issues recur frequently in financial sector disputes, are particularly relevant to investments in financial services, and have been inconsistently treated by investment tribunals.

This article begins with an overview of the key events and circumstances leading to the CHF loan conversion disputes. It examines the proliferation of CHF loans among consumers in CEE countries since the early 2000s, the economic impact of the CHF-EUR unpegging and the responses to the ensuing financial turmoil.

It then situates the CHF loan conversion measures within the broader context of jurisprudence and debates surrounding currency and exchange rate interventions in investment law. In doing so, it delineates critical distinctions between general currency regulations and the redenomination of financial instruments, as well as between the treatment of public and private contracts in such interventions, particularly in the context of the fair and equitable treatment (FET) standard.

The following section zooms into one of the most controversial aspects of the CHF loan conversion laws: their retroactive application. It canvasses the relevance of the much-maligned concept of retroactivity in assessing regulatory changes under the FET standard, reflecting on its interplay with the notion of regulatory stability in international investment law, and provides a typology of the divergent approaches to retroactive legislation in investment arbitration and academic discourse. By critically engaging with these approaches and their normative foundations, it argues against the existence of a strict prohibition of retroactivity under the FET standard, instead advocating for a more nuanced position against unreasonable retroactivity.

The article then turns to investor conduct, focusing on the role of investor diligence in evaluating the reasonableness of the impugned regulatory measures and of the investor expectations of stability under the FET standard, with particular attention to financial services investors and consumer protection. In the course of these discussions, the Addiko v Montenegro (2021) ruling⁷ and the pending CHF loan conversion claims against Croatia are revisited to illustrate key points. Ultimately, the article concludes, alluding to the broader implications of these issues for the adjudication of financial and other disputes in the age of ‘polycrisis’ and ‘permacrisis’.

The CHF loan saga: an exchange rate’s path to investment arbitration

In the early 2000s, CHF loans gained considerable popularity across several European countries, including (but not limited to) Hungary, Croatia, Poland, Austria, Romania, Greece, Serbia, Slovenia, and Montenegro.⁸ According to SNB’s estimates, CHF 238 billion in CHF loans were outstanding in the euro area by the end of 2007, with an additional CHF 122 billion in other European countries.⁹ In many CEE countries, whose banking markets were often dominated by foreign-owned banks, CHF loans came to represent a significant share of total loans extended to the non-banking sector, primarily in the form of mortgages.¹⁰

These loans placed the exchange rate risk—specifically, the risk of CHF appreciation or local currency depreciation—on borrowers. A vast majority of those borrowers, lacking CHF-denominated income, were unhedged against that risk. In contrast, banks largely insulated themselves from exchange rate fluctuations through derivative arrangements, such as intragroup and interbank swaps.¹¹ The primary allure for borrowers lay in the lower interest rates these loans offered compared to those denominated in euros or local currencies (eg Croatian kuna or Hungarian forint).¹² In addition to the expectation of lower and more manageable loan repayment, these reduced rates often inflated borrowers’ perceived creditworthiness, enabling them to secure larger loans than would have been possible with other currencies.¹³ However, many of these loans also combined currency indexation with variable interest rates, resulting in repayment amounts that could—and frequently did—increase significantly after the loan agreements were concluded.¹⁴ Borrower demand was further fuelled by aggressive and often misleading marketing campaigns, which portrayed the Swiss franc as a stable ‘safe-haven’ currency and were not transparent about the exchange rate fluctuation risks involved.¹⁵

On 15 January 2015, SNB unexpectedly announced the abandonment of the CHF–EUR exchange rate peg, which had been maintained at 1.20 rate. The SNB had initially established the peg in 2011 to prevent the over-appreciation of its ‘safe-haven’ currency and protect its export sector. Yet, persistent demand for the Swiss franc coupled with the continuing depreciation of the euro led the SNB to accumulate vast reserves of euros in defence of the peg. Against the backdrop of a post-crisis strengthening US dollar (USD), a sanction-affected rouble that prompted Russian entrepreneurs to move more money in Swiss banks, and European Central Bank (ECB)’s then imminent quantitative easing heralding further euro depreciation, the SNB eventually scrapped the peg in 2015.¹⁶ The announcement came just a few weeks after the SNB had issued a statement reaffirming its commitment to the peg,¹⁷ rendering the decision—in the words of the then International Monetary Fund (IMF) Managing Director Christine Lagarde—‘a bit of a surprise’,¹⁸ though less euphemistically, it was dubbed ‘Francogeddon’ due to the chaos it unleashed in global currency markets. Within minutes of the announcement, the Swiss franc surged by more than 20 per cent against the euro (see Fig. 1) and other domestic currencies, such as the kuna, which was pegged with the euro. Among the most severely affected were the hundreds of thousands of CHF loan holders, for whom the repayment burden became dramatically heavier overnight (often placing the homes financed by these loans at risk of foreclosure).¹⁹ Indicatively, in Croatia, outstanding CHF loans accounted for €3 billion (more than 35 per cent of housing loans) at the time.²⁰

Figure 1.

CHF v EUR (2001–2017). Source of data: ECB and SNB.

Well before the ‘Francogeddon’, several institutional and independent studies had flagged the systemic risks involved in excessive foreign currency lending and unhedged foreign currency exposure.²¹ Hungary managed to phase out foreign currency loans in 2014 by mandating their conversion into local currency at a predetermined exchange rate,²² and thus largely shielded itself from the fallout from the SNB’s 2015 decision²³—an outcome not shared by other CEE countries with substantial foreign currency debt exposure. Among those, Croatia and Montenegro introduced their own conversion models in late 2015, post-‘Francogeddon’, which mandated the conversion of CHF loans into domestic currency at the historical exchange rate prevailing at the time the loans were issued.²⁴ Romanian and Slovenian legislative bodies also drafted similar loan conversion bills, but those were eventually struck down by their respective constitutional courts.²⁵

In Serbia, the Supreme Court in 2019 ruled that CHF currency clauses were invalid unless banks could demonstrate that borrowers had been adequately informed of the risks involved and permitted the conversion to EUR-indexed loans at the historical exchange rate of the loan conclusion date. Shortly thereafter, Serbia enacted legislation allowing borrowers to convert any outstanding CHF-indexed mortgage debt at the exchange rate on the conversion date, with an additional 38 per cent reduction in the amount owed, provided any ongoing legal proceedings were dropped.²⁶ Other countries, such as Poland and Greece, refrained from taking legislative action, leaving distressed borrowers to seek recourse through domestic courts, with varying outcomes.²⁷ As of mid-2024, however, Poland was reportedly still considering legislative intervention to facilitate the resolution of tens of thousands of pending CHF mortgage cases in its courts.²⁸ The wave of judgments in favour of CHF borrowers in Poland has reportedly put a significant financial strain on Polish banks, with the chief of State-controlled PKO BP (Poland’s largest bank) stating in November 2024 that compensating CHF loan holders had depleted resources and could hinder the country’s green transition financing.²⁹

The enactment of conversion laws, particularly those applying historical exchange rates, was challenged by lenders in both domestic and international fora. Six known investor–State claims were filed by Austrian, Hungarian, and French banks against Croatia, one against Montenegro, and another against Slovenia.³⁰ Four of the claims against Croatia were settled in early 2021,³¹ and the claim against Slovenia was discontinued in 2024 (following the judicial repudiation of Slovenia’s CHF loan conversion law).³² While the precise amount of damages claimed in most of those cases remains unknown, Addiko Bank (which initiated claims against all three countries) reported losses of €247.5 million in Croatia and €11 million in Montenegro due to the conversion laws.³³ A pre-enactment impact assessment by the Croatian National Bank estimated that the conversion would cost banks in Croatia approximately €1.1 billion—an amount purportedly equivalent to three years of anticipated profits.³⁴ Following the settlements, Croatia’s Prime Minister announced that the agreements had spared the country from ‘the potential payment of at least HRK 2.5 billion’ (around EUR 340 million).³⁵ Meanwhile, in Addiko Bank v Montenegro, a 2021 arbitral tribunal dismissed the bank’s claims on the merits under the 2001 Austria–Yugoslavia Bilateral Investment Treaty (BIT).³⁶ As of the time of writing, the two claims by Addiko and Société Générale against Croatia remain pending.³⁷

Currency and exchange rate interventions in international investment law: the CHF loan conversion in context

States have historically intervened through regulation into public and private contracts,³⁸ to stabilize markets, address systemic risks, alleviate economic hardships, and regulate their national economies particularly during financial crises. These interventions have taken manifold forms, including sovereign debt restructurings,³⁹ bank bail-ins,⁴⁰ mandatory write-downs,⁴¹ as well various currency and exchange rate measures. This section focuses on the latter category of measures, which can be broadly divided into two main types (though they are often employed in tandem):

• General currency and exchange rate regulations: Policies affecting the broader monetary system, including currency devaluations, exchange rate regime changes, and exchange controls.⁴² Such measures may indirectly affect the economic equilibrium of public and private contractual arrangements.

• Redenomination of assets: Direct interferences into contracts, such as forced conversion of foreign currency assets or contractual payments into the local currency, through the abrogation or modification of contractual terms (currency or exchange rate clauses). Such an intervention lies at the heart of the CHF loan conversion disputes.

Both types of measures, though typically aimed at addressing macroeconomic and socioeconomic stability concerns, may also ignite tensions between the State’s right to regulate its monetary affairs and the protection of foreign investors. The specific ways in which these tensions manifest in relation to each type of measure are explored in turn below.

General currency and exchange rate regulation

It is a generally accepted principle that a State is entitled to regulate its own currency.⁴³ This principle is encapsulated in the concept of monetary sovereignty, which encompasses a State’s prerogatives to (inter alia) define, issue and redenominate its currency⁴⁴, determine its relationship with foreign currencies (for instance, by deciding whether to peg it to another currency), devalue or revalue it, permit or restrict the use of foreign currencies within its territory, and impose exchange controls.⁴⁵ Such powers have been exercised extensively, especially since the dismantling of the Bretton Woods system of fixed exchange rates (and the gold convertibility).⁴⁶

While monetary sovereignty grants States broad discretion in that respect, its exercise is not unfettered. It is subject to customary international law and treaty obligations⁴⁷, including the IMF Articles of Agreement, international trade law, and investment treaties.⁴⁸ Examples of currency and exchange rate regulations, with reverberations in the international investment law realm, include Malaysia’s adoption of a fixed exchange rate policy and exchange controls during its 1998 financial crisis,⁴⁹ Argentina’s 1991 peso-USD convertibility regime and its abandonment in 2002,⁵⁰ as well as Switzerland’s above-mentioned decisions to peg its currency to the euro in 2011 and subsequently unpeg it in 2015.⁵¹ Although various investment treaty standards may be implicated in such measures—such as the prohibition of expropriation, most-favoured-nation or national treatment clauses, and free transfer provisions—the following discussion centers on the FET standard.

In cases involving Argentina’s emergency measures, several tribunals invoked the notion of ‘monetary sovereignty’ to underscore the latitude afforded to States in shaping their currency and exchange rate policies—noting repeatedly that BITs do not protect foreign investments from currency devaluations.⁵² However, even general exchange rate policies may breach a BIT, if designed or implemented in an unfair or inequitable manner. In Hochtief v Argentina, the tribunal observed that a ‘deliberate choice to abandon peso-dollar parity in circumstances in which parity could have been maintained’ might have contravened the FET standard under the Germany-Argentina BIT.⁵³ While the tribunal ultimately concluded that the unpegging of the peso was not a ‘deliberate choice’ but a necessity due to the unsustainability of the parity regime,⁵⁴ its observation seems to hint at a more exacting standard for assessing exchange rate policies under the FET standard. This leaves some ambiguity as to whether drastic changes in a State’s currency and exchange rate regimes must be strictly necessary or merely reasonable and non-arbitrary to avoid breaching investment treaty obligations.⁵⁵

That notwithstanding, tribunals have generally refrained from assuming the role of a ‘super-regulator’ of international monetary and currency policy; in dealing with the ‘normative conflict between investment protection and monetary sovereignty’,⁵⁶ tribunals have for the most part tilted towards preserving the latter, when assessing general currency and exchange rate regulations. Such measures are unlikely to breach the FET standard unless they are unreasonable or arbitrary, unjustifiably discriminatory, or abusive. For example, a State deliberately manipulating⁵⁷ its currency regime to exacerbate depreciation, not to maintain financial stability, but rather to obtain a competitive advantage over neighbouring States or to evade its foreign debt obligations, could cross this threshold.⁵⁸

Redenomination of financial assets

The redenomination of assets represents a more direct public intervention than the general currency regulations discussed earlier, yet it is neither uncommon nor novel. Historical examples abound: the USA’s legislative abrogation of the gold clauses in public and private contracts to combat the deflationary pressures of the Great Depression in the 1930s⁵⁹; Germany’s 1933 moratorium law mandating the conversion of foreign-currency debts into Reichsmarks;⁶⁰ Mexico’s forced conversion of foreign currency loans and deposits into pesos during the 1980s banking crisis;⁶¹ and, more recently, Russia’s 2022 authorization of foreign debt repayments in roubles amid geopolitical tensions.⁶²

Like general currency regulations, asset redenomination may engage investment treaty standards such as the FET standard. While these policies may not always be strictly monetary measures, they often form part of a State’s regulation of its banking and payment systems—powers subsumed within its monetary sovereignty.⁶³ Typically following currency devaluations, redenominations aim to mitigate adverse effects or distribute the burden of depreciation.⁶⁴ For example, Argentina’s blanket redenomination of USD-denominated contracts into pesos (pesification) followed its unpegging of the peso from the USD and the resulting devaluation. Several tribunals addressed the abandonment of peso-dollar parity and the pesification of contracts as interconnected measures, not only because they were enacted through a single legislative act, but also because the pesification of USD-denominated contracts was viewed as a reasonable and necessary step to mitigate the severe adverse consequences of devaluation.⁶⁵ Economic experts had previously highlighted systemic risks posed by devaluations without redenomination, as evidenced by the 1994–1995 Mexican and 1997 East Asian financial crises.⁶⁶

Most (but not all) of the tribunals in the ‘Argentinian crisis arbitrations’ found that the pesification breached the FET standard, reasoning that the legal and regulatory framework governing the investments had been fundamentally altered, thereby violating investors’ legitimate expectations.⁶⁷ However, it is important to note that these cases primarily involved the pesification of public utility tariffs. The tribunals’ findings often hinged on Argentina’s specific undertakings to induce investment, as well as its direct relationship with the claimants, established through invitations to bid, licenses, permits, or contracts.

A distinction can be drawn in cases involving the redenomination of purely private contracts. In Metalpar v Argentina, the tribunal rejected claims concerning the forced pesification of private debt contracts (involving the claimants’ subsidiary financing customers for automotive purchases). The tribunal reasoned that, in the absence of specific assurances or a contractual relationship with the State, investors could not reasonably expect protection from economic instability or crisis-driven regulatory measures.⁶⁸ This situation bears closer resemblance to the CHF loan conversion laws, which redenominated private-to-private debt contracts between banks and consumers. Indeed, in a similar vein, the tribunal in Addiko v Montenegro, rejected the claim against the regulatory redenomination of the CHF loans, noting the absence of general legal stability expectations and underscoring that ‘when balancing a State’s right to regulate against an investor’s expectations, the Tribunal must afford significant latitude to the State to decide what is appropriate for its own internal needs’.⁶⁹

In view of the above, it appears that tribunals tend to afford greater deference to a State’s right to regulate in the context of private-to-private debt restructurings, when balancing it against any investor’s expectations arising from the general legal framework. In contrast, unilateral modifications of contracts in which the government is a party appear to be subject to higher scrutiny.⁷⁰ This pattern mirrors the different standards applied by national courts to sovereign versus private debt restructurings.⁷¹ Whether forced private debt redenomination violates the FET standard largely hinges on the scope and nature of a State’s obligation to maintain a stable legal environment—a topic examined further below.

Asset redenomination may also violate investment treaty standards, if implemented arbitrarily, discriminatorily, or in bad faith. In the jointly-heard von Pezold v Zimbabwe and Border Timbers v Zimbabwe cases, the tribunal found that Zimbabwe’s forced exchange of the claimants’ USD export proceeds into Zimbabwean dollars (ZD) at artificially overvalued rates violated the FET provisions of the Switzerland–Zimbabwe and Germany–Zimbabwe BITs.⁷² Zimbabwe’s measures combined a general currency regulation (setting an official USD–ZD exchange rate) and asset redenomination (forced conversion of USD earnings into ZD), which the tribunal addressed en bloc. After an admittedly brief examination, the tribunal concluded that Zimbabwe had ‘set and used’ its exchange rates in a ‘grossly unfair, idiosyncratic, arbitrary and bad faith manner’, finding that such ‘manipulation’ of the exchange rate constituted a breach of the FET.⁷³ However, the lack of any detailed elaboration leaves unclear what precisely constitutes prohibited manipulation of an exchange rate regime and what qualifies as a grossly unfair, arbitrary, or abusive asset redenomination.

Another relevant case of contract redenomination (which also followed currency revaluation) sheds some light into the latter question. Gramercy v Peru involved claimants holding Peruvian agrarian land reform bonds (bonos agrarios) issued in the 1970s.⁷⁴ Amid the hyperinflation of the 1990s, Peru redenominated and devalued its currency twice, rendering the bonds effectively worthless. While the Peruvian government initially enacted a law to pay the bonds according to their face value, the constitutional court later overturned this, mandating the revaluation of the bonds by converting the outstanding amount in Peruvian soles into USD.⁷⁵ The tribunal ruled that the exchange rate applied by the government was arbitrary and violated the minimum standard of treatment under the Peru–US Trade Promotion Agreement. Peru had applied an artificially high exchange rate to convert the bonds into USD and then used a lower official rate to convert the principal and interest back to soles. In the absence of reasonable justification, the tribunal found that these actions appeared driven solely by Peru’s intent to reduce the bonds’ value.⁷⁶

The regulatory intervention in the CHF loans’ currency clauses was by all accounts a controversial measure. Unlike other currency conversions, these measures retroactively recalculated loans as if they had been denominated in euros (or other local currencies) from their inception. The ECB and IMF expressed concerns about the—then draft—conversion bills on several occasions, mainly on account of that retroactivity.⁷⁷ From an investor’s perspective, such measures may be challenged as breaching the FET standard,⁷⁸ based on three principal lines of argument: (i) that the retroactive legislation violated the State’s obligation to maintain a stable and predictable legal framework for the investment; (ii) that the retroactive measure frustrated legitimate expectations underpinning the investment; and (iii) that the measure was arbitrary and/or unreasonable and thus violated the FET standard (and/or the non-impairment standard, sometimes included as a distinct standard in investment treaties, but treated as equivalent for the purposes of this article). The first two grounds represent understandings of an obligation of regulatory stability as part of the FET standard, which is further discussed below.

Retroactive legislation under the FET standard

Regulatory stability under the FET standard

The assessment of regulatory change under the FET involves two key, albeit contrasting, facets.⁷⁹ On the one hand, the FET standard involves the maintenance of (at least some degree of) regulatory stability. On the other hand, it does not operate qua insurance system for investors against adverse regulatory changes and does not prevent States from exercising their normal regulatory powers to adapt to new circumstances and regulate in the public interest.⁸⁰ That said, significant controversy persists over the nature and scope of the relevant stability obligation (and the corresponding constraints to the host State’s right to regulate). Central points of contention pertain to whether regulatory stability is a distinct element of the FET standard and/or is subsumed under the doctrine of legitimate expectations;⁸¹ whether legitimate expectations can be based on the stability of the legal framework absent specific representations by the host State; and most importantly, the extent of such a regulatory stability obligation within the context of the State’s inherent right to regulate.

There have been several scholarly attempts to distil the essence of investment case law on the obligation of regulatory stability and give a comprehensive answer to the question of when does a change in the host State’s legal framework breach the FET standard.⁸² Most deftly, Federico Ortino distinguishes between two alternative jurisprudential understandings of ‘the guarantee of regulatory stability’ under the FET standard: the ‘strict regulatory stability’ and a ‘soft(er) regulatory stability’ obligation.⁸³ In broad terms, the strict understanding suggests that any (substantial) adverse regulatory change would amount to an FET violation, while the soft understanding impugns not the regulatory change as such, but rather asks whether it was reasonable (or proportionate) in view of the various interests at stake.

The strict approach was spearheaded by some tribunals at the beginning of the century (particularly the 2005 Occidental v Ecuador I tribunal and few early tribunals dealing with Argentina’s pesification measures), which drew from references to the desirability ‘to maintain a stable framework’ in the preambles of the respective BITs.⁸⁴ To illustrate, the tribunal in Enron v Argentina, held that FET protects ‘expectations derived from the conditions that were offered by the State to the investor at the time of the investment’.⁸⁵ While it was set out that ‘specific guarantees’ were included in Argentina’s tariff regulatory regime, for the tribunal the critical element for finding an FET violation was that the ‘“stable legal framework” that induced the investment [was] no longer in place.’⁸⁶ Ortino and other scholars have observed that as international investment law evolved and claims multiplied, investment tribunals progressively calibrated their approaches toward regulatory stability towards a ‘softer’, ‘more reserved’ or ‘more cautious’ approach, opposing the association of the FET provision with a strict obligation of regulatory stability, balancing stability against the State’s right to regulate, looking into the reasons underlying the regulatory change.⁸⁷ Tellingly, most of the later tribunals of the Argentina saga (including in Total, Continental, Metalpar and El Paso v Argentina) drifted towards that approach, diverging from earlier Argentina tribunals dealing with materially similar factual circumstances.⁸⁸ In Total v Argentina, for instance, the majority of the tribunal held that the pesification of the tariffs could not be considered unfair ‘in light of the exceptional nature of Argentina’s crisis’.⁸⁹

Despite this wider turn away from an absolute right to stability, and the consistent affirmation of the host State’s inherent right to regulate, there is still a level ambiguity, as Ortino also observes⁹⁰: some recent tribunals have used the degree of seriousness or ‘radicality’ of a regulatory change as the test for the FET violation,⁹¹ perpetuating doubt as to whether the FET standard only protects against unreasonable regulatory changes, or also against ‘fundamental’/‘radical’ changes regardless of their purpose.⁹²

What makes a regulatory change ‘fundamental’ or ‘drastic’ can best be dealt with on a case-by-case basis. Yet, tribunals have repeatedly referred to the alteration of the ‘essential characteristics’ of the regulatory framework on which investors relied to invest,⁹³ and flagged certain features of the modification that may be relevant in that respect: abrupt nature,⁹⁴ continuing changes,⁹⁵ and retroactive effect.⁹⁶ Even commentators who have argued that there is no distinct stability obligation and/or that legitimate expectations can hardly arise out of investors’ reliance on the general legal framework without specific commitments by the State, have noted that the concept will ‘come into play with respect to legislation with a retroactive effect’.⁹⁷

A principle (?) of non-retroactivity of legislation in international investment law

The distaste for retroactivity in law-making is deeply rooted in the legal psyche. Charles Sampford opens his monograph on ‘Retrospectivity and the Rule of Law’ by briskly observing that: ‘Nothing is more certain to cause apoplectic explosions of fear and loathing among some lawyers than the mere mention of the dreaded word “retrospectivity”.’⁹⁸ This sentiment is not entirely without good reason.

Whilst approaches to retroactive law-making certainly vary among domestic jurisdictions (especially outside the criminal law context),⁹⁹ non-retroactivity finds its normative foundations in the universal idea(l) of the rule of law, and the sub-ideas of legal certainty, stability and predictability.¹⁰⁰ HLA Hart argued that retroactive law-making ‘disappoints the justified expectation of those who, in acting, have relied on the assumption that the legal consequences of their acts will be determined by the known state of the law established at the time of their acts.’¹⁰¹ Non-retroactivity in law-making is also a principle in the Razian conception of the rule of law, which, grounded in the respect for autonomy and human dignity, ‘entails treating humans as persons capable of planning and plotting their future.’¹⁰² Reflecting the claim that the law must provide guidance, Lon Fuller also includes ‘the abuse of retroactive legislation’ among his notorious King Rex’s failures to make law.¹⁰³ While the foregoing represent different theoretical understandings of (the rule of) law, they converge on the value of prospective legislation therein.

The indeterminate nature of retroactivity

According to Jill Fisch (from whom I borrow the title of this sub-section), retroactivity is far from a binary construct whereby a new law is either retroactive or prospective.¹⁰⁴ There are many different degrees and hues of intertemporal effects of legislation—not to mention the terminological jumble usually surrounding the notions of ‘retroactive’ and ‘retrospective’.¹⁰⁵ Retroactive laws, the ‘most extreme class’ of retrospective laws according to Ben Juratowitch, constitute laws that not only change the status quo (and may thus affect existing contacts in the future), but from the time of the change, the law is deemed to have been applicable in the past.¹⁰⁶ I must add that there is a commonly invoked distinction between laws with retroactive effects on the one hand, and laws with immediate effects on the other,¹⁰⁷ largely corresponding to the related EU-law-originating distinction between ‘actual’ and ‘apparent’ retroactivity (ie where the relevant conduct is applied prospectively only, but affects past events and plans not definitely concluded yet).¹⁰⁸

Those distinctions can be difficult and controversial in practice.¹⁰⁹ To illustrate, one of the contested issues in the series of investment claims brought against Spain due to the regulatory changes in its renewable energy remuneration regime was the retroactive nature of the ‘claw-back’ element of the regulation, which consisted in the reduction or elimination of future subsidies otherwise payable by reference to amounts lawfully paid in the past in respect of past production. Tribunals have made diverging findings on whether that measure was retroactive¹¹⁰ or simply had immediate effect (also described as ‘retrospective’ or a ‘weaker form of retrospectivity’),¹¹¹ while few of the later tribunals have resisted offering a firm characterisation, noting that ‘what matters is not the label “retrospective” but the substance’ of the measure.¹¹² There is indeed no uniform definition of retroactivity,¹¹³ and I will not attempt to venture one myself. For the purposes of this article, I largely rely on Sampford’s definition of retroactivity (or retrospectivity—I use the terms interchangeably here) as legislation that alters the legal consequences of past actions or events,¹¹⁴ and focus rather on the legal implications tribunals draw after a finding that a law is retroactive or retrospective.

Conceptual and terminological confusion notwithstanding, the CHF conversion laws under discussion appear to be retroactive in the sense that they altered the terms of existing contracts, mandating the complete recalculation of CHF loans based on these new terms. Their express purpose was to ‘place borrowers of CHF loans in the same position that they would have been in had their loans, from inception, been denominated in euros (or denominated in [local currency] with currency clauses linking payments to euros)’.¹¹⁵ Montenegro’s conversion law also applied to already terminated, repaid or assigned loans,¹¹⁶ while Croatia’s law did not apply to CHF loans that were already fully repaid.¹¹⁷

Retroactive legislation as breach of FET: typology and analysis of approaches

Prior to the CHF loan conversion cases, several investors had challenged retroactive interferences in financial instruments, but none progressed to a determination on the merits under the FET standard.¹¹⁸ Greece’s retroactive introduction of collective action clauses into existing sovereign bond contracts withstood scrutiny from the European Court of Human Rights, which ruled that Greece acted legitimately to maintain economic stability and restructure public debt in the broader public interest.¹¹⁹ Whether that or similar legislative measures altering contractual clauses retroactively would survive arbitral scrutiny remains largely untested in international investment law. This section delves into that question, taking stock of relevant caselaw and scholarly debates on retroactive legislation, both within and beyond the realm of financial regulation.

I identify three primary approaches to evaluating retroactive legislation in international investment law (acknowledging that any classification, while useful, inevitably oversimplifies certain nuances):

1. Strict approach—General principle of non-retroactivity. There exists a strict principle (or rule or standard) of non-retroactivity in international investment law such that retroactive measures constitute a fundamental alteration to the legal framework and therefore (echoing a strict understanding of the regulatory stability obligation) breach, by their nature, the FET standard.

2. Defeasible presumption subject to retroactivity-specific justification. This approach posits a (rebuttable) presumption against retroactive regulation, which can be defeated exceptionally by demonstrating a specific and compelling justification for the retroactive application of the law. This approach is usually predicated on the assumption that values of stability and legal certainty underlie the FET standard.

3. Broad approach—Retroactivity as a factor in reasonableness evaluation. Rather than constituting a breach per se, retroactivity is one of several factors to be considered in assessing whether a measure violates the FET standard. It falls on the claimants to prove that the retroactive measures contravene the FET standard (eg because they were unreasonable or disproportionate in view of the public interest pursued). This approach does not adhere to a single vision of stability under the FET standard. Tribunals applying this framework have offered divergent views on regulatory stability, ranging from a strict understanding of the stability obligation to the ‘softer’ view that investor expectations based solely on the general regulatory environment—absent specific assurances—are not protected.

Both tribunals and scholars have occasionally assumed the existence of a rule of non-retroactivity of regulation in international investment law, derived either from the rule against the retroactive application of treaties in international law under Article 29 of the Vienna Convention on the Law of Treaties (VCLT), or from a rule-of-law-inspired interpretation of the FET standard.

An example of the first approach is the 2018 decision in RREEF v Spain. The tribunal found that Spain’s retroactive clawback of remuneration under its renewable energy regime violated the ‘principle of non-retroactivity’ (which it considered a ‘well-established general principle of law’) and, by extension, the stability obligation in Article 10(1) of the Energy Charter Treaty (ECT).¹²⁰ The tribunal grounded the existence of that principle in a statement from the Mondev v USA tribunal, which affirmed the rule of non-retroactivity in relation to State responsibility under international law, specifically referencing Articles 28 of the VCLT and 13 of the International Law Commission’s Articles on State Responsibility.¹²¹ However, the RREEF tribunal’s reasoning suffers from a theoretical flaw: the Mondev tribunal’s statement pertained to the ratione temporis jurisdictional scope of a treaty, not the permissibility of retroactivity of domestic legislation under its substantive standards. The RREEF tribunal did not address this distinction, and subsequent tribunals, such as BayWa v Spain (2019)¹²² and PV Investors v Spain (2020),¹²³ echoed this conclusion without further explanation.

Somewhat more compellingly, the Casinos Austria v Argentina tribunal in its 2018 decision referred to the retroactive application of regulation as one of the ‘rule of law-elements’ of the FET standard¹²⁴—echoing the view of rule of law as a ‘normative yardstick’ guiding the interpretation of substantive investment treaty standards.¹²⁵ In a similar vein, it has been argued that ‘the principle of non-retroactivity is one of the basic standards of international investment law’, and therefore the implementation of bank bail-ins may result in State liability against foreign investors, even when justified by an ‘overriding public interest’ like the preservation of financial stability.¹²⁶ As also noted earlier, non-retroactivity is indeed a virtue of good governance and law-making. The preference for prospective legislation drawn from the ideas of the rule of law and legal certainty is persuasive and normatively appealing. However, this should not be automatically equated with a general prohibition against retroactive legislation within the FET standard.¹²⁷ The rule of law remains a fluid (some argue ‘essentially contested’¹²⁸) concept, as do some of its elements like legal certainty/stability—not the least because of their dispersed development within national and regional systems and the consequently variable socio-legal connotations attached thereto.¹²⁹ While the idea of the rule of law and its elements offer a valuable analytical lens for investor-State dispute settlement,¹³⁰ they do not necessarily imply that retroactivity, in itself, constitutes a violation of the FET standard.

The first investment tribunal to tackle the issue of retroactive legislation in a nuanced manner was in Cairn v India in late 2020. The tribunal noted that ‘the principle of legal certainty (and its corollaries, stability, and predictability) provides significant guidance when determining whether retroactive taxation is compatible with the FET standard’.¹³¹ This principle is separate and independent from any legitimate expectations arising from specific assurances.¹³² It posited that retroactive laws subvert the ability of individuals to foresee the legal consequences of their actions, thus warranting a general—but not absolute—presumption against retroactivity.¹³³ Drawing on the Venice Commission’s Rule of Law Checklist, the tribunal developed a two-pronged proportionality test to assess the permissibility of retroactive measures under the FET standard:

(i) the retroactive application of a new regulation is only justified when the prospective application of that regulation would not achieve the specific public purpose sought, and (ii) the importance of that specific public purpose must manifestly outweigh the prejudice suffered by the individuals affected by the retroactive application of the regulation.¹³⁴

Following this approach, the tribunal found India’s retroactive taxation unjustified: while the maximization of revenue recoverable from multinational companies’ capital gains was a valid policy justification for prospective taxation, it was insufficient to justify retroactive legislation.¹³⁵ That unjustifiably retroactive legislation was, according to the tribunal, ‘in violation of the principle of legal certainty, which the Tribunal considers to be one of the core elements of the FET standard, and of the rule of law more generally.’¹³⁶

In 2021, the Eurus v Spain tribunal (then chaired by the late James Crawford) appeared to follow a similar logic in finding that Spain’s claw-back measure was inconsistent with the principle of stability in Article 10(1) ECT. The tribunal concluded that the disputed measures could achieve the intended purpose ‘without the [retroactive] element of claw-back’.¹³⁷

In yet another case against Spain’s regulatory changes to its renewable energy regime, the tribunal in Cavalum v Spain also found the retroactivity element of the claw-back provision problematic and in breach of the ECT,¹³⁸ but disagreed on the existence of a principle of non-retroactive legislation. Reflecting the third approach identified earlier, the tribunal noted that ‘[t]here is no general principle which prohibits the retroactivity of legislation, but it may, depending on the context, be relevant to unreasonableness, breach of legitimate expectation or destruction of acquired rights.’¹³⁹ However, the tribunal did not expound on how retroactivity factors into these assessments, either in principle or in the case at hand, merely citing the RREEF tribunal’s conclusions.¹⁴⁰ Likewise, the earlier Total v Argentina tribunal had included the retroactive effects of legislation among the features of regulatory changes to be considered in assessing a breach of the FET standard.¹⁴¹ It found that a retroactive elimination of a tax exemption for the claimant’s oil and gas exports violated the FET standard because it contravened specific assurances made to the claimant about the maintenance of tax-free status.¹⁴² This leaves open a question: in the absence of such specific representations, how would retroactivity factor into the evaluation of a contested measure?

The Addiko v Montenegro tribunal offered its own answer to this question. It dismissed claims that the retroactive conversion of CHF loans had frustrated the investor’s legitimate expectations, or was disproportionate, unreasonable or arbitrary. The tribunal underscored that the FET standard does not give a right to regulatory stability per se,¹⁴³ nor does it recognize expectations of legal stability unless the investor was specifically induced by the sovereign regulator to make the investment.¹⁴⁴ Finding no such express or implied assurances, the tribunal further noted that, even if there were such expectations, they would be deemed unreasonable when weighed against the State’s right to regulate. The conversion law did not fundamentally alter the regulatory framework for the claimant’s investment, as its effect was limited to only one aspect of the bank’s operations—the CHF loans.¹⁴⁵ While the tribunal did not consider the retroactive nature of the law in evaluating the claimant’s stability expectations,¹⁴⁶ it did consider it in the context of proportionality. It noted that ‘[t]here is no rule in international law that a retroactive measure is by its very nature in violation of the FET standard’ and that ‘[t]he onus is … on Claimant to show that the retroactive nature of the measure was in contravention of the FET standard.’¹⁴⁷ The tribunal concluded that the claimant had failed to discharge that burden, by failing to ‘explain[] why the retroactive application of the legislation to loans that have already been converted, terminated, repaid or assigned is disproportionate’.¹⁴⁸ It further observed that ‘good reasons’ justified the conversion’s retroactive effect, namely the law’s objective of alleviating the distress of CHF loan holders.¹⁴⁹ By the same token, the Addiko tribunal found that the retroactive application was neither unreasonable nor arbitrary, as it was rationally connected to a legitimate public policy objective and did not impose an excessive burden on the claimant.¹⁵⁰ The tribunal also dismissed the claimant’s comparisons between Montenegro’s retroactive model and Serbia’s prospective conversion framework,¹⁵¹ stressing that the FET standard ‘does not hold a State to the standards adopted by other States, or by international best practices’, and that the countries’ CHF loan exposure differed.¹⁵²

Arbitrariness, as tribunals often emphasize quoting the International Court of Justice (ICJ) in the ELSI case, is ‘not so much something opposed to a rule of law, as something opposed to the rule of law’.¹⁵³ This, however, does not mean that retroactivity is automatically arbitrary, for reasons also explained above. Besides showing the lack of rational correlation of the retroactive application to the policy objective, an arbitrariness (or even due process) argument could be bolstered if the legislation also contravened the host State’s domestic procedures regarding retroactive laws.¹⁵⁴

While the evolution of investment case law on retroactivity has been neither straightforward nor uniform, recent tribunals appear to be shifting away from using ‘retroactivity’ as a mere ‘slogan’,¹⁵⁵ toward more nuanced and principle-based evaluations. While the Cairn v India and Addiko v Montenegro tribunals diverged in their approaches towards stability and retroactivity per se, they converged in their requirement for something more than mere retroactivity to establish an FET breach: there must be unreasonableness or impropriety in the retroactive application. That said, ambiguity persists regarding how retroactivity is factored into FET assessments. The outcomes of the pending cases in Addiko v Croatia and Société Générale v Croatia, as well as future cases involving retroactive legislation and restructurings, will turn on how tribunals approach these conceptual frameworks of stability and retroactivity in relation to the specific facts at issue.

As Fuller observes, a retroactive law taken by itself and in abstract may appear a ‘monstrosity’, but there are circumstances where ‘granting retroactive effect to legal rules not only becomes tolerable, but may actually be essential to advance the cause of legality’¹⁵⁶—a characterization that may well apply to the CHF loan conversion laws, as discussed further below.

Misselling of financial products: investor diligence and consumer protection in investment arbitration

Concerns regarding the suitability and misselling of financial instruments are not uncommon in disputes involving complex financial products.¹⁵⁷ Such products lend themselves to the introduction of unfair clauses and expose consumers to risks they often do not fully comprehend. Beyond the significant harm caused to retail investors and consumers, misselling poses broader risks to financial stability at the macroeconomic level. In the case of CHF (and other foreign currency) loans, concerns about their ‘malign riskiness’ were raised well before the CHF–EUR unpegging and the subsequent interventions by Croatia and Montenegro in 2015.¹⁵⁸ Banks offering such financial instruments could not have been unaware of their risk profiles and should have informed potential borrowers accordingly. Yet, many failed to provide consumers with the essential information needed to make a free and informed decision, as required under both national and European laws.¹⁵⁹ Moreover, in several instances, banks misleadingly marketed CHF loans as stable, employing ‘toxic’ lending and marketing practices.¹⁶⁰

In addition to the surge of domestic litigation related to CHF loans in various jurisdictions, the CHF loan crisis also begat a string of judgments from the Court of Justice of the European Union (CJEU) on financial consumer protection,¹⁶¹ which dynamically interpreted the EU law transparency requirement that contractual terms be drafted in plain intelligible language, particularly in the context of financial contracts and currency clauses.¹⁶² The CJEU clarified that financial institutions must provide borrowers with sufficient information to allow an average, reasonable consumer to understand not only the formal or grammatical meaning of a term related to foreign exchange risk, but also its actual economic consequences.¹⁶³ In response, several domestic courts invalidated CHF currency clauses, concluding that banks had misled and inadequately informed consumers about exchange rate risks.¹⁶⁴

In the realm of investment arbitration, it is well-established that States have the right to exercise their regulatory powers in the public interest, including the protection of financial services consumers. Tribunals have generally accorded deference to the policy choices of financial regulators, affording States considerable latitude in determining appropriate measures in light of the public interest advanced by financial regulation.¹⁶⁵ Consumer protection in financial services is not only a matter of social welfare but also ties closely to the preservation of financial stability and the prevention of widespread debt crises, given the potential economic fallout from large numbers of defaulting mortgage holders.¹⁶⁶ While that concern was not pronounced in Addiko v Montenegro due to the relatively limited number of CHF borrowers affected, it may carry greater significance in the pending claims against Croatia, where the exposure to foreign currency mortgages is substantially higher.¹⁶⁷ In Addiko v Montenegro, the claimant brought up the smaller number of affected borrowers when contesting the reasonableness of the conversion, leading the tribunal to state that even if that assertion was taken at face value, ‘where individuals are suffering from severe financial distress, even a small number can seem large’, and ‘[i]n any event, Claimant has furnished no authority to suggest that a Parliament cannot enact a legislation to protect a small group of individuals.’¹⁶⁸

Moreover, the issue of misselling by banks could influence the assessment of CHF loan conversions under the BIT at multiple levels (jurisdiction, admissibility, merits, quantum, and counterclaims).¹⁶⁹ For present purposes, the focus is on its relevance to the merits review of the conversion legislation, particularly through the lens of investor diligence.¹⁷⁰ There are two principal ways in which investor diligence may be considered within the substantive assessment of liability under the FET standard: (i) ‘the investor’s degree of diligence in forming a reasonable expectation’ and (ii) ‘investor negligence justifying intervention from State authorities’.¹⁷¹ Both avenues are particularly pertinent to investors in the financial sector, who may be (mis)selling products and services in the host State.

Representing the first approach, the Parkerings v Lithuania tribunal held that while stability and predictability are in principle protected under the FET standard, ‘[t]he investor will have a right of protection of its legitimate expectations provided it exercised due diligence and that its legitimate expectations were reasonable in light of the circumstances’ and accordingly ‘an investor must anticipate that the circumstances could change, and thus structure its investment in order to adapt it to the potential changes of legal environment.’¹⁷² Tribunals have increasingly embraced this interpretive approach in assessing whether an investor’s expectations were legitimate and protected.¹⁷³ However, tribunals have diverged over whether due diligence is a strict prerequisite for the recognition of the expectations’ reasonableness (the ‘strict approach’),¹⁷⁴ or merely a balancing factor in its assessment¹⁷⁵ (‘broad approach’¹⁷⁶). And, as Rudolf Dolzer, Ursula Kriebaum, and Christoph Schreuer observe, tribunals often rely on the concept of due diligence in name only, presuming reliance on the host State’s regulatory framework without any detailed examination of the investor’s due diligence.¹⁷⁷

Nonetheless, the Addiko v Montenegro tribunal followed the strict due diligence approach set out in Parkerings, concluding that the claimant’s expectations could not be deemed reasonable due to its lack of diligence. The tribunal noted that the claimant should have been aware of the bank’s high credit risk exposure, exacerbated by poor loan approval practices, at the time it acquired shares in the bank in 2013. By then, the bank’s customers had already begun challenging the validity of the CHF loan currency clauses and variable interest rate provisions in domestic courts.¹⁷⁸ These circumstances, according to the tribunal, should have alerted the claimant to the potential for regulatory changes affecting CHF loans.¹⁷⁹

The exercise of due diligence may relate both to assessing business risks and understanding the regulatory framework governing the investment.¹⁸⁰ The reasonableness of an investor’s expectations and the degree of due diligence required must be evaluated in light of the specific circumstances of the case, including—but not limited to—the political and socio-economic conditions in the host State¹⁸¹ and the industry in which the investor operates.¹⁸² In highly regulated sectors such as banking and finance, investors should anticipate State intervention, given the sector’s inherent complexity, the evolving nature of associated risks, and the broader objective of safeguarding financial stability, protecting consumers, and adapting to economic shifts. The tribunal in Invesmart v Czech Republic echoed this sentiment noting that ‘[a] putative investor, especially one making an investment in a highly regulated sector such as financial services … has the burden of performing its own due diligence in vetting the investment within the context of the operative legal regime’, and that diligence ‘plays an important role in evaluating [the investor’s] expectation’.¹⁸³ At the same time, the regulatory framework that an investor must account for extends beyond sector-specific laws and includes the host State’s obligations to its citizens, such as protecting their human (and consumer) rights.¹⁸⁴ Against this backdrop, a bank’s expectation that missold financial products would enjoy immunity from regulatory interference to protect financial services consumers could hardly be considered reasonable or legitimate—even if the consumer finance market was under- or unregulated at the time the investor entered it.¹⁸⁵

The timing of the assessment also warrants attention. Legitimate expectations are typically gauged at the time the investment is made,¹⁸⁶ meaning that the investor’s diligence is evaluated primarily at the pre-investment stage. The test was straightforward in Addiko v Montenegro, as the claimant invested in the bank in 2013, by which time the issues with the CHF loans were already well-documented. However, in scenarios where an investor acquires shares in a bank before it begins offering CHF loans—as it appears to be the case in at least one of the pending cases against Croatia—the diligence analysis becomes more complex. Some tribunals have recognized that investments often occur through multiple stages over time, requiring the assessment of legitimate expectations at each decisive point in the creation, expansion, or development of the investment.¹⁸⁷ It could be argued that the introduction of new financial services, such as CHF loans, constitutes an expansion of the investment, thereby necessitating an evaluation of the investor’s expectations at those subsequent stages. Furthermore, the subsequent conduct of the investor could also be considered under the second approach mentioned earlier, as a factual justification for the challenged measure and thus an indication of their reasonableness and non-arbitrariness.¹⁸⁸ The banks’ negligent CHF lending practices without adequate disclosure (in violation of national laws, as the Croatian courts have already ruled)¹⁸⁹ could arguably bolster the conversion law’s reasonabless and proportionality.¹⁹⁰

Concluding observations: implications for a world of ‘polycrisis’ and ‘permacrisis’

The hyperglobalization of international finance has exponentially increased systemic risks and the potential for crisis spillovers. As Ian Goldin’s and Mike Mariathasan’s ‘butterfly defect’ metaphor illustrates, local shocks are likely to trigger far-reaching global repercussions.¹⁹¹ To illustrate this with an—admittedly simplistic—schematic, a primarily US-based mortgage crisis escalated into a worldwide financial disaster, destabilizing the Eurozone; that in turn led to a sharp appreciation of CHF against the euro, ultimately forcing Switzerland to abandon its currency peg. That decision, although made in response to domestic pressures, severely impacted several European economies and societies heavily reliant on CHF-denominated debt. Foreign currency exposures, such as those observed in the CHF loans crisis, are a recurrent vulnerability in financial markets, especially in emerging economies.¹⁹²

These foreign currency risks are just one symptom of broader, overlapping crises facing global policymakers today. With monetary policies tightening to combat inflation, economies face threats of recession and financial instability, exacerbated by pandemic aftershocks, soaring food and energy prices, and intensifying geopolitical tensions. In this environment, concepts like ‘polycrisis’ and ‘permacrisis’ are emerging to capture the persistent, interconnected and multifaceted nature of contemporary instabilities.¹⁹³ More than just academic constructs, those reflect a new reality that necessitates a rethinking of regulatory responses.

In an era of permanent instability, defending a ‘slogan’ of stability can feel Sisyphean. The normalization of crisis management and the growing prevalence of interventionist regulatory measures—particularly in the financial sector—underscore the need to reassess what is considered ‘fair’ and ‘equitable’ in international investment law.¹⁹⁴ Prompted by the CHF loan crisis, this article explored how public interventions into the financial sector, particularly through currency and exchange rate measures, may engage the State’s liability under investment treaties. It also sought to illuminate two relatively opaque aspects of financial regulation assessment under the FET standard, the retroactive regulation and investor diligence—acknowledging, however, that several other significant issues in the CHF loan conversion disputes could not be addressed in this brief contribution. Taking stock of the relevant jurisprudence, it appears that the arbitral treatment of these concepts tracks the broader evolution of investment case law towards a better balance between investor protection and the host States’ right to regulate, even though significant ambiguity persists in their application.

The relevance of the article’s analysis extends beyond financial regulation. States and regional authorities are increasingly enacting retroactive legislation, particularly in the context of environmental regulation¹⁹⁵ (as also seen from Spain’s changes to its photovoltaic energy remuneration regime, discussed earlier), and will likely continue to do so as they strive to phase-out ‘traditional’ energy sources and meet climate targets. Tellingly, one of the contested issues in the much-discussed Eco Oro v Colombia case about the lawfulness of Colombia’s gold mining ban was the effect of the ban’s retroactivity. In their partial dissenting opinions, Horacio Grigera Naón and Philippe Sands expressed contrasting visions of retroactivity and legal certainty, with the former criticizing the measure’s retroactive effect for subverting good faith, legal certainty and predictability, and the latter responding that, outside the criminal law context, there is no strict rule against retroactivity, citing the tribunal’s approach in Cairn v India.¹⁹⁶

All in all, the CHF loan crisis and the ensuing loan conversion claims discussed provide a helpful focal point for rethinking the notions of retroactive legislation and investor diligence in the context of investment treaty protection from regulatory changes, and illustrate the need to move from generalizations toward more principled yet adaptable approaches, as regulatory disputes grow increasingly complex in the age of poly- and permacrisis.

Footnotes

1

‘Fracogeddon as Swiss Franc Ends Euro Cap’ (BBC News, 16 January 2015) <https://www.bbc.com/news/av/business-30845248> accessed 20 January 2025.

2

For the purposes of this article, the term CHF loans encompass all loans offered in CHF as foreign currency, including CHF-denominated and CHF-indexed loans. For a brief but clear presentation of the distinction among the three main types of foreign currency loans (ie foreign currency loans, loans indexed (or pegged) to a foreign currency and loans denominated in a foreign currency), see Rafał Mańko, Unfair Terms in Swiss Franc Loans: Overview of European Court of Justice Case Law (European Parliament Briefing, 2021) <https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/689361/EPRS_BRI(2021)689361_EN.pdf> accessed 20 January 2025.

3

See eg Arif H Ali and others, Empirical Study: International Invetsment Law Protections in Global Banking and Finance, Preliminary Version (British Institute of International and Comparative Law 2024) 5; Arif H Ali and David L Attanasio, International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice (Kluwer Law International 2021); Federico Lupo-Pasini, ‘Financial Disputes in International Courts’ (2018) 21 Journal of International Economic Law 1; Giorgio Sacerdoti, ‘BIT Protections and Economic Crises: Limits to Their Coverage, The Impact of Multilateral Financial Regulation and the Defence of Necessity’ (2013) 28 ICSID Review 351; Christian Tams, Stephan Schill and Rainer Hofmann (eds), International Investment Law and the Global Financial Architecture (Edward Elgar Publishing, Cheltenham 2017) 160; Michael Waibel, Sovereign Defaults before International Courts and Tribunals (CUP, Cambridge 2011).

4

Christian Tams, Stephan Schill and Rainer Hofmann, ‘International Investment Law and the Global Financial Architecture: Identifying Linkages, Mapping Interactions’, in Tams and others (n 3) 3–22, 7.

5

For a discussion on the positive statistical association between economic crises and the number of investor–State arbitration disputes, see Christian Bellak and Markus Leibrecht, ‘Do Economic Crises Trigger Treaty–Based Investor–State Arbitration Disputes?’ (2021) 24 Journal of International Economic Law 127. See also Anne van Aaken and Jürgen Kurtz, ‘Prudence or Discrimination? Emergency Measures, The Global Financial Crisis and International Economic Law’ (2009) 12 Journal of International Economic Law 859.

6

Carolyn B Lamm and others, ‘The Evolving Dynamics of Monetary Restrictions as International Arbitration’s Next Big Challenge’ (2022) 46 XIX ICC Institute Dossier—Overriding Mandatory Rules and Compliance in International Arbitration 92–93.

7

Addiko Bank v Montenegro, ICSID Case No ARB/17/35, Award (Excerpts) (24 November 2021).

8

See ESRB Recommendation on Foreign Currency Lending (ESRB/2011/1), 21 September 2011, Annex; Emilia Mišćenić, ‘Currency Clauses in CHF Credit Agreements: A “Small Wheel” in the Swiss Loans’ Mechanism’ (2020) 6 Journal of European Consumer and Market Law 226.

9

Martin Brown, Marcel Peter and Simon Wehrmüller, ‘Swiss Franc Lending in Europe’ (2009) 64 Aussenwirtschaft 167, 168.

10

Mańko (n 2) 2–3; Agnes Gagyi and Marek Mikuš, ‘Introduction: Boom, Crisis and Politics of Swiss Franc Mortgages in Eastern Europe: Comparing Trajectories of Dependent Financialization of Housing’ (2023) 27 City 560, 563–65; Brown, Peter and Wehrmüller (n 9) 176–77.

11

Mańko (n 2) 3.

12

ibid 2. The kuna was the currency of Croatia until 2023, when it was replaced by the euro.

13

Petra Rodik and Marek Mikuš, ‘Moral Economies of Housing in Post-Boom Croatia: Swiss Franc Loans Crisis and Politics of Housing Financialization’ (2023) 27 City 579, 585.

14

ibid.

15

See Section ‘Misselling of financial products: investor diligence and consumer protection in investment arbitration’ below.

16

‘Swiss National Bank Discontinues Minimum Exchange Rate and Lowers Interest Rate to −0.75%’ (SNB Press Release, 15 January 2015) <https://www.snb.ch/en/mmr/reference/pre_20150115/source/pre_20150115.en.pdf> accessed 20 January 2025. On the possible reasons behind SNB’s unpegging (especially ECB’s quantitative easing policy), see Julien Pinter and Marc Pourroy, ‘How Can Financial Constraints Force a Central Bank to Exit a Currency Peg? An Application to the Swiss Franc Peg’ (2023) 75 Journal of Macroeconomics 1.

17

‘Swiss National Bank Introduces Negative Interest Rates’ (SNB Press Release, 18 December 2014) <https://www.snb.ch/en/mmr/reference/pre_20141218/source/pre_20141218.en.pdf> accessed 20 January 2025.

18

‘IMF’s Lagarde on Swiss move: “A bit of a surprise”’ (CNBC, 15 January 2015) <https://www.cnbc.com/video/2015/01/15/lagarde-swiss-move-bit-of-a-surprise.html> accessed 20 January 2025.

19

Andreas Fischer and Pinar Yeşin, ‘Foreign Currency Loan Conversions and Currency Mismatches’ (2022) 122 Journal of International Money and Finance 1; Mišćenić (n 8) 227; Addiko v Montenegro (n 7) para 583.

20

ECB, Opinion CON/2015/32 on Croatia (18 September 2015), para 2.1.

21

See eg Christoph Rosenberg, ‘IMF Survey: Foreign Currency Borrowing More Risky for Eastern Europe’ (IMF, 28 October 2008); Ina Coretchi, ‘EBRD Boosts Foreign Currency Risk Awareness’ (ERBD, 22 September 2009); Brown and others (n 9) 167; ESRB (n 8) 1; Raphael Auer, Sebastien Kraenzlin and David Liebeg, ‘How Do Austrian Banks Fund Their Swiss Franc Exposure?’ (2012) Austrian National Bank Financial Stability Report 54; Pinar Yeşin, ‘Foreign Currency Loans and Systemic Risk in Europe’ (2013) 95 Federal Reserve Bank of St Louis Review 219, 222.

22

ECJ, Case C-51/17 OTP Bank and OTP Faktoring Teréz Ilyés and Emil Kiss (2018) EU:C:2018:750, paras 11–16, 26.

23

European Commission, Country Report Hungary 2016, Commission Staff Working Document SWD(2016) 85 final (26 February 2016) 28; Péter Kolozsi, Ádám Banai and Balázs Vonnák, ‘Phasing Out Household Foreign Currency Loans: Schedule and Framework’ (2015) 14 Financial and Economic Review 83.

24

‘Parliament Amends Laws to Enable CHF Loan Conversion’ (Croatian Parliament Press Release, 18 November 2015) <https://www.sabor.hr/en/press/news/parliament-amends-laws-enable-chf-loan-conversion> accessed 20 January 2025; Law on Amendments of the Law on Consumer Payment Appropriation and Law on the Amendment of the Law on Credit Institutions, Official Gazette of the Republic of Croatia, NN 102/15 (25 September 2015); Law on the Conversion of Swiss Franc (CHF)-denominated Loans into Euro (EUR)-denominated Loans, Official Gazette of Montenegro, No 46/2015 (14 August 2015) and No 59/2016 (15 September 2016).

25

Zsuzsanna Novák and Imre Vámos, ‘Conversion of Foreign Currency Loans in the CEECs’, Proceedings of the ENTRENOVA Conference 71 (2017); Jorg Sladič, ‘Foreign Currency Loans in Slovenia’, in Piotr Tereszkiewicz and Mariusz Golecki (eds), Protecting Financial Consumers in Europe (Brill, Leiden 2023) 172–92, 191.

26

Ana Vilenica, Milan Škobić and Nemanja Pantović, ‘CHF-Indexed Housing Debts in Serbia: Dependent Financialization, Housing Precarity and Housing Struggles’ (2023) 27 City 636, 642. The law is available in English translation here: <https://www.nbs.rs/export/sites/NBS_site/documents-eng/propisi/zakoni/conversion_CHF_loans.pdf> accessed 20 January 2025.

27

In 2024, the Polish Supreme Court ruled that the CHF-EUR currency clauses in CHF loans were null and void; Sąd Najwyższy (Supreme Court of Poland), “‘Komunikaty o Sprawach: Sąd Najwyższy Rozstrzygnął Zagadnienia Prawne Dotyczące Kredytów “Frankowych”’ (25 April 2024) <https://www.sn.pl/aktualnosci/SitePages/Komunikaty_o_sprawach.aspx?ItemSID=646-b6b3e804-2752-4c7d-bcb4-7586782a1315&ListName=Komunikaty_o_sprawach> (in Polish) accessed 20 January 2025. In contrast, the Greek Supreme Court has ruled that the currency clauses in CHF mortgages were clear and valid; see Areios Pagos (Supreme Civil Court of Greece) Judgments No 4/2019 and No 948/2021, https://www.areiospagos.gr (in Greek) accessed 20 January 2025.

28

‘Poland Working on Simplifying Swiss Franc FX Loan Settlements and Court Cases’ (Reuters, 25 June 2024) <https://www.reuters.com/business/finance/poland-working-simplifying-swiss-franc-fx-loan-settlements-court-cases-2024-06-25/> accessed 20 January 2025. See also Andromachi Pavlou, ‘Ελβετικό Φράγκο: Το Δεύτερο Τρίμηνο η Λύση για τους Δανειολήπτες’ (OT, 24 January 2025) <https://www.ot.gr/2025/01/24/oikonomia/elvetiko-fragko-to-deytero-trimino-i-lysi-gia-tous-daneioliptes/> (in Greek) accessed 26 January 2025, reporting that the Greek government is also considering a regulatory intervention into CHF mortgages in the second quarter of 2025.

29

Raphael Minder, ‘Polish Bank Chief Warns Capital Shortage Will Affect Green Transition’ (Financial Times, 27 November 2024) <https://www.ft.com/content/4dbbb54b-1529-48f3-bff6-6623780694f6?utm_source=chatgpt.com> accessed 20 January 2025.

30

UniCredit Bank Austria and Zagrebačka Banka v Croatia, ICSID Case No ARB/16/31; Raiffeisen Bank International and Raiffeisenbank Austria v Croatia, ICSID Case No ARB/17/34; Addiko Bank v Croatia, ICSID Case No ARB/17/37; Erste Group Bank and others v Croatia, ICSID Case No ARB/17/49; Société Générale v Croatia, ICSID Case No ARB/19/33; OTP Bank Plc v Croatia, ICSID Case No ARB/20/43; Addiko Bank v Montenegro, ICSID Case No ARB/17/35; Addiko Bank v Slovenia, ICSID Case No ARB/22/9.

31

Although the terms of the settlements remain unknown, it has been reported that the banks may have agreed to discontinue their claims in exchange for lower deposit insurance premiums in the future; ‘Croatia Settles Several Swiss Loans Arbitrations’ (Investment Arbitration Reporter, 3 February 2021) <https://www.iareporter.com/articles/croatia-settles-several-swiss-loans-arbitrations/> accessed 20 January 2025.

32

Jack Ballantyne, ‘Austrian Bank Withdraws Claim Against Slovenia’ (Global Arbitration Review, 6 February 2024) <https://globalarbitrationreview.com/article/austrian-bank-withdraws-claim-against-slovenia> accessed 20 January 2025.

33

Hypo Group Alpe Adria (later Addiko), Group Annual Report 2015, 4, <https://www.addiko.com/financial-reports/#1557223871647-d9b6bb0c-2ad8> accessed 20 January 2025.

34

ECB Opinion (n 20) para 3.4.1.

35

Government of the Republic of Croatia, ‘Croatia and Six Banks Reach Deal Over CHF Loan-Related Arbitration Proceedings’ (3 February 2021) <https://vlada.gov.hr/news/croatia-and-six-banks-reach-deal-over-chf-loan-related-arbitration-proceedings/31437> accessed 20 January 2025.

36

Addiko v Montenegro (n 7).

37

Addiko v Croatia (n 30); Société Générale v Croatia (n 30).

38

The terms ‘public’ and ‘private’ are used broadly here to refer to contracts involving at least one State party and contracts exclusively between private parties, respectively.

39

See eg Argentina’s and Greece’s sovereign debt restructurings, challenged in: Abaclat v Argentina, ICSID Case No ARB/07/5, Ambiente Ufficio v Argentina, ICSID Case No ARB/08/9, and Alemanni v Argentina, ICSID Case No ARB/07/8 [all three settled/discontinued]; Poštová v Greece, ICSID Case No ARB/13/8, Award (9 April 2015), and Cyprus Popular Bank v Greece, ICSID Case No ARB/14/16, Decision on Jurisdiction and Liability (8 January 2019) [both dismissed in relevant part on jurisdictional grounds]. See also Waibel (n 3).

40

See eg Cyprus’ 2013 forceful conversion of deposits into shares to recapitalize its largest banks, unsuccessfully challenged in Marfin v Cyprus, ICSID Case No ARB/13/27, Award (27 July 2018), and Aleksandrowicz v Cyprus, SCC Case No 2014/169, Award (11 February 2017).

41

See eg Switzerland’s 2023 write-down of Credit Suisse bonds as part of an emergency bank rescue, following which Switzerland has received several notices of investment claims by aggrieved bondholders; Lisa Bohmer, ‘Switzerland Now the Recipient of Six Treaty-Based Notices of Dispute in Relation to Credit Suisse Rescue’ (Investment Arbitration Reporter, 10 January 2025) <https://www.iareporter.com/articles/switzerland-now-the-recipient-of-six-treaty-based-notices-of-dispute-in-relation-to-credit-suisse-rescue/> accessed 20 January 2025.

42

Cf categorization in Ali and Attanasio (n 3) 287–98. The authors propose a tripartite classification of currency and exchange interventions: (i) general foreign exchange intervention; (ii) asset redenomination, and (iii) capital and exchange controls. For the purposes of this article, exchange control measures are not treated as a distinct category, as they may manifest either as general foreign exchange regulations or as specific asset redenominations (eg as illustrated in von Pezold v Zimbabwe, discussed below). A separate analysis of the application of free transfer clauses to such measures is beyond the scope of this article.

43

Case Concerning the Payment of Various Serbian Loans Issued in France and Case Concerning the Payment in Gold of the Brazilian Federal Loans Issued in France (1929) PCIJ Series A Nos 20/21, 44.

44

On the distinction between currency redenomination and asset redenomination (which is discussed in the following subsection), see Ali and Attanasio (n 3) fn 154.

45

Charles Proctor, Mann and Proctor on the Law of Money, 8th ed (OUP, Oxford 2023), paras 19.02–19.29, particularly 19.03 and 19.08; Geneviève Burdeau, L’Exercice des Compétences Monétaires par les États (The Hague Academy, Recueil des Cours, 1988) 223–49. On monetary sovereignty as an evolving concept with both positive and normative components, see Claus D Zimmermann, A Contemporary Concept of Monetary Sovereignty (OUP, Oxford 2013).

46

Ali and Attanasio (n 3) 286–88. See also Matthias Goldmann, ‘International Investment Law and Financial Regulation: Towards a Deliberative Approach’, in Tams and others (n 3) 57–85, 62–64.

47

The State’s assumption of obligations by concluding international treaties is another expression of its sovereignty; Case of the S.S. ‘Wimbledon’ (France v Germany) (1923) PCIJ Ser A No 1, para 35.

48

Proctor (n 45) paras 19.03, 19.21 22.01–22.91; Certain Norwegian Loans (France v Norway) (1957) ICJ Rep 9, Separate Opinion of Judge Sir Hersch Lauterpacht, 37 (‘[n]ational legislation—including currency legislation—may be contrary, in its intention or effects, to the international obligations of the State’). See also Continental Casualty v Argentina, ICSID Case No ARB/03/9, Award (5 September 2006), para 278; Federico Lupo-Pasini, ‘Monetary Policy Measures in Investment Law: The Uneasy Relationship Between Monetary Stability and Investment Protection’, in Thomas Cottier and others (eds), The Rule of Law in Monetary Affairs (CUP, Cambridge 2014) 570–92, 586–91.

49

Those measures were contested in Gruslin v Malaysia (II), ICSID Case No ARB/99/3, Award (27 November 2000). The sole arbitrator dismissed the claims on jurisdictional grounds.

50

The unpegging of the Argentinian peso from the USD formed part of the emergency measures taken by Argentina to address its 2001–2002 financial crisis. More than 40 investment claims were filed by foreign investors challenging those measures, with thirteen of those resulting in merits awards; see August Reinisch and Johannes Tropper, ‘The Argentinian Crisis Arbitrations’, in Hélène Ruiz Fabri and Edoardo Stoppioni (eds), International Investment Law: An Analysis of the Major Decisions (Hart Publishing, Cambridge 2022) 119–34.

51

The claims at the epicenter of this article concern Croatia and Montenegro’s retroactive redenomination of CHF loans, following Switzerland’s unpegging decision. Whether Switzerland’s action could themselves be subject to (inter-State) arbitration claims is briefly explored in Danilo Ruggero Di Bella, ‘Could Some European Countries Initiate a State-To-State Investment Arbitration Against Switzerland for Abruptly De-Pegging the Swiss Franc From the Euro?’ (Kluwer Arbitration Blog, 8 October 2017) <https://arbitrationblog.kluwerarbitration.com/2017/10/08/european-countries-initiate-state-state-investment-arbitration-switzerland-abruptly-de-pegging-swiss-franc-euro/> accessed 20 January 2025.

52

Continental v Argentina (n 48) para 278; El Paso v Argentina, ICSID Case No ARB/03/15, Award (31 October 2011), para 222; Total v Argentina, ICSID Case No ARB/04/01, Decision on Liability (25 August 2006), para 163; National Grid v Argentina, UNCITRAL, Award (3 November 2008), para 96; Enron v Argentina, ICSID Case No ARB/01/3, Award (22 May 2007), para 166.

53

Hochtief v Argentina, ICSID Case No ARB/07/31, Decision on Liability (29 December 2014), para 243.

54

ibid. See also Total v Argentina (n 52) para 163 (describing the abandonment of the parity as ‘inevitable by the impossibility for the country to maintain the exchange rate’).

55

See also Section ‘Regulatory stability under the FET standard’ below.

56

Lupo-Pasini (n 48) 571. See also Goldmann (n 46) 83.

57

See von Pezold v Zimbabwe, ICSID Case No ARB/10/15 and Border Timbers v Zimbabwe, ICSID Case No ARB/10/25, Award (28 July 2015), para 889 (referring to Zimbabwe’s ‘manipulation of its foreign exchange rates’).

58

Proctor (n 45) paras 19.38, 22.28. See also Burdeau (n 45) 261.

59

See Hayk Kupelyants, ‘Police Powers of the State in Sovereign Debt Restructuring’, in Tams and others (n 3) 89–119, 101–05, 114–15. See also Mitu Gulati and Mark Weidemaier, ‘Euro-Area Redenomination and the Gold Clause Cases’ (Credit Slips, 6 March 2017) <https://www.creditslips.org/creditslips/2017/03/euro-area-redenomination-risk-and-the-gold-clause-cases.html> accessed 20 January 2025.

60

See eg Re Claim by Helbert Wagg Sf Co Ltd [1956] 2 WLR 188; Michael Mann, ‘England’ (1956) 5 International and Comparative Law Quarterly 295.

61

Liliana Rojas-Suarez and Steven R Weisbrod, Financial Fragilities in Latin America: The 1980s and 1990s (IMF Occasional Paper 132, 1995) 17–18; West v Multibanco Comermex SA (CA 9th Cir) 807 F 2d 820 (1987).

62

Jure Zrilič, ‘Are We in for a New Wave of Investment Arbitrations?’ (Verfassungsblog, 21 March 2022) <https://verfassungsblog.de/are-we-in-for-a-new-wave-of-investment-arbitrations/> accessed 20 January 2025.

63

Proctor (n 45) para 19.08.

64

See eg Charles Calomiris, ‘Devaluation with Contract Redenomination in Argentina’ (National Bureau of Economic Research Working Paper No 12,644, 2006).

65

Total v Argentina (n 52) paras 163–64; Continental v Argentina (n 48) paras 211–14.

66

Calomiris (n 64) 8–9 (cited in Continental v Argentina, para 213).

67

See Ali and Attanasio (n 3) 293; Reinisch and Tropper (n 50) 125.

68

Metalpar v Argentina, ICSID Case No ARB/03/5, Award (6 June 2008), paras 186–87. It is speculated that the award is Metalpar may have motivated CIT Group to discontinue its own claims against Argentina (ICSID Case No ARB/04/9), which also concerned the pesification of private leasing contracts; Luke Eric Peterson, ‘US Financial Firm Discontinues Argentine Claim, But Reserves Rights to Take Part in Any Future Settlement Talks’ (Investment Arbitration Reporter, 2 April 2009), <https://www.iareporter.com/articles/u-s-financial-firm-discontinues-argentine-claim-but-reserves-rights-to-take-part-in-any-future-settlement-talks/> accessed 20 January 2025. Another claim challenging the pesification of private debt instruments was dismissed due to the non-satisfaction of pre-arbitral steps; Daimler v Argentina, ICSID Case No ARB/05/1, Award (22 August 2012).

69

Addiko v Montenegro, paras 560, 638–42.

70

See eg Continental v Argentina (n 48) para 261(iii).

71

Kupelyants (n 59) 114–16.

72

von Pezold v Zimbabwe (n 57) paras 557–59, 580–81. The same measure was also found in violation of the BITs’ free transfer clauses; see para 609.

73

ibid paras 557, 889.

74

Gramercy v Peru, ICSID Case No UNCT/18/2, Award (6 December 2022).

75

ibid para 842–43.

76

ibid paras 861–65, 882–83.

77

ECB Opinion (n 20) para 3.2.2; and Opinion CON/2019/27 on the conversion of Swiss franc loans (18 July 2019), para 3.2.5; and Opinion CON/2018/21 on the conversion of Swiss franc loans (16 April 2018); and Opinion CON/2017/9 on foreign exchange-linked loans (24 March 2017); IMF, ‘2015 Article IV Consultation–Press Release; Staff Report; and Statement by the Executive Director for the Republic of Croatia’ (2 July 2015) 14. See also IMF, Montenegro—Financial Sector Assessment Program—Banking Supervision and Regulation—Technical Note (June 2016), paras 14–16.

78

The discussion of a potential expropriation (‘regulatory taking’) argument falls beyond the scope of the present article, as does any discussion of necessity defence (noting incidentally that none of the BITs applicable to the CHF loan conversion cases contain a ‘non-precluded measures’ provision).

79

Cf Chen Yu, ‘Disentangling Legal Stability from Legitimate Expectations: Towards Greater Deference to Regulatory Changes in Renewable Energy Transition Policies in Investment Arbitration’, World Trade Review 1 (2024) (canvassing the two ‘dimensions’ adopted by investment tribunals in the interpretation of stability, ie the protection of legitimate expectations and States’ right to regulate for public purposes).

80

Pildegovics v Norway, ICSID Case No ARB/20/11, Award (22 December 2023), para 505. See also Rudolf Dolzer, Ursula Kriebaum and Christoph Schreuer (eds), Principles of International Investment Law, 3rd ed (OUP, Oxford 2022) 205–08.

81

This article does not engage or take a position on this debate. It appears, however, that most—though not all—tribunals that have considered stability to be a distinct element of the FET standard appear to have relied on the language of art 10(1) of the ECT (‘shall, in accordance with the provisions of the Treaty, encourage and create stable […] conditions for Investors of other Contracting Parties’) (or similar BIT articles), or have drawn from references to the desirability of a stable framework from the applicable BIT’s preamble.

82

See eg Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles, 2nd ed (OUP, Oxford 2017), paras 7.153–7.173; Federico Ortino, ‘The Obligation of Regulatory Stability in the Fair and Equitable Treatment Standard: How Far Have We Come?’ (2018) 21 Journal of International Economic Law 845; Yu (n 79) 5–9; Diego Zannoni, ‘The Legitimate Expectation of Regulatory Stability under the Energy Charter Treaty’ (2020) 33 Leiden Journal of International Law 451; Moshe Hirsch, ‘Between Fair and Equitable Treatment and Stabilization Clause: Stable Legal Environment and Regulatory Change in International Investment Law’ (2011) 12 Journal of World Investment and Trade 783.

83

Ortino (n 82) 848–50.

84

CMS v Argentina, ICSID Case No ARB/01/8, Award (12 May 2005), paras 266–69, 274; Enron v Argentina (n 52) paras 259–62, 267; LG&E v Argentina, ICSID Case No ARB/02/1, Decision on Liability (3 October 2006), paras 124 and 13; Occidental v Ecuador I, LCIA Case No UN3467, Award (1 July 2004), para 183.

85

Enron v Argentina (n 52) para 262. This Award was subsequently annulled for manifest excess of powers for its treatment of Argentina’s necessity defence, although not in connection with the point addressed here.

86

ibid para 267.

87

Ortino (n 82) 855; Ursula Kriebaum, ‘FET and Expropriation in the (Invisible) EU Model BIT’ (2014) 15 Journal of World Investment and Trade 454, 471; Yu (n 79) 9. See also Saluka v Czech Republic, UNCITRAL, Partial Award (17 March 2006), para 306.

88

Continental v Argentina (n 48) para 258; El Paso v Argentina (n 52) paras 350–52, 367–68; Metalpar v Argentina (n 68) paras 185–87.

89

Total v Argentina (n 52) paras 163, 179.

90

Ortino (n 82) 858–63.

91

Antin v Spain, ICSID Case No ARB/13/31, Award (15 June 2018), para 532; OperaFund v Spain, ICSID Case No ARB/15/36, Award (6 September 2019), para 509.

92

Compare, for example Novenergia v Spain, ICSID Case No 2015/063, Final Award (15 February 2018), para 695, with Infracapital v Spain, ICSID Case No ARB/16/18, Decision on Jurisdiction, Liability and Directions on Quantum (13 September 2021), paras 527–31.

93

See eg Antin v Spain (n 91) para 532; Total v Argentina (n 52) para 168; OperaFund v Spain (n 91) para 508; Eiser v Spain, ICSID Case No ARB/13/36, Award (4 May 2017), para 382; RREEF v Spain, ICSID Case No ARB/13/30, Decision on Responsibility and Principles of Quantum (30 November 2018), para 314; Silver Ridge v Italy, ICSID Case No ARB/15/37, Award (26 February 2021), paras 416–17, 437.

94

See eg Charanne v Spain, SCC Case No 062/2012, Award (21 January 2016), para 517.

95

See eg PSEG v Turkey, ICSID Case No ARB/02/5, Award (19 January 2007), para 250; Mamidoil v Albania, ICSID Case No ARB/11/24, Award (30 March 2015), para 621.

96

See eg Total v Argentina (n 52) para 129; Renergy v Spain, ICSID Case No ARB/14/18, Award (6 May 2022), para 681(iii); Bilcon v Canada, PCA Case No 2009–04, Award on Jurisdiction and Liability (17 March 2015), para 572.

97

Stephan Schill, ‘Fair and Equitable Treatment under Investment Treaties as an Embodiment of the Rule of Law’ (2005) 3 Transnational Dispute Management 1, 28. See also Yu (n 79), 13–16; and Caroline Henckels, ‘Legitimate Expectations and the Rule of Law in International Investment Law’, in August Reinisch and Stephan Schill (eds), Investment Protection Standards and the Rule of Law (OUP, Oxford 2023) 43–60, 51–55.

98

Charles Sampford, Retrospectivity and the Rule of Law (OUP, Oxford 2006) 1.

99

Marc Jacob and Stephan Schill, ‘Fair and Equitable Treatment: Content, Practice, Method’, in Marc Bungenberg and others (eds), International Investment Law: A Handbook (Nomos, Baden-Baden 2015) 700–63, 748, fn 280.

100

See Joseph Raz, The Authority of Law: Essays on Law and Morality (OUP, Oxford 2009) 214–16, 219.

101

HLA Hart, The Concept of Law, 2nd ed (Clarendon Press, Oxford 1994) 276.

102

Raz (n 100) 214, 219–21. See also Stephen Munzer, ‘A Theory of Retroactive Legislation’ (1982) 61 Texas Law Review 427.

103

Lon Fuller, The Morality of Law (Yale University Press, New Haven 1969) 39, 44, 51–62. See also Sampford (n 98) 67–68.

104

Jill Fisch, ‘Retroactivity and Legal Change: An Equilibrium Approach’ (1997) 110 Harvard Law Review 1055, 1067–72.

105

For a more nuanced discussion on the relevant terminology and concepts, see Ben Juratowitch, Retroactivity and the Common Law (Hart Publishing Oxford Portland, Oregon 2008) 6–13.

106

ibid 12.

107

Phillips and ConocoPhillips v PDVSA, ICC Case No 16,848/JRF/CA, Final Award (17 September 2012), para 178; Nations Energy v Panama, ICSID Case No ARB/06/19, Award (24 November 2010), para 646.

108

Paul Craig, EU Administrative Law, 3rd ed (OUP, Oxford 2018) 604–05; Henckels (n 97) 51.

109

Craig (n 108) 605, fn 21.

110

See eg Sevilla Beheer v Spain, ICSID Case No ARB/16/27, Decision on Jurisdiction, Liability and the Principles of Quantum (11 February 2022), paras 904–05; RREEF v Spain (n 93) para 328; BayWa v Spain, ICSID Case No ARB/15/16, Decision on Jurisdiction, Liability and Directions on Quantum (2 December 2019), para 492; Foresight and Greentech v Spain, ICSID Case No ARB/14/20, Award (14 November 2018), para 395.

111

See eg Isolux v Spain, SCC Case No V2013/153, Award (12 July 2016), para 814; RWE v Spain, ICSID Case No ARB/14/34, Decision on Jurisdiction, Liability and Certain Issues of Quantum (30 December 2019), para 617; Eurus v Spain, ICSID Case No ARB/16/4, Decision on Jurisdiction and Liability (17 March 2021), para 347; Stadtwerke v Spain, ICSID Case No ARB/15/1, Award, 2 December 2019; cf Stadtwerke v Spain, Dissenting Opinion by Professor Kaj Hober, 2 December 2019, paras 21–22.

112

Eurus v Spain (n 111) paras 346–49; Infracapital v Spain (n 92) para 695; EBL v Spain, ICSID Case No ARB/18/42, Award (11 January 2024), paras 824–25.

113

Sampford (n 98) 8–38; Tradex v Albania, ICSID Case No ARB/94/2, Decision on Jurisdiction (24 December 1996) 186.

114

Sampford (n 98) 17, 23.

115

ECB Opinion (n 20) para 1.2.

116

Addiko v Montenegro (n 7) para 704.

117

Zakon o izmjeni i dopunama Zakona o kreditnim institucijama (Law on Amendments to the Credit Institutions Act) (22 September 2015), art 357a, <https://sredisnjikatalogrh.gov.hr/srce-arhiva/263/139572/narodne-novine.nn.hr/clanci/sluzbeni/2015_09_102_1972.html> accessed 20 January 2025.

118

See n 39.

119

Mamatas and Others v Greece (App Nos 63,066/14, 64,297/14 and 66,106/14) (ECtHR, 21 July 2016), paras 103–04. See also Malysh and Others v Russia (App No 30,280/03) (ECtHR, 11 February 2010), para 80.

120

RREEF v Spain (n 93) paras 325–330, 474, 596.

121

Mondev v USA, ICSID Case No ARB(AF)/99/2, Award (11 October 2002), para 68 (internal references omitted).

122

BayWa v Spain (n 110) paras 495–96.

123

PV Investors v Spain, PCA Case No 2012–14, Award (28 February 2020), para 813.

124

Casinos Austria v Argentina, ICSID Case No ARB/14/32, Decision on Jurisdiction (29 June 2018), para 244. The tribunal eventually rendered no decision on the alleged FET violation, following its positive finding of expropriation; Award (5 November 2021), para 438.

125

See eg August Reinisch and Stephan Schill, ‘Introduction’, in Reinisch and Schill (n 97) 1–19.

126

Anna DeLuca, ‘Bank Rescue Measures under International Investment Law’, in Michael Waibel (ed), The Legal Implications of Global Financial Crises ( Brill, Leiden 2020) 407–60, 430–32. DeLuca relies on James Crawford’s statement that ‘if the applicable law is international law, the criterion of liability is a set of standards more or less indistinguishable from the standards of the rule of law – absence of arbitrary conduct, judicial independence, non-retrospectivity’ (in ‘International Law and the Rule of Law’ (2003) 24 Adelaide Law Review 3, 8). However, it is at best unclear whether Crawford intended to refer to a standard of non-retrospectivity of domestic legislation, as all his internal references (to Mondev v USA and Yaung Trading v Myanmar) concerned the separate issue of non-retrospectivity of international treaties.

127

See also Yarik Kryvoi and Shaun Matos, ‘Non-Retroactivity as a General Principle of Law’ (2021) 17 Utrecht Law Review 46, 57–58, disputing the existence of such an internationally applicable general principle of law.

128

Jeremy Waldron, ‘Is the Rule of Law an Essentially Contested Concept (in Florida)?’ (2002) 21 Law & Philosophy 137.

129

International Law Association Committee on the Rule of Law and International Investment Law, ‘Lisbon Interim Report’ (3 May 2022), para 13, <https://www.ila-hq.org/en_GB/documents/ila-committee-on-rol-and-iil-lisbon-interim-report-03-05-2022> accessed 20 January 2025.

130

Martins Paparinskis, ‘The Rule of Law and Fair and Equitable Treatment’, in Reinisch and Schill (n 97) 23–42, 40–41.

131

Cairn v India, PCA Case No 2016–07, Final Award (21 December 2020), para 1757. According to the tribunal, that was a separate ground under the FET standard, independent from any legitimate expectations arising from specific assurances; see paras 1771, 1786.

132

ibid, paras 1771, 1786.

133

ibid, para 1757.

134

ibid, para 1760; see also paras 1787–90.

135

ibid para 1814. Possible retroactivity-specific justifications could have been combatting tax abuse, the correction of technical errors and avoiding the ‘announcement effect’; see paras 1796–801. See also Sampford (n 98) 93–94.

136

Cairn v India (n 131) para 1816. See also Caroline Henckels, ‘Justifying the Protection of Legitimate Expectations in International Investment Law: Legal Certainty and Arbitrary Conduct’ (2023) 38 ICSID Review 347, 349–351, suggesting that the principle of legal certainty provides the more cogent justification for the protection of legitimate expectations (as opposed to reliance-based or other theories), and that there is a strong justification for protection of legitimate expectations in cases of State measures with actual retroactive effect.

137

Eurus v Spain (n 111) para 355. See also EBL v Spain (n 112) paras 823–825.

138

Cavalum v Spain, ICSID Case No ARB/15/34, Decision on Jurisdiction, Liability and Directions on Quantum (31 August 2020), paras 636–637.

139

ibid para 417.

140

See also Infracapital v Spain (n 92) paras 697–98.

141

Total v Argentina (n 52) para 129.

142

ibid paras 437–44.

143

Addiko v Montenegro (n 7) paras 559, 656 (even though art 2(1) of Austria-Yugoslavia BIT provided that ‘[e]ach Contracting Party shall in its territory encourage and create, as far as possible, stable, equitable, favourable and transparent conditions for investments of investors of the other Contracting Party’).

144

ibid paras 640–41.

145

ibid paras 642–43, 659–65.

146

The redaction of the parties’ submissions from the award leaves it unclear whether the claimant raised the issue of the conversion law’s retroactivity as part of its legitimate expectations claim.

147

Addiko v Montenegro (n 7) para 700.

148

ibid para 701.

149

ibid paras 702–03.

150

ibid para 754.

151

See (n 26).

152

Addiko v Montenegro (n 7) paras 745–49.

153

See eg, Cairn v India (n 131) para 1741, citing Elettronica Sicula SpA (ELSI) (USA v Italy), Judgment (1989) ICJ Rep 15, para 128.

154

IC Power v Peru, ICSID Case No ARB/19/19, Award (3 October 2023) para 453 (‘Resolution No. 141 was manifestly arbitrary … it breached the fundamental principle of non-retroactivity of laws and regulations recognized in Peruvian law (as well as by any other advanced legal system)’).

155

Zachary Douglas, ‘Instead of Principles, Slogans’ (2022) 38 ICSID Review 1.

156

Fuller (n 103) 53.

157

Diane Bugeja, Reforming Corporate Retail Investor Protection: Regulating to Avert Mis-Selling (Hart Publishing, Oxford 2019) 4; Kern Alexander, Principles of Banking Regulation (CUP, Cambridge 2019) 237.

158

See n 21.

159

Indicatively, the Croatian Supreme Court found that all eight banks offering CHF-indexed loans in the country failed in their duties to adequately inform consumers and thus nullified the foreign currency clauses of the loans; see Supreme Court of Croatia, Rev 2221/2018-11, Judgment (3 September 2019).

160

See Damian Cyman, ‘Consumers Protection in the Area of Loans Indexed to Foreign Currency’, in Michal Radvan and others (eds), The Financial Law Towards Challenges of the XXI Century: Conference Proceedings (Masaryk University 2017) 454–65, 457–58; Fernando Zunzunegui, ‘Mis-selling of Financial Products: Mortgage Credits’ (European Parliament, 2018) 15; Farid Aliyev and others, ‘Unfair Lending Practices and Toxic Loans’, EFIN Research Working Group on Over-Indebtedness (2016); Zoltán László Kiss (ed), Foreign Currency Loans? Studies, Essays, Polemical Treatises on the ‘Special Banking Product’ (Rejtjel Publishing, Budapest 2018).

161

ECJ, Case C-26/13 Kásler v OTP (2014) EU:C:2014:282; ECJ, Case C-186/16 Andriciuc v Banca Românească (2017) EU:C:2017:703; OTP Bank (n 22); ECJ, Case C-118/17 Dunai v ERSTE Bank (2019) EU:C:2019:207; ECJ, Case C-260/18 Dziubak v Raiffeisen Bank (2019) EU:C:2019:819; ECJ, Case C-511/17 Lintner v UniCredit Bank (2020) EU:C:2020:188; ECJ, Case C-81/19 Banca Transilvania SA (2020) EU:C:2020:532; ECJ, Case C-19/20 IW and RW v Bank BPH (2021) EU:C:2021:341; ECJ, Case C-932/19 JZ v OTP (2021) EU:C:2021:673; ECJ, Case C-472/20 Lombard Pénzügyi (2022) EU:C:2022:242; ECJ, Case C-520/21 Bank M (2023) EU:C:2023:478.

162

See Piotr Tereszkiewicz, ‘Foreign Currency Loans and Directive 93/13: The CJUE as a Legal Architect’, in Tereszkiewicz and Golecki (n 25) 229–50.

163

OTP Bank (n 22) para 78; Andriciuc (n 161) para 45.

164

See eg Emilia Mišćenić, ‘Foreign Currency Loans in Croatia’, in Tereszkiewicz and Golecki (n 25) 123–51, 140–44.

165

ICC Commission Report, Financial Institutions and International Arbitration (International Chamber of Commerce, 2016) 15. See also Section ‘Currency and exchange rate interventions in international investment law: the CHF loan conversion in context’ earlier.

166

Fischer and Yeşin (n 19) 2; see also Constitutional Court Decision U-I-3685/2015 (4 April 2017), <https://narodne-novine.nn.hr/clanci/sluzbeni/full/2017_04_39_873.html> accessed 20 January 2025, referring to the justification of Croatia’s CHF conversion law along these lines.

167

Rodik and Mikuš (n 13).

168

Addiko v Montenegro (n 7) para 606.

169

Jorge E Viñuales, ‘Investor Diligence in Investment Arbitration: Sources and Arguments’ (2017) 32 ICSID Review 346, 355–66.

170

Peter Muchlinksi refers similarly to the duty to conduct business in a reasonable manner as being an application of the equitable principle, in the sense that ‘he who seeks equity must do equity’; see Peter Muchlinski, ‘“Caveat Investor”? The Relevance of the Conduct of the Investor Under the Fair and Equitable Treatment Standard’ (2006) 55 International and Comparative Law Quarterly 527, 547–52. See also see Zachary Douglas, ‘The Plea of Illegality in Investment Treaty Arbitration’ (2014) 29 ICSID Review 155, 185.

171

Here I adopt the classification made by Viñuales (n 169) 361.

172

Parkerings v Lithuania, ICSID Case No ARB/05/8, Award (11 September 2007), para 333.

173

See eg South American Silver v Bolivia, PCA Case No 2013–15, Award (22 November 2018), para 648; RWE v Spain (n 111) paras 507–14; Encavis v Italy, ICSID Case No ARB/15/39, Award (11 May 2024), para 785.

174

Shaun Matos, ‘Investor Due Diligence and Legitimate Expectations’ (2022) Journal of World Investment & Trade 313, 320–23.

175

Gavrilović v Croatia, ICSID Case No ARB/12/39, Award (26 July 2018), para 986; Biwater v Tanzania, ICSID Case No ARB/05/22, Award (24 July 2008), para 601; Rusoro Mining v Venezuela, ICSID Case No ARB(AF)/12/5, Award (22 August 2016), para 525; Lemire v Ukraine, ICSID Case No ARB/06/18, Decision on Jurisdiction and Liability (14 January 2010), para 285.

176

Matos (n 174), 317–20.

177

Dolzer, Kriebaum and Schreuer (n 80) 211.

178

Addiko v Montenegro (n 7) paras 643–52.

179

ibid paras 649, 653.

180

Markus Burgstaller and Giorgio Risso, ‘Due Diligence in International Investment Law’ (2021) 38 Journal of International Arbitration 697, 704–08.

181

Genin v Estonia, ICSID Case No ARB/99/2, Award (25 June 2001), para 361; Nagel v Czech Republic, SCC Case No 49/2002, Award (9 September 2003), para 293; Duke Energy v Ecuador, ICSID Case No ARB/04/19, Award (18 August 2008), para 340.

182

Invesmart v Czech Republic, UNCITRAL, Award (26 June 2009), para 254; RWE v Spain (n 111) para 510; InfraRed v Spain, ICSID Case No ARB/14/12, Award (2 August 2019), para 370.

183

Invesmart v Czech Republic (n 182) para 254. See also Renergy v Spain (n 96) para 681.

184

Urbaser v Argentina, ICSID Case No ARB/07/26, Award (8 December 2016), paras 619–24.

185

Cf Philip Morris v Uruguay, ICSID Case No ARB/10/7, Award (8 July 2016), para 429 (‘[m]anufacturers and distributors of harmful products such as cigarettes can have no expectation that new and more onerous regulations will not be imposed…’). See also Cavalum v Spain (n 138) para 427.

186

Dolzer, Kriebaum and Schreuer (n 80) 211.

187

Frontier Petroleum v Czech Republic, UNCITRAL, Final Award (12 November 2010), para 288; Tethyan v Pakistan, ICSID Case No ARB/12/1, Decision on Jurisdiction and Liability (10 November 2017), para 901; Christoph Schreuer and Ursula Kriebaum, ‘At What Time Must Legitimate Expectations Exist?’, in Jacques Werner and Arif H Ali (eds), A Liber Amicorum: Thomas Wälde—Law Beyond Conventional Thought (CMP Publishing, 2009) 265–76, 268–70.

188

Genin v Estonia (n 181) para 361. See also Levy de Levi v Peru, ICSID ARB/10/17, Award (26 February 2014), para 478 (in the context of an expropriation claim).

189

See n 159.

190

A similar argument has been made with respect to sovereign lending; see Marie Sudreau, ‘Bilateral Investment Treaties and the Principles on Responsible Sovereign Lending and Borrowing: Working Together Towards the Provision of an International Legal Framework Addressing Sovereign Debt Issues?’, in Tams and others (n 3) 160–90, 164.

191

Ian Goldin and Mike Mariathasan, The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do about It (Princeton University Press, Princeton NJ 2014) 36.

192

F Gulcin Ozkan and D Filiz Unsal, Global Financial Crisis, Financial Contagion, and Emerging Markets, IMF Working Paper WP/12/293 (2012); Győző Gyöngyösi, Judit Rariga and Emil Verner, The Anatomy of Consumption in a Household Foreign Currency Debt Crisis, ECB Working Paper Series No 2733 (2022).

193

Mark Lawrence and others, ‘Global Polycrisis: The Causal Mechanisms of Crisis Entanglement’ (2024) 7 Global Sustainability 1; Gordon Brown and others, Permacrisis: A Plan to Fix a Fractured World (Simon & Schuster Limited New York 2023) 9.

194

For another recent proposal to rethink the concept of ‘stability’ under the FET standard, see Yu (n 79) (suggesting a ‘more deferential interpretation of stability’ disentangled from the concept of legitimate expectations).

195

Kryvoi and Matos (n 127) 55–56.

196

Eco Oro v Colombia, ICSID Case No ARB/16/41, Partial Dissenting Opinion of Horacio A Grigera Naon (9 September 2021), paras 10–11; and Partial Dissent of Professor Philippe Sands (9 September 2021), para 39.

Author notes

*

PhD Candidate, Faculty of Law, St John’s College, University of Cambridge, [email protected]. The views expressed in this article are the author’s own and do not necessarily reflect the position of any entity with which the author is or was associated. In the interest of full disclosure, the author was briefly involved in two of the CHF loan conversion cases discussed, brought against the Republic of Croatia, while working as an intern in a law firm acting for the State between 2019 and 2020. A previous draft of this article was submitted as a dissertation in partial fulfilment of the requirements for the University of Cambridge Master of Laws (LLM) degree (2018–2019). The author is extremely grateful to Michael Waibel, supervisor of said dissertation, for his invaluable guidance and encouragement. Thanks are also due to Helin Laufer and to the anonymous peer-reviewers for their helpful comments on later iterations of the article. Any errors are the author’s alone.

**

Consistent with JIEL’s policies and practice, Professor Waibel was not involved in the process of selection of this article for publication.