An obscure ruling by an arbitral tribunal sitting in Sweden could have major ramifications for foreign investors and host countries alike. In mid-January, a panel of arbitrators ruled on the first of dozens of international arbitration claims that have been launched against the government of Spain, following the country's roll-back of generous incentives that had been offered in recent years to investors in the renewable energy sector. 

The offer of generous long-term 'feed-in tariffs' had attracted dozens of investors to invest in Spain's photovoltaic sector. Similarly generous offers in other European countries, among them Germany, Italy, and the Czech Republic, pulled in new investments over the past decade. 

But when the global financial crisis started to bite, such incentives looked more like an albatross hanging around the necks of the taxpayers. As host governments have slowly retreated from such commitments – by reducing the sums paid for renewably generated energy or scaling back the time period during which such special tariffs are available – many foreign investors have responded by suing their host countries for breach of international investment protection treaties. 

According to the investors, the host states are guilty of quashing their 'legitimate expectations', by reneging on (supposedly) binding legislative promises. 

But, there lies the rub. 

Most investors do not have contracts that locked in these preferential energy rates. Thus, their legal cases hinge on whether arbitrators will agree that 'promises' made by governments in the form of legislation and other decrees must be kept by those governments. 

Countries such as Spain argue that they enjoy latitude to change policies – even if that leads to pain for investors – and that international investment protection treaties do not guarantee the affected investors any right to be compensated for financial losses that might arise from these policy changes. 

In a January 21 ruling, a panel of arbitrators hearing a case against Spain sided with the government by a two-to-one majority. For the majority, a government retains considerable latitude to alter its policy course, without being held to a strict requirement to compensate those foreign investors who invested on the basis of promises made under the prevailing legislation. 

Notably, a third arbitrator in this case dissented from his colleagues, and reasoned that investors should be able to count on legislative promises – even in the absence of binding contracts with a host government. If legislative promises are reneged upon, investors whose 'legitimate expectations' have been quashed should expect some compensation from the offending government.

Luke Eric Peterson is the publisher of InvestmentArbitrationReporter.com a specialist news service focused on the law and policy of foreign investment.