The effects of illegal investments on the jurisdiction of investment arbitration

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Investment treaty requires Contracting States to provide a foreign investor with substantive protections, including national treatment and fair and equitable treatment, in relation to its investment. In addition, investment treaty allows investors of a Contracting State to arbitrate disputes directly with other Contracting State(host state) for violation of the treaty. In order to bring investment disputes to arbitration, the investor must have made a qualifying investment under the investment treaty. Most investment treaties provide a definition of investment which they intend to protect. Also, some treaties limit their application under certain requirements. This paper addresses such prerequisite, which is increasingly at issue in recent investment treaty arbitration – that is, the legality of investment in question. It has become rather common for the respondent states to insist that investors have not complied with the law in making their investment, and accordingly, should be prevented from pursuing their claims. The problem is how to deal with the jurisdictional objection to the competence of the arbitral tribunal where the relevant treaty has a ‘in accordance with host state law’clause. After reviewing several arbitral cases on this matter, this paper witnesses certain jurisprudence in this respect. First, there is agreement among arbitral tribunal that explicit ‘in accordance with host law’ clauses have the effect of depriving foreign investments from treaty protection and work as a bar to the jurisdiction of the tribunal. On the other hand, where the treaty does not have such clauses, arbitral tribunal regarded the illegality of investment as a matter of admissibility rather than of jurisdiction. Secondly, arbitral tribunals agree that illegality depriving a treaty-based tribunal from jurisdiction does not refer to every illegality, but that it only effects illegality of the investment itself. Third, as regards timing, arbitral tribunals agree that only initial illegality is relevant and subsequent changes of host state’s laws do not deprive an investment form treaty protection. Furthermore, knowledge of or acceptance by the host State of the illegality will not allow the State to invoke a breach of domestic law by the investor in order to evade treaty protection. Fourth, illegal conduct of the host State, as contrast with that of investor, will not affect treaty protection of an investment. Finally, in the absence of an explicit in accordance with clause, illegality of the investment needs to be dealt with at the stage of the merits rather than of jurisdiction.

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* 2021년 이후 발행 논문의 참고문헌은 현재 구축 중입니다.

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