Illegality Requirement

KluwerArbitration
Document information The illegality objection in investor–state arbitration

Caline Mouawad; Jessica Beess und Chrostin
Publication (*) (†)
Arbitration International ABSTRACT

In the past decade, the number of investment tribunals wrestling with allegations of
Topics investor illegality and corrupt conduct has soared. Much has been said and written about
Investment Arbitration corruption in investment arbitration, but the treatment and import of objections on the
basis of an investor’s illegal conduct other than corruption has not received equal
Bibliographic attention. This article seeks to fill that void through a comprehensive, methodical review of
investment awards to date that have grappled with the issue.
reference Allegations of investor misconduct are richly diverse, ranging from the wilful disregard of local
Caline Mouawad and foreign investment restrictions to inadvertent administrative omissions a host State knowingly
Jessica Beess und Chrostin, elected not to enforce. Recognizing that the factual matrices giving rise to the illegality objection are
'The illegality objection in highly fact-specific, this article explores the contours of the illegality objection, its typology, the
investor–state arbitration', in analytical framework tribunals apply, the evolving and competing applicable legal standards, the
William W. Park (ed), scenarios when illegality is fatal to jurisdiction or admissibility (or not), and the relevance of the
Arbitration International, State’s conduct in perhaps overcoming that death knell.
(© The Author(s); Oxford
University Press 2021,
Volume 37 Issue 1) pp. 57 -
1. INTRODUCTION
95 In the past decade, the number of investment tribunals wrestling with allegations of investor illegality
and corrupt conduct has soared. From an exceptional objection asserted in the most extreme of
cases to one nearly as run-of-the-mill as jurisdictional objections based on the definition of ‘investor’
and ‘investment’, the illegality and corruption objection is a powerful weapon that States have
wielded successfully to stop a claim in its tracks. Much has been said and written specifically about
corruption and investment arbitration, including on the standard of proof, the applicable law, the
public policy considerations, the arbitrators’ duty to report, and the legal consequences of a
corruption finding. (1) Less tackled is the question of how investment tribunals treat the illegality
objection proper, exclusive of corruption.
Outside the context of corruption, illegality is, almost inevitably, a greyer and murkier world to
explore. Unlike corruption—which is well-defined and universally condemned as a red line that
cannot be crossed—illegality covers a broad spectrum of conduct, from the most minor and
inadvertent illegality to the most severe (shy of corruption). This palette of misconduct is richly
diverse and fact-specific and, if investment awards are to be followed, does not automatically bar
an investor’s access to investment arbitration. But discerning the point of no return along this
continuum of misconduct is not so straightforward: given its different permutations, illegality may be
less susceptible to clear categorizations as to its definition, content, and consequences. Faced with
an illegality objection, an investment tribunal is called to assess not only the nature and evidence of
the illegality, but also whether such illegality, if proven, precludes the investor altogether from access
to investment arbitration. Put differently (and perhaps more bluntly), when is an investor’s illegality
serious enough to demand the sanction of declining treaty protection?
Given the prevalence of the illegality objection today, it is imperative for parties, counsel, and
arbitrators alike to understand its contours, its typology, the analytical framework, the evolving and
competing applicable legal standards, the scenarios when illegality is fatal to jurisdiction (or not),
and the relevance of the State’s conduct in perhaps overcoming that death knell. This article delves
into these various facets of the illegality objection through a comprehensive, methodical review of
investment awards to date that have grappled with the issue.
When these awards are viewed together, several fundamental takeaways emerge. First, the
requirement that an investment must be legal to enjoy the protections of the applicable investment
treaty (ie the legality requirement) either arises from the express provisions of the investment treaty
or is implied from generally accepted or international legal principles. Absent an express legality
requirement, the overwhelming majority of tribunals have implied one. Ultimately, irrespective of
whether the legality requirement is express or implied, to qualify as a potential jurisdictional hurdle,
the alleged illegality must arise in the making of the investment or be a serious breach that goes to
the heart of the existence of the investment—serious enough to warrant the consequence of
declining treaty protection.
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Secondly, tribunals nearly unanimously treat allegations of illegality primarily as a jurisdictional
issue, with only an exceptional few treating it as an admissibility issue. The practical import of this
distinction in the context of allegations of investor illegality will be minimal, however, if not altogether
wanting.
Thirdly, although various paradigms for analysing an illegality objection persist, the growing trend in
recent cases is a proportionality-based approach to illegality, which weighs the gravity of the
illegality against the sanction of declining jurisdiction. Comprised of the seriousness of the law
breached and of the investor’s violation, the gravity of the illegality forms a sliding scale that grants
tribunals the flexibility to assess various factual permutations on a case-by-case basis. Notably, an
investor’s due diligence, or lack thereof, may be outcome-determinative: some tribunals have held
an investor to a strict duty of due diligence, while others have factored the investor’s level of due
diligence into the other components of the proportionality analysis.
Finally, even if a State sustains its burden of proof and proves illegality, a number of exceptions to
the preclusive effect of an illegality finding may rescue an investor’s claim from its fate, including if
the illegality was minor or inadvertent, if the illegality did not render the investment void ab initio, and
if the State’s own conduct was condemnable or tacitly approved the illegality.
Although this relatively limpid roadmap can be distilled from the arbitral awards, in reality the
illegality landscape is complex and nuanced, and well deserving of the deep dive that this article
seeks to undertake. Section 2 explores first the sources of the legality requirement, while Section 3
examines its parameters. Section 4 delves into the nub of the illegality objection as a bar to
jurisdiction or admissibility, explores the evolving applicable legal standards, identifies the
illegalities that tribunals have condemned by denying jurisdiction, and considers the relevance of an
investor’s due diligence to the analysis. Section 5 catalogues the available defences to the illegality
objection, namely the State’s failure to sustain its burden of proof and, if illegality is found, the
exceptions to the preclusive effect of illegality as a bar to jurisdiction. Finally, Section 6 concludes
with reflections on the evolution of the illegality objection to date.
2. THE LEGALITY REQUIREMENT

The legality requirement is rooted in one of two sources: (i) an express provision of the treaty that
requires an investment to be made ‘in accordance with’ the host State’s laws; or (ii) an implied,
inherent, or autonomous legality requirement arising from general principles of international law that
commands respect for the integrity of such laws. Somewhat surprisingly, these normative
underpinnings of the legality requirement do not appear to inform whether to treat a legality
objection as a matter of jurisdiction or admissibility of an investor’s claim, or neither.
2.1 Express legality requirement

The legality requirement of a bilateral investment treaty (BIT) typically appears in the definition of
‘investment’ as a permutation of the following stock formulation: ‘“investment” shall mean any kind of
asset accepted in accordance with the respective laws and regulations of either Contracting State’.
(2) The definition of ‘investment’ is not the only article in a BIT that can contain an express legality
requirement, however. The Inceysa v El Salvador tribunal—the first tribunal to face this question in
2006—expressly rejected this narrow reading of a BIT and embraced the principle that an express
legality requirement could appear in other BIT provisions: ‘the Claimant is not right to indicate that in
order to determine whether its investment falls within the scope of the [BIT], it is necessary to
examine only the definition of the term investment … and that it is not possible to examine other
clauses of the [BIT] to determine the type of investments protected by it’. (3) The Inceysa v El
Salvador tribunal found a legality requirement tucked away in two different BIT provisions, (4) namely
(i) the provision extending BIT protection to investments made ‘in accordance with the laws’ before
the entry into force of the treaty, (5) and (ii) the ‘Protection’ provision that requires each contracting
State to protect investments ‘made in accordance with its legislation’. (6)
Other tribunals have since followed Inceysa v El Salvador and similarly found an express legality
requirement in the provision that applies a BIT to investments made prior to its entry into force (7)
and in the ‘Promotion and Protection of Investments’ provision. (8) Some notable exceptions bear
mention, however. The Achmea v Slovak Republic tribunal altogether refused to read an express
legality requirement in the investment promotion provision that required each contracting State to
promote and admit investments in accordance with its laws. (9) It reasoned that the investment
promotion provision concerned ‘the duty of each State Party to promote inward investment’ and did
not purport to qualify the meaning of ‘investment’ under the applicable BIT. (10) The SAUR
v Argentina and Álvarez y Marín v Panama tribunals reached the same conclusion. (11) Similarly,
the Churchill Mining v Indonesia tribunal found that a provision in the applicable BIT that required
investments to be ‘granted admission in accordance with the [local investment law]’ was ‘narrower
than the traditional legality requirement in the sense that it only demands admission in accordance
(12)
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with the relevant domestic laws and not general compliance with the host State’s legislation’. (12)
Wherever this express legality requirement may surface, arbitral tribunals almost always treat the
illegality question as a jurisdictional issue. (13) Many tribunals view the express legality requirement
as a condition of a State’s consent to arbitrate. The legality of the investment is deemed to be ‘an
essential condition of [the State’s] offer of this method of dispute settlement’. (14) Put slightly
differently, the State’s consent ‘is limited to investments made in accordance with the laws of the
host State of the investment’ such that disputes arising from illegal investments ‘are outside the
consent granted by the parties and, consequently, are not subject to the [tribunal’s] jurisdiction’. (15)
But at least one tribunal has rejected the ‘general assumption that States do not consent to the
arbitration of disputes relating to illegal investments. The result of such a sweeping and
undifferentiated opinion might contradict the purposes of international conventions for the protection
of investments’. (16)
A handful of investment tribunals have treated illegality as an admissibility question, rather than a
question of jurisdiction, notwithstanding an express legality requirement. (17) The consequence of a
successful objection to either jurisdiction or admissibility, however, is dismissal of the claim,
prompting at least one tribunal to highlight that ‘the characterization of these [illegality] arguments as
either jurisdictional or relating to admissibility’ is essentially ‘immaterial’. (18)
2.2 Implied, inherent, or autonomous legality requirement

If the applicable treaty does not contain an express legality requirement, an overwhelming majority
of tribunals have implied one, (19) with the notable exception of the Bear Creek v Peru tribunal. (20)
Where is this implied legality requirement rooted? Some tribunals simply declare its existence as
an autonomous legality requirement, independent of any specific wording in a BIT or international
legal norm. As the Minnotte v Poland tribunal noted, ‘it is now generally accepted that investments
made on the basis of fraudulent conduct cannot benefit from BIT protection; and this is a principle
that is independent of the effect of any express requirement in a BIT that the investment be made in
accordance with the host State’s law’. (21) Likewise, the Cortec v Kenya tribunal referred to an
‘accepted jurisprudence’ that ‘to be protected an investment has to be in accordance with the laws
of the host State and made in good faith’. (22) Meanwhile, the Oxus Gold v Uzbekistan tribunal
summarily agreed with prior tribunals (Plama v Bulgaria, Phoenix Action v Czech Republic,
Inceysa v El Salvador, Hamester v Ghana, and SAUR v Argentina) that ‘an investment may not
qualify for protection under a BIT, where such investment was made in breach of relevant laws and
regulations, including international treaties but also national law of the host State’. (23) The SAUR
v Argentina tribunal similarly deemed that the words of a BIT are not outcome-determinative and
that legality is a ‘tacit condition of any BIT[.]’. (24)
Other tribunals uncovered an implied legality requirement by interpreting the text and purpose of the
BIT and examining the Contracting States’ intent. For instance, the Cortec v Kenya tribunal
concluded that the ‘text and purpose’ of the BIT was ‘not consistent with holding host governments
financially responsible for investments created in defiance of their laws fundamental [to] protecting
public interests such as the environment’. (25) The Plama v Bulgaria tribunal turned to the
introductory note of the Energy Charter Treaty (ECT) as well as the statements made at the
adoption session of the ECT to conclude that the ECT cannot apply to investments made contrary to
law. (26) In Achmea v Slovak Republic, although the definition of ‘investment’ did not expressly
require that the investment be made in accordance with the laws of the host State to fall under BIT
protection, ‘in the view of the Tribunal, it is wholly unreasonable to suppose that the Parties could
have intended to protect investments that violate, for example, a prohibition on foreign investment in
a specified sector of the economy’. (27)
Still other tribunals invoked international legal principles—such as international public policy (Liman
Caspian Oil v Kazakhstan), (28) good faith (SAUR v Argentina), (29) or some version of unclean
hands (Khan Resources v Mongolia, Álvarez y Marín v.Panama) (30) —to imply a legality
requirement. For these tribunals, whether the BIT contains an express legality requirement is ‘not a
relevant factor’ (31) or is ‘unnecessary to secure the objects and purpose of the BIT’. (32) The finality
of the investment arbitration system protects solely lawful and good faith investments, and it would
be “incomprehensible that a State would offer the benefit of protection through investment
arbitration if the investor, to obtain such protection, has acted contrary to the law’. (33) Put differently,
an investor that has obtained its investment ‘by acting in bad faith or in violation of the laws of the
host state … should not be allowed to benefit [from treaty protection] as a result, in accordance with
the maxim nemo auditor propriam turpitudinem allegans’. (34)
Regardless of the precise origin of the implied legality requirement, the common ground among
tribunals appears to be, as expressed by one scholar, that ‘no State has taken its fervour [sic] for
foreign investment to the extent of removing any controls on the flow of foreign investment into the
host State’. (35)
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Like tribunals facing an express legality requirement, the vast majority of tribunals discerning a
legality requirement beyond the express text of a BIT seems to favour addressing the illegality
objection as a matter of jurisdiction, with a couple of cases handling it as a matter of admissibility
(36) and others punting it to the merits. (37) The source of the legality requirement thus does not
appear to impact tribunals’ assessment of whether an allegation of illegality is an issue of
jurisdiction or admissibility. (38)
3. THE PARAMETERS OF THE LEGALITY

REQUIREMENT
Irrespective of whether the legality requirement is express or implied, a tribunal often will consider
two factors to decide the threshold question of whether the alleged illegality qualifies as a potential
jurisdictional hurdle: the timing of the illegality and its subject-matter.
First, with respect to the timing of the illegality (known as the temporal scope of the legality
requirement), arbitral tribunals are virtually unanimous that the alleged illegality must arise in the
making of the investment before it can qualify as a potential jurisdictional hurdle. (39) Any illegality
that arises subsequently, during the performance of the investment, would not be a jurisdictional
obstacle, but may be relevant to the merits or damages, as the case may be. (40) Tribunals
consistently have espoused this temporal scope of the legality requirement in their awards. In
Hamester v Ghana, the tribunal found that the legality requirement conditioned the application of
the BIT on the legality of the creation of the investment. (41) For that tribunal, ‘only this issue bears
upon this Tribunal’s jurisdiction … the legality of the investor’s conduct during the life of the
investment is a merits issue’. (42) Likewise, the Quiborax v Bolivia tribunal concluded that the
legality requirement contained in the Chile–Bolivia BIT ‘is limited to the establishment of the
investment; it does not extend to the subsequent performance’. (43)
The fundamental rationale underlying the temporal scope of the legality requirement is the tribunal’s
obligation to determine its jurisdiction based on the treaty provisions, which typically require the
claimant to establish that (i) it is a protected investor within the meaning of the treaty and (ii) it owns
(or, at the relevant point in time, owned) a protected investment. If the alleged illegality occurred in
the making of the investment, the argument goes that there never existed an ‘investment’ capable of
enjoying treaty protection. In contrast, if the alleged illegality post-dates the making of the
investment, the investor, in fact, made a protected investment, thereby satisfying the jurisdictional
requirements of the treaty. (44)
Upholding jurisdiction as long as an investment is lawfully made does not mean that the alleged
post-investment illegality will go unexamined or unpunished; rather, such illegality allegations will be
considered a merits or quantum issue, not a jurisdictional one: ‘allegations by the host state of
violations of its law in the course of the investment, as a justification for state action with respect to
the investment, might be a defense to claimed substantive violations of the BIT, but could not
deprive a tribunal acting under the authority of the BIT of its jurisdiction’. (45) Any investor illegality
after or unrelated to the making of the investment ‘would be a matter for the Tribunal to consider at
the merits stage of the proceedings’. (46) For example, a tribunal could examine whether the State’s
response to an investor’s alleged post-investment illegality is justified and not a breach of the BIT.
Recognizing the interplay between the investor’s actions and the State’s reactions, the Khan
Resources v Mongolia tribunal favoured airing out both sides in a merits phase: ‘[i]f the investor
acts illegally, the host state can impose upon it sanctions available under local law … However, if
the investor believes these sanctions to be unjustified, it must have the possibility of challenging
their validity’. (47) Holding otherwise ‘would undermine the purpose and object of the Treaty’ and
would ‘deny the investor the right to make its case before an arbitral tribunal based on the same
alleged violations the existence of which the investor seeks to dispute on the merits’. (48) Thus, the
timing of the investor’s alleged illegality—namely if it post-dates the making of the investment—may
defer the issue to the merits phase even with an express legality requirement in the BIT (and a
fortiori with an implied legality requirement).
Secondly, with respect to the subject-matter of the illegality, arbitral tribunals also adopt a consistent
position: not all breaches of domestic law are the same and deserve the same consequence of
declining BIT protection. Most tribunals reject that ‘any violation of any of the host State’s laws would
result in the illegality of the investment within the meaning of the BIT and preclude such investment
from benefiting from the substantive protection offered by the BIT’. (49)
The Quiborax v Bolivia tribunal succinctly distilled the types of breaches that would warrant
declining BIT jurisdiction: ‘The subject-matter scope of the legality requirement is limited to (i) non-
trivial violations of the host State’s legal order (Tokios Tokeles, LESI and Desert Line), (ii)
violations of the host State’s foreign investment regime (Saba Fakes), and (iii) fraud – for instance,
(50)
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to secure the investment (Inceysa, Plama, Hamester) or profits (Fraport)’. (50) As discussed further
below in Section 5.2, the first category of ‘non-trivial’ violations of the State’s legal order goes to the
gravity of the illegality—either the brazenness of the violation (eg wilful misrepresentation) or the
importance of the legal norm breached (eg international public policy) (51) —while the latter two
categories echo and complement the temporal scope of the legality requirement by requiring a link
between the illegality and the investment legal regime. Whether these types of breaches will result
ultimately in a tribunal declining jurisdiction may depend on a weighing of various factors, including
whether the outcome is proportional to the seriousness of the illegality.
With these parameters in mind, a review of investment awards to date sheds light on how and when
tribunals treat illegality as a jurisdictional hurdle and when, if ever, they excuse such illegality or
otherwise dampen the harshness of the outcome of declining BIT jurisdiction.
4. THE LEGAL FRAMEWORK OF THE

ILLEGALITY OBJECTION AS A BAR TO
JURISDICTION OR ADMISSIBILITY
As noted above, the vast majority of tribunals analysing allegations of illegality in the making of the
investment has held that such illegality bears on the tribunal’s jurisdiction or the admissibility of the
investor’s claims. This section explores the kinds of illegality that, if established, preclude the
tribunal’s jurisdiction or render the claims inadmissible. These types of illegality generally fall into
two categories: (i) the investor’s own unlawful conduct, and (ii) the investor’s failure to conduct due
diligence that would have exposed illegality committed by the investor’s partners.
4.1 The investor’s unlawful conduct

The investor’s own illegal conduct in the making of its investment generally will preclude the
tribunal’s jurisdiction or render the claims inadmissible if the investor (i) commits fraud; (ii) conceals
or misrepresents facts that, if known to the host state, would have prevented the making of the
investment; (iii) breaches a law of the host state that is fundamental to the making of the investment;
or (iv) breaches a fundamental law of the domestic legal order. As noted above, the majority of
tribunals has treated illegality as a jurisdictional question and has developed principles and tests to
determine when illegality precludes jurisdiction on that basis (subsection 4.1.1). Only a minority of
tribunals has held illegality in the making of the investment to be a question of admissibility
(subsection 4.1.2).
4.1.1 Jurisdiction
The seminal cases of Inceysa v El Salvador and Fraport v Philippines (I and II) have set the
standard and paved the way for tribunals to deny jurisdiction based on a respondent State’s
successful illegality objection. These cases are nearly always cited to support the contention that an
illegally-made investment is not entitled to BIT protection.
In Inceysa v El Salvador, El Salvador accused the claimant of having falsified financial documents
and misrepresented purposefully its experience and capacity to make the investment at issue. (52)
El Salvador argued that the claimant had not made its investment ‘in accordance with the laws’, per
the legality requirement in the ‘Promotion and Admission’ provision of the applicable BIT, (53) and
thus that the tribunal had no jurisdiction to hear the dispute. The tribunal agreed with El Salvador that
the issue was a matter of consent: ‘the consent granted by Spain and El Salvador in the BIT is
limited to investments made in accordance with the laws of the host State of the investment’, (54)
and any disputes arising from an investment made illegally ‘are outside the consent granted by the
parties and … this Tribunal is not competent to resolve them, for failure to meet the requirements of
Article 25 of the Convention and those of the BIT’. (55) Given the evidence of the claimant’s illegally-
made investment, the tribunal concluded that Inceysa could not avail itself of BIT protection ‘because
its investment does not meet the conditions of legality necessary to be included within the scope of
that investment protection’. (56) It was clear to the tribunal that, had the host State known the truth
about the investor’s financials and actual credentials, the host State would not have permitted the
investment. (57)
Both Fraport v Philippines tribunals reached an analogous conclusion. In that case, the investor
sought and received legal advice from local counsel in the Philippines regarding national law
restrictions on foreign ownership of certain types of investments. The investor, however, knowingly
disregarded counsel’s advice and entered into secret shareholder agreements to hide its true
ownership structure. The Fraport I tribunal held that the investor acted in knowing violation of the
host State’s law. (58) Because the claimant’s ‘ostensible purchase of shares … which concealed a
different type of unlawful investment, is not an “investment” which is covered’ by the BIT, the tribunal
declined jurisdiction. (59) The Fraport II tribunal reached the same result but, like the Inceysa v El
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Salvador tribunal before it, considered the legality requirement to be a matter of consent (rather
than a matter of the definition of ‘investment’): ‘The illegality of the investment at the time it is made
goes to the root of the host State’s offer of arbitration under the treaty … Lack of jurisdiction is
founded in this case on the absence of consent to arbitration by the State for failure to satisfy an
essential condition of its offer of this method of dispute settlement’. (60)
Common to the Inceysa v El Salvador and Fraport I/II decisions is that, when an investor actively
deceives the State about its identity, credentials, financials, or similar information, such as to induce
the host State to allow an investment that it would not have otherwise allowed, the tribunal will not
assert jurisdiction (or, as in Plama v Bulgaria discussed at subsection 4.1.2, it will hold the claim
inadmissible). (61)
The Cortec v Kenya and Álvarez y Marín v Panama tribunals followed in the footsteps of the
Inceysa v El Salvador and Fraport I/II tribunals. Faced with a breach of a fundamental norm
(environmental in the first case, the well-being of indigenous peoples in the second) that voided the
underlying legal instrument as well as the claimants’ serious breach of that norm (circumvention in
the first case, and wilful disregard of red flags in the second), these two tribunals deemed it
appropriate to deny jurisdiction in these circumstances. But to reach this conclusion on the illegality
objection, they applied the analytical framework of the Kim v Uzbekistan tribunal, which merits a
preliminary exposition.
The Kim v Uzbekistan decision is pivotal: it inaugurated a principle-based legal framework to
tackle illegality allegations and account for certain variables that may weigh for or against a finding
of BIT jurisdiction. In that case, the claimants acquired majority stakes in two cement plants in
Uzbekistan over a few years by way of a complex contractual framework, namely a $34 million
share purchase agreement governed by English law as well as additional share purchase
agreements registered with the Tashkent Stock Exchange that disclosed a purchase price of $2.2
million. Uzbekistan argued that this structure and discrepancy between the registered and real price
amounted to concealment, fraud, and false disclosure of the security transaction, in violation of
Uzbek law. (62)
Although factually comparable to Inceysa v El Salvador and Fraport I/II in that the alleged illegality
concerned the investor’s failure to comply with local legal requirements to establish its investment,
the tribunal found the claimants made their investment in a ‘highly uncertain legal environment’ (63) in
good faith (64) and without any intention to defraud. (65) The tribunal found that the claimants’
registration of an ‘incorrect’ price did not necessarily amount to an intention to defraud or
manipulate the market. (66) It further concluded that the claimants’ failure to register the English
share purchase agreement with the stock exchange did not ‘sufficiently compromise a significant
interest of Uzbekistan so as to render proportionate the exclusion of the investment from the
protections of the BIT’, (67) particularly given that the sanctions for these alleged breaches of Uzbek
law were fines or penalties rather than rendering the transaction null and void. (68)
Dissatisfied with the approach of prior investment tribunals, which it found lacking in ‘reference
either to the text of the treaty in question or to underlying principles’, (69) the tribunal applied the
Vienna Convention on the Law of Treaties to interpret the legality requirement found in the provision
applying the BIT to investments made before its entry into force. It concluded that, ‘[g]iven the aim of
encouraging investment through the provision of some measure of security, it is not plausible that
the drafters of the BIT intended to include minor acts of noncompliance as a basis for denying
jurisdiction’. (70) The converse was not necessarily true: excluding trivial acts of non-compliance
‘does not establish that the legality requirement is limited to violations of fundamental laws’. (71)
In the tribunal’s view, a ‘more principled approach’ is rooted in the ‘principle of proportionality’ and
balancing ‘the object of promoting economic relations by providing a stable investment framework
with the harsh consequence of denying the application of the BIT in total when the investment is not
made in compliance with legislation’. (72) Denying BIT jurisdiction is proportionate ‘only when its
application is triggered by noncompliance with a law that results in a compromise of a
correspondingly significant interest of the Host State’. (73)
The Kim v Uzbekistan tribunal articulated a three-step analysis: (i) the importance of the law
allegedly breached; (ii) ‘the flagrancy of the investor’s noncompliance’ (74) ; and (3) ‘whether the
combination of these two elements results in a compromise of a significant interest of the Host
State to such an extent that the harshness of the sanction of placing the investment outside of the
protections of the BIT is a proportionate consequence for the violation examined’. (75) In other
words, there is no BIT protection for investments made in breach of national law when ‘the
combination of the investor’s conduct and the law involved’ results ‘in a compromise of a significant
interest of the Host State’. (76) This test requires a case-by-case analysis ‘to ensure that the
harshness of the sanction of placing the investment outside of the protections of the BIT is a
proportionate consequence for the violation examined’. (77) Under the tribunal’s normative
framework, the rules that prior tribunals articulated are ‘factors to be considered’ (78) and tribunals
(79)
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must ‘treat each case on its own facts’. (79)
Presumably the tribunal aspired to fashion a principled approach that could apply to any factual
permutation of an illegality allegation. Unlike in some prior cases, the analysis in Kim v Uzbekistan
was not black or white—a finding of illegality did not necessarily preclude jurisdiction.
The Kim v Uzbekistan tribunal’s three-part test and proportionality inquiry informed the decisions of
subsequent tribunals, including the Cortec v Kenya and Álvarez y Marín v Panama tribunals. In
Cortec v Kenya, the illegality at issue concerned the claimant’s alleged failure to comply with
Kenya’s regulatory framework in obtaining a special mining license. Kenya alleged that the
claimants failed to obtain various key approvals and consents necessary to obtain a valid mining
license, including failing to submit an environmental impact study. Instead, the claimants allegedly
procured their mining license through successful political lobbying of outgoing government officials,
which the incoming government subsequently revoked. The claimants challenged the revocation in
the courts, which ruled that the mining license was void ab initio because the claimants, inter alia,
had not complied with Kenyan law. The issue before the BIT tribunal was whether the BIT protected
a mining license not issued in accordance with Kenyan law. (80)
After implying a legality requirement in the BIT, (81) the tribunal endorsed the need to weigh the
gravity of the illegality when assessing its impact. (82) The omission of minor regulatory
requirements or inadvertent misstatements ‘will not have the same impact as an investment
“created” in defiance of an important statutory prohibition imposed in the public interest’. (83) Put
differently, for an investment to benefit from BIT protections, ‘it has to be in substantial compliance
with the significant legal requirement of the host state’. (84)
The tribunal found that the claimants’ mining license was void ab initio under international law
(echoing the Liman Caspian Oil v Kazakhstan tribunal, see below at subsection 5.2.2), thus
leaving the tribunal without jurisdiction. (85) The mining license was ‘a piece of paper’ (86) ‘with the
signature of a rogue official, signed in defiance of the applicable statute law [that] does not
constitute a “qualified” investment for purposes of jurisdiction’. (87) Accordingly, the tribunal
concluded it lacked jurisdiction and dismissed the claim. (88)
To reach this conclusion, the tribunal applied the proportionality test that the Kim v Uzbekistan
tribunal articulated, assessing (i) the significance of the breached obligation and (ii) the seriousness
of the investor’s conduct, weighed against (iii) the harshness of denying the claimants BIT
protection. (89) The tribunal found that (i) the regulatory obligations to get environmental approvals
were of fundamental importance (90) ; (ii) non-compliance with this obligation was ‘a serious matter’,
and the claimants’ entire conduct evidenced a disregard and ‘serious disrespect’ for the
‘fundamental public policies of the host country in relation to the environment and resource
development’ (91) ; and (iii) denying the claimants protection under the BIT was proportionate given
their breaches of Kenyan law. (92) Even if the license had not been void ab initio but only voidable,
the tribunal found that the respondent State had established that the mining license was issued
contrary to Kenyan law and international law such that it did not qualify as a protected investment
under the BIT. (93)
The claimants in Álvarez y Marín v Panama also were found to have made their investment in
breach of national law. The claimants relied on a local intermediary to acquire four properties
located within an indigenous region. According to national law, privately-held land in that region
could be sold to private parties, but the indigenous authorities retained a preferential right to
acquire the land for sale. The intermediary helped three indigenous sellers to register as the owners
of their lands and, after local authorities declined to exercise their preferential right, purchased
these properties through a Panamanian company, in which the claimants later acquired shares.
After the press questioned the legality of the acquisition, the national authorities issued a report
concluding that two of the plots were outside of the protected region, which provoked protest among
the indigenous population and resulted in the occupation of the properties. The claimants
commenced a BIT arbitration, arguing that the report frustrated their projects and deprived their
investments of any value. Among other jurisdictional objections, Panama argued that the claimants
had acquired their investments unlawfully.
Like in Cortec v Kenya, the tribunal held that a legality requirement was implicit in all BITs. (94) In
line with the overwhelming majority of investment tribunals, the Álvarez y Marín v Panama tribunal
decided that, to warrant the sanction of declining jurisdiction, the illegality must have been for the
purpose of making the investment. (95) But not every illegality should deprive a tribunal of jurisdiction:
‘a general principle of law requires that there be proportionality between the nature of the offense
and the severity of the punishment’. (96) The alleged illegality—committed at the time of making the
investment and closely related to the act of investing itself—should be serious. (97)
Taking inspiration from the proportionality test in Kim v Uzbekistan, (98) the tribunal focused on two
elements: the importance of the norm breached by the investor, and the motives and conduct of the
(99)
7
latter. (99) The tribunal concluded that the breach committed—purchasing the land at a lower price
than had been offered to the local authorities—was serious and breached a fundamental law that
served a public interest (namely, the well-being of indigenous people). (100) Under local law, a
breach meant that any sale of land was void (101) and, indeed, Panama had prosecuted a breach of
the law, (102) which signalled to the majority of the tribunal that the norm was important and the
breach serious. The claimants’ failure to exercise the requisite due diligence (discussed further
below at Section 4.2)—notwithstanding ‘red flags’ (103) and legal advice (104) —sealed the fate of
the claimants’ claims, and the tribunal declined jurisdiction over the dispute.
As the cases discussed above demonstrate, tribunals’ treatment of the illegality objection has
evolved from a bright line rule to a more nuanced, fact-specific proportionality analysis that
recognizes that not all illegality is created equal.
4.1.2 Admissibility
While jurisdictional defects implicate a tribunal’s authority to adjudicate the case, challenges to
admissibility concern defects in the claim. A successful objection to either will deprive the investor
and its investment of treaty protection. The distinction, therefore, is arguably immaterial from a
practical perspective, at least as it relates to the illegality objection. (105)
A handful of tribunals have chosen to consider the impact of illegality in the making of the investment
as a question of admissibility rather than jurisdiction. It is difficult to discern a pattern or principled
approach that explains when or why some tribunals choose to consider this as a question of
admissibility. Tribunals that take this approach mostly do not explain their reasoning. It is
noteworthy, however, that at least some tribunals discussed the illegality objection as a bar to
admissibility rather than jurisdiction after having upheld jurisdiction in a prior decision. (106)
The oft-cited case of Plama v Bulgaria was the first tribunal to treat the illegality question as an
issue of admissibility and to open the way for other tribunals to do the same, whether the legality
requirement was express or implied. In Plama v Bulgaria, the investor misrepresented that it was a
consortium of major companies with substantial assets, when it was not, and deliberately failed to
inform the host State of its true state of affairs. (107) Had Bulgaria known the truth about the
investor’s financials and credentials, the tribunal reasoned, Bulgaria would not have permitted the
investment. (108)
Under these circumstances, the tribunal found that the investment was the result of a ‘deliberate
concealment amounting to fraud, calculated to induce the Bulgarian authorities to authorize’ the
claimant’s investment. (109) Although the ECT did not contain an express legality provision, this did
not mean that the ECT ‘cover[s] all kinds of investments, including those contrary to domestic or
international law’. (110) The tribunal turned to statements made at the adoption session of the ECT
as well as to the introductory note to the ECT to conclude that the ECT ‘should be interpreted in a
manner consistent with the aim of encouraging respect for the rule of law’, ie the ECT cannot apply
to investments made contrary to law. (111) The tribunal found that the investment was made in breach
of Bulgarian law, which required good faith negotiations, and of ‘the applicable rules and principles
of international law’ per the applicable law provision of the ECT, including the international legal
principle of good faith. (112) It would be contrary to the principle of nemo auditor propriam
turpitudinem allegans and international public policy to protect such an unlawful investment. (113)
Accordingly, the claimant’s misconduct in making its investment precluded the application of the
ECT.
Other tribunals have approached the question of whether the illegality objection strikes at the heart
of the tribunal’s jurisdiction or the claim’s admissibility with ambivalence. In von Pezold
v Zimbabwe, the State argued that the claimant failed to obtain the State’s approval of its
investment and to comply with certain additional local law requirements. The State presented its
illegality objection as a question of admissibility, (114) and thus the tribunal treated the State’s
arguments ‘as admissibility objections, consistent with how they have been presented by the
Respondent in the majority of its pleadings’. (115) As noted above (Section 2.1), however, the
tribunal considered that ‘the characterization of these arguments as either jurisdictional or relating to
admissibility, in these cases, is immaterial[.]’ (116)
Oxus Gold v Uzbekistan exhibits that same ambivalence as to whether the illegality objection
impacts jurisdiction or admissibility. The Oxus Gold v Uzbekistan tribunal faced an allegation by
the State that the claimant misrepresented the type of financing to which it would resort and made
its investment in breach of national law. The State argued that these illegalities defeated both the
tribunal’s jurisdiction and the admissibility of the claimant’s claims. Without more analysis, the
tribunal summarily agreed with Plama v Bulgaria, Inceysa v El Salvador, SAUR v Argentina,
Hamester v Ghana, and Phoenix Action v Czech Republic, that ‘an investment may not qualify for
protection under a BIT, where such investment was made in breach of relevant laws and regulations,
including international treaties but also national law of the host State’. (117) But since the tribunal
8
found that the State had no expectation that the claimant would resort solely to equity financing and
not debt financing, it dismissed the respondent’s objections to jurisdiction and admissibility. (118)
The tribunal did not address whether the illegality objection should properly be considered a matter
of jurisdiction or admissibility. Neither did the Churchill Mining v Indonesia tribunal, which first
upheld jurisdiction over the claimants’ claims, but subsequently dismissed them in their entirety,
finding that ‘claims arising from rights based on fraud or forgery which a claimant deliberately or
unreasonably ignored are inadmissible as a matter of international public policy’. (119)
4.2 The investor’s lack of due diligence

Even if the investor itself did not commit an unlawful act, some tribunals have declined to exercise
jurisdiction over a claim due to an illegality committed by the investor’s partner, regardless of
whether the investor knew about the illegality. These cases range from an approach akin to strict
liability to the tribunal’s subjective assessment of whether the claimant conducted sufficient due
diligence. On the latter end of the spectrum, tribunals generally consider that the investor has an
obligation to exercise due diligence before making its investment, and if the investor’s due
diligence is insufficient to expose its partner’s illegal conduct, the investor should not be entitled to
invoke treaty protection. These cases appear philosophically distinct from other cases discussed
above in that the investor manifestly lacked mala fide and indeed, often the investor was not even
aware of another party’s mala fide.
The Anderson v Costa Rica tribunal, for example, declined jurisdiction over the investors’ case
even though the claimants had not knowingly made an illegal investment. In that case, 137 Canadian
nationals invested in Costa Rica’s financial system through an investment fund run by brothers who
committed fraud. Although these claimants were themselves victims of the brothers’ fraud
perpetrated on them, (120) the tribunal held them to a strict legality requirement: ‘the BIT states this
requirement in objective and categorical terms’. (121) In other words, each claimant had to meet the
legality requirement ‘regardless of his or her knowledge of the law or his or her intention to follow the
law’. (122) Because Canada and Costa Rica specifically included a provision that investments must
‘be “made” or “owned” in accordance with the law of the host country’, this was a ‘clear indication of
the importance that they attached to the legality of investments made by investors of the other Party
and their intention that their laws with respect to investments be strictly followed’. (123) Since the
claimants’ transaction to acquire their investments was not in accordance with Costa Rican law, the
claimants did not own an ‘investment’ under the BIT and the tribunal lacked jurisdiction to hear their
claims against Costa Rica. (124) The tribunal considered that ‘prudent investment practice requires
that any investor exercise due diligence before committing funds to any particular investment
proposal’, ie that investors ‘assure themselves that their investments comply with the law’. (125) Such
due diligence requirement ‘is neither overly onerous nor unreasonable’. (126)
The Churchill Mining v Indonesia tribunal also expected the highest level of due diligence from the
claimants, who had no actual knowledge of their local partner’s forgery of certain signatures on
documents relating to the mining concession. Though the investors had no specific knowledge of
such wrongdoing, the tribunal held that they should have ‘exercise[d] a heightened degree of
diligence’ because they were aware of an ‘endemic problem of corruption in the Indonesian mining
sector’ and their local partner had ‘no record of proven reliability’. (127) The claimants ‘relied upon
the information given to [them] by [their local partner], believed that what [the local partner] conveyed
was true, and never took independent steps to ascertain the veracity of such information’. (128)
When allegations of forgery came to the claimants’ attention, according to the tribunal, they did not
adequately investigate them. (129) Given the claimants’ failure to exercise the necessary level of due
diligence in the circumstances, the tribunal dismissed the claims as inadmissible.
The Álvarez y Marín v Panama tribunal imposed a less stringent standard of ‘reasonable due
diligence’, (130) but nonetheless denied jurisdiction due to the claimants’ failure to investigate
numerous ‘red flags’, such as the local partner’s outrageous commission (95 percent of the
purchase price), and failure to ensure compliance with national law. (131) More egregious still, and
reminiscent of the Fraport I and II decisions, the claimants had obtained legal advice on the law at
issue, on the special status of the indigenous peoples in that region, and on how to invest lawfully,
but chose not to heed that advice. (132) The claimants’ deliberate turning of a blind eye was fatal to
their claims.
The decisions of these tribunals appear draconian when contrasted with the award in Minnotte
v Poland. That case concerned a dispute arising from the failed construction of blood plasma
fractionation facilities in Poland. The respondent alleged that the investment was tainted by fraud,
deceit, and illegality (the tribunal did not specifically explain the nature of these allegations), but did
not allege that the investors had actual knowledge of these facts. Rather, the respondent’s
allegations of fraud were directed at the investors’ local partner. (133) The question thus became
‘whether this Tribunal’s jurisdiction is vitiated by reason of the alleged negligent failure of the
Claimants to investigate the factual circumstances surrounding the making of their investment. The
(134)
9
Tribunal considers that it is not’. (134) According to the tribunal, although there ‘may be
circumstances where fraud is so manifest, and so closely connected to facts (such as the making of
an investment) which form the basis of a tribunal’s jurisdiction as to warrant a dismissal of claims in
limine for want of jurisdiction’, such situation is ‘likely to be exceptional; and it is not the situation in
the present case’. (135) Because the tribunal had determined that the applicable BIT did not contain
an express legality requirement and the investors, at worst, had negligently failed to detect their
local partner’s fraud, the tribunal was not compelled to decline jurisdiction. (136)
The tribunal further rejected the respondent’s argument that principles of international law, ‘such as
the principle ex turpi causa non oritur actio (assuming, arguendo, that principle to have the status of
a rule of international law), would bar its jurisdiction in the case of the Claimants whose connection
with an alleged fraud consists in a negligent failure to make inquiries which might (or might not)
have unearthed evidence of fraud’. (137) The Minnotte v Poland tribunal thus found that the illegality
objection did not bar its jurisdiction because (i) the applicable treaty did not contain an express
legality requirement; (ii) absent an express legality requirement, an implied legality requirement
would preclude jurisdiction over investments that were made fraudulently (but not other forms of
illegality that do not amount to violations of international public policy); and (iii) based on the facts of
the case, there was no evidence that the investors committed fraud, even if there might have been
illegality or if the investors’ local partner might have committed fraud.
The Minnotte v Poland tribunal refused to penalize the claimants’ lack of due diligence into the
legality of the investment when making their investment, but instead asserted jurisdiction and punted
the question of illegality to the merits (138) —in stark contrast to the Anderson v Costa Rica and
Churchill Mining v Indonesia tribunals, which held the claimants to a strict standard of due
diligence and declined jurisdiction even though the claimants were themselves victims of a fraud.
Perhaps the lack of an express legality requirement in the applicable BIT (in contrast to the BIT in
Anderson v Costa Rica) comforted the Minnotte v Poland tribunal in its decision not to create a
jurisdictional hurdle for negligence or lack of due diligence, barring a ‘deliberate closing of eyes to
evidence of serious misconduct or crime, or an unreasonable failure to perceive such evidence’.
(139)
5. Defences to the Illegality Objection

With the increasing frequency of the illegality objection, a robust body of jurisprudence has emerged
carving out defences and exceptions to the general proposition that investments tainted by illegality
are not entitled to treaty protection. Naturally, the most widely accepted defence to an illegality
objection is that the State failed to carry its burden of proof to establish that there was, in fact,
illegality. In other words, the most airtight defence of an investor is ‘I did not commit any illegality in
making my investment’. Section 5.1 below provides an overview of the cases in which the State did
not carry its burden of proof. Even in cases where the tribunal finds illegality, however, tribunals have
crafted exceptions that allow them nonetheless to assert jurisdiction or find the investor’s claims
admissible. These exceptions are discussed in Section 5.2.
5.1 The state failed to carry its burden of proof

Several investment tribunals have found that the State did not sustain its burden of proof on illegality
and asserted jurisdiction over the dispute. The illegality alleged in these cases covered a broad
spectrum of investor misconduct:
i.Failure to register the contract under the foreign investment law (Inmaris v Ukraine (140) );
ii.Fraud in presenting inflated invoices and obtaining loan repayments to which the investor was not
entitled (Hamester v. Ghana (141) );
iii.Purchase of bonds in violation by the Italian banks of certain selling restrictions applicable to the
bonds, of local regulations regarding the marketing of such financial instruments, and of the
principle of good faith (Abaclat v Argentina (142) );
iv.Fraudulent acquisition of shares in a company without an infusion of capital in the Czech Republic
as part of that transaction (InterTrade v Czech Republic (143) );
v.Violation of the applicable commercial code, failure to pay appropriate taxes, and fraud and
misrepresentation (Quiborax v Argentina (144) );
vi.Omission of information or presentation of erroneous information to acquire the concession, and
failure to comply with formalities (Convial v Peru (145) );
vii.Breach of the mining law by acquiring indirect control over holders of mining rights without prior
authorization from the government (Rusoro v Venezuela (146) );
viii.Concealment, securities fraud, and false disclosure of the real price of a share purchase
(147)
10
transaction (Kim v Uzbekistan (147) );
ix.Bad faith misrepresentation of the investor’s economic situation to obtain more favourable royalty
rates (Glencore v Colombia (148) );
x.Scheme to defraud the province and shareholders by siphoning millions from the concessionaire
through a series of secret payments disguised as personnel salaries, in breach of labour and
accounting laws (SAUR v Argentina (149) );
xi.Circumvention of legislation requiring express authorization for foreign investors to acquire real
estate property (Gosling v Mauritius (150) ); and
xii.Diversion of substantial financial resources, fictitious payments, sham property lease
agreements, and forged invoices to defraud creditors and transfer funds abroad (Minnotte
v Poland (151) ).
In every instance, the tribunal concluded the State had not proven that the investor breached the host
State’s law when making its investment and thus rejected the illegality objection to its jurisdiction.
Although these cases turned on whether the State met its burden of proving the illegality in the
making of the investment, it is remarkable that only a few tribunals discussed the applicable
standard of proof and, even then, only in a cursory fashion. For example, the Hamester v Ghana
tribunal rejected the illegality objection, finding that ‘the Respondent has not fully discharged its
burden of proof[.]’ (152) The only apparent discussion of the standard of proof the tribunal applied is
its statement that ‘[t]he Tribunal can only decide on substantiated facts, and cannot base itself on
inferences’ and in the case at hand, there was ‘no conclusive evidence’ that the investment would
not have been made but for the alleged illegality. (153)
In rejecting the State’s illegality objection in Intertrade v Czech Republic, the tribunal noted that the
‘standard of proof in investment treaty cases is not a criminal standard, i.e. beyond a reasonable
doubt’. (154) But the tribunal did not offer an alternative standard; it merely noted that it was
‘satisfied’ that an investment had been made within the meaning of the applicable treaty. (155)
Similarly, the Quiborax v Argentina tribunal simply stated that the State must prove its illegality
objection ‘to the satisfaction of the Tribunal[.]’ (156)
These cases barely offer a sketch of an outline for a standard of proof: the tribunal does not need to
be convinced beyond a reasonable doubt, but it must be presented with substantiated facts, not
mere inferences. Whether such facts are sufficient to convince a tribunal to find illegality depends on
the tribunal’s ‘satisfaction’. In other words, it falls within the tribunal’s discretion. Until future
investment awards contribute to the development of the applicable standard of proof for illegality,
this is the unfortunate extent of the guidance provided by the cases to date.
5.2 Exceptions to the preclusive effect of illegality

As allegations of investor illegality have multiplied, certain exceptions to the blanket rule of thumb
that a finding of illegality precludes treaty claims have emerged. These exceptions can be divided
into five categories: (i) the illegality was minor, procedural or inadvertent; (ii) the State was
previously willing to cure the illegality; (iii) the State was complicit in the illegality; (iv) the State acted
in a manner that created legitimate expectations of protection or is otherwise estopped from
invoking the illegality objection; and (v) the illegality did not vitiate the investment or render it void ab
initio. Each is discussed in turn here.
5.2.1 The illegality was minor, procedural, or inadvertent rather than wilful
As discussed above in Sections 3 and 4, if the illegality is a breach of the investment law, the
investment regime, or some other fundamental aspect of the making of the investment, then it
strikes at the heart of the very existence of the investment and the State’s consent to arbitrate. (157)
Accordingly, in that context, a breach, no matter how small, generally will result in the tribunal
declining to hear the claim either on jurisdictional or admissibility grounds. The gravity of the breach
is not a primary inquiry.
Outside the context of a breach related to the making of an investment, however, certain categories
of illegality, even if established, do not defeat a tribunal’s jurisdiction or render an investor’s claims
inadmissible because they do not strike at the heart of the investment. These illegalities are
generally considered to be those that are minor, merely procedural in nature, or inadvertent rather
than wilful. Put differently, the breach must be ‘serious’ for the tribunal to decline to hear the claims.
This gives rise to two questions:
1.What is not a serious breach? (158) ‘[M]inor errors and a failure to observe the bureaucratic
formalities of the domestic law’, (159) a ‘trivial, minor contravention of the law’, (160) an ‘omission of a
minor regulator requirement … or inadvertent misstatements’, (161) or an ‘inadvertent and technical
breach of local law’. (162)
(163)
11
2.What is a serious breach? One that is ‘manifest’, (163) ‘so manifest, and so closely connected to
facts (such as the making of an investment)’, (164) a breach of ‘fundamental legal principles of the
host country’, (165) ‘in defiance of an important statutory prohibition imposed in the public interest’,
(166) a ‘fraud, which would indubitably lead to internationally vitiating the investment for purposes of
its protection’, (167) ‘a violation of a prohibition on foreign investment in a particular sector’, (168) and
‘a combination of both the importance of the requirements in the law and the flagrancy of the
investor’s noncompliance’. (169)
Thus, to constitute a ‘serious’ breach deserving of a tribunal declining to hear the claims, the
investor’s illegality must either breach a fundamental norm or important law to the host State or be
reprehensible, wilful, or deliberate, or both.
The Kim v Uzbekistan tribunal discussed these two angles in depth. As noted above (subsection
4.1.1), it articulated a three-step inquiry to apply on a case-by-case basis: (i) the importance of the
law allegedly breached; (ii) the gravity or seriousness of the alleged breach; and (iii) ‘whether the
combination of these two elements results in a compromise of a significant interest of the Host
State to such an extent that the harshness of the sanction of placing the investment outside of the
protections of the BIT is a proportionate consequence for the violation examined’. (170) When ‘the
combination of the investor’s conduct and the law involved’ results ‘in a compromise of a significant
interest of the Host State’, (171) there can be no BIT protection for investments made in breach of
national law. By framing the question as one of non-compliance that compromises a significant
interest of the Host State, the tribunal sought to focus on the significance of the violation. The
seriousness of the law ‘is a central part of the examination but not the sole focal point. It is not only
the law, but the act of noncompliance (or in some wordings, the violation) that is key’. (172) Indeed,
an investor may breach ‘a law of some import egregiously’ or it may breach a law of ‘fundamental
importance in only a trivial or accidental way’. (173)
The tribunal then gave express guidance on the relevant considerations for each part of this three-
part test, the first two of which are relevant for purposes of this section on the gravity (or lack thereof)
of the illegality. With respect to the importance of the law breached, the tribunal identified the
following relevant considerations (174) :
i.How severe a sanction does the Host State’s law impose for a breach of the law at issue? The
level of sanction can inform the tribunal as to the importance of the law to the State. In other words, if
the sanction is a low level fine, it suggests that the obligation is not as important to the State as the
breach of a law that is sanctioned by imprisonment. Likewise, a law that renders a transaction void
ab initio in case of a breach suggests that the law may be more significant to the State than one that
results only in a voidable transaction. This inquiry recalls the decisions in Liman Caspian Oil v
Kazakhstan (discussed in the next section), Achmea v Slovak Republic, Cortec v Kenya, and
Álvarez y Marín v Panama.
ii.What bearing does a Host State’s failure to investigate, prosecute, or enforce against the breach
have on the significance of that legal norm to the Host State? This factor must be assessed against
the background of a State’s limited resources.
‘What does evidence of widespread noncompliance suggest as to the significance of the obligation
to the State?’ Perhaps the widespread non-compliance suggests an abandoned norm of the past,
or perhaps it ‘reflects an important current objective of the State’ that it wants to enforce (like
combatting corruption).
With respect to the seriousness of the investor’s conduct, the tribunal set forth a non-exhaustive list
of relevant inquiries (175) :
i.Did the investor in fact breach the law?
ii.How intentional was the investor’s breach? In other words, was intent an aggravating factor or lack
of intent an excuse?
iii.Does the law lack clarity such that it suggests ‘a greater likelihood of acts that are accidental or in
good faith as opposed to egregious violations’?
iv.Did the investor conduct due diligence or otherwise make an effort to comply with the law?
v.Does a State’s failure to investigate or prosecute a breach lessen the seriousness of the breach?
vi.What does the investor’s post-investment conduct suggest as to the seriousness of the breach
and whether the investor pursued the investment in good faith?
By looking at the dual prism of the importance of the law breached and the level of the investor’s
disrespect for such laws, tribunals have the flexibility to assess the gravity of the illegality on a case-
by-case basis, ie tribunals are empowered to draw conclusions based on a more holistic view of
the facts.
12
Whether a breach is ‘serious enough’ to warrant precluding a BIT claim is not only a matter of this
dual prism, however. It is intricately intertwined with the notion of proportionality and a deep-seated
sense that the draconian consequence of a denial of jurisdiction is disproportionate to the minor or
procedural violation committed. Most likely in an attempt to retain the utmost flexibility to reach the
‘right’ result, a line of cases has weighed the seriousness of the illegality—both in terms of how
fundamental the law breached is and how flagrant the investor’s disregard for national norms—
against the harshness of the outcome (ie proportionality). These tribunals have made fact-specific,
case-by-case analyses, and have held that different circumstances justify different outcomes.
This notion of proportionality—of ensuring that the dramatic consequence of ‘no jurisdiction’
corresponds to the gravity of the investor’s wrongdoing—crept into various arbitral decisions before
it was formally designated as such in Kim v Uzbekistan and its line of cases. One of the earliest
cases to carve out minor or administrative errors from the legality requirement is Tokios Tokelès
v Ukraine. (176) In that case, the State contested the tribunal’s jurisdiction, arguing that the claimant
had allegedly used an improper corporate formality to register the local company (incorporating it
as a ‘subsidiary private enterprise’ rather than a ‘subsidiary enterprise’), and had made errors in
documents related to asset procurement and transfer. (177) Having taken note that Ukrainian
government authorities had registered the claimant’s local subsidiary as a valid enterprise and
subsequently, over eight years, registered each of the claimant’s investments, (178) the tribunal
concluded that ‘to exclude an investment on the basis of such minor errors would be inconsistent
with the object and purpose of the Treaty’. (179)
While the Tokios Tokelès v Ukraine tribunal did not articulate a formal proportionality test akin to
that later articulated in Kim v Uzbekistan, similar considerations seem to have animated its
ultimate conclusion: there is something inherently unjust about closing the door on a claimant when
the illegality involves a minor breach of a relatively unimportant law.
Other investment tribunals endorsed this approach (180) and were more explicit in their analysis.
Starting from the premise that ‘[n]ot all violations of the host State’s legal system lead to the illegality
of the investment, affecting the jurisdiction of the tribunal hearing the matter’, (181) tribunals posited
that different degrees of illegality warrant different consequences: ‘illegality must be serious, or
manifest, and [] minor errors and a failure to observe the bureaucratic formalities of the domestic
law will not justify the denial of jurisdiction’. (182) Rather than focusing on the gravity of investor
illegality and balancing that against the consequence of a denial of jurisdiction, (183) yet other
tribunals approached the same issue from a different perspective, one more State-centred: they
urged balancing the risk of overextending the scope of State consent to illegally-made investments
with the risk of rewarding a State’s abusive ferreting out of minor illegalities ex post facto to ‘escape
the consequences of its standing agreement to arbitrate’ and defeat jurisdiction. (184)
As discussed above, the Kim v Uzbekistan tribunal formalized this balancing of competing
interests by calling it what it was: a proportionality principle. For that tribunal, there is no BIT
protection if ‘the combination of the investor’s conduct and the law involved results in a compromise
of a significant interest of the Host State to such an extent that the harshness of the sanction of
placing the investment outside of the protections of the BIT is a proportionate consequence for the
violation examined’. (185) The competing interests that the Kim v Uzbekistan tribunal put in the
balance—the importance of the law breached, the seriousness of the breach, the significance of the
State’s compromised interest, and the proportionality of the sanction—were yet again a different
permutation of interests than what previous tribunals had valued. The tribunal’s ruling sounded the
death knell of the rigid rule that any breach of national law in the making of the investment
necessarily vitiates the tribunal’s jurisdiction to hear the investor’s claims.
The analytical framework of the three-part test in Kim v Uzbekistan gained traction in subsequent
investment awards, solidifying the notion of a balancing test to determine whether an investor’s
illegality was ‘minor’ or ‘trivial’. Citing Kim v Uzbekistan with approval, (186) these tribunals focused
on the importance of the law or regulation the investor breached and on the motives and conduct of
the latter (187) or, put differently, on the flagrancy of the breach. If the claimant’s breaches of national
law ‘showed serious disrespect for the fundamental public policies of the host country in relation to’
principal norms—like the protection of the environment (188) or the well-being of indigenous people
(189) —‘the proportionate response’ of denying BIT protection was warranted. (190) If, on the other
hand, the norm breached did ‘not involve the breach of fundamental legal principles’ (191) and the
claimant’s illegality was ‘inadvertent’ and merely a ‘technical breach of local law’, (192) tribunals
asserted jurisdiction over the dispute, notwithstanding the illegality.
5.2.2 The illegality did not render the investment void ab initio
This category of exception covers any illegality that, under the relevant domestic law, renders the
investment voidable, but not void ab initio. The rationale underlying this distinction is that if an
investment is void ab initio, the legal consequence is that it never existed and thus there was never
an investment that could qualify for treaty protection. In contrast, an investment that is merely
13
voidable existed up until the point that it is voided (if ever) and does not deprive a tribunal of
jurisdiction.
The seminal case for this voidability exception is Liman Caspian Oil v Kazakhstan, in which the
State accused the claimants of acquiring a license to explore and extract hydrocarbons through an
assignment agreement that breached Kazakhstani law. A Kazakhstani court later declared the
assignment agreement invalid, and ordered the claimants to restore the license to the original
concessionaire, without providing for the claimants to recoup the consideration that they had paid.
The claimants brought an arbitration under the ECT, claiming that the courts’ actions amounted to a
denial of justice and thus breached the ECT.
At the outset of its jurisdictional analysis, the tribunal drew a distinction between a transaction that is
void ab initio, and one that is merely voidable. (193) In the case at issue, the assignment of the
license in breach of Kazakhstani law would render the transaction merely ‘voidable’, (194) not
automatically invalid, ie an interested party would have to bring a legal action to seek a declaration
that the transfer was invalid. (195) The tribunal found—without more discussion—that the ‘scope of
Respondent’s consent to jurisdiction [under the ECT] must be understood to extend also to those
investments in respect of which the underlying transaction was made in breach of Kazakh law and
was therefore voidable’. (196) Since the claimant’s transfer of the license was not invalid, but only
voidable, the transaction fell within Kazakhstan’s consent to jurisdiction, and the tribunal asserted
jurisdiction. (197)
Interestingly, the tribunal went further in dictum, stating that even if an investment were void ab initio
under Kazakhstani law, ‘it could be argued that an investment had still been made and consequently
that a dispute over such an investment regarding an alleged breach of the ECT would fall within the
jurisdiction of this Tribunal. In such a case, the question of legality might well be relevant to the
merits, but it would not have preclusive effect at the level of jurisdiction’. (198) Thus, for the Liman
Caspian Oil v Kazakhstan tribunal, the scope of the State’s consent to jurisdiction under the ECT
extended to breaches of Kazakhstani law that resulted not only in a voidable transaction, but also in
transactions void ab initio. The limit to the tribunal’s view, however, was a breach of international
public policy: ‘The Tribunal agrees with the authorities cited by the Parties that it does not have
jurisdiction over investments made in violation of international public policy’, such as those involving
fraud and bribery. (199) Since the State did not prove that the claimant acquired the license by
fraudulent misrepresentation to the Ministry of Energy or by fraud on the minority shareholders, there
was no breach of international public policy and the tribunal had jurisdiction over the dispute. (200)
5.2.3 The State was previously willing to cure the illegality
If the claimant cannot establish that (i) it did not commit any illegality, or (ii) the illegality that it
committed was minor, procedural, and in good faith, or (iii) that the illegality did not vitiate the
investment from the outset, it may still persuade a tribunal to adjudicate the merits of the investor’s
claims if the State was previously aware of the illegality and indicated its willingness to allow the
claimant to cure it.
The case of Mamidoil v Albania is central to the development of this ‘curability’ exception. In that
case, the State argued that the investor failed to obtain certain permits that were allegedly
necessary under Albanian law to construct and operate its investment (a tank farm), such that the
tribunal had no jurisdiction over the dispute. After conducting a fact-intensive inquiry into the validity
under Albanian law of each of the permits and licenses required, the tribunal concluded that the tank
farm was built without the necessary ‘construction site permit[,] and [that] the [lack of] construction
permit as well as the operation of the tank farm without the exploitation permit’ violated Albanian
law. (201)
But the tribunal took care to establish a principled distinction among different kinds of illegality,
explaining that ‘not every type of non-compliance with national legislation bars the protection of an
investment’. (202) Only some will impact the tribunal’s jurisdiction. Echoing the findings of other
investment tribunals, the Mamidoil v Albania tribunal stressed that ‘there must be an inner link
between the illegal act and the investment itself’. (203) An illegality ‘without any material connection to
the investment’ or its substance or procedural requirements will not impact the investment. (204) The
illegality also must be serious; ‘“a failure to observe the bureaucratic formalities of the domestic law”
will not justify the denial of jurisdiction’. (205)
Although the Mamidoil v Albania tribunal rejected the claimant’s argument that ‘the non-application
for and the non-issuance of the permits were but minor administrative errors’, (206) it nonetheless
overlooked this non-compliance with domestic law because Albania previously had indicated that it
was willing to cure the illegality if the claimant was willing to regularize the files. (207) Under such
circumstances, the tribunal deemed that ‘the real issue is less one of the seriousness or triviality of
the illegality but, rather, concerns finality. The Tribunal interprets Respondent’s proposals as
indications that it was ready to disregard the illegality for the past, to suspend it for the present and
(208)
14
to repair it for the future’. (208) For the tribunal, the State ‘can be expected to accept the jurisdiction
of an arbitral tribunal when, in that State’s own appreciation, the illegality of the investment was
susceptible of being cured, as that State’s legalization offers show’. (209) Accordingly, the tribunal
asserted jurisdiction over the dispute and punted the legal significance of the lack of permits to the
merits phase of the arbitration. (210)
As the Mamidoil v Albania case demonstrates, an investor’s illegality may be serious and strike at
the heart of the existence of a lawful investment, and yet not preclude the tribunal’s jurisdiction or the
admissibility of the investor’s claims. The core of the inquiry in such circumstances centres on the
conduct of the State prior to the investor’s initiation of a treaty claim. If the State accepted the
investment or otherwise indicated that it knew of the illegality but was willing to allow the investment
to continue, it cannot subsequently avail itself of the illegality objection to deny that investment treaty
protection. Put differently, a State may not have its proverbial cake and eat it too—it may not benefit
from an influx of foreign investment, knowing of the investor’s illegality and expressing its willingness
to accept the existence of such investment, only to turn around later and deny the existence of the
investment for purposes of treaty protection based on the same illegality that it previously did not
consider irremediable.
5.2.4 The State was complicit in the illegality
A related exception to the illegality objection posits that a State cannot be complicit in the illegality
and subsequently invoke such illegality to deny the existence of an investment. This exception is the
philosophical cousin of the curability argument: it prohibits a State from benefitting from the
investment—or even from the illegality—only to then deny treaty protection to the investor on the
basis of that illegality. Tribunals thus adopt a holistic approach that analyses not only the investor’s
illegal conduct but also the State’s conduct in condoning or encouraging the illegality.
For example, in Gavrilović v Croatia, the claimants (Mr Georg Gavrilović, an Austrian national, and
Gavrilović d.o.o., a Croatian limited liability company) owned a meat processing enterprise in Mr
Gavrilović’s native country, Croatia. Mr Gavrilović fled to Austria during the communist era, gained
citizenship, and returned to Croatia after it declared independence. Mr Gavrilović’s former meat
processing enterprise was placed into bankruptcy and sold back to him. The second claimant,
Gavrilović d.o.o., was the successor of the companies that Mr Gavrilović purchased back from the
bankruptcy proceedings. Mr Gavrilović revived the business, and argued that Croatia committed
various treaty breaches that undermined the claimants’ investment.
The respondent State attempted to defeat the tribunal’s jurisdiction by alleging that the claimants
had (i) made suspicious money transfers from the bankruptcy estate to Gavrilović d.o.o.’s accounts
and third parties’ accounts; (211) (ii) paid numerous bribes to the liquidator; (212) and (iii) improperly
placed the companies in bankruptcy when they were still capable of making payments, making them
ineligible for bankruptcy under Croatian law. (213)
The Gavrilović v Croatia tribunal found that, even though there may have been illegality, Croatia
was complicit and therefore could not invoke the illegality of the investment to defeat jurisdiction. It
summarized the factual evidence succinctly as follows:
Croatia was fighting a war and needed money, specifically foreign currency, to
purchase weaponry. Croatia employed Mr Gavrilovic to assist it in that scheme
by smuggling money out of the country and depositing it in foreign bank
accounts that Croatia controlled. Mr Gavrilovic was a willing participant in this
scheme. He wanted to get back his family’s meat-processing business and he
asked the Government for help in return for his contribution to the war effort.
The Government obliged. There was thus a quid pro quo… (214)
Croatia had used Mr Gavrilović in furtherance of its war effort, and when he asked for a favour in
return, Croatia ‘orchestrated a scheme to return his father’s business to him, including by loaning
him the funds he needed to purchase the [investment]’. (215) Given the evidence of the State’s
‘extensive involvement’ in the scheme and the lack of evidence that Mr Gavrilović initiated or
orchestrated it, the tribunal had ‘difficulty accepting that the illegality is opposable to the First
Claimant under international law’. (216) It thus dismissed Croatia’s illegality objection. (217)
Perhaps less dramatic but equally on point is a State’s conduct in breach of its own laws that relates
to or enables the claimant’s alleged illegality. In Karkey v Pakistan, the tribunal found that ‘[a]ll the
contractual modifications that Pakistan alleges were made in breach of its procurement laws were
duly agreed by the contracting parties [which included organs of the State]’. (218) Accordingly, it
concluded that Pakistan ‘cannot avoid jurisdiction under the BIT by invoking its own failure to comply
with domestic law’ (219) and recasting it as an illegality stemming solely from the claimant. The
illegality was the shared responsibility of Pakistan and the claimant, and as such Pakistan could not
15
invoke it as a sword to defeat BIT jurisdiction.
Unlike the cases discussed in Section 4.1 that involved the investor’s unilateral, intentional deceit of
the host State (eg Fraport I/II), Gavrilović v Croatia and Karkey Karadeniz v Pakistan concerned
bilateral illegality in which the State was complicit. Bilateral illegality is the critical underpinning of
the complicity exception, which does not allow a State to ‘preclude an investor from seeking
protection under the BIT on the ground that [the State’s] own actions are illegal under its own laws’.
(220)
5.2.5 The State acted in a manner that created legitimate expectations of protection or
is otherwise estopped from invoking the illegality objection
The final category of exceptions to the illegality objection finds its origins in established international
legal principles. The principle of estoppel is ‘embedded in international law’ and ‘may be found
when a party demonstrates by its conduct that it will not exercise a right and a counter-party
legitimately relies on this conduct’. (221) As with the curability and complicity exceptions, the
estoppel exception looks to the State’s conduct to avoid the severe consequence of a finding of no
jurisdiction or inadmissibility of claims. It is perhaps the least overt of the three exceptions. It does
not require the State to agree to cure the illegality or to be an active and willing participant in the
illegality. Rather, it speaks to the State’s willingness to turn a blind eye to the illegality (up until it
finds itself embroiled in an investor–state dispute). If the State previously indicated (implicitly or
explicitly) its acceptance of the investment leading the investor to believe that its investment was
lawful and entitled to protection, the State will be estopped from subsequently invoking the illegality
objection to undermine the existence of the investment.
Already early in the development of the illegality objection, the Fraport I tribunal articulated estoppel
as a viable defence in dictum, observing that ‘[t]here is, however, the question of estoppel.
Principles of fairness should require a tribunal to hold a government estopped from raising
violations of its own law as a jurisdictional defense when it knowingly overlooked them and
endorsed an investment which was not in compliance with its law’. (222) Likewise, the von Pezold
v Zimbabwe tribunal accepted that estoppel is a legitimate defence to the illegality objection, (223)
and ultimately was ‘not convinced that the Claimants breached any of Zimbabwe’s laws, but even if
they did, the Tribunal is of the opinion that the Respondent is estopped from now denying that BIT
protection exists’. (224)
Establishing the defence of estoppel generally imposes a high bar, and ‘[m]ere inactivity, as
opposed to an act, is not enough’ to found an estoppel defence. (225) Notwithstanding this high bar,
however, claimants’ invocation of the estoppel exception has met with moderate success to date,
with at least two investment tribunals finding that States were estopped from invoking the illegality
objection. In Kardassopoulos v Georgia, the tribunal concluded that the activities of the investor’s
joint venture exceeded those permitted under domestic law, but that Georgian authorities had
authorized them ultra vires (226) and had signed the claimant’s concession documents. Although a
Georgian court ‘may well [conclude] that the [Joint Venture Agreement] is void ab initio under
Georgian law’, (227) this mere fact did not necessarily preclude the tribunal’s jurisdiction (228) (in
contrast to the decisions discussed above at subsection 5.2.2). Here, the State’s objection did not
allege that the investor committed an illegal act, but rather that Georgia’s ‘State-owned enterprises
violated Georgian law by exceeding their authority, thus rendering void ab initio the JVA and the
Concession’. (229)
For the tribunal, the State could not avoid jurisdiction ‘simply’ because the investment may have
been void ab initio under Georgian law because the highest levels of the government had ratified it,
and ‘in the years following the execution of the JVA and the Concession … Georgia never protested
nor claimed that these agreements were illegal under Georgian law’. (230) Ultimately, ‘[i]n light of all
of the above circumstances, the Tribunal is of the view that Respondent created a legitimate
expectation for Claimant that his investment was, indeed, made in accordance with Georgian law
and, in the event of breach, would be entitled to treaty protection’. (231) Because the acts of
Georgian officials, even if ultra vires, were cloaked with governmental authority and attributable to
the State, they gave the investor a legitimate expectation of legality and entitlement to protection,
and the State was ‘accordingly estopped from objecting to the Tribunal’s jurisdiction rationae
materiae under the ECT and the BIT on the basis that the JVA and the Concession could be void
ab initio under Georgian law’. (232)
In Arif v Moldova, the tribunal considered the respondent’s allegation that the judicial invalidation of
certain contractual rights vitiated the investment, thereby depriving the tribunal of jurisdiction. (233)
The tribunal rejected this argument as ‘formalistic’. (234) At the time of the investment, ‘and for many
months thereafter, both Parties believed and were allowed to trust that the [agreements] were valid,
and that the investment had been made in accordance with the legislation of Moldova. Both Parties
acted in good faith on this basis’. (235) For the tribunal, Moldova could not now rely ‘on its own law
and decisions of its own courts to deny juridical existence’ (236) —applied ‘retrospectively to the
(237)
16
date of the investment’ (237) —‘to agreements that existed in fact, and were relied upon by both
Parties’. (238) Although the tribunal ostensibly treated this as a temporal issue, its reasoning closely
resembled an estoppel argument given its emphasis on the element of reliance. Specifically, the
tribunal noted that there are ‘temporal limitations on a jurisdictional argument based on the illegality
of an investment, where the legality of the investment has been accepted and acted upon in good
faith by both parties over a period of time’. (239) In cases such as this one—with no fraud, no
corruption, and no concealed illegality—'the passage of time and the actions of the parties on the
mutual assumption of legality cannot be ignored in the determination of jurisdiction’. (240)
These investment awards delineate the traits of a successful estoppel argument in the context of
illegally-made investments. Rooted in equity, estoppel examines the conduct of both the investor-
claimant and the State-respondent. The investor invoking estoppel must have acted in good faith
when it made its investment—it must not have knowingly made an investment in violation of
domestic law. The State must have acted in a manner that created a legitimate expectation on the
part of the investor that the investment was indeed lawful, and must have sustained such conduct
over time. In Kardassopoulos v Georgia, the State’s conduct lasted several years, while in Arif
v Moldova, a few months sufficed. Whether this conduct was ultra vires is irrelevant; if it was
cloaked in the mantle of governmental authority, it is attributable to the State. If these foregoing
criteria are met, even an investment that was void ab initio because it was unlawful under domestic
law may be entitled to treaty protection.
6. CONCLUSION
This journey through the topography of the illegality objection (exclusive of corruption) highlights that,
in the most recent generation of cases, the genesis of the alleged illegality extends beyond an
investor’s active deception or misrepresentation à la Plama v Bulgaria or Fraport v Philippines
into the realm, inter alia, of an investor’s level of due diligence, its compliance with various
administrative regulations of varying importance, and its intentionality in breaching legal norms. In
other words, in the context of an illegality objection, investment tribunals scrutinize a broad range of
investor conduct, which they assess holistically and qualitatively.
While some trends are clearly discernible, investment tribunals have not (yet) settled on a uniform
approach to the illegality objection. Certain aspects remain emerging and others, like a clearly-
defined standard of proof, remain lacking. For instance, the case law shows an evolution from a
bright-line rule to a more nuanced appreciation of the contours and the impact of an alleged illegality
. Although a few investment tribunals recently have adopted the proportionality analysis of the Kim
v Uzbekistan tribunal, the sample size is not robust enough to assess whether it will solidify as the
new standard or whether it will morph into yet another formulation. Likewise, the ad hoc exceptions
to the preclusive effect of illegality are ever developing. As tribunals continue to grapple with the
harsh consequences of denying BIT jurisdiction due to an investor’s alleged illegality, they may well
carve out additional exceptions to avoid a manifestly unfair result.
Analysing the case law and identifying trends to date distils the parameters of the legal framework
of the illegality objection (exclusive of corruption) as it stands today, and allows the arbitration
community to take stock of how it has treated these kinds of objections to date. Only then can there
be a deliberate effort to bring more uniformity to the collective approach, to systematize the
exceptions to the objection, and to fill gaps that should be filled. The next generation of cases
involving an illegality objection holds the promise of bringing clarity on these (and future) issues.
References
*)
Caline Mouawad, Partner at Chaffetz Lindsey LLP, New York, USA
†)
Jessica Beess und Chrostin, Senior Associate at Covington & Burling LLP, New York, USA. E-
mail: jbeessundchrostin@cov.com
The views expressed in this article are the authors’ and do not necessarily reflect the views of their
firms.
1)
See, eg Florian Haugeneder, ‘Corruption in Investor–State Arbitration’ (2009) 10(3) Journal of
World Investment & Trade; Isuru C Devendra, ‘State Responsibility for Corruption in International
Investment Arbitration’ (2019) 10(2) Journal of International Dispute Settlement 248–87; Aloysius P
Llamzon, Corruption in International Investment Arbitration (Oxford International Arbitration Series
2014); Andrew T Bulovsky, ‘Promises Unfulfilled: How Investment Arbitration Tribunals Mishandle
Corruption Claims and Undermine International Development’ (2019) 118(1) Mich L Rev.
2)
17
2)
Fraport AG Frankfurt Airport Services Worldwide v Republic of the Philippines, ICSID Case No
ARB/03/25, Award, 16 August 2007 (‘Fraport I Award), paras 281, 335; see also Quiborax S.A. et
al. v Plurinational State of Bolivia, ICSID Case No ARB/06/2, Decision on Jurisdiction, 27
September 2012 (‘Quiborax v Bolivia Decision’), para 51 (‘“investment” means any kind of assets
or rights related to an investment as long as this has been made in accordance with the laws and
regulations of the Contracting Party in whose territory the investment was made’); Rusoro Mining
Limited v The Bolivarian Republic of Venezuela, ICSID Case No ARB/(AF)/12/5, Award, 22
August 2016 (‘Rusoro v Venezuela Award’), para 289 (‘“investment” as “… any kind of asset
owned or controlled by an investor of one Contracting Party … in the territory of the other
Contracting Party in accordance with the latter’s laws’”.); InterTrade Holding GmbH v The Czech
Republic, PCA Case No 2009-12, Final Award, 29 May 2012 (‘InterTrade v Czech Republic
Award’), para 115 (‘The term “investments” comprises all kinds of assets that are invested in
accordance with domestic legislation … ‘); Alasdair Ross Anderson et al. v Republic of Costa
Rica, ICSID Case No ARB(AF)/07/3, Award, 19 May 2010 (‘Anderson v Costa Rica Award’), para
46 (‘“investment” means any kind of asset owned or controlled either directly, or indirectly … by an
investor of one Contracting Party in the territory of the other Contracting Party in accordance with
the latter’s laws … ’); Vladislav Kim and others v Republic of Uzbekistan, ICSID Case No
ARB/13/6, Decision on Jurisdiction, 8 March 2017 (‘Kim v Uzbekistan Decision’), para 371 (‘As a
matter of interpretation, the Tribunal adopts the apparent view of the Parties that the phrases “made
in compliance with legislation” and “made in accordance with law” involve equivalent obligations.’).
3)
Inceysa Vallisoletana, S.L. v Republic of El Salvador, ICSID Case No ARB/03/26, Award, 2
August 2006 (‘Inceysa v El Salvador Award’), para 197.
4)
Inceysa v El Salvador Award, para 188 (‘Consequently, the limitation of consent based on the
“accordance with law clause” may be contained not only in the definition of investment, but also in
the precepts related to “Protection” or even in the chapter related to “Promotion and Admission”.’);
see also ibid, para 189 (quoting the respondent state’s pleading with approval) (‘First, many
investment treaties incorporate limitations into their definition of investment … Alternatively or in
addition, State Parties sometimes incorporate a requirement of compliance with the host State’s
laws into provisions addressing the applicability of the treaty … A common variation in applicability
provisions of investment treaties is to specify the prerequisite of investment legality for the extension
of treaty protections to investments made prior to the date the treaty entered into force … Third,
State Parties frequently incorporate “in accordance with law” limitations into treaty provisions
requiring host States to admit or accept foreign investments … Finally, State Parties frequently
incorporate “accordance with law” requirements in the provision pledging protection and non-
impairment of qualifying investments, which is usually the first substantive obligation section of the
investment treaties.’).
5)
ibid, paras 204–06.
6)
7)
18
7)
See Kim v Uzbekistan Decision, para 374 (‘This Agreement shall apply to investments within the
territory of one Contracting Party’s State, made in compliance with its legislation by investors from
the other Contracting Party’s State, regardless of whether they were made before or after the entry
into force of this Agreement.’); Gustav F W Hamester GmbH & Co KG v Republic of Ghana,
ICSID Case No ARB/07/24, Award, 18 June 2010 (‘Hamester v Ghana Award’), para 126 (‘[t]his
Treaty shall also apply to investments made prior to [the Treaty’s] entry into force by nationals or
companies of either Contracting Party in the territory of the other Contracting Party consistent with
the latter’s legislation’.); Inceysa v El Salvador Award, para 204 (the BIT ‘will also apply to
investments made before its entry into force by the investors of a Contracting Party in accordance
with the laws of the other Contracting Party in the territory of the latter’); Glencore International A.G.
and C.I. Prodeco S.A. v Republic of Colombia, ICSID Case No ARB/16/6, Award, 27 August
2019 (‘Glencore v Colombia Award’), para 825 (‘Pursuant to Arts. 2 and 4(1) of the [Switzerland-
Colombia] Treaty, protection applies only to investments made in accordance with Colombia’s laws
and regulations’) (art 2: ‘This Agreement shall apply to investments of investors of one Party, made
in the territory of the other Party in accordance with its laws and regulations, whether prior to or after
the entry into force of the Agreement.’); Georg Gavrilović and Gavrilović d.o.o. v Republic of
Croatia, ICSID Case No ARB/12/39, Award, 26 July 2018 (‘Gavrilović v Croatia Award’), para 221
(‘Croatia cannot be found to have consented to ICSID arbitration, and consequently to this
Tribunal’s jurisdiction unless the investment in question in a particular dispute arising under the BIT
was made “in accordance with” the law of the host State. Article 11(1) of the BIT provides in relevant
part, “[t]he present Agreement shall apply to investments, made in the territory of one of the
Contracting Parties in accordance with its legislation, by investors of the other Contracting Party …”
.’).
8)
Mamidoil Jetoil Greek Petroleum Products Societe S.A. v Republic of Albania, ICSID Case No
ARB/11/24, Award, 30 March 2015 (‘Mamidoil v Albania Award’), para 292 (‘Each Contracting
Party shall in its territory promote, as far as possible, investments by investors of the other
Contracting Party and admit such investments in accordance with its legislation’) (art 2 of Greece–
Albania BIT); Fraport I Award, para 282 (‘Each Contracting State shall promote as far as possible
investments in its territory by investors of the other Contracting State and admit such investments in
accordance with its Constitution, laws and regulations as referred to in Article 1 paragraph 1.’) (art 2
of Germany–Philippines BIT); Inceysa v El Salvador Award, para 201 (‘Each Contracting Party
shall protect in its territory the investments made, in accordance with its legislation … ‘) (art 3 of
Spain–El Salvador BIT); Glencore v Colombia Award, para 825 (‘Pursuant to Arts. 2 and 4(1) of
the [Switzerland-Colombia] Treaty, protection applies only to investments made in accordance with
Colombia’s laws and regulations’) (art 4(1): ‘Each Party shall protect within its territory investments
made in accordance with its laws and regulations by investors of the other Party … ’); Inmaris
Perestroika Sailing Maritime Services GmbH et al. v Ukraine, ICSID Case No ARB/08/8,
Decision on Jurisdiction, 8 March 2010 (‘Inmaris v Ukraine Decision’), para 135 (‘Article 2(2) of
the BIT defining the scope of its application states: “Investments, which have been undertaken by
nationals or companies of the other Contracting Party in accordance with the legal regulations of a
Contracting Party in the field of application of its legal system, shall enjoy the full protection of the
Treaty”.’).
9)
Achmea B.V. v The Slovak Republic, PCA Case No 2008-13, Final Award, 7 December 2012
(‘Achmea v Slovak Republic Award’), paras 165–66.
10)
Achmea v Slovak Republic Award, para 166 (‘Article 2 of the Treaty is concerned with the duty of
each State Party to promote inward investment, and to admit investments in accordance with its
law, where those investments are made by investors of the other State Party. Article 2 does not
purport to qualify the definition of an investment. That definition is set out in Article 1(a) of the Treaty
(set out in paragraph 158, above) which, unlike provisions in certain other bilateral investment
treaties, does not contain a requirement that investments be made ‘in accordance with the laws and
regulations’ of the host State.).
11)
19
11)
SAUR International S.A. v The Argentine Republic, ICSID Case No ARB/04/4, Decision on
Jurisdiction, 6 June 2012 (‘SAUR v Argentina Decision’), para 307 (the obligation to act in
accordance with the laws of the host state ‘conditions and limits the obligation of States to admit
and promote investments from the other Contracting Party, but does not condition the conduct of the
foreign investor’) (‘l’exigence d’agir “dans le cadre de sa législation” conditionne et limite le devoir
des États d’admettre et d’encourager des investissements de l’autre partie contractante, mais ne
conditionne pas les agissements de l’investisseur étranger’.); Álvarez y Marín Corporación S.A. et
al. v Republic of Panama, ICSID Case No ARB/15/14, Award, 12 October 2018 (‘Álvarez y Marín
v Panama Award’), para 127 (the obligation to act ‘in accordance with the law’ of the host State ‘is
an obligation on the State, not on the investor’, and an obligation on the investor that its investment
comply with the host State’s laws cannot be inferred) (‘la exigencia de actuar ‘dentro del marco de
sus leyes y reglamentaciones” es una imposición dirigida al Estado – no al inversor – y por tanto,
no puede inferirse de ella un deber del inversionista para que su inversion cumpla con la legalidad
del Estado receptor’).
12)
Churchill Mining Plc v Republic of Indonesia, ICSID Case No ARB/12/14 and 12/40, Decision on
Jurisdiction, 24 February 2014 (‘Churchill Mining v Indonesia Decision’), para 291.
13)
But see Abaclat et al. v The Argentine Republic, ICSID Case No ARB/07/5, Decision on
Jurisdiction and Admissibility, 4 August 2011 (‘Abaclat v Argentina Decision’) (treating illegality as
a matter of merits, not jurisdiction, because the legality requirement was found in the ‘applicable
law’ provision rather than the definition of ‘investment’), para 382 (‘At the stage of jurisdiction, the
Tribunal’s examination is limited to verifying the existence of a dispute relating to an investment, and
focuses thus on the definition of the investment. It is not concerned yet with the question whether the
investment was validly made, i.e., whether it fulfils the necessary requirements to enjoy full protection
under the BIT. This will be a matter to be dealt at the merits stage of the present dispute, subject to
the Tribunal’s findings on jurisdiction.”’).
14)
Fraport AG Frankfurt Airport Services Worldwide v Republic of the Philippines, ICSID Case No
ARB/11/12, Award, 10 December 2014 (‘Fraport II Award’), para 467.
15)
Inceysa v El Salvador Award, para 207; see also Saba Fakes v Republic of Turkey, ICSID Case
No ARB/07/20, Award, 14 July 2010 (‘Saba Fakes v Turkey Award’), paras 114–15 (‘bilateral
investment treaties are at liberty to condition their application and the whole protection they afford,
including consent to arbitration, to a legality requirement of one form or another … the Contracting
Party cannot be deemed to have given its consent to arbitrate the dispute under Article 8(3) of the
BIT [if the investment is not established in accordance with the laws] and there would therefore be
no consent to the Centre’s jurisdictional within the meaning of Article 25(1) of the ICSID
Convention’.); Gavrilović v Croatia Award, para 221 (‘Croatia cannot be found to have consented
to ICSID arbitration, and consequently to this Tribunal’s jurisdiction unless the investment in question
in a particular dispute arising under the BIT was made “in accordance with” the law of Croatia, the
host State.’); Anglo-Adriatic Group Limited v Republic of Albania, ICSID Case No ARB/17/6,
Award, 7 February 2019 (‘Anglo-Adriatic v Albania Award’), para 287 (‘The subject-matter of a
dispute arising out of an illegal investment falls outside the scope of Albania’s consent to arbitrate’
in the foreign investment law).
16)
Mamidoil v Albania Award, para 480.
17)
See, eg Churchill Mining PLC and Planet Mining Pty Ltd v Republic of Indonesia, ICSID Case
No ARB/12/14 and 12/40, Award, 6 December 2016 (‘Churchill Mining v Indonesia Award’), para
528 (‘the general principle of good faith and the prohibition of abuse of process entail that the
claims before this Tribunal cannot benefit from investment protection under the Treaties and are,
consequently, deemed inadmissible’.).
18)
von Pezold and others v Republic of Zimbabwe, ICSID Case No ARB/10/15, Award, 28 July 2015
(‘von Pezold v Zimbabwe Award’), para 346 (specifying that this distinction was without a
difference ‘save as to whether the Claimants are entitled to raise their MFN defence’); Churchill
Mining v Indonesia Award (finding the claimant’s claims inadmissible due to fraud and forgery of
documents in connection with acquisition of mining rights).
19)
20
19)
See, eg Fraport II Award, para 332 (‘The Tribunal is also of the view that, even absent the sort of
explicit legality requirement that exists here, it would be still be appropriate to consider the legality
of the investment. As other tribunals have recognized, there is an increasingly well-established
international principle which makes international legal remedies unavailable with respect to illegal
investments, at least when such illegality goes to the essence of the investment.’); SAUR
v Argentina Decision, para 308 (‘The condition of not committing a grave violation of the legal
order is a tacit condition of any BIT, because in any event it is incomprehensible that a State would
offer the benefit of protection through investment arbitration if the investor, to obtain such protection,
has acted contrary to the law’) (‘La condition de ne pas commettre de violation grave de l’ordre
juridique est une condition tacite, propre à tout APRI, car en tout état de cause, il est
incompréhensible qu’un État offre le bénéfice de la protection par un arbitrage d’investissement si
l’investisseur, pour obtenir cette protection, a agi à l’encontre du droit’); Phoenix Action, Ltd. v The
Czech Republic, ICSID Case No ARB/06/5, Award, 15 April 2009 (‘Phoenix Action v Czech
Republic Award’) para 101 (‘In the Tribunal’s view, States cannot be deemed to offer access to the
ICSID dispute settlement mechanism to investments made in violation of their laws … it is the
Tribunal’s view that this condition – the conformity of the establishment of the investment with the
national laws – is implicit even when not expressly stated in the relevant BIT.’).
20)
Bear Creek Mining Corporation v Republic of Peru, ICSID Case No ARB/14/21, Award, 30
November 2017 (‘Bear Creek v Peru Award’), paras 320–24, 335 (declining to read a legality
requirement into the free trade agreement, which identified such requirement as ‘a “special
formality” that the host State is entitled to adopt if it so wishes’, and which Peru had not adopted
expressly). Of note, the tribunal stated in dictum that its finding may have been different had Peru
alleged, and the tribunal found, that the claimant committed fraud as opposed to a mere procedural
breach. ibid.
21)
David Minnotte and Robert Lewis v Republic of Poland, ICSID Case No ARB(AF)/10/1, Award,
16 May 2014 (‘Minnotte v Poland Award’), para 131.
22)
Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v Republic of
Kenya, ICSID Case No ARB/15/29, Award, 22 October 2018 (‘Cortec v Kenya Award’), para 260.
23)
Oxus Gold v The Republic of Uzbekistan, UNCITRAL, Final Award, 17 December 2015 (‘Oxus
v Uzbekistan Award’), para 706.
24)
SAUR v Argentina Decision, para 308.
25)
Cortec v Kenya Award, para 333.
26)
Plama Consortium Limited v Republic of Bulgaria, ICSID Case No ARB/03/240, Award, 27
August 2008 (‘Plama v Bulgaria Award”), para 139. The tribunal also noted that granting ECT
protection to the claimant’s illegally-made investment would be contrary to the principle nemo
auditor propriam turpitudinem allegans and international public policy. ibid, para 143.
27)
Achmea v Slovak Republic Award, para 170.
28)
Liman Caspian Oil BV and NCL Dutch investment BV v Republic of Kazakhstan, ICSID Case No
ARB/07/14, Award, 22 June 2010 (‘Liman Caspian Oil v. Kazakhstan Award’), para 194 (‘The
Tribunal agrees with the authorities cited by the Parties that it does not have jurisdiction over
investments made in violation of international public policy’, such as those involving fraud and
bribery); see also Inceysa v El Salvador Award, para 249 (‘It is not possible to recognize the
existence of rights arising from illegal acts, because it would violate the respect for the law which, as
already indicated, is a principle of international public policy’).
29)
21
29)
SAUR v Argentina Decision, para 308 (‘The finality of the system of investment arbitration consists
in protecting only lawful and good faith investments … the requirement of not committing a grave
violation of the legal order is a tacit condition of any BIT, because in any event it is
incomprehensible that a State would offer the benefit of protection through investment arbitration if
the investor, to obtain such protection, has acted contrary to the law.’) (‘Il entend que la finalité du
système d’arbitrage d’investissement consiste à protéger uniquement les investissements licites et
bona fide…La condition de ne pas commettre de violation grave de l’ordre juridique est une
condition tacite, propre à tout APRI, car en tout état de cause, il est incompréhensible qu’un État
offre le bénéfice de la protection par un arbitrage d’investissement si l’investisseur, pour obtenir
cette protection, a agi à l’encontre du droit.’); see also Inceysa v El Salvador Award, para 239 (‘By
falsifying the facts, Inceysa violated the principle of good faith from the time it made its investment
and, therefore, it did not make it in accordance with Salvadoran law. Faced with this situation, this
Tribunal can only declare its incompetence to hear Inceysa’s complaint, since its investment cannot
benefit from the protection of the BIT, as established by the parties during the negotiations and the
execution of the agreement.’); Phoenix Action v Czech Republic Award, para 100 (‘the purpose of
international protection is to protect legal and bona fide investments’), para 113 (‘The Tribunal has
to prevent an abuse of the system of international investment protection under the ICSID
Convention, in ensuring that only investments that are made in compliance with the international
principle of good faith and do not attempt to misuse the system are protected’), para 106 (‘In the
Tribunal’s view, States cannot be deemed to offer access to the ICSID dispute settlement
mechanism to investments not made in good faith. The protection of international investment
arbitration cannot be granted if such protection would run contrary to the general principles of
international law, among which the principle of good faith is of utmost importance’); Hamester
v Ghana Award, paras 123–24 (‘An investment will not be protected if it has been created in
violation of national or international principles of good faith; by way of corruption, fraud, or deceitful
conduct…It will also not be protected if it is made in violation of the host State’s law’); InterTrade
v Czech Republic Award, para 137 (‘The Tribunal takes no issue with the general principle of
international law that, in order to benefit from investment protection, an investment must be made in
good faith. As the Tribunal in Gustav Hamester observed, this is a general principle that exists
independently of specific language to this effect in the treaty’).
30)
See also Inceysa v El Salvador Award, para 240.
31)
SAUR v Argentina Decision, para 308 (‘Whether the BIT between France and Argentina mentions
or not the requirement that an investor act in accordance with domestic laws is not a relevant
factor.’) (‘Le fait que l’APRI entre la France et l’Argentine mentionne ou non l’exigence que
l’investisseur agisse conformément à la législation interne ne constitue pas un facteur pertinent.’);
see also Phoenix Action v Czech Republic Award, para 101 (‘it is the Tribunal’s view that this
condition – the conformity of the establishment of the investment with the national laws – is implicit
even when not expressly stated in the relevant BIT’); Hamester v Ghana Award, paras 123–24 (‘An
investment will not be protected if it has been created in violation of national or international
principles of good faith; by way of corruption, fraud, or deceitful conduct … It will also not be
protected if it is made in violation of the host State’s law. These are general principles that exist
independently of specific language to this effect in the Treaty.’).
32)
33)
SAUR v Argentina Decision, para 308 (‘Il entend que la finalité du système d’arbitrage
d’investissement consiste à protéger uniquement les investissements licites et bona fide…La
condition de ne pas commettre de violation grave de l’ordre juridique est une condition tacite,
propre à tout APRI, car en tout état de cause, il est incompréhensible qu’un État offre le bénéfice de
la protection par un arbitrage d’investissement si l’investisseur, pour obtenir cette protection, a agi
à l’encontre du droit’); see also Álvarez y Marín v Panama Award, para 134 (it is ‘reasonable to
assume that States have only consented to this curtailment of their sovereignty under the condition
that this protection mechanism is limited to investments made in accordance with their own legal
systems’).
34)
22
34)
Khan Resources et al. v Government of Mongolia, PCA Case No 2011-09, Decision on
Jurisdiction, 25 July 2012 (‘Khan Resources v Mongolia Decision’), para 383 (‘An investor who
has obtained its investment in the host state only by acting in bad faith or in violation of the laws of
the host state, has brought him or herself within the scope of application of the ECT only as a result
of his wrongful acts. Such an investor should not be allowed to benefit as a result, in accordance
with the maxim nemo auditor propriam turpitudinem allegans’); see also Álvarez y Marín
v Panama para 135 (to extend BIT protection to investments made in breach of national law would
run counter to ‘one of the most basic principles of all legal systems: nemo audiatur propriam
turpitudinem allegans’).
35)
M Sornarajah, The International Law on Foreign Investment (2nd edn, CUP 2004) 106.
36)
See Plama v Bulgaria Award, paras 133–40; Oxus Gold v Uzbekistan Award, para 713.
37)
See below Section 5.
38)
But see Aloysius P Llamzon and Anthony Sinclair, ‘Investor Wrongdoing in Investment Arbitration:
Standards Governing Issues of Corruption, Fraud, Misrepresentation, and other Investor
Misconduct’ in Albert Jan Van den Berg (ed), Legitimacy: Myths, Realities, Challenges, ICCA
Congress Series No 18, 451, 499 (2015) (‘The prevailing view is that absent express wording in the
applicable investment treaty, breach of host State law whether at the inception of an investment or
subsequently is not a jurisdictional matter. Rather, it is a matter which may, depending on the
circumstances, lead to claims being excluded on grounds of inadmissibility, or present the host
State with a possible defence to allegations of treaty breach.’).
39)
See, eg Quiborax v Bolivia Decision, para 277 (rejecting one of the investor’s alleged illegalities
because ‘such breach would like outside the temporal scope of the legality requirement, as it would
have been committed after the investment was established’.); Churchill Mining v Indonesia
Decision, para 315 (‘The present decision is limited to jurisdiction and does not prejudge any
alleged wrongdoing by the Claimant during the operation of the investment, which is a matter for the
merits.’); see also Mamidoil v Albania Award, para 481 (‘not every type of non-compliance with
national legislation bars the protection of an investment. First, it is evident that there must be an
inner link between the illegal act and the investment itself. Illegal conduct of the investor will not affect
the investment insofar as it does not relate to its substance or procedural requirements but rather
occurs without any material connection to the investment’); Inceysa v El Salvador, para 239 ( ‘By
falsifying the facts, Inceysa violated the principle of good faith from the time it made its investment
and, therefore, it did not make it in accordance with Salvadoran law. Faced with this situation, this
Tribunal can only declare its incompetence to hear Inceysa’s complaint, since its investment cannot
benefit from the protection of the BIT, as established by the parties during the negotiations and the
execution of the agreement.’); Oxus v Uzbekistan Award, para 707 (‘In order to lose the protection
under the BIT, it is however necessary, as largely agreed in the above cited cases, that the illegality
affects the “making”, i.e. arises when initiating the investment itself and not just when implementing
and/or operating it.’).
40)
See, eg Occidental Petroleum Corp. and Occidental Exploration and Production Co. v The
Republic of Ecuador, ICSID Case No ARB/06/11, Award, 5 October 2012 (reducing awarded
damages by 25% on the basis that the investor’s attempt to transfer its rights under an agreement
with Ecuador to a third party without notifying Ecuadorian officials amounted to a negligent breach
of Ecuadorian law and contributed to the investor’s injury).
41)
Hamester v Ghana Award, para 126.
42)
ibid, para 127.
43)
Quiborax v Bolivia Decision, para 266; see also ibid (‘Indeed, the Treaty refers to the legality
requirement in the past tense by using the words investments ‘made’ in accordance with the laws
and regulations of the host State and, in Spanish, “haya efectuado” (Fraport, Hamester, Saba
Fakes)’) (footnotes omitted); Kim v Uzbekistan Decision, paras 375, 376 (‘If a violation of the law
is not related to Claimants’ decision to make the investment, then such violation is not an action
within the scope of the legality requirement’).
44)
23
44)
There is one outlier case in which the tribunal held that illegality in the course of the investment
rendered the investors’ claims inadmissible. In Churchill Mining v Indonesia, the tribunal found that
the investors’ local partner had very likely committed forgery in relation to certain mining licenses.
Although the illegality arose after the investors began the mining project (ie after they made the
investment), the tribunal considered that the widespread forgery in over 30 documents underlying
the investment ‘taints the entirety of the Claimants’ investment[,]’ rendering their claims
inadmissible. Churchill Mining v Indonesia Award, para 528.
45)
Fraport I Award, para 345.
46)
Kim v Uzbekistan Decision, para 377.
47)
Khan Resources v Mongolia Decision, para 384.
48)
ibid; see also Yukos Universal Limited v The Russian Federation, PCA Case No AA 227, Final
Award, 18 July 2014 (‘Yukos v Russia Award’), para 1355 (‘There is no compelling reason to deny
altogether the right to invoke the ECT to any investor who has breached the law of the host State in
the course of its investment. If the investor acts illegally, the host state can request it to correct its
behavior and impose upon it sanctions available under domestic law, as the Russian Federation
indeed purports to have done by reassessing taxes and imposing fines. However, if the investor
believes these sanctions to be unjustified (as Claimants do in the present case), it must have the
possibility of challenging their validity in accordance with the applicable investment treaty. It would
undermine the purpose and object of the ECT to deny the investor the right to make its case before
an arbitral tribunal based on the same alleged violations the existence of which the investor seeks
to dispute on the merits.’).
49)
Saba Fakes v Turkey Award, para 119; see also Convial Callao S.A. and CCI – Compañía de
Concesiones de Infraestructura S.A. v Republic of Peru, ICSID Case No ARB/10/2, Final Award,
21 May 2013 (‘Convial v Peru Award’), para 404 (‘Not all violations of the host State’s legal
system lead to the illegality of the investment, affecting the jurisdiction of the tribunal hearing the
matter.’).
50)
Quiborax v Bolivia Decision, para 266 (stating in dictum that, even if the claimants had breached a
law regarding a shareholder registry, ‘any such breach would have been trivial and thus beyond the
subject matter scope of the legality requirement’) (para 281); see also Convial v Peru Award, para
409 (quoting Quiborax v Bolivia with approval).
51)
See below Section 5.2.
52)
Inceysa v El Salvador Award, paras 236–37.
53)
ibid, paras 203, 207.
54)
ibid, para 207.
55)
ibid.
56)
ibid, para 335.
57)
ibid, para 237.
58)
Fraport I Award, paras 313, 315, 327; see also ibid, para 327 (‘Fraport had been fully advised and
was fully aware of the ADL [Anti-Dummy Law] and the incompatibility with the ADL of the structure of
its investment which it planned and ultimately put into place with the secret shareholder
agreements.’).
59)
60)
ibid, para 467.
61)
Inceysa v El Salvador Award, para 237; see also Plama v Bulgaria Award, para 133 (‘The
Arbitral Tribunal is persuaded that Bulgaria would not have given its consent to the transfer of Nova
Plama’s shares to PCL had it known it was simply a corporate cover for a private individual with
limited financial resources.’).
62)
24
62)
Kim v Uzbekistan Decision, paras 414–15.
63)
ibid, para 429.
64)
ibid, para 432.
65)
ibid, para 439.
66)
ibid.
67)
ibid, para 446.
68)
ibid, para 447.
69)
ibid, para 385.
70)
ibid, para 394.
71)
ibid, para 395.
72)
ibid, para 396.
73)
ibid (emphasis in original). In support of this proportionality principle, the tribunal referred back to
the Decision on Jurisdiction of the Metalpar v Argentina tribunal, in which the tribunal found that it
would be ‘disproportionate to punish’ the ‘lack of adequate registration’ of a foreign company in the
public commerce registry ‘by denying the investor an essential protection such as access to ICSID
tribunals’. ibid, para 397, quoting Metalpar S.A. and Buen Aire S.A. v Argentine Republic, ICSID
Case No ARB/03/5, Decision on Jurisdiction, 27 April 2006, paras 83–84.
74)
75)
ibid, para 408.
76)
ibid, para 404; see also ibid, para 398 (‘An investor may violate a law of some import egregiously
or it may violate a law of fundamental importance in only a trivial or accidental way. Seriousness to
the Host State is to be determined by the overall outcome, which will depend on the seriousness of
the law viewed in concern with the seriousness of the violation.’).
77)
ibid, para 404.
78)
ibid, para 401.
79)
ibid, para 400.
80)
81)
82)
ibid, para 320 (citing Kim v Uzbekistan Decision).
83)
ibid.
84)
ibid, para 321.
85)
ibid, para 333; see also Liman Caspian Oil v Kazakhstan Award, para 181.
86)
87)
ibid, para 343.
88)
ibid, para 11.
89)
ibid, para 343.
90)
25
90)
ibid, para 346.
91)
92)
ibid, para 365.
93)
ibid, para 12.
94)
Álvarez y Marín v Panama Award, paras 134–35.
95)
ibid, para 135.
96)
ibid, para 151.
97)
For ‘trivial’ breaches, ‘the State may apply the sanctions provided for in its national law, but it would
be disproportionate to deprive the investor of international protection’. Álvarez y Marín v Panama
Award, para 151.
98)
ibid, para 153.
99)
100)
ibid, paras 314, 326, 330, 334.
101)
ibid, para 333.
102)
ibid, para 335.
103)
ibid, para 341.
104)
105)
There may be circumstances in which the distinction is material, such as when an investor has not
satisfied the preconditions to arbitration but otherwise is a protected investor with a protected
investment. In such circumstances, the investor’s claim may be inadmissible, but the investor could
cure the defect by satisfying the preconditions.
106)
See, eg Plama Consortium Limited v Republic of Bulgaria, ICSID Case No ARB/03/24, Decision
on Jurisdiction, 8 February 2005; Oxus Gold v The Republic of Uzbekistan, UNCITRAL,
Jurisdictional Award/Decision (not public), 1 January 2012; Churchill Mining v Indonesia
Decision.
107)
Plama v Bulgaria Award, paras 133–34.
108)
ibid, para 133 (‘The Arbitral Tribunal is persuaded that Bulgaria would not have given its consent to
the transfer of Nova Plama’s shares to PCL had it known it was simply a corporate cover for a
private individual with limited financial resources.’).
109)
ibid, para 135.
110)
ibid, para 138.
111)
ibid, para 139.
112)
113)
ibid, para 143.
114)
von Pezold v Zimbabwe Award, para 344 (‘In its Post-Hearing Brief, the Respondent
acknowledged that it has presented its objections regarding the legality of the Claimants’ alleged
investments and their approval as admissibility objections as opposed to jurisdictional objections
… .’).
115)
von Pezold v Zimbabwe Award, para 346.
116)
26
116)
ibid, para 346. The tribunal specified that the distinction was immaterial ‘save as to whether the
Claimants are entitled to raise their MFN defense’. ibid The claimants invoked the most-favoured
nation clause to invoke other treaties that did not contain the same State approval requirement
allegedly contained in the applicable treaty. ibid, para 345. If the lack of approval, or illegality, had
been treated as a jurisdictional issue, the claimants would not be in a position to avail themselves of
the MFN provision to benefit from more favourable treaty provisions.
117)
Oxus v Uzbekistan Award, para 706.
118)
ibid, para 713.
119)
Churchill Mining v Indonesia Award, para 508.
120)
Anderson v Costa Rica Award, para 27.
121)
ibid, para 52.
122)
ibid.
123)
ibid, para 53.
124)
ibid, para 57.
125)
ibid, para 58.
126)
ibid.
127)
Churchill Mining v Indonesia Award, para 519.
128)
ibid.
129)
130)
Álvarez y Marín v Panama Award, para 337.
131)
ibid, para 341.
132)
133)
Minnotte v Poland Award, para 134.
134)
ibid, para 137.
135)
ibid, para 132.
136)
137)
ibid, para 139.
138)
The tribunal deemed that the claimants’ alleged failure ‘to make inquiries which might (or might not)
have unearthed evidence of fraud’ was not something that could deprive the tribunal of jurisdiction or
render the claims inadmissible; rather, it was a question of merits. Minnotte v Poland Award,
paras 139–40. The tribunal found no reason ‘in international law for denying altogether the
protection of a bilateral investment treaty such as the one applicable in the present case, in every
case where the claimant has been negligent in respect of the detection of wrongdoing that is
alleged to have accompanied the making of the investment’. ibid, para 163. Although there may be
circumstances ‘in which the deliberate closing of eyes to evidence of serious misconduct or crime,
or an unreasonable failure to perceive such evidence, would indeed vitiate a claim’, no such
evidence or circumstances were proven in the instant case. ibid.
139)
140)
27
140)
The Inmaris v Ukraine tribunal concluded that this failure did not render the contract illegal but only
meant that the claimants did not avail themselves of the benefits of the foreign investment law.
Inmaris v Ukraine Decision, para 145.
141)
The Hamester v Ghana tribunal found insufficient evidence of an overall deceitful scheme by the
investor in the initiation of the investment. Hamester v Ghana Award, para 136.
142)
The Abaclat v Argentina tribunal noted that it was undisputed between the parties that Argentina
issued the bonds in accordance with its laws. Abaclat v Argentina Decision, para 384.
143)
Based on the totality of the evidence, the tribunal found that the claimant acquired the shares at
issue and the State did not put forward convincing evidence to nullify that investment. InterTrade
v Czech Republic Award, para 136.
144)
The tribunal concluded that Bolivia had failed to show that the claimant acquired the shares in
breach of Bolivian law, and that to the extent the claimant made any mistake in its financial
statements, this mistake was inadvertent, and thus trivial and outside the subject-matter scope of
the legality requirement. Quiborax v Bolivia Decision, paras 276, 280.
145)
The tribunal did not definitively decide whether the investor breached Peruvian law because the
alleged breaches were excused by Peru’s behaviour: the tribunal was not convinced that the public
tender requirements that were allegedly breached constituted fundamental principles of Peruvian
law or the general Peruvian legal and investment regime, and Peru, in any event, awarded the
tender notwithstanding any supposed breaches of such requirements. Convial v Peru Award,
paras 410–12.
146)
The tribunal found no breach of Venezuela’s mining regulations and dismissed Venezuela’s
jurisdictional objection. Rusoro v Venezuela Award, para 340.
147)
The tribunal found no intention to defraud or manipulate the market on the claimants’ part and
concluded that the claimants’ alleged breaches did not ‘sufficiently compromise a significant
interest of Uzbekistan so as to render proportionate the exclusion of the investment from the
protections of the BIT’. Kim v Uzbekistan Decision, para 446.
148)
The tribunal was ‘not convinced by Respondent’s allegation that Claimants secured their investment
through bad faith and deceit’. Glencore v Colombia Award, para 855.
149)
The tribunal concluded that Argentina had not proven that the salary payments were increased
fraudulently or that they were illicit dividend distributions in favor of SAUR. SAUR v Argentina
Decision, para 303.
150)
In view of its factual findings dismissing the allegations of illegality, the tribunal did not need ‘to
engage in the debate on the relevance or the absence in the BIT of an explicit requirement that the
investment be made in accordance with law’. Thomas Gosling and others v Republic of Mauritius,
ICSID Case No ARB/16/32, Award, 18 February 2020 (‘Gosling v Mauritius Award’), para 127.
151)
As discussed above (Section 4.2), the tribunal found no manifest violation of Polish law and no
indication that the claimants had actual knowledge of the alleged illegality perpetrated by a third
party, such that the tribunal asserted jurisdiction and held the claims admissible. Minnotte v Poland
Award, paras 134, 140.
152)
Hamester v Ghana Award, para 132.
153)
Ibid, paras 134–35.
154)
InterTrade v Czech Republic Award, para 136.
155)
ibid.
156)
Quiborax v Bolivia Decision, para 262.
157)
See above Section 4.1.
158)
28
158)
It bears noting that a breach of contract or a breach of non-investment laws that are not expressly
covered by the BIT does not constitute a breach of the legality requirement. See Vannessa
Ventures Ltd. v The Bolivarian Republic of Venezuela, ICSID Case No ARB(AF)/04/6, Award, 16
January 2013 (‘Vannessa v Venezuela Award’), para 134 (legality requirement did ‘not extend to
purely contractual obligations’ with the host state) (holding that contractual breaches are not
breaches of local law and thus do not breach the BIT legality requirement, and finding no BIT breach
because the investor’s contractual breaches justified the State’s termination of contract); Saba
Fakes v Turkey Award, para 120 (holding that a breach of competition or telecommunications law
requirements did ‘not trigger the application of the legality requirement’ since the BIT did not cover
these laws); see also ibid, para 119 (‘The Tribunal also considers that it would run counter to the
object and purpose of investment protection treaties to deny substantive protection to those
investments that would violate domestic laws that are unrelated to the very nature of investment
regulation … unless specifically stated in the investment treaty under consideration, a host State
should not be in a position to rely on its domestic legislation beyond the sphere of investment
regime to escape its international undertakings vis-à-vis investments made in its territory.’).
159)
160)
ibid, para 483; see also Quiborax v Bolivia Decision, paras 266, 281 ((‘[E]ven if Claimants had
breached a rule concerning the handling of the shareholders’ registry … any such breach would
have been trivial and thus beyond the subject matter scope of the legality requirement’).
161)
162)
Allard v Barbados Award, para 94.
163)
Mamidoil v Albania Award, para 482; see also Phoenix Action v Czech Republic Award, para
104.
164)
165)
Rumeli Telekom A.A. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v Kazakhstan, ICSID
Case No ARB/05/16, Award, 29 July 2008 (‘Rumeli v Kazakhstan Award’), para 319; see also
Desert Line Projects LLC v The Republic of Yemen, ICSID Case No ARB/05/17, Award, 6
February 2008 (‘DLP v Yemen Award’), para 104; Convial v Peru Award, para 407 (‘several
tribunals have considered that only the violation of fundamental legal principles of the Host
Contracting State can result in the invalidity of the investment for jurisdictional purposes’).
166)
167)
ibid, para 410.
168)
Achmea v Slovak Republic Award, para 176.
169)
170)
ibid, para 408.
171)
ibid, para 404.
172)
ibid, para 398.
173)
ibid.
174)
ibid, para 406.
175)
ibid, para 407.
176)
Tokios Tokelès v Ukraine, ICSID Case No ARB/02/18, Decision on Jurisdiction, 29 April 2004
(‘Tokios Tokelès v Ukraine Decision’).
177)
Tokios Tokelès v Ukraine Decision, para 83.
178)
ibid, para 86.
179)
29
179)
ibid.
180)
See, eg Alpha Projektholding Gmbh v Ukraine, ICSID Case No ARB/07/16, Award, 8 November
2010 (‘Alpha v Ukraine Award), paras 296–97 (agreeing ‘with the rationale of the tribunal in
Tokios in reaching its own conclusion that Claimant’s investment is not excluded from the Tribunal’s
jurisdiction by virtue of alleged defects in Claimant’s registration paperwork’.); DLP v Yemen
Award (investment could not be declared illegal on the basis of the investor’s failure to apply for a
certificate by a low-ranking investment authority that would undoubtedly have been issued upon
request ‘both because of the general endorsement of the investment at the highest level of the
State, and in light of the YIL benefits by the ad hoc decision communicated by the Vice Prime
Minister’.).
181)
Convial v.Peru Award, para 404.
182)
Mamidoil v Albania Award, para 482; see also ibid, para 483 (‘not every trivial, minor
contravention of the law should lead to a refusal of jurisdiction’).
183)
Convial v Peru Award, paras 410–12.
184)
Mamidoil v Albania Award, para 483 (‘On the one hand, neither Claimant nor the Tribunal may
presume that the host State waives its sovereignty and agrees to the arbitration of disputes went the
investor made the investment in violation of its substantive or procedural legislation. On the other
hand, States must not be allowed to abuse the process by scrutinizing the investment post festum
with the intention of rooting out minor or trivial illegalities as a pretext to free themselves of an
obligation.’).
185)
Kim v Uzbekistan Decision, para 408; see also ibid, para 413 (denying BIT protection is
proportional ‘only when its application is triggered by noncompliance with a law that results in a
compromise of a correspondingly significant interest of the Host State’).
186)
Álvarez y Marín v Panama Award, para 153; Cortec v Kenya Award, para 320 (endorsing ‘the
application of the Kim principle of proportionality to an assessment of the impact of alleged
illegalities’).
187)
Álvarez y Marín v Panama Award, paras 154, 156.
188)
Cortec v Kenya Award, para 349. As discussed earlier, the tribunal concluded that the breach
committed (i) was serious, (ii) breached a fundamental law that served a public interest, (iii)
rendered the underlying transaction void, (iv) was prosecuted by the Host State, and (v) occurred in
the context of the claimant ignoring legal advice, disregarding red flags, and failing to conduct
further diligence to ensure compliance with national law. ibid, paras 314, 326, 330, 333–35, 341,
342, 346.
189)
Álvarez y Marín v Panama Award, para 316ff.
190)
191)
Peter A. Allard v The Government of Barbados, PCA Case No 2012-06, Award on Jurisdiction,
13 June 2014 (‘Allard v Barbados Award’), para 94 (finding that the claimant’s failure to comply
with exchange control laws did not deprive the tribunal of jurisdiction).
192)
Allard v Barbados Award, paras 93–94.
193)
Liman Caspian Oil v Kazakhstan Award, para 181.
194)
ibid, para 182.
195)
ibid.
196)
ibid, para 187.
197)
ibid; see also Cortec v Kenya Award, para 333 (declining jurisdiction because the claimants’
mining license was void ab initio under international law).
198)
30
198)
Liman Caspian Oil v Kazakhstan Award, para 187.
199)
ibid, para 194.
200)
ibid.
201)
202)
ibid, para 481.
203)
ibid.
204)
ibid.
205)
ibid, para 482; see also ibid, para 483 (‘not every trivial, minor contravention of the law should lead
to a refusal of jurisdiction’).
206)
ibid, para 489.
207)
ibid, para 492.
208)
ibid, para 493.
209)
ibid, para 494.
210)
ibid. On the merits, a notable conclusion the tribunal drew from the investor’s violation of local law
was that the investor was not entitled to legitimate expectations of protection under the treaty’s fair
and equitable treatment provision. The tribunal explained:
Therefore, the Tribunal finds that the construction and the operation of the tank
farm did not comply with Albanian law and were illegal. In the circumstances,
Claimant is not entitled to rely on the perpetuation of its activities in illegal
circumstances and cannot claim a violation of legitimate expectations with
respect to the illegal operation of the tank farm. This finding is consistent with
the Tribunal’s earlier view that it has jurisdiction to hear the claims, given that
Respondent had shown its willingness to consider a legalization once the
respective applications were made. Absent such legalization, however, Claimant
could not legitimately expect that it could continue its activities in Albania despite
their illegality.
ibid, para 716.

211)
Gavrilović v Croatia Award, para 257.
212)
ibid, para 263.
213)
ibid, para 253.
214)
ibid, para 325.
215)
ibid.
216)
ibid.
217)
31
217)
ibid, para 400. It also dismissed Croatia’s inadmissibility objection based on the same illegality
allegations. ibid, para 406. As noted at the outset, allegations of corruption are beyond the scope of
this analysis. Nevertheless, it is noteworthy that the Gavrilović v Croatia tribunal stated in dictum
that its decision might have been different had the State presented convincing evidence of bribery. It
held that the irregularities in the bankruptcy proceeding were ‘either committed by or authorised by
the Bankruptcy Court, an organ of the State, or by other organs or agencies’ of the State,’ and it was
thus questionable whether the respondent could undermine the applicability of the BIT on the basis
of its own illegal acts. ibid, para 324. If, however, the respondent could establish that its officials
‘had been corrupted or otherwise improperly influenced [by claimant] there would be a basis for a
successful illegality objection.’ ibid.
218)
Karkey Karadeniz Elektrik Uretim A.S. v Islamic Republic of Pakistan, ICSID Case No ARB/13/1,
Award, 22 August 2017 (‘Karkey v Pakistan Award’), para 624.
219)
Karkey v Pakistan Award, para 624.
220)
Kardassopoulos v Georgia Decision on Jurisdiction, para 182.
221)
222)
223)
von Pezold v Zimbabwe Award, para 416.
224)
ibid.
225)
226)
ibid, paras 152–56, 158–65.
227)
ibid, para 157.
228)
ibid.
229)
ibid, para 183.
230)
231)
ibid, para 192.
232)
ibid, para 194.
233)
Mr Franck Charges Arif v Republic of Moldova, ICSID Case No ARB/11/23, Award, 8 April 2013
(‘Arif v Moldova Award’).
234)
Arif v Moldova Award, para 374.
235)
ibid.
236)
ibid, para 375.
237)
ibid.
238)
ibid.
239)
ibid, para 376.
240)
ibid.
32
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Illegality Requirement

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Illegality Requirement

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Document information The illegality objection in investor–state arbitration

Arbitration International ABSTRACT

2. THE LEGALITY REQUIREMENT

2.1 Express legality requirement

2.2 Implied, inherent, or autonomous legality requirement

3. THE PARAMETERS OF THE LEGALITY

4. THE LEGAL FRAMEWORK OF THE

4.1 The investor’s unlawful conduct

4.2 The investor’s lack of due diligence

5. Defences to the Illegality Objection

5.1 The state failed to carry its burden of proof

5.2 Exceptions to the preclusive effect of illegality

ibid, para 716.

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