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Between the Lines of
the Vienna
Convention? Canons
and Other Principles of
Interpretation in Public
International Law
Topics
Investment Arbitration
Bibliographic
reference
Rumiana Yotova, 'Chapter
13: Compliance with
Domestic Law: An Implied
Condition in Treaties
Conferring Rights and
Protections on Foreign
Nationals and Their
Property?', in Joseph Klingler
, Yuri Parkhomenko , et al.
(eds), Between the Lines of
the Vienna Convention?
Canons and Other Principles
of Interpretation in Public
International Law, (© Kluwer
Law International; Kluwer Law
International 2018) pp. 307 -
330
© 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.
Chapter 13: Compliance with Domestic Law: An Implied
Condition in Treaties Conferring Rights and Protections
on Foreign Nationals and Their Property?
Rumiana Yotova
(*)
§13.01 INTRODUCTION
Non-compliance with domestic law in the making of investments is increasingly invoked as a
defence by States against claims in international arbitration. (1) A number of bilateral investment
treaties (BITs) contain varying formulations of express clauses requiring that foreign investments are
made in accordance with the domestic law of the host State. These have been used by arbitrators
as anchors for assessing the compliance of investments with domestic law and denying them all
international protections. (2) While some tribunals have inferred that compliance with domestic law is
an implied
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condition for granting international protection to investments even in the absence of treaty language
to that effect (3) or indeed, of an international treaty all together, (4) others have required express
legality clauses. These divergent approaches raise two pertinent interpretative questions. First,
whether compliance with domestic law could or should be read as an implied condition when
interpreting BITs and more broadly, in international treaties conferring rights on foreign nationals on
the territory of the host State in the absence of express language to this effect? Second, if the
answer to the first question is affirmative, how should such treaties be interpreted and applied in
practice, focusing in particular on what legal consequences should be drawn in cases of non-
compliance with domestic law where the treaty is silent on this point. Notably, the Vienna
Convention on the Law of Treaties does not contain guidance in this respect as it only regulates the
relevance of domestic law for the conclusion and observance of international treaties in Articles 46
and 27 respectively.
This chapter will argue that an implied condition of compliance with domestic law is to be read into
international treaties conferring rights and protections on foreign nationals, as a general principle of
treaty interpretation emanating from the Lotus principle and the principle of good faith, and that this
has important implications for the applicability of the treaties in question to tainted investments.
Given the significant amount of State practice on these questions evidenced in investment treaties,
as well as in cases, investment law will be used as a case study to extrapolate broader
interpretative conclusions.
§13.02 COMPLIANCE WITH DOMESTIC LAW AS
AN IMPLIED CONDITION IN INTERNATIONAL
TREATIES
It is a truism that foreign nationals are subject to the domestic law of the host State in whose territory
they are present. (5) As codified in the Montevideo Convention on the Rights and Duties of States,
‘[t]he jurisdiction of states within the limits of national territory applies to all the inhabitants’. (6) This is
a function of the principle of territorial sovereignty of States and the corollary exclusive jurisdiction
they have within their own territory, (7) in particular the right to regulate and choose their own political,
social and economic system. (8) As noted in the Lotus case, ‘restrictions upon the independence of
States cannot … be presumed’ and further, States have a wide measure of discretion
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with respect to their territorial jurisdiction and the application of their laws the title for which rests
upon their sovereignty. (9) Accordingly, the signing of international treaties conferring rights on third-
State nationals cannot and should not be interpreted as an abrogation of the State’s right to
regulate the foreign nationals operating on its territory or to require that they comply with its
domestic laws. Such an abrogation would be a significant restriction of the host State’s sovereignty
and would thus require an express stipulation to this effect.
This interpretation is widely supported by State practice – treaties conferring rights or protections
on foreign nationals within the territory of the host State often include an express requirement for
compliance with the domestic law of the host State. For example, the 1951 Convention Relating to
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 the Status of Refugees sets out the general obligation that every refugee ought to conform with the
laws and regulations of the country where they find themselves. (10) In similar vein, both the Vienna
Conventions on Diplomatic and on Consular Relations stress ‘the duty of all persons enjoying such
privileges and immunities to respect the laws and regulations of the receiving State’. (11) Despite
the otherwise extensive privileges granted to foreign nationals under these treaties, including
immunity from enforcement jurisdiction, the receiving States retained their prescriptive jurisdiction
and the duty of compliance with domestic laws remained intact. It could be argued a fortiori that
other treaties conferring more limited rights on foreign nationals are not intended to exempt them
from the domestic laws and jurisdiction of the host State either. Indeed, out of 2,572 international
investment agreements mapped by UNCTAD, over 60% (or 1,642), contain an express clause
requiring investments to comply with the domestic law of the host State as part of the very definition
of what constitutes an investment, (12) thus conditioning its protection.
The question arises, therefore, whether compliance with domestic law should be read as an implied
condition in all international treaties conferring rights or protections on foreign nationals on the
territory of the host State. In the absence of express language to this effect, is there an interpretative
presumption that States did not intend to waive the requirement of compliance of all subjects
present in their territory with their domestic law, and what are the consequences of rebutting that
presumption on the international plane? Interestingly, scholars have not properly engaged with this
interpretative question, except for McNair who mentions in passing that ‘circumstances can exist in
which it would be implied that [rights secured by the treaty are subject to the laws of the contracting
States]’, (13) giving as an example treaties permitting foreigners to enter and travel freely in the
territory of a contracting State. However, further scholarly engagement with this question is needed,
especially given its growing practical importance in the modern era of economic integration and the
related trends of trade and investment liberalization, where foreign economic actors operate in
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multiple States. Knowing which laws they ought to comply with, as well as the consequences
attached to non-compliance, would contribute to legal certainty and predictability, as well as to the
legitimacy of economic treaties in times of public scepticism and heated debate.
The North Atlantic Coast Fisheries Case is particularly informative in this context. The arbitral
tribunal was called upon to interpret an 1818 Treaty between the USA and Great Britain (GB)
whereby GB conferred upon US nationals the liberty to fish in British waters. (14) One of the
questions of contention between the parties was whether GB maintained the right to reasonably
regulate the liberties conferred by the treaty in the absence of express language to this effect. The
tribunal rejected the American contention that since the treaty conferred ‘liberties’ on American
nationals ‘for ever’, they were exempted from the local legislation of GB in the absence of express
stipulation to the contrary. It stressed instead that the right to regulate ‘is an attribute of State
sovereignty, and as such must be held to reside in the territorial sovereign, unless the contrary be
provided’. (15) The tribunal further underlined that the burden of proving an abdication by GB of its
sovereign right to regulate within its territory was on the US. (16) Accordingly, it concluded that ‘no
reason has been shown why this Treaty … should be considered as different from every other
Treaty under which the right of a State to regulate the action of foreigners admitted by it on its
territory is recognized’. (17) This approach is convincing and should be followed in general when
interpreting treaties conferring rights or protections on foreign actors.
However, compliance with and enforcement of domestic laws under these treaties remain within the
purview of the host State and there is little to suggest that non-compliance would affect the
interpretation of the rights conferred on the foreign nationals under international law. Arguably, the
situation is different in investment law, where individuals are given standing to bring claims against
the host State directly before an international tribunal. This vertical element introduced in the
relations between the State and the individual entails specific consequences in cases of non-
compliance with domestic law, enforceable not only before domestic courts but also before
investment treaty tribunals. A key argument for that is the principle of good faith in treaty
interpretation codified in Article 31 of the VCLT. The general principle of good faith requires the
parties to refrain from taking unfair advantage and to act in the ‘spirit of honesty and respect for the
law’. (18) Interpreting the term ‘investment’ in BITs in good faith would entail that investments made in
violation of the domestic law of the host State should not qualify as falling under the scope of the
treaty and thus should not benefit from its protection, given the presumption that foreigners are
subject to and
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ought to respect the domestic law of the host State. This also follows from the general principle of
law postulating ex injuria non oritur jus, meaning that no one should be allowed to benefit from their
own wrong.

§13.03 COMPLIANCE WITH DOMESTIC LAW IN

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 INTERNATIONAL ECONOMIC TREATIES
Clauses requiring compliance with the domestic law of the host State are common in BITs and take
various forms. (19) Analysing the key BIT provisions can help discern whether there are differences
in their interpretation and application in practice, as well as whether a broader rule can be inferred.
They are also evidence of the recognition of the principle of compliance with domestic law as an
interpretative presumption for treaties conferring rights on third party nationals on the territory of the
host State.

[A] Treaties of Friendship, Commerce and Navigation

Nearly 3,000 BITs (20) currently regulate the investment relations between States and between
States and investors. This network evolved from older instruments conferring economic and related
rights on foreign nationals, particularly treaties of friendship, commerce and navigation (TFCNs),
which have not been the subject of as much scholarly debate. (21)
TFCNs date back to the late eighteenth century – the 1778 Treaty of Amity and Commerce between
France and the US (22) and the 1794 Jay Treaty of Amity, Commerce
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and Navigation (23) are considered their precursors. (24) TFCNs were concluded up until the 1960s,
when BITs and trade agreements gradually became the preferred form of regulation. (25) TFCNs
themselves evolved over time: while the fundamental objective of the early treaties was to secure a
minimum standard of treatment for foreigners and their property abroad, (26) their main purpose
after World War II became the protection of investments. (27) A number of the provisions contained
in modern BITs can be traced back to TFCNs, which illustrate the historical development of clauses
requiring compliance with domestic law. One significant structural difference between the two types
of instruments, however, is that TFCNs did not give standing to foreign nationals to bring
international claims against the host State.
Clauses requiring compliance with domestic law were commonplace in TFCNs. In contrast to
modern BITs, which require that investments are made in accordance with domestic law, most
TFCNs contained compliance with domestic law requirements addressed directly not only to the
property, but also to the individual beneficiaries. They required that foreigners act in conformity with
the laws of the host State, not only for the purposes of admission, but more importantly, as a
condition for their freedom to exercise economic rights and to benefit from favourable treaty
standards.
For example, the 1849 Hawaiian-American TFCN imposed a condition of compliance with
domestic law (hereinafter ‘legality’) on the protection of persons and property, as well as on the
national and MFN treatment of foreigners. (28) Detailed legality clauses with respect to the
admission, the exercise of economic rights and the substantive standards of treatment can be found
in all later generations of TFCNs, in varying combinations but with comparable wording. (29) The
1948 Italy-USA TFCN stands out as containing a remarkable number of specific legality clauses in
relation to
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admission, national treatment, MFN treatment, FPS, access to courts, the acquisition, ownership of
and transactions with property, as well as the exploitation of mineral resources. (30) Accordingly, the
scope of protection under each of these standards was explicitly conditioned by the compliance
with the domestic law of the host State.
The ICJ had occasion to interpret a TFCN clause containing two compliance with domestic law
requirements in the Case Concerning Elettronica Sicula (ELSI), where the issue was whether Italy
breached the 1948 Italy-USA TFCN by interfering in the bankruptcy proceedings of ELSI, a
corporation controlled by US nationals. The US claim was based, inter alia, on Article 3(2) of the
TFCN, which provided for the admission and national treatment of foreigners, both conditioned on
compliance with domestic law (hereinafter ‘legality clauses’):

Corporations and associations, controlled by nationals, corporations and

associations of either High Contracting Party and created or organized under
the applicable laws and regulations within the territories of the other High
Contracting Party, shall be permitted to engage in [commercial, manufacturing,
processing, mining, educational, philanthropic, religious and scientific] …
activities therein, in conformity with the applicable laws and regulations ... (31)

The Chamber interpreted the legality clauses as conditions for the operation of foreign corporations
in the territory of the host State, irrespective of the accordance of the domestic law in question with

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 the TFCN:

The reference to conformity with ‘the applicable laws and regulations’ surely
means … that Italian corporations and associations controlled by United States
nationals must conform to the local applicable laws and regulations; moreover,
they must do so even if they believe a law or regulation to be in breach of the
FCN Treaty, and, indeed, even if it were in breach of the FCN Treaty. (32)

The effect of compliance with domestic law requirements in TFCNs as a corollary of State
sovereignty and the right to regulate was interpreted by the Court as a condition for protection under
the treaty, notably irrespective of the content of that law or its compliance with the standards of the
treaty. The respect for the law of the host State was broadly regarded as the quid pro quo for
admitting and protecting foreigners and their property. As observed in 1758 by Vattel, ‘even in
those countries which every foreigner may freely enter, the sovereign is supposed to allow him
access only upon this tacit condition, that he be subject to the laws … the foreigner tacitly submits to
it, as soon as he enters the country, as he cannot presume that he has access upon any other
footing’. (33)
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Overall, legality clauses in TFCNs are more detailed and numerous, compared to modern BITs.
They expressly conditioned most if not all economic activities of foreign subjects in the host State.
Acting in conformity with the national law of the host State was understood as a fundamental
precondition for granting economic rights and protections to foreigners on the international plane.
Compliance with domestic law also conditioned the protection of their property. The large majority
of BITs that contain express language adopt only the latter model of compliance with domestic law,
namely, the one relating to the investment rather than to the conduct of the investor. Furthermore,
legality clauses in modern BIT practice are most often to be found in the definition of ‘investment’ or
in the admission clauses and very rarely in relation to the substantive standards of protection.
However, an historic interpretation of modern BITs in light of their precursor TFCNs might go as far
as to suggest that even when not expressly stipulated, the legality requirement is an implied
condition for both the admission and the protection of foreign investments. The legality of the
conduct of the investor is more difficult to imply, given that the majority of BIT drafters did not choose
to include it in the text of their treaties, deviating from the well-established TFCN practice to that
effect, which indicates a lack of general recognition or State practice to this effect.
In conclusion, the evolution of TFCNs indicates that compliance with the national law of the host
State was a fundamental requirement for admitting and protecting foreign investments that was
seen as implied in the relations between the Sovereign and the foreign subject.

[B] Legality Conditions in Early Investment Codification

Attempts
The first attempts at codifying investment law are also telling with respect to the evolution of the
requirement to comply with domestic law. The League of Nations formed a Special Joint
Committee on Foreign Private Investment to consolidate international standards in the area of
investment. It saw legality not merely as a condition for economic activities, but as a positive
obligation of foreign investors under international law, stressing that:

Foreign enterprises should comply in letter and in spirit with the domestic laws of
the country in which they do business, should refrain from inducing domestic
contracts, which they know to be detrimental to the other party or impossible to
fulfill, should abstain from any action that might be considered as an interference
in the conduct of national affairs and should seek no illegal favour from public
officials. (34)

Another example is the 1960 OECD Draft Convention on the Protection of Foreign Private
Property, which does not contain an express legality clause in its wide definition of property in
Article 9(c), but whose Commentaries to Article 9(c) specify
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that in order ‘[t]o come within the provisions of this Convention, property must be lawfully acquired’.
(35) Accordingly, domestic law is used to construe the scope of the term ‘property’ under the treaty
and non-compliance with it would deprive the object of international protection.
Both of these early attempts at multilateral investment codification under the auspices of
international organizations used compliance with domestic law as a condition for protection of

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 foreigners and of their investments under the treaty – one did so expressly, the other implicitly.
Notably, they used the two models of formulating the condition – one linking it directly to the
behaviour of the investor and another, to the definition of the investment. These models made their
way to modern BITs, and while legality of the investment is a requirement in the large majority of
treaties, the legality of investor conduct has been included in treaty practice too. (36)

[C] Compliance with Domestic Law in Modern BITs

A review of existing and model BITs reveals strong evidence that compliance with domestic law
plays an important interpretative role as a condition in treaties conferring rights and protections on
foreign nationals and their property that ought to be satisfied for the treaty to apply and produce its
intended legal effects. A systematic reading of BITs concluded by a number of both capital-
exporting and importing States indicates that the compliance of foreign investments with domestic
law is broadly incorporated in BIT provisions, ranging from preambular paragraphs to conditions for
applying the substantive standards of protection. These will be assessed in the order of their
appearance in BITs.
Scholars, too, agree that the legality of investments is a condition for their protection in investment
law. (37) The ongoing debate, however, concerns the application of the requirement in practice and
the consequences of non-compliance, i.e., whether non-compliance with domestic law clauses can
be relied upon as a jurisdictional defence, as a matter of admissibility or as a question of the merits.
(38) The various formulations of legality clauses require careful examination, as they constitute one of
the main reasons for the differing applications of the condition.
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[1] Preambular References to Compliance with Domestic Law
It is undisputable that preambles have no direct normative effect, yet they are a valuable tool for
interpretation, authoritatively forming part of the context of the treaty, as well as often setting out the
object pursued by the contracting parties. (39) References to compliance with domestic law set out
in preambular paragraphs can inform the interpretative process of the substantive clauses of the
BIT, including any legality clauses.
There are several types of preambular paragraphs in BITs which reflect compliance with domestic
law considerations, including references to respect for the law of the host State and legality. For
example, the Australia – India BIT reaffirms respect for national law by ‘[a]cknowledging that
investments of investors of one Contracting Party in the territory of the other Contracting Party would
be made within the framework of the laws of that other Contracting Party’. (40) The Parties to the
Energy Charter Treaty affirmed specifically their regard ‘to competition rules concerning mergers,
monopolies, anti-competitive practices and abuse of dominant position’. (41) These references
indicate the shared understanding of the States parties that the requirement of compliance with
domestic law conditions the protection of investments under the BITs.
[2] Legality in the Definition of Investment
The very first BIT, the 1959 Agreement between Germany and Pakistan, contains no fewer than
three references to the compliance of investments with domestic law: one in the admission clause,
one in the definition of companies and one in the exchange of notes clarifying the understanding of
the parties of the term ‘investment’. (42) While some BITs contain express legality requirements in
the definition of investment, in others, it could be inferred from other clauses of the treaty, as well as
the preparatory works and accompanying memoranda.
Similar provisions are contained, for example, in the BeLux – China BIT, (43) the Austria – Czech
and Slovak Republic BIT, (44) the Germany – Argentina BIT, (45) the
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Argentina – Mexico BIT, (46) the Australia – India BIT, (47) the ASEAN Comprehensive Investment
Agreement, (48) the Swiss – Egypt BIT, (49) and the Canada – China BIT. (50) The Canada – EU
Comprehensive Economic and Trade Agreement (CETA) sets out a temporal condition in its
legality clause requiring that a ‘covered investment’ comply with ‘the applicable law at that time’. (51)
A number of Model BITs, too, include a reference to compliance with domestic law in the definition
of investment, and are indicative of the endorsement of the condition by both capital-exporting and
importing States. These include the Model BITs of Turkey, (52) Finland, (53) Greece, (54) Iran, (55)
Sweden, (56) Thailand, (57) China, (58) India, (59) France, (60) Malaysia, (61) Benin (62) and Colombia.
(63)

Including the requirement for compliance with domestic law in the definition of investment clause
qualifies the consent of the host State with respect to what constitutes a covered investment.
Accordingly, the consequences of non-compliance with such legality clauses pertain to the
jurisdiction of investment tribunals.

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 [3] Legality in the Scope of Application Clauses
Some BITs expressly define the scope of application of the treaty by reference to investments made
in conformity with the laws of the host State, which is highly indicative of the legal consequences that
States attach to non-compliance. Such provisions can be found in the Model BITs of Switzerland,
(64) Greece, (65) India, (66) China, (67) Malaysia, (68) Mongolia, (69) Benin (70) and Colombia, (71)
among others.
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Notably, in all these treaties, the legality in the scope of application clause is set out in addition to
the legality requirement in the definition of investment and mirrors its exact formulation. These
clauses are important, however, in clarifying the consequences that States attach to violations of the
requirement of compliance with domestic law, namely, the exclusion of illegal investments from all
protection under the treaty. This type of legality clause, similarly to the legality requirement in the
definition, has the effect of placing illegal investments outside of the consent of the parties and thus
pertains to the jurisdiction of investment tribunals.
[4] Legality in the Admission of Investment Clauses
Investors do not have a general right to entry and establishment in foreign States under international
law: within very broad limits, States are free to prescribe conditions as they see fit. This is why a
number of BITs provide that host States can admit investments in their territory in accordance with
their legislation. As observed by Salacuse, ‘the admission clause allows the host State to retain
control over the entry of foreign capital … and to determine the conditions under which foreign
investment will be permitted, if at all’. (72) Some scholars suggest that legality conditions in the
admission clause also imply a legality requirement in the definition of the investment. (73)
A compliance with domestic law requirement for admission is set out, inter alia, in: the 1984 Be-Lux
– China BIT, (74) the 1986 USA – Egypt BIT, (75) the 1991 Austria – Czech and Slovak Federal
Republic BIT, (76) the 1992 Be-Lux – Paraguay BIT, (77) the 1993 Germany – Argentina BIT, (78) the
1996 Spain – El Salvador BIT, (79) the 1999 Australia – India BIT, (80) the 2012 Switzerland – Egypt
BIT, (81) the 2012 Japan – Korea – China investment agreement (82) and the 2012 Canada – China
BIT. (83) Admission in accordance with domestic law of the host State is also contained in a number
of modern model
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agreements, including the model BITs of Switzerland, (84) South Africa, (85) Turkey, (86) Denmark, (87)
Greece, (88) Iran, (89) Austria, (90) the Belgo-Luxembourg Economic Union, (91) Sweden, (92)
Thailand, (93) Mauritius, (94) India, (95) China, (96) The Netherlands, (97) the United Kingdom, (98)
France, (99) Malaysia, (100) Mongolia, (101) Benin, (102) Colombia, (103) Germany (104) and Burundi.
(105)

Even though legality requirements for the admission of investments relate to the pre-investment
stage and do not condition the investment once it has been admitted, they may become relevant in
the interpretation of investment treaties without other compliance with domestic law requirements.
Treaties only containing legality in their admission clauses include the 1992 BeLux – Paraguay BIT,
the 1995 Spain – El Salvador BIT and the 2012 Japan – Korea – China trilateral investment treaty.
The presence of a legality requirement for the admission of investments could be interpreted as
indicating the drafters’ intention to imply a legality requirement for protected investments and could
constitute an argument against the admissibility of claims arising out of illegal investments or serve
as a defence on the merits.
[5] Legality and the Protection of Investments
It is less common for BITs to link legality requirements directly to the substantive standards of
protection of the investment. For example, the Germany – Argentina BIT provides that only
‘[i]nvestments made by nationals or companies of either Contracting Party in the territory of the
other Contracting Party in accordance with the laws and regulations of the latter Party shall enjoy
full protection under this Treaty’. (106) A similar formulation is contained in the Spain – El Salvador
BIT, (107) the Sweden Model
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BIT (108) and the Mauritius Model BIT. (109) The Mongolia Model BIT is phrased slightly differently,
stating that: ‘[e]ach Contracting Party shall protect within its territory investments made in
accordance with its laws and regulations’. (110) The 2007 Colombian Model BIT provides that
‘[n]othing contained in this Agreement shall bind either Contracting Party to protect investments
made with capital or assets derived from illegal activities’. (111) Another example of a clause linking
legality to the standards of treatment can be found in the BeLux – China BIT, which contains a
legality requirement within its umbrella clause, requiring that investment contracts ‘shall be in
conformity with the laws of the Contracting Party accepting the investment and the provisions of this
Agreement’. (112)

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 Whereas some of these model BIT formulations seem to suggest that the obligation to protect
investments is conditioned in its entirety on the compliance of such investments with the domestic
law of the host State, the formulation of the Germany – Argentina BIT leaves scope for ambiguity as
to whether investments not entirely in accordance with the national laws can still enjoy some degree
of protection. So far, investment tribunals have only considered the requirement of compliance with
domestic law in relation to their jurisdiction and/or the admissibility of the claims, focusing their
interpretation on the term ‘investment’. The question of the relevance of the requirement when
deciding the merits remains to be clarified in practice. If invoked in investment arbitration, these
types of legality clauses in the substantive standards of treatment would pertain to the merits. It is
also unclear whether State practice is sufficiently broad to support the proposition that a compliance
with domestic law requirement could be inferred when interpreting the substantive standards of
treaty protection in the absence of express language to this effect.
[6] Legality and the Conduct of the Investor
Legality clauses conditioning the conduct of the investor are rare in BIT practice. Accordingly, given
the lack of evidence of State practice, it is difficult to argue that the legality of investor conduct is an
implied condition in investment law at present.
The ASEAN Comprehensive Investment Agreement is one example of rare treaty practice
providing for the denial of benefits to both ‘investors of another Member State and to investments of
that investor, where it establishes that such investor has made an investment in breach of domestic
laws of the denying Member State by misrepresenting its ownership in those areas of investment
which are reserved for natural or juridical persons of the denying Member State’. (113) This clause
combines the two models of legality requirements by addressing them both to the investor and to
the investment. In contrast to most legality clauses, this one specifies the legal consequences of a
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violation, namely, the denial of benefits to the investor and the investment. The Agreement on
Promotion, Protection and Guarantee of Investments among Member States of the Organisation of
the Islamic Conference (OIC Agreement) sets out a legality of the conduct of the investor clause in
greater detail. (114) The new India Model BIT has a whole chapter on the obligations of investors,
investments and their home State, including the prohibition of corruption, as well as the obligations
of disclosure and of payment of taxes, and also requires continued compliance with domestic law in
the definition of investment and the scope of application provision. (115) Notably, the India Model BIT
incorporates both models of requiring compliance with domestic law – with respect to the
investment and the investor. It also sets out explicitly the consequences of non-compliance, being
the loss of benefits under the treaty, and in addition, the ability of the host State to seek enforcement
or take other legal action in response to the breach. (116)
Notably, all these agreements originate from capital-importing States, indicating their readiness as
host States to impose legality conditions on the protection of the investor. Accordingly, this State
practice is not general and is thus insufficient to indicate recognition that compliance with domestic
law on the part of the investor should be implied when interpreting BITs.

[D] Conclusions
The historical development of TFCNs, as well as the numerous existing legality clauses in BITs and
model treaties, strongly indicate the general understanding of States that in order to fall under the
scope of protection of the international treaties, foreign investments must be made in accordance
with the law of the host State. This requirement finds expression in a variety of conditions not only for
the entry and operation of investments, but also in relation to the consent of the host State to accord
them protection under the BIT. Accordingly, the principle of compliance with domestic law can be
invoked as a defence against claims based on illegal investments where the applicable BIT
contains an express legality clause or as a challenge to the admissibility of such claims that can be
inferred even in the absence of express legality requirements.

§13.04 COMPLIANCE WITH DOMESTIC LAW IN

INVESTMENT ARBITRATION
[A] General Trends
In addition to being included in numerous BITs, the requirement of compliance with domestic law is
also commonly raised in practice. The case law of investment tribunals is illustrative of the
interpretation and application of the requirement in international
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practice. The relevant investment awards will be assessed to identify the common trends underlying
the interpretative approaches.
(117)

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 Scholars broadly agree on the existence of a requirement of legality in investment law, (117) though
they differ with respect to its function, scope and consequences. Cremades conceptualizes legality
as flowing from the general principles of good faith, legitimate expectations and clean hands. (118)
Dolzer and Schreuer construe legality more concretely, as being based ‘not just [on] the laws on
admission and establishment but also [on] other rules of the domestic legal order’. (119)
With respect to the consequences of applying the principle of compliance with domestic law,
scholars differ as to whether it pertains to the jurisdiction of investment tribunals, the admissibility of
claims or the merits of the case. (120) Scholars also disagree as to whether legality conditions the
definition (121) or the validity of the investment. (122) The principle of legality in investment law has
also been subject to criticism. It has been referred to as the ‘Achilles Heel of investment arbitration’
for placing the host State in the powerful position where the tribunal ‘must first examine the speck in
the eye of the investor and defer, and may be never address, a beam in the eye of the Host State’.
(123) Overall, the treatment of the compliance with domestic law requirement in doctrine leaves open
a number of questions, some of which can be answered by reference to case law.

[B] Manifestations in Practice

Compliance with domestic law requirements have been generally upheld and applied in numerous
investment cases. (124) Admittedly, most of these cases involved a treaty containing an express
requirement to this effect, but this is arguably due to the
P 323
prevalence of compliance clauses in BIT practice. Notably, however, a number of tribunals have
affirmed that the requirement of compliance with domestic law can and should be implied in the
absence of a treaty provision to that effect, giving different justifications for this. (125) In
Kardassopoulos v. Georgia, a case under the Energy Charter Treaty and the Greece-Georgia BIT,
neither of which contains an express requirement for compliance with the domestic law of the host
State, it was observed that:

Protection of investments under a BIT is obviously not without some limits. It

does not extend, for instance, to an investor making an investment in breach of
the local laws of the host State. A State thus retains a degree of control over
foreign investments by denying BIT protection to those investments that do not
comply with its laws. (126)

Another relevant interpretative approach is the one taken in Achmea v. Slovak Republic, where the
only legality requirement in the BIT was in the promotion and admission clause and the Respondent
asked the Tribunal to decline jurisdiction on the basis that the investment was made in violation of
Slovak law by either implying a legality requirement in the definition of investment or by interpreting
the term ‘investment’ in good faith. (127) The Tribunal began its analysis by stressing that it was not
free to rewrite the treaty, but agreed that:

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. The terms of the Treaty could not be
interpreted in good faith to require such protection. (128)

Some tribunals conceptualized the requirement as a general principle of international law. The
tribunal in Fraport II noted 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.
(129)

According to Ampal-American Israel Corporation and others v. Arab Republic of Egypt, ‘[i]t is a
well-established principle of international law that a tribunal constituted on the basis of an
investment treaty has no jurisdiction over a claimant’s investment which was made illegally in
violation of the laws and regulations of the Contracting
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State’. (130) Similarly, Hamester v. Ghana emphasized that, ‘[a]n investment will not be protected if

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 it has been created in violation of national or international principles of good faith [and] … 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’. (131)
Legality was even defined as the sixth Salini criteria of what constitutes an investment in Jan
Oostergetel v. Slovak Republic, (132) another case where the applicable Netherlands-Slovakia BIT
did not contain an express compliance with domestic law requirement. Other cases where the
requirement for compliance with domestic law was inferred in the absence of treaty language to this
effect, be it in obiter dicta, include: SAUR v. Argentina, holding that the requirement not to commit a
serious violation of the domestic law of the host State is a tacit condition in all BITs, based on the
principles of legality and good faith; (133) Oxus Gold v. Uzbekistan; (134) Mamidoil v. Albania,
where the tribunal reasoned that ‘neither Claimant nor the Tribunal may presume that the host State
waives its sovereignty and agrees to the arbitration of disputes when the investor made the
investment in violation of its substantive or procedural legislation’; (135) Khan Resources v.
Mongolia, inferring a compliance with domestic law requirement in the Energy Charter Treaty (ECT)
based on the maxim nemo auditur propriam turpitudinem allegans, i.e., no one should benefit from
their own wrong; (136) Niko Resources (Bangladesh) Ltd. v. People’s Republic of Bangladesh;
(137) and Phoenix v. Czech Republic, where the tribunal inferred a compliance with domestic law
requirement under the ICSID Convention, reasoning on the basis of the principles of good faith and
the prohibition against abuse of rights. (138)
Admittedly, there are cases going in the opposite direction, where tribunals refused to infer a
requirement of compliance with domestic law in the absence of treaty language to this effect. For
example, in Anatolie Statie, Gabriel Stati, Ascom SA and Terra Raf Trans Trading Ltd v.
Kazakhstan, a case which arose under the ECT, the Tribunal dismissed the Respondent’s
arguments based on the principle of legality, reasoning:
P 325

the ECT contains no requirement in this regard. Indeed, if the contracting states
had intended there to be such a requirement, they could have written it into the
text of the Treaty ... This consideration is even more valid in view of the
extremely detailed definition of investment and other details regulated in the
ECT. At least with regard to jurisdiction, the Tribunal does not see where such a
requirement could come from. (139)

This reasoning is flawed because it goes contrary to both the principles of good faith in treaty
interpretation by subsuming illegal investment within the scope of protected investments under the
ECT, as well as the Lotus principle by assuming that the State parties to the ECT limited their
sovereign right to regulate illegal investments since they did not expressly affirm it. Furthermore,
there are a number of ECT cases – some already mentioned, others to be discussed below –
where tribunals readily inferred a requirement of compliance with domestic law.
Turning to cases where tribunals inferred a compliance with domestic law requirement in the
absence of an express treaty provision to this effect, and in which this was decisive for the outcome
as part of the ratio decidendi, two examples will be tackled in turn.
[1] Plama v. Bulgaria
The Plama v. Bulgaria case arose out of the privatization, operation and bankruptcy of an oil
refinery, which according to the investor led to violations of the substantive guarantees of the ECT, a
treaty which, as noted above, does not contain a clause requiring compliance with domestic law.
(140) The respondent objected to the jurisdiction and admissibility of the claims, arguing that
‘Claimant obtained its investment in Nova Plama via misrepresentation in violation of Bulgarian law’
and accordingly, that the investment contract was void or voidable and the investment did not fall
under the definition of Article 1(6) of ECT. (141) The tribunal decided that it had jurisdiction over the
dispute and deferred the examination of these arguments as a question of admissibility to the
merits phase. (142)
Bulgaria argued that the privatization contract was void ab initio under the Bulgarian Privatisation
Act for being concluded with a fictitious party and voidable under the Obligations and Contract Act,
rendering the investment claims inadmissible since there was no ‘investment’ under Article 1(6)
ECT. (143) The respondent also relied on the principle of good faith under international and
Bulgarian law, arguing that the claimant failed to abide by it. (144) The claimant countered that it
made no positive misrepresentation, had no duty to inform the host State about the identity of its
P 326
shareholder, and that in any event Bulgaria knew or should have known who the purchaser was. (145)
The tribunal accepted Bulgaria’s factual allegations as to the misrepresentation (146) and accepted
(147)

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 the causal link between the misrepresentation and the conclusion of the contract. (147) It accordingly
concluded that the investment was ‘the result of fraud, calculated to induce the Bulgarian authorities
to authorize the transfer of shares to an entity that did not have the financial and managerial
capacities required to resume operation of the Refinery’. (148)
The tribunal went on to draw the consequences of the fraud, clarifying that the misrepresentation
was not a question pertaining to its jurisdiction but rather one regarding the claimant’s entitlement to
the substantive protections of the ECT. (149) The tribunal analysed the Bulgarian contract law
provisions stating that fraud and misrepresentation are grounds for invalidating agreements and
concluded that the ‘negotiation and conclusion of the Second Privatization Agreement were carried
out … in flagrant violation of these provisions’ and rendered the contract unlawful. (150) The tribunal
went on to conclude that since the investor’s behaviour was contrary to Bulgarian law and
international law, this precluded the application of the protections of the ECT. (151) The arbitrators
did note that:

Unlike a number of Bilateral Investment Treaties, the ECT does not contain a
provision requiring conformity of the Investment with a particular law. This does
not mean, however, that the protections provided for by the ECT cover all kinds
of investments, including those contrary to domestic or international law. (152)

The tribunal went on to interpret the ECT by reference to its introductory note, which provided as an
aim the strengthening of the rule of law. (153) This led it to conclude that ‘the ECT should be
interpreted in a manner consistent with the aim of encouraging respect for the rule of law’, and that
‘the substantive protections of the ECT cannot apply to investments that are made contrary to law’.
(154) It also held that granting the treaty protections to the investment would be contrary to the
principle nemo auditur propriam turpitudinem allegans, (155) the principle of good faith, (156) as well
as the ex turpi causa defence resting on the principle of public policy. (157)
The methodology used by the tribunal was to draw guidance exclusively from the previous case law
on international public policy, including Inceysa’s somewhat questionable approach of
internationalizing the legality requirement, as well as on the
P 327
basis of the applicable law to the dispute settlement clause in the ECT. Interpreting the term
‘investment’ in good faith or inferring a compliance with domestic law requirement based on the
right to regulate would have been preferable and led to the same conclusion. Despite the somewhat
laboured reasoning and the invocation of multiple principles of domestic and international law,
however, the tribunal reached the right conclusion by holding that the ECT cannot be interpreted as
giving protection to investments made in violation of the domestic law of the host State, despite the
absence of an express clause to this effect.
[2] WDF v. Kenya
The dispute arose out of the investment of World Duty Free (WDF) in duty-free complexes in Kenya.
(158) The investment was based on a lease contract between WDF and the Kenya Airports Authority
on behalf of the Government, (159) which was the sole basis for the tribunal’s jurisdiction in the
absence of an applicable BIT. During the hearings, the majority owner and CEO of WDF testified
that he was required to make a ‘personal donation’ of USD 2 million to the President of Kenya ‘in
order to do business with the Government’. (160)
When WDF brought an investment claim for alleged illegal expropriation, (161) Kenya countered that
the investment contract was unenforceable as it was procured by a bribe, arguing that ‘[a]s a matter
of Kenyan, English and International ordre public, the resulting Contract does not have the force of
law’. (162) Kenya also relied on the fact that both Kenyan and English law were applicable under the
contract and that both treated contracts tainted with illegality as unenforceable. (163) The Claimant
submitted in response that its CEO did not meet the mens rea requirement for bribery, as he
believed it was lawful and ‘not only acceptable but fashionable’ (164) in Kenya in accordance with the
local practice of ‘Harambee’, mobilizing private donations for public purpose, (165) as well as that
the tainted bribery contract was severable from the main one. (166) Notably, WDF claimed also that
the ICSID Convention did not include public policy as grounds for annulment. (167)
The tribunal was satisfied that the underlying contract was obtained through a bribe (168) and went
on to examine ‘the consequences of the bribe on the enforceability and validity of the Agreement,
both under ordre public international and the applicable laws’. (169) It placed particular emphasis on
the fact that the Kenyan Prevention of
P 328
Corruption Act and Anti-Corruption and Economic Crimes Act both sanctioned corruption. (170) The
tribunal anchored part of its analysis in the concept of international public policy as a ground for
refusing the recognition of foreign judgments and awards but also as a reference to universal
(171)
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 standards applicable in all fora. (171) It then went on to examine the consequences of illegal
contracts under English and Kenyan law, being the laws chosen by the parties to govern the
contract, (172) concluding that:

In the Tribunal’s view, it is significant that in England, historically, the common

law has traditionally abhorred the corruption by bribery of officers of state,
ranking its offence next to high treason … Like any other contract, a state
contract procured by bribing a state officer is legally unenforceable, as an affront
to the public conscience … In conclusion, as regards public policy both under
English law and Kenyan law (being materially identical) and on the specific facts
of this case, the Tribunal concludes that the Claimant is not legally entitled to
maintain any of its pleaded claims in these proceedings on the ground of ex
turpi causa non oritur actio. (173)

Notably, the consequence that the tribunal drew from the established violation was the
unenforceability of the investment contract obtained through corruption and the corresponding non-
recognition as lawful of the investment as a whole. Following the corruption revelations, Kenya itself
rescinded the contract in its counter-memorial. (174)
Finally, it should be noted that, similarly to Plama, the tribunal felt the need to rely on multiple
principles to justify its conclusion, including international public policy, the relevant domestic laws, as
well as the principle that no one should be allowed to benefit from their own wrong.
Overall, the majority of tribunals seem to agree that legality is indeed an implied requirement for
investments even in the absence of treaty language to that effect. However, they differ in their
reasoning for inferring that domestic law ought to be complied with for investments to fall under the
scope of treaty and/or international law protection. The majority of tribunals support this conclusion
as an extrapolation of the principle of good faith. Others also rely on the prohibition against abuse of
rights and/or the maxim that no one should be allowed to benefit from their own wrong. Finally, in
cases involving most serious illegalities that amount to violations of not only domestic but also
international law, tribunals also resort to the concept of international public policy. Even though it is
only a minority of tribunals who base their inference of the requirement of compliance with domestic
law on the principle of State sovereignty and the corresponding right of the host State to regulate, it
is submitted that this is the preferable approach as it is most consistent with the development of
investment treaties and their function in international law.
P 329

§13.05 CONCLUSIONS
Based on the analysed investment treaties and arbitral awards, it can be concluded that the
requirement that protected investments comply with the domestic law of the host State is generally
recognized in BIT practice and increasingly applied in investment arbitration. Accordingly, it can and
should be treated as an implied condition when interpreting BITs. The same is not true with respect
to the legality of investor conduct, which is not generally recognized as a condition for investment
protection and as such requires express language in the BIT in order to generate jurisdictional
effects. Ultimately, the requirement of legality of investments as an implied condition in BITs stems
from the principles of State sovereignty, the right to regulate and the obligation to interpret treaties
in good faith. The implied condition of compliance with domestic law serves important normative
purposes. It enables investment tribunals to protect the rule of law and to guarantee the integrity of
the system of investment law in a time of backlash vis-à-vis the actions of non-State actors.
P 329
References
*)
The author would like to give special thanks to Professor James Crawford for his encouragement
and helpful comments, as well as to the editors of the book for the direction and the wonderful
initiative.
1)
See, e.g., Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID
Case No. ARB/03/25, Award (16 Aug. 2007) (Fortier, Cremades, Reisman) and Fraport AG
Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/11/12,
Award (10 Dec. 2014) (Bernardini, Alexandrov, van den Berg); Alasdair Ross Anderson et al. v.
Republic of Costa Rica, ICSID Case No. ARB(AF)/07/3, Award (19 May 2010) (Morelli Rico,
Salacuse, Vinuesa).
2)

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 2)
Inceysa Vallisoletana SL v. Republic of El Salvador, ICSID Case No. ARB/03/26, Award (2 Aug.
2006) (Oreamuno Blanco, Landy, van Wobeser), ¶¶ 246–247.
3)
Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award (27 Aug.
2008) (Salans, van den Berg, Veeder), ¶¶ 144–146.
4)
World Duty Free Company Limited v. Republic of Kenya, ICSID Case No. ARB/00/7, Award (4
Oct. 2006) (Guillaume, Rogers, Veeder), ¶ 145.
5)
See James Crawford, Brownlie’s Principles of International Law 611 (8th ed., Oxford 2012).
6)
Convention on the Rights and Duties of States Art. 9, 26 Dec. 1933, 165 L.N.T.S. 19. See to the
same effect, Art. 2(2) of the Charter of Economic Rights and Duties of States, GA Res. 29/3281
(1974) adopted with 120 votes in favour, 6 against and 10 abstentions.
7)
Island of Palmas case (Netherlands v. USA), PCA, Award (4 Apr. 1928), 2 UNRIAA 829, 838.
8)
Declaration on Principles of International Law concerning Friendly Relations and Co-operation
among States, GA Res. 2625 (XXV) (1970). See also Military and Paramilitary Activities in and
Against Nicaragua (Nicaragua v. USA), Merits, Judgment (27 Jun. 1986), ICJ Reports 1986, p.
131.
9)
S.S. Lotus (France v. Turkey), Judgment (7 Sep. 2017), PCIJ Series A, No. 10, pp. 18–19.
10)
Convention Relating to the Status of Refugees Art. 2, 28 Jul. 1951, 189 U.N.T.S. 137.
11)
Vienna Convention on Diplomatic Relations Art. 41(1), 18 Apr. 1961, 500 U.N.T.S. 95. See also
Vienna Convention on Consular Relations Art. 55, 24 Apr. 1963, 500 U.N.T.S. 95.
12)
United Nations Conference on Trade and Development, IAA Mapping Project,
http://investmentpolicyhub.unctad.org/IIA/mappedContent#iiaInnerMenu (accessed March 2018).
13)
Arnold McNair, The Law of Treaties (Oxford: the Clarendon Press, 1961), 451.
14)
North Atlantic Coast Fisheries (Great Britain v. USA), PCA, Award (7 Sep. 1910), 11 UNRIAA
173.
15)
Ibid., p. 179.
16)
Ibid., p. 186.
17)
Ibid. (emphasis added).
18)
62 Interpretation of the Algerian Declaration of 19 January 1981, 605 (E. Lauterpacht ed., 1982).
See in general, Robert Kolb, La Bonne Foi en Droit International Public (Presses Universitaires
de France 2000).
19)
See, e.g., Treaty between the Federal Republic of Germany and Pakistan for the Promotion and
Protection of Investments (signed 25 Nov. 1959; entered into force 28 Apr. 1962), Arts 1(1), 8(4);
Agreement between the Government of the People’s Republic of China and the Belgian-
Luxembourg Economic Union on the Reciprocal Promotion and Protection of Investments (signed 4
Jun. 1984; entered into force 5 Oct. 1986), Art. 1(2); Agreement between the Republic of Austria
and the Czech and Slovak Federal Republic Concerning the Promotion and Protection of
Investments (signed 15 Oct. 1990; entered into force 1 Oct. 1991), Art. 1(1); Agreement between
the Government of the United Mexican States and the Government of the Republic of Argentina for
the Promotion and Reciprocal Protection of Investments (signed 13 Nov. 1996; entered into force
22 Jun. 1998), Art. 1(1); Association of Southeast Asian Nations Comprehensive Investment
Agreement (2009), Art. 4(a); Agreement between the Government of Canada and the People’s
Republic of China for the Promotion and Reciprocal Protection of Investments (signed 9 Sep. 2012;
entered into force 1 Oct. 2014), Art. 1(4).
20)
See United Nations Conference on Trade and Development, International Investment Agreements
Navigator, http://investmentpolicyhub.unctad.org/IIA (accessed March 2018).

21)

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 21)
See, e.g., Jeswald Salacuse, The Law of Investment Treaties Ch. 4 (Oxford 2010); Kenneth
Vandevelde, A Brief History of International Investment Agreements, in The Effect of Treaties on
Foreign Direct Investment (K. Sauvant & L. Sachs eds, Oxford 2009); Rudolph Dolzer & Christoph
Schreuer, Principles of International Investment Law Ch. 5 (Oxford 2008); Georg
Schwarzenberger, Foreign Investment and International Law Ch. 2 (Stevens & Sons 1969); H.C.
Hawkins, Commercial Treaties & Agreements: Principles and Practice (Rinehart 1953).
22)
Treaty of Amity and Commerce between France and the United States of America, 6 Feb. 1778, 46
C.T.S. 417.
23)
Treaty of Amity, Commerce and Navigation between His Britannic Majesty and the United States of
America, 19 Nov. 1794, 52 C.T.S. 243.
24)
Andreas Paulus, Treaties of Friendship, Commerce and Navigation, in, Max Planck
Encyclopedia of International Law online edition (2011).
25)
The first BIT was concluded in 1959 between Germany and Pakistan: Treaty between the Federal
Republic of Germany and Pakistan for the Promotion and Protection of Investments, supran.19.
26)
Salacuse, supran.21, at 85.
27)
Kenneth Vandevelde, A Brief History of International Investment Agreements, 12 U. C. Davis J.
Int’l L. & Pol’y 157 (2005).
28)
Treaty of Friendship, Commerce, and Navigation between the United States of America and His
Majesty the King of the Hawaiian Islands Art. 8, 20 Dec. 1894, 18 Stat. 406. This treaty was the
basis for an unsuccessful claim brought to arbitration in 1999 by Mr Larsen against Hawaii, under
the auspices of the PCA.
29)
Treaty of Commerce and Navigation between Great Britain and Japan Art. 3, 16 Jul. 1894, 23 T.S.
189; Treaty of Friendship, Commerce, and Navigation between the United Kingdom of Great Britain
and Northern Ireland and Nicaragua Arts 1, 12, 13, 28 Jul. 1905, 1736 U.N.T.S. 252; Treaty on
Friendship, Commerce and Consular Rights between Germany and the Unites States of America
Arts 1, 12, 13, 8 Dec. 1923, 4 Stat. 4191 (1938); Treaty of Commerce and Navigation between
Finland and Italy Arts 1, 4, 22 Oct. 1924, 32 L.N.T.S. 149, which in addition required conformity with
the laws for granting access to justice; Treaty of Commerce and Navigation between Austria and
the Netherlands Arts 1, 2, 28 Mar. 1929, 109 L.N.T.S. 39, conditioning upon legality the admission,
MFN treatment, full protection and security, and the access to justice of foreigners; Treaty of
Commerce and Navigation between His Majesty in respect of the United Kingdom and the
President of the Republic of Turkey Art. 2, 1 Mar. 1930, 58 L.N.T.S. 407, linking the definition of
companies under the treaty to the requirement that ‘they do not pursue any illegitimate ends’ and
subjecting the admission, the free exercise of economic rights and the national treatment of
foreigners to conformity with national laws, including the regulations relating to public morality, health
and pauperism in Arts 5, 7 and 13.
30)
Treaty of Friendship, Commerce and Navigation between the United States of America and the
Italian Republic Arts 1, 2, 3, 5, 19 U.N.T.S. 171.
31)
Ibid., Art. 3(2).
32)
Elettronica Sicula S.P.A. (ELSI) (United States of America v. Italy), Judgment (20 Jul. 1989), ICJ
Reports 1989, p. 15, at p. 51, ¶ 72.
33)
Ibid., ¶ 101 (emphasis added).
34)
Report by the Special Joint Committee on Foreign Private Investment, Conditions for Private
Foreign Investment, Series of League of Nations Publications, II Economic & Financial, 1946.II.A.1
(Princeton Univ. Press), p. 43, ¶ 135 (1946).
35)
OECD Draft Convention on the Protection of Foreign Property (1967), 43, ¶ 3(a).
36)
Agreement on Promotion, Protection and Guarantee of Investments among Member States of the
Organisation of the Islamic Conference (signed 5 Jun. 1981; entered into force 23 Sep. 1986), Art.
9.
37)

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 37)
Campbell McLachlan, Laurence Shore & Matthew Weiniger, International Investment Arbitration:
Substantive Principles 21, ¶ 2.17 (Oxford 2007); Thomas Wälde, Nouveaux horizons pour le droit
international des investissements dans le context de mondilisation de l’economie 53 (2004);
Salacuse, supra n.21, at 167.
38)
Richard Kreindler, Competence-Competence in the Face of Illegality in Contracts and Arbitration
Agreements 361 Recueil des Cours 131, 406–413, 430–432 (2013), arguing that illegality can be
both a matter of jurisdiction and admissibility and Zachary Douglas, The Plea of Illegality in
Investment Treaty Arbitration, 29(1) ICSID Rev. 155, 185 (2014) taking the view that ‘[a] plea of
illegality… never goes to the tribunal’s jurisdiction in investment treaty arbitration’.
39)
See Vienna Convention on the Law of Treaties Art. 31(1) and (2), May 23, 1969, 1155 U.N.T.S.
331. See also Treaty between the United States of America and the Republic of Ecuador
concerning the Encouragement and Reciprocal Protection of Investment (signed 27 Aug. 1993;
entered into force 11 May 1997), Letter of Submittal 1.
40)
Agreement between the Government of Australia and the Government of the Republic of India on
the Promotion and Protection of Investments (signed 26 Feb. 1999; entered into force 4 May 2000),
¶ 4.
41)
Energy Charter Treaty (signed Dec. 1994; entered into force Apr. 1998), ¶ 12.
42)
Germany – Pakistan BIT (1959), supran.19, at Arts 1(1), 8(4) and Exchange of Notes of 25 Nov.
1959, ¶ 1.
43)
BeLux – China BIT (1984), supran.19, at Art. 1(2).
44)
Austria – Czech and Slovak Federal Republic BIT (1990), supran.19, at Art. 1(1).
45)
Agreement for the Promotion and Protection of Investments between the Federal Republic of
Germany and the Republic of Argentina (signed 9 Apr. 1991; entered into force 8 Nov. 1993), Art.
1(1).
46)
Argentina – Mexico BIT (1996), supran.19, at Art. 1(1).
47)
Australia – India BIT (1999), supran.40, at preambular ¶ 4 and Art. 1(c).
48)
ASEAN Comprehensive Investment Agreement (2009), supran.19, at Art. 4(a).
49)
Agreement between the Swiss Confederation and the Arab Republic of Egypt on the Promotion
and Protection of Investments (signed 7 Jun. 2010; entered into force 15 May 2012), Art. 1(1).
50)
Canada – China BIT (2012), supran.19, at Art. 1(4).
51)
Comprehensive Economic and Trade Agreement between Canada and the European Union and its
Member States (signed 30 Oct. 2016), Art. X.3.
52)
Republic of Turkey Model Bilateral Investment Treaty (2000), Art. 1(2).
53)
Republic of Finland Model Bilateral Investment Treaty (2001), Art. 1(1).
54)
Hellenic Republic Model Bilateral Investment Treaty (2001), Art. 1(1).
55)
Islamic Republic of Iran Model Bilateral Investment Treaty (2001), Art. 1(1).
56)
Kingdom of Sweden Model Bilateral Investment Treaty (2002), Art. 1(1).
57)
Kingdom of Thailand Model Bilateral Investment Treaty (2002), Art. 1(1) in fine, requiring legality
when altering the form of an investment and a fortiori, of the investment as such.
58)
People’s Republic of China Model Bilateral Investment Treaty (2003), Art. 1(1).
59)
Republic of India Model Bilateral Investment Treaty (2003), Art. 1(b).

60)

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 60)
French Republic Model Bilateral Investment Treaty (2006), Art. 1(e).
61)
Malaysia Model Bilateral Investment Treaty, Art. 1(2)(a), requiring accordance of the investment with
‘the laws, regulations and national policies of the Contracting Parties’.
62)
Republic of Benin Model Bilateral Investment Treaty, Art. 1(1).
63)
Republic of Colombia Model Bilateral Investment Treaty (2007), Art. 2(1).
64)
Swiss Confederation Model Bilateral Investment Treaty (1995), Art. 2.
65)
Hellenic Republic Model BIT (2001), supran.54, at Art. 2.
66)
India Model BIT (2003), supran.59, at Art. 2.
67)
China Model BIT (2003), supran.58, at Art. 11.
68)
Malaysia Model BIT, supran.61, at Art. 10.
69)
Mongolia Model Bilateral Investment Treaty, Art. 2.
70)
Benin Model BIT, supran.62, at Art. 11.
71)
Colombia Model BIT (2007), supran.63, at Art. 2(1).
72)
Salacuse, supran.21, at 197.
73)
Nora Gallagher & Wenhua Shan, Commentary on the China Model BIT, in Commentaries on
Selected Model Investment Treaties 148 (C. Brown ed., Oxford 2013).
74)
BeLux – China BIT (1984), supran.19, at Art. 2.
75)
Treaty between the United States of America and the Arab Republic of Egypt Concerning the
Reciprocal Encouragement and Protection of Investments (signed 11 Mar. 1986; entered into force
27 Jun. 1992), Art. 2(1).
76)
Austria – Czech and Slovak Federal Republic BIT (1991), supran.19, at Art. 2(1).
77)
Agreement between the Belgian-Luxembourg Economic Union and the Republic of Paraguay on
the Reciprocal Promotion and Protection of Investments (signed 6 Oct. 1992; entered into force 9
Jan. 2004), Art. 2(1).
78)
Germany – Argentina BIT (1991), supran.45, at Art. 2(1).
79)
Agreement for the Promotion and Protection of Investments between the Kingdom of Spain and the
Republic of El Salvador (signed 14 Feb. 1995; entered into force 20 Feb. 1996), Art. 2(1).
80)
Australia – India BIT (1999), supran.40, at Art. 4.
81)
Switzerland – Egypt BIT (2010), supran.49, at Art. 3.
82)
Agreement among the Government of Japan, the Government of the Republic of Korea and the
Government of the People’s Republic of China for the Promotion, Facilitation and Protection of
Investment (signed 13 May 2012; entered into force 17 May 2014), Art. 2(2).
83)
Agreement between the Government of Canada and the People’s Republic of China for the
Promotion and Reciprocal Protection of Investments (signed 9 Sep. 2012; entered into force 1 Oct.
2014), Art. 3.
84)
Switzerland Model BIT (1995), supran.64, at Art. 3(1).
85)
Republic of South Africa Model Bilateral Investment Treaty (1998), Art. 2(1).
86)
Turkey Model BIT (2000), supran.52, at Art. 3(1).
87)

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 87)
Kingdom of Denmark Model Bilateral Investment Treaty (2000), Art. 2(1).
88)
Hellenic Republic Model BIT (2001), supran.54, at Art. 3(1).
89)
Iran Model BIT (2001), supran.55, at Art. 3(1).
90)
Republic of Austria Model Bilateral Investment Treaty (2002), Art. 2(1).
91)
Belgian-Luxembourg Economic Union Model Bilateral Investment Treaty, Art. 2(1).
92)
Sweden Model BIT (2002), supran.56, at Art. 2(1).
93)
Thailand Model BIT (2002), supran.57, at Art. 3(1).
94)
Republic of Mauritius Model Bilateral Investment Treaty (2002), Art. 3(1).
95)
India Model BIT (2003), supran.59, at Art. 3(1).
96)
China Model BIT (2003), supran.58, at Art. 2(1).
97)
Netherlands Model Bilateral Investment Treaty (2004), Art. 2.
98)
United Kingdom of Great Britain and Northern Ireland Model Bilateral Investment Treaty (2006), Art.
2(1).
99)
France Model BIT (2006), supran.60, at Art. 2.
100)
Malaysian Model BIT, supran.61, at Art. 2(1).
101)
Mongolia Model BIT, supran.69, at Art. 3(1).
102)
Benin Model BIT, supran.62, at Art. 2(1).
103)
Colombia Model BIT (2007), supran.63, at Art. 3(1).
104)
Federal Republic of Germany Model Bilateral Investment Treaty (2008), Art. 2(1).
105)
Republic of Burundi Model Bilateral Investment Treaty, Art. 2(1).
106)
Germany – Argentina BIT (1991), supran.45, at Art. 2(2) (emphasis added).
107)
Spain – El Salvador BIT (1995), supran.79, at Art. 2(2).
108)
Sweden Model BIT (2002), supran.56, at Art. 2(4).
109)
Mauritius Model BIT (2002), supran.94, at Art. 3(3).
110)
Mongolia Model BIT, supran.69, at Art. 4(1).
111)
Colombia Model BIT (2007), supran.63, at Art. 2(3).
112)
BeLux – China BIT (1984), supran.19.
113)
ASEAN Comprehensive Investment Agreement (2009), supran.19, at Art. 19(2).
114)
OIC Investment Agreement (1981), supran.36, at Art. 9.
115)
Republic of India Model Bilateral Investment Treaty (2016), Arts 1(6), 2(1), Ch. III.
116)
Ibid., Art. 8(3) and (4).
117)
McLachlan, Shore & Weiniger, supran.37, at 21, ¶ 2.17; Wälde, supran.37, at 53; Salacuse,
supran.21, at 167.

118)

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 118)
Bernardo Cremades, Investment Protection and Compliance with Local Legislation 24(2) ICSID
Rev. 557, 561 (2009).
119)
Rudolph Dolzer & Christoph Schreuer, Principles of International Investment Law 93 (2nd ed.,
Oxford 2012).
120)
Seesupran.38.
121)
Muthucumaraswamy Sornarajah, The International Law of Foreign Investment 317–318 (3rd ed.,
Cambridge 2010); UNCTAD, Scope and Definition: UNCTAD Series on issues in investment
agreements 24.
122)
Kreindler, supran.38, at 406. See also Andrew Newcombe, Investor Misconduct: Jurisdiction and
Admissibility, in Evolution in Investment Treaty Law and Arbitration 198–199 (Brown & Miles eds,
Cambridge 2011); Stephan Schill, Illegal Investments in International Arbitration 11(2) L. & Prac.
Int’l Ct. & Trib. 281, 285 (2012); Christina Knahr, Investments ‘in Accordance with Host State Law’,
in International Investment Law in Context 29 (A. Reinisch & C. Knahr eds, Eleven International
2008); Cremades, supran.118, at 562.
123)
Fraport v. Philippines, ICSID Case No. ARB/03/25, Dissenting Opinion of Mr Bernardo M.
Cremades (16 Aug. 2007), supran.1, at ¶ 37.
124)
See e.g., Fraport v. Philippines, ICISD Case No. ARB/03/25, Award (16 Aug. 2007), supran.1, at ¶
336 and Fraport v. Philippines, ICSID Case No. ARB/11/12, Award (10 Dec. 2014), supran.1, at ¶
468; Alasdair et al. v. Costa Rica, supran.1, at ¶¶ 54–57; Abaclat and Others (Case formerly
known as Giovanna a Beccara and Others) v. Argentine Republic, ICSID Case No. ARB/07/5,
Decision on Jurisdiction and Admissibility (4 Aug. 2011) (Tercier, van den Berg, Abi-Saab), ¶ 381.
125)
Jan Oostergetel and Theodora Laurentius v. Slovak Republic, UNCITRAL, Final Award (23 Apr.
2012) (Kaufmann-Kohler, Wladimiroff, Trapl), ¶¶ 178, 184; Railroad Development Corporation v.
Republic of Guatemala, ICSID Case No. ARB/07/23, Second Decision on Objections to
Jurisdiction (18 May 2010) (Sureda, Eizenstat, Crawford), ¶ 140.
126)
Ioannis Kardassopoulos v. Republic of Georgia, ICSID Case No. ARB/05/18, Decision on
Jurisdiction (6 Jul. 2007) (Fortier, Orrego Vicuña, Watts), ¶ 182.
127)
Achmea B.V. v. Slovak Republic, PCA Case No. 2008-13, Award (7 Dec. 2012) (Lowe, van den
Berg, Veeder), ¶ 168.
128)
Ibid., ¶ 170.
129)
Fraport v. Philippines, ICSID Case No. ARB/11/12, Award (10 Dec. 2014), supran.1, at ¶ 332.
130)
AMPAL-American Israel Corp., et al. v. Arab Republic of Egypt, ICSID Case No. ARB/12/11,
Decision on Jurisdiction (1 Feb. 2016) (Fortier, McLachlan, Orrego Vicuña), ¶ 301.
131)
Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, ICSID Case No. ARB/07/24, Award
(18 Jun. 2010) (Stern, Cremades, Landau), ¶¶ 123–124.
132)
Jan Oostergetel and Theodora Laurentius v. Slovak Republic, supran.125, at ¶ 184.
133)
SAUR International SA v. Republic of Argentina, ICSID Case No. ARB/04/4, Decision on
Jurisdiction and Liability (6 Jun. 2012) (Fernández-Armesto, Hanotiau, Tomuschat), ¶ 308.
134)
Oxus Gold Plc v. Republic of Uzbekistan, UNCITRAL, Final Award (17 Dec. 2015) (Tercier, Stern,
Lalonde), ¶ 706.
135)
Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Republic of Albania, ICSID Case No.
ARB/11/24, Award (30 Mar. 2015) (Knieper, Banifatemi, Hammond), ¶ 483.
136)
Khan Resources Inc, Khan Resources BV and Cauc Holding Company Ltd v. Government of
Mongolia, UNCITRAL, Decision on Jurisdiction (25 Jul. 2012) (Hanotiau, Fortier, Williams), ¶ 383.

137)

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 137)
Niko Resources (Bangladesh) Ltd. v. People’s Republic of Bangladesh, Bangladesh Petroleum
Exploration & Production Company Ltd (BAPEX) and Bangladesh Oil Gas and Mineral
Corporation (Petrobangla), ICSID Case Nos. ARB/10/11 & ARB/10/18, Decision on Jurisdiction
(19 Aug. 2013) (Schneider, McLachlan, Paulsson), ¶¶ 380, 430–438.
138)
Phoenix Action Ltd v. Czech Republic, ICSID Case No. ARB/06/5, Award (15 Apr. 2009) (Stern,
Bucher, Fernández-Armesto), ¶¶ 106–113.
139)
Anatolie Stati, Gabriel Stati, Ascom Group SA and Terra Raf Trans Traiding Ltd v. Republic of
Kazakhstan, SCC Arbitration V (116/2010), Award (19 Dec. 2013) (Böckstiegel, Haigh, Lebedev),
¶ 812.
140)
Plama v. Bulgaria, supran.3, at ¶¶ 56–73.
141)
Ibid., ¶ 96.
142)
Ibid., ¶ 97.
143)
Ibid., ¶¶ 102–103.
144)
Ibid., ¶ 104.
145)
Ibid., ¶¶ 107–109.
146)
Ibid., ¶¶ 128–129.
147)
Ibid., ¶ 133.
148)
Ibid., ¶ 135.
149)
Ibid., ¶ 112.
150)
Ibid., ¶ 137.
151)
Ibid., ¶ 135.
152)
Ibid., ¶ 138.
153)
Ibid., ¶¶ 138–139.
154)
Ibid., ¶ 139.
155)
Ibid., ¶ 143.
156)
Ibid., ¶ 145.
157)
Ibid., ¶ 146.
158)
World Duty Free v. Kenya, supran.4, at ¶ 62.
159)
Ibid., ¶¶ 62–64.
160)
Ibid., ¶ 66.
161)
Ibid., ¶¶ 76–78.
162)
Ibid., ¶ 105.
163)
Ibid., ¶ 106.
164)
Ibid., ¶ 120.
165)
Ibid., ¶ 110.

166)

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 166)
Ibid., ¶ 111.
167)
Ibid., ¶ 113.
168)
Ibid., ¶ 136.
169)
Ibid., ¶ 129.
170)
Ibid., ¶ 142.
171)
Ibid., ¶¶ 138–141.
172)
Ibid., ¶¶ 158–165.
173)
Ibid., ¶¶ 173, 179.
174)
Ibid., ¶109.

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