Illegality and Jurisdiction in Investment Arbitration

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Abstract

A foreign investor complaining by international arbitration of conduct alleged to be prohibited under an investment treaty may face the allegation that some illegality in connection with the acquisition of the investment operates to deprive the arbitral tribunal of its jurisdiction. This article considers whether there is, as has been suggested, a rule that illegality cannot in principle have such an effect.

Introduction

‘A plea of illegality relating to the conduct of the putative investor never goes to the tribunal’s jurisdiction in investment treaty arbitration.’ So asserts Zachary Douglas at the conclusion of a typically erudite paper.1 The present article argues that, in appropriate cases, it does.
The issue arises where a foreign investor seeks to take to international arbitration a
complaint that a state has infringed some provision of an investment treaty but is met with
an allegation that, in the process of acquiring the investment, it has itself been guilty of
some unlawful conduct. Does that allegation, if true, mean that the claimant has no right
to complain under the treaty at all, so that the tribunal constituted to hear the complaint
must conclude that it lacks jurisdiction to do so? Does it make any difference whether the
treaty appears to say anything about what constitutes an ‘investment’ for its purposes?
The point is in some ways a narrow one, for it is not controversial that a tribunal with
jurisdiction may nonetheless dismiss a claim on the ground of the claimant’s misconduct.
But it is important for the principled development of this field of international law to
know whether there is a rule that arbitral tribunals should generally assume jurisdiction
to decide investment claims even where a claimant has been shown to have acted illegally
in the process of investing.

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