Starting from the premise that the original purpose of what has become known as “legality” clauses was to exempt pre-establishment State conduct from the protection of bilateral investment treaties (“BIT”s), this paper examines whether it is an acceptable instance of arbitrator-made law to use such clauses to remove investments from treaty protection entirely on the grounds of corruption or other alleged illegally. For the purpose of the Twelfth Annual Arbitration Conference, this author argues that it is not.
A typical example of a legality clause says: “The term ‘investments’ shall comprise any kind of assets, implemented in accordance with the laws and regulations of the Contracting Party in whose territory the investment is made. . . .” This paper argues that such clauses were intended only to give States full discretion to allow or not allow an investment, whether by law, regulation, or exercise of executive discretion. BIT protection would apply only after a State allowed an investment to be made under its laws and regulations.
Section I of this paper provides an overview of legality clauses and the original State intent behind their inclusion in BITs. Section II explains that the recent expansive interpretation of legality clauses to police corruption and other alleged wrongdoing by investors is unduly indirect and redundant of existing international law that provides ample bases for tribunals to address any such alleged wrongdoing. Finally, Section III outlines several problems and inconsistencies that have arisen from tribunals’ expansive interpretation of legality clauses.