Originally from Investment Treaty Arbitration and International Law - Volume 12

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PANEL 1

The original purpose of these clauses was just to exempt pre-investment decisions from liberalization, but tribunals have consistently used them as the basis for admissibility decisions involving corruption and other alleged illegalities in the establishment of investments. Is this an acceptable instance of arbitrator-made law?

MR. MICHAEL NOLAN: Well, with everyone up here now situated, we should begin with Panel 1.

Let me first briefly introduce the Panel. We’re going to discuss something called commonly the “illegality defense,” and I’ve already confused matters by introducing it in that way because the illegality defense is really not a defense at all, at least as it’s commonly formulated. That’s really part of what makes this topic interesting as probably everyone in this room understands.

One prominent aspect of treaty based arbitration now that is something of a part – I don’t mean this in any derogatory way – but something of the usual playbook of these cases is that very frequently States will challenge the conduct of Investors in some way as non compliant with domestic legal norms.

What is interesting, among other things, about this topic is that, although sometimes the shorthand reference to this is that the States will assert essentially a legality or an illegality defense, the formulation of the legal framework in which this defense is commonly heard is that the “illegality” or “contended illegality” of the Investment goes to the legal definition of the “investment.” This means there is such a thing in this submission of many in this practice as an “investment” in an economic sense, something that, from a financial or economic point of view would be understood to be an investment, as we use the term.