Many bilateral investment treaties (BITs) require foreign investments to be made or owned “in accordance with” or “in conformity with” the laws of the host State. Some treaties incorporate this “legality requirement” in the definition of investment, whereas in other treaties it can be found in substantive provisions on investor protection. The French Model BIT, for example, provides in Article 1(1) that:
investments are investments which have already been made or may be made subsequent to the entering into force of this Agreement, in accordance with the legislation of the Contracting Party on the territory or in the maritime area of which the investment is made.
The question of how to deal with investments that were not made in accordance with the law of the host State has arisen in a number of investment treaty arbitrations. Classic examples of illegality include corruption and bribery in respect of the admission of foreign investments; but illegality also covers more subtle cases where investors circumvented the host State’s foreign ownership restrictions or made false representations in a bidding process. At the same time, some commentators have affirmed that not every investment made in violation of domestic rules is outside the protective scope of a BIT – the nature and gravity of the violation matters.