Pleas of illegality and the application of domestic law in investment treaty arbitration

Abstract

It is generally accepted that State Parties can rely on ‘in accordance with the host State law’ clauses (or legality clauses) with a view to curtailing arbitral tribunals' jurisdiction to disputes arising from lawful investments. Given the increasing attention dedicated to legality in modern investment treaty practice, it is likely that ‘in accordance with the host State law’ clauses will continue playing an important role in arbitration proceedings. In light of the foregoing, this article examines how arbitral tribunals interpret and apply domestic law when dealing with jurisdictional challenges based on pleas of illegality. Drawing upon the limitations to legality clauses elaborated by the case law, the authors demonstrate that tribunals tend to adopt an ‘international’ approach in interpreting and applying domestic law. The authors explain why this international approach is fundamentally flawed and suggest an alternative approach to use in future disputes.