The Principle of Clean Hands in International Investment Arbitration: What is the Extent of Investment Protection in Investor-State Disputes?

Abstract

In the last decade, the investor-state dispute settlement system has been subject to criticism. It is mainly due to the fact that the standard of protection under investment treaties significantly tips the scales in investors’ favor. Such a tilted protection mechanism has been referred to as “asymmetric treaties.” It creates an unbalanced investment law regime under which two-thirds of the cases are settled or lost by states. However, despite the vast protection of investors, it is not unlimited. One of the bars to having a dispute resolved by an arbitral tribunal in investor-state arbitration proceedings is the illegality of the investment. It is understood as the non-conformity of the investment with the laws and regulations of the host state. There is a prevailing view that the illegality of the investment would deprive the investor of a treaty protection to a certain extent. The illegality can influence the jurisdiction of the tribunal and the admissibility of the claim, as well as have negative consequences with regard to the merits of the case, such as resulting in a reduced compensation. The more contentious issue, which is a subject of this article, present in both legal writing as well as case law refers to the presence of the so-called principle of clean hands in the international investment law regime. As explained further, the clean hands principle concerns one of the prerequisites the party seeking relief has to comply with. Therefore, if a party has “unclean hands,” i.e. if the party has engaged in a certain type of a wrongdoing (including but not limited to fraud, misrepresentation, violation of state’s laws and regulations) related to its own claim, the clean hands doctrine will prevent that party from benefiting from its own unlawful behavior.