The Defence of Illegality in International Investment Arbitration: A Hybrid Model to Address Criminal Conduct by the Investor, at the Crossroads between the Culpability Standard of Criminal Law and the Separability Doctrine of International Commercial Arbitration

This thesis addresses the question as to how an investment Tribunal is to react if, in the context of a case brought before it for breach of standards of protection of an investment, the respondent argues that the investment for which protection is sought has been secured by resorting to some form of criminality. The classical pattern of criminality relevant in investment arbitration is that of an investor who corrupts the public officials of a Host State to secure a bid, or of an investor who deceives the Host State by false representation and fraud, for the purposes of obtaining an investment contract. Against this background, a defence by the Host State that has become increasingly common is the so-called Defence of Illegality. It operates on the basis of the following scheme: a Host State breaches the substantive provisions that international law accord to investments made in a foreign Country, for instance by means of expropriating without compensation the investor’s investment. In the ensuing dispute before an investment Tribunal, the defendant Host State raises the illegality committed by the investor in the making of the investment as a defence against the breach of the substantive provisions on the protection of the investment, of which it is accused, to avoid responsibility. This thesis will assess various forms of criminality that can be perpetrated by investors and will address the question as to whether such illegal conduct produces its effects on the jurisdiction of the arbitral Tribunal, or rather whether these are issues that should be considered at the admissibility or merit phase of the arbitral proceedings. This thesis intends to demonstrate that both legal and policy considerations dictate that the Defence of Illegality in investment arbitration should be strictly curtailed and that a Tribunal should only decline to exercise its jurisdiction in exceptional cases. Rather, Tribunals should look at the entire set of circumstances at the merits stage and perform a proper balancing test between the conduct of the investor and the Host State. In reaching this conclusion, this thesis will take into account as point of reference two systems of law that have been for the most part neglected by scholars who have investigated the Defence of Illegality in investment arbitration: international commercial arbitration and criminal law.