A Study On Illegal Investments In International Arbitration

The Salini case in 2001 was recognized as the first time that the legality of investment was involved in an international arbitration.Since then,illegal investments and legality of investment have been examined in more international investment arbitration cases.This article takes the perspective of international investment arbitration and illegal investments as the main research object.Through empirical research,this paper discusses the procedural and substantive issues related to illegal investments in international arbitration.At the end,the essay focuses on the circumstance which China may participate in international investment arbitration and provides the precautionary strategies.This paper consists of five parts.The introduction aims to raise the question,clarify the research value,the main research methods and the structure of the thesis as well as focus on the related literature and point out the main innovations and deficiencies of this article.The first chapter mainly defines the illegal investment.This chapter focuses on the identification of illegal investments.First,combining the theory of international investment activities,international investment legal rules and the interpretations made by the arbitration tribunals,this article argues that the standard for the determination of illegal investment should be the law of the host state.In a broad way,foreign investment that violates the law of the host state is illegal investment,while the specific situation of illegal investment may vary from country to country.Then,by combining the facts of investment arbitration cases,this chapter divides illegal investments into several types,such as business activity illegal per se,illegal means of obtaining investment,violation of access requirements,violation of ownership restrictions and formal errors.The third part of this article consists of chapter two and chapter three.Both chapters use arbitration cases to discuss the procedural or substantive disputes related to illegal investments in the practice of international investment arbitration.Among them,chapter two discusses the disputes related to arbitration procedures,which includes two major issues.The first one is about the characterization of the legal consequences of illegal investment in the arbitration.Illegal investments may constitute an obstacle to jurisdiction or an obstacle to admissibility or adversely affect the merits in the arbitration process.That depends on the use of procedural rights by the host state and the terms of investment agreements.The second one is regarding the jurisdiction of the counterclaim by host state against investors.This article considers that whether the host state has the procedural rights of the counterclaim and whether the arbitral tribunal has jurisdiction over the counterclaim cannot be decided based on traditional experience.They should depend on the dispute settlement provisions of the investment agreements in different cases.Chapter three discusses several substantive disputes involved in arbitrations of illegal investments,which includes four issues.First,whether the most-favored-nation treatment clause can be used by investors to escape from the legality requirements.This article finds that the tribunals tended to take the negative answer and the conclusion were consistent.Second,what is the standard of proof for the existence of illegal investments.In this regard,this article finds although the tribunals used different terms,the “clear and convincing” is fundamental.Third,how the tribunals distinguish the degree of violation of host state law.In this regard,this article argues that the tribunals agreed only investments with serious violations of state law that produce procedural or substantive consequences and the tribunal tend to examine the seriousness of investor behavior and laws which it violates simultaneously.Last,can estoppel be used by investors to exclude the illegality of investment.In this regard,this article finds that tribunals generally recognize the application of estoppel but it cannot be invoked for investments that seriously violate host state law and international public policy.Chapter four of this article is divided into two parts.First,based on the empirical research in the two former chapters,the first section aims to explore the way that international investment arbitration can improve on the issue of illegal investments.In this paper,we consider that the asymmetry of international investment agreements is the fundamental reason behind the application of international investment rules.Therefore,the dispute settlement clauses should be appropriately reformed and the investor obligation clauses should be gradually increased to suppress illegal investments from the beginning.Then,the next section mainly examines the illegal investment issue that China may need to pay attention to under the new foreign investment system.This article argues prevention measures should be applied both as the host state and the home country.The concluding part summarizes the main content of this paper,reiterating the priorities and conclusions of each chapter and points out the value for national practice in international investment arbitration.