Compliance with Domestic Law: An Implied Condition in Treaties Conferring Rights and Protections on Foreign Nationals and Their Property?

Abstract

Non-compliance with domestic law in the making of investments is increasingly invoked as a defence by states against claims in international arbitration. A number of bilateral investment treaties (BITs) contain varying formulations of express clauses requiring that foreign investments are made in accordance with the domestic law of the host State. These have been used by arbitrators as anchors for assessing the compliance of investments with domestic law and denying them all international protections. While some tribunals have inferred that compliance with domestic law is an implied condition for granting international protection to investments even in the absence of treaty language to that effect[1] or indeed, of an international treaty all together, others have required express legality clauses. These divergent approaches raise two pertinent interpretative questions. First, whether compliance with domestic law could or should be read as an implied condition when interpreting BITs and more broadly, in international treaties conferring rights on foreign nationals on the territory of the host State in the absence of express language to this effect? Second, if the answer to the first question is affirmative, how should such treaties be interpreted and applied in practice, focusing in particular on what legal consequences should be drawn in cases of non-compliance with domestic law where the treaty is silent on this point. This chapter will argue that an implied condition of compliance with domestic law is to be read into international treaties conferring rights and protections on foreign nationals, as a general principle of treaty interpretation emanating from the Lotus principle and the principle of good faith, and that this has important implications for the applicability of the treaties in question to tainted investments. [1] Plama v Bulgaria, Award of 27 August 2008, paras 144-6.