Law
The Doctrine of Unclean Hands in International Investment Arbitration
Quick fact
In several investment arbitrations, tribunals have refused jurisdiction or dismissed claims on the basis of investor misconduct, even when the state's own actions were questionable. For instance, in World Duty Free v. Kenya, the tribunal found that a contract obtained through bribery could not be enforced, invoking the principle that 'ex turpi causa non oritur actio'—no action can arise from a base cause.
Why this is interesting
Can a corrupt investor demand protection from international tribunals? Surprisingly, some have tried—and the results reveal a powerful legal principle.
Read the full explanation
Understanding The Doctrine of Unclean Hands in International Investment Arbitration
Imagine you're in a football game, and you cheat by tripping an opponent. When you then try to claim the trophy, the referee might say you have 'unclean hands' and cannot benefit from your own wrongdoing. That's the essence of the unclean hands doctrine: a party who has acted wrongfully in relation to the matter at hand cannot seek relief from the court or tribunal. In international investment arbitration, where a foreign investor sues a state for mistreatment, the state can raise this defense. It argues: 'Yes, we might have violated your rights, but you obtained your investment through fraud, bribery, or other misconduct, so your claim should be dismissed.' This defense is rooted in equity—a body of legal principles that focus on fairness and good conscience. It reflects a general principle of law recognized in many domestic systems, and it acts as a shield for states against claims tainted by illegality.
A deeper explanation
The unclean hands doctrine operates as a mechanism to preserve the integrity of the arbitration process and the legitimacy of investor-state dispute settlement (ISDS). It is often raised alongside similar defenses like illegality, corruption, and fraud. How does it work in practice? First, the tribunal must determine whether the investor's misconduct is connected to the claim. For example, if an investor bribed an official to obtain a license, and the state then revoked that license, the investor's claim for expropriation might be barred because the investment itself was procured illegally. Second, tribunals differ on whether the defense goes to jurisdiction (whether the tribunal can hear the case) or admissibility (whether the claim can be heard on its merits). Some tribunals, like in Plama v. Bulgaria, treated it as a jurisdictional issue because the investment treaty only protects 'in accordance with the law.' Others, like in Hamester v. Ghana, considered it a question of admissibility, refusing to hear the claim on the merits. The key principle is that a claimant cannot benefit from its own wrongdoing—a maxim often cited as 'ex turpi causa non oritur actio.' This principle is considered a general principle of law under Article 38(1)(c) of the ICJ Statute. However, the doctrine is not absolute. Tribunals often require a 'clear and serious' link between the misconduct and the claim. For instance, minor regulatory violations may not suffice. Also, if the state itself was complicit in the wrongdoing, the defense may fail. Why does this matter? It balances the protection of foreign investors with the need to uphold public policy and good governance. It prevents investors from using arbitration to launder their misdeeds, and it reassures states that they are not forced to compensate those who have acted in bad faith.