Austria: Unlawful Investors Cannot Depend On Bilateral Treaties In A Dispute

Last Updated: 13 October 2009

Article by Gerold Zeiler and Katarina Hruskovicova

Many bilateral investment treaties (BITs) contain provisions under which investments have to be made in accordance with the host state's laws. A violation of domestic law bears the imminent danger that the investor will lose the protection of the BIT. Gerold Zeiler and Katarina Hruskovicova of Schoenherr address the scant jurisprudence on this point.

For many foreign investors, the protection of their investment by international law is an essential criterion when they decide to invest. The extent of this protection largely depends on whether the host state has concluded a BIT with the investor's home state and whether it is a party to the European Charter Treaty and to the Icsid Convention.

If the host state and the investor's home state concluded a BIT, this BIT will in many cases define the term "investment" by reference to the host state's law. The Austrian-Romanian BIT, for instance, contains the following provision: "For the purposes of the Agreement [...] the term 'investment' shall include all assets invested in by an investor of a contracting party in the territory of another contracting party in accordance with the latter's laws".

The importance of these provisions has been demonstrated by recent jurisprudence of international arbitral tribunals dealing with cases in which the investor violated host state laws and at a later stage tried to protect its investment by raising claims against the host state.

Jurisprudence of international arbitral tribunals

The tenor of the argument raised by the host states was that only the host state's laws are relevant for determining whether the investors had actually made an investment or not. Investments which do not qualify as investments under the host state's laws do not enjoy protection under the BIT. The host states argue that the arbitral tribunals consequently lacked jurisdiction to decide the investors' claims.

This argument was rightly rejected by the tribunals, which decided that the term "investment" must be interpreted solely in accordance with the BIT and the criteria established under international law.

However, the tribunals also found that the purpose of the reference to national law is that certain unlawful investments are excluded from the scope of the BIT. In these cases the arbitral tribunals would lack jurisdiction to decide on claims raised by the investors. If the investor violates national law when making his investment, he runs the risk of losing the protection provided by the BIT.

This was the crux of the decision rendered in the cases of Inceysa v El Salvador and Fraport v Philippines. In both cases, the respective arbitral tribunals found that the investor had consciously violated the host state's law when investing. In Inceysa, the host state argued that the investor obtained the relevant concession contract by fraud, as he had consciously presented incorrect financial figures and false information on his experience gained in similar projects.

In Fraport, the investor sought to circumvent the host state's laws on the maximum participation a foreigner may hold in a Philippine company by acquiring indirect participations and concluding undisclosed side letters with other shareholders in order to increase his control over the Philippine company.

The arbitral tribunals held that host states do not subject themselves to the unlimited jurisdiction of arbitral tribunals. On the contrary, the arbitral tribunals' jurisdiction is limited to investments which have been established in accordance with the domestic laws of the respective host states. Consequently, if an investor does not make an investment in accordance with the host state's law, the arbitral tribunal lacks jurisdiction.

As can be seen from this line of jurisprudence, it is of utmost importance for investors to comply with the host state's laws. Arbitral tribunals have realised, however, that this somewhat rigid approach requires restrictions on several points.

Limitations of the approach

Conformity with the host state's law only at the time the investment was made would lead to considerable legal uncertainty if the investor fears that any infringement on his part of the host state's domestic law during the time he holds his investment would deprive him of the protection of the BIT.

The tribunal in Fraport therefore limited the timeframe within which the investor must not have violated the host state's law. It restricted this requirement to the time when the investor first establishes his investment rather than extending it to the entire duration of the investment.

This limitation is generally welcome. At second glance, however, it is problematic. Of course the point in time in which an investment may be considered to have been established is not easily defined. In Fraport, for instance, the investor acquired shares in a local company and concluded agreements with other shareholders during a longer period of time. The "establishment" of the investment therefore may extend over a longer period of time. Not knowing precisely when his investment was "established" may bring about considerable legal uncertainty for the investor.

Good faith of the investor

When an investor invests, he often sails into relatively uncharted legal waters. The Fraport tribunal attempted to address this reality by taking into account whether the investor acted in good faith when violating the host state's law. In the tribunal's reasoning, an investor will not lose the protection of the BIT if the host state's domestic law was unclear and the investor, although violating the law, acted in good faith.

For instance, according to the tribunal, a legal due diligence report on which the investor relied but which failed to indicate the relevant provision of the host state's law may prove the investor's good faith. A further indication may be that the violation of the host state's law was not of primary relevance for the profitability of the investment. The tribunal held that this can be assumed if the investor could have established his investment in accordance with the host state's domestic law without any loss of profitability.

The tribunal's decision, however, did not explain in any more detail when the criterion of ambiguity of the domestic law is fulfilled, which created legal uncertainty for the investor. It is the investor's burden to establish that he acted in good faith, something which may prove difficult in practice.

Minor violations of the host state's law

Another argument, which the tribunal in Tokios Tokelès v Ukraine provided to investors who violated the host state's law, was that the violation was only minor. The tribunal had been faced with the allegation that the investor had disregarded certain formal requirements when establishing a company in the host state.

The tribunal considered the infringements to be minor and would not exclude the investor from the protection of the BIT, as this would run counter to the BIT's object and purpose. The arbitral tribunal, however, did not specify where the line is to be drawn between minor infringements that bear no relevance for the jurisdiction of the tribunal and larger violations that do.


Exceptions to the relevance of violations of domestic law have been established by tribunals on a case-by-case basis, which allow for induction towards more general rules. Of course, the law is still being developed. Investors are therefore advised to study the relevant BIT for references to the host state's law before investing, and to meticulously adhere to domestic law, especially in the initial phase of the investment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions