The ICSID Tribunal in Inceysa Vallisoletana S.L. v. Republic of El Salvador declined jurisdiction to hear claims of breach of contract and expropriation asserted by a Spanish company, Inceysa Vallisoletana, S.L. ("Inceysa"), against the Republic of El Salvador.1 The Tribunal concluded that it lacked jurisdiction where Inceysa's underlying investment was not made "in accordance with law".

Inceysa commenced arbitration in July 2003 following the decision of El Salvador's Ministry of the Environment and Natural Resources ("MARN") not to proceed with a November 2000 concession contract for the operation of vehicle inspection services. Despite previously awarding the concession to Inceysa, MARN subsequently retained two other companies to provide similar services, and ultimately moved to terminate the contract in the Salvadoran courts. According to Inceysa, MARN's actions breached the concession contract and El Salvador's national investment law, and violated a 1995 bilateral investment treaty between Spain and El Salvador (the "BIT" or the "Treaty").2 Inceysa sought more than $120 million in damages.

El Salvador contended that the "Investment Treaty by its terms and intent extend[ed] protection only to investments made in El Salvador in accordance with its laws," and that its national investment law similarly excluded "fraudulent investments" from the scope of its protections.3 El Salvador's jurisdictional objection centered on the allegation that Inceysa obtained the concession by defrauding the state during the public bidding process, including through submission of false financial documentation, intentional misrepresentation of its qualifications and concealment of its relationship with another bidder. According to El Salvador, where its consent to ICSID jurisdiction was expressly limited to "disputes involving investments otherwise entitled to protection under the Treaty, i.e., investments made in accordance with Salvadoran law," Inceysa could not invoke its protections.4

The tribunal agreed, finding that "because Inceysa's investment was made in a manner that was clearly illegal, it [wa]s not included within the scope of consent expressed by Spain and the Republic of El Salvador in the BIT," and thus "the disputes arising from it [we]re not subject to the jurisdiction of the Centre."5 In order to arrive at this conclusion, the Tribunal undertook a two-part analysis, first considering whether El Salvador had limited its consent in the BIT to disputes concerning investments made legally, and, if so, whether Inceysa's investment was made in accordance with Salvadoran law.

The tribunal assessed El Salvador's written consent to ICSID jurisdiction in the BIT, which, flowing from Article 25(1) of the ICSID Convention, the tribunal recognized a fortiori did not constitute a limitless agreement to arbitrate any dispute purportedly falling within the Treaty's terms. Rather, the tribunal determined that it was bound to examine whether the particular dispute was within the scope of El Salvador's consent, giving effect to both the will of the contracting states as well as the principle of good faith.After noting that so-called "accordance with law" clauses were among the most common mechanisms employed by states to limit the scope of investment protection obligations, the tribunal examined the express language of the Treaty itself. Here, although the clause did not appear in the Treaty's definition of investment, the parties included such a qualification in two other articles regulating the "Protection" and "Promotion and Admission" of that investment. Moreover, the Treaty's travaux préparatoires made clear the parties' mutual intent that compliance with local law be a precondition to an investment's protection under the Treaty. The tribunal noted that the diplomatic exchanges between Spain and El Salvador firmly established, "without any doubt,...the will of the parties to the exclude from the scope of application and protection of the agreement disputes originating from investments which were not made in accordance with the laws of the host state." 6 On the facts, the tribunal concluded that El Salvador had substantiated its allegations that Inceysa acted fraudulently during the bidding process, and that consequently Inceysa's investment failed to comply with Salvadoran law. The tribunal held that Inceysa's actions violated the principle of good faith underlying El Salvador's consent toICSID jurisdiction, a principle found applicable under the BIT and the Salvadoran Constitution. The tribunal likewise concluded that upholding jurisdiction under the BIT could not be squared with international public policy barring parties from benefiting from their own fraud, declaring that Inceysa could not "seek to benefit from an investment effectuated by means of one or several illegal acts and, consequently, enjoy the protection granted by the host state."7

For the same reasons, the tribunal held Inceysa's actions barred it from accepting the unilateral offer to arbitrate disputes before ICSID contained in El Salvador's national investment law. Finally, the tribunal ruled that it had no jurisdiction to hear Inceysa's breach of contract claims as the provisions in the concession contract did not meet the standards set forth in Article 25 of the ICSID Convention for consent to jurisdiction.