Originally from Investment Treaty Arbitration and International Law - Volume 12

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A local law clause is a treaty provision requiring that an investment be made “in accordance with” the host State’s law.  Local law clauses are common in modern bilateral investment treaties (“BITs”),  most typically in the definition of “investment.”  For example, Article 1(1) of the Italy-Morocco BIT  defines “investment” as “all categories of assets invested . . . in accordance with the laws and regulations of the aforementioned party.”   Other BITs define “investment” as an asset owned, accepted or implemented in accordance with the host State’s law.   All of these variations of the definition of “investment” have been interpreted by tribunals as legality requirements,  meaning that an investment must conform to the host State’s laws in order to benefit from treaty protection. 

A legality requirement may also arise from clauses delineating the scope of treaty protection. For example, Article 13 of the United Kingdom-Venezuela BIT, which states that the treaty “shall apply to investments in the territory of one Contracting Party made in accordance with its laws and regulations . . .,”  has been interpreted as a legality requirement that “limits the scope of BIT application to investments made in compliance with the rules of the host State.”