Source: https://globalarbitrationreview.com/insight/the-arbitration-review-of-the-americas-2018/1146893/corruption-in-international-arbitration-challenges-and-consequences
Timestamp: 2019-04-21 00:32:24+00:00

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Despite worldwide anti-corruption efforts, corruption remains a persistent problem in many countries. This is particularly true in the Americas, where the majority of countries still fall below the global average on corruption indices.1 The ongoing Operation Car Wash investigation in Brazil, which has reached across industries and up to the top levels of the Brazilian government, illustrates corruption's pervasiveness.
Although there are several international legal instruments relevant to corruption,2 these instruments largely operate through the institution and enforcement of national anti-corruption laws. Thus, corruption allegations typically arise and are prosecuted pursuant to national laws, by domestic enforcement agencies, in national courts. The United States Foreign Corrupt Practices Act is a premier example of a national anti-corruption regime with international effect.
In recent years, however, corruption allegations have also arisen more frequently in international arbitration. In this context, states or state-owned entities have increasingly asserted corruption allegations as a defence to claims brought against them. Unlike in the domestic context, the rules and instruments relevant to the arbitration are typically silent on how arbitrators should address corruption allegations.
Arbitral tribunals faced with such allegations must thus determine several issues that may significantly affect the outcome of the arbitration. We address four key issues that arbitrators may face: (i) where corruption fits in the context of an arbitral proceeding, (ii) the applicable standard of proof, (iii) whether domestic court findings on corruption are relevant to the proceedings, and (iv) the legal consequences that may result from corruption allegations.
International arbitration tribunals have taken different approaches in analysing where corruption allegations fit into the arbitration proceeding. In the investment context, tribunals appear more likely to treat corruption as an issue of jurisdiction when the alleged corruption is said to have induced the investment and when the treaty expressly specifies that investments must be made legally, and to treat such allegations as an issue of admissibility or merits when the alleged corruption arises later during performance. In the commercial arbitration context, publicly available awards indicate that tribunals more often treat corruption as part of the merits.
Other tribunals have treated corruption allegations as part of the merits of the dispute. For example, in its decision on jurisdiction, the Kim tribunal stated that any matters regarding corruption that arose after the initial investment were ‘more appropriately addressed at the merits stage'.21 Of course, consideration of corruption allegations during the merits stage may also be a consequence of when respondents raise the allegations. For example, following the jurisdictional phase, the respondents in Niko Resources filed additional submissions alleging that the underlying contracts were ‘procured through corruption'.22 While it had already dealt with corruption issues in the jurisdictional phase, the tribunal agreed to examine the new corruption charges in light of ‘the seriousness of corruption offenses' and its ‘responsibility for upholding international public policy'.23 A decision on these issues is pending.
When faced with corruption allegations, arbitral tribunals may also have to determine the applicable standard of proof.
What to make of domestic courts' findings?
Where the corruption allegations at issue are the subject of domestic criminal proceedings, the tribunal may also decide whether to consider domestic courts' findings.
The Niko Resources tribunal found, however, that the respondent had not satisfied its burden of proof with respect to other alleged acts of corruption because investigations by the local authorities had ‘not led to any trial, let alone conviction for acts of corruption that may be attributed to the [c]laimant'.39 The tribunal also pointed to the Supreme Court of Bangladesh's finding that the underlying contract ‘was not obtained by flawed process by resorting to fraudulent means'40 and the Canadian court's finding that Niko ‘ha[d] never been convicted of a similar offence nor . . . sanctioned by a regulatory body for a similar offence.'41 As such, the tribunal appeared to give some credence to the findings of domestic courts in determining whether the respondent had carried its evidentiary burden.
Tribunals have also grappled with identifying the appropriate legal consequences of corruption on a party's claims, and determining the factors that are relevant to this analysis. While traditionally tribunals may have taken a binary, all-or-nothing approach to corruption, more recently commentators and some tribunals have considered a more proportional approach.
Corruption allegations have increasingly arisen in international arbitration and there is no reason to think that this trend will slow down in the immediate future. Tribunals faced with such allegations will, therefore, continue to develop a coherent approach that balances the importance of promoting anti-corruption with fairness to the parties.
The views expressed in this article are solely those of the authors. The authors are grateful to Joshua B Pickar for his contributions to this article.
TRANSPARENCY INT'L, Corruption Perceptions Index 2016 (25 Jan. 2017) www.transparency.org/news/feature/corruption_perceptions_index_2016#resources.
See, e.g., Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, 17 Dec. 1997, S. Treaty Doc. No. 105-43; Inter-American Convention against Corruption, 29 Mar. 1996, 35 I.L.M. 724.
See, e.g., Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, paragraph 279 (4 Oct. 2013).
Metal-Tech, supra note 3, paragraph 164 (emphasis omitted).
See, e.g., id. paragraph 372; see generally Jean Kalicki, Dmitri Evseev & Mallory Silberman, Legality of Investment, in BUILDING INTERNATIONAL INVESTMENT LAW -THE FIRST 50 YEARS OF ICSID 127, 132-34 (M Kinnear et al. eds. 2015).
See Kalicki, supra note 6, at 133 (‘[A] number of tribunals have recognized that, irrespective of whether the applicable treaty contains an express "in accordance with law" provision, only investments that are lawfully made can obtain the substantive protections of an investment treaty, including access to investor-State arbitration.').
World Duty Free v. Republic of Kenya, ICSID Case No. ARB/007, Award, paragraph 157 (4 Oct. 2006).
See Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, paragraph 101 (15 Apr. 2009); see also SAUR Int'l S.A. v. Argentine Republic, ICSID Case No. ARB/04/4, Decision on Jurisdiction and Liability, paragraph 308 (6 June 2012) (noting that the legality requirement ‘is a tacit condition' in every BIT) (‘La condition de ne pas commetre de violation grave de l'ordre juridique est une condition tacite, proper à tout APRI.') (unofficial translation); Inceysa Vallisoletana, S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, Award, paragraph 257 (2 Aug. 2006) (inferring legality requirement from the treaty's travaux préparatoires); Plama Consortium Ltd. v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award, paragraph 139 (27 Aug. 2008) (finding that, despite the lack of a legality provision in the Energy Charter Treaty, ‘the substantive protections of the ECT cannot apply to investments that are made contrary to law').
See, e.g., Niko Resources v. People's Republic of Bangladesh, Bangladesh Petroleum Exploration & Production Co. Ltd., & Bangladesh Oil Gas and Mineral Co., ICSID Case Nos. ARB/10/11 & ARB/10/18, Decision on Jurisdiction, paragraphs 471, 484-85 (19 Aug. 2013) (holding that jurisdiction was proper because the corruption occurred once ‘the [joint venture agreement] had already been concluded', and not during the making of the contract).
Vladislav Kim v. Republic of Uzbekistan, ICSID Case No. ARB/13/6, Decision on Jurisdiction, paragraph 377 (8 Mar. 2017).
See Michael Hwang S.C. & Kevin Lim, Corruption in Arbitration - Law and Reality, Arbitration-icca.org, paragraphs 92-93 (4 Aug. 2011) (expanded version of Herbert Smith-SMU Asian Arbitration Lecture), www.arbitration-icca.org/media/0/13261720320840/corruption_in_arbitration _paper_draft_248.pdf; see also Antonio Crivellaro, Arbitration Case Law on Bribery: Issues of Arbitrability, Contract Validity, Merits and Evidence, in MONEY LAUNDERING, CORRUPTION AND FRAUD, DOSSIERS - ICC INSTITUTE OF WORLD BUSINESS LAW 109, 113-14 (Karsten & Berkeley eds., 2003) (surveying cases and noting only one publicly reported award in which the arbitrator refused jurisdiction on the basis of the claimant's illegal conduct).
Argentine Engineer v. British Company, Case No. 1110 of 1963, 21 Y.B. Comm.Arb. 47 (ICC Int'l Ct. Arb.).
GARY B. BORN, INTERNATIONAL COMMERCIAL ARBITRATION 989 (2d ed. 2014).
Hesham Talaat M. Al-Warraq v. Republic of Indonesia, UNCITRAL, Award on Respondent's Preliminary Objections to Jurisdiction and Admissibility of the Claims, paragraph 99 (21 June 2012).
Hesham Talaat M. Al-Warraq v. Republic of Indonesia, UNCITRAL, Final Award, paragraph 683(6) (15 Dec. 2014).
World Duty Free, supra note 8, paragraph 187; see also Spentex Netherlands, B.V. v. Republic of Uzbekistan, ICSID Case No. ARB/13/26, Award (27 Dec. 2016) (noting that treating corruption as either an issue of admissibility or jurisdiction would result in dismissal of claims) (not public, see https://www.iareporter.com/articles/in-newly-unearthed-uzbekistan-ruling-exorbitant-fees-promised-to-consultants-on-eve-of-tender-process-are-viewed-by-tribunal-as-evidence-of-corruption-leading-to-dismissal-of-all-claims-under-dutch/).
Kim, supra note 12, paragraph 553.
Niko Resources (Bangladesh) Ltd. v. Bangladesh Petroleum Exploration & Prod. Co. Ltd. & Bangladesh Oil Gas and Mineral Corp., ICSID Case Nos. ARB/10/11, ARB/10/18, Procedural Order No. 13, paragraph 1 (26 May 2016).
Fraport AG Frankfurt Airport Servs. Worldwide v. Republic of the Philippines, ICSID Case No. ARB/11/12, Final Award, paragraph 479 (10 Dec. 2014); EDF (Servs.) Ltd. v. Romania, ICSID Case No. ARB/05/13, Award, paragraph 221 (8 Oct. 2009) (‘The seriousness of the accusation of corruption in the present case, considering that it involves officials at the highest level of the Romanian Government at the time, demands clear and convincing evidence.').
Fraport, supra note 24, paragraph 479.
Libananco Holdings Co. Ltd. v. Republic of Turkey, ICSID Case No. ARB/06/8, Award, paragraphs 125-26 (2 Sept. 2011) (quotation marks omitted); see also Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18, Award, paragraph 124 (26 July 2007) (outlining the various standards of proof).
Metal-Tech, supra note 3, paragraph 243.
Getma Int'l v. Republic of Guinea, ICSID Case No. ARB/11/29, Award, paragraph 184 (16 Aug. 2016).
Id. paragraph 221 (unofficial translation) (‘La Défenderesse a donné priorité au moyen de défense que constitue la corruption, plutôt qu'à la poursuite des corrompus.').
Id. paragraph 226 (unofficial translation) (‘En l'absence de toute justification de la part de la Défenderesse pour son omission d'utiliser ses pouvoirs pour apporter la preuve, le cas échéant, de la corruption, le [t]ribunal arbitral ne voit pas d'autre conclusion possible à tirer de cette omission que celle que l'Etat ne croyait pas lui-même que la preuve existe.').
Niko Resources, Decision on Jurisdiction, supra note 10, paragraph 373.
World Duty Free, supra note 9, paragraph 66 (4 Oct. 2006).
Metal-Tech, supra note 4, paragraph 30.
EDF, supra note 24, paragraph 221.
Kim, supra note 12, paragraph 545; see also Libananco, supra note 27, paragraph 126 (finding that because, even if proven, the allegations of ‘fraud and other wrongdoing' were not dispositive, the question of standard of proof was ‘of academic interest only').
JSC BTA Bank v. Ablyazov  EWHC 510 (Comm).
Niko Resources, Decision on Jurisdiction, supra note 10, paragraph 423.
Id. paragraph 427 (emphasis omitted).
Inceysa, supra note 9, paragraphs 53-63, 67, 209, 212.
World Duty Free, supra note 8, paragraph 188.
See, e.g., Metal-Tech, supra note 3, paragraph 389.
See John R. Crook, Remedies for Corruption, 9(3) WORLD ARB. & MEDIATION REV. 303, 311 (2015) (‘The binary rule makes an investor bear a heavy price for the actions of the State's agents or representatives, while the State potentially typically bears no consequences for misconduct of its agents.'); see also Niko Resources, Decision on Jurisdiction, supra note 10, paragraph 465 (noting that if it accepted the state's position on this issue, the state entities ‘could invoke the arbitration clauses but Niko could not'.).
See, e.g., Andrea J. Menaker, The Determinative Impact of Fraud and Corruption on Investment Arbitrations, ICSID REVIEW (2010) 25 (1): 67-75; Carolyn B. Lamb, Hansel T. Pham, & Rahim Moloo, Fraud and Corruption in International Arbitration, 10(3) TRANSNAT'L DISP. MGMT. 699, 711 (outlining public policy concerns related to corruption).
See Menaker, supra note 49; see also Metal-Tech, supra note 3, paragraph 389.
Metal-Tech, supra note 3, paragraph 389.
See José María de la Jara & Eduardo Iñiguez, The Case Against the Corruption Defense, EFILA BLOG (16 May 2017), https://efilablog.org/2017/05/16/the-case-against-the-corruption-defense.
See Crook, supra note 48, at 311 (arguing that the all-or-nothing approach of the corruption defense as posing a jurisdictional bar is inequitable, allows for unjust enrichment, and has negative effects on the arbitration system.
Kim, supra note 12, paragraph 413.
Patel v. Mirza  UKSC 42.
World Duty Free, supra note 8, paragraph 185.
See, e.g., Aloysius P. Llamzon, State Responsibility for Corruption: The Attribution Asymmetry in International Investment Arbitration, 10(3) TRANSNAT'L DISP. MGMT. 1, 3 (2013).
See U.N. INT'L LAW COMM'N, Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries, art. 7, in Work of Its Fifty-Third Session, U.N. GAOR, 53rd Sess., Supp. No. 10, U.N. Doc. A/56/10 (2001) (‘The conduct of an organ of a State or of a person or entity empowered to exercise elements of the governmental authority shall be considered an act of the State under international law if the organ, person or entity acts in that capacity, even if it exceeds its authority or contravenes instructions.').
See, e.g., Murray Walter, Inc. v. Sarkisian Bros., 107 A.D.2d 173, 177-78 (N.Y. App. Div. 1985) (stating that courts have estopped equally culpable defendants from asserting an illegality defense to a breach of contract).
Getma, supra note 29, paragraph 221-26.
Metal-Tech, supra note 3, paragraph 422; see also Spentex, supra note 20 (holding that claimant's corruption rendered claims inadmissible, but ‘urging' respondent to make a donation of US$8 million to a United Nations anti-corruption fund or face an adverse order on costs and fees, in light of its own role in the corruption).

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