Source: https://globalanticorruptionblog.com/2016/01/22/is-corruption-an-emerging-cause-of-action-in-investor-state-arbitration-2/
Timestamp: 2019-04-19 21:16:33+00:00

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The first international tribunal to apply anticorruption norms was ICC Award No. 1110, in 1963. In this ad hoc arbitration, the distinguished Judge Lagergren declined to enforce a contract between a foreign investor and an Argentine businessman hired on commission to win electricity tenders, which the parties admitted was a contract to facilitate bribes. He ruled that parties “who ally themselves in an enterprise” involving “gross violations of good morals and international public policy” will “forfeit any right to ask for assistance of the machinery of justice … in settling their disputes.” Since this ruling, a range of arbitral tribunals—including the Iran-US Claims Tribunal, ICSID, and tribunals constituted under the Energy Charter Treaty and various bilateral investment treaties (BITs)—have accordingly dismissed arbitration claims arising from contracts secured through corruption.
In Siemens v. Argentina, prior bribery enabled the host state to avoid paying a $218 million judgment initially ordered for terminating the investor’s contract. After the initial award, a joint U.S.-German investigation under their respective anti-bribery laws revealed that Siemens had secured the investment through bribes. Argentina moved to seek annulment of the award, but the eventually the parties eventually settled when Siemens admitted wrongdoing and abandoned its attempt to enforce the original ISDS award.
This “corruption defense” in ISDS has proved controversial. Professor Yackee, for example, has suggested the defense may encourage public officials to engage in corruption, or might dissuade countries from adopting clearer domestic anticorruption laws—concerns previously discussed on this blog. A corruption defense also risks undermining the jurisdiction of arbitral tribunals over otherwise compelling claims. ISDS has a clear interest in adapting to the practical realities of foreign investment, including the possibility of corruption. Perhaps because of these challenges, there is some evidence that the anticorruption defense may be on the wane. A number of recent ISDS panels have accepted jurisdiction over disputes involving corrupt contracts. For example, the tribunal in Tanzania Electric Power Supply Company v. Independent Power Tanzania rejected the host state’s argument that bribery of public officials rendered the contract void and precluded jurisdiction. Tribunals have also rightfully rejected claims where the corrupt conduct was specifically intended by investors to manipulate access to arbitral remedies, as in Phoenix v. Czech Republic.
Last year in Djibouti v. DP World, Djibouti withdrew DP World’s 30-year concession to operate Africa’s largest container terminal and initiated arbitral proceedings, alleging that DP World had secured the concession through bribery. Unfortunately, because the arbitration arises from a private contract rather than an investment treaty, public information is limited on the current proceedings. Even though this is a private commercial arbitration, a decision in Djibouti’s favor could offer persuasive authority for investor-state disputes arising from investment treaties.
Perhaps even more relevant here is the widely discussed Yukos v. Russian Federation decision, which also hints at corruption as its own cause of action. In Yukos, the tribunal found that Russia had improperly expropriated assets of an oil company. The company’s cause of action against Russia was based in part on corrupt conduct by Russian public officials, including “fabricated” legal proceedings and a “special unit” in the General Prosecutor’s Office dedicated “exclusively” to “fabricating evidence” against the company and its chairman. While the Yukos tribunal did not label these as corruption claims per se, the tribunal found this conduct established a cause of action under ISDS. Notably, Russia sought to invoke the corruption defense recognized in cases like World Duty Free, arguing that because the claimants had engaged in corrupt business dealings, the tribunal should decline jurisdiction. Instead, the tribunal found that corruption had not tainted the immediate contract under dispute, and expressly rejected the argument that an “unclean hands” doctrine constituted a “general principle of law recognized by civilized nations” that could bar access to remedies in arbitration. The tribunal awarded the staggering compensation of $50 billion against Russia. As discussed previously on this blog, the Yukos decision suggests that investors might have a valid claim against host states where a breach of conventional “fair and equitable treatment”—such as due process or transparency—overlaps with corrupt conduct by public officials. Over time, tribunals may find that fair and equitable treatment also includes a freestanding cause of action for corruption.
A shift towards corruption as a cause of action in investor-state arbitration would have several possible implications.
First, this shift would reinforce anticorruption norms as increasingly settled principles of public international law, providing further persuasive authority for a range of international legal bodies.
Second, while the anticorruption community may welcome corruption as a cause of action, a new claim might also enable governments to escape foreign investments that become unpopular, fiscally untenable, or otherwise unwanted—which would otherwise be protected under international law. Tribunals would need to interpret a corruption cause of action that is tailored to guard against misuse.
Third, a shift towards a corruption cause of action would suggest that ISDS tribunals have had a far more significant role in developing “public welfare” norms than is typically appreciated. Anticorruption is one of the few public welfare principles to develop through arbitration without explicit treaty support. (Environmental protection and public health regulations have seen less success—see, respectively, Germany’s recent settlement with Vattenfall and Philip Morris’s claims pending against Australia and Uruguay.) While the Transparency and Anti-Corruption chapter of the TPP does not provide any express cause of action or defense, arbitral tribunals may interpret the TPP’s unprecedented inclusion of anticorruption standards as support for considering corruption in investor-state disputes, and rejecting corruption as a defense to a tribunal’s jurisdiction.
While corruption has not yet been recognized as a cause of action in investor-state arbitration, or even as a formal defense, an increasing number of decisions indicate that ISDS tribunals may consider anticorruption an emerging international legal norm. The TPP hints at codifying this principle. These changes suggest a growing consensus that anticorruption standards cannot be artificially separated from other international legal remedies.
This entry was posted in Commentary and tagged enforcement, international arbitration, Investor-State Arbitration, ISDS, TPP, Trans-Pacific Partnership, U.S. Trade Representative, World Duty Free v. Kenya, Yukos, Yukos v. Russian Federation by Danielle Young. Bookmark the permalink.
Danielle Young is a student at Harvard Law School. She previously worked as a human rights advisor to multinationals operating in emerging markets, and in the Special Litigation Unit of the World Bank Integrity Vice Presidency.

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