Despite worldwide anti-corruption efforts, corruption remains a persistent problem in many countries. This is particularly where the majority of countries still fall below the global average on corruption indices. Corruption in international business is becoming endemic. International business contracts are frequently the subject of disputes which come to arbitration. There are concerns that parties to contracts procured through corruption may choose arbitration as the preferred form of dispute resolution because the process is confidential and consensual, and because arbitrators are traditionally reluctant to investigate corruption on their own initiative. If true, that creates a very real risk that corrupt contracts can be legitimized and enforced through arbitration. Although there are several international legal instruments relevant to corruption,1 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 question this paper will address remains that if evidence of corruption emerges during the course of an arbitration, how should the arbitrators deal with it, the outcome or response can effectively assist international efforts to combat corruption.
ARBITRATION AND CORRUPT CASES
In recent years, corruption allegations have arisen more frequently in international arbitration. In many contexts, states or state-owned entities have increasingly asserted corruption allegations as a defense to claims brought against them. Unlike in the domestic context, the rules and instruments relevant
1. TRANSPARENCY INT’L, Corruption Perceptions Index 2016(25 Jan. 2017) transparency.org/news/feature/corruption_perceptions_index_2016#resources.
to the arbitration are typically silent on how arbitrators should address corruption allegations.
Transparency International’s latest global corruption report highlights that nearly two in five business executives say they have been asked to pay a bribe when dealing with public institutions.2 One in five claim to have lost business because of bribes by a competitor. More than a third feels that corruption is getting worse. Corruption stifles free and fair competition, and undermines democracy in any nation. Little surprise that it has become the subject of universal condemnation. Yet it appears to be a problem that simply won’t go away.
In principle, if corruption is established in an international commercial arbitration, the contract is invalid and void, and the claimant is entitled to no legal remedy.
As Judge Gunnar Lagergren3 said, while dismissing a claim brought under a contract involving the payment of bribes, “a case involving such gross violation of good morals and international public policy, can have no countenance in any court.. nor in any arbitral tribunal.”
Yet historically there has been a general reluctance by arbitral tribunals to deal with bribery and corruption issues where they do not form a substantive part of the case before them. Arbitrators do not always feel comfortable investigating signs of corruption, particularly where as will frequently be the case where both parties to the arbitration have been involved in the corruption neither of the parties raises the issue. Arbitrators are often concerned that the consensual
2. Ibid, TRANSPARENCY INT’L, Corruption Perceptions Index 2016(25 Jan. 2017) transparency.org/news/feature/corruption_perceptions_index_2016#resources.
3. ICC arbitration award made in 1963.
4. Mathew L Rea: Bribery and Corruption in International Arbitration (2016); Rea@bclpaw.com
nature of the process, and of their appointment, means that they cannot self-initiate investigations. Frequently they decide not to look into signs of corruption on the basis that such allegations, even if proved, would not affect the outcome of the final decision.
Arbitration Tribunals have also traditionally taken the view that bribery and corruption allegations are best left to domestic courts and have viewed their jurisdiction as confined to resolving the commercial disputes, without going beyond that. Arbitrators sometimes feel that they lack the powers to force parties to hand over incriminating material (unlike domestic courts), and are therefore limited to simply drawing adverse inferences from a failure to produce documents where a party is requested to do so.
These attitudes seem to be changing however. There is a strengthening international consensus that corruption must be tackled and positive steps taken to stamp it out. Tribunals are now showing more willingness to deal with issues of corruption when they arise. There is increased concern that arbitrators should not be seen as endorsing corrupt contracts, and a recognition that they do have the necessary powers to self-initiate investigations where there are obvious signs of corruption, and to declare contracts to be unenforceable, or claims inadmissible, where allegations of corruption can be proved.
In World Duty Free Co. Ltd v Kenya5 for example the tribunal found that both under Kenyan and English law, the contract was voidable for illegality due to corrupt conduct and the claim was dismissed. In that case corrupt payments were admitted so the tribunal was given a relatively easy task. In Metal-Tech v Republic of Uzbekistan6 however, where corruption was alleged by the respondent, the tribunal felt able to infer corruption on the basis of strong evidence to that effect and declined jurisdiction.
5. ICSID Case No. ARB/10/7
6. ICSID Case No. ARB/10/3
SITUATIONS WHERE CORRUPTION MIGHT ARISE
There are two main situations where tribunals may need to decide corruption issues7:
- ‘RED FLAGS’
Where the arbitration tribunals themselves become suspicious, from the evidence before them, of the presence of corruption, in circumstances where the issue has not been raised by any of the parties to the dispute. In these situations tribunals may wish to initiate investigations themselves, either to ensure that their awards will be enforceable, or out of a public duty to investigate corruption. Their concerns will include whether they have the necessary procedural powers to do so, what evidence and standard of proof they should require before making any factual findings of corruption, and whether the effect of a finding of corruption will have the result that one party benefits from an unconscionable windfall.
- ALLEGATIONS OF CORRUPTION
Where one of the parties, usually the respondent, alleges corruption. Allegations of corruption are generally either made during the arbitration proceedings, or at the enforcement stage. In these situations tribunals will be concerned to prevent tactical claims of corruption, made on spurious grounds in order to escape from bad commercial deals, cause increased costs and unnecessary delay, or discredit the claimant. At the same time tribunals will want to avoid the risk of arbitration being perceived as a shelter for corruption, and may be reluctant to dismiss such allegations without further investigation, even where they apparently lack substance. Tribunals who fail to investigate good faith suspicions of illegality risk being accused of facilitation if suspicions are not investigated but later proven.
7. 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.
PROCEDURAL POWERS OF THE ARBITRATION TRIBUNAL
Tribunals’ powers to self-initiate investigations of corruption derive in part from the need for tribunals to ensure the validity of their own mandate, and therefore to ensure, through investigation of the legality of the contract containing the arbitration clause, that they have the necessary jurisdiction, and that the claims are properly arbitrable.
For example Article 418 requires the tribunal to “make every effort to make sure that the Award is enforceable at law“. If the contract was procured through corruption or bribery it is likely that any arbitration award on that contract will violate international public policy. Public policy is one of a narrow group of grounds available for denying enforcement of an international arbitral award under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards9. In other words Article 4110 requires tribunals to make inquiry into suspected corruption in order to ensure its award is enforceable at law.
If a tribunal decides to investigate corruption concerns during proceedings, it must of course ensure, consistent with due process, that the parties are made fully aware of all its concerns and given a proper opportunity to address those concerns and make submissions and provide evidence in response.
A tribunal will frequently have the amongst others to order the production of documents or evidence to allow it to determine an issue of corruption, even if that issue has not been raised by the parties. If a party fails to comply without good reason the tribunal will be entitled to draw adverse inferences from that failure.11 Under section 42 of the Act12 a tribunal can apply on its own initiative to the English court for an order requiring a party to comply.
8. The ICC Rules
9. The New York Convention
10. Ibid, 15
STANDARD AND BURDEN OF PROOF
As a matter of practice the burden of proof in international arbitration is generally borne by the party making the allegation. However corruption is frequently difficult to prove and there is a good argument for saying that once evidence indicative of corruption (but not conclusive) has been produced the burden of proof should be reversed. If the issue has been raised by the tribunal itself the question is likely to be resolved in practice through drawing adverse inferences from a party’s failure to adduce evidence to contradict the allegations.
As to the standard of proof, most national arbitration laws, and institutional rules, leave the question of what the standard of proof should be to the arbitrators’ discretion. Generally tribunals will decide issues on the basis of “a reasonable conclusion to draw from the balance of the evidence”, or “a balance of probabilities”. The seriousness of corruption allegations has however led tribunals in certain cases to require “clear and convincing evidence” of corruption, or proof “beyond doubt”, or “beyond reasonable doubt”. These are high standards which can be tough to satisfy. Bribery and corruption, by nature, will have been deliberately concealed, and evidentiary trails will have been destroyed or disguised.
A tribunal’s investigatory powers are limited, and documentary evidence is likely to be minimal. Evidence will therefore frequently be circumstantial. In these circumstances tribunals have felt able to exercise their discretion to lower the standard of proof and have been prepared to base their decisions instead on inferences and circumstantial evidence “which lead to a very high probability” of corruption.
Tribunals may also consider reporting corruption concerns to relevant regulatory authorities, although they will be concerned that making such a report could be in violation of confidentiality obligations.
11. (see for example section 41(7)(b) of the Act, and Article 9(5) of the IBA Rules of the Taking of Evidence in International Arbitration).
THE EFFECT OF FINDINGS OF CORRUPTION
At the merits stage a tribunal should fully consider substantive questions regarding whether alleged illegality or breach of public policy renders a contract void, voidable and/or unenforceable. Tribunals should therefore investigate evidence relating to the allegation and determine its significance under the applicable law. Depending on how the issue is approached, there are two key issues for tribunals to consider when deciding whether alleged illegality should defeat the Claimant’s claim. These are:
- The connection between the alleged illegality and the contract (i.e. there must be a sufficient connection to the contract for a tribunal to find that it renders the contract invalid or unenforceable); and
- The legal effect of the alleged illegality pursuant to the applicable law. A tribunal should explicitly refer to its findings following such investigations in its factual and legal conclusions in the award.
UNCONSCIONABLE WINDFALL FOR ONE PARTY
Where a tribunal grants no relief on a claim based on rights obtained or otherwise tainted by corruption, does this result in the respondent unfairly profiting at the claimant’s expense? In Metal-Tech13 the tribunal initiated its own investigation and sought to clarify the factual scenario as much as possible in order to be able to make a well-informed decision with respect to its jurisdiction over the substance of the dispute. This resulted in the tribunal rejecting the claim on grounds that the investment contract was obtained illegally through corrupt payments. The tribunal said that refusal to grant any relief was necessary “not to punish one party at the cost of the other, but rather to ensure the promotion of the rule of law, which entails that a court or tribunal cannot grant assistance to a party that has engaged in a corrupt act”.
This is perhaps not a surprising or unfair result in circumstances where both parties, by participating in corruption, were voluntarily taking the risk that their contract may ultimately be unenforceable.
THE CORRUPT CASES AND NIGERIA PERSPECTIVE
In nationwide consultation on treating corruption in Nigeria,14 the Chief Justice of Nigeria, Justice Onnoghen placed a Circular on Practice Direction dated May 28, 2017 on the compulsory enforcement of Arbitration provisions in contracts by the courts in order to promote faster commercial dispute resolutions and foster greater confidence in the judicial system by domestic and foreign investors. It is the general believe that the directive will stimulate commercial transaction in Nigeria and also support the vision of the Federal government to promote economic development and growth.
13. Metal-Tech, supra note 3, paragraph 164 (emphasis omitted).
14. 19th September 2017, http://sunnewsonline.com/cjn-approves-special-courts-for-corruption-financial-crime-cases/
Also the Directives on designation of special courts solely for the purpose of hearing and speedy determining of corruption cases is highly commendable. The Federal Government will do whatever it takes within the context of the provided precedent to ensure peace and security of the nation in the sustenance of our democracy.
The attorney General further promised to ensure that all executive branch institutions always acknowledge and respect the fact that the Judiciary is pivotal to the maintenance of law and order, and must be fully supported to discharge that mandate. The overall good news is that the detention of any corrupt intention at the commencement of any international transaction will receive positive attention from the Federal Government of Nigeria. On the second note, if an arbitration tribunal discover an element of criminality in any transaction, the coast is clear for prompt attention of the Nigeria courts.
- WHERE CORRUPTION FITS IN THE CONTEXT OF AN ARBITRAL PROCEEDING:-
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.
In Metal-Tech v Republic of Uzbekistan,15 the tribunal considered the alleged corruption as a jurisdictional matter and justified this result as follows:
The rights of the investor against the host State, including the right of access to arbitration, could not be protected because the investment was tainted by illegal activities, specifically corruption. The law is clear – and rightly so – that in such a situation the investor is deprived of protection and, consequently, the host State avoids any potential liability.16
Many of the cases where tribunals have considered allegations of corruption or other illegality to pose a jurisdictional bar involved an express legality requirement. However, some tribunals have held that a legality requirement need not be express, but may be implicit. For example, in World Duty Free v Kenya, the tribunal refused to entertain the merits of the dispute, even though the underlying agreement contained no express legality requirement, finding that ‘bribery is contrary to . . . international public policy.17
Irrespective of whether a legality requirement exists, some tribunals have refused to treat corruption allegations as a jurisdictional matter where the alleged corruption does not relate to the making of the underlying contract or investment.
In the commercial arbitration context, available sources indicate that tribunals are more inclined to treat corruption allegations as part of the merits. One oft-cited exception is the ICC Case 1110 of 1963, in which Judge Lagergren declined jurisdiction over a claim by an agent retained to bribe government officials to secure a contract.18
an illegal act – commercial arbitral tribunals faced with illegality or corruption allegations have ‘ordinarily’ entertained such claims and made awards on the merits, rather than dismissing such disputes on jurisdictional or non-arbitrability grounds.19
15. Metal-Tech, supra note 5.
16. 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).
17. World Duty Free v. Republic of Kenya, ICSID Case No. ARB/007, Award, paragraph 157 (4 Oct. 2006).
18. GARY B. BORN, INTERNATIONAL COMMERCIAL ARBITRATION 989 (2d ed. 2014).
19. 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).
- THE APPLICABLE STANDARD OF PROOF:-
When faced with corruption allegations, arbitral tribunals may also have to determine the applicable standard of proof. As a general matter, the rules of arbitral procedure are typically silent on the applicable standard of proof. Some tribunals have applied a ‘clear and convincing evidence’ standard when assessing corruption allegations. In doing so, tribunals have justified the heightened evidentiary standard by pointing to the severe consequences of corruption on the investor’s claims. For example, in Fraport v Republic of the Philippines, the tribunal held that:
Considering the difficulty to prove corruption by direct evidence, the same may be circumstantial. However, in view of the consequences of corruption on the investor’s ability to claim the [treaty] protection, evidence must be clear and convincing so as to reasonably make-believe that the facts, as alleged, have occurred. Having reviewed the parties’ positions and the available evidence related to the period prior to Fraport’s Initial Investment, the tribunal has come to the conclusion that respondent has failed to provide clear and convincing evidence regarding corruption and fraud by Fraport.20
Others have rejected the idea that ‘allegations of fraud or other serious wrongdoing’ automatically require a ‘heightened standard of proof,” or they have applied a different standard. Noting in this context ‘that corruption is by essence difficult to establish and that it is thus generally admitted that it can be shown through circumstantial evidence.
20. 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).
Under English law, for example, the standard of proof may vary with the gravity of the allegations. As the High Court of Justice held, ‘although the standard of proof is the civil standard, the balance of probabilities, the cogency of the evidence relied upon must be commensurate with the seriousness of the conduct alleged.
- Whether domestic court findings on corruption are relevant to the proceedings:-
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 21 decision on jurisdiction illustrates the various ways in which domestic criminal proceedings may be relevant to a tribunal’s analysis. In that case, the claimant had been convicted of corruption by a Canadian court following a guilty plea, leading the tribunal to conclude that the claimant had ‘committed the acts of corruption which were sanctioned in the Canadian conviction. 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 claimant. The tribunal appeared to give some credence to the findings of domestic courts in determining whether the respondent had carried its evidentiary burden.
21. 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).
- The legal consequences that may result from corruption allegations:-
Tribunals have also faced 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.
The traditional approach draws on the principle that a contract procured by corruption is voidable at the election of either party. World Duty Free is the iconic case applying the traditional approach to corruption. In that case, the tribunal concluded that this payment constituted a bribe and found the claims inadmissible on this basis, notwithstanding the fact that the respondent had accepted the bribe.22
Under the traditional approach, the consequences are severe – a complete bar to the investor’s claims. As such, all the consequences appear to fall on the investor, with no investment consequence for the state. Some have justified this approach by pointing out the seriousness of corruption, and its harmful effect in countries where government officials have enriched themselves at the expense of their citizens. Given this seriousness, they argue that the law should have the strictest incentives to prevent bribery and other forms of corruption.
22. 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.’).
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.23
Tackling bribery and corruption remains high on the international agenda and the role of international arbitration in assisting with these efforts is an important one.
There have been proposals to introduce a universal system to enforce anti-corruption principles. For instance, the World Bank, in collaboration with the UN, has put forward the idea of an ‘International Anti-Corruption Forum’, which would provide ‘an international arbitration mechanism allowing for decisions on the commercial effects of corruption and bribery’. Academics have also recommended forming either a court or an arbitral tribunal that would review public sector contracts and international commercial transactions to identify corruption.24
In the meantime arbitrators appointed in disputes under international business contracts are in a privileged position to be able to spot and tackle evidence of bribery and corruption where it arises. In order to help the worldwide efforts to combat bribery and corruption, and continue to protect the integrity and reputation of international arbitration, they should not hesitate to do so.
23. Bryan Cave Leighton Paisner LLP a New, Fully Integrated, Global Law Firm, February 26, 2018
24. Corruption in Developing Countries. Tribalism might as well remain the greatest obstacle to tackling official corruption in Nigeria. Journal of Modern African Affairs, 1983.