This webinar hosted by Morrison & Foerster (UK) LLP and Essex Court Chambers discussed the issue of corruption in international arbitration.
The panelists engaged in a lively discussion on the use of allegations of corruption as a sword or a shield in arbitration and enforcement proceedings. This included questions of whether and in what circumstances the conduct of state officials, i.e., alleged bribery, should be attributed to the state, and an evaluation of the Red Flag Standard often used by Tribunals in assessing allegations of corruption. The panel also addressed possible instances of corruption within the arbitral process itself and answered some interesting questions raised by the floor, for example, whether co-arbitrators should be required to raise issues of corruption if encountered within their tribunal. It was an hour filled with interesting debate, spanning a large breadth of case law and recent developments which certainly addressed the elephant in the (virtual!) room and left both the audience and panelists with a lot to ruminate over.
Allegations of corruption now seem to be par for the course in most international arbitrations involving states. These allegations may come up as a defence in the course of the proceedings itself (e.g., where it is alleged that the underlying contract was procured by corruption from the seminal World Duty Free v Kenya case to more recent instances such as the Ruta del Sol Award and Spentex v Republic of Uzbekistan case) or, alternatively, at the enforcement/challenge stage (e.g., the P&ID v Nigeria case that has been making its way through the English courts in the past year).
In addition, we are seeing an increasing frequency of allegations of corruption being raised by states at a pre-dispute stage, often as a basis for cancelling concessions or terminating contracts. The question posted at the outset of the event was whether this approach actually operates as a double edged sword – and whether in fact, repeat allegations of corruption by a state may have a significant detrimental impact in attracting outside investment and loss of reputation and credibility on the world stage.
The event kicked-off with a discussion on whether permitting a state in an investor-state dispute to secure dismissal of a claim on jurisdictional grounds creates a perverse incentive for the state to cynically reap the benefits of an investment or contract over time, wilfully ignoring, or turning a blind eye to, the corrupt conduct of its own officials, and then terminate the contract and defend any resulting claim based on the investor’s corruption. The issue for the panel was whether that of itself creates an entirely inequitable situation – in placing disproportionate blame on the investor. Should this be permitted and, if so, what role can a tribunal play to alleviate this imbalance?
An initial question the panel discussed was whether the conduct of state officials should be attributed to the state, in the same way that the conduct of corporate officials is attributed to the corporate entity. The panel debated who constitutes the ‘state’ for these purposes – can every state official at any level be said to represent the state or does it only apply to senior officials; and who is the victim of corrupt acts by state officials – is it the state itself or the public/taxpayer who have suffered the loss, or in some cases, may have actually derived a partial benefit from the investment in any event.
Another interesting question posed was whether a tribunal can determine whether a state should be held accountable for not acting on the alleged corruption until it was convenient to do so to defend or defeat a claim. States are of course obliged by international law to detect and prosecute corruption, but are often remiss in complying with those obligations until convenient to do so. Some have argued that arbitral tribunals undermine the international anti-corruption regime because they ignore the state’s role in the corruption.
A case in point discussed by the panel was Union Fenosa Gas and Egypt. In that case, the tribunal was not prepared to accept Egypt’s claims made 15 years after the fact that the claimant’s investment had been procured through corruption, when neither the agent nor public officials said to have been involved had been prosecuted, and the Tribunal noted that the allegations appeared to have been made purely for tactical reasons.
The panel acknowledged that Union Fenosa is perhaps an extreme case considering the time that had lapsed (15 years), but noted that it points to a willingness by some arbitral tribunals to express displeasure regarding fresh allegations of corruption made by states in the context of defending claims, at least as a factual manner. The panel went on to discuss the practical impact of the tribunal’s consternation of such conduct, including whether there is the potential for the ‘head’ and the ‘heart’ of the tribunal to meet in these circumstances. The panel also considered various creative approaches that tribunals have used to express their disapproval of the state’s contributory conduct – including the Spentex v Uzbekitan case, in which the tribunal dismissed the claim on jurisdictional grounds based on its finding of corruption, but ordered the state to contribute to an anticorruption NGO or face an adverse costs order.
This led on to a discussion of whether, in considering the corruption claims in the merits phase of the arbitration, investment tribunals may use a contributory-fault approach that evaluates each party’s role in the corrupt act to determine the final award. The difficulty highlighted here was, in an investment treaty arbitration scenario, if a contract has been secured through corruption, then the contract itself is void for illegality and therefore the tribunal would have no jurisdiction to determine the merits. This is different to commercial arbitrations where the severability of the arbitration clause may still permit a tribunal to evaluate the merits and apply such a contributory fault approach.
The discussion then moved on to the topic of when allegations of corruption are made in a vague, obtuse or indirect manner – and the extent to which a tribunal should either conduct an investigation of its own accord or permit a party to engage in a ‘fishing expedition’ through disclosure/document production so as to obtain ‘proof’ to substantiate its complaints. The panel considered the test for disclosure in the IBA Rules on the Taking of Evidence in International Arbitration and noted that there is limited scope for ‘fishing expeditions’ to be permitted. The panel however noted that it is rare that there is clear evidence of corruption and that therefore there needs to be an element of discretion exercised as to what circumstantial evidence may be sufficient to meet the required threshold.
The panel then discussed the standard of proof that the tribunal should adopt in considering corruption allegations (which was also a question from the audience). The panel considered whether the Red Flag Standard is a satisfactory test for tribunals considering allegations of corruption. The panel noted that the usual standard of proof with respect to allegations of corruption requires ‘clear and convincing evidence’ or ‘preponderance of evidence’. In the Spentex v Uzbekistan case, however, the tribunal was prepared to adopt a ‘connecting the dots’ standard of proof (having regard to various ‘red flags’ of corruption in finding that the claimant investor had engaged in corrupt practices. The panel also discussed the ‘Basel Toolkit for Arbitrators – Guidelines on Corruption and Money Laundering in International Arbitration’ and the guidelines that it provides arbitrators when faced with or considering allegations of corruption.
The discussion then moved on from the arbitral hearing to the enforcement stage, and the question of whether national courts should permit allegations of corruption to be ventilated at the enforcement or challenge stage where no such allegations were made in the underlying arbitration proceedings, or whether, in doing so, the courts are overstepping their jurisdiction and effectively opening an investigation into the merits of the case. The panel spent a few moments debating these issues, noting the different approaches taken by national courts in different jurisdictions. It was noted that in England for example, a court would not entertain a reopening of the facts on the basis that this goes against the very principle of one stop justice ensconced in arbitration. The French courts however have taken a different approach and have been willing to revisit the merits and apply their own red flags test as a matter of public policy. The panel spent some time discussing the different approaches taken by the English, French and Swiss courts in the Alexander Brothers v Alstom case with the English and Swiss courts taking a broadly similar approach in declining to reopen the facts of the case whilst the French courts took a contrary view.
Having talked at length about allegations of corruption relating to the subject matter of the dispute being raised at various stages – as a jurisdictional challenge, during the merits hearing, and at the enforcement stage, the panel then went on to consider the situation where the allegation is that the arbitral process itself is corrupted. It was acknowledged that the parties put a lot of faith in the panel and that generally this faith is justified. However, there have been isolated incidents where impropriety on the part of an arbitrator has been called into question – for example, the much publicised Slovenia v. Croatia case from a few years back. Generally speaking there is no hard and fast rule on how to approach suspicions or indicators that a tribunal (or a tribunal member) has been compromised, but it was noted that there are available remedies to seek to remove an arbitrator under most arbitral statutes although much thought should be given to the issue before proceeding down this route.
It is clear that all of these points are open to debate and there is no clear answer or uniform approach either at the tribunal level or by courts at the enforcement stage. What the panel could all agree on, however, was that the corruption ‘elephant’ is a large and real presence at all stages in the arbitral process and something that arbitration practitioners are very likely to encounter and therefore need to find ways to address.
The cases and initiatives referred to in the webinar: