By: Emeka Adibe (PhD, MCArb); Ozioma Izuorah, (LL.M FCIArb); Rosemary Chidimma Nnaemeka-Okeke ( M.Sc, MCArb)
Introduction
An Overview of the Meaning of Corruption and Its Impact in Investment Relations
In international arbitration, corruption has become a significant topic of discourse and will continue to occupy the minds of scholars and arbitrators as long as businesses and investments thrive. The origin of arbitration itself was hinged on replacing the old burdensome court system in delivering justice expeditiously while ensuring ease of transparent mercantile engagements. The most enduring quality of the process is the mileage it gives to parties to resolve disputes while maintaining friendly relations between them.
International anti-corruption movements have also deepened global consciousness of the detrimental effects of corruption on development and peace. Transparency International’s approach has been to undertake a brief description and then go into extensive illustrations of the effects of corruption. The tag, ‘abuse of entrusted power for private gain’, as such, depicts three types of corruption, from ‘grand’ to ‘petty’ and ‘political’, ‘depending on the amounts of money lost and the sector where it occurs. Grand corruption consists of acts committed at a high level of government that distort policies or the central functioning of the state, enabling leaders to benefit at the expense of the public good. Petty corruption refers to everyday abuse of entrusted power by low- and mid-level public officials in their interactions with ordinary citizens, who often are trying to access basic goods or services in places like hospitals, schools, police departments and other agencies. Political Corruption is a manipulation of policies, institutions and rules of procedure in the allocation of resources and financing by political decision-makers, who abuse their position to sustain their power, status and wealth.
On the political front, corruption is a major obstacle to democracy and the rule of law … Economically, Corruption depletes national wealth … corruption corrodes the social fabric of society. It undermines people’s trust in the political system, in its institutions and its leadership … Environmental degradation is another consequence of corrupt systems.
Within the above definitions and explanations regarding the evil effects of corruption are captured the very essence of what arbitration is called upon to eliminate in order for societies and businesses to run smoothly.
Corruption has been held to deliver a considerable negative impact on international investment space, especially with respect to engendering poor and precarious economic returns, which drive national development. Consequently, if the investment world is not protected from corrupt practices, it will inexorably distort international competitive conditions, engender tendencies that encourage repudiation of contracts and expropriation by governments and discourage foreign investments which drive national development.
Faces and Allegations of Corruption in International Arbitration
There is an urgent need to showcase the various shades of corruption in investment relations in order to alert tribunal and parties adequately. Some of the ways allegations of corruption may arise in the context of international arbitration include occasions where ‘in investor-state arbitrations, a state accuses an investor of obtaining a concession or other investment opportunity by way of corruption. This ordinarily occurs after an election, where a newly elected government accuses the previous administration of accepting bribes. Another scenario could be situations where payments are made to ‘third parties by intermediaries, that appear not to be legitimate, and disputes arise as to the payment of sums due under such contractual agreements.’
Corruption may also occur in the form of 1) Facilitating or ‘grease’ money, 2) Gifts, and 3) Influence peddling, depending on the applicable law of particular jurisdictions.
Baizeau et al discuss these categories as follows:
- Facilitating or “grease” payments are payments made ‘to accelerate the carrying out of routine government acts to which the person is making the facilitating payment is legally entitled – that is, to speed up a non-discretionary process, rather than to influence a discretionary process.’
- Gifts: To constitute corruption, the giving of gifts will depend on ‘circumstances, including value, frequency and timing’. In some states, it might be considered to be part of a common and lawful practise in the country where it is made, but not necessarily by third parties, including arbitrators.
- The third, Influence Peddling, also known as “trading in influence”, is identifiedas a process ‘whereby third parties, in exchange for money or another advantage, agree to use their influence with a public official in order to achieve a favourable business outcome for the principal. While it is related to bribery, the difference is that no compensation passes directly to the public decision-maker.’
When any action under the above categories slips into the region of the unacceptable, it becomes a clear case of fraud, which is what corruption is in the final analysis.
The Attitude of the Arbitral Tribunal to Allegations of Corruption under Common Law and Civil Law Jurisdictions
It is important to distinguish between attitudes to corruption under the common law system as different from the civil law jurisdiction. Under the common law adversarial system, which makes it incumbent on each party to prove its claims, there is reluctance on the part of arbitrators to upset the normal burden of proof between the parties.
The civil law jurisdiction, on the other hand, allows for a spontaneousinvestigation by the tribunal. In any event, inquisitorial, on its own accord, runs less risk of endangering their awards by undertaking the investigation of corruption.
The general consensus was thought to be that an arbitrator had no jurisdiction to address issues of corruption since it is a criminal allegation, best left to national courts. But this was a misconception stemming from a wrongly reported ruling of the Swedish Judge Gunnar Largergren, in considering the 1963 ICC Case No. 1100. The arbitrator, in that case, had observed that, as a matter of principle, he had the power to rule ex officio that the contract was void due to corruption, but had in fact, found that there was no evidence that corruption had occurred.
For years, arbitrators stuck to that doctrine that they should avoid the subject of corruption. This position has been corrected in the more recent case of Metal-Tech v Republic of Uzbekistan.
Corruption can be addressed both procedurally or substantively as long as it has the potential to affect the outcome and depending on the circumstances of its occurrence.
Arbitral tribunals must determine four key issues when faced with a corruption allegation. The key issues include: ‘(i) where corruption fits in the context of arbitral proceedings (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.’
(a) Legislative Boundaries and Standard of Proof for an Allegation of Corruption in Arbitration Proceedings.
Article 19 (1) UNCITRAL Model Law, for instance, gives parties the freedom to agree on the procedure to be followed in conducting the arbitral proceedings. The applicable substantive law is important as different countries treat a contract that is tainted with corruption as voidable, while others treat such as void ab initio. In England, for example, a contract procured by corruption is voidable.
In regard to the standard of proof for an allegation of corruption in international arbitral proceedings, the UNCITRAL rules contain specific provisions on the allocation of the burden of proof.
Civil law jurisdictions favour a standard of proof borne out of the ‘inner conviction of the judge’; applied to international arbitration, the arbitrator is expected to know the law. He can pronounce what the law is. In common law jurisdictions, the parties persuade’ the judge by presenting their argument for him to pronounce on the state of the law.
(b) Standard of Proof in Arbitral Practice
Scholars are generally of the opinion that arbitral tribunals are generally reluctant to base their findings of fact solely on the burden and standard of proof but rather attempt to establish the truth on the basis of the available evidence. The conclusion is that arbitral practice generally does not apply uniform formulae of the standard of proof.
(c) The Standard of Proof Applicable in Investment Arbitration
No uniform standard has been established for the proof of corruption in investment arbitration. The arbitral practice both in commercial and investment arbitration’ show that ‘actual evaluation of evidence is more important than the abstract definition of the applied standard.
In the finding for corruption, the tribunal concludes that while keeping to a high standard may be justified for corruption allegation, and it can only deal with the civil consequences of corruption which does not differ remarkably from a finding of liability for a breach of contract or any other standard applicable to foreign investments.
Nevertheless, the difficulty with proving corruption is compounded by the dearth of evidence, as well as timeous access to such evidence.
With the changing face of Investment law, it has become clear that the parties’ positions are no longer fixed. These usual patterns of behaviour have transformed to newer models of arbitral practice where corruption allegations may be raised at any time and by any of the parties.
New Trends in Bilateral Investment Treaty (BIT) Provisions and The Use Of Carve-Out Clauses
More recent BITs have been seen to include anti-corruption clauses to address the corruption allegations in investment treaties. The US-Morocco Free Trade Agreement in its Article 18.5, is an example.
Similarly, Article 8 of the Japan-Philippines BIT provides: ‘Measures against Corruption: Each Party shall ensure that measures and efforts are undertaken to prevent and combat corruption regarding matters covered by this agreement in accordance with laws and regulations. …’
This paper herein advances the position that this is a better and more justifiable approach to allegations of corruption in investment dispute arbitration.
Hence, ‘Carve-out clauses’ are currently to be found in several ‘model’ investment agreements to specifically provide for arbitration in the event of a dispute. They have the effect of describing the scope of the treaty’s application. In the case of arbitration, carve out clauses that determine a tribunal’s jurisdiction or the investment treaties applicability upon the investor’s compliance with anti-corruption law.
Importantly, the provisions outlaw in explicit terms, ‘facilitation payments, illegal political contributions, as well as complicity in any of the described acts. In fact, article 8(3) ‘explicitly excludes any investor that does not comply with Article 9 (Corruption) from benefitting from the provisions of the treaty.
The advantages of carve-out clauses are immense. They represent a step toward levelling the playing field within the same market by ensuring that corrupt investors lose legal protection. For most states with relatively weak judicial systems, where there might be little motivation for foreign investors to maintain the rule of law compliance, the carve-out clauses create certainty. Notably, the inclusion of carve-out clauses brazenly acclaims that parties are willing to abide by tenets of pacta sunt servanda that underlie investment contracts. Investment law and arbitration should never be viewed as ‘one-way-street favouring foreign investors nor one that gives host states free pass on their obligation, simply by holding up the corruption of their agents. Carve out clauses should therefore show a commitment to anti-corruption rather than represent perfunctory ‘throw-away provisions’ allowed by parties during treaty negotiations.
Conclusion
From the earliest interpretation of the role of the arbitrator with regards to dealing with allegations of corruption in arbitration, views have moved from total avoidance to cautious inquiry regarding the arbitral tribunal’s jurisdiction. Systems of laws and trade practices have affected clear conceptions about outcomes of such inquiries, thus leading to unclear directions for arbitrators. However, some misconceptions have been corrected. Clear definitions are emerging as to what constitutes corruption in arbitration through the efforts of many national and international anti-corruption organisations. However, the thinking in many quarters is that parties should be conscious of the debilitating effect of corruption in the world of business and carefully craft their contractual agreements, BITs and multilateral treaties to forestall endangering their contracts. Arbitrators are also required to closely investigate allegations of corruption, bearing in mind the provisions of laws and systems of laws applicable to both the substantive and procedure of the dispute at hand. In time, with the operation of international anti-corruption conventions and Model/ Carve out clauses being developed in modern BITs and Multilateral treaties, arbitral practices will no doubt become more certain and harmonized.
K Noussia, ‘History, Importance and Modern Use of Arbitration’, in Confidentiality in International Commercial Arbitration, (2010 Springer), 12 – 17.
Nigel Blackaby and Constantine Partasides, Redfern and Hunter on International Arbitration, (5th Edition Student Version, 2009 , Oxford University Press); Para. 1.08, 4
Transparency International, <www.transparency.org/what-is-corruption/#define> quoted in Domitille Baizeau and Tessa Hayes, ‘The Arbitral Tribunal’s Duty and Power to Address Corruption Sua Sponte’, in Andrea Menaker (ed), International Arbitration and the Rule of Law: Contribution and Conformity, ICCA Congress Series, Volume 19 (© Kluwer Law International; Kluwer Law International 2017) pp. 225 -265, 2017, <https://www.lalive.law/data/publications/Duty_and_Power_to_Address_Corruption.pdf > accessed 11/12/2018
Transparency International, <www.transparency.org/what-is-corruption/#define > (accessed 10/09/2020)
CIARB Resources available at:< https://www.ciarb.org/news/corruption-in-international-arbitration/ > (accessed 9/10/2020).
Council of Ministers Resolution No. 1275 prohibits payments to intermediaries in the context of government contracts for the sale of armaments and other military equipment.
S Kulkarni, ‘Enforcing Anti-Corruption Measures through International Investment Arbitration’, Transnational Dispute Management, Vol. 10, Issue 3, 2012,< www.transnational-dispute-management.com> (accessed 20/09/20)
J Gillis Wetter, ‘Issues of Corruption before International Arbitral Tribunals: The Authentic Text and True Meaning of Judge Gunnar Lagergren’s 1963 Award in ICC Case No. 1110’, 10 Arb. Int’l (1994, no. 3) 277 at 282.
ICSID Case No. ARB/10/3
Mark W Friedman, Floriane Lavaud and Julianne J Marley, ‘Corruption in International Arbitration Challenges and Consequences’, Global Arbitration Review, 29 August, 2017
https://globalarbitrationreview.com/chapter/1146893/corruption-in-international-arbitration-challenges-and-consequences> Accessed 11 Dec 2018
‘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.’ Ibid. They cite Metal Tech as a case where tribunal treated corruption in investment arbitration as a jurisdictional matter
Friedman et al considering the rulings in the Niko Resources Case, (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)), where the tribunal accepted a Canadian court’s conviction following a guilty plea by the Claimant as evidence that the claimant had ‘committed the acts of corruption which were sanctioned in the Canadian conviction’; but in Inceysa v El Salvador, the tribunal rejected the view that it was required to defer to local court findings relating to the legality of the investment in determining whether the claimant satisfied the applicable legality requirement. Each case will therefore depend on the facts before tribunals and will be determined on their merits.
Haugeneder and Liebsche (note. 28)
Westacre (UK) v. Jugoimport (Yugoslavia), Corruption in International Arbitration, 08 Nov 2018. <https://www.ciarb.org/news/corruption-in-international-arbitration/> (accessed 09/10/2020)Agreement between Japan and the Republic of the Philippines for an Economic Partnership, 2006.
