08 Nov 2018
For many years there has been a push towards reducing corruption across the globe. Some countries introduced anti-corruption legislation some time ago, such as the US Foreign Corrupt Practices Act 1977 and China’s Criminal Law of the People’s Republic of China 1980 (Reformed in 1997). More recently, the Organisation for Economic Co-operation and Development’s (OECD) Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions has driven further legal changes such as the Bribery Act 2010 in the UK, Clean Companies Act 2015 in Brazil and Anti-Bribery Act 2017 in Mexico.
As a Brazilian, I am very familiar with how these developments have impacted international arbitration, through Operation Jet-Wash, which has touched a number of commercial arbitrations in the energy and infrastructure sectors, relating to Brazil and Latin America. The Operation is so dramatic, Netflix have produced a series called “The Mechanism” narrating the underlying corruption.
The law relating to corruption in international arbitrations is developing, and there remain a number of important challenges. In this article I seek to highlight some of the difficult issues arbitrators grapple with, in an effort to provoke further debate. It is not possible to cover all the issues that are likely to arise, my intention is simply to give a flavour of the difficulties arbitrators may face.
What are the arbitrators to do?
Corruption normally arises in two ways, in the context of international arbitrations. First, in investor-state arbitrations, where 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. Secondly, corruption can arise in the context of commercial arbitration, in a subtler way, payments 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.
The general consensus was thought to be that an arbitrator had no jurisdiction to address such matter and criminal and corruption investigation and determination was the preserve of the courts. This misconception arose from the wrongly reported words of Swedish Judge Gunnar Largergren, in considering the 1963, ICC Case No. 1100. This misinterpretation has now been corrected and a summary of his award is available in Professor Julian Lew QC’s doctoral thesis.
This dogma of arbitrators avoiding the subject endured in one form or another, for many years:
“If the defendant does not use [bribery] in his presentation of facts, an arbitral tribunal does not have to investigate”.
Such a view no longer reflects “best practice” today. This is predominantly due to a philosophical shift by arbitrators seeing themselves less as servants of the parties and more like guardians of the truth, protecting the international public order. A fine line, in practice. It is now generally established that once the issue of corruption is raised and affects outcome, an arbitrator must examine and address it. The tribunal must determine whether this exercise is within its jurisdiction, in accordance with the doctrine of kompetenz-kompetenz.
Procedural or substantive issue?
Once it is established that an allegation of corruption will affect the outcome, it is addressed in different ways, depending on how it arises and the type of arbitration it arises in.
Where such an allegation is made in an Investor-State Dispute Settlement (ISDS) mechanism, the very raison d'être, may rest on whether the underlying investment was entered into lawfully. If so, that question will need to be determined first, as a procedural point on the tribunal’s jurisdiction.
Many bilateral (BIT) or multilateral (MIT) investment treaties, have an express or implied legality requirement, to be engaged. In other words, unless the investment was made legally, the dispute resolution mechanism does not engage, and any constituted arbitral tribunal would lack the requisite jurisdiction to adjudicate on issues arising between the investor and the state. Care must be taken to determine whether the corruption was used to “obtain” the investment, rather than any advantages, after securing the investment opportunity, which would not necessarily affect jurisdiction. Having said this, some tribunals take the view that any corruption offends public policy considerations and therefore decline jurisdiction.
There are also instances, where although a claim may succeed on jurisdiction, and proceeds to substantive arguments, the tribunal may hold that the claims are not admissible, as they are premised on unlawful acts.
The situation is treated differently in commercial arbitrations, where the corruption can be either patent or latent. In such circumstances, the issue is dealt with in the merits of the dispositive part of an award. Jurisdiction does not ordinarily arise in commercial arbitrations due to the doctrine of separability, found in section 7 of the English Arbitration Act 1996, in article 7 UNCITRAL Model Law, and in various other domestic and international laws. The doctrine provides that the arbitral agreement is separate to the underlying contract, and therefore, even if it has been procured by corruption, the arbitral agreement ordinarily stands, as does the jurisdiction of the tribunal.
What is the applicable law?
A tribunal must determine the applicable law and standard of proof to discharge the evidential burden. According to Article 19(1) of UNCITRAL Model Law:
“subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings”.
It is perhaps not surprising that in this context, there has been some historic hesitation on the part of arbitrators to grapple with and address corruption allegations in international arbitrations. Arbitrators are, often, stuck with the choices made by the parties in terms of seat, substantive law, procedural rules and institutional rules.
The applicable substantive law is important as different countries treat a contract that is tainted with corruption as voidable and others as void ab initio . In England, for example, a contract procured by corruption voidable. This is distinguished from a contract the object of which is to procure bribery, which is void. To contextualise this, a concession agreement for oil and gas exploration and production which was granted to the concessionaire by illegal payments from an intermediary to a state agent is voidable. In contrast, the contract between the intermediary and the state-agent, for payment of a sum of money in exchange for the illegal grant of the concession is void.
It is noteworthy that under English law, the defence of corruption no longer automatically debars a claimant from making a claim or obtaining a remedy. Lord Toulson stated :
“The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system […]. In assessing whether the public interest would be harmed in that way, it is necessary a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, b) to consider any other relevant public policy on which the denial of the claim may have an impact and c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts”.
Where English law applies, the mere fact of corruption, even if found does not necessarily nullify the tribunal’s exercise in determining whether or not the claim succeeds on its merits and what, if any, relief should be awarded. This may seem counter-intuitive, however, in circumstances where states are often met with impunity , in terms of corruption allegations, such an approach can lead to a more equitable outcome.
Which standard of proof should be applied?
There is no clear consensus as to the standard of proof to be applied in international arbitrations, in respect of allegation of corruption. Civil and common law countries have an inherent difference in their perspectives of standards of proof. In civil law countries the standard of proof can be referred to as the “inner conviction of the judge ”, or in this case the arbitrator.
In common law countries, some argue that a higher standard of proof is necessary, in light of the seriousness of the allegations. For example, in England, Mr Justice Teare stated :
“[…] 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”.
Today, there is a growing body of opinion that agrees with the view summarised by a tribunal as:
“[…] 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 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”. (Emphasis added)
However, the argument that a higher civil standard of proof exists has often been rejected . In my view, there is a single civil standard: the balance of probabilities. As Lord Hoffman stated :
“The civil standard of proof always means more likely than not. The only higher degree of probability required by the law is the criminal standard”.
If the purpose of the rules of evidence is to maintain the proper balance between commercial interests and the integrity of corruption findings in international arbitration, a higher standard of proof fails to achieve the desired effect. Conversely, the balance of probabilities standard, in the discharge of the burden of proof in corruption allegations, allows that balance to be struck.
Having said this, in practice, there are numerous examples where the standard of proof is otiose, either because allegations have not been disputed , or because the evidence presented, does not meet any proper standard of proof . The reality is that discharging an evidential burden of proof in corruption, is seldom achieved . The natural consequence of this, is that arbitral tribunals have difficulty in making findings of corruption, and therefore a body of case law is lacking.
How should admissibility, relevance, materiality and the weight of evidence be approached?
Corruption, by its very nature, is not commonly documented or witnessed by a disinterested person. Parties are often left to rely on circumstantial evidence to prove their allegations. These can include circumstances such as the (a) commission fee is extraordinarily high and disproportionate to services rendered (b) nature and manner in which the services rendered are unexplained and/or
suspicious (c) intermediaries fail to explain and justify the legitimacy of its organisational, managerial and operational structure and/or its relations with the relevant public officials or (d) pervasiveness of corruption in the host state renders it virtually impossible to obtain public procurement contracts without corrupt acts.
In Nico Resources, the claimant’s criminal conviction for corruption in Canada had been admitted and drew the tribunal to a conclusion that the evidential burden, in proving the allegations of corrption had been discharged. However, those findings were limited to matters overlapping between the issues in the arbitration and criminal conviction. Other allegations of corruption were dismissed, as they remained under investigation.
Conversely, another tribunal found that it was not bound the findings of the local courts. It held the legality issue was a matter that fell within its kompetenz-kompetenz, and it was entitled to make its own findings of fact. It rejected the argument that the local court’s decision amounted to res judicata, and that any issue estoppel arose.
In my opinion, the Inceysa case was incorrect. Where a decision of a competent court is final, and has dealt with the issues in question, a tribunal ought to attribute weight to that evidence. This is to be distinguished from the case where there is an investigation or ongoing appeal, which does merit a tribunal making its own findings. It matters not which court convicted the party, as the principle of comity is, in my opinion, sufficiently robust a reason to defer to such a conviction, to protect against any challenge to an award. In this case, this is one of the rare occasions where arbitrators are given an easy option to make a reasoned, positive finding, and I see no reason not to take it.
Does an arbitrator have a duty to report?
A question arbitrators confronting these issues must consider is whether they are under a duty to report any adverse findings of criminal conduct to the authorities. On the face of it, arbitrators are bound by their duty of confidentiality and/or privilege. However, many arbitrators are professionals, whether they be lawyers, engineers, architects, etc. They will also be bound by, potentially competing professional codes of conduct.
If we take the position of an English barrister, like me, then irrespective of where I am sitting, I will be bound by the core duties in the Bar Standards Board’s Code of Conduct. If I am in the EU, I will also be bound by other ancillary legislation such as EU Directive 2015/849, the anti-money laundering directive. As far as confidentiality goes, any duty would be overreached by my core and legislative duties.
What would be the position if positive findings had been made, at a preliminary stage, for example, and the parties enter into an agreement, which then becomes a consent award? Strict interpretation of section 328 of the Proceeds of Crime Act 2002, may deem the arbitrators become concerned in an arrangement known or suspected to facilitate the acquisition, retention, use or control of criminal property. Or alternatively, an enabler, within scope of a penalty under paragraph 1 of schedule 16 of the Finance Act (No.2) 2017.
In 2005, the English Court of Appeal held that legal privilege and access to justice took precedence over a lawyer’s obligations under the Proceeds of Crime Act 2002, in litigation, including where a consensual resolution occurred. This resonates with the common law principle of privilege. In other words, a proprietary interest of the parties. It would therefore, in theory,
follow that an arbitrator is not permitted to breach the parties’ privilege in respect of any obligation under section 328. The same must be true in respect of the Finance Act. The unknown element is whether the exception applies only to litigation in the courts or to any form of dispute resolution, such as arbitration. In my view, same reasoning is likely to be applicable to arbitration which attracts a statutory right for resolving disputes “in accordance with the applicable law”.
However, this position is difficult to reconcile with the words of Mr Justice Popplewell :
“In the "ordinary run" of criminal cases the solicitor will be acting in the ordinary course of professional engagement, and the client doing no more than using him to provide the services inherent in the proper fulfilment of such engagement, even where in denying the crime the defendant puts forward what the jury finds to be a bogus defence. But where in civil proceedings there is deception of the solicitors in order to use them as an instrument to perpetrate a substantial fraud on the other party and the court, that may well be indicative of a lack of confidentiality which is the essential prerequisite for the attachment of legal professional privilege. The deception of the solicitors, and therefore the abuse of the normal solicitor/client relationship, will often be the hallmark of iniquity which negates the privilege”.
This case suggests that where a party denies the corruption and pursues a civil claim or arbitration, advancing the underlying deceit, in order to recover the proceeds of that crime, the fraud exception applies, and privilege does not arise.
The relevant anti-money laundering legislation in Singapore is the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Cap. 65A). Section 39(1) SCA imposes a duty of disclosure on a person who knows or has reasonable grounds to suspect that certain property may represent the proceeds of, was used in connection with, or is intended to be used in connection with criminal conduct.
Where the legislation of a country imposes a positive duty on the arbitrator to report findings of a crime when they come on notice, such a duty overreaches any duties owed to the parties on confidentiality or privilege. In any event, where civil proceedings are being pursued in advancement of the original crime, English law holds that privilege does not arise.
How will the award be met under a judicial review?
Arbitration has always enjoyed a symbiotic relationship with the courts. As Lord Mustill put it :
“Ideally, the handling of arbitral disputes should resemble a relay race. In the initial stages, before the arbitrators are seized of the dispute, the baton is in the grasp of the court; for at that stage there is no other organisation which could take steps to prevent the arbitration agreement from being ineffectual. When the arbitrators take charge they take over the baton and retain it until they have made an award. At this point, having no longer a function to fulfil, the arbitrators hand back the baton so that the court can, in case of need, lend its coercive powers to the enforcement of the award.”
The judicial review arbitral awards either in respect of challenges to enforcement or applications to set aside is inevitable. Where allegations of corruption are adjudicated upon by arbitral tribunals
checks and balances may be imposed by judicial review and control. It is the extent of those checks and balances that may vary.
I begin by qualifying this article only has scope for examination of jurisdictions limited to parties to the New York Convention 1958. In “arbitration friendly” jurisdictions, the tendency of the courts is not to review awards, save in exceptional circumstances. Such courts treat arbitral tribunals as courts of first instance and will hesitate to review their decisions on the merits.
Most arbitration laws, which follow the UNCITRAL Model Law, have little scope for review, unless there has been a breach of natural justice or the award is incompatible with public policy. The threshold for a review on merits tends to be high. In exercising this discretion, there is friction between the needs for finality and policing the jurisdiction’s public policy concerns. Regard for the finality of arbitral awards serves a number of functions such as (a) it prevents the revisiting issues already determined (b) provides certainty and predictability in international arbitration and (c) upholds the principle of comity .
There can be significant disparity, between jurisdictions and even courts within certain jurisdictions, regarding the permissible extent of court review of a tribunal’s findings. Take the example discussed above, in respect of the English law position of illegality. A tribunal bound by English law may make a finding of corruption and nonetheless make an award in favour of the party relying on that illegality. A US or Swiss court would be unlikely to review such an award on its merits.
In England, even where grounds for review are advanced, the courts are slow to go behind an award. This stance was best put by Mr Justice Coleman , and has recently been confirmed In England:
“As regards arbitrations, there is the strongest conceivable public policy against re-opening issues of fact already determined by the arbitrators. That is the policy which [...] it is now accepted, prohibits investigation by the courts [...] of the weight of the evidence before the arbitrator in order to disturb findings of fact [...] The introduction of fresh evidence in order to disturb an English award is subject to requirements similar to those relating to the introduction of fresh evidence to challenge an English judgment [...] the fresh evidence must be of sufficient cogency and weight to be likely to have influenced the arbitrator's conclusion and the evidence must not have been available or reasonably obtainable at the time of the hearing. The principles of finality and justice are nicely balanced by that rule. The authorities do not suggest that any different rule applies to English arbitrations in those cases where it is alleged that the consequence of permitting fresh evidence to be adduced would be that evidence given at the hearing by the successful party could be shown to have been perjured”.
There are exceptions to when a court may be prepared to look behind an award. In some jurisdictions such review is purely in respect of matters of law, while in others a full de novo review of law and facts may be undertaken. A Parisian court did just that and in refusing to enforce an award. In another French case , the court held it was entitled to:
“[…] scrutinize the award [...] both as a matter of law and fact on all elements specifically justifying the application or non-application of the international public policy rule and [t]o decide otherwise would lead, in effect, to deprive the control of the judge of all efficacy, and therefore, of all its rationale”.
In 2004, the New South Wales Supreme Court obscured the position in Australia for some years. Mr Justice McDougall stated:
“The very point of provisions such as s8(7)(b) is to preserve to the court in which enforcement is sought, the right to apply its own standards of public policy in respect of the award. In some cases the inquiry that it required will be limited and will not involve detailed examination of factual issues. In other cases, the inquiry may involve detailed examination of factual issues. But I do not think that it can be said that the court should forfeit the exercise of the discretion”.
More recently, following amendments to the Australian International Arbitration Act 1974, the case law that followed has directed its approach, with that of the US, Switzerland and England. Mr Justice Foster stated:
“Whether or not, in 2004, there was a general discretion in the Court to refuse to enforce a foreign award which was brought to the Court for enforcement, the amendments effected by the 2010 Act make clear that no such discretion remains. Section 8(7)(b) preserves the public policy ground. However, it would be curious if that exception were the source of some general discretion to refuse to enforce a foreign award. Whilst the exception in s8(7)(b) has to be given some room to operate, in my view, it should be narrowly interpreted consistently with the United States cases [...] To the extent that McDougall J might be thought to have taken a different approach, I would respectfully disagree with him”.
Most countries hold, as a matter of international public policy, there must be limitation to the scope of review of arbitral awards by national courts. However, there are exceptions to that limitation, which vary, depending on the forum. In my view, the English courts are recalcitrant to find that corruption contravenes international public policy. The decisions by Mr Justice Coleman and Sir David Hirst in the Westacre cases and Mr Justice Steel in R v J , demonstrate the English court’s position that the public policy of sustaining the finality of arbitral awards outweighs the public policy in discouraging corruption. I would endorse the view of Lord Justice Waller in Westacre :
“the principle against enforcing a corrupt bargain [...] is [...] based on public policy of the greatest importance and almost certainly recognised in most jurisdictions throughout the world”.
Corruption allegations in international arbitration have risen and there is no reason to think that this trend will slow in the future. Arbitral discretion and absence of agreed rules of evidence substantially contribute to the current struggle against the adjudication of corruption allegations in international arbitration. Tribunals faced with such allegations will continue to develop a coherent approach that balances the importance of promoting anti-corruption with fairness to the parties.
Examinations into corruption by a tribunal fall within its kompetenz, if the existence of corruption is relevant to the resolution of the dispute submitted to it. The burden of proving corruption rests with the alleging party. In order for a tribunal to make a positive finding, that party must discharge their burden of proof, on the balance of probabilities. The applicable evidentiary rules for corruption allegations should be flexible enough to facilitate transnational dispute settlement but stringent enough to ensure the integrity of corruption findings.
Contracts procured by corruption should be set aside for the victim to avoid its ongoing contractual obligations. Claims in contract which have as their object procurement of corruption, are generally deemed void or inadmissible. However, a party’s unilateral intention to commit corrupt acts in performing a contract will not necessarily preclude the innocent party from bringing a claim.
Legislative provisions may require arbitrators to report to competent authorities, any corruption or ancillary crimes, which comes to their attention in the course of an arbitration. Any such obligation overreaches any express or implied duty of confidentiality or privilege.
The level of judicial review of arbitral awards varies not only in different jurisdictions, but within different courts within those jurisdictions. Although the scope for reviewing arbitral awards tends to be narrow in New York Convention states, sufficient range should be allowed, for the proper consideration and reparation of corruption. It is now the prevailing legal consensus that corruption undermines international public policy.
 Westacre v Jugoimport ICC Case No. 7047
 Metal-Tech v Republic of Uzbekistan ICSID Case No. ARB/10/3
 Phoenix v Czech Republic ICSID Case No. ARB/06/5
 Vladislav Kim and others v Republic of Uzbekistan ICSID Case No. ARB/13/6
 Niko Resources v Bangladesh ICSID Case No. ARB/10/18
 World Duty Free v Kenya ICSID Case No. Arb/00/7
 Hesham Talaat M Al-Warraq v Republic of Indonesia, UNCITRAL
 Moroccan Agent v French Contractor ICC Case No. 9333
 World Duty Free v Kenya ICSID Case No. Arb/00/7
 Patel v Mirza  EWCA Civ 1047
 UNCITRAL, Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries, art. 7, in Work of Its Fifty-Third Session, UN GAOR, 53rd Sess, Supp No. 10, UN 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.')
 Florian Haugeneder and Christoph Liebscher “Chapter V: Investment Arbitration – Corruption and Investment Arbitration: Substantive Standards and Proof” in Christian Klausegger, Peter Klein, et al Austrian Arbitration Yearbook 2009 (C H Beck, Stampfli & Manz 2009)
 JSC BTA Bank v Ablyazov  EWHC 510 (Comm)
 Fraport AG Frankfurt Airport Servs Worldwide v Republic of the Philippines ICSID Case No. ARB/11/12
 Getma International v Republic of Guinea ICSID Case No. ARB/11/29
 Secretary of State for the Home Department v Rehman  UKHL 47
 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
 EDF (Servs) Ltd v Romania ICSID Case No. ARB/05/13
 Vantage v Petrobras ICDR Case No 01-15-0004-8503
 Inceysa Vallisoletana SL v Republic of El Salvador ICSID Case No. ARB/03/26
 Bowman v Fels  EWCA Civ 226
 JSC BTA Bank v Ablyazov & Ors  EWHC 2788 (Comm)
 Lord Mustill, “Comments and Conclusions in Conservatory Provisional Measures in International Arbitration”, 9th Joint Colloquium (ICC Publication, 1993)
 Re an arbitration between Hainan Machinery Import and Export Corporation and Donald & McArthy Pte. Ltd  1 SLR 34
 Northrop Corporation v Triad Financial Establishment 593 F. Supp. 928 (1984)
 Thomson-CSF v Frontier AG (Swiss Federal Tribunal) 16(1) ASA Bulletin 118 (1998)
 Westacre Investments Inc v Jugoimport-SPDR Holding Co Ltd  3 WLR 770
 BRG Trading (UK) Limited v Sinocore International Co Limited  EWCA Civ 838
 Indagro v Ancienne Maison Marcel Bauche (Court of Cassation) Rev Arb 2017/3 900
 European Gas Turbines SA v Westman International Ltd (Paris Court of Appeal) XX Y.B. Comm. Arb. 198 (1995)
 Corvetina Technology Ltd v Clough Engineering Ltd  NSWSC 700
 Uganda Telecom Limited v Hi-Tech Telecom Pty Ltd  FCA 131
 R v J  EWHC 1531 (Comm)
 Westacre Investments Inc v Jugoimport-SPDR Holding Co Ltd  3 WLR 811
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