International Arbitration and Corruption

Risha Sharma, Research Associate

Corruption is a disease that has gripped and embedded itself deep within the everyday function by immeasurable lengths. In international trade and investment, corruption is often associated with the bribing of a foreign public official who has some degree of influence over international business involving his or her country. The official is promised, offered or given, directly or indirectly, an illegal payment or advantage in exchange for his or her reciprocal promise to act or refrain from acting in his or her official capacity in a manner specified by the briber ((Mohamad Abdul Raouf  “How Should International Arbitrators Tackle Corruption Issues ?” Foreign Investment Law Journal Vol. 24, No. 1, Spring 2009 International Centre for Settlement of International Disputes)). The official’s act or omission allows the briber to obtain or retain business or other improper advantage with respect to the conduct of international business. The scale and scope of bribery in business is staggering. Nearly two in five polled business executives have been asked to pay a bribe when dealing with public institutions. Half estimated that corruption raised project costs by at least 10 per cent. One in five claimed to have lost business because of bribes by a competitor. More than a third felt that corruption is getting worse. The consequences are dramatic. In developing and transition countries alone, corrupt politicians and government officials receive bribes believed to total between US$20 and 40 billion annually the equivalent of some 20 to 40 per cent of official development assistance. The cost is measurable in more than money. When corruption allows reckless companies to disregard the law, the consequences range from water shortages in Spain, exploitative work conditions in China or illegal logging in Indonesia to unsafe medicines in Nigeria and poorly constructed buildings in Turkey that collapse with deadly consequences ((The 2009 Global Corruption Report Executive Summary Page XXV)). Mr. J.D. Wolfensohn, former President of the World Bank had remarked in his 1996 speech while addressing the keys to achieving growth and reducing poverty in developing countries that, “We need to deal with the cancer of corruption”. It therefore comes as little or no surprise that the international community abhors and vigorously denounces corruption. This is self evident from the various conventions, rules, authorities and opinions such as the  US Foreign Corrupt Practices Act (1977); Inter-American Convention against Corruption (1996); OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997); European Union Convention on the Fight Against Corruption involving Officials of the European Communities or Officials of Member States of the European Union (Council Act of 26 May 1997); Council of Europe Criminal Law Convention on Corruption (1999) among others; that condemn corruption thus, supporting the claim that there exits an international public policy against corruption. Corruption has been deemed to be an international evil and is contrary to good morals and to international public policy common to the community of nations ((Judge Lagergren’s award in ICC Case No. 1110 (1963), 10 (3) Arbitration International  282, ICC Case  No.1110)). The award given in the World Duty Free case ((World Duty Free Company Limited v The Republic of Kenya ICSID Case No. ARB/00/7  Award , October 4, 2006))states that,

“In light of domestic laws and international conventions relating to corruption, and in light of the decisions taken in this matter by courts and arbitral tribunals, this Tribunal is convinced that bribery is contrary to the international public policy of most, if not all, States or, to use another formula, to transnational public policy. Thus, claims based on contracts of corruption or on contracts obtained by corruption cannot be upheld by this Arbitral Tribunal”.

These rules, authorities and opinions are also responsible for the popular belief that issues of corruption are relatively simple to resolve in international arbitration. Arbitrations involving allegations of corruption throw up difficult factual and legal issues at practically every stage of the arbitral process. It is imperative that international arbitration practitioners have a firm grasp of how to approach these issues, especially since sectors of major importance for international arbitration suffer from endemic corruption.  Recent commentary confirms that these definitions correctly emphasize the essence of corruption in its legal sense, and further notes that most modern states regard the definition of corruption as extending to include all persons who are induced to act corruptly in the discharge of their duties, whether in the public or private sectors ((Mohamad Abdul Raouf  “How Should International Arbitrators Tackle Corruption Issues ?” Foreign Investment Law Journal Vol. 24, No. 1, Spring 2009 International Centre for Settlement of International Disputes)). More generally, corruption many encompass a variety of wrongful acts in addition to bribery such as trading in influence, abuse of public office for private gain, obstruction of justice diversion of property by a public official, illicit enrichment and money laundering ((Ibid)). There are however in certain respects subtle and sometimes significant differences between the leading national and international legal regimes as to the type of conduct constituting corruption or bribery. For instance, facilitation payments otherwise known as speed or grease payments to foreign public officials, which are payments made with the purpose of expediting or facilitating the provision of services or routine government action which an official is normally obliged to perform ((UK Law Commission Consultation Paper No. 185 (31 October 2007) Appendix F, para. F.5)). Putting aside the thorny issue of facilitation payments and other more subtle distinctions between the various anti-corruption regimes, international consensus on a broad definition of both public and private sector corruption can nevertheless be found in Articles 15, 22, 16,and of the UN Convention Against Corruption (UNCAC). There is yet another form of corruption described in Article 18 UNCAC as trading in influence, which is more controversial, and will be the subject of further analysis in the course of this article. It suffices to mention at this juncture that the elements of trading in influence are similar to Articles 15 and 16, except that the offence involves a person having real or supposed influence over public bodies or officials, trading the abuse of such influence as opposed to the payment of bribes, in return for an undue advantage from a person seeking this influence ((Michael Hwang S.C. and Kevin Lim,  Corruption in Arbitration— Law and Reality, Foreign Investment Law Journal Vol. 24, No. 1, Spring 2009 International Centre for Settlement of International Disputes)).

Broadly speaking, one can distinguish between issues of corruption which arise at the primary tribunal level before the award is rendered, and those which arise thereafter if the award is challenged before reviewing national courts, which may be asked to set aside or refuse enforcement of the award. Parties’ claims or defences may be expressly premised upon the other party’s corrupt dealings, or their joint corrupt object underlying a contract in dispute. A tribunal is clearly obliged to investigate and rule upon the existence and consequences of corruption in such case to resolve the parties’ dispute ((Ibid)). However, if neither party alleges corruption, but the evidence on record leads the tribunal to suspect that corrupt activities may have been afoot, it is less clear whether a tribunal may assume of its own accord an inquisitorial role to establish their occurrence and rule upon their consequences. An award could be at risk of being set aside or refused enforcement if arbitrators stray into ultra petita territory by enquiring into the existence of corruption and ruling upon its consequences, where such issues are not raised by the parties. Paradoxically, if a tribunal declines to take the initiative in probing the existence of corruption, national courts reviewing a subsequent challenge to the award may be tempted to make their own enquiries to ascertain the existence of corruption, and uphold the challenge on public policy grounds should corruption be revealed ((Ibid)). While an award may be challenged under Articles 34(2)(a)(iii) and 36(1)(a)(iii) UNCITRAL Model

Law and Article V(1)(c) New York Convention on the basis that the tribunal has ―dealt with a dispute not contemplated by or not falling within the terms of the submission to arbitration, this provision is narrowly construed by state courts, which are loathe to find that a tribunal has exceeded its powers. The general proposition that emerges from a distillation of various case law and commentary is that a tribunal will not be regarded as having exceeded its authority so long as the matters determined or the evidence relied upon in its award are relevant to resolution of the dispute submitted to the tribunal. In Minmetals Germany GmbH v Ferco Steel Ltd Colman J. refused to sustain the respondent’s challenge under, inter alia, Section 103(2) (d) UK Arbitration Act 1996 which is in pari materia with the aforementioned provisions of the New York Convention and UNCITRAL Model Law. The respondent resisted enforcement on the basis that the tribunal had exceeded its mandate by quantifying the claimant’s loss according to findings made in separate arbitration proceedings, which neither claimant nor respondent had raised or submitted as evidence in their arbitration. Colman J. dismissed this argument, reasoning that a tribunal acts within its mandate so long as it relies on evidence which is relevant to the resolution of the dispute submitted for determination by the parties, even if such evidence had not been raised by either party ((Ibid)). Given that corrupt dealings by one or both parties can have a dispositive impact on the enforceability of claims submitted to the tribunal, and are therefore relevant to the resolution of the dispute between the parties, it stands to reason that consideration of issues of corruption falls well within the tribunal’s mandate, even if neither party raises corruption as part of its claim or defence and the tribunal conducts its own investigations into corruption sua sponte. The parties’ conduct must be necessarily considered by the tribunal as a part of its mandate to determine the parties’ claims, defences etc.

In the presence of this multifarious legal framework of instruments that establishes an international rule of law regime on corruption, those charged with administering justice including international arbitrators have an undeniable responsibility to that such instruments are applied properly. However, unlike judges, arbitrators or private judges are only committed to the contract which creates their mission. Accordingly, a tribunal that does uncover evidence of corruption sua sponte and makes relevant consequent findings is not giving either party ―more than it actually sought in its claims, defences, or counterclaims. Rather, it is rigorously and faithfully ascertaining whether it ought to uphold such claims, defences and counterclaims which have been submitted to it for resolution, by applying the consequences of illegality which flow from a finding of corruption under the applicable law. Such a tribunal should therefore be safe from state courts’ accusations of having exceeded its authority. The policy considerations favouring the tribunal’s self-enquiry into suspicions of corruption are also clear. A tribunal is not ―solely a manifestation and instrumentalization of party autonomy which can ignore international goals of sanctioning illegality. Tribunals must remain vigilant and alert to the possibility of corrupt dealings being hidden by one or both parties, otherwise they may become unwitting accessories to heinous acts ―more odious than theft. In this regard, it is important for tribunals to bear in mind that many arbitral jurisdictions are anxious to preserve the finality of arbitral awards, and generally refuse to disturb the tribunal’s findings. This should doubly incentivise tribunals to properly investigate suspicions of corruption, so that their awards do not become a means for undeserving and unscrupulous parties to exploit minimal judicial intervention and thereby reap the benefit of their misdeeds. However, a note of caution is in order: tribunals should only pursue the issue of corruption where there is some prima facie evidence of wrongdoing, and not every suspicious element in the execution or performance of the contract should set the tribunal off on an inquisitorial exercise of its own irrespective of the wishes of the parties. A laissez-faire attitude that closes its eyes to all evidence of corruption is as undesirable as an over-zealous approach to detecting corruption, which will bog down arbitral proceedings with unnecessary demands for information and explanation, at the expense of parties who are likely to be innocent of wrongdoing. This would compromise the institution of international arbitration as surely as ignoring compelling evidence of corruption would. In international arbitration, it is axiomatic that each party bears the burden of proving the facts relied on in support of its claim or defence. The standard of proof is often assumed to be a balance of probabilities, or, in other words, more likely than not. Can there be any justification for departing from these basic propositions where corruption is sought to be established, given the limits of the tribunal’s powers of investigation and compulsion, and given that those who participate in bribery and corruption often mask their activities with great ingenuity.  This is one of the most contentious problems of corruption cases in arbitral practice ((Michael Hwang S.C. and Kevin Lim, Corruption in Arbitration— Law and Reality, Foreign Investment Law Journal Vol. 24, No. 1, Spring 2009 International Centre for Settlement of International Disputes)). This standard of proof appears to approximate the ―beyond reasonable doubt standard in criminal law, in relation to which the UN Anti-Corruption Toolkit ((UN Anti-Corruption Toolkit (2004) 81))observes:

“…the nature of major corruption cases makes such a high burden of proof particularly difficult to meet. Senior officials actively engaged in corruption are often in a position to impede investigations and destroy or conceal evidence, and pervasive corruption weakens investigative and prosecutorial agencies to the point where gathering evidence and establishing its validity and probative value becomes problematic at best…”

These elements of intermediary agreements may give rise to concerns that part of the commission paid to the intermediary is meant to be reimbursement for bribes paid to government officials, or that bribes were in fact paid, whether with or without the principal’s consent. The intermediary may also exercise improper influence over government officials in order to procure a favourable result for his principal. Depending on the applicable legal regime, intermediary agreements providing for the exercise of influence by the intermediary may be regarded as legitimate lobbying contracts ((In ICC Case No. 7047 (1994).)). The difficulty in proving corruption in connection with an intermediary agreement lies of course in demonstrating there was such impropriety involved or intended in the manner that the intermediary performed or was to perform the agreement. Aside from the problems already mentioned above that parties face in procuring evidence of corruption, one can also imagine how independent evidence necessary to corroborate a party’s allegations of corruption will have to come from the officials or politicians whom the intermediary has bribed, which is hardly likely when the bribe takers are likely to lay themselves open to the possibility of prosecution in their home countries. Thus, some commentators have remarked that burden shifting is justifiable in adjudicating intermediary agreement disputes in which corruption is alleged, since ― the party accused of corruption is typically easily capable, if it is actually innocent of the allegations, of producing countervailing evidence ((Corruption and Misuse of Public Office Article 433-1)). Notwithstanding the fact that evidence of corruption is difficult to procure, we disagree with those who suggest that the tribunal should shift the burden of proof onto the impugned party, as it is too radical to depart from such a basic and widely accepted rule as the requirement that a party must prove the facts upon which it wishes to rely. This rule exists for good reason— to prevent parties from making baseless assertions and to secure the integrity of the fact finding process. It avoids the presumption that a fact exists when evidence is not sufficiently probative to demonstrate such. It is also, in a sense, a rule of natural justice and due process. If this rule can be abridged in relation to proof of corruption, then by parity of reasoning there should be nothing to stop its application to other issues for which proof is difficult to obtain. This is not a slippery slope that international arbitration can afford to embark upon. Partasides cites the following passage from Himpurna California Energy Ltd (Bermuda) v PT (Persero) Perusahaan Listruk Negara (Indonesia), which encompasses this non-derogable cardinal rule of law:

 “The members of the Arbitral Tribunal do not live in an ivory tower. Nor do they view the arbitral process as one which operates in a vacuum, divorced from reality. … The arbitrators believe that cronyism and other forms of abuse of public trust do indeed exist in many countries, causing great harm to untold millions of ordinary people in a myriad of insidious ways. They would rigorously oppose any attempt to use the arbitral process to give effect to contracts contaminated by corruption. But such grave accusations must be proven. There is in fact no evidence of corruption in this case. Rumours or innuendo will not do. Nor obviously may a conviction that some foreign investors have been unscrupulous justify the arbitrary designation of a particular investor as a scapegoat.”

Turning to the requisite standard of proof that a party must discharge to establish corruption, like Partasides, we think it should remain the balance of probabilities standard. It should certainly not be pegged at the beyond reasonable doubt standard in criminal law, since the tribunal is dealing with the consequences of corruption on a matter of civil liability. A tribunal does not impose criminal sanctions, which renders it unnecessary and undesirable for it to proceed with the same degree of caution as a criminal court would apply in ascertaining the facts of the case before it. More importantly, given the difficulty in proving corruption, a criminal standard of proof would be almost impossible to satisfy and plays directly into the hands of unscrupulous parties, who can simply deny wrongdoing and exploit the high threshold of proof to avoid liability. Hoffmann L.J. illustrates how the inherent unlikelihood of a particular alleged event may heighten the cogency of the evidence required to establish its occurrence “… some things are inherently more likely than others. It would need more cogent evidence to satisfy one that the creature seen walking in Regent‘s Park was more likely than not to have been a lioness than to be satisfied to the same standard of probability that it was an Alsatian. On this basis, cogent evidence is generally required to satisfy a civil tribunal that a person has been fraudulent or behaved in some other reprehensible manner. But the question is always whether the tribunal thinks it more probable than not. Since in many cases, corruption will be inherently more unlikely than, for instance, words amounting to a contractual offer, it will therefore require more cogent evidence to establish. However, as Partasides rightly points out, this must be weighed with the interests of fairness, which require an arbitral tribunal to consider ―the challenge the parties before them face in substantiating their claims of corruption due to the circumstances of those claims… (and the need) to take account of the intrinsically difficult nature of demonstrating a bribe. These factors may depress the strength of evidence of corruption required”.

The tribunal may also draw adverse inferences from a party’s failure or inability to adduce counter evidence where prima facie evidence of its involvement in corruption has been produced. The result of drawing such inferences may be to allow the tribunal to make a finding of corruption where the evidence is otherwise insufficient to meet the balance of probabilities standard.  Drawing of an adverse inference in this situation is different from reversing the burden of proof. An adverse inference only arises from a failure by the impugned party to adduce evidence, which can be reasonably construed in the circumstances as an attempt to conceal corrupt activities. It provides the party alleging corruption with an additional inferred fact to discharge its burden of proof, which burden remains on that party throughout the proceedings ((Mohamad Abdul Raouf  “How Should International Arbitrators Tackle Corruption Issues ?” Foreign Investment Law Journal Vol. 24, No. 1, Spring 2009 International Centre for Settlement of International Disputes)). In order to make a finding that a party has committed a corrupt act, and to determine the legal consequences which ensue, a tribunal must ascertain whether the established facts make out all the elements of the offence of corruption under the applicable law.

In international arbitration, there is considerable divergence in opinion as to the correct approach for determining the applicable conflict of laws rules. This stems from the fact that, unlike national courts, arbitral tribunals do not have a ―forum as such, whose conflict of laws rules are automatically applicable. Moreover, domestic arbitration legislation generally confer upon tribunals wide discretion to select ―the conflict of laws rules which it considers applicable.

As a conclusion, the following can be summarised with regard to corruption in international arbitration:

(a) Sua sponte investigations of corruption by a tribunal fall within its mandate or authority, if the existence of corruption is relevant to the resolution of the dispute submitted to it (which will almost always be the case.

(b) The burden of proving corruption lies on the party alleging corruption. In order for a tribunal to make a finding of corruption, that party must discharge the balance of probabilities standard of proof. This evidentiary standard must be flexibly understood— in determining whether it has been discharged, factors such as the intrinsic difficulty of proving corruption, and the inherent likelihood or unlikelihood of corruption in the specific circumstances of the case, should be taken into account. Applying this evidentiary standard, tribunals may also consider various indicia and circumstantial evidence of corruption, and/or draw adverse inferences from an impugned party’s failure to produce documents (when so ordered) or exculpatory evidence.

(c) Choice of law analysis is usually required when dealing with intermediary agreement disputes. Where foreign mandatory laws or rules of public policy at the place of performance or seat of arbitration prohibit an intermediary agreement, contrary to the parties’ chosen law, whether they override the chosen law is a matter to be determined in accordance with the arbitral seat’s national conflicts rules. However, any law deemed applicable to the parties’ dispute under the arbitral seat’s conflicts rules must yield to transnational public policy against corruption, to the extent of any incompatibility between the two.

(d) If a tribunal makes a finding of corruption, it nevertheless has jurisdiction over the parties’ dispute, and is entitled to adjudicate issues of corruption as they are arbitrable. Contracts procured by corruption must generally be set aside by the victim of corruption in order for it to avoid its obligations there under, whereas claims arising out of contracts providing for corruption are deemed unenforceable or inadmissible without parties having to set it aside. However, generally speaking, one party’s unilateral intention to commit corrupt acts in performing a contract will not preclude the other innocent party from making claims arising out of the contract.

It remains to conclude this article by teasing out what has been implicit in some of our discussions: that the reality of judicial and arbitral practice relating to certain issues of corruption sometimes clashes incongruously with the theoretical disposition of the law on the subject. For example, there is the anomalous view in recent English decisions that corruption-tainted awards do not violate English international public policy, notwithstanding universal, and the common law’s historical, condemnation of corruption. Also, there is the sense that some minimal review courts, which.

As held in R v Charles Hildyards Thornton Whitaker ((R v Charles Hildyards Thornton Whitaker [1914] 3 KB 1283))“the common law… abhors corruption, purportedly accord maximum deference to the tribunal’s findings, are in reality on the cusp of the more intrusive contextual review approach.”

Turning to arbitral practice, one may question whether, in a case where corruption has not been proven to the requisite legal standard of proof, an arbitrator with lingering doubts may in reality allow them to colour his or her conduct of and views on the parties’ dispute. Special care must be taken by the arbitrator to avoid being consciously or unconsciously affected by rumours or innuendo; through the quality of their submissions, parties may also be able to play a part in tackling this problem. In addition, it is an open question to what extent law enforcement authorities have an interest in prosecuting arbitrators for failure to disclose suspicions of corruption, or whether it is even practically possible given the confidentiality that often shrouds arbitral proceedings, notwithstanding arguably clear anti-money laundering legislation, which may suggest that they are under such a duty of disclosure. We are unaware of any arbitrator coming forward to report to the authorities his or her suspicions of corruption aroused from hearing a case, and this status quo looks set to continue, pending further guidance on this grey area.