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Case-note articles/books Investment Arbitration: a poor forum for the international fight against corruption http://www.yjil.yale.edu/investment-arbitration-a-poor-forum-for-the-international- fight-against-corruption/ Investment tribunals are ill-suited to hear allegations of corruption. Tribunals also do not distinguish between bribes paid to secure a government action and bribes paid to violate the law. Investment treaties were originally meant to attract capital to developing countries with protections against the perceived threat of expropriation. Treaties do not extend protection to investment made through corruption. Treaties may state that investments can only be protected where they are made ‘in accordance with the respective laws and regulations of either contracting state’. This outcome hurts investors more than host states because they lose protection of investment treaties and a forum for obtaining damages. It therefore makes ITA the suitable forum for punishing businesses that bribe overseas. The tribunal in WDF found that it had no jurisdiction to hear the investment dispute as a matter of international public policy and the applicable laws in Kenya and England. The 2 million bribe deprived the tribunal of hearing claims of damages around 500 million dollars. It is more common however, for the host state to make an allegation of bribery knowing that if there is a finding on corruption, then it will immunize it from paying any damages/liability. Metal-Tech v Uzbekistan – the host state was able to avoid liability by producing evidence of bribery in the formation of an agreement between the members of the Uzbek government and Israeli investors. The tribunal found it had no jurisdiction to hear the dispute but acknowledged Uzbek’s complicity in the bribe by ordering that parties share the arbitration cost. Some have suggested that arbitrators should investigate allegations of corruption on their own initiative rather than allow each party to provide the proof on which the allegations rest. But, the structural mechanics of investment arbitration undermine the justification behind the common law principle that in case of equal fault, the defendant’s case prevails. The current ITA system does not consider factors surrounding the bribe e.g. whether it was paid to violate the law or secure a government action. In cases where clear evidence of bribery is brought before a tribunal, tribunals should find they have no jurisdiction to hear investment disputes. Extending the in pari delicto (equal wrongdoing, the defendant prevails) doctrine in investment arbitration gives the host-state an advantage because private investors will almost always be claimants and states will always be respondents/defendants. Once paid, bribes will defeat the protections of investment treaties and immunize host state from liability under the treaty.
State corruption in ICSID BIT Arbitration: can it be estopped http://arbitrationblog.kluwerarbitration.com/2017/03/09/state-corruption-in-icsid-bit- arbitration/ ICSID tribunals have refused to hear the merits of investment treaty claims if a corrupt act was involved in contract formation. Even though it was designed to ensure neutral and apolitical resolution of disputes, ICSID inadvertently incentivises states to promote a corruption scheme in order to establish in advance the corruption defence. 3-step approach to estopping states who are complicit in the corrupt act from asserting this defence: (i). Claimants must distinguish the seminal ICC case that recognised the corruption defence in the context of international arbitration ICC Case 1110 (1963) – Judge Lagergren held that a contract between private parties in which they agreed to bribe a public official was non-arbitrable for lack of jurisdiction. This case involves a private contract which was drafted for an invalid purpose unlike BIT claims. When corruption creeps into a contract formed under a BIT, only the private investor accepts the risk that it cannot recover if the state breaches. (ii). Litigants must analogize to existing ICSID jurisprudence recognizing the estoppel doctrine Fraport – the tribunal here pointed out that a tribunal should hold a government estopped from raising violations of its own law as a jurisdictional defence when it knowingly overlooked them and endorsed an investment which was not in compliance with its law. (iii). Claimants must justify a departure from the results in WDF and Metal-Tech In WDF, ICSID refused to reach the merits because the contract was formed after bribes were paid to the Kenyan President. Metal-Tech, the tribunal refused jurisdiction because lobbyists were used to pay bribes to Uzbek officials in order to get and keep the investment contract. Claimants must argue that contracts tainted by corruption are ‘voidable’. They must also argue that the acts of high-ranking government officials/a head of state should impute knowledge to the state. Claimants must also abandon attempts to legitimize the corrupt conduct. The claimant should admit that the act leading to contract formation was illegal and in so doing, implicate the defendant state’s officials in the act. This places the defendant in the uncomfortable position of either (i) arguing that the act was lawful or (ii) conceding that the act was unlawful but attempting to disclaim knowledge or responsibility in order to justify a corruption defence and rebut arguments in favour of estoppel. The more apparent the corruption was, the harder it will be for a state to disclaim knowledge of responsibility for participating in or ratifying that act.
III Jurisdiction versus admissibility Jurisdiction is about the scope of the State’s consent to arbitrate, admissibility is about whether the claim can or should be resolved by an international tribunal which has found jurisdiction. Jurisdiction is defined in terms of time, person and subject matter, but a claim can also be found inadmissible on the same grounds. Examples are: time – if the claimant fails to adhere to the timing of the commencement of the arbitration (notification of claim, cooling off period, domestic litigation requirement). Person – a claim where the investment is beneficially owned, or de facto controlled by a national of the host state (aka nationality claims). Subject matter – even though the claim brought is within the tribunal’s jurisdiction, it arises out of events or circumstances that are tainted by an internationally recognized illegality or incompatibility with international or transnational public policy which then renders the claim inadmissible. However, this determination is closely linked to the merits of the case. Tribunal decisions suggests that the concepts are not opposites, they simply focus on different aspects of arbitral decision-making; jurisdiction on the scope of the state’s consent to arbitrate and admissibility is about the claim and its temporal, personal and substantive dimensions. Jurisdiction and admissibility – Jan Paulsson (2005) http://www.arbitration-icca.org/media/4/82328233070217/ media012254599444060jasp_article_-jurisdiction_and_admissibility- _liber_amicorum_robert_briner.pdf The problem in a nutshell In the International Court of Justice, the issue of admissibility may arise after jurisdiction has been established. International law cannot ignore the implications of recognising the distinction between jurisdiction and admissibility from the perspective of reviewability. SGS v Philippines – the two parties had entered into a contract which stipulated that disputes should be referred to a Philippine court. SGS went straight to ICSID under the BIT between Switzerland and the Philippines. Philippines – no jurisdiction because the claim was for failure for payment under the contract and the disputes clause in the contract required such matters to be brought before the courts in Philippines. Tribunal – it has jurisdiction because of the broadness of the treaty definition which also covered contractual claims. BUT the tribunal would still give effect to a valid choice of forum clause in the contract. The tribunal concluded that the claim was inadmissible for this reason because a decision under the BIT would be premature as the disputes clause provided for resolution by the domestic courts in the Philippines. The tribunal used ‘impediment’ and ‘premature’ which Paulsson argued denoted that the claim was inadmissible. Methanex v US – the tribunal here took the view that this was not a jurisdictional challenge by also did not clear the air by adding that it wasn’t an objection of inadmissibility either. The US wasn’t arguing that the case was unhearable, but that
it was hopeless. A challenge of inadmissibility is one that argues the case should not be heard. Enron v Argentina – the tribunal said that a successful admissibility objection would normally result in rejecting a claim for reasons connected with the merits. If a claim should not be heard at all, then the issue is of admissibility and the tribunal’s decision is final. But if the claim could not be brought before that particular forum and is subject to further recourse, then the issue is of jurisdiction. According to what we know and understand about corruption and its treatment within the international sphere, investments involving corruption should be treated as inadmissible. This would mean that the claims will not be heard at all on the merits and the tribunal’s decision is final. The tribunal in WDF made mention to the fact that they do not want to allow claims of corruption to proceed because of what it would signify for international law and international policy (talk about the disadvantage to one party that you read about as a counterpoint). Once it’s established that the parties have consented to the jurisdiction of a particular tribunal, there’s a powerful policy reason to recognise its authority to dispose conclusively of other threshold issues which are matters of admissibility (alleged impediments to consideration of the merits of the dispute). Jurisdiction, competence and admissibility of claims in ICSID arbitration proceedings
- Gerold Zeiler The venture It should be possible to avoid the confusion of defining admissibility by simply applying a stricter terminological standard. Jurisdiction and competence Jurisdiction can be defined as the power and authority of a court to hear and determine a judicial proceeding. It is clear that to some extent, jurisdiction and competence are synonyms. In a legal context, using different words in order to convey the same meaning would be a reliable sign of confusion. Admissibility Jurisdiction and admissibility are two very different concepts. Fitzmaurice observes that an objection to admissibility ‘is a plea that the tribunal should rule the claim inadmissible on some ground other than its ultimate merits’ while an objection as to jurisdiction is ‘a plea that the tribunal itself is incompetent to give any ruling at all whether as to the merits or as to the admissibility of the claim’ (G. Fitzmaurice, The Law and Procedure of the International Court of Justice (1986), volume II, 438–9). Mr Highet in his dissenting opinion in Waste Management made it clearer that jurisdiction is the power of the tribunal to hear the case while admissibility is where the case itself is defective – whether it is appropriate for the tribunal to hear it. ( Waste Management, Inc v United Mexican States , ICSID Case No. ARB(AF)/98/2, Award, 2 June 2000, Dissenting Opinion K. Highet, para 58).
The eyes shut approach – here, the investment arbitrators appear to be passive. They rely on weak procedural grounds when rationalising their decision to avoid inquiry into matters that indicate a strong chance of corruption. In Southern Pacific Properties v Arab Republic of Egypt (1992) the Egyptian government requested the tribunal to declare the claims unfounded by reason of corruption. The tribunal found that allegations not supported by evidence and based on suppositions are not sufficient to prove corruption. This decision can be distinguished from the facts of our case as there was a clear acceptance by Mr Ali that he made a payment to President Moi in order to ensure that he got the contract to build the duty-free shops. In African Holdings v Congo (2008) Congo alleged that the contracts were not valid because they had been obtained through corruption. The tribunal recognised that these allegations were grave and required evidence. In the absence of this evidence, the tribunal dismissed the allegations made by Congo saying that they were based on general considerations about the Mobutu period and related political events. In EDF v Romania (2009), the claimant asserted that when it refused to pay bribed, Romania unlawfully expropriated it’s investment. The tribunal stated that the burden of proof lay with the claimant and that clear and convincing evidence needed to be provided that a bribe had been requested from a government official and that it was made on behalf of the government. The tribunal rejected EDF’s claimants after finding that it had failed to produce clear and convincing evidence that the bribe was requested on behalf of the Romanian government. The zero-tolerance approach – tribunals firmly deny foreign investors’ claims on jurisdictional/substantive grounds based on the host states’ defence of bribery/fraud in the inducement of the investment opportunity. In WDF the tribunal dismissed the claims advanced by the foreign investor. In Plama v Bulgaria (2008) the tribunal stated that the investment was the result of fraud and this behaviour was contrary to provisions of Bulgarian laws and to international law and so precluded the claimant from securing the protections of the ECT. In Azpetrol v Azerbaijan (2009) a witness of the claimant admitted to paying bribes to the government under cross-examination in an attempt to defend an assertion in his witness statement that the Respondent was corrupt. The host state filed an objection stating that the case couldn’t proceed because of the evidence of bribery and the case was terminated by agreement of the parties. In WDF, Mr Ali paid the bribe in advance in order to get the contract, but in this case, the bribes were paid to stop the government from investigating into the investor’s operations. Furthermore, this case can also be distinguished from WDF in that even though Azerbaijan alleged that there was corruption and invoked the unclean hands rule, similar to the Kenyan government, the case was terminated by the parties and not by the tribunal itself. In Azerbaijan, the tribunal did not have a chance to give a reasoned judgement as to why it would/would not hear the case. It would be highly likely that even though the facts of both cases differed, the tribunal would still have refused to hear the case or even dismissed the claims due to the bribery allegations. Furthermore, it may also have been interesting to see how the tribunal would have treated the question of the burden of proof. Seeing as in previous cases where bribery was alleged the standard of proof was very high, the tribunal may have come to a similar conclusion here, that if the claimant was to put forward this argument, then their evidence had to be clear and concise. A solution to the problem facing arbitrators dealing with cases where corruption is alleged could be to provide a certain flexibility in terms of burden of proof, where if
the alleging party brought relevant evidence without it being conclusive, the tribunal could request the other party to bring counter evidence to rebut this. Arbitrators are often better financed than prosecutors and can investigate the cases themselves and they are independent as compared to national prosecutors and judges. A state that has accepted and benefitted from a bribe should be precluded from complaining. If a state takes no action to investigate or prosecute the corrupt acts of its own officials, it should forfeit its right to rely on corruption as a defence. As interesting as this proposition appears, there is still a valid argument that was put forward in WDF and buttressed by Lord Mustill’s opinion where he stated that states cannot void something that they are not aware of. A state can still rely on the corruption defence if it was not aware of the corrupt acts of its officials, similar to how this corruption was only brought to light at the tribunal stage. Furthermore, as the tribunal in WDF stated that President Moi was not an agent of Kenya and so his illegalities cannot be attributed to the Government or the Republic of Kenya, this reliance on corruption will still remain a valid defence. In some countries, there is an acceptance that corruption is a part of doing business in some circles. In these countries, if arbitral tribunals punish investors by removing their treaty protections, the result may conflict with the original aim of the treaty, which is to attract investments. However, if this action by tribunals were to be looked at differently, it can still be argued that these countries would be forced to reckon with their business practices that allow for corruption to remain rampant in commercial enterprise. It would be prudent for a government seeing that it is losing investment to continue with corrupt practices that are frowned upon internationally. Regardless of both these instances, there will always be businesses willing to take the risk and invest in countries and pay bribes in order to complete these businesses which indirectly forfeits the protections accorded by the international treaty they signed. Future investors who are aware of ICSID jurisprudence will be alive to the fact that if their business deal goes wrong and they come before a tribunal, they cannot allege corruption and expect to succeed. Drawing the line: addressing allegations of unclean hands in investment arbitration – Mariano de Alba Unclean hands doctrine – the lawfulness of the investor’s conduct is a pre-condition for the bestowal of jurisdiction upon the arbitral tribunal. There are two factors that an investment arbitration tribunal should take into account when confronted with allegations of unlawful acts committed by an investor in establishing/developing its investment: (i) the tribunal should assess the type and the degree of the violation of the law committed by the investor. (ii) the tribunal should evaluate the relationship between the investor’s wrongdoing and the state’s conduct in connection with the commission and subsequent treatment of the infraction. Introduction The typical situation is where once the case is brought before an arbitral tribunal, the host state argues that the investor should not be allowed to proceed with its claims since the establishment/development of the investment contravened the host state’s law. The clean hands doctrine implies that a party will not be allowed to bring a claim if its proven that it was involved in an unlawful act in relation to its claim.
Corruption in international investment arbitration, Alexandrov Stanimir A, The American Journal of International Law; Washington, Vol. 109, Iss. 3, (Jul 2015): 702- 707 International organisations such as the OECD and the WB have been at the forefront of developing norms and procedures for fighting corruption. State’s invoke corruption on the part of the investor as a defence and seek to dismiss the investor’s claims based on the investor’s unlawful conduct. Investor-state tribunals are not criminal courts and so they lack the instruments that law-enforcement authorities and criminal courts have to investigate and prove corruption. A party bears the burden of proving the facts on which it relies to support its claim/defence. However, corruption is very difficult to prove conclusively especially given the limits arbitral tribunals face. In cases where admission by witness is manifest, this is easy. But most cases hold difficulties in obtaining the said evidence. There is also a debate on whether the standard of proof should be heightened given the seriousness of the allegations of corruption, or whether it should be lowered given the difficulties inherent in obtaining direct evidence of corruption. Denying a corrupt investor the protections of an investment treaty, while unjustified, may not necessarily achieve the overarching policy goal of discouraging, preventing and punishing corruption. State officials or agents are often as guilty of corruption as the investor and yet they are the ones who benefit from its own corrupt conduct. The corruption trump in investment arbitration – Joan E Donoghue Two points emerge from the overview of Aloysius’s book, (i) international conventions express categorical opposition to corruption focussing more on the payment of bribes by private persons than on the receipt of bribes by corrupt officials. (ii) implementation of the conventions falls to the parties, primarily through their criminal justice systems. Michael Reisman says that these conventions are simply lip service that governing elites adhere to. Elites who benefit from corrupt practices are not threatened by the stringent norms enshrined in conventions. Investment arbitration is governed by the treaties countries sign and these are unlikely to contain explicit guidance regarding the implications of corruption. In Metal- Tech and WDF, tribunals found that the investor corruption had occurred and dismissed the claims. In both cases, corruption functioned as a ‘trump card’ barring any consideration of the merits. Both tribunals expressed discomfort with the fact that the consequences of a corrupt transaction feel entirely on the claimant. Both didn’t attribute the corruption of an official to the state itself. Both parties had to divide up the costs of arbitration amongst themselves. In Siemens v Argentina and Azpetrol v Azerbaijan, proceedings were discontinued after solid evidence of corruption emerged. Llamzon recommends that host states be required, as a condition of invoking corruption as a defence, to show that they have actively prosecuted the corrupt
officials (p280). He also considers that tribunals should weigh the wrongful conduct of the investor against any complicity or negligence by the respondent. The writer doubts that a corruption trump which imposes the costs of corruption entirely on the investor, has much potential to deter corruption in foreign investment. MOL v Republic of Croatia: The ICSID case where investor corruption as a defence strategy of the host state in international investment arbitration might succeed – Margareta Habazin http://arbitrationblog.kluwerarbitration.com/2015/11/16/mol-v-republic-of-croatia-the- icsid-case-where-investor-corruption-as-a-defense-strategy-of-the-host-state-in- international-investment-arbitration-might-succeed/ No matter how outrageous the host states’ conduct toward the investors were in WDF and Metal-Tech, the fact of the investors’ involvement in corruption to procure and win government contracts deprived the investors of the favourable award and protection of their rights with host state’s evading liability for investment violations profiting from their violation. In MOL v Republic of Croatia, MOL initiated ICSID arbitration against Croatia pursuant to the ECT claiming that the host state breached its obligations in connection to investments made by the claimant. The Croatian government argued that the shareholder agreement signed between both parties was procured through bribery of the Prime Minister. Croatia argues that the corruption forms a jurisdictional objection, the investor never made a valid investment so the tribunal lacks the jurisdiction to hear the case. The investor denies any wrongdoing arguing that there has been no conviction in domestic courts of those involved and any factual determinations in Croatian courts are not under the purview of ICSID. Bribery must be sufficiently proven to convince the tribunal that it lacks jurisdiction over the claim. The tribunal in Plama relied on the general principle incorporated into international law that tribunals will not assist investors who have engaged in illegal activities. If corruption is established, the arbitral tribunal can decline its jurisdiction - Inceysa Vallisoletana S.l. v. Republic of El Salvador , ICSID Case No. ARB/03/26 or the claim can be considered to be inadmissible - Phoenix Action Ltd. v. The Czech Republic , ICSID Case No. ARB/06/5. Kaj Hobér, Annette Magnusson and Marie Öhrström, Between East and West: Essays in honour of Ulf Franke (Juris 2010) p. 309- Corruption in International Investment Arbitration: Jurisdiction and the unclean hands doctrine – Richard Kreindler Bribery under international law
defective – whether it is appropriate for the tribunal to hear it.’ So the tribunal may consider itself to have jurisdiction but cannot maintain the claims as matter of law. The authority to rule on inadmissibility in investment arbitration Lack of express authority in the ICSID convention should not prevent tribunals from considering issues of admissibility. In CMS v Argentina the tribunal stated that ‘the distinction between admissibility and jurisdiction does not appear quite appropriate in the context of ICSID as the Convention deals only with jurisdiction and competence’. The virtue of maintaining a distinction between the two is that the focus of the arbitral tribunals’ inquiry can thereby be sharpened. The unclean hands doctrine and inadmissibility It is important in the context of ICSID to take applicable international public policy into account at the preliminary stage in evaluating jurisdiction and admissibility. Proving corruption in arbitration: lessons to be learned from Metal-Tech v Republic of Uzbekistan – Deyan Dragiev http://arbitrationblog.kluwerarbitration.com/2014/02/11/proving-corruption-in- arbitration-lessons-to-be-learned-from-metal-tech-v-republic-of-uzbekistan/ Allegations of corruption traditionally lead to a controversy as to which party has to bear the burden of proof e.g. the party seeking to establish jurisdiction should refute the suspicion of corruption v the party alleging corruption should prove its existence. The tribunal here was active and issued procedural orders to establish an explanation for some facts in the case. The tribunal was engaged in establishing all the circumstances regarding existence/non-existence of corruption in the case. It didn’t remain passive like other tribunals. The tribunal sought to clarify the factual scenario as much as possible as to make a well-informed decision regarding the existence of grounds for jurisdiction. There was no reasonable explanation for the consultancy contracts by Metal-Tech regarding the investment, they didn’t have any qualifications relating to the claimant’s business and the payments made were high compared to the standard of those living in Uzbekistan. There was also no explanation as to how the consultants provided support to the claimant; one consultant worked in the office of the president and the other was the brother of the PM. Even though the circumstances established a presumption that bribery occurred, there was no evidence showing how, when and where Metal-Tech bribed any officials in Uzbekistan unlike in WDF where there was a direct admission by Mr Ali of when, where and how the bribe to President Moi was paid. The tribunal refused jurisdiction over the case as the claim was based on corruption. The absence therefore of a reasonable explanation is sufficient to result into a dismissal of the claim.
