Part II Substantive Issues, Ch.15 Corruption
Hilmar Raeschke-Kessler, Dorothee Gottwald
Edited By: Peter T Muchlinski, Federico Ortino, Christoph Schreuer
- Investment ‘in accordance with host state law’ — Corruption claim — Corruption — Investment — UNCITRAL Arbitration Rules
(1) The Notion of Corruption and the Notion of International Investment 586
(2) Two Types of Corruption Cases in Foreign Investment 591
(a) Type 1: The Main Contract 593
(i) Reasons for Holding the Main Contract to be Invalid or Unenforceable 594
(ii) Reasons for Holding that the Main Contract Remains Valid and Enforceable 596
(iii) Modification and Adaptation of the Main Contract 598
(iv) Related Legal Transactions Containing the Investment 600
(v) Remedies 601
(vi) Dispute Settlement 602
(b) Type 2: The Agency Agreement 607
Concluding Remarks 614
(p. 585) Corruption is omnipresent. It takes place in all countries, neither being a specific problem of developing economies nor restricted to authoritarian or transitional societies.1 To take the country of the authors, Germany, for example, since the 1990s a public perception has arisen that many decisions on major public procurement contracts, on economic policy, or on important investments may involve illicit payments, or at least the attempt to make them. First, the public was confronted with the Opel and Mannesmann scandals and later learned that even high-level officials, like the former German State Secretary of Defence Holger Pfahls, or members of the national parliament, were involved in corrupt practices. Aside from this inglorious news from the so-called developed world, the serious effects that corruption causes to developing and transitional societies cannot be ignored.2 To mention only the economic effects, it has been estimated that in the construction sector, depending on the country and the project, bribes can amount to from 5 per cent to 30 per cent of the project costs. These sums are not available for use in other projects where the country may urgently need them.3
Corruption is also not a recent problem.4 However, during the 1990s the extent of real and perceived corruption rose significantly throughout the world,5 becoming, according to some scholars, even a problem ‘of global revolutionary force’.6 This development occurred because of the globalization of capital flows and a new attitude towards foreign investment in the developing world. The problem of international corruption in the context of international investment is one that is closely related to business ethics.
The following study examines the legal effects of corruption on international investment contracts. It proposes solutions for contracts and dispute resolution and aims at a balance between anti-corruption values and the economic rationality of contracts, in particular the mutual responsibilities of the parties and the specifics of complex long-term projects. The introduction gives an overview of the definitions (p. 586) of key terms, the legal scope of the Chapter, and the legal instruments regulating corruption in foreign investment. Some general characteristics of corruption cases and some systematic remarks on the types of problems and cases are provided in Section 2. There the Chapter examines problems related to the main contract, which is the contractual relationship between the investor and the host state or other investors. It goes on to consider problems of dispute settlement related to the main contract. The Chapter then deals with problems of agency agreements, which are contracts between investors and intermediaries, mostly consultancy firms, and the dispute settlement problems related to these agency agreements.
The study draws on an analysis of 36 cases from arbitration and litigation from the last three decades.7 The sample includes arbitrations before the ICC, ICSID, UNCITRAL, NAFTA, and ad hoc tribunals. These were selected using the following notions of investment and corruption:
(a) The term investment shall refer for present purposes to foreign direct investment (FDI). According to a common definition used by the OECD and the EC, foreign direct investments are those made by non-residents to establish lasting References(p. 587) economic ties with a foreign enterprise, which allow the investor to exercise effective influence in the management of that enterprise.8 The criterion of influence helps distinguish direct from portfolio investment.9 The concept of foreign direct investment covers not only ‘greenfield investment’ (creation of a new enterprise) and the 100 per cent purchase of an existing enterprise by mergers and acquisitions. The partial purchase of an existing enterprise can also be a foreign direct investment, as long as it guarantees to the investor influence on the management, which is assumed when he or she holds a share of more than 10 per cent of the market value.10 In addition, since the development of the ‘new forms of investment’, the concept of FDI also includes ‘turn-key’ projects, ‘product in hand’, ‘BOT’ (‘Build, Operate, and Transfer’) projects, and ‘buy-back’ agreements between companies or with the host states' governments.11
(b) Article 1.1 of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, defines corruption as, ‘intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official, for that official or for a third party, in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business’. This definition refers to the so-called ‘hard’ corruption to public officials.
For the purposes of this chapter, a notion of corruption is used that is broader in two senses. First, in contrast to ‘hard corruption’ the concept of ‘influence peddling’ (‘trading in influence’ or ‘trafic d'influence’) will also be included. Influence peddling is the offering, giving, or promising of an undue advantage to a person like an expert or consultant who then sells their influence to the government. The reason why this is not covered by the OECD definition is that there was no international consensus over whether or not influence peddling should be established as a criminal offence. Today, a universal consensus on disapproval of these activities References(p. 588) seems to be easier to achieve.12 In an international investment context, influence peddling is a very frequent phenomenon and will therefore be included in the notion of corruption in this chapter.
Secondly, the OECD definition covers only the bribing of public officials. For the purposes of this study, the bribing of decision-makers in the business world will also be included as it is in several international documents.13 Most international arbitrations deal with the bribing of public officials in their position as decision-makers.14 With the privatization of public functions, these cases will probably become of greater importance in the future.
(c) Corruption in the context of international direct investment touches on many aspects of the legal system. The debate on corruption in the foreign investment context as a criminal offence started in the USA in the highly moral post-Watergate atmosphere. Until then, corruption had been a criminal offence exclusively in the domestic context, due to the principle of territoriality and the idea that every country should be responsible for the integrity of its own officials.15 When the US Congress passed the Foreign Corrupt Practices Act (FCPA) in 1977, the USA was the first country in the world to impose serious criminal consequences for the bribing of foreign officials. Domestic pressure by the American business community not only caused several amendments to the FCPA,16 but also induced the US government to press for an international anti-corruption agreement in the UN and OECD. However, only after the end of the Cold War and amidst a growing anti-corruption climate in Europe, did the international community give up its resistance,17 which References(p. 589) had been nurtured by the fear of a hidden trade agenda,18 the wish for own business advantages and by lack of interest.19 In the 1990s, several international conventions had been concluded that obliged the signatory states to make the bribery of foreign decision-makers a criminal offence. The FCPA and the criminal laws passed since then in most countries20 have, however, remained an issue of controversy.21
The treatment of transnational bribery in tax law has developed very similarly to that in criminal law. Home states that accept the tax deductibility of bribes to foreign officials provide an incentive for illicit practices. Abolishing the tax deductibility of foreign bribes was therefore the next important task of the OECD, whose Council consented in 1996 to the Recommendation on the Tax Deductibility of Bribes to Foreign Public Officials. One of the last countries to give up tax deductibility was Germany.22
Foreign investment frequently takes place in the context of international investment protection and multilateral investment guarantee agencies. If corruption occurs, it may be asked whether the illicit background of the whole investment affects the insurance protection given by multilateral agencies. Corruption also increases the costs of international investments, so some organizations have begun to ask about the possibilities and benefits of corruption insurance.23
In the follow-up procedures after the OECD Convention 1996, the laws on unfair competition were strengthened as a means to combat corruption. Corrupt practices are held to violate fair competition laws. Some countries, such as Japan, considered extending their laws on unfair competition in implementing the OECD Convention.24
Corruption in the international investment context may have effects on decisions based on public law, rendering them void or voidable, as well as perhaps not influencing their validity. Examples are public procurement decisions, or decisions based on public law related to the realization of investment, such as planning permissions or concessions based on environmental law.
Today investments are typically structured by one or several contracts between investors and the host states—in addition to, or even rather than by, concessions and other decisions of public law.25 If the investor has bribed officials of the host state References(p. 590) during the negotiation of these contracts, the host state may claim the invalidity of the main contract. If the investor did not commit the offence but used intermediaries (eg a consultancy firm) for the negotiations, disputes may arise between the intermediary and the investor about the legality and the validity of their agreement. These disputes may include claims for restitution or for damages arising from the corrupt practices.
In any of these disputes where corruption is an issue, problems may arise as to the adequate form of dispute settlement in arbitration and litigation. While the problems of criminal, tax, insurance, and unfair competition law depend on the domestic legal context, contractual relationships between foreign investors, host states, and intermediaries tend to be solved in an international setting, mostly using international arbitration as a mechanism for dispute resolution. This chapter will deal with contractual relations and with the possibilities for dispute settlement in relation to foreign investment. It will exclude the issues of criminal, tax, insurance, and unfair competition law and will touch on public law only where necessary.
(d) The international community has adopted a series of multilateral instruments since its efforts to address the problem of corruption in the 1990s. The earliest of these were signed in the OECD context: The OECD Recommendation on Combating Bribery in International Business Transactions in 1994, the OECD Recommendation of the Council on the Tax Deductibility of Bribes to Foreign Public Officials in 1996, and the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions. Regional efforts led to the Inter-American Convention against Corruption, adopted by the OAS in 1996, and the African Union Convention on Preventing and Combating Corruption of 2003. The European Union has adopted the Convention on the Fight against Corruption involving Officials of the European Communities or Officials of Member States of 1997 and launched several initiatives on criminal law enforcement.26 The Council of Europe passed the Criminal Law Convention on Corruption and the Civil Law Convention on Corruption in 1999. Some international bodies addressed the problem of prevention, and passed Model Codes of Conduct, among these the Council of Europe in its Recommendation on Codes of Conduct for Public Officials (2000) and the International Chamber of Commerce—ICC—in its Rules of Conduct for Corporate Self-Regulation of 1996. The most recent and most comprehensive multilateral instrument is the United Nations Convention against Corruption of 2003 (entry into force: 2005).
These multilateral instruments typically do not deal with the consequences of corruption in private law. The OECD Conventions and Recommendations concentrate on criminal law, tax law, and law enforcement,27 the Inter-American, References(p. 591) African, and European Instruments on prevention and on criminal law. Codes of Conduct aim exclusively at prevention. The only instrument that deals with private law in detail is the Civil Law Convention of the Council of Europe. It addresses loss caused by corruption (Arts 3–7), contracts (Art 8), evidence, and court procedures (Arts 9–12).
The same situation is prevalent in bilateral and national instruments. Bilateral Investment Treaties (BITs), which address investment protection in situations of political uncertainty, regulate the admission, treatment, expropriation, and dispute settlement in the context of international investment rather than questions of related contracts.28 The recent national laws mentioned above address foreign bribery from the point of view of criminal law. The legal consequences of bribery in a foreign investment context therefore have to be solved by general national regulations of contract law in home and host states, the conflict rules of international private law, and by customary international law.
Although corruption takes place in an infinite variety of constellations, all known cases dealt with in arbitration or litigation have had some features in common. A brief overview of these general characteristics seems to be appropriate, followed by the two principal types into which they can be divided. In the first category, the parties involved are arbitration or litigation the investor and the host state or a state-owned and governed entity. In the second category, the investor has undertaken the business through an agent/intermediary and has an arbitration or litigation with the latter.
International arbitration dealt with the issue of corruption as early as the 1960s, and some doctrines that are still valid today were developed at that time. Nevertheless, the ‘corruption eruption’ of the 1990s has led to an increased number of international arbitrations on the issue during the 1990s. Arbitrations now cover cases involving References(p. 592) the highest-ranking officials of a state, such as its president or members of the cabinet, as well as the corruption of lower grades in the hierarchy, though, particularly in infrastructure projects of national importance, the involvement of higher grades may be more probable.29
The most striking similarity within the group of cases analysed is their relation to a rather limited area of foreign investments. By far the majority of cases deal with infrastructure projects, like energy plants, telecommunication systems, or waste landfills.30 The value of an investment project may be billions of US dollars. The next group in size terms concerns the purchase of armaments and the construction of military training facilities,31 followed by the exploitation of natural resources.32 Cases with no connection with relation to public procurement are relatively rare, the few known examples relating to privately run petrochemical projects, tourism, and a cotton-spinning factory.33
Geographically, although corruption occurs around the world and capital flows do not only move towards the developing world but also between developed countries34 and from oil- and gas-producing countries to all others, most arbitrations where corruption was an issue related to investments in South Asia and the Middle East.
Investors hardly ever commit illicit activities themselves. In the majority of the cases, they contract intermediaries, often agents or consultants, to act on their behalf. The advantages for the investor are obvious: he does not have to lose face to anyone, and leaves the ‘dirty work’ to others. In addition, the agent or consultant often has their seat of business in the host country, or is even a national of it. Thus, he or she is culturally and geographically closer to the officials of the host country and knows more about their culture, including the habits governing corrupt practices.
From a systematic point of view, most cases where corruption has been an issue in arbitration fit into one of the following two types.35 In the first category, the parties References(p. 593) involved are the investor and the host state or a state-owned and governed entity. They have entered into an investment agreement, for example a joint venture, BOT, or turn-key contract. During or after realization of the investment, a dispute has arisen between the parties about some conditions of the agreement. Typically, the host state has not honoured its contractual obligations, forcing the investor to initiate arbitration. Often an important reason for the dispute results from the internal politics of the host state: a new government has recently come to power and is reviewing critically the acts of its predecessor government. It highlights the fact that the contract with the investor was not concluded in a correct fashion but was based on the bribery of previous government members. It therefore contests the obligation of the host state to fulfil the contract. Economically, this is the most important type of dispute which, because of its frequent occurrence in relation to infrastructure projects, may involve billions of US dollars. From a legal point of view, it poses complex legal problems. From the 36 cases studied, 11 cases fall into this category.
The remaining 25 cases studied belong to agency agreements. The parties—investor and agent/intermediary—have concluded an agency agreement. The agreement usually obliges the agent to develop intermediary activities (such as legal and fiscal advice or consultancy) to help the investor to obtain a certain public procurement or infrastructure contract. The investor is to pay the agent a commission in the event of success, in other words, if the investor gains the contract with the host state or one of its public entities. The commission is determined as a percentage of the main contract's volume: percentages may vary widely between 1.5 per cent and 33.33 per cent (both in ICC case no. 6497).36 After the host state has awarded the contract to the investor, there is usually a characteristic pattern: the investor refuses to pay the agent the commission due to him or her under the agency agreement. The agent then initiates arbitration. The investor then contests that the agency agreement was invalid ab initio for its illegal content. He or she alleges that the real objective of the agreement was to bribe foreign officials in the host state, and that only part of the commission was to serve as remuneration for the service provided by the agent, the greater part of the commission being due to be passed as bribes into the hands of the state's officials in their capacity as decision-makers.
What are the legal problems related to the main contract between the investor and the host state, once the host state has raised allegations of corruption and therefore References(p. 594) considers the contract to be invalid or unenforceable? This is a much-disputed area. However, sound solutions are required because of the immense economic impact foreign infrastructure projects may have on the host state as well as on the investor.
An arbitral tribunal may find the main contract to be valid and enforceable, even if tainted by corruption. The modification and adaptation of the contract by the arbitral tribunal allows for flexible and economically adequate solutions. It will be examined whether or not the legal transactions that typically accompany the main contract share its fate. Questions of restitution are often raised in these cases. Less frequently, claims for damages occur. Each issue will now be considered in turn.
(i) Reasons for Holding the Main Contract to be Invalid or Unenforceable
The most obvious legal function of alleged corruption in a dispute between investor and host state on the main contract seems to be to support the attempt of the host state to be relieved from its contractual obligations. Some host states simply held the main contract to be invalid because of corruption37 while others considered it unenforceable.38 At first sight, it seems indeed natural that a contract obtained by illegal means like corruption is void. By analysing the arguments offered by host states in arbitrations related to main contracts, one can distinguish three reasons, each one leading to invalidity or unenforceability of the contract as a legal consequence of corruption.
First, national laws may contain mandatory rules providing for corruption itself as a primary reason for nullity.39 Then a contract concluded under the influence of corruption is ipso iure and ab initio null and void. This position is based on the idea that corruption is illegal and/or immoral and so courts or arbitral tribunals should not lend their jurisdictional power to enforce contracts infected by it (nemo auditur suam turpitudinem allegans). In such situations, the host state simply deems a contract ‘without consideration, unauthorized, illegal and fraudulent (to be) ineffective in law’,40 for ‘where a contract has been obtained by bribes, it shall References(p. 595) not be enforced’.41 Here corruption itself is regarded as sufficient reason to render a contract void or unenforceable. In a recent case, an ICSID arbitral tribunal held the main contract unenforceable for corruption under English law and the law of the host state, Kenya.42
However, the main contract between host state and investor in most cases is subject to the substantive laws of a neutral third country like Switzerland. This choice of law by the parties made prior to concluding the main contract specifically excludes the application of mandatory laws of the host state by the arbitral tribunal. It is therefore consequent that the Swiss Federal Court in such circumstances has held the main contract to be neither illegal in terms of breaking Swiss anti-corruption laws, nor immoral by Swiss standards or in consideration of foreign mandatory anti-corruption laws.43
Secondly, the invocation of invalidity of the main contract may be based not on the national law of the host state, but on international anti-corruption policy.44 The arbitrator is obliged to render an internationally enforceable award and has to comply with international public policy (cf Art 5 § 2 b New York Convention). In recent years, the international community achieved a far-reaching anti-bribery consensus, as can be seen from the multilateral activities on combating corruption. Anti-corruption has become part not only of international but transnational public policy just like combating terrorism, drug trafficking, or smuggling.45
However, there is no transnational consensus on the legal consequences of corruption as far as the invalidity of the main contract is concerned. On the contrary, one of the recent multilateral instruments gives a strong indication that the international community does not support ipso iure nullity. The parties to the Civil Law Convention on Corruption of the Council of Europe agreed on a solution that leaves the contract valid and only gives the parties the right to have the contract declared void by a national court.46 One may therefore conclude that the rule of ipso iure and ab initio nullity does not belong to the shared legal and moral values of contemporary states and that international public policy does not contain this rule.
References(p. 596) A third argument for invalidity is that corruption causes a defect of consent to the respondent state. The state is not subject to any contractual obligation concluded by its corrupt official because it was not able freely to exercise its choice. Several international documents support this point of view. Article 50 of the Vienna Convention on the Law on Treaties deals with the case that the consent of a state was caused by bribery to one of its officials, treating this as a defect of consent.47 Article 8(2) Civil Law Convention of the Council of Europe is based on the same idea, referring to the state ‘whose consent has been undermined by an act of corruption’. However, the consequence of these provisions is not ipso iure invalidity of the contract but its avoidance on request of the party suffering from the defect.
(ii) Reasons for Holding that the Main Contract Remains Valid and Enforceable
One may conclude that unless the applicable national law provides a rule of ipso iure nullity, corruption does not render the main contract invalid or unenforceable. On the contrary, there are reasons that strongly support the validity of the main contract, particularly if high-ranking officials of the host state are involved, like members of the cabinet, their deputies, or even the prime minister or president of that state.
International law contains the fundamental principle of state responsibility,48 referring to ‘the accountability of states for violation of international law, and the requirement that states make reparation for such violations’.49 With the growing international consensus on anti-corruption, and the signing of multilateral anti-corruption conventions, hard corruption is to be considered as a violation of international law. Accountability means in this context that states have to bear the consequences of corruption and assume full responsibility for the actions of their organs. This is obvious if the highest-ranking hierarchy, such as heads of state or the prime minister, is involved in the corrupt acts. It is not different if the state is represented by corrupt lower-ranking officials, like heads or deputy heads of departments.50
State responsibility includes contractual responsibility, which means that the state must in general meet its obligations as a contractual party in spite of the References(p. 597) corrupt activities of its officials.51 The economic argument for this principle is simple: if the state could easily avoid any obligation resulting from a contract tainted by corruption, it could profit from its own violation of international law. Various scenarios underline this argument. If corruption has the force to render a contract automatically invalid, states could withdraw from their obligations merely by presenting an incident of bribery, which, in a world of omnipresent corruption, would not be too difficult to find. In a situation where a government simply seeks to avoid contractual obligations because it may have developed a liquidity problem, or because the price of the relevant goods produced under the main contract has changed, the state would have an easy instrument to do so. The host state could break the contract and, when the investor seeks compensation, argue that the contract is invalid. This would favour the host state in an unjustified way in relation to the investor and lead to irrational and unjustified terminations of contracts. Anti-corruption policy protects not the parties to the dispute but the citizens and consumers who pay for corruption through higher prices and taxes. However, this is not an argument for the invalidation of the contract.52 Invalidating the contract may lead to the economic destruction of the investment. This may have serious effects on the economy of the host state, including its infrastructure. Moreover, it contradicts the host state's obligation of investment protection. Finally, if investors cannot trust in the state's responsibility towards its contractual obligations, this will have a negative effect on the investment climate and on the state's attractiveness to foreign investors.
The doctrine of state responsibility does not lead to the nullity of the contract on grounds of immorality, but rather points in the direction of the continuing validity of the contract in spite of corruption. International arbitration has so far not taken a clear position between these two possibilities. Although states as respondents have frequently claimed invalidity, only recently have arbitrators decided a case relying on this issue. The Supreme Court of Pakistan in the HUBCO case decided on jurisdiction only and not on the merits of the case, and the dispute was later settled outside arbitration by adaptation of the contract.53 In Himpurna v PLN, Oil Fields of Texas v Iran, and American Bell v Iran, the arbitral tribunals found that there was insufficient evidence of corruption.54 In Wena Hotels v Egypt, the arbitral tribunal held that the validity of the contract was irrelevant for the existence of the damages References(p. 598) claimed and so did not decide on the legal consequences of corruption.55 The arbitral tribunal in the Himpurna case emitted a serious warning about the economic effects of the theory of invalidity of contracts,56 while the arbitral tribunal in World Duty Free v Republic of Kenya held the main contract to be unenforceable, according to international public policy and national law.57 It seems too early to find a consolidated position of arbitral tribunals, although there seems to be at least a certain degree of reservation.
(iii) Modification and Adaptation of the Main Contract
If the main contract remains valid and enforceable, this does not mean that corruption has no effect on it. It is obvious and essential that an arbitral tribunal divides the legal consequences of corruption reasonably between the parties. The party that initiates an arbitration may seek settlement of a dispute about its contractual duties and performance in the past but it may also look for a decision related to its future rights and duties. This is particularly so in the context of investment arbitration. In this context, the term ‘modification’ will be used for the changing of rights or obligations related to the past.58 If contractual provisions need to be changed or amended, with effect for the future, this will be referred to as adaptation of the contract.59
Contract adaptation is commonly used to deal with unforeseen developments after the contract has been concluded, especially in situations of force majeure and the appearance of special risks. Corruption, however, is a problem inherent in the contract from its beginning. It leads to a situation that has much in common with one calling for contract adaptation. It is only discovered, or at least made public, at a stage after the conclusion of the contract. The parties will then have to deal with a situation that in reality is unbalanced but was intended to appear to others to be fair and reasonable.
Modification or adaptation of a contract by an arbitrator, although at first sight practicable and helpful, is a sensitive process touching the heart of party autonomy. As the basis of all commercial activity, the parties' autonomy and freedom of choice find their clearest expression in the contract. Intervening in the result of their References(p. 599) negotiations without the consent of the parties by an arbitral tribunal can only be accepted in extreme situations.
Corruption is one of those extreme situations. It may require the modification of a contract leading to its partial invalidation. In long-term contracts on goods or services, the price for each unit may contain a kick-back element, as was allegedly present in the Hubco environment. There, the price of deliveries, already performed in the past, may be reduced ex post to a fair market price and the part of the price containing the corrupt kick-back element may be invalidated. This may lead to a claim for partial restitution on behalf of the state as buyer of goods or services. It will be discussed below whether such a claim should succeed.
Adaptation of a contract by an arbitral tribunal with effect for the future is a more difficult problem. The arbitrator, in adapting the contract for the future, does not act in his or her normal function that aims to produce an enforceable award. National laws provide different provisions as to whether the arbitrator is able to do so.60 A general rule is missing,61 and the matter has been hotly disputed.62 In any case, the arbitrator has to take the will of the parties into consideration. His or her authority is limited by the request for relief. A party may only seek a decision for monetary claims brought before the arbitrator and prefer to renegotiate its contractual relationship outside the arbitration proceedings or take recourse to non-binding conciliation processes as offered by ICC and UNCITRAL. The arbitrator is thus not allowed to exceed his or her power by adapting the contract for the future. A party may ask for a declaratory judgment that its contract with the state is valid in spite of alleged or even proven corruption. It may request the arbitral tribunal to determine the fair market price for goods and services it is to deliver to the state in the future. A state may request the arbitral tribunal to redraft certain clauses of the contract as set out in its request for relief, should the arbitral tribunal not hold the contract to be invalid in toto because of the elements of corruption present in its past relationship with the foreign investor. It is also possible that the parties seek mere guidelines for their ‘complex future cooperation’ from the arbitral tribunal,63 and this may be a reasonable way to deal with the situation.
The criteria for modification and adaptation have to be taken from the whole of the contractual and economic relationship between the parties. The starting point has to be the will of the parties at the moment when they concluded the contract. The arbitral tribunal must also consider the role both parties have played in the corrupt activity. It has to ensure that they do not benefit from their corrupt behaviour. Where market prices for goods or services are taken into consideration, they must (p. 600) be those that were in force at the time the contract was concluded, and not those at the time of the decision. Where public tendering processes have taken place, the cheapest offer within the tendering process can be taken into account.
An important element is the status of the contractual relationship at the time arbitration is initiated by one party. If the investor has not yet started to perform its obligations, or where performance is only at the beginning, it may be a fair solution to declare the whole contract void because of corruption. However, nullity of the contract may no longer be fair and reasonable, once the investor has performed a major part of its obligations. Corruption is no justification for expropriating the investor without any fair and reasonable compensation by declaring the contract to be null and void at such a late and advanced stage of the relationship between the parties.
(iv) Related Legal Transactions Containing the Investment
Any substantial foreign investment like a BOT project consists not only of one agreement, but normally of several related legal transactions between different entities or persons. Normally the act of corruption takes place by way of a separate contract, where visible links between the corruption and the investment project are not always easy to detect.
The specific contract of tacit understanding between the investor (or his or her intermediary) and the deciding official of the host state (or his or her intermediary), containing the favour the official is to receive as ‘remuneration’ for the business opportunities granted by the state to the investor, relates to the inner core of corruption. This contract or understanding is the actual corruption agreement. This agreement is invalid ab initio due to the illegality of its content. The illegality of the transaction may result from national contract laws, like Articles 19 and 20 Swiss OR or § 134 German Civil Code—BGB—from national criminal anti-corruption laws, or from international anti-corruption policy. Its illegality is part of a transnational public order as best expressed in the International Law Association's resolution passed at its Delhi conference in 2002. The invalidity of the corruption agreement is not disputed. If the official has not yet received his promised remuneration for his corrupt activities, any claim for such remuneration must be dismissed by a court or arbitral tribunal. Neither can the investor, in case the official has already received his remuneration as an advance payment, but has not yet ‘performed’ what was expected of him, sue successfully for performance or request his money back.
Secondly, complex infrastructure projects are frequently based on a multitude of interdependent but individual contracts. Individual contracts of this type may contain in addition to the ‘main contract’, regulations about financing, corporate structures, or insurance. They are to be treated independently, according to the same rules as the main contract. If they were affected by corrupt means separately, they can be separately modified.
References(p. 601) Thirdly, related actions of public law are to be taken into account. In some countries or situations, investors need concessions for the investment itself. Nearly always, they have to apply for administrative acts, such as planning permissions or mining concessions, for the realization of the investment. These actions are subject to national public law. In German administrative law, public decisions affected by corruption are not invalid but can be revoked easily by the deciding public entity.64 The question of whether the fate of the act of public law has any consequences for the main contract has to be decided according to the law applicable to the main contract.
One of the reasons why arbitral tribunals have been restrictive in invalidating main contracts may be that invalidity leads to very unpleasant results in restitution. Should the host state really have to give back the whole investment, the nuclear power plant, the petrochemical project or the cotton factory? This does not correspond to the will of the parties, nor to their mutual economic interests. Investors cannot simply ‘take back’ complex long-term projects and reinstall them in a new environment without significant loss. Accordingly, recovery problems may be solved as follows.
The substance of the investment—for example, the power plant, the factory or the construction—stays with the host state. Generally, the main contract remains a valid causa for the investment.
The corruption agreement is null and void and is therefore not a causa for the bribe. However, the rule nemo auditur suam turpitudinem allegans hinders the parties to an illegal contract in recovering any payment if they have already performed what was expected under the agreement. This rule is usually applied very restrictively because it favours the recipient of the illegal payment, and it is too inflexible to solve complex conflicts.65 However, in the case of the already paid bribe the result does not seem unjust, because court protection of a claim on an illegal ground must be refused.
In a case where the bribe has already been paid, and the official has already ‘performed’ what was expected of him or her under the agreement whether in part or in full, there will be no restitution between the investor and the official(s) involved. The investor will not get the bribe back or its equivalent in monetary terms. On the contrary, the official will have to pass the monetary equivalent of the bribe he or she has received from the investor on to the state.
If the arbitrator is to adapt a contract, he or she may declare some of its conditions unacceptable and therefore invalid because of corruption. To recall the easiest case, the marking up of prices, if he or she changes the price provisions, this would References(p. 602) in effect declare the exorbitant price as unacceptable and the market price as valid. The payments performed in order to fulfil the exorbitant price would have been paid without causa. If they can be identified as a quid pro quo for the bribe, the rule nemo auditur suam turpitudinem allegans applies, and the payments cannot be recovered. This is not unjust because the loss of restitution can be seen as equivalent to the loss of restitution of the bribe and even more as a deterrent for the bribe-payer. In more complex cases, in which the quid pro quo character cannot be determined clearly, recovery is not excluded.66
In several situations, instead of or in addition to claims for restitution, the parties may claim damages. The Civil Law Convention on Corruption of the Council of Europe contains some relevant regulations. These establish the obligation of the states' parties to provide for effective compensation mechanisms for all persons who have suffered damage because of corruption (Art 3). The conditions are that the respondent has committed, authorized, or failed to prevent the act of corruption, the plaintiff has suffered damage, and there is a causal link between the act of corruption and the damage (Art 4). Each state has to bear responsibility for its officials (Art 5); the compensation has to be reduced if the plaintiff contributed to the damage (Art 6); and the damage has to be claimed within a limitation period of not less than three years (Art 7). Except for the strict limitation period in the last provision, those are general principles of many national laws. However, in arbitration, claims for damages have not yet become an issue.67
Some respondents argue that corruption cases are generally not subject to arbitration because they include problems of public law and policy and issues of criminal law.68 Some national courts have confirmed this position, for example, the Supreme Court of Pakistan in its three-two majority judgment in the HUBCO case, which found that corruption cases required a ‘finding about alleged criminality’ References(p. 603) and therefore were ‘not referable to arbitration’.69 In SGS v Pakistan,70 the Supreme Court of Pakistan held that in arbitration proceedings the Republic of Pakistan was restricted to ‘the claims based on the terms and conditions of the agreement in question’, which meant that corruption issues should not be discussed.71 According to this idea, a corruption case is ‘not a commercial dispute arising from an undisputed legally valid contract, or relatable to such a contract’.72 One reason for such decisions may be that host states prefer that corruption committed by their officials is not an issue discussed in the forum of international arbitration.
This position is not convincing. Claims out of contracts remain contractual claims even when preliminary questions may refer to different fields such as tax, criminal, and public law. A contract tainted by corruption remains a commercial contract and is therefore referable to arbitration.73 This is also the arbitral practice, which deals with contractual cases as commercial disputes even if corruption is involved.74 ICC No. 6474 was a case where the respondent alleged the arbitration agreement itself to be specifically ‘induced by corruption or fraud, or … tainted by illegality’.75 The arbitral tribunal rejected this argument for lack of evidence. However, in an obiter dictum, it made it explicitly clear that a claim on the non-performance of a contract is always a pecuniary claim.76
Courts of the respondent states may decide differently. In the HUBCO judgment, the Pakistan Supreme Court did not even insist on evidence of corruption but considered prima facie allegations of corruption as sufficient to exclude the arbitrability of the contractual relationship.77 If, according to this judgment, even an allegation of corruption could render an issue non-arbitrable, arbitration in a world of almost omnipresent corruption, particularly in the foreign investment context, would become close to impossible.78 This means that the arbitrator has to consider criminal anti-corruption laws as part of the applicable mandatory law. When corruption is alleged by one of the parties, he or she has to apply the criminal law of the lex References(p. 604) contractus. In addition, he or she may apply the relevant provisions of the international anti-corruption instruments which show that anti-corruption is part of transnational public policy.79 However, none of this abolishes the arbitrator's power to decide on the merits of the case.
After the issue of arbitrability, the standard of proof is one of the most contentious problems of corruption cases in arbitral practice. Usually, arbitrators consider a fact as proven if there is a ‘preponderance of evidence’. This means that the existence of a fact is more probable than its opposite or its non-existence.80 However, for evidence of corruption, some arbitral tribunals have demanded a higher standard of proof.81 The tribunal in the Westinghouse case, considering bribery in private law cases a species of fraud, required ‘a clear preponderance of the evidence’.82 In ICC No. 5622 (Hilmarton), the tribunal required evidence ‘beyond doubt’, and in the Claude Reymond award from 1995 ‘further and direct evidence’.83 In the first final award of 1999 in the Himpurna case, the arbitrators required ‘clear and convincing proof’.84
The reasons for an elevated standard of proof are diverse. In the Westinghouse case, the tribunal argued that there is a general rule of international law that ‘fraud is never lightly to be presumed’.85 However, it remains doubtful where such a rule can be found. If the idea behind this is that corruption and fraud are something startling and improbable,86 this does not seem adequate in today's world of omnipresent corruption.
In the Himpurna case, the tribunal held that ‘there is a presumption in favour of the validity of contracts; that this presumption is healthy; that it is strengthened when contracts have provided the basis upon which many persons have acted over time, and that a finding of illegality or other invalidity must not be made lightly, but must be supported by clear and convincing proof’.87 The tribunal, by raising the standard of proof, did not actually deal with problems of evidence as such. It tried to evade the consequences of ipso iure invalidity of the main contract. Leaving the References(p. 605) contract valid and open to modification (unless national laws provide for invalidity) is a methodologically more transparent and more flexible solution.
A second group of tribunals take into account the difficulties of the alleging party in proving corruption and therefore make the evidentiary burden easier for that party, requiring only ‘serious indices’88 or a situation where ‘no reasonable doubts remain’.89 The tribunal in ICC No. 6497 90 even considered shifting the burden of proof for circumstances that belonged to the sphere of the claimant.91 In the end, it did not do so because the respondent's main witness refused to tell the names of alleged beneficiaries of the bribes in question. So, more than with the standard or burden of evidence, this case dealt with the refusal of both parties to cooperate fully with the procedure,92 the tribunal having to apply general rules.
For the principle of equality of the parties, the usual standard and burden of proof should be applied, as was done by a third group of tribunals.93 A higher or lower standard of proof is unjust because it leads to inequality of the parties. Corruption is normally invoked by the respondent party, who wants to evade its obligations, and therefore bears the burden of proof. If a higher standard of proof were required for allegations of corruption, this would typically give the claimant an unjust advantage. For the same reasons, lower standards of proof should not be applied.
A final set of issues arising out of dispute settlement under main contracts concerns public policy values in setting aside and enforcement procedures. An internationally recognized principle supports the finality of awards. National courts may only refuse the enforcement of an award, obtained in an international commercial arbitration, or set it aside, for issues of public policy (Art 5, § 2 b United Nations New York Convention),94 a notion which should refer to the national concept of References(p. 606) international public policy but not to domestic public policy.95 Corruption cases are to be treated by applying these general rules. This means that there should be no re-opening of the facts and law unless a violation of international public policy is involved.96 Anti-corruption values relating to hard corruption are considered as part of international public policy, whereas the banning of influence peddling is sometimes not yet considered a part of such policy.97
After the enforcement proceedings in the Soleimany v Soleimany case in England, some confusion appears to have arisen about the finality of awards. The ad hoc tribunal in this case, the Beth Din, a body that applied Jewish law, had considered the contract as illegal due to violation of Iranian export laws, but illegality was without effect under the applicable Jewish law. The Court of Appeal refused enforcement because an English court would not ‘enforce a contract governed by the law of a foreign and friendly state … if performance is illegal by the law of such country’.98 The Court pointed out that ‘an enforcement judge, if there is prima facie evidence from one side that the award is based on an illegal contract, should inquire further to some extent’. The Court should conduct a summary examination into the facts and law, including into the way the arbitral tribunal conducted the proceedings.
However, the Soleimany decision concerned an exceptional situation. It dealt with a case of open illegality, where ‘it was apparent from the face of the award that the arbitrator was dealing with an illicit enterprise’,99 but without any legal response in the arbitral proceedings. Normally illegality based on corruption is not obvious but disputed by one party. In such cases, where the arbitral tribunal had dutifully examined but not accepted illegality, any re-opening of the facts and law in the setting aside or enforcement proceeding is to be rejected.100
References(p. 607) (b) Type 2: The Agency Agreement
Two types of anti-corruption laws can influence the contractual relation between investor and intermediary: laws that prohibit intermediaries and/or laws that criminalize corruption. If the agreement is invalid and the parties have already performed, restitution problems can also arise.
Many countries have anti-corruption laws that forbid the activity of intermediaries in public procurement matters. Some of them ban the activities of intermediaries completely;101 some restrict them to registered consultant firms,102 or to domestic citizens.103 These laws have a preventive anti-corruption background and are mostly part of the legal systems of investment-importing countries. They are based on the idea that the work of intermediaries is a typical instrument for disguising corrupt activities. Although they have their explicit sanction in the field of criminal law, a state that considers these practices as illegal will not be willing to enforce contracts dealing with them. Consequently, agency agreements are likely to be held invalid within the legal order of the host state.
Agents and investors frequently seek to evade these provisions by agreeing on a choice-of-law clause in favour of a neutral law that allows for intermediaries.104 For example, the parties in the Hilmarton case concluded an agency agreement on legal and fiscal advice in the context of a tendering process for public works in Algeria. In Algeria, this kind of intermediary activity is illegal. The parties therefore agreed to apply Swiss law.
Such a choice of law is valid and supported by the principle of party autonomy (Art 3 of the Rome Convention of 1980).105 The only limits to the contractual freedom of the parties are norms that call for universal application and invalidate any choice-of-law clause that seeks to evade them (international imperative rules or a priori limits).106 However, banning intermediation in public procurement is not an imperative international rule. On the contrary, many countries, typically the References(p. 608) capital-exporting or home countries of investors, do not even disapprove of the intermediary's activities.107
This finding is supported by the stance of the ‘validation requirement’, which means that ‘from two legal solutions, the judge will choose the one which favours the validity of an agreement’ (favor negotii).108 In ICC No. 4145, the agency agreement contained a choice-of-law clause in favour of ‘the laws of the Canton of Geneva, Switzerland or country X’. These two laws were contradictory in regard to the question of intermediaries. The respondent held the law of country X applicable, because it prohibits the activities of intermediaries. Under Swiss law, the agreement would have been a legal brokerage contract. The arbitrators based their decision in favour of Swiss law on the principle of favor negotii which calls for the application of a law that renders the agreement valid.109
The validity of such a choice-of-law clause does not suggest that prohibitions of intermediaries play no role whatsoever. Some national conflict rules, like Article 19 of the Swiss Private International Law Act, authorize the arbitral tribunal to apply a foreign mandatory law if the case has a close connection and there are preponderant and legitimate interests for its application.110 In scholarly debate, some want to apply foreign mandatory laws generally under similar conditions.111
The prohibition of intermediaries is, however, not a law which has preponderant and legitimate interests for its applications. The Swiss Tribunal Fédéral considers only those laws of preponderant interest that aim at the protection of ‘fundamental interests of the individual or of the human community’.112 The prohibition of intermediaries serves primarily the domestic (social, economic) interests of the host state, and is therefore not to be applied.113
The anti-corruption background of these laws does not lead to a different result. The objective of a law alone cannot lead to its application in a foreign context. Most mandatory laws relate to domestic public policy values. Applying them on this basis References(p. 609) would lead to a general direct application of foreign mandatory laws and so cause an unacceptable limitation on party autonomy. Considering that the prohibition of intermediaries is not an international policy value, the violation of foreign laws prohibiting intermediaries as such remains without effect, if the parties have chosen the laws of a neutral third country to govern their contract.
It is undisputed that an agreement, whose objective is to bribe foreign officials, has an illegal objective and is null and void.114 In the frequent cases governed under Swiss law, invalidity follows from Article 20 OR. German law provides nullity for illegality in § 134 BGB. Article 8 (1) of the Civil Law Convention on Corruption obliges the signing states to provide for regulations of nullity.115 According to whichever law is applicable, the arbitral tribunal may require that both parties116 or only one party117 has the intention to act illegally. An agency agreement aiming at corruption is invalid because it violates international public policy. The general rule nemo auditur suam turpitudinem allegans provides that no arbitral tribunal should hold such agreement to be valid. Any award to the contrary should be unenforceable.
In cases where the parties' conduct is not considered as illegal according to the applicable national law, the contract may still be considered null and void on grounds of immorality. The German Federal Supreme Court so decided even before foreign bribery was declared a criminal offence.118 The arbitral tribunal in the first Hilmarton award considered an agency agreement aiming at ‘influence peddling’ to be invalid because of immorality under Swiss law.119 States that have ratified the References(p. 610) relevant international anti-corruption conventions are obliged to combat bribery and therefore cannot enforce such awards.120
Contracts may be invalidated in part only, if the major part of the obligation is legal, the minor part being illegal. An agency agreement may oblige the consultant to further the opportunities of the investor in any legal way possible and to use bribery only as a last resort. In such a case, the agency agreement does not exclusively aim at bribery. It must then be determined whether the objectives of the contract can be separated into a legal and an illegal part. If this is not possible, the whole agreement must be considered invalid.121 If the consultant did not employ any illicit means during his or her services on behalf of the principal, he or she deserves their fees. If he or she did bribe officials, they do not, the contract being void.
Payments to fulfil an invalid contract are performed without causa. However, the principle of exclusion of recovery also applies here. If the investor has already paid the commission, the agent may keep it without being obliged to render the illegal service. He or she may even keep the share that was determined for the foreign official if this part is not claimed by the foreign government. Only in this way can it be ensured that the arbitral tribunal does not lend its discretionary power to the refunding of payments under an illegal or immoral contract.
However, this consequence only appears legitimate if both parties consented with a corrupt intent and therefore the principal deserves the hard consequence of exclusion of recovery. Arbitral tribunals therefore frequently examine if both parties participated equally in the violation of public policy. Only then is it ensured that ‘one party is not thereby enabled to reap the fruits of his own dishonest conduct by enriching himself at the expense of the other’.122
A number of specific dispute settlement problems arise in relation to the agency agreement. If the agency agreement is per se null and void, it has to be examined whether the related arbitration agreement is itself invalid or if it is independent of the agency agreement. Agency agreements never expressly contain consent to corrupt activities, so special issues of evidence arise in arbitral proceedings. Finally, the rule of anti-corruption policy values in setting aside and enforcement procedures shall be considered.
References(p. 611) The severability (or separability) doctrine implies that the arbitration agreement remains binding in spite of the invalidity, unenforceability, or termination of the underlying contract.123 This is laid down in Article 16(1) of the UNCITRAL Model Law on Arbitration and most of the institutional arbitration rules like Article 6(4) ICC Rules.124 In a much discussed award of 1963 (ICC No. 1110), Judge Lagergren held that the separability doctrine does not apply where corruption is at stake.125 A contract that violated morality and international public policy should not be subject to an arbitral award that could be enforced under the New York Convention.126 The arbitrator should therefore deny his jurisdiction from the beginning.
Since the 1980s, however, there has been consensus within arbitral practice that the severability doctrine also applies to corruption cases.127 This change reflects a growing confidence in international arbitration as an instrument to protect international public policy.128 Indeed, the general reasons for the severability doctrine apply fully to the needs of corruption cases. If the arbitration agreement were dependent on the underlying contract, the arbitral tribunal would first have to examine in extenso the validity of the agency agreement, which in many cases will be the main problem References(p. 612) of the dispute. If it concluded that the agreement was a contract on bribery and therefore invalid, the tribunal could not use this result to judge the merits of the case, but should immediately dismiss the claim for lack of arbitrability. Until then, the examination of the contract would have taken place before an arbitral tribunal that did not even have the competence to examine the contract. Party autonomy is much better served if the arbitrator accepts the case and decides that the contract is null and void.129 If he or she gets it wrong, the award will be set aside or rendered unenforceable.
As to the standard of proof, the same principles apply as discussed above for the main contract, which means that the general standard of ‘preponderance of probability’ should be applied. In cases of agency agreements, an additional problem arises. The circumstances that determine the reason for their invalidity are not external facts. It is, for example, irrelevant whether or not the intermediary indeed offered bribes to public officials, and whether or not they accepted. The only fact that decides on the validity of such contracts is whether the agreement (expressly or silently) contemplated the bribing of foreign officials or not. However, the parties almost never document such consensus in a written agreement. Witnesses who can speak about the real intentions of the parties are rare.130 To determine the ‘real’ objective and content of these contracts, arbitral practice has therefore developed some indications that are useful as circumstantial evidence.131
First, arbitrators look at the nature of the services that the agent really performed. If it can be established that he or she later spent a large part of the commission in bribing foreign officials, this can be an indication that this is what the agent was supposed to do.132 On the other hand, the real and tangible performance of lawful consultancy services was judged to be an indication that the contract did not have illegal objectives.133 One tribunal accepted a very short-term appointment (2.5 months) between a consultant and an investor as one indication among others.134 However, the simple lack of any rendered services cannot be used as an indication that the real objective of the contract was bribery,135 but on the other hand, if the agent claims that he or she had performed legal activities but does not have any documentation of them, this can be an indication that their activities were illegal.136
References(p. 613) Similar indications arise from the circumstances of a decision by the public authority in favour of the principal. If it can be established that the decision was taken due to bribery of officials by the agent, this is an indication that the parties to the agency agreement had planned to achieve the decision in this way.137 Arbitral tribunals have, in particular, discussed situations where the final public procurement price had increased without legitimate reason.138
If the parties have agreed on an exorbitant commission, this can be an indication that the commission is not due to stay with the agent but contains a part that is to be used as a bribe. However, as the parties are free to agree on a commission beyond the market price, such a fee is only a weak indication.139 Finally, the identity, status, and structure of the agent can be used as circumstantial evidence. This has been accepted, in particular, if the agent is a former official of the host state.140
Turning to anti-corruption as a policy value in setting aside and enforcement procedures, the principles mentioned earlier—holding that corruption should be treated in enforcement proceedings like other allegations and should not allow for easy re-opening of examinations—apply also in cases involving agency agreements. Agency agreements aiming at corruption violate international public policy and an award relating to such an agreement would be barred from enforcement. However, setting aside an award for corruption will only be practical in exceptional circumstances. A situation such as the Soleimany case, where the tribunal did not take into account international policy because the party acted legally under the applicable law, is hardly imagineable in a case dealing with hard corruption. On the other hand, if the alleging party presents new allegations of corruption before the setting aside or enforcement court, and has a valid excuse why it could not present these earlier to the arbitral tribunal in spite of its best efforts, international policy on anti-corruption would lead to the nullity or unenforceability of the award. In such rare situations, courts should be free to re-examine the award.141
References(p. 614) Concluding Remarks
From the above discussion, the following conclusions can be drawn. As regards main contracts, where corruption is involved the flexible treatment of main (investment) contracts should be preferred, taking the principle of state responsibility into account.
The main contract remains per se valid (unless invalidity follows from the chosen applicable law), but can be modified, adapted, or declared void by an arbitral tribunal in its award. In that way, the investment remains where it is and keeps fulfilling its economic function, the investment contract continuing to be its causa. Related contracts, surrounding the main contract, such as financing or insurance contracts, and related acts of public law, are independent of the main contract and have to be examined separately. In addition, arbitral tribunals should judge allegations of corruption on the facts, applying the usual standard of proof, including circumstantial evidence. In setting aside and enforcement procedures, anti-corruption as an international public policy value should not lead to stricter national control of arbitral awards and to easier re-opening of examination than is the normal standard applied by courts in international arbitration.
In relation to agency agreements, the presence of intermediaries between the investor and the host state is one of the most typical features of corruption in international investment, but should not automatically point to corruption in a dispute between principal and agent. Agency agreements between investors and intermediaries, containing an understanding about the bribing of foreign officials, are invalid. They are not affected by the prohibition of intermediaries that exist in many national laws, but their invalidity is a consequence of the illegality of their objective. Consequently, what has been paid in performance of such an agreement is excluded from restitution. Where corruption is alleged, agency agreements remain arbitrable because of the principle of severability. In this area, arbitral practice has developed a series of indications that may be used to determine whether or not the objective of the agency contract is corruption. Awards that enforce agency agreements aiming at corruption are contrary to international public policy and therefore void.
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- Blessing, Marc, ‘State Arbitrations: Predictably Unpredictable Solutions?’, 22 J Int'l Arb 435 (2005)
- (p. 615) Böckstiegel, Karl-Heinz, ‘Public Policy and Arbitrability’, 3 ICCA Congress Series 177 (1986)
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- Glynn, Patrick, Kobrin, Stephen J, and Naím, Moisés, ‘The Globalization of Corruption’, in Kimberly Ann Elliott (ed), Corruption and the Global Economy (Washington, Institute for International Economics, 1997)
- Heidenheimer, Arnold J, Johnston, Michael, and LeVine, Victor, Political Corruption: A Handbook (New Brunswick, NJ, Transaction Books, 1989)
- Hetzer, Wolfgang, ‘Korruptionsbekämpfung in Europa’, NJW 3746 (2004)
- Heuzè, Vincent, ‘La morale, l'arbitre et le juge’, Revue de l'arbitrage 179 (1993)
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- Nichols, Philip M, ‘Regulating Transnational Bribery in Times of Globalization and Fragmentation’, 24 Yale JIL 257 (1999).
- OECD, Code of Liberalization of Capital Movements (Paris, OECD, 1978)
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1 Transparency International, ‘Corruption Perceptions Index 2005’, at <http://www.transparency.org/policy_research/surveys_indices/cpi>; Patrick Glynn, Stephen J Kobrin, and Moisés Naím, ‘The Globalization of Corruption’, in Kimberly Ann Elliott (ed), Corruption and the Global Economy (Washington, Institute for International Economics, 1997) at 7 (hereinafter Corruption and the Global Economy); Arnold J Heidenheimer, Michael Johnston, and Victor LeVine, Political Corruption: A Handbook (New Brunswick, NJ, Transaction Books, 1989) Part III, 443 (hereinafter Political Corruption).
2 On positive and harmful effects of corruption in the developing world, see David H Bayley, ‘The Effects of Corruption in a Developing Nation’ and J S Nye, ‘Corruption and Political Development: A Cost-Benefit Analysis’ in Political Corruption, above n 1 at 935 and 963.
3 Transparency International, ‘Preventing Corruption on Construction Projects: Risk Assessment and Proposed Actions for Project Owners’ 2 (2005), available at <www.transparency.org>.
4 The history of corruption has become a well-documented field of study lasting recent years. See eg Jakob van Klaveren, ‘Corruption as a Historical Phenomenon’ and Linda Levy Peck, ‘Corruption and Political Development in Early Modern Britain’, both in Political Corruption, above n 1 at 73 and 219.
7 Twenty-seven of the cases deal with corruption in foreign direct investments (FDI) processes in a strict sense (ICC No. 6401, HUBCO v WADPA, Himpurna v PLN, American Bell v Iran, Metalclad v Mexico, Wena v Egypt, ICC Nos. 1110, 3913, 3916, 4145, 5622, 6248, 6286, 6497, 7047, 8113, 8891, 9333, Westman v EGT, Lunik v Soliman, The Claude Reymond Award, The Jürgen Dohm Award, Geneva Chamber of Commerce and Industry Award of 02/23/1988, Corvetina v Clough, State Agency A v Respondent X, Coetzee v Paltex, Luchetti v Peru, World Duty Free v Republic of Kenya). In order to examine corruption cases in the FDI context, it may also be helpful, beyond the FDI cases according to this definition, to look at other types of contracts. Similar problems may arise, particularly in the context of purchase contracts for public procurement. It must be remembered that society constantly develops new patterns of illegal behaviour, and that corruption is frequently linked to other types of crime such as price-fixing, insider trading, tax evasion, illegal rebates, antitrust, environmental crime, money-laundering, smuggling, illegal armament trade, and fraud. Considering some of these problems may be helpful because similar problems arise in contracts linked to these crimes. Five corruption cases outside an FDI context are therefore included (ICC No. 6474, Oil Fields of Texas v Republic of Iran, SGS v Pakistan, Beta v Alpha, ICC No. 7664) as well as two cases that deal with similar problems, such as smuggling and money-laundering (Soleimany v Soleimany, ICC No. 2730, ICC No. 5943). Citations to the cases will be given in the course of the chapter.
8 OECD, Code of Liberalization of Capital Movements, Annex A, I; European Council Directive 88/361 of 24 June 1988 for the implementation of Art 67 of the Treaty, I, and Explanatory Note 1; Giorgio Sacerdoti, ‘Bilateral Treaties and Multilateral Instruments of Investment Protection’, Hague Academy Collected Courses Receuil des Cours 269 at 251, 306 (1997) (hereinafter ‘Bilateral Treaties’); Paul E Comeaux and N. Stephan Kinsella, Protecting Foreign Investment under International Law: Legal Aspects of Political Risk xix (Dobbs Ferry, NY, Oceana, 1997).
9 M Sornarajah, The International Law on Foreign Investment (Cambridge, Cambridge University Press, 2nd edn, 2004) at 7; Christoph Schreuer, ‘Das internationale Investitionsrecht’ in H Neuhold, W Hummer, and C Schreuer (eds), sterreichisches Handbuch des Völkerrechts (Vienna, Manz, 4th edn, 2004).
13 Art 2 of the Council of Europe's Civil Law Convention on Corruption has a definition similar to the OECD, but including private recipients of bribes: in the Council of Europe's Criminal Law Convention on Corruption, bribery in the private sector is covered in Arts 7 and 8. The United Nations Convention refers to corruption in the private sector in its Art 12, the African Union Convention on Preventing and Combating Corruption in its Art 4. The Inter-American Convention Against Corruption in the Organization of American States (OAS) only refers to public officials (cf Art VI).
15 Bruce Seymour, ‘Illicit Payments in International Business: National Legislation, International Codes of Conduct, and the Proposed United Nations Convention’, in Norbert Horn (ed), Legal Problems of Codes of Conduct for Multinational Enterprises (Deventer, Kluwer, 1980) 219 at 221.
16 In 1988, an amendment was passed that accepted as affirmative defence evidence that the payment is legal in the host country. However, the 1998 amendments broadened the US jurisdiction in corruption cases and included payments to secure ‘any proper advantage’ and payments to officials of international organizations.
17 The USA failed to establish a consensus about international corruption within the UN ECOSOC's Commission on Transnational Corporations and in the Committee on an International Agreement on Illicit Payment in the late 1970s. The only successful, though isolated, initiative was that the 1976 OECD Declaration on International Investment and Multilateral Enterprises included a clause on corruption.
20 For national legislation see <http://www.oecd.org/document/30/0,2340,en_2649_34855_2027102_1_1_1_1,00.html>.
27 Although the OECD Convention mentions that private law can also be a means to combat corruption: Art 3(4) reads: ‘Each Party can consider the imposition of additional civil or administrative sanctions upon a person subject to sanctions for the bribery of a foreign public official’. Cf also the Revised Recommendation of the Council on Combating Bribery in International Business Transactions, II, which reads: ‘… That each Member country examine the following areas and, in conformity with its jurisdictional and other basic legal principles, take concrete and meaningful steps to meet this goal: … vi) civil, commercial, and administrative laws and regulations, so that bribery would be illegal’. However, in the text of the recommendation there is no further reference to this objective.
29 Examples are ICC No. 7664 (Frontier AG v Thompson), a case linked to the Elf scandal, Himpurna v PLN, which included alleged bribes to high-ranking Indonesian politicians, including President Habibie, and ICC No. 6401, where bribes to the Philippine President Marcos were an issue.
35 There are very few atypical corruption cases: ICC No. 6286 deals with the dissolution of a consortium due to one of the member's illegal conduct. In the recent case of Lucchetti (Empresas) v Peru, ICSID Case No Arb/03/4, award of 7 February 2005, 19 ICSID Rev-FILJ 359 (2004), the tribunal had to decide on its jurisdiction on the basis of the Peru-Chile BIT. This treaty would only have been applicable if a Peruvian court had not validly settled the dispute before the ratification of the BIT. The respondent alleged corruption in the proceedings before the Peruvian court and so contested the settlement of the conflict before the national judiciary.
37 Federation of Pakistan through WAPDA (Secretary Water and Power) in the HUBCO case, Supreme Court of Pakistan, 20 June 2000, Arb Int'l 439, 439 (2000) (hereinafter HUBCO v WAPDA); PLN in the Himpurna case, Final Award of 4 May 1999, 25 YB Comm Arb 11, para 113 (2000) (hereinafter Himpurna v PLN); Wena Hotels v Egypt, ICSID Case No. Arb/98/4, Award of 25 May 1999, 41 ILM 881 (2002); Award of 8 December 2000; Decision of Ad Hoc Committee 28 January 2002, 41 ILM 896 (2002).
38 The Islamic Republic of Iran in American Bell International v Iran, Award in Case No. 48 (255-48-3) of 19 September 1986, 12 YB Comm Arb 292, 292 (1987) (hereinafter American Bell v Iran); The Islamic Republic of Iran in Oil Fields of Texas v Iran (National Iranian Oil Company), Award in Case 43 (258-43-1) of 8 October 1986, 12 YB Comm Arb 287, 298 (1987) (hereinafter Oil Fields of Texas v Iran).
39 Himpurna v PLN, above n 38 at para 113; World Duty Free v Republic of Kenya, ICSID Case No. ARB/00/7, <http://ita.law.uvic.ca/documents/WDFv.KenyaAward.pdf> at 49–62.
45 Hilmar Raeschke-Kessler, ‘Some Aspects of International Public Policy in International Commercial Arbitration’, Presentation in Berlin on 20 August 2004, P Lalive and PM Patocchi, ‘Transnational (or Truly International) Public Policy and International Arbitration’, in ICCA Congress Series No. 3 (New York, 1986), 258. This was different in the late 1980s, cf Bruno Oppetit, ‘Le paradoxe de la corruption à l'épreuve du droit du commerce international’, 114 JDI 5, 16 (1987).
46 Art 8(2) of the Council of Europe Civil Law Convention on Corruption: ‘Each Party shall provide in its internal law for the possibility of all parties to a contract whose consent has been undermined by an act of corruption to be able to apply to the court for the contract to be declared void, notwithstanding their right to claim for damages’.
47 Article 50 of the Vienna Convention on the Law of Treaties: ‘If the expression of a State's consent to be bound by a treaty has been procured through the corruption of its representative directly or indirectly by another negotiating State, the State may invoke such corruption as invalidating its consent to be bound by the treaty’.
48 UN provisions on State responsibility, available at <http://www.un.org/inc/text/state_responsibility/responsibilityfra.htm>.
51 For the question whether a state is liable under contracts entered into by its state-controlled entities, see Marc Blessing, ‘State Arbitrations: Predictably Unpredictable Solutions?’ presentation at 8th IBA International Arbitration Day Geneva, 18 March 2005, published in 22 J Int'l Arb 435 (2005).
53 Hilmar Raeschke-Kessler, ‘Corrupt Practices in the Foreign Investment Context: Contractual and Procedural Aspects’, in Norbert Horn (ed), Arbitrating Foreign Investment Disputes 488 (The Hague, Kluwer Law International, 2004).
56 ‘When a country's reputation as a contractual partner suffers, the terms on which it is able to attract foreign investment and financing are impaired…. an over-readiness by international arbitrators to accept illegality defences may harm an international mechanism which benefits numerous countries that rely on access to international funding, technology, and trade.’ Himpurna v PLN above n 38 at para 114.
58 Cf Norbert Horn, ‘The Concepts of Adaptation and Renegotiation in the Law of Transnational Commercial Contracts’, in Norbert Horn (ed), Adaptation and Renegotiation of Contracts in International Trade and Finance (The Hague, Kluwer Law International, 1985) 7.
59 ‘Adaptation of a contract means the adjustment of its terms in a new situation’, Horn (ed), ibid.
60 See further the contributions by Richard Buxbaum, Horacio A Grigeira Naón, Enrique P Syquia, and Fath El Rahman Abdalla El Sheikh, in Horn (ed), ibid.
63 Horn, ibid at 182.
66 Note, however, Cameroon Airlines v Transnet Limited, 2004 WL 3327971 (QBD (Comm Ct)),  TCLR 1,  EWHC 1829, where an award was set aside in part due to the use of erroneous valuation principles that neither side had argued for.
67 The only known compensation case in the corruption context did not concern the damage for corruption, but is rather an expropriation case. Wena Hotels v Egypt deals with the compensations that Wena claimed for expropriation after the seizure of various hotels by the Egypt government. Corruption played a role as the defendant tried to contest the validity of the investment contract by allegations of corruption. However, the arbitrators did not find that there was a connection between the validity of the contracts and the compensation for expropriation and did not decide about the corruption issue; Wena Hotels v Egypt, Award of 8 December 2000, above n 38 at A, Award of 28 January 2002, ‘Did the Tribunal not deal with questions submitted for its decision?’.
68 HUBCO v WAPDA, above n 38 at paras 15 and 19. If the main contract is invalid, problems of the severability or separability of the arbitration agreement may also arise, which will be examined below in the context of agency agreements. HUBCO v WAPDA, ibid para 31: ‘It may be noted that since WAPDA accepts the validity of the arbitration agreement …, no issue of “separability” actually arises in this case’.
69 Ibid at para 47(e).
70 SGS v Pakistan, Supreme Court of Pakistan, 3 July 2002, 28 YB Comm Arb 1312 (2003) (hereinafter SGS v Pakistan); in the arbitration proceedings before the ICSID tribunal, corruption was not decided upon; cf Decision of the Tribunal on Objections to Jurisdiction, <http://www.worldbank.org/icsid/cases/SGSvPhil-final.pdf>.
71 SGS v Pakistan, ibid at para 83.
72 Ibid; cf also Robert N Hornick, SGS v Pakistan, above n 70 ‘The Mihaly Arbitration’, 20 J Int'l Arb 189 (2003).
73 Ibid at paras 39–40; Homayoon Arfazadeh, ‘Considerations pragmatiques sur la competence respective de l'arbitre et du juge en matière de corruption’, 19 ASA Bulletin 672 (2001).
74 Since ICC No. 3913, Award of 1981, quoted in YD, Observations, Coll ICC Arbitral Awards 497 (1974–85) (hereinafter ICC No. 3913). Cf also Karl-Heinz Böckstiegel, ‘Public Policy and Arbitrability’, 3 ICCA Congress Series 177, 200–21 (1986).
76 ICC No. 6474, ibid at paras 127–9.
79 Alexis Mourre, ‘Arbitration and Criminal Law: Reflections on the Duties of the Arbitrator’, 22(1) Arb Int'l 95, 99 (2006) (hereinafter Mourre); Matti S Kurkela, ‘Criminal Law in International Arbitration—Notes to Arbitrators’, ICC Task Force on Criminal Law and Arbitration, March 2006.
86 Ibid at 103.
88 ICC No. 8891, 127 JDI 1076, 1079 (2000) (hereinafter ICC No. 8891): ‘En effet, l'objet illicite est généralement dissimulé derrière des dispositions contractuelles d'apparence anodine. C'est pourquoi les arbitres n'ont souvent autre choix que de se fonder sur des indices. Ceux-ci doiventtre sérieux.’
93 In ICC Case No. 4145, the tribunal stressed to follow ‘general principles of interpretation’, according to which a fact can also be proven by circumstantial evidence, if it leads to ‘very high probability’—which implies that direct evidence needs only to present normal probability, ICC Case No. 4145, Interim Awards and Final Award of 1983, 12 YB Comm Arb 97, para 28 (1987) (hereinafter ICC No. 4145). In ICC Case No. 7047, the tribunal seeks to be ‘convinced’ of the alleged fact, a ‘mere suspicion’ being not sufficient, ICC No. 7047 Final Award of 1994 in 21 YB Comm Arb 79, para 54 (1996) (hereinafter ICC No. 7047). In ICC Case No. 9333, the tribunal requires ‘conviction’, 19 ASA Bulletin 757, para 8 (2001) (hereinafter ICC No. 9333).
94 Art 5 § 2 of the New York Convention reads: ‘Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that … b) The recognition or enforcement of the award would be contrary to the public policy of that country’.
100 Westacre v Jugoimport, High Court, Queen's Bench Division (Commercial Court), 19 December 1997, 23 YB Comm Arb 836 paras 77–9 (1998): ‘… only by going behind the award and admitting further evidence of Kuwait public policy would an English or any other enforcement court become aware that the underlying contract was contrary to Kuwait public policy. Given the weight to be attached to the public policy of sustaining the finality of international arbitration awards …, it is difficult to see how enforcement of such an award could be said to represent a lack of respect for the law of or administration of justice in Kuwait … Moreover, as a I have already held, it does not follow that, merely because an underyling contract is void at common law because direct enforcement would be contrary to public policy enforcement of an international arbitration award which treated that contract as enforceable would itself automatically be contrary to public policy.’ Cf also HUBCO above n 38 at paras 34–5. For a different view see Corvetina v Clough, Supreme Court of New South Wales, IntADR or <http://www.kluwerarbitration.com> paras 14, 15 (only relating to the problem of separate hearings). In United Mexican States v Metalclad Corp (2001) BCSC 664, the British Columbia Supreme Court in a decision of 2 May 2001 re-examined the same evidence as the tribunal, coming to the conclusion that corruption was not sufficiently proven.
102 Egypt, Kuwait, Syria (exception of total ban for registered firms); see Sayed, ibid at 194.
103 Bahrain, United Arab Emirates, Kuwait, Saudi Arabia (general commercial contracts), Qatar; see Sayed, ibid at 192.
104 For definitions, see Sayed, ibid at 169–71.
105 Art 3 § 1 of the Rome Convention on the Applicable Law to contractual relations reads: ‘A contract shall be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract.’
110 Art 19 § 1 SPILA reads: ‘If, pursuant to Swiss legal concepts, the legitimate and manifestly preponderant interests of a party so require, a mandatory provision of law other than that designated by this Code may be taken into account if the circumstances of the case are closely connected with that law’. It is, however, already doubtful if Art 19 Swiss PILA is applicable if there is a valid party choice, taking into account Art 187 PILA; see State Agency A v Respondent X, Tribunal Fédéral, 30 December 1994, 21 YB Comm Arb 172, para 20 (1996) (hereinafter State Agency A v Respondent X). Art 187 PILA reads: ‘The arbitral tribunal shall rule according to the law chosen by the parties or, in absence of such choice, according to the law with which the action is most closely connected’.
114 ICC No. 1110, Award of 1963, 10 Arb Int'l (1994) at para 16 (hereinafter ICC No. 1110); ICC 2730 Award of 1982 Coll, ICC Arbitral Awards 490, 494 (1974–85); ICC 3913, above n 74 at 498; ICC No. 3916, Award of 1982, 111 JDI 930, 933 (1984) (hereinafter ICC No. 3916); ICC 4145, above n 93 para 24, ICC No. 6286, 19 YB Comm Arb 141, para 22 (1999) (hereinafter ICC No. 6286), ICC No. 6497, above n 37 at para 2; ICC No. 7047, above n 93 at para 53; ICC No. 8891, above n 88 at 1079; State Agency A v Respondent X, above n 110 at para 23.
115 Art 8(1) of the Civil Law Convention on Corruption reads as follows: each party shall provide in its internal law for any contract or clause of a contract providing for corruption to be null and void.
119 ICC No. 5622, Final Award of 1988, 19 YB Comm Arb 105, para 34 (1994) (hereinafter ICC No. 5622). Note the different characteristics of the Algerian law No. 78-02 and the prohibitions of intermediaries quoted above: while the latter prohibit any activities of agents, the Algerian law in the Hilmarton case aims at combating the activities above defined as trading in influence. However, this position was not accepted and the award was set aside by the Swiss courts, Cour de Justice Geneva, 17 November 1989, 19 YB Comm Arb 214 (1994), Tribunal Fédérale Suisse, 17 April 1990, Revue de l'arbitrage 342 (1993); cf also Vincent Heuzè, ‘La morale, l'arbitre et le juge’, Revue de l'arbitrage 179 (1993).
122 ICC No. 1110, ibid at para 21. Cf also ICC No. 5622, above n 119 at para 56. Without examination of the parties' intentions, ICC No. 5943, 123 JDI 1014, 1017 (1996); ICC No. 6497, above n 37 at para 2 (‘the result … is not necessarily equitable … But this is legally irrelevant’); Mourre above n 79 at 101.
124 Art 16(1) of the UNCITRAL Model Law reads: ‘The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.’ Art 6 § 4 ICC rules reads: ‘Unless otherwise agreed, the Arbitral Tribunal shall not cease to have jurisdiction by reason of any claim that the contract is null and void or allegation that it is non-existent, provided that the Arbitral Tribunal upholds the validity of the arbitration agreement. The Arbitral Tribunal shall continue to have jurisdiction to determine the respective rights of the parties and to adjudicate their claims and pleas even though the contract itself may be non-existent or null and void.’
125 ICC No. 1110, above n 114; cf also 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 277 (1994).
127 ICC No. 3916, above n 114 at 931; ICC 4145, above n 93 at para 8; ICC 5662, Final Award of 1988 above n 120 at para 50; cf also Andrew Rogers and Rachel Launders, ‘Separability—The Indestructible Arbitration Clause’, 10 Arb Int'l 77 (1994); Pierre Mayer, ‘The Limits of Severability of the Arbitration Clause’, 9 ICCA Congress Series 261 (1999).
128 YD, Observations, Coll ICC Arbitral Awards 497, 498–9 (1974–85): ‘Il y a cependant une évolution sensible entre l'attitude reflétée par la sentence rendue en 1963 dans l'affaire no 1110 qui constatait à considérer la matière non arbitrable … et celle qui consiste à constater la nullité du contrat que révèlent les sentences plus récentes…. les arbitres sont de plus en plus convaincus qu'il leur appartient de sanctionner eux-mmes les violations de l'ordre public, et en particulier de l'ordre public international dont ils sont des gardiens naturels.’ In Westacre v Jugoimport, the High Court, Queen's Bench (Commercial Court), in its decision of 19 December 1997, argued from the perspective of the enforcement court with a strong support to the severability doctrine for reasons of confidence in arbitration: ‘If the issue of illegality by reason of corruption is referred to high calibre ICC Arbitrators and duly denied by them, it is entirely inappropriate in the context of the New York Convention that the enforcement Court should be invited to retry that very issue in the context of a public policy submission.’ (23 YB Comm Arb 836, para 71 (1998) ); Mourre, above n 79 at 98.
139 The defendant was successful with this indication in ICC No. 8891, above n 88 at 1081; it was discussed in ICC No. 6497, above n 37 at para 17 (33.33% for ‘extraordinary services’) and in ICC No. 7047, above n 93 at paras 43–4; refused in ICC 9333, above n 93 at para 9 (‘il se peut que l'intermédiaire soit simplement avide’).
140 ICC No. 3916, above n 114 at 932 (‘la composition de “son groupe” ’). Refused in ICC No. 6497, above n 37 at para 8. A friendship between the agent and one of the decision-makers of the purchasing public entity is not an indication of corruption, Lunik v Soliman, ASA Bulletin 210, para 44 (1998).
141 International Law Association, New Delhi Conference (2002), ‘Final Report on Public Policy as a Bar to Enforcement of International Arbitral Awards’, para 52, An example of these problems under the Arbitration Act of South Africa is Coetzee v Paltex, Provincial Division of the High Court of South Africa, 8 May 2002, Digest by Lise Bosman, IntADR or <http://www.kluwerarbitration.com>.