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Corruption in Investor-State Arbitration: Balancing the Scale of Culpability

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Handbook of International Investment Law and Policy

Abstract

This chapter will give a general background and overview of the subject matter of “corruption” in investor-state arbitration, including a critical examination of the standard and burden of proof in allegations of corruption and fraud in the underlying investment. Essentially, the main emphasis and arguments of this chapter will focus on a very important and widely occurring but rarely discussed aspect of corruption in investor-state claim – which is the need for the tribunals to adopt a balanced approach in addressing the issue of corruption as it relates to both the investor and the host state. This is because a vast majority of Investor-State Dispute Settlement (ISDS) cases reveal that many tribunals tend to adopt a lope-sided approach whereby an investor bears the brunt by losing the protection afforded under a bilateral investment treaty (BIT) whenever a host state relies on corruption as a “defense” to a claim, thereby undermining the involvement of the host state which is equally complicit in the alleged corrupt act(s). Many tribunals appear to ignore this glaring reality and even very little commentaries have been written on it in academic literatures. This chapter further argues that both the investor and the host state should be made to face the investment arbitration-specific consequences and neither party should be exculpated. Finally, this chapter will also argue that there are a number of practicable ways through which a tribunal can castigate a host state on allegations of corruption on its part or that of its official(s).

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Notes

  1. 1.

    Nicholls C et al. (2006) Corruption and the misuse of public office, 1st edn. Oxford University Press, para. 1.01

  2. 2.

    Garner BA Black’s law dictionary, 8th edn. p 371

  3. 3.

    See Kraft D (2009) English private law and corruption: summary and suggestions on the development of European Private Law. In: Meyer O (ed) The civil consequence of corruption. Nomos, p 207.

  4. 4.

    See in this handbook, the chapter by Krista Nadakavukaren Schefer on “Crime in International Investment Arbitration.”

  5. 5.

    Latin word meaning “equally in the wrong in the” or “in equal fault” https://en.wikipedia.org/wiki/In_pari_delicto

  6. 6.

    ICSID Case No. ARB/00/7, Award (4 October 2006). Award available at https://www.italaw.com/cases/3280

  7. 7.

    Siemens A. G. V. The Argentine Republic, ICSID Case No. ARB/02/8, Award (6 February 2007); Azpetrol International Holdings B.V., Azpetrol Group B.V. and Azpetrol Oil Services Group B.V. V. The Republic of Azerbaijan, ICSID Case No. ARB/06/15, Award (8 September 2009); Metal-Tech Ltd V. Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award (4 October 2013)

  8. 8.

    See Haugeneder F (2009) Corruption in investor-state arbitration. J World Invest Trade 10(3):323–339; Lamin CB, Moloo R, Pham HT (2010) Fraud and corruption in international arbitration. In: Fernandez-Ballesteros MA, Arias D (eds) Liber Amicorum Bernardo Cremades. La Ley, Madrid, pp 699–731.

  9. 9.

    Jones D (2012) The remedial Armoury of an arbitral tribunal: the extent to which tribunals can look beyond the parties’ submissions, arbitration. Int J Arbitr Mediation Dispute Manag 78(2):102–122

  10. 10.

    Raouf MA (2009) How should international arbitrators tackle corruption issues? ICSID Rev – Foreign Invest Law J 24(I):116–136. https://www.arbitration-icca.org/media/4/96147450128024/media113534227575450abdel_raouf_how_should_international_arbitration_tackle_corruption_issues.pdf

  11. 11.

    See Fibrosa Spolka Akcyjna V. Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4, where the principle was enunciated to the effect that where a contract had been frustrated by a supervening event, sums paid or rights accrued under the contract before the frustrating event occurs cannot be reclaimed but that all obligations falling due after it are discharged.

  12. 12.

    Vogl F (1998) The supply side of global bribery. Financ Dev 35(2). https://www.imf.org/external/pubs/ft/fandd/1998/06/vogl.htm

  13. 13.

    ICSID Case No. ARB/13/26 https://www.italaw.com/cases/2252

  14. 14.

    Hepburn J (2014) In accordance with which host state laws? Restoring the ‘Defence’ of investor illegality in investment arbitration. J Int Dispute Settlement 5:531

  15. 15.

    Meshel T The use and misuse of the corruption defence in international investment arbitration. J Int Arbitr 30, note 16 at 267, 274. See also Chaisse J (2020) Plea of illegality in international arbitration. In: Fabri HR (ed) Max Planck encyclopedia of international procedural law. Oxford University Press, London.

  16. 16.

    See Yukos Universal Limited (Isle of Man) V. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award (18 July 2014), 1358–1363.

  17. 17.

    See Metal-Tech V. Uzbekistan ICSID Case No. ARB/10/3 (Award dated 4 October 2013).

  18. 18.

    See World Duty Free V. Kenya (supra).

  19. 19.

    See Rumeli V. Kazakhstan ICSID Case No. ARB/05/16 (Award dated 29 July 2008); RSM V. Grenada ICSID Case No. ARB/05/14 (Decision dated 7 December 2009); Methanex Corp. V. United States of America, Final Award of the Tribunal on Jurisdiction and Merits (Award dated 3 August 2005); F-W Oil Interests V. Trinidad and Tobago ICSID Case No. ARB/01/14 (Award dated 3 March 2006); EDF (Services) Limited V. Romania ICSID Case No. ARB/05/13 (Award dated 8 October 2009) [221].

  20. 20.

    See Rumeli V. Kazakhstan ICSID Case No. ARB/05/16 (Award dated 29 July 2008); RSM V. Grenada ICSID Case No. ARB/05/14 (Decision dated 7 December 2009). On the substantive standards, see Chaisse J, Bellak C (2015) Navigating the expanding universe of investment treaties – creation and use of critical index. J Int Econ Law 18(1):79–115 and Chaisse J (2015) The issue of treaty shopping in international law of foreign investment – structuring (and restructuring) of investments to gain access to investment agreements. Hastings Bus Law Rev 11(2):225–306.

  21. 21.

    ICSID Case No. ARB/05/13 (Award dated 8 October 2009)

  22. 22.

    EDF (Services) Limited V. Romania (supra)

  23. 23.

    See: Born G (2009) II international commercial arbitration. Kluwer, 1858.

  24. 24.

    Meaning: “The burden of proof rests upon the plaintiff,” See: Garner BA Black’s Law dictionary, 8th edn. p 1616

  25. 25.

    Sandifer DV (1975) Evidence before international tribunals. University Press of Virginia, 127 (the burden of proof rests upon him who asserts the affirmative of a proposition that if not substantiated will result in a decision adverse to his contention.). See also Chaisse J (2015) The issue of treaty shopping in international law of foreign investment – structuring (and restructuring) of investments to gain access to investment agreements. Hastings Bus Law Rev 11(2):225–306.

  26. 26.

    See Metal Tech V. Uzbekistan (supra), para. 237 where the tribunal held that the principle that each party has the burden of proving the facts on which it relies is widely recognized and applied by international courts and tribunals.

  27. 27.

    Metal Tech V. Uzbekistan (supra), para. 238

  28. 28.

    Ibid. para. 241

  29. 29.

    Oil Fields of Texas, Inc. V. Iran et al., Award No. 258-43-1, 25, Yearbook Commercial Arbitration, Vol. XII (1987), P. 288

  30. 30.

    Fraport AG Frankfurt Airport Services Worldwide V. Republic of the Philippines, ICSID Case No. ARB/11/12 (Award dated 10 December 2014) https://www.italaw.com/cases/2852

  31. 31.

    Europe Cement Investment & Trade S.A. V. Republic of Turkey, ICSID Case No. ARB(AF)/07/2 (Award dated 13 August 2009) https://www.italaw.com/cases/documents/422

  32. 32.

    Libananco Holdings Co. Ltd V. Republic of Turkey, ICSID Case No. ARB/06/8 (Award dated 2 September 2011). https://www.italaw.com/cases/626

  33. 33.

    World Duty Free Company V. Republic of Kenya (supra); Wena Hotels Ltd. V. Arab Republic of Egypt, ICSID Case No. ARB/98/4 (Award dated 8 December 2000). https://www.italaw.com/cases/1162

  34. 34.

    EDF V. Romania (supra) [221]

  35. 35.

    Metal Tech V. Uzbekistan (supra), para. 243

  36. 36.

    Libananco V. Turkey (supra), para 125

  37. 37.

    ICSID Case No. ARB/06/3 (Award dated 6 May 2014), para 183

  38. 38.

    Since “fraud” by definition involves only one party (e.g., the Claimant-investor) who makes a material misrepresentation toward the Respondent-State in order to secure the contract, which the latter then discovered; unlike “corruption” where both parties may have reasons to suppress facts and evidence thereby making it more difficult to prove.

  39. 39.

    See: Jose Maria de la Jara & Eduardo Iniguez, The Case Against the Corruption Defence, EFILA BLOG (16 May 2017) https://efilablog.org/2017/05/16/the-case-against-the-corruption-defense/

  40. 40.

    Metal-Tech V. Uzbekistan (supra)

  41. 41.

    Crook JR (2015) Remedies for corruption. World Arbitr Mediation Rev 9(3):303, 311

  42. 42.

    See Menaker AJ (2010) The determinative impact of fraud and corruption on investment arbitrations. ICSID Rev 25(1):67–75.

  43. 43.

    Metal-Tech V. Uzbekistan (supra) [para. 389]

  44. 44.

    Id.

  45. 45.

    Crook JR (2015) Remedies for corruption. World Arbitr Mediation Rev. 9(3):303, 311

  46. 46.

    See Jose Maria de la Jara & Eduardo Iniguez, The Case Against the Corruption Defence, EFILA BLOG (16 May 2017) https://efilablog.org/2017/05/16/the-case-against-the-corruption-defense/

  47. 47.

    ICSID Case No. ARB/13/26 (Award dated 27 December 2016).

  48. 48.

    German Settlers in Poland, Advisory Opinion, 1923, P.C.I.J., Ser. B. No. 6, p. 22 https://www.icj-cij.org/files/permanent-court-of-international-justice/serie_B/B_06/Colons_allemands_en_Pologne_Avis_consultatif.pdf

  49. 49.

    See Articles 4, 5 and 7 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts (November 2001), Year Book of the International Law Commission, Vol. II (2001), Part Two: Report of the Commission to the General Assembly on the work of its fifty-third session, p. 40, 42, 45.

  50. 50.

    Cremades & D.J.A. Cairns, Trans-national Public Policy in International Arbitral Decision-Making: The Cases of Bribery, p. 215.

  51. 51.

    Partial Award No. 324-10,199-1 (2 November 1987), Iran-United States Claims Tribunal Reports, Vol. 17, Cambridge: Grotius Pub. Ltd., 1988, pp. 92–112

  52. 52.

    Ibid., pp. 110–111

  53. 53.

    World Duty Free Company V. Republic of Kenya (supra) para. 185

  54. 54.

    As of the time of this chapter, the award has not been published and its content still remains confidential. However, as a result of the milestone set in the case, few facts and commentaries have emerged. https://davastrat.org/2017/09/26/a-legally-turbulent-affair-the-textile-industry-in-uzbekistan/

  55. 55.

    Ibid.

  56. 56.

    Ibid.

  57. 57.

    The payment seems to have been made (according to IAReporter) by the respondent state to the United Nations Development Program, in order not to risk an adverse ruling on the costs of arbitration, although successful in its main defense against the investor. https://www.iareporter.com/articles/in-an-innovative-award-arbitrators-pressure-uzbekistan-under-threat-of-adverse-cost-order-to-donate-to-un-anti-corruption-initiative-also-propose-future-treaty-drafting-changes-that-woul/

  58. 58.

    See Llamzon AP (2014) Corruption in international investment arbitration. Oxford University Press, Oxford, para. 10.06

  59. 59.

    World Duty Free V. Kenya (supra), para. 180

  60. 60.

    Wena Hotels V. Egypt (supra) para. 116

  61. 61.

    Fraport AG Frankfurt Airport Services Worldwide V. Republic of the Philippines (supra), para. 377, 385–386

  62. 62.

    This power is inherent in the ICSID Convention, Art. 61(2)

  63. 63.

    See Metal-Tech V. Uzbekistan (supra), para. 422; Spentex V. Uzbekistan (supra).

  64. 64.

    See https://www.iareporter.com/articles/in-an-innovative-award-arbitrators-pressure-uzbekistan-under-threat-of-adverse-cost-order-to-donate-to-un-anti-corruption-initiative-also-propose-future-treaty-drafting-changes-that-woul/

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  1. American University Washington College of Law, Washington, DC, USA

    Ayodeji Akindeire

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Correspondence to Ayodeji Akindeire .

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Editors and Affiliations

  1. School of Law, City University of Hong Kong, Kowloon, Hong Kong

    Julien Chaisse

  2. School of Business and Law, University of Portsmouth, Portsmouth, UK

    Leïla Choukroune

  3. Institute of Malaysia and International Studies, National University of Malaysia, Bangi, Selangor, Malaysia

    Sufian Jusoh

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Akindeire, A. (2020). Corruption in Investor-State Arbitration: Balancing the Scale of Culpability. In: Chaisse, J., Choukroune, L., Jusoh, S. (eds) Handbook of International Investment Law and Policy. Springer, Singapore. https://doi.org/10.1007/978-981-13-5744-2_111-1

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