Arbitration and corruption: sheltering wrongdoing or a new tactical game?

Arbitration and corruption: sheltering wrongdoing or a new tactical game?

Corruption has always affected global commerce, but in recent years a strengthening international consensus has developed that assertive steps must be taken against it. New anti-bribery legislation has been enacted in many jurisdictions since 2010, including the UK, Italy, the Netherlands, Russia, Ukraine, China, Brazil and Canada, supplementing the long standing US Foreign Corrupt Practices Act. Jayne Bentham, Stephen Moses and Joseph Lewin of Simmons & Simmons discuss the steps being taken internationally to combat corruption in arbitration.

Many of the countries where corruption is a particular concern, such as those which Transparency International scores poorly for Control of Corruption, or which rank towards the bottom of its Corruption Perceptions Index, are precisely the areas where businesses prefer arbitration over reliance on the courts. For parties from these countries, arbitration offers access to a neutral forum and a quality of resolution that might not be available in domestic courts.

Partly because of its appeal to parties based in states with high perceived corruption levels, there is concern in some quarters about ulterior motives for choosing arbitration. Can it be used as a means to mask corruption, in the knowledge that the process will be confidential and that a tribunal will not investigate corrupt practices of its own accord? In this way, it is feared, contracts can be obtained through bribery, then enforced and legitimised through arbitration.

There is, therefore, an increasing dialogue about the need for reform, because arbitration’s role in the global economy is at risk if it is itself perceived as providing a safe haven for corruption. At the same time, though, a tactic has emerged in arbitration of exploiting precisely that sensitivity about corruption as a means of challenging arbitration agreements, and arbitral awards, through making allegations of corruption.

Arbitration therefore faces twin and competing pressures in preserving its integrity. On the one hand, it is essential that arbitrators rise to the challenge of rooting out corruption. On the other, tribunals need to defend the robustness of the process, and the enforceability of awards, against tactical challenges that seek to avoid justice being done.

Duties and powers of tribunals

Until recently, bribery and corruption tended to be seen as a domestic issue best left to local courts. Traditionally tribunals have viewed their role as being limited to deciding contractual disputes, without jurisdiction to go beyond the commercial dispute between the parties. Tribunals have often been disinclined to consider questions of corruption that did not form a substantive part of the case before them.

There are good reasons for tribunals to be nervous of corruption allegations. National courts are empowered to force parties to divulge information and, where necessary, to hand suspicious material over to the police or other state investigators. Arbitrators lack these powers. They are appointed by contract and lack the ability to force parties to hand over incriminating evidence. Indeed, if a party refuses to hand over documents that might provide evidence of corrupt practices, at present all a tribunal can do is to draw an adverse inference from the failure.

Another issue for tribunals is what standard of proof to apply when considering a corruption allegation. No institutional rules set down the standard of proof for arbitral proceedings, leaving it to the tribunal to determine the standard of proof they deem appropriate. On issues of corruption, some tribunals have adopted the common law criminal standard of 'beyond reasonable doubt', feeling that an allegation of criminality should be tested to a high standard. Others take the view that the difficulty of proving corruption without the ability to compel the production of evidence should justify a lower standard, with greater willingness to draw inferences. The common law civil standard of 'on the balance of probabilities', is also used, along with 'clear and convincing proof' which is commonly thought to represent a position between the two.

The historic unwillingness to rule on allegations of corruption has started to change. The way in which courts, institutions, and lawyers understand and interpret arbitration agreements has shifted in ways which enable and indeed encourage arbitrators to engage with issues of corruption.

First, it is now broadly agreed that an arbitral tribunal’s jurisdiction to consider challenges to the commercial agreement before them extends to challenges that the contract is unenforceable for reasons connected with corruption.

Secondly, there is a growing understanding that an arbitral award that enables the enforcement of a corrupt contract is contrary to public policy, and so should itself not be enforceable. 'Public policy' is one of the narrow group of grounds available for denying enforcement to an arbitral award, both under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and under the various domestic arbitration statutes that follow the UNCITRAL Model Law by which an award can be denied enforcement. National courts can rightly be expected to see corruption as an issue which goes to the heart of public policy, and may refuse to allow the enforcement of an award that might further corruption.

Thirdly, it is increasingly accepted that in order to fulfil their duties and render enforceable awards, arbitral tribunals may, for example, need to consider questions such as whether the contract between the parties is a corrupt one; whether the agreement to arbitrate is itself tainted by corruption; whether the parties’ conduct has been corrupt; and what the consequences of those findings are.

Situations in which corruption arises as an issue in arbitration

There are two principal scenarios in which corruption can become an issue in arbitral proceedings.

The first is that a tribunal becomes concerned about 'red flags' indicating the possible presence of corruption, and may wish to take further steps: whether out of public duty, or to ensure that later attempts are not made to challenge the award. It is this scenario that has triggered discussion amongst arbitrators and lawyers involved. Some have suggested that a new obligation be added to arbitrators’ duties, requiring them to investigate corruption where it is apparent.

The second scenario is where the question of corruption is raised by one of the parties, usually as a ground for avoiding the enforcement of a contract. Due to the perceived danger of arbitration becoming a shelter for corruption, arbitrators are often unwilling to dismiss allegations of bribery or corruption, even where those allegations have no substance.

However, at the same time tribunals have often shown a reluctance to get to grips with corruption allegations because they are concerned that they lack the powers to deal with those allegations sufficiently. In the past, tribunals have often avoided reaching a conclusion on such allegations, finding that they did not need to decide the issue or that the party raising the allegation had not produced sufficient evidence to substantiate it.

For example, in Fitzpatrick Equatorial Guinea Ltd v Republic of Equatorial Guinea (ICC award) the claimant claimed that the government had required it to use a local agency with ties to the government that charged high fees. When this was refused, the government refused to process engineer’s certificates. The tribunal found that the state had breached its contractual obligations, without looking at the underlying motives and thereby side-stepping the corruption issue.

While the recent debate has tended to emphasise the need for arbitrators to engage more with allegations of corruption, this heightened awareness has led to a new problem. A regrettable pattern has now developed of parties attempting to use allegations of corruption as a tactic to escape undesirable commercial deals.

Tactical accusations: allege corruption, resist enforcement

There has been a growing number of examples of arbitral tribunals being asked by parties to consider questions of corruption. These are generally raised by respondents, (a) during the proceedings, when looking for a way to discredit the claimant and the contract in dispute, or (b) after the award, when looking for a way to resist enforcement at the national court level.

For example, a party that has failed to make payments due under a contract may allege that the contract was obtained through bribery, and that the tribunal should refuse to allow its enforcement on public policy grounds.

Such tactics can be used to cause delays in the arbitral process and to increase the expense of obtaining redress.

Some examples include the following:

  1. Westacre v Jugoimport, 1999, was one of the first cases in which such tactics came to international attention. Jugoimport had appointed Westacre as a consultant to assist in procuring contracts for the sale of weapons to Kuwait; Westacre duly did so; but Jugoimport refused to pay. During the arbitration, Jugoimport made bribery allegations without evidence. When these were rejected, Jugoimport continued to make those allegations in the national courts in an attempt to resist enforcement in Switzerland and, later, the UK.

  2. In Nomihold v MTSF, 2011, Nomihold sold shares in a company to MTSF, and MTSF defaulted on part of the purchase price. Nomihold, advised by Simmons & Simmons, commenced arbitration, during which MTSF alleged that the company in question had obtained its assets criminally. There was no evidence for this, and it was rejected. MTSF, though, then argued in court that enforcing the award would assist money laundering. When that too was rejected, MTSF appealed in the UK, resisted enforcement in Luxembourg, caused further proceedings in the Seychelles, and even brought a fresh arbitration.

  3. In Honeywell v Meydan Group, 2014, Meydan failed to pay Honeywell for work carried out in Dubai, and Honeywell pursued payment through arbitration in the DIAC. Meydan, though, then resisted enforcement in the UK, claiming that certain payments that Honeywell had made with the approval of Meydan’s staff were bribes. The High Court, though, has dismissed that allegation, and allowed enforcement of the award. Given the past history of the case, and the fact that an appeal against enforcement is already under way in the Dubai courts, Meydan might well seek to pursue an appeal in England, though the scope for such appeals is extremely narrow, and they rarely succeed.

These cases illustrate that even where a party pleading corruption does not succeed in preventing enforcement of an award, it may still have scope for repeated and widespread challenges, delaying enforcement and dramatically increasing the cost of proceedings, as well as causing negative publicity for its opponent.

Opportunities for reform

It is clear, then, that corruption is a key issue on the agenda for international arbitration. At present, various attempts are being made to reform the arbitration process.

  1. The first suggestion is that arbitrators should be expected to take the initiative where there are indicators of possible corruption, regardless of whether or not the issue is raised by the parties. Increasingly, that view is accepted, and tribunals regard themselves as obliged to consider corruption where it is suggested by the facts before them.

  2. One of the most interesting ideas being mooted is that of allowing arbitrators to have access to the courts in cases where they detect clear evidence of corruption, but consider their own powers insufficient. Given that most modern arbitration statutes (such as s44 of the English Arbitration Act 1996 (AA 1996, s44)) give courts in the seat of arbitration the right to exercise a supervisory function, this is a possibility that may already be within the grasp of many tribunals, albeit one that has yet to be fully explored.

  3. Another suggestion is for the institutions that administer the arbitral process to take a role in dealing with corruption, allowing a platform for an impartial investigation, removed from the commercial dispute. However, as the institutions have no greater coercive powers of investigation than tribunals, this seems unlikely to provide a solution.

  4. Cases such as those considered above are increasingly creating a body of jurisprudence that will help tribunals to consider issues of corruption without giving rise to abuses. One of the positive developments being seen is that, in cases where corruption issues are raised and dealt with during arbitral proceedings, the parties will be prevented from raising them again at a later stage, absent clear evidence of concealment. This limits the scope for unsuccessful respondents to raise challenges post-award.

  5. Finally, given the number of cases in which corruption is raised, it can be hoped that, with time, a body of precedent might emerge that will eventually lead to the establishment of an accepted threshold at which corruption allegations become material. At present, there is no standard burden of proof for a party alleging corruption. An established threshold would allow bona fide attempts to challenge corrupt arrangements to be ventilated, without fear that the allegation would fail, and that the party raising it would then be prevented from raising it in future. At the same time, it would mean that abusive attempts to challenge genuine awards on the basis of manifestly inadequate allegations of corruption would be weeded out.

It is clear that further reform efforts are needed, both to combat corruption and to resist abuses. Notwithstanding those abuses, the opportunity to pursue the anti-corruption agenda in international arbitration is a necessary one to preserve the usefulness of arbitration to cross-border trade, and is therefore one to be welcomed.

This article was first published on Lexis®PSL ArbitrationClick here for a free trial of Lexis®PSL.

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