CORRUPTION AND INTERNATIONAL INVESTMENT ARBITRATION

Marta Tsvengrosh

Words: 3015

Table of contents Introduction....3 1. Prohibition of corruption on international level. Its consequences in the context of international investment arbitration....4 2. Corruption and lack of jurisdiction.5 2.1. 2.2. 2.3. Illegality of investment through corruption5 Lack of consent because of corruption...7 Estoppel under unclean hands doctrine..8

3. Corruption and inadmissibility...9 4. Corruption and the merits of the case.9 Conclusions...11 Bibliography..12

INTRODUCTION Corruption is one of the greatest evils of modern world, which penetrates in almost all aspects of our life. Despite its prohibition on domestic and international level, business transactions in many world countries are conducted through corruption. Unfortunately, investment contracts are not exceptional. In a large survey conducted in 2008 by Transparency International, almost a half (45 per cent) of the multinational companies from OECD countries that were interviewed reported that personal and familiar relationships rather than competitive bidding are frequently used to win public contracts in the non-OECD countries where they operate. 1 In a different study, more than one third of international business managers estimated that corruption increases international project costs by more than 10 per cent, while one-sixth believed that corruption inflates costs by more than a quarter.
2

One survey found that about three-quarters of

managers from countries including the United States, United Kingdom and Germany believed that companies from their countries regularly or occasionally used intermediaries to circumvent anti-corruption laws3. This sad statistics speaks louder than words. We can only guess which the actual percentage of investment contracts tainted with corruption is. And although the problem of corruption is mentioned probably not in all investment cases in which it is in fact present, the cases involving corruption are likely to be appearing frequently. This paper aims at analyzing the consequences of corruption in the context of international investment arbitration, particularly, how it affects the jurisdiction of the tribunal.

1 TI, 2008 Bribe Payers Survey (Berlin: TI, 2008), cited in TI, Foreign direct investment and global supply chains: do they chain or dilute corporate integrity?, Transparency international global corruption report, 2009 2 Control Risks and Simmons&Simmons, Facing up to Corruption 2007: A Practical Business Guide (London: Control Risks, 2007), cited in TI, 2009 3 Control Risks and Simmons&Simmons, Facing up to Corruption 2006: A Practical Business Guide (London: Control Risks, 2006), cited in TI, 2009

1. Prohibition of corruption on international level. Its consequences in the context of international investment arbitration. Before addressing the legal consequences of corruption with respect to jurisdiction in investment treaty arbitrations, its necessary to show that corruption offends international law, as the legal standard applicable.4 There can be little doubt that bribery offends customary international law and general principles of law respectively. Customary law and general principles of law form part of the corpus of international law pursuant to Article 38 (1) of the ICJ Statute 5. Since the beginning of 90s a number of international conventions condemning bribery have been enacted, the UN Anti-Corruption Convention,6 and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions being among them. The widespread condemnation of bribery is evidenced by various decisions of international arbitral tribunals 7 as well as prohibition by the criminal law in most of countries. Therefore, the prohibition against bribery () should be considered a general principle of law recognized by civilized nations in the sense of Article 38(1)(c) Statute. 8 Therefore, corruption is against international law. According to Article 34 of the UN Anti-Corruption Convention, State Parties may consider corruption a relevant factor in legal proceedings to annul or rescind a contract, withdraw a concession or other similar instrument or take any other remedial action. This article provides a basis upon which, in the international legal order, a respondent State may raise investor corruption as a defense to possible liability for breach of a bilateral investment treaty.9 The same as in international commercial arbitration, in investment arbitration issues of corruption are raised by the respondent (in this case the host State) in order to resist a claim. Accordingly allegations of corruption are likely to be made by the host State against the investor in respect of the establishment or development of the investment.

4 Richard Kreindler, Corruption in International Investment Arbitration: Jurisdiction and the Unclean Hands Doctrine, Liber Amicorum for Ulf Franke, p. 312 5 Statute of the International Court of Justice, 1945 6 United Nations Convention Against Corruption, 2003 7 E.g., ICC Case No. 1110, ICC Case No 6401 8 Kreindler, p. 312 9 Bernardo M. Cremades, Corruption and investment arbitration, in Liber Amicorum in Honor of Robert Briner: International Law, Commerce and Dispute Resolution, p. 207

There have been a number of investment arbitrations where corruption has been alleged; in some cases the tribunal has examined and rejected the allegations, in others it has not found it necessary to determine the corruption issues.10 Examples to date include, inter alia, bribery of a senior member of government 11, corruption of the judiciary to overcome regulatory obstacles. 12 It is important to note that allegations of corruption arising in this way are likely to involve the host States own officials.13 When talking about the consequences of corruption in the context of international investment arbitration, the main question which arises is whether corruption affects jurisdiction, admissibility, or it is the question of merits. 2. Corruption and lack of jurisdiction Lack of jurisdiction may be based on 3 independent grounds: 1) Due to illegality of investment 2) Due to lack of consent 3) Estoppel from accepting the offer to submit to jurisdiction.14 Lets analyze them step by step. 2.1. Illegality of investment through corruption One of the conditions for investment tribunal to have jurisdiction over the dispute, the latter should be arising from investment15. The question is whether the tribunal can have jurisdiction when investment is illegal (including for the reasons of corruption). ICSID Convention neither give the definition of investment, nor expressly specify that investment should be legal. This does not mean, however, that ICSID gives protection to illegal investments, including those tainted with corruption. This would contradict the purpose of the Convention, as it was agreed upon considering the need for international cooperation for economic development16, it is unlikely that corruption could contribute to such development. Additionally, the ICSID Convention provides that dispute under the Convention are to be decided by reference to international law17, and the Convention itself should be interpreted in

10 Cremades, p. 213 11 World Duty Free Company Limited v. Republic of Kenya (ICSID case ARB/00/7) 12 As alleged in Lucchetti S.A. and Lucchetti Peru S.A. v. Republic of Peru (ICSID case ARB/03/4). Award on jurisdiction 13 Cremades, p. 214 14 Kreindler, p. 312 15 Lucy Reed, Jan Paulsson and Nigel Blackaby, Guide to ICSID Arbitration, General course 1 materials, Investment arbitration 1, p. 5 16 Preamble to the ICSID Convention 17 ICSID Convention, art. 42 (1)

accordance with international law18. As it was already mentioned in the previous paragraphs, corruption offends international law. Therefore it should be concluded that only legal and noncorrupt investments can enjoy protection under the ICSID. The view that illegal investment cannot be protected by international investment law is confirmed in Inceysa v. El Salvador ICSID case, where the tribunal stated: If this Tribunal declares itself competent to hear the disputes between the parties, it would completely ignore the fact that, above any claim of an investor, there is a meta-positive provision that prohibits attributing effects to and act done illegally. () It is not possible to recognize the existence of right arising from illegal acts, because it would violate the respect for the law which as already indicated, is a principle of international public policy. () Consequently, this Arbitral Tribunal decided that Inceyas investment is not protected by the BIT because it is contrary to international public policy.19 The formula in accordance with host state law or similar formulae in their definition of the term investment is frequently used in BITs. 20 As corruption is condemned in domestic legal systems of most countries, investment tainted with corruption cannot be protected by these BITs. The Tribunal in Fraport stated: Respect for the integrity of the law of the host state is () a critical part of development and a concern of international investment law.21 In the dissenting opinion Prof. Cremades stated: It is () possible for the Contracting Parties to a BIT to exclude the jurisdiction of an arbitral tribunal for illegalities committed by the investor.22 2.2. Lack of consent because of corruption Another condition for the arbitral tribunal to have jurisdiction in investment disputes is consent of the parties. Particularly, consent may result from a unilateral offer by the host state, expressed in its legislation or in a treaty, which is subsequently accepted by the investor.23 It might be implied that in those cases the host States offer to submit a dispute to ICSID jurisdiction extends only to legal investments. By offering to submit a dispute under

18 VCLT, art. 31(3)(c) 19 Inceysa Vallisoletana S.L. v. Republic of El Salvador, ICSID case No. ARB/03/26, paras. 248-52 20 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, General course 1 materials, Investment arbitration 1, p. 65 21 Fraport AG Frankfort Airport Services Worldwide v. Republic of Philippines, ICSID Case No. ARB/03/25, para 402 22 Ibid Dissenting Opinion, 14, cited in Kreindler, p. 315 23 The ICSID Convention: a commentary : a commentary on the Convention on the settlement of investment disputes between States and nationals of other States / Christoph H. Schreuer; with Loretta Malintoppi, 2009, p. 191

ICSID, the host State does not give consent to submit to ICSID investments made through corruption or other illegal investments.24 In Incesya v. El Salvador case the Tribunal stated as follows: consented granted by Spain and El Salvador in the BIT is limited to the investments made in accordance with laws of the host State of investment. Consequently, this tribunal decides that the disputed that arise from investment made illegally are outside the consent granted by the parties and, consequently, are not subject to jurisdiction of the Centre, and that this Tribunal is not competent to resolve them, for failure to meet the requirements of Article 25 of the Convention and those of the BIT.25 In Inceysa v. El Salvador case the host State gave its consent in the Art. 15 if its Investment Law to ICSID to hear all disputes referring to investment law arising between EL Salvador and investor in question. However, in the case at hand (..), Inceysa cannot enjoy the rights granted by said Investment Law because its investment does not meet the condition of legality.26 The Tribunal found it had no jurisdiction. 3.3. Estoppel under unclean hands doctrine Apart from whether jurisdiction may be lacking by reason of the illegality of the investment or by reason of failure of consent, jurisdiction could be considered to be independently lacking because a claimant is estopped by reason of unclean hands from accepting respondents offer.27 Because corruption of the investor cannot affect the validity of the treaty, the substantive rights remain intact. Effect of corruption on an investors treaty rights is procedural. The corrupt investor will be stopped from claiming the benefit of the substantive rights in the BIT, which is supported by the doctrine of clean hands or ex injuria non oritur in public international law.28 The unclean hands doctrine initially existed as a common law doctrine, but nowadays it can be found in the laws of civil law countries as well and can be regarded as a principle of international law.29 The doctrine is closely related to several similar Latin maxims, like Ex delicto non oritor actio (an unlawful act cannot serve as the basis of an action in law) and Ex turpi causa non oritur (an action cannot arise from a dishonorable cause).30
24 Kreindler, p. 316 25 Incesya v El. Salvador, para 207 26 Inceysa v. El Salvador, para 332 , http://ita.law.uvic.ca/documents/Inceysa_Vallisoletana_en.pdf 27 Kreindler, p. 322 28 Cremades, p. 216 29 Kreindler, p. 317 30 Phillip Wendel, State responsibility for interferences with the freedom of navigation, in Public International Law 157 (207), cited in Kreindler, p. 317

By applying the unclean hands doctrine as a general principle of public international law tribunals are supposed to dismiss claims tainted by any illegal behavior, including corruption.31 In this context, the arbitral tribunal in World Duty Free held: If, from the plaintiffs own stating or otherwise, the cause of actions appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted.32 3. Corruption and inadmissibility Another consequence that corruption in investment arbitration might invoke is inadmissibility of the claim. Tribunals do not put clear distinction between jurisdiction and admissibility in international investment arbitration. In CMS Gas Transmission Company v. Republic of Argentina the arbitral Tribunal stated: The distinction between admissibility and jurisdiction does not appear quite appropriate in the context of ICSID as the Convention deals only with jurisdiction and competence.33 Corruption as an issue of admissibility was dealt with in World Duty Free case, which will be discussed in more detail in the next chapter. As R. Kreindler states, defendant may raise the issue of corruption as a jurisdictional issue, but may contest the existence of any arguable legal case even assuming, or particularly assuming, the facts as alleged by the claimant investor. 34 When a claimant seeks protection of stable, equitable, favorable and transparent conditions 35, but is found to have engaged in bribery of governmental officials, the estoppel defense may apply.36 As Muchlinski observes, Firms should also avoid involvement in bribery and other forms of corruption. () Failure to meet these ethical standards should act as a factor in determining whether the investors complaint of unfair and inequitable treatment is properly made out.37 4. Corruption and merits. The consequences of investment made through corruption might become to play a role at the stage of hearing the merits of the case. Some authors argue that because of its complexity and possible difficulties that might arise while trying to investigate the issues of corruption at
31 Kreindler, p. 316-317 32 World Duty Free, para. 181 33 Decision on Jurisdiction, July 17, 2003, ICSID Case No. ARB/01/8, http://ita.law.uvic.ca/documents/cmsargentina_000.pdf 34 Kreidler, p.326 35 ECT, art. 10 36 Kreindler, p. 326 37Muchlinski, p. 535

the jurisdictional stage, its more practical to address those issues at the stage of the merits. B. Cremades says in this respect: The nature of investment arbitration means in contrast to the established position in international commercial arbitration that corruption might probably be raised as a jurisdictional issue if the corrupt investor is incapable of completing the arbitration agreement or the corruption negates a precondition to jurisdiction in the BIT. It cannot be excluded, however, that, for practical reasons, the tribunal might prefer to proceed to the merits and hear all the evidence before ruling on the issues of corruption and jurisdiction.38 The case which expressly deals with corruption in investment arbitration (however, not as an issue of jurisdiction, but as issue of admissibility and merits) is World Duty Free case. The World Duty Free Company Ltd. (Clamant) and the Republic of Kenya went into contract according to which the Claimant was to equip certain duty free complexes at Nairobi and Mombassa airports39. The World Duty Free Company Ltd. sued in ICSID the Republic of Kenya because the latters breach of contract and expropriation of the company without compensation. Kenya based its defense on the fact that the investment was made through corruption. In fact it was accepted by both parties that the claimant had made a personal donation in that amount of 500000 $ to the President, by presenting him with a suitcase full of cash, and to have it returned to him full of fresh corn.40 The claimant argued that this formed part of a local system of custom (Harambee), and that in Kenyan practise, a donation of this type was not only acceptable, but fashionable. 41 The Tribunal didnt agree with the claimants arguments and found that: In light of domestic laws and international conventions relating to corruption, and in light of the decisions taken in this matter by courts and arbitral tribunals, this Tribunal is convinced that bribery is contrary to the international public policy of most, if not all, States or, to use another formula, to transnational public policy. Thus, claims based on contracts of corruption or on contracts obtained by corruption cannot be upheld by this Arbitral Tribunal42 What is striking about this case is that the recipient of the bribe was not a random state officer, but the President, moreover, it was solicited by him. At the same time no attempt
38 Cremades, p. 216 39 World Duty Free, para 61 40 Ibid, para 130 41 Ibid, para 120 42 Ibid, para 157

has been made by Kenya to prosecute him for corruption or to recover the bribe in civil proceedings.43 In this respect the Tribunal said: As regards public policy, is that the law protects not the litigating parties but the public; or in this case, the mass of tax-payers and other citizens making up one of the poorest countries in the world. () If Kenya were guilty of bribery and the claimant in this proceeding, it would likewise fall at the same procedural hurdle, to the benefit of the Claimant as respondent.44 The finding in World Duty Free has far reaching implications. There was a finding, as a matter of law, that the contract was unenforceable and also a finding, as a matter of procedure, that the claim was inadmissible. The claim was in contract and the contract was the fruit of an illegality - that is why procedurally and substantively, the claim was held to be inadmissible and unsustainable.45 CONCLUSIONS When proven, corruption in international investment arbitration may lead to different consequences. There is consistency neither among academics, nor in ICSID jurisprudence as to whether corruption pertains to jurisdiction, admissibility or the merits in investment arbitration. I believe, however, that corruption affects first and foremost jurisdiction of the tribunal, and lack of jurisdiction can be found on three independent grounds: 1) illegality of the investment (as only legal investment can be protected under ICSID convention); 2) lack of consent (the host State does not give consent to investments made through corruption); 3) estoppel from accepting the offer to submit to jurisdiction under the unclean hands doctrine (ex delicto non oritor action unlawful act cant be a basis for an action in law).

43 Ibid, para. 180 44 Ibid, para. 181 45 World Duty Free v The Republic of Kenya: a Unique Precedent? A summary of the Chatham House International Law discussion group meeting held on 28 March 2007, www.chathamhouse.org.uk/publications/papers/.../9129_il280307.pdf

Bibliography Legislation

Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, 1965 Energy Charter Treaty, 1995
http://www.encharter.org/fileadmin/user_upload/document/EN.pdf

United Nations Convention Against Corruption, 2003,

http://www.unodc.org/documents/treaties/UNCAC/Publications/Convention/08-50026_E.pdf

OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, http://www.oecd.org/dataoecd/4/18/38028044.pdf Vienna Convention on the Law of Treaties,

http://untreaty.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf

Cases World Duty Free Company Limited v. Republic of Kenya (ICSID case ARB/00/7) http://ita.law.uvic.ca/documents/WDFv.KenyaAward.pdf Lucchetti S.A. and Lucchetti Peru S.A. v. Republic of Peru (ICSID case ARB/03/4). http://ita.law.uvic.ca/documents/luchetti.pdf Inceysa Vallisoletana S.L. v. Republic of El Salvador, ICSID case No. ARB/03/26, paras. 248-52 http://ita.law.uvic.ca/documents/Inceysa_Vallisoletana_en.pdf Fraport AG Frankfort Airport Services Worldwide v. Republic of Philippines, ICSID Case No. ARB/03/25, para 402. http://ita.law.uvic.ca/documents/FraportAward.pdf CMS Gas Transmission Company v. Republic of Argentina, July 17, 2003, ICSID Case No. ARB/01/8, http://ita.law.uvic.ca/documents/cms-argentina_000.pdf Books, articles, commentaires Foreign direct investment and global supply chains: do they chain or dilute corporate integrity?, Transparency international global corruption report, 2009 Richard Kreindler, Corruption in International Investment Arbitration: Jurisdiction and the Unclean Hands Doctrine, Liber Amicorum for Ulf Franke (2010 ) Bernardo M. Cremades, Corruption and investment arbitration, in Liber Amicorum in Honour of Robert Briner: International Law, Commerce and Dispute Resolution. Lucy Reed, Jan Paulsson and Nigel Blackaby, Guide to ICSID Arbitration, General course 1 materials, Investment arbitration 1.

Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, General course 1 materials, Investment arbitration 1. The ICSID Convention: a commentary : a commentary on the Convention on the settlement of investment disputes between States and nationals of other States / Christoph H. Schreuer; with Loretta Malintoppi, 2009

Muchlinski, Peter (2006) ''Caveat Investor'? The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard.' International and Comparative Law Quarterly, 55 (3). pp. 527-557., http://eprints.soas.ac.uk/3466/

World Duty Free v The Republic of Kenya: a Unique Precedent? A summary of the Chatham House International Law discussion group meeting held on 28 March 2007,
www.chathamhouse.org.uk/publications/papers/.../9129_il280307.pdf