Corruption in international business is becoming endemic. Transparency International's latest Global Corruption Report highlights that nearly two in five business executives say they have been asked to pay a bribe when dealing with public institutions. One in five claim to have lost business because of bribes by a competitor. More than a third feel that corruption is getting worse. Corruption stifles free and fair competition, and undermines democracy. Little surprise that it should be the subject of universal condemnation. Yet it appears to be a problem that simply won't go away.
International business contracts are frequently the subject of disputes which come to arbitration. There are concerns that parties to contracts procured through corruption may choose arbitration as the preferred form of dispute resolution because the process is confidential and consensual, and because arbitrators are traditionally reluctant to investigate corruption on their own initiative. If true, that creates a very real risk that corrupt contracts can be legitimised and enforced through arbitration.
So if evidence of corruption emerges during the course of an arbitration, how then should the arbitrators deal with it, and can they effectively assist international efforts to combat corruption?
In principle, if corruption is established in an international commercial arbitration, the contract is invalid and void, and the claimant is entitled to no legal remedy. In international treaty claims against states evidence of corruption can lead to the tribunal declining jurisdiction, or considering the claim to be inadmissible. As Judge Gunnar Lagergren said, in an ICC arbitration award made as long ago as 1963 in which he dismissed a claim brought under a contract involving the payment of bribes, "a case.. involving such gross violation of good morals and international public policy, can have no countenance in any court.. nor in any arbitral tribunal."
Yet historically there has been a general reluctance by arbitral tribunals to deal with bribery and corruption issues where they do not form a substantive part of the case before them. Arbitrators do not always feel comfortable investigating signs of corruption, particularly where (as will frequently be the case where both parties to the arbitration have been involved in the corruption) neither of the parties raises the issue. Arbitrators are often concerned that the consensual nature of the process, and of their appointment, means that they cannot self-initiate investigations. Frequently they decide not to look into signs of corruption on the basis that such allegations, even if proved, would not affect the outcome of the final decision.
Tribunals have also traditionally taken the view that bribery and corruption allegations are best left to domestic courts and have viewed their jurisdiction as confined to resolving the commercial disputes, without going beyond that. Arbitrators sometimes feel that they lack the powers to force parties to hand over incriminating material (unlike domestic courts), and are therefore limited to simply drawing adverse inferences from a failure to produce documents where a party is requested to do so.
These attitudes seem to be changing however. There is a strengthening international consensus that corruption must be tackled and positive steps taken to stamp it out. Tribunals are now showing more willingness to deal with issues of corruption when they arise. There is increased concern that arbitrators should not be seen as endorsing corrupt contracts, and a recognition that they do have the necessary powers to self-initiate investigations where there are obvious signs of corruption, and to declare contracts to be unenforceable, or claims inadmissible, where allegations of corruption can be proved.
In World Duty Free Co. Ltd v Kenya (Respondent) (ICSID Case No. ARB/00/7) for example the tribunal found that both under Kenyan and English law, the contract was voidable for illegality due to corrupt conduct and the claim was dismissed. In that case corrupt payments were admitted so the tribunal was given a relatively easy task. In Metal-Tech v Republic of Uzbekistan (ICSID Case No. ARB/10/3) however, where corruption was alleged by the respondent, the tribunal felt able to infer corruption on the basis of strong evidence to that effect and declined jurisdiction.
Situations where corruption might arise
There are two main situations where tribunals may need to decide corruption issues:
- ‘Red flags’
Where the tribunals themselves become suspicious, from the evidence before them, of the presence of corruption, in circumstances where the issue has not been raised by any of the parties to the dispute. In these situations tribunals may wish to initiate investigations themselves, either to ensure that their awards will be enforceable, or out of a public duty to investigate corruption. Their concerns will include whether they have the necessary procedural powers to do so, what evidence and standard of proof they should require before making any factual findings of corruption, and whether the effect of a finding of corruption will have the result that one party benefits from an unconscionable windfall; and
- Allegations of corruption
Where one of the parties, usually the respondent, alleges corruption. Allegations of corruption are generally either made during the arbitration proceedings, or at the enforcement stage. In these situations tribunals will be concerned to prevent tactical claims of corruption, made on spurious grounds in order to escape from bad commercial deals, cause increased costs and unnecessary delay, or discredit the claimant. At the same time tribunals will want to avoid the risk of arbitration being perceived as a shelter for corruption, and may be reluctant to dismiss such allegations without further investigation, even where they apparently lack substance. Tribunals who fail to investigate good faith suspicions of illegality risk being accused of facilitation if suspicions are not investigated but later proven.
Tribunals' powers to self-initiate investigations of corruption derive in part from the need for tribunals to ensure the validity of their own mandate, and therefore to ensure, through investigation of the legality of the contract containing the arbitration clause, that they have the necessary jurisdiction, and that the claims are properly arbitrable.
For example Article 41 of the ICC Rules requires the tribunal to ".. make every effort to make sure that the Award is enforceable at law". If the contract was procured through corruption or bribery it is likely that any arbitration award on that contract will violate international public policy. Public policy is one of a narrow group of grounds available for denying enforcement of an international arbitral award under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention. In other words Article 41 requires tribunals to make inquiry into suspected corruption in order to ensure its award is enforceable at law.
If a tribunal decides to investigate corruption concerns during proceedings, it must of course ensure, consistent with due process, that the parties are made fully aware of all its concerns and given a proper opportunity to address those concerns and make submissions and provide evidence in response.
A tribunal will frequently have the power (see for example section 34(2)(d) of the Arbitration Act 1996, Article 22.1 of the LCIA Rules, amongst others) to order the production of documents or evidence to allow it to determine an issue of corruption, even if that issue has not been raised by the parties. If a party fails to comply without good reason the tribunal will be entitled to draw adverse inferences from that failure (see for example section 41(7)(b) of the Act, and Article 9(5) of the IBA Rules of the Taking of Evidence in International Arbitration). Under section 42 of the Act a tribunal can apply on its own initiative to the English court for an order requiring a party to comply.
Standard and burden of proof
As a matter of practice the burden of proof in international arbitration is generally borne by the party making the allegation. However corruption is frequently difficult to prove and there is a good argument for saying that once evidence indicative of corruption (but not conclusive) has been produced the burden of proof should be reversed. If the issue has been raised by the tribunal itself the question is likely to be resolved in practice through drawing adverse inferences from a party's failure to adduce evidence to contradict the allegations.
As to the standard of proof, most national arbitration laws, and institutional rules, leave the question of what the standard of proof should be to the arbitrators' discretion. Generally tribunals will decide issues on the basis of "a reasonable conclusion to draw from the balance of the evidence", or "a balance of probabilities". The seriousness of corruption allegations has however led tribunals in certain cases to require "clear and convincing evidence" of corruption, or proof "beyond doubt", or "beyond reasonable doubt". These are high standards which can be tough to satisfy. Bribery and corruption, by nature, will have been deliberately concealed, and evidentiary trails will have been destroyed or disguised. A tribunal's investigatory powers are limited, and documentary evidence is likely to be minimal. Evidence will therefore frequently be circumstantial. In these circumstances tribunals have felt able to exercise their discretion to lower the standard of proof and have been prepared to base their decisions instead on inferences and circumstantial evidence "which lead to a very high probability" of corruption.
Tribunals may also consider reporting corruption concerns to relevant regulatory authorities, although they will be concerned that making such a report could be in violation of confidentiality obligations.
The effect of findings of corruption
At the merits stage a tribunal should fully consider substantive questions regarding whether alleged illegality or breach of public policy renders a contract void, voidable and/or unenforceable. Tribunals should therefore investigate evidence relating to the allegation and determine its significance under the applicable law. Depending on how the issue is approached, there are two key issues for tribunals to consider when deciding whether alleged illegality should defeat the Claimant’s claim. These are: (i) the connection between the alleged illegality and the contract (i.e. there must be a sufficient connection to the contract for a tribunal to find that it renders the contract invalid or unenforceable); and (ii) the legal effect of the alleged illegality pursuant to the applicable law. A tribunal should explicitly refer to its findings following such investigations in its factual and legal conclusions in the award.
Unconscionable windfall for one party?
Where a tribunal grants no relief on a claim based on rights obtained or otherwise tainted by corruption, does this result in the respondent unfairly profiting at the claimant's expense? In Metal-Tech the tribunal initiated its own investigation and sought to clarify the factual scenario as much as possible in order to be able to make a well-informed decision with respect to its jurisdiction over the substance of the dispute. This resulted in the tribunal rejecting the claim on grounds that the investment contract was obtained illegally through corrupt payments. The tribunal said that refusal to grant any relief was necessary “not to punish one party at the cost of the other, but rather to ensure the promotion of the rule of law, which entails that a court or tribunal cannot grant assistance to a party that has engaged in a corrupt act”.
This is perhaps not a surprising or unfair result in circumstances where both parties, by participating in corruption, were voluntarily taking the risk that their contract may ultimately be unenforceable. In a commercial context that risk could fall on either side because at the time of the contract neither party will know whether it might end up as claimant or respondent in any dispute. In an investment claim on the other hand the State party will inevitably be the respondent and therefore the party in a position to be able to profit from a contract being declared invalid. But if that was the risk voluntarily undertaken by the commercial party when it participated in corruption at the outset, it is not necessarily in the strongest position to argue that the result is unfair.
In certain circumstances tribunals have found ways of mitigating this perceived unfairness through non-contractual remedies, by for example granting an allowance to the claimant in money corresponding to the value of any work done pursuant to a contract. In World Duty Free Co. Ltd v Kenya the arbitral tribunal awarded restitution to the claimant despite invalidating the contract due to corruption.
Tackling bribery and corruption remains high on the international agenda and the role of international arbitration in assisting with these efforts is an important one.
There have been proposals to introduce a universal system to enforce anti-corruption principles. For instance, the World Bank, in collaboration with the UN, has put forward the idea of an ‘International Anti-Corruption Forum’, which would provide ‘an international arbitration mechanism allowing for decisions on the commercial effects of corruption and bribery’. Academics have also recommended forming either a court or an arbitral tribunal that would review public sector contracts and international commercial transactions to identify corruption.
In the meantime arbitrators appointed in disputes under international business contracts are in a privileged position to be able to spot and tackle evidence of bribery and corruption where it arises. In order to help the worldwide efforts to combat bribery and corruption, and continue to protect the integrity and reputation of international arbitration, they should not hesitate to do so.