Authority of the Arbitral Tribunal
Powers of Arbitrators
Columbia Arbitration Day 2021 featured a panel discussion on “Allegations of Corruption in International Arbitration – Key Issues”. The session was moderated by Dr. Kabir Duggal and broken into four presentations by Sophie Nappert, Ari MacKinnon, Vladimir Khvalei, and Mélida Hodgson.
Dr. Duggal opened up the discussion by providing a general overview of the impacts of corruption on the world’s economy. According to the UN Secretary-General, corruption represents 5% of the global GDP, and the World Bank estimates the global cost of corruption to be around USD 2.6 trillion. The impact is even more significant if one considers that corruption deviates critical resources that would otherwise be employed in the general welfare.
Dr. Duggal also pointed out that corruption is a recurring theme both in commercial and investment arbitration and has serious consequences. Nevertheless, there is an astonishing lack of clarity on how tribunals should proceed when faced with these allegations. These perspectives have prompted the question of how to reconcile the fact that, on the one hand, corruption is so serious that it demands a severe response from tribunals, and on the other hand, arbitrators lack enforcement powers and are constrained to the parties’ pleadings. Dr. Duggal invited the speakers to join the discussion and advised that the panelists were given fixed positions to argue and the views expressed in the event may not represent their true views.
SETTING THE STAGE
Kicking off the presentations, Sophie Nappert initiated by stating that the landscape in international arbitration is still fragmented with respect to corruption. She advocates for a need of consensus in the field as lack of homogeneity is a problem not only for the phenomenon of corruption and its consequences, but also for the legitimacy of the arbitral process as an instrument of global governance.
To tackle some of the issues that call for homogeneity, Ms. Nappert introduced the ICC Task Force on Addressing Issues of Corruption in International Arbitration assembled to approach some of the core questions with which tribunals have been grappling, especially regarding questions of the standard of proof. What has emerged from the work carried out so far is that tribunals give very uneven responses to this question, ranging from an apparent willingness to engage with indicia of corruption on fragile procedural grounds all the way to demanding a heightened burden of proof.
Ms. Nappert noted that the task force is currently involved in raising awareness on how tribunals address questions related to corruption and identifying past and current practices in both commercial and investment arbitration. She indicated that a subject as broad as corruption with a high level of need for homogeneity has led the ICC Task Force to join forces with the ICC Corporate Responsibility and Anti-Corruption Commission and the IBA. At this point, the task force has finalized its scope of work and a list of issues that will be the focal point of the work and has drawn significant interest from the international arbitration community. Ms. Nappert closed by providing an optimistic expectation of exploring the use of algorithms to assist tribunals in identifying corruption indicators.
CORRUPTION IN INTERNATIONAL COMMERCIAL ARBITRATION
The following presentation was carried out by Ari MacKinnon, who shared an insightful perspective on corruption in international commercial arbitration, with a particular focus in Latin America. While being a problem worldwide, corruption is a significant problem in this particular region, where a considerable number of countries consistently score poorly on Transparency International’s Corruption index.
Discussing the relevant ongoing events in Latin America, Mr. MacKinnon provided an overview of Operation Lava Jato (Car Wash), which started as an investigation into potential money laundering in Brazil, quickly metamorphosed to focus upon a potential bribery scheme to obtain contracts with Petrobras, the Brazilian state-owned oil company, and ended up unveiling a massive corruption scheme that had ramifications all over Latin America and had an impact in disputes in the region.
Drawing from his practice, Mr. MacKinnon noted that corruption has been increasingly raised as a defense to breach of contract in an attempt to establish that an agreement was illegally procured and thus not enforceable. The recurrence of the topic has raised some critical questions to which tribunals are not giving consistent responses. One point is whether commercial arbitration is the proper forum to plead allegations of corruption. He points out that the subject has varying acceptance levels as Latin American jurisdictions tend to be less open to public policy issues being pleaded before an arbitrator. Another question is the burden of proof that should apply to allegations of corruption. While some tribunals apply a preponderance of the evidence standard, others require a much higher burden – clear and convincing evidence. The issue encounters an even more significant challenge in Latin America where jurisdictions do not have well-established doctrine about burden of proof. Lastly, he posed the question of whether contracts procured through corruption should be considered void or voidable, to which he advanced there is no consensus either.
On the intersection between arbitral and enforcement proceedings, Mr. MacKinnon shared some details of Vantage Deepwater Co. v. Petrobras America Inc., which was an offshoot of Operation Lava Jato. In a nutshell, Vantage and Petrobras executed an agreement in 2008 and several years later allegations emerged that the agreement was obtained through corruption, although the oil company could not confirm these allegations through its internal investigations. Two years after the allegations emerged, one of the individuals involved pleaded guilty, and Petrobras tried to cancel the contract. Vantage brought an arbitration for improper termination. The arbitration revolved around whether there has been bribery and whether Petrobras had ratified the agreement after becoming aware of the allegations. The divided award found that regardless of bribery, there has been ratification because Petrobras continued with the contract after it at become aware of the bribery allegations. The respondent tried to resist enforcement in the Southern District of Texas under Article V(2)(b) of the New York Convention on the grounds that enforcing a contract procured by bribery violates U.S. public policy. The case raised the question of the possibility of a national court revisiting an arbitral tribunal’s findings on corruption and how a court should proceed when confronted with public policy issues. Ultimately, the District Court upheld the award. The conclusion that stood out was that the national court has to take the facts as found by the arbitrators and should not assess factual findings de novo.
Vladimir Khvalei followed the discussion by presenting the investor’s perspective regarding corruption in international arbitration. He noted that notwithstanding its widespread nature, tribunals hardly ever make findings of corruption and that the main challenges are based on the difficulty of obtaining evidence and the high standard of proof required.
Mr. Khvalei provided some indicators that an agreement is tainted by corruption. First, an individual willing to maximize profits through criminal activities will conduct their businesses in a highly corrupted country. Second, they will avoid the private sector and instead target states, state-owned entities or publicly listed companies where control mechanisms tend to be less efficient. Third, they will look for an industry that receives a large amount of public funds, such as defense, public health, or telecom.
Mr. Khvalei confronted the issue of whether international arbitration is a safe harbor for corruption. He believes that, unfortunately, this is still often the case and some factors may contribute to this reality. Often, arbitrators do not consider they must investigate corruption ex officio. Arbitral tribunals also lack the investigative apparatus to do so due to their private nature, preventing them from compelling witnesses to testify and issuing coercive investigative measures. Furthermore, it is common for arbitrators to place the burden of proof on the party alleging corruption and to impose a high standard of proof. Individuals involved in corruption cover their tracks. The speaker believes that these factors contribute to the fact there is a very small number of positive findings in corruption in investment arbitration.
The speaker provided examples of cases where the tribunal imposed a high standard of proof and refrained from making findings on corruption despite the red flags. For instance, in ICC Case No. 6401, the tribunal required “clear and convincing evidence”. In another case, ICC Case No. 13384, the tribunal concluded there was “no conclusive evidence of corruption”, even in the face of a shortage of written evidence, no indication of bank accounts for payments, the consultant’s lack of experience, and an ill-defined purpose of the agreement. By contrast, Mr. Khvalei highlights a new trend that might be arising in international arbitration that requires tribunals to raise the issue of corruption sua sponte. He thinks that a tribunal that overlooks corruption might face several consequences such as violation of national and international public policy, the risk of the award being set aside, and the possibility of lending credibility to an illegal arrangement and of assisting the payment of bribes. In some cases, it might even mean that arbitrators could be held criminally liable for negligence for overlooking the criminal activity.
Mr. Khvalei discussed a well-known case where the award was set aside due to the tribunal’s failure to assess corruption properly. In ICC Case No. 21754/FR, the tribunal ruled that there was no direct evidence that the respondent obtained the agreement through bribery and that no findings of corruption should be based on alleged indications of corruption. In the set-aside proceedings filed in the Netherlands, the national court found that the arbitral tribunal imposed a too strict standard in requiring direct proof. The court concluded that the case provided “strong indications” that the agreement was obtained through corruption and the award was ultimately annulled. The speaker considers that this approach taken by national courts sends a solid message to arbitral tribunals that they should not close their eyes to corruption.
As a closing remark, Mr. Khvalei also shared the work of the ICC Task Force on Addressing Issues of Corruption in International Arbitration on which he is co-chair along with Sophie Nappert, and emphasized that its scope is to provide best practices for arbitrators in dealing with corruption.
As for the opposite side of investment arbitration, Mélida Hodgson provided the state’s perspective on the issues of corruption. She vouched for Mr. Khavleli’s assertion that corruption is a relatively rare issue to be raised in investment arbitration mainly because of difficulties of proof. However, she believes that some progress has been made, notwithstanding that arbitrators raising the issue sua sponte might still be far on the horizon.
Ms. Hodgson touched upon the lack of consensus on how corruption should be assessed in international arbitration, whether it is a jurisdictional, admissibility, or merits issue. Providing illustrative case studies, Ms. Hodgson compared the consequences of corruption when it happens at the inception or during the course of the investment. Ms. Hodgson walked the audience through the cases of World Duty Free v. Kenya and the Metal-Tech v. Uzbekistan in which corruption at an early stage of the investment lead to dismissal for lack of jurisdiction. On the other hand, corruption during the investment’s life tends to lead to an analysis on the merits rather than as a jurisdictional issue, as occurred in Lao Holdings v. Laos and Fraport v. Philippines.
Moving on, Ms. Hodgson noted that states’ failure to investigate and prosecute corruption could be to their detriment. The idea was summarized in Fraport, in which the tribunal ruled that “principles of fairness should require a tribunal to hold a government estopped from raising violations of its own law as a jurisdictional defense when it knowingly overlooked them as endorsed an investment which was not in compliance with its law.” However, states’ willingness to investigate might be challenging. For instance, the start of domestic investigations might prompt investors to request the issuance of preliminary measures enjoining an investigatory body from continuing with a criminal investigation on the grounds that the investigations are retaliation for bringing the arbitral proceedings.
As for the cases where there are actually domestic findings of corruption, Ms. Hodgson pointed out that they may not be determinative because tribunals are reluctant to consider their findings unless they are based on what she calls “the videotape proof” – an unequivocal piece of evidence that would lead to an undisputed conclusion of corruption. While acknowledging that this is a slight exaggeration of the kind of evidence required, she also highlighted that domestic investigations may drag on for years before there is a conviction, exacerbating proof issues since an indictment may not be enough for investment tribunals. All these issues, combined with the fact that arbitral tribunals have no investigative powers on their own, pose a risk of corruption being unaddressed.
As for states’ liability for corruption, Ms. Hodgson stressed that they should bear some responsibility. However, it is challenging to hold citizens liable for the acts of state officials who crossed the line. Thus, tribunals are reluctant to sanction states because ultimately, their responsibility will burden innocent taxpayers. On this note, she provides the innovative solution rendered in the Spentex Netherlands, BV v. Republic of Uzbekistan case in which the tribunal assigned costs and order the amount to be directed to a UN anti-corruption initiative. She believes that there is a discussion about whether the tribunal has such an authority, but if the goal is to require tribunals to act and balance these issues, they should be given the power to take the necessary measures.
Furthermore, Ms. Hodgson elaborated on the challenges states may face when trying to establish a case of corruption, especially when it comes to current administrations investigating a former government’s acts. States may encounter individuals who were involved in the corrupt act and will not be willing to cooperate and to provide the necessary documents to build the case. Another issue is of record keeping, especially in jurisdictions where government officials keep their own records and states do not have systems to guarantee the archiving of these documents. States also face other unique challenges: possible conflicting jurisdiction with domestic investigatory bodies; the sometimes lack of continuity in their internal representation, with the result an argument may not be raised in a timely manner, resulting in missing an important opportunity for the submission of proof.
In conclusion to her presentation, Ms. Hodgson highlighted newer treaties, such as Netherland Model BIT and the Morocco-Nigeria BIT, which have a requirement that corruption be considered if raised and that a claim cannot go forward if shown. In her view, the language of these newer documents indicates a movement towards incorporating corruption in treaties.
 Sophie Nappert is an arbitrator in independent practice at 3 Verulam Buildings, Gray’s Inn. Ms. Nappert is dual-qualified as an Avocat of the Bar of Quebec, Canada and as a Solicitor of the Supreme Court of England and Wales. She is a guest lecturer at Columbia Law School, Harvard Law School and McGill University Faculty of Law.
 Ari MacKinnon is a partner in the New York office of Cleary Gottlieb Steen & Hamilton LLP. Mr. MacKinnon’s practice focuses on disputes matters in Latin America with a particular emphasis on international arbitration and corruption issues.
 Vladimir Khvalei is a partner in the Moscow office of Baker & McKenzie and heads the firm’s CIS Dispute Resolution Practice Group. Mr. Khvalei is former Vice-President of the ICC International Court of Arbitration (July 2009-July 2018) and a member of the London Court of International Arbitration (LCIA).
 Mélida Hodgson is a partner at Jenner & Block and heads the firm’s New York International Arbitration Practice. Ms. Hodgson focuses her practice on investor-state and commercial arbitrations, counselling governments and state-owned entities, as well as corporate entities, with respect to international investment protection provisions, business disputes and World Trade Organization (WTO) dispute resolution and international trade policy issues. She is a founding member of the Washington Women in International Arbitration.
 Press Release, Secretary-General, Cost of Corruption at Least 5 Per Cent of Global Gross Domestic Product, Secretary-General Says in International Day Message, U.N. Press Release SG/SM/19392-OBV/1848 (Dec. 5, 2018).
 Policy commissions, ICC, https://iccwbo.org/leadership/#leadershipadr (last visited Apr. 5, 2021).
 Corruptions Perception Index, Transparency International, https://www.transparency.org/en/cpi/2020/index/nzl (last visited Apr. 5, 2021).
 Vantage Deepwater Co. v. Petrobras Am., Inc., 966 F.3d 361 (5th Cir. 2020).
 ICC Case No. 6401, 1998 J. du Droit Int’l 1058.
 ICC Case No. 13384, ICC Bull. Special Supplement: Tackling Corruption in Arb., 2013, at 62.
 Hof’s-den Haag 22 oktober 2019 (Wells Ultimate/Bariven) (Neth.), https://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:GHDHA:2019:2677.
 World Duty Free Co. v. Republic of Kenya, ICSID Case No. ARB/00/7, Award (Oct. 4, 2006), https://www.italaw.com/sites/default/files/case-documents/italaw15005.pdf.
 Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award (Oct. 4, 2013), https://www.italaw.com/sites/default/files/case-documents/italaw3012.pdf.
 Lao Holdings N.V. v. Lao People’s Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award (Aug. 6, 2019), https://www.italaw.com/sites/default/files/case-documents/italaw10703.pdf.
 Fraport AG Frankfurt Airport Servs. Worldwide v. Republic of the Philippines, ICSID Case No. ARB/03/25, Award (Aug. 16, 2007), https://www.italaw.com/sites/default/files/case-documents/ita0340.pdf.
 Id., ¶ 346.
 Spentex Neth., B.V. v. Republic of Uzbekistan, ICSID Case No. ARB/13/26, Award (Dec. 27, 2016), https://www.iareporter.com/articles/in-newly-unearthed-uzbekistan-ruling-exorbitant-fees-promised-to-consultants-on-eve-of-tender-process-are-viewed-by-tribunal-as-evidence-of-corruption-leading-to-dismissal-of-all-claims-under-dutch/.
 Netherlands Model Investment Agreement, Mar. 22, 2019, https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5832/download.
 Reciprocal Investment Promotion and Protection Agreement, Morocco-Nigeria, Dec. 3, 2016, https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5409/download.