Investment Arbitration: A Poor Forum for the International Fight Against Corruption
By Leo O’Toole
As international investment arbitration has grown in prominence and as international norms against corruption have strengthened, the number of allegations of corruption brought by parties in investment arbitration proceedings has increased. Eager to enlist investment arbitration in the international anti-corruption campaign, some have welcomed allegations of corruption in investment arbitration and argued that arbitrators should investigate potential corruption sua sponte. In contrast, I argue that while it may be tempting to harness the power of investment arbitration in the international fight against corruption, investment tribunals are ill-suited to hear allegations of corruption. Rather than reducing corruption, the fixed roles of parties in investment arbitration—investors consistently acting as claimants and host-states consistently acting as respondents—and the one-sided consequences of a finding of corruption might actually create new incentives for bribery. Furthermore, investment arbitration is a poor forum for corruption allegations, because tribunals generally do not distinguish between bribes paid to secure a routine government action and bribes paid to violate the law.
Unlike international commercial arbitration, which is a creature of contract between two private parties, international investment arbitration arises out of a treaty between two sovereign entities. Broadly speaking, states sign investment treaties in one of two ways. First, two states can sign bilateral investment treaties allowing country A’s investors to file claims for arbitration against the government of country B for damages made to an investment in country B— and vice versa. Second, states can enter into multilateral treaties – such as the North American Free Trade Agreement or the Energy Charter Treaty – that have investment chapters, which again allow for investors of country A to sue country B for damages made to the investors’ investment in country B, and vice versa. Conceived of during a period of decolonization, investment treaties were originally intended to attract capital to developing countries with protections against the perceived threat of expropriation.
Each investment treaty defines the scope of its protections differently, but no investment treaty gives protection to investments secured through corruption. Defining investments broadly, the Energy Charter Treaty covers “every kind of asset owned or controlled directly or indirectly by an investor.” NAFTA, on the other hand, has a more restrictive definition of investment. Regardless of the scope of investments covered under the treaty, treaties do not extend protection to investment made through corruption. A treaty may have explicit language that it only protects investments made “in accordance with the respective laws and regulations of either Contracting state.” Absent this language, tribunals have nevertheless found that “general principles” of international law prevent the tribunal from hearing a dispute that has been tainted by corruption. To be clear, this outcome hurts investors more than host-states; investors lose the protections of investment treaties and lose a forum for obtaining damages. Because of this asymmetry, investment arbitration might, at first blush, seem like a suitable forum for punishing businesses that bribe overseas.
World Duty Free v. Kenya illustrates how a finding of corruption affects investment arbitration proceedings. There, an Isle of Man corporation brought claims against the government of Kenya for breaching a contract for “construction, maintenance and operation of duty-free complexes at Nairobi and Mombasa International Airports.” Presumably unaware of the consequences, World Duty Free’s CEO freely admitted the 2 million USD bribe that his company paid to the Kenyan President to secure the contract. As a result of this admission, and without considering the merits of World Duty Free’s claim of breach of contract, the tribunal found it had no jurisdiction to hear this investment dispute as a “matter of ordre public international and public policy under the contract’s applicable laws [the laws of Kenya and England].” Ultimately, a 2 million USD bribe deprived the tribunal of hearing claims of damages around 500 million USD.
World Duty Free v. Kenya, however, is unusual in that the bribe paying party presented evidence of its own wrongdoing; instead, it is typically the host-state who raises allegations of bribery. If statistics on the perception of widespread bribery are to be believed, allegations of bribery in investment disputes are raised much less often than they could be. In the rare instances when allegations of bribery are made, it is much more common for the host-state to make this allegation, knowing that a finding of corruption will effectively immunize it from any liability. Metal-Tech v. Uzbekistan presents an example where Uzbekistan, the host-state, was able to avoid liability by producing evidence of bribery in the formation of a joint-venture agreement between members of the Uzbekistani government and Israeli investors. The tribunal found it had no jurisdiction to hear the dispute, but nevertheless made the parties split the costs of the arbitration, acknowledging Uzbekistan’s complicity in the bribe.
The increasing importance of the international anti-corruption movement likely contributed to the candid discussions of corruption and the ultimate outcomes in the World Duty Free and Metal-Tech awards. Up until the Watergate era, bribery of foreign officials to secure contracts was common among Western corporations. Beginning with the post-Watergate U.S. Foreign Corrupt Practices Act in 1977 and moving through the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 1997, a steady consensus has developed, such that Chapter 26 of the now-moribund Trans-Pacific Partnership was dedicated to anti-corruption provisions required of signatory states. To deal with the sanctions and fines from the far-reaching U.S. Department of Justice, a global anti-corruption compliance industry has developed with catchphrases like “Will you act now or pay later?” to help companies avoid with the very real prospect of sanctions and fines arising from overseas bribery. This article will not focus on the interaction between domestic anti-bribery enforcement and investment arbitration, but Siemens v. Argentina illustrates how national anti-bribery enforcement affects international investment arbitration. In 2007, Siemens secured a 218 million USD award against Argentina; however, it never enforced the award, because in 2008, a U.S. Department of Justice investigation revealed widespread bribery by Siemens, including in Argentina, making enforcement of the award extremely difficult.
To accomplish the objectives of the international anti-corruption movement and to ensure the integrity of awards rendered under investment arbitration, some have suggested that arbitrators should investigate allegations of corruption on their own initiative rather than allowing each party to provide the proof on which its allegations rest.
For two chief reasons, I argue that investment arbitration is ill-suited to handle allegations of corruption. First, the structural mechanics of investment arbitration undermine the justification behind the common law principle that in a case of equal fault, the defendant’s case prevails [in pari delicto potior est conditio defendentis]. Second, the current system does not consider factors surrounding the bribe, such as whether the bribe was paid to secure routine government action or whether it was paid to violate the law. Without question, corruption seriously impairs development and harms the well-being of hundreds of millions across the globe. Businesses that bribe should be prosecuted by the national authorities who have jurisdiction over those cases. In cases where clear evidence of bribery is brought before a tribunal, tribunals should find they have no jurisdiction to hear investment disputes. That said, tribunals should not seek out evidence of corruption sua sponte because investment arbitration is a poor forum for punishing businesses accused of bribery.
First, the justification for the in pari delicto doctrine makes sense in ordinary litigation but not in investment arbitration. Similar to the clean hands doctrine, the in pari delicto doctrine states that in the case of equal fault—for example, both litigants being party to a corrupt contract—the court will not grant relief. Accordingly, the plaintiff’s suit is dismissed and the defendant gets off largely scot-free. In a case of breach of contract outside of investment arbitration, the default rule—in the case of equal fault the defendant’s case prevails—does not systematically benefit either party; neither party to a corrupt contract knows ex ante whether, in the case of litigation, they will be the plaintiff or the defendant. Investment arbitration, however, is different, because private investors will almost always be claimants and states will always be respondents. Extending the in pari delicto doctrine to investment arbitration gives the host-state an advantage, because the host-state will benefit from its almost certain position as respondent/defendant. The default rule is transformed from ‘in equal fault, the defendant’s case prevails’ to ‘in equal fault, the host-state’s case prevails.’ This default rule in investment arbitration actually creates an incentive for host-states to solicit bribes for investments. Once paid, these bribes will defeat the protections of investment treaties and immunize host-states from liability under the treaty. Rather than suppressing bribery, an investment tribunal system eager to hear and rule on allegations of bribery may actually encourage bribery.
Second, investment arbitration does not consider the function of the bribe. For example, under the FCPA, an investor is not liable for facilitating payments made to secure routine government action. There is a meaningful difference between a payment that secures something that the investor is lawfully entitled—say, securing a permit in accordance with the law—and a payment that allows the investor to break the law with impunity—paying a government official to ignore the dumping of hazardous waste. Proponents of investment arbitration are quick to stress its function in maintaining and promoting the rule of law; however, insofar, as investment arbitration is insensitive to the difference between a bribe paid to vindicate the law and a bribe paid to corrupt the law, investment arbitration is a poor forum for airing allegations of corruption.
While it may be tempting to harness the power of investment arbitration in the international fight against corruption, investment tribunals are ill-suited to hear allegations of corruption. The in pari delicto rule may encourage rather than discourage bribery, and investment arbitration tribunals fail to take into account the purpose of bribes. Undoubtedly, the international anti-corruption campaign should continue through other domestic and international means, but investment arbitration is a poor forum for the airing of allegations of corruption.