The impact of corruption on the ability to arbitrate

Patricia de Clapiers, Associate, London

Speedread

Corruption, and the issue of how arbitrators should deal with allegations or evidence of corruption, remains a hot topic in international arbitration. The decision of the tribunal in Metal-Tech -v- Uzbekistan¹ to refuse jurisdiction based on evidence of corruption adds to that debate.

Background

Arbitrations involving allegations of corruption raise difficult factual and legal issues. Until Metal Tech, World Duty Free -v- Kenya² was the only ICSID (International Centre for Settlement of Investment Disputes) case where an arbitral tribunal dismissed a claimant's claims in their entirety on the basis that the contract under which the claimant brought its claims was procured by the payment of bribes.

The investor, World Duty Free, initiated ICSID arbitration against Kenya pursuant to a contract to run duty-free operations in Kenya's international airports. During the proceedings, World Duty Free admitted to paying a US$2m donation to secure the contract. Under both English law and Kenyan law (the governing law of the contract was unclear) the contract was voidable at the instance of Kenya. The contract was set aside and the investor's claim was dismissed.

Corruption is notoriously difficult to prove, partly because of the limits on a tribunal's powers of investigation and compulsion, but also because allegations of corruption raise issues as to the burden of proof. On the one hand, the ingenuity of corrupt activities militates toward a lowering of the burden of proof (if not a reversal). On the other hand, the seriousness of the allegations suggests that a higher burden of proof should be imposed. There is also the much debated issue of the extent to which the tribunal itself should probe further once the issue of corruption is raised.

Metal-Tech

In Metal-Tech, the information on the basis of which the claim was dismissed surfaced during a hearing in January 2012. This prompted the tribunal to order further disclosure and reconvene for another hearing. The tribunal, acting on its own motion, considered that "indicators" and "red-flags" arising from Metal-Tech's evidence were sufficient to raise a presumption that bribery had been committed. The corruption pertained to consultancy contracts for which the consultants hired did not have any of the requisite qualifications, were closely related to government officials (one was the prime minister's brother), and received an extremely high remuneration (US$4m). Metal-Tech failed to provide a clear and logical explanation and unsuccessfully contended that the consultants were lobbyists. The tribunal considered that the payments were made in breach of Uzbek law and dismissed the claim for lack of jurisdiction. Of interest is the fact that both parties were ordered to bear their own costs. The tribunal considered this fair to reflect the fact that the claimant had tried to minimise costs and the host state's implicit participation in the corruption.

Comment

Commentators have welcomed this decision; arbitrators are increasingly encouraged to recognise the elusive nature of evidence of corruption and draw the correct inferences. The case also highlights the impact that corruption can have on a company's investments. Aside from criminal investigations and reputational damage, it can seriously weaken any legitimate rights a company may have.

Please click on the links below for the other articles in the April 2014 Arbflash:

• Procedural fairness when a respondent fails to participate: the English High Court decision in Interprods -v- De La Rue
• The Indian Supreme Court decision in World Sport Group: fraud allegations referred to arbitration
• Joining a non-signatory to an arbitration: Singapore High Court judgment in The Titan Unity (No.2)
• Spanish court confirms validity of asymmetric dispute resolution clauses
• Intervention by the courts: the Chief Justice of the Supreme Court of Western Australia quashes an award for lack of procedural fairness
• International news
• New JCAA Rules

_{¹ Metal-Tech Ltd (Claimant) -v- Republic of Uzbekistan (Respondent) (ICSID Case No. ARB/10/3).}

_{² World Duty Free Company Limited (Claimant) -v- the Republic of Kenya (Respondent) (ICSID Case No. Arb/00/7).}