Today’s post is from Paul Cohen (Perkins Coie).
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Regular readers of FCPA Professor can be forgiven for wondering what role anti-corruption laws could possibly play in international arbitration. The two fields seem, at first blush, to have as much in common as toxic torts law has with trusts and estates.
The reality, however, is that international arbitration practitioners constantly grapple with allegations of bribery and corruption. If arbitrators resolving these issues get them wrong from time to time, that may be because the FCPA/anti-corruption bar and the great-and-good of the international arbitration world rarely mix. Indeed, they prefer to treat each other, in Stephen Jay Gould’s phrase about science and religion, as non-overlapping magisteria.
As one of the small number of practitioners with one foot in each field, I’ve tried from time to time to expound on the state of anti-bribery law to my arbitration colleagues. I’m grateful to Professor Koehler for the invitation to do the reverse here.
International arbitration is a form of dispute resolution between parties from different jurisdictions. Arbitrators appointed by the parties, rather than courts, decide the issues. Thanks to a 1958 treaty on the recognition of arbitrators’ decisions (the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, aka the New York Convention) to which 150 nations subscribe, it is easier to enforce those decisions, known as “awards,” worldwide than it is to have a foreign court judgment recognized and domesticated. That accounts in large part for international arbitration’s popularity.
Then there is the additional fact that other dispute resolution options prove unpalatable to one of the parties. In contracts between an American entity and one from, say, one of the BRIC countries, the American entity is unlikely to accept the neutrality or efficacy of the counterparty’s home court for the purpose of dispute resolution.
By the same token, the counterparty will often reject a US court jurisdiction clause, coming as it does with the prospect of extensive discovery, expense, and potentially a jury trial.
These disputes between private parties pursuant to contracts with arbitration clauses come under the rubric of international commercial arbitration. These arbitrations are often non-public, so information about them is often incomplete.
There is a second, and increasingly frequent, species of arbitration that occurs pursuant to trade and investment treaties between nations. Under these treaties, a private party from one country that invests in the territory of another can arbitrate directly against the other country – no sovereign immunity – if it can allege that the other country violated pertinent terms of the treaty.
To take a (stereo)typical example: if an American oil company invests billions of dollars in oil exploration in Country X, and Country X’s government then nationalizes the oil industry, the American company may have a claim against Country X for expropriation of its assets. This kind of arbitration is known, intuitively enough, as investment treaty arbitration.
Because these arbitrations involve sovereign nations (and often large, publicly-traded companies), their proceedings and conclusions are better-known and better-publicized.
What does all this have to do with corruption? Increasingly often, one party or another alleges that bribery of some kind played a part in the underlying transaction on which the arbitration turns. Perhaps that should not come as a huge surprise: a plurality of arbitrations involve energy and mineral resources in places that would be considered the usual suspects in any corruption survey.
Moreover, with the number of arbitrations on a steady upswing and allegations of corruption showing no sign of abating, look for more opportunities for these two traditionally distinct fields to overlap and interact.
These issues first appeared in arbitration more than half a century ago. At the time, “consulting” agreements with third parties – the kind we warn clients today are red flags in international business transactions – were commonplace for companies seeking to do business with sovereigns and state-owned entities. Occasionally, parties to these agreements decided that they would renege on their arrangements with the “consultants.” They then found themselves in arbitration for breach of contract.
In one such dispute, an engineer with close connections to Argentina’s Peron regime brought arbitration against a British electrical manufacturer looking to sell equipment to Argentine power plants. It was self-evident that the agreement between the engineer and the electrical manufacturer was effectively a vehicle to funnel corrupt payments to Argentine decision-makers.
The arbitrator hearing the case rejected the claim. He stated:
“[T]here exists a general principle of law recognised by civilised nations that contracts which seriously violate bonos mores [good morals] or international public policy are invalid or at least unenforceable and that they cannot be sanctioned by courts or arbitrators […] [P]arties who ally themselves in an enterprise of the present nature must realise that they have forfeited any right to ask for assistance of the machinery of justice (national courts or arbitral tribunals) in settling their disputes.”
Note that this decision came in 1963, fully 14 years before the enactment of the FCPA. Bribing foreign officials was not yet a crime in the US or elsewhere, but that did not make contracts for which the very purpose was corrupt enforceable.
Several arbitral decisions followed in similar vein. All of them dealt with the issue of whether arbitrators could enforce contracts that effectively rewarded a party for funneling bribes to foreign officials. All of them agreed that they could not.
This left open a separate question: what happened when parties arbitrated in a case where there may have been corruption in the original transaction? For example, going back to our original hypothetical about an American oil company in Country X: if it transpired that the oil company had secured a concession to drill for oil through a bribe two decades earlier, how might this affect the arbitrators’ consideration of the oil company’s expropriation claim?
The answer seems to be that arbitrators will acknowledge that the contract itself is legitimate, despite having been procured by bribery, but that they will not award any damages to a party involved in the bribery. But because of the reasons arbitrations arise in the first place, the practical effect of this distinction is that sometimes states and state entities get a free pass when they misbehave.
That is what happened in the case of Siemens and Argentina. Siemens had won $200 million in an investment treaty arbitration after a tribunal adjudged that Argentina had expropriated Siemens’ assets in that country. That was in early 2007. As every FCPA practitioner knows, Siemens subsequently admitted to having engaged in large-scale bribery of foreign officials, including in Argentina. Siemens discontinued efforts to enforce the arbitral award. Argentina effectively walked away $200 million better-off.
The other (in)famous example involves the Government of Kenya in an arbitration against the World Duty Free company.
World Duty Free had contracted to build a duty free outlet at the Nairobi Airport. The company was implicated in a fraud involving the President’s re-election campaign. The Kenyan Government froze World Duty Free’s assets and transferred its shares to a different owner. World Duty Free later proved that the fraud allegations had been false, but by then the damage had been done.
The company brought an arbitration against Kenya pursuant to the contract Kenya had signed with it to build the duty free facility. During the arbitration proceedings, it came to light that World Duty Free’s principal had made a “personal donation” to the President of Kenya, consisting of $2 million cash in a suitcase, at the time that the parties were negotiating the contract.
The tribunal concluded that it could not award any damages to World Duty Free under the circumstances. As a legal matter, that was probably an easy call; as a moral question, it is much more nuanced. The Kenyan government escaped liability for a wrongful taking; it did so by invoking a transaction in which its own President solicited and received a $2 million bribe (for which, naturally, he was never prosecuted).
The circumstances of the World Duty Free case were unusual: the principal admitted that he had made the “personal donation” to the President of Kenya (although, laughably, he said he did not consider the “donation” to be a bribe); the proverbial suitcase full of cash really was a suitcase full of cash. This was the territory of truth being stranger than fiction.
In other cases, an allegation of bribery is much harder to prove. Arbitrators, devoid of subpoena power and without the sanction of criminal prosecution, have been loath to investigate allegations, and likewise leery of concluding that bribes have occurred. In one arbitration, EDF v. Romania, a Tribunal opined:
“[C]orruption must be proven and is notoriously difficult to prove, since, typically, there is little or no physical evidence. The seriousness of the accusation of corruption in the present case, considering that it involves officials at the highest level of the Romanian Government at the time, demands clear and convincing evidence. There is general consensus among international tribunals and commentators regarding the need for a high standard of proof of corruption.”
Some commentators and practitioners have countered that the “clear and convincing evidence” standard has no place in an arbitration, where criminal or punitive sanctions will not be applied. Others have suggested that the burden shift to the party alleged to have been involved in corruption once the accusing party has made a prima facie case that something illegal occurred. Since international arbitrations are not bound by precedent, it is unlikely that there will be consensus on how to approach these allegations.
We have yet to see large investigations arising out of corruption allegations first made in an arbitration. As noted above, arbitrators are reluctant to read any duty or power to compel investigations in their mandate to decide a case. Companies implicated in corruption allegations have likewise been slow to conduct independent investigations of any such allegations when they arise in arbitrations. This may be due to the fact that such independent investigations are relatively recent phenomena outside the United States.
Nonetheless, as the tide of arbitrations shows no sign of waning, and as corruption investigations by non-US regulators gather strength, expect to receive calls from your arbitration colleagues in the future.
