Turkish Law Blog

The Problem of Corruption in International Commercial Arbitration

Aysu Düz Aysu Düz/ University of Kent
09 July, 2019
400

Introduction

Corruption has existed for a long time, but its recent growth is significant. The World Bank Group`s report estimates that approximately $1.5 trillion in bribes are paid by businesses and individuals each year [1]. According to Transparency International Corruption Perceptions Index 2017, two-thirds of the 180 countries and territories in the world are highly corrupted [2]. Even in developed countries, the phenomenon of corruption is gloomy.

These tragic figures prove that corruption still constitutes a big problem worldwide given that various institutions, including political parties, judiciary, parliament, and legislature, are extremely corrupted [3]. An inevitable consequence of this situation is that corruption is also quite prevalent in arbitration. Dealing with corruption allegations in the practice of international arbitration is relatively commonplace over the past decades. The impartiality and confidentiality of international arbitration proceedings cause some dilemmas for arbitrators when they face with any corruption’s indicia. Therefore, there are divergent approaches as to whether arbitrators should be bound by a duty to report corrupt practices during arbitral proceedings once they become aware of it. Although it is a well-known fact that corruption is against the international public policy, arbitrators face some limits on proving corruption; therefore, the role of arbitrators is substantial during arbitral proceedings.

The Problem of Corruption

A.    Corruption in Arbitration

Corruption is a multifaceted concept and it is, thus, crucial for an arbitral tribunal to first decide precisely what corruption is, and what it isn’t, in order to adjudicate matters involving it. Thereafter, arbitrators would consider the act committed by one or more of the parties in the conflict and try to relate it with the definition of corruption; to finally investigate whether the act is legal or not [4].

There is no, widely accepted, the definition of corruption which involves all corruptive acts or fits to all types and forms of corruption. Hence, the literature presents several descriptions such as “the abuse of public office for private gain” [5] or “misuse of public power” [6] or “misuse of office for unofficial ends” [7]. All these definitions lack some aspects or types of corruption proving the difficulty of a unique universally accepted definition for this broad term.

Corruption can occur in different types of organizations (e.g. petty corruption, administrative corruption, corporate corruption, political corruption), in various forms (such as systemic corruption, grand corruption) and levels (like the gift, bribe, fraud) [8]. As a consequence, it is quite crucial for arbitrators to identify the type of corruption before adjudication, so that they examine political, economic and cultural effects of corrupt practices and then, during arbitral proceedings, they can take it into account.

B.     Jurisdiction 

The Committee on International Arbitration of the International Law Association (ILA) evaluated the development of the concept in public policy during the 21st century in its 2002 final report stated that “there is an international consensus that corruption and bribery are contrary to international public policy” [9].

So, what has an arbitral tribunal to do if there is a dispute concerning the performance of an international commercial agreement whose object, as an excuse for non-performance, is the payment of bribes or some other fraudulent inducement? [10] This issue was first raised in 1963 by Judge Gunnar Lagergren, who was acting as the sole arbitrator in the ICC Award No. 1110 when he disqualified himself as not having jurisdiction and stated that “such corruption is an international evil; it is contrary to good morals and to international public policy common to the community of notions”[11].

Although some tribunals supported that issues of corruption are not arbitrable [12], arbitrators have recently taken the position that a mere allegation of illegality should not relieve a tribunal of jurisdiction to determine the dispute [13], including the question of illegality [14]. Therefore, the absence of a uniform approach in the case of corruption, in international commercial arbitration, raises various issues, based on the arbitrators’ experiences, backgrounds or perceptions. However, the modern approach which is based on the concept of separability, i.e. an allegation of illegality does not itself deprive the arbitral tribunal of jurisdiction, has recently received prevalent acceptance, both nationally and internationally. Under the doctrine of separability, the arbitration clause is deemed independent and separate from the contract in which it is contained and will, therefore, survive and continue to be valid, even if the arbitral tribunal decides that the main contract is void and null given its corrupt practices [15].

C.    The Role of Arbitrators in Corruption

The arbitration community is divided on whether or not arbitrators should have a duty to report corrupt practices. Regarding this issue, the role of arbitrators, the confidentiality of arbitral proceedings, and international public policy should be considered.

Initially, should we accept that arbitrators are servants of the parties or administrators of justice? On the one hand, a prima facie duty of the arbitrators is to resolve a disagreement between parties, therefore, they have limited power to determine the contractual rights and obligations of parties [16]. On the other hand, “the arbitrators owe duties not only to the parties but also to the international business community at large” [17]. Nevertheless, the arbitrators who act as national judges should bear the same duties during any dispute resolution.  However, national judges are not obliged to report corrupt practices which are committed abroad to the related criminal authorities of different countries in the absence of a convention. Under this circumstance, how we can force the arbitrators to report it albeit our awareness that it remains beyond their missions? [18]

Moreover, it is generally accepted that confidentiality of the arbitral process is a keystone for many parties to choose arbitration as a dispute resolution method rather than assigning to national courts. Thus, imposing a duty to report corrupt acts on arbitrators causes uncertainty in terms of the parties and about whether it threatens the confidentiality of the arbitral proceedings. According to Cremades and Cairns, “notwithstanding the private and often confidential nature of international arbitration, arbitral tribunals have a public responsibility to the administration of justice that is inseparable from their autonomy as recognized and respected by natural courts” [19]. Despite the fact that there is no regulation in any of the countries that explicitly impose a duty to report corruption or attempts to commit crimes on arbitrators, “confidentiality should protect a legitimate business interest and not an illegitimate objective of evading detection and prosecution” [20].

It is widely accepted the condemnation of corruption as an essential rule of transnational public policy, which creates a global consensus. National laws, international conventions, and arbitral case law indicate how corruption should be perceived in transnational public policy [21]. It can be concluded that there are many circumstances that specify the role of arbitrators, and in the absence of a uniform approach regarding this issue, it is possible to encounter divergent methods.

D.    Related Cases in International Commercial Arbitration

In order to comprehend better how the arbitrators conduct cases related to corruption, landmark cases should be examined. First, Fiona Trust & Holding Corporation ( and 20 others) v Yuri Privalov (and 17 others) is one of the most famous examples of the doctrine of separability. In this case, the Court held that arbitration clauses are to be treated as distinct agreements from the main agreement; therefore, the allegations of corruption were not enough to invalidate the arbitration clause—"something more” was needed [22]. The case of Prima Paint Corp v Flood & Conklin Manufacturing Co. shows that the U.S. Supreme Court also has adopted the separability doctrine. It was held that even if there was a fraud in the inducement of a contract, an arbitrator has jurisdiction as long as the corruption was not alleged specifically with respect to the arbitration clause within the contract [23].

On the contrary, some international commercial arbitrators have adopted a zero-tolerance approach condemning corruption as a public policy. In the ICC Award 3916 of 1982, when the sole arbitrator faced with a contract which includes paying bribes, it was rendered that serious violation of moral standards or international public policy cannot be approved and an agreement which includes that kind of issues should be accepted as null and void [24].

Conclusion

Therefore, it is better for arbitrators to create their own corruption control system to combat corruption in arbitration rather than declining their jurisdiction of the arbitral tribunals. When they decline their jurisdiction, they neither help to prevent corruption nor benefit the parties which are left with no remedy [25]. Nevertheless, these cases indicate the approaches of different jurisdictions and different arbitrators in terms of corrupt practices in international commercial arbitration.


Bibliography

[1] 'Combating Corruption' (World Bank, 2017) <http://www.worldbank.org/en/topic/governance/brief/anti-corruption> accessed 1 July 2019

[2] 'Corruption Perceptions Index 2017' (www.transparency.org, 2018) <https://www.transparency.org/news/feature/corruption_perceptions_index_2017> accessed 1 July 2019

[3] 'Research - GCB - Overview' (Transparency.org, 2018) <https://www.transparency.org/research/gcb/overview> accessed 1 July 2019

[4] Sagar Kulkarni, 'Enforcing Anti-Corruption Measures Through International Investment Arbitration' (2013) 10 Transnational Dispute Management 3

[5] 'Helping Countries Combat Corruption: The Role Of The World Bank' (Www1.worldbank.org) <http://www1.worldbank.org/publicsector/anticorrupt/corruptn/cor02.htm> accessed 3 July 2019

[6] Sagar Kulkarni, 'Enforcing Anti-Corruption Measures Through International Investment Arbitration' (2013) 10 Transnational Dispute Management 3

[7] Robert Klitgaard, 'International Cooperation Against Corruption' [1998] Finance&Development 3

[8] Vinay Bhargava, 'Curing The Cancer Of Corruption' [2006] Global Issues for Global Citizen

[9] Final Report on Public Policy as a Bar to Enforcement of International Arbitration Awards (International Law Association Committee on International Commercial Arbitration 2002 )

[10] Alan Redfern and Martin Hunter, Redfern And Hunter On International Arbitration (6th edn, Oxford University Press 2015) 119

[11] Michael Hwang and Kevin Lim, 'Corruption In Arbitration: Law And Reality' (Arbitration-icca.org, 2011)<http://www.arbitrationicca.org/media/4/97929640279647/media013261720320840corruption_in_arbitration_paper_draft_248.pdf> accessed 3 July 2019

[12] ICC Case No. 15668 [2011]; ICC Case No. 11307 [2003]; ICC Case No. 1110 [1963]; World Duty Free v Kenya [2006] ICSID, ARB/00/7; Metal-Tech Ltd v The Republic of Uzbekistan [2013] ICSID, ARB/10/3

[13] Fiona Trust v Yuri Privalov[2007] EWCA Civ 20; Interprods Limited v De La Rue International Limited [2014] EWCH 68 (Comm); Harbour Assurance Co Ltd v Kansa General International Insurance [1993] QB 701

[14] Margaret L. Moses, The Principles And Practice Of International Commercial Arbitration (3rd edn, Cambridge University Press 2017) 35

[15] Mohamed Abdel Raouf, 'How Should International Arbitrators Tackle Corruption Issues?' (2009) 24 ICSID Review Foreign Investment

[16] Matti S. Kurkela, 'Criminal Laws In International Arbitration – The May, The Must, The Should And The Should Not' (2008) 20 Asa Bulletin 290; Sara Nadeau-Séguin, 'Commercial Arbitration And Corrupt Practices: Should Arbitrators Be Bound By A Duty To Report Corrupt Practices?' (2013) 3 Transnational Dispute Management 7

[17] Sara Nadeau-Séguin, 'Commercial Arbitration And Corrupt Practices: Should Arbitrators Be Bound By A Duty To Report Corrupt Practices?' (2013) 3 Transnational Dispute Management 7

[18] Richard H. Kreindler, 'Aspects Of Illegality In The Formation And Performance Of Contracts' (2003) 11 ICCA 16th International Arbitration Congress 283

[19] Bernardo Cremades and David J. A. Cairns, 'Trans-National Public Policy In International Arbitral Decision Making: The Cases Of Bribery, Money Laundering And Fraud' [2003] ICC Institute of World Business Law: Arbitration-Money Laundering, Corruption and Fraud 65-93

[20] Dragor Hiber and Vladimir Pavic, 'Arbitration And Crime' (2008) 25 Journal of International Arbitration 477

[21] Carolyn B. Lamm, Hansel T. Pham and Rahim Moloo, 'Fraud And Corruption In International Arbitration' (2013) 10 Transnational Dispute Management 699

[22] Ayten Mustafayeva, 'Doctrine Of Separability In International Commercial Arbitration' (2015) 1 Baku State University Law Review 93; Moses (n 20) 98

[23] Gerald Aksen, 'Prima Paint v. Flood & Conklin--What Does It Mean?' (2012) 43 St. John's Law Review 2-21; Moses (n 20) 98-99

[24] Sara Nadeau-Séguin, 'Commercial Arbitration And Corrupt Practices: Should Arbitrators Be Bound By A Duty To Report Corrupt Practices?' (2013) 3 Transnational Dispute Management 7

[25] Sagar Kulkarni, 'Enforcing Anti-Corruption Measures Through International Investment Arbitration' (2013) 10 Transnational Dispute Management 3

 

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