José María de la Jara*[1] and Eduardo Iñiguez*[2]
In 1989, high-profile executives from Dubai met with Daniel Arap Moi, former President of Kenya, to seek his approval for the construction of duty free complexes at the Nairobi and Mombasa International Airports.
At the beginning of the meeting, an executive from the investor, World Duty Free (WDF), left a brown briefcase containing US$ 500,000.00 in cash by the wall. When the gathering was over, the cash had been replaced with fresh corn … and the project had been approved.
A few years later, WDF began an investment arbitration claiming the Kenyan Government had breached their agreement. During the process, the investor alleged the payment was a gift required by protocol. This was seized by the Republic of Kenya, which argued that bribing was illegal and that the investor’s conduct should not be protected. Upon that, the tribunal held that “corruption is contrary to international public policy of most, if not all states or, to use another formula, to transnational public policy” and consequently declared the claim inadmissible. This is known as the “Corruption Defense”.
First recognized in ICC Case No. 1110 in 1963, the Corruption Defense has been used by states when the contract that gives place to the arbitration was obtained by corrupted means.
The acceptance of this strategy has typically resulted in the refusal to hear the merits of the claim, even where the corruption also involved the state , given place to the tribunal declining its jurisdiction (e.g. Inceysa Vallisoleta v. Republic of El Salvador) or considering the claim inadmissible (e.g. Phoenix Action v. The Czech Republic).
Arbitration practitioners have recognized the attribution asymmetry derived from the Corruption Defense, leading to a one-sided result where states that took part on the corrupt act could profit from their own illicit conduct. However, tribunals have not yet come to a different solution different than sharing arbitration costs.
In our view, exaggerated reliance on the Corruption Defense might actually end up increasing the net levels of illegal acts in host states. Hence, in this article we propose three steps to analyze whether such strategy should be accepted by tribunals. This guide will help states on their evaluation of the contingencies of the Corruption Defense, as well as innocent, gullible or equally-guilty investors that want to fight against that strategy.
- Is the state contradicting itself?
Since host states are typically defendants in investment arbitration, it is them who have historically brought out the defenses based on the investors’ “unclean hands”.
From that point of view, states should bear in mind that some tribunals have required a high-standard of proof for corruption.
For example, in Bin Hammam v. FIFA, Mr. Hammam, a candidate for FIFA President was present in a meeting with Mr. Warner and several delegates who would decide on his candidacy. Immediately after Mr. Hammam left the room, Mr. Warner announced there were “gifts” for the delegates, which were actually envelopes containing US$ 40,000 in cash. Even though the tribunal determined “it is more likely than not that Mr. Bin Hammam gave the money”, it held that other scenarios could not be excluded, such as the money being given to Mr. Warner “as a token of appreciation for setting up the meeting” or “that there was another source of money”.
If the state provides evidence that could to fulfill this high standard, investors could argue that a Corruption Defense contradicts the host state’s previous acts. This is known as the Doctrine of Estoppel.
In sum, such doctrine posits that no one should take advantage of its own previous acts. In Saltman words, “[i]t is intended to afford protection against injustice and fraud to an injured party by denying another party the right to repudiate any acts, admissions of representations which have been relied on by the injured party to its detriment”.
As discussed by Reeder, international investment tribunals have already applied the Estoppel Doctrine. For example, in Fraport, the tribunal recognized that: “[p]rinciples 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 and endorsed an investment which was not in compliance with its law”.
In our view, the Doctrine of Estoppel could be used to fight against the Corruption Defense, as the state’s request for arbitration relies on a corrupt procurement of the contract, where the state also participated.
In order to establish a contradiction, the investor would need to prove that the contract was concluded between the host state and a private party by corrupted means. In contrast, bribery between private parties, as in ICC Case No. 1110, will not help investors on fighting against the Corruption Defense.
Once the corrupt act by the state is identified and proven (first act), the state should be banned from using its own corruption as a defense against the investor’s claim (contradiction).
Under this framework, the Republic of Kenya’s use of the Corruption Defense should not have been accepted, as it acknowledged to have received a bribery.
- Is the state responsible?
A possible barrier for the application of the Estoppel Doctrine is whether the conduct of a specific official or government organization can be extended and considered as the state’s responsibility.
According to Pitou, even when US courts will generally not estop agents who have acted without actual authority, several of them are likely to construe a government employee’s authority, so the estoppel can proceed.
International investment arbitration tribunals also follow such a position. For example, the tribunal in SGS v. The Republic of Paraguay held that the conduct of host state officials remains attributable to the state. Furthermore, in the Waguih case, the tribunal stated that the conduct of any state organ shall be considered an act of the state, even there when it exceeds the authority of that organ.
Therefore, in a situation where the President of a state itself is the one who incurs in the corruption acts (like in the Kenyan case), such behavior should be considered as an act of the state.
Also, host states should take into account that their strategic position would be dramatically hampered if the investor provides evidence that they did not do anything to investigate nor prosecute the corrupt acts that are now being used as defense. After all, how could a state benefit from its own behavior if nothing has been done to remedy it?
As stated by Raouf, “if a host State takes no action in order to investigate or prosecute the corrupt acts of its own officials, it should have a consequence upon its right to rely corruption as a defense”.
As a result, states that want to rely on the Corruption Defense should be demanded to prove that they have done everything on their power to investigate and sanction the illegal conduct.
Furthermore, admitting the corruption acts and doing nothing about them (not now nor before) could be considered as ex post knowledge or ratification of those, as in Ionnis Kardassopoulos v Georgia. As Kulkarni concludes, “lack of genuine interest in combating corruption may be inferred and lend credence to an estoppel claim”.
- Is the investor responsible?
Even if the aforementioned steps are applied, investment tribunals will still be cautious to deny the Corruption Defense, as it could mean favoring the investor on the merits, even when the contract that gave place to arbitration involved illicit acts.
Consequently, investors fighting against a Corruption Defense should prove the gravity of each party’s contribution to the illegal behavior. In order to do that, as suggested by Kulkarni, they might consider presenting evidence of (i) who began the corrupt behavior, (ii) the amount paid, (iii) the involvement of the state and (iv) to what extent the conduct was only incidental.
Also, as stated by Davies, an investor should make reasonable efforts to monitor, supervise and punish its employees and co-operate with law enforcement authorities. He must be able to prove that he has taken measures to prevent and, given the case, correct any possible corruption acts.
Specially, an investor must take in consideration what the International community has called “red flags”, which are indicators of ethical and/or reputational risks that could possibly be a sign of corruption. The following are some of red flags identifies by the he Woolf Committee:
- An investor lacks experience in the sector and still gets the contract/project;
- No significant business presence of the company within the country;
- An investor request ‘urgent’ payments or unusually high commissions;
- An investor requests payments be paid in cash, to be paid in a third country, to a numbered bank account, or to some other person or entity; and/or
- An investor has a close personal/professional relationship to the government.
Based on that, investors should prepare their defense taking into account whether any of its employees incurred in a behavior tagged as a “red flag” and, if so, which measures were taken to punish such conduct and mitigate its impact.
Final remarks
Freeing states from their responsibilities and denying investors’ access to arbitration where both might be responsible is an asymmetrical solution, especially if states know from the outset that they will be defendants and thus will be the only ones allowed to use the Corruption Defense. As identified by Rojas, this encourages states to take less precaution against illegal behavior, as they could ultimately rely on the Corruption Defense. Moreover, Reeder warns that states could immunize themselves against arbitral judgments by preparing a Corruption Defense in advance, avoiding liability even for willfully violating an investment treaty.
Corruption is no doubt despicable. However, arbitrators that “close their eyes” when faced with corruption allegations and deny their jurisdiction are not the answer to such illegal practices. As Kreindler explains, determining illegality is both the business and the duty of arbitrators. In our view, this would result in great disclosures with respect to corruption, as both parties would be incentivized to litigate the attribution of the illegal act, resulting in potential benefits for global anti-corruption efforts.
In conclusion, states and investors should both respond for their acts, in proportion to their fault. After all, it takes two to tango.
[1] Associate at Bullard Falla Ezcurra +. Executive Director at PsychoLAWgy.
[2] Intern at Bullard Falla Ezcurra +.
* The authors would like to thank Matt Reeder for his contribution to this work.