i Types of disputes raising issues of bribery and corruption
Recent years have seen enhanced efforts by enforcement agencies and prosecutors in many countries to combat bribery and corruption. Since the entry into force of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 1999, the OECD Working Group on Bribery has successfully promoted a number of initiatives intended to strengthen the powers of law enforcement agencies involved in the fight against bribery and corruption. This includes the introduction of rules on corporate liability and increased protections for whistle-blowers, as well as new and very effective forms of international cooperation between national law enforcement agencies.2
These developments have not failed to have an impact on international arbitration. During recent years, there has been a sharp increase in the number of cases in which international arbitral tribunals have had to rule on issues of bribery and corruption in the context of contractual disputes. Two main scenarios can be distinguished in this regard.3
First, arbitral tribunals have to deal with disputes arising from contracts allegedly procured by bribery. Such allegations are often raised by states, state-owned entities and sometimes also private entities, after large investment projects conducted in collaboration with foreign investors have come under scrutiny for compliance issues. Quite frequently, these issues arise after or in connection with a government change in the host state, with the new government taking a critical view of public spending and projects initiated by its predecessors. These cases raise questions regarding the status and unwinding of contracts induced by bribery, which are particularly tricky when projects have already been partially completed.4 However, to the extent that these issues arise in an investor–state setting, arbitration proceedings often focus on a preliminary issue, namely on the ability of an investor to challenge measures that the host state may have adopted in reaction to the (alleged) discovery of illegal conduct. Investors in fact increasingly face the objection that their claims should already be dismissed at the jurisdiction or admissibility stage on the basis that the applicable bilateral investment treaties do not afford protection to investments that were obtained through improper means.5
The second category of cases concerns the relationship between companies and intermediaries retained to solicit business, particularly in emerging markets. In many countries, foreign companies wishing to do business depend on door-openers or lobbyists familiar with the expectations and decision-making processes of prospective customers. While the use of such lobbyists is generally permissible, it is a fact that intermediaries sometimes engage in illegal conduct to win business for their client, for example, by complying with payment requests of state officials or other people in power. Contracts with intermediaries, therefore, can raise questions regarding the legitimacy of services rendered and of remunerations promised. In recent years, this has become a recurring issue in commercial arbitration cases, not least because companies often subject all payments to third parties to increased scrutiny when they come under investigation for potentially improper business conduct. Such a step, in turn, may trigger payment claims from intermediaries, who in many cases can point to written contracts creating at least an appearance of legitimacy.
ii Issues for arbitral tribunals
Over the past few years, international arbitral tribunals have developed a heightened awareness for issues of bribery and corruption, demonstrating a clear willingness to look behind appearances created to identify criminal conduct and determine its potential relevance for claims pending in arbitration (see Section II). Nevertheless, arbitral tribunals battle with a number of factual and legal challenges when dealing with such cases. One of the key questions is how and when allegations of bribery are actually introduced into the proceedings, and to what extent they can be proven. In this regard, the dynamics somewhat vary between investment arbitration and commercial cases.
In investment cases, allegations of bribery are generally raised as a defence by a host state accused of unfair treatment by a foreign investor. Such cases often come up after a former government has been ousted, with the successors taking a more critical view of large infrastructure projects commissioned by the previous government. For example, evidence of improper conduct occurring in the tender process or negotiations may make it necessary in the eyes of the new government to exit onerous contracts with foreign companies – even if such contracts may already have been (partially) performed.
In commercial cases, the set-up typically is somewhat different. Most cases concern payment claims by intermediaries. Often, such claims are raised after the company that retained the intermediary stopped payments, for example because doubts regarding their legitimacy have arisen, or an investigation into the company's dealings with third parties has been opened. In other cases, the intermediary may be demanding amounts in excess of what the company believes to be due. Either way, the intermediary claiming for payment will not want to suggest that the services rendered included the exercise of improper influence, let alone the payment of bribes, as this would defeat the basis for the payment claim. Likewise, the company sued will generally be reluctant to invoke bribery as a defence, knowing that such allegations will likely lead to inquiries into its own responsibility, and into that of individuals acting on its behalf. Therefore, very often, both sides avoid expressly addressing the issue and instead try to justify their position on other grounds. Typically, issues of bribery and corruption are then only raised in setting-aside or enforcement proceedings after other arguments have failed, or after new facts have come to light through other channels, for example, through a parallel criminal investigation.
This then raises the question of when defences based on allegations of bribery are admissible until, and what standards of review courts should apply in this regard at the setting-aside or enforcement stage. As demonstrated below, the response to this question varies between jurisdictions, with some courts having begun to promote enhanced judicial control in recent years (see Section III).
ii Powers and Duties of Arbitral Tribunals in the Face of Bribery Allegations
i Exercise and scope of jurisdiction
Arbitration is based on consent. It is only by virtue of the parties' agreement that an arbitral tribunal can claim jurisdiction for a specific matter in lieu of the state courts. The parties' agreement determines the subject matter and scope of the arbitration, with the arbitrators essentially acting as service providers to the parties. Consequently, the question may be asked as to whether arbitrators risk overstepping their mandate when reviewing and ruling on issues of bribery or other criminal conduct in the context of contractual claims. In practice, the answer will generally be negative.
Contrary to what was suggested by Judge Gunnar Lagergren in a much-noted case from the 1960s,6 it is generally accepted today that arbitral tribunals have jurisdiction to review and rule on allegations of bribery if they are relevant to the outcome of the case. The fact that this may require the arbitral tribunal to apply or consider mandatory provisions of foreign or domestic law, including criminal law rules, is no obstacle to the exercise of jurisdiction.7 As a matter of principle, it is furthermore clearly established that an arbitral tribunal cannot decline jurisdiction over a case on the sole basis that the underlying contract may have an illegal content. Under the widely recognised theory of separability, arbitration clauses are deemed to have a separate legal existence from the contract in which they are contained (see Article 178 Paragraph 3 Swiss Private International Law Act (PILA); Section 7 English Arbitration Act of 199 (1996 Act)). Consequently, arbitrators do not lose their jurisdictional powers simply because the contract containing the arbitration clause is alleged to be unenforceable or voidable as a result of illegal conduct. 8 Rather, this question is typically analysed at the merit stage only.
While the principle of separability is also known and accepted in investment arbitration, arbitral tribunals have in several recent investment cases declined to render a decision on the merits when the underlying foreign investment was allegedly obtained through bribery or fraud, holding that such an investment does not meet the legality requirement frequently foreseen in investment treaties.9 According to this approach, only investments made in conformity with the legal rules of the host country are entitled to treaty protection. While this conclusion is sometimes reached on the basis of a separate admissibility test and sometimes on jurisdictional grounds,10 the practical consequence is that claims by investors wishing to invoke substantive protection standards, such as the fair and equitable treatment standard or the protection from unjustified expropriations, may be dismissed even at a preliminary stage, without review of the merits of the case. This far-reaching consequence has been criticised for imposing a disproportionately harsh sanction on investors alleged to have engaged in bribery, and for failing to take into account the potential responsibility of the host state for the conduct of its current or former representatives.11
ii Power of arbitral tribunals to raise and investigate bribery
Findings of bribery or other criminal conduct can have broad and far-reaching implications in an arbitration and beyond. Therefore, the way in which allegations of illegality are introduced into the proceedings, and the standards that are applied for their assessment, matter greatly. At the same time, these are issues that arbitrators regularly struggle with due to gaps in the evidence and their relative inability to independently investigate the underlying allegations.
Relevance of the parties' pleadings
In both investor–state and commercial cases, it is in principle the responsibility of the parties to set out, substantiate and prove their claims. Arbitral tribunals risk an annulment on ultra petita grounds if they sua sponte broaden the scope of a dispute, or introduce additional facts and claims that none of the parties has invoked into the proceedings.
Consequently, a party wishing to avoid a contractual claim by relying on bribery as a defence, in principle, has to establish that illegal payments were made and that this renders the claims pending in arbitration void and unenforceable, or at least voidable.12 Nevertheless, the statement made by a tribunal more than 20 years ago in Westacre that '[i]f the defendant does not use it [bribery] in his presentation of facts, an arbitral tribunal does not have to investigate'13 no longer captures today's reality. If they want to avoid their award from being annulled or declared unenforceable, arbitrators can no longer turn a blind eye to red flags indicating potentially illegal behaviour, but must address their potential relevance. Such red flags may in particular include high amounts of success fees promised to intermediaries in combination with other factors, such as the lack of explanation or documentation concerning an intermediary's actual activities, hints that entities acting as intermediaries are controlled by individuals within the prospective customer's organisation or payments made to offshore jurisdictions without plausible explanation.14 If arbitrators on the basis of such indicia develop a suspicion that bribes may have been paid, it is standard practice today to spontaneously invite the parties to comment, provided the issue is relevant for the outcome of the case.
However, the powers of an arbitral tribunal to address the contractual implications of alleged bribery evidently also depend on the substantive legal rules applicable to the dispute. While there is a broad international consensus today for combatting bribery, the consequences of bribery on contractual rights and duties continue to be governed by national laws providing for different solutions. For example, under Swiss law, a contract induced by bribery is, contrary to a contract to bribe someone, not deemed automatically null and void. The party that was induced to conclude the contract through the exercise of improper influence has the right to rescind the contract, but this declaration requires an express and timely declaration by the party concerned.15 In the absence of such a declaration, an arbitral tribunal would, from a Swiss legal perspective, not be able to reject contractual claims on the basis that the underlying contract was tainted by bribery. The situation is similar under English law, where contracts for the payment of a bribe are considered per se illegal, whereas contracts procured by illegal conduct are only voidable as opposed to being automatically null and void.16
Difficulty of proving bribery
The burden of proof for defences based on the illegality of a transaction lies with the party raising such a defence. The standard of proof to be applied in cases involving allegations of bribery or other criminal conduct is less clear.17 It is generally accepted that the high standard of proof beyond reasonable doubt typically used in criminal cases should not be determinative.18 Rather, it seems appropriate to apply the same standard of proof as in other civil or commercial cases, not least because of the serious consequences associated with accusations of corruption, particularly in an investor–state context.19 This essentially means that clear and convincing evidence of bribery is required.20 This being said, the discussion of different standards of proof is theoretical to some extent, considering the large discretion that arbitral tribunals enjoy in reviewing the evidence submitted to them.
In practice, the main difficulty often is that parties involved in bribe or fraud schemes will generally have taken precautions to avoid a clear paper trail. Additionally, the individuals having relevant knowledge generally are reluctant to testify as witnesses for fear of personal consequences, whether because of their own involvement, or because they might be accused of having breached their supervisory duties.21 A party alleging bribery, therefore, often has to rely on circumstantial evidence relating, for example, to the nature of the services provided by an intermediary, the amount of commission fees paid, efforts made to conceal payment flows and the situation in the country where business has been solicited.22 There is no doubt that arbitral tribunals have the power to assess and rely on such circumstantial evidence, and that they regularly do so in cases involving allegations of bribery or other criminal conduct. Unsurprisingly, arbitral decisions confirming the existence of bribery generally rely on a combination of factors, rather than on isolated elements such as the mere amount of commissions paid. However, whether such evidence will ultimately suffice to establish the allegations raised and relief sought is case-specific. It is the task of arbitral tribunals to assess whether indicia of illegal conduct are indeed relevant for the specific dispute on which they have to rule, and whether such indicia support the legal conclusions that one of the parties asks the tribunal to draw, or the relief which the tribunal is asked to grant.23
iii Challenges in applying the law
In addition to raising procedural and factual difficulties, allegations of bribery can also create challenges for arbitrators when it comes to determining and applying substantive law. Many international agreements relating to large projects contain a choice of law clause providing for the application of a national law different from that of the country where the project is located. In such a situation, arbitral tribunals may have to ask themselves which particular rules should determine the existence and potential consequences of alleged illegal conduct.
Even though active and passive bribery in relation to public officials today constitutes a crime in most countries around the world, substantial differences persist not only with respect to the actual enforcement of such rules, but also with regard to their specific scope and content. For instance, the question as to what constitutes an undue advantage depends, among other things, on the specific status and legal duties of the recipient as defined by local law. Additionally, while anti-bribery rules aligned with the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions can arguably be described as an internationally accepted common core, the same is not true for rules relating, for example, to commercial bribery or to the granting of undue advantages outside the context of specific transactions or negotiations, which sometimes is also referred to as trafic d'influence.24 Furthermore, many countries have adopted additional safeguards outside criminal law intended to ensure that decisions on large infrastructure projects and other major investments are taken in a transparent manner. For example, bidders in tender proceedings regularly have to disclose past convictions for economic crime,25 or have to give undertakings not to use any intermediaries in a tender.
Such rules of the host state will generally not be part of the substantive law applicable to the contractual relationship with the investor, or between a foreign company and an intermediary. Consequently, the question may arise of whether the arbitral tribunal should consider such rules of the host state in addition to the applicable lex causae, namely as part of internationally mandatory laws. This issue came up in the well-known Hilmarton case, in which an intermediary's payment claims had initially been dismissed by an arbitrator on the basis that his retention violated an Algerian regulation against influence peddling.26 In annulment proceedings in Switzerland, the award was set aside, as it was considered that the Algerian regulation did not constitute a relevant foreign mandatory provision of law, but rather was a domestic economic regulation motivated by protectionist considerations.27 As a result, the intermediary was awarded the entire sum promised.28
The approach to foreign mandatory laws and international public policy has evolved since the days of Hilmarton, not least because of growing international harmonisation in areas such as competition law and anti-bribery rules. Nevertheless, the question under what circumstances foreign mandatory laws need to be taken into account as part of, or in addition to, the lex causae, and with what specific consequences, remains tricky. In Switzerland, state courts are required to consider foreign mandatory laws if there is a close connection to Switzerland, and if their application appears mandated by legitimate and preponderant interests of one of the parties (see Article 19 PILA; see also Article 9(1) of the Rome I Regulation). Additionally, courts have at times considered that the violation of foreign rules with a public policy character may render a contract unethical, and hence null and void under the lex causae.29 Arbitral tribunals apply similar tests, and have on this basis considered the impact of core provisions of European competition law,30 or of anti-bribery rules, on claims pending in arbitration. It is, however, very rare to see arbitral tribunals justify their conclusions on the basis of foreign mandatory rules that substantially differ from, or even are in conflict with, the rules of the lex causae – much more frequently, they conclude that relevant foreign laws seem to support conclusions already reached anyway under the law applicable to the dispute.
iv Duty to report suspicions of bribery to the authorities
Apart from having to determine the potential effects of bribery on claims pending in arbitration, arbitrators in some cases also have to ask themselves whether they may, notwithstanding their – more or less broadly defined – duty of confidentiality, have to report findings made in the course of proceedings to the authorities.
In many legal systems, public officials, including judges, are under a statutory duty to report certain offences, for example in the area of tax law, to the competent authorities.31 As they are not public officials, arbitrators are not bound by these duties. A duty to report suspicious transactions can, however, potentially result from anti-money laundering rules or from general criminal law. Thus, the Fourth European Anti-Money Laundering Directive (Fourth EU Directive)32 requires notaries and other independent legal professionals completing certain financial or corporate transactions on behalf of clients to file a report when there are reasonable grounds to suspect that funds involved in the transaction are the proceeds of criminal activity.
The reporting duties arising from the Fourth EU Directive are targeted at activities qualifying as financial intermediation. They do not extend to the representation of clients in judicial proceedings, and therefore, according to the prevailing view, in principle also not to the adjudication of claims by arbitrators.33 This is consistent with the general expectation that arbitration is, subject to overriding exceptions, a confidential process, whether by virtue of the applicable arbitration rules or the arbitration agreement.34
This being said, it is important to remember that the processing of criminal proceeds with a view to concealing their illegal origin constitutes money laundering. Both the perpetrators of and accomplices to such acts generally face punishment under national laws, irrespective of specific reporting duties. In the context of judicial or arbitration proceedings, this can become relevant for settlement agreements. Arbitrators who knowingly facilitate a settlement or issue a consent award in a situation where concrete evidence of criminal conduct was presented during the proceedings may risk being accused of aiding and abetting a money laundering scheme. A few years ago, this point was in fact raised in relation to a settlement reached before the English courts. At the time, the English Court of Appeal took a narrow view on Section 328 of the UK Proceeds of Crime Act 2002, holding that the prohibition to facilitate the acquisition, retention, use or control of criminal property is not intended to apply to consensual steps taken in an ordinary litigious context.35 Nevertheless, if an arbitrator understands that proceedings were initiated with the specific purpose of laundering funds resulting from criminal conduct, there is a risk that the arbitrator might become an accomplice to criminal conduct. Often, the response to such suspicions will be for the tribunal to raise its concerns with the parties. If no satisfactory answers are provided within reasonable notice, and the arbitration appears to be a mere sham, the arbitrators must have the right to decline their participation and to step down, if only to avoid incurring personal liability.
iii Judicial Control of Arbitral awards in Annulment and ENFORCEMENT proceedings
i Approaches to the annulment or non-enforcement of arbitral awards
Ultimately, the standards that arbitral tribunals have to apply in cases involving allegations of bribery are defined by the level of judicial control over awards, particularly at the seat of the arbitration, but also indirectly in jurisdictions where enforcement of an award may be sought due to assets being located there.
Courts in arbitration-friendly jurisdictions generally exercise great restraint in reviewing awards, both in setting-aside applications pursuant to local arbitration laws and in enforcement proceedings under the New York Convention. This is based on the view that, to the extent arbitration is recognised as a full equivalent of state court litigation, courts should not interfere with the work of arbitral tribunals, and essentially only ensure that arbitration as a process complies with certain basic guarantees. The focus, therefore, is on the validity and scope of the arbitration clause, as well as on the upholding of fundamental procedural principles, such as the parties' right to be heard and to equal treatment (see, for France, Article 1502-5 New Civil Procedure Code (NCPC); for Switzerland, Article 190 PILA; for England, Sections 67 and 68 1996 Act). A review of the merits of the case and conclusions reached by the arbitral tribunal is, in principle, only possible if the award is found to be incompatible with public policy because it disregards fundamental legal principles and values (see Article 1502-5 NCPC; Article 190 Paragraph 2(e) PILA). This limited substantive review focuses on the actual outcome of the case, rather than on the underlying reasoning and factual assessments. Thus, the French Court of Appeal has held in connection with mandatory rules of European competition law that the breach of international public policy must be blatant, actual and concrete to justify the setting aside of the award.36 The Swiss Federal Supreme Court applies a similar test, requiring the award to be untenable in light of fundamental principles of law.37 Foreign awards of which enforcement is sought pursuant to the New York Convention are essentially subject to the same standard of review (see Article V(2)(b) of the New York Convention; Article 194 PILA).
The 1996 Act takes a somewhat broader approach, as it, subject to leave being granted by the court, allows parties to make an appeal on questions of law (Section 69 1996 Act) in addition to raising jurisdictional and procedural challenges (Sections 67 and 68 1996 Act). While this relatively broad review power is not uncontroversial, it does not extend to questions of fact38 or to the application of foreign law.39 Thus, to the extent that issues of law are revisited on appeal, this can, in principle, only be done on the basis of the factual findings in the award (see Section 69(3)(c) 1996 Act).40 English courts also have the possibility to annul awards pursuant to Section 68(2)(g) 1996 Act if it appears that the award was obtained by fraud or in a manner contrary to public policy. While this provision allows applicants to introduce new evidence that was previously suppressed in the arbitration in a fraudulent manner, the threshold for obtaining an annulment on this basis is high.41
ii Scope and level of judicial review in cases involving allegations of bribery
The effectiveness of judicial control exercised over arbitration cases involving allegations of bribery or other criminal conduct to a great extent depends on whether courts are prepared to review an arbitral tribunal's factual findings, and on the standards applied by them in the course of such fresh review. This is a question that courts in several jurisdictions have had to consider in recent years, and to which they have responded differently. In particular, French courts have recently somewhat stepped back from their traditional hands-off approach to the review of arbitral awards in the context of allegations of criminal conduct, while Swiss and English courts continue exercising restraint.
Switzerland: judicial restraint outside revision proceedings
In Switzerland, the facts previously established by an arbitral tribunal are not reviewed in setting-aside applications, unless the taking and assessment of the evidence itself violates due process or public policy requirements.42 While the Swiss Federal Supreme Court has made it clear that the prohibition on bribery forms part of international public policy for the purposes of annulment and enforcement proceedings,43 allegations of bribery that were known to the parties at the time of the arbitration but not raised by them, or that were not sufficiently established in the arbitration, cannot be advanced in setting-aside applications. In practice, therefore, setting-aside applications based on allegations of illegal conduct often fail in Switzerland.44 Similar standards apply with respect to the enforcement of foreign awards, although case law on this aspect is much more scarce.45
However, if new evidence or new relevant facts are discovered after the arbitral award has been issued, or if it appears that the arbitration itself was influenced by criminal acts, for example, through false testimony or falsified documents, the Swiss Federal Supreme Court can order the arbitration to be reopened (revision).46 This step has been taken in cases involving allegations of bribery, for example, in connection with a controversial sale of frigates by France to Taiwan, which has occupied tribunals and courts in several countries.47 The revision procedure in particular allows the introduction of evidence resulting from criminal proceedings into the arbitration after its closure, and thus to corroborate allegations of which the tribunal may not have been convinced at the time the award was issued. However, outside this specific scenario, the Swiss Federal Supreme Court bases itself on the arbitral tribunal's assessment of the facts. As has been made clear in several recent cases, the Swiss Federal Supreme Court is also not prepared to annul awards ordering the payment of commissions to intermediaries on the sole basis that a company's collaboration with such intermediaries may be looked upon critically in parallel criminal or administrative proceedings, if illegality was not previously established in the arbitration.48
England: judicial restraint absent special circumstances
Similar to Swiss courts, English courts have taken a cautious approach to the review of cases involving allegations of bribery or other criminal conduct. As in Switzerland, English courts have reserved the discretion to order the annulment or non-enforcement of awards in exceptional circumstances, but show great restraint in using this option.
Thus, in a 2016 case concerning a long-term gas supply contract governed by Iranian law, a tribunal seated in London rejected allegations of bribery that had been raised as a defence against a claim for non-performance.49 Challenges against this award pursuant to Section 67 (lack of jurisdiction) and Section 68 (fraud in the proceedings) of the 1996 Act were rejected by the English High Court. In line with earlier cases, it was confirmed that a distinction should be drawn between contracts that are per se illegal,50 such as contracts for the payment of a bribe, and contracts potentially procured by illegal conduct, which are, in principle, only voidable as opposed to being automatically null and void. As the respondent had not argued the voidability of the contract before the arbitral tribunal, the Court was not prepared to conduct a fresh review of the merits of the case. The judge considered that the factual assessment made by the arbitrary tribunal can only be reopened in very exceptional circumstances or in the presence of fresh evidence, which did not exist in this case.
Similarly, strict standards apply in enforcement proceedings, in line with the objective of privileging the finality of awards as described in the 1999 Westacre case.51 Thus, in a 2014 decision, the English High Court upheld a Dubai International Arbitration Centre award concerning payment claims arising from a construction dispute.52 After the contractor had obtained an award ordering payment of outstanding fees, the other party raised allegations of criminal conduct before the Dubai court, and subsequently in parallel enforcement proceedings in England. In both cases, the argument failed. The English High Court considered that the challenge based on allegations of bribery was belated and unsupported by evidence. More recently, this narrow approach to the review of challenges based on allegations of criminal conduct was confirmed by the Court of Appeal in a case concerning the enforcement of a China International Economic and Trade Arbitration Commission award.53 In this case, forgery and extortion had been pleaded but rejected in the course of the arbitration on the basis that the allegations made were irrelevant for the claims pending in arbitration. In deciding to enforce this award in England, the English Commercial Court and, subsequently, the Court of Appeal, noted that while enforcement may be denied pursuant to the New York Convention on public policy grounds relating to illegality, the tribunal's factual assessments should not be revisited absent exceptional circumstances. As part of their analysis, the English courts considered the degree of connection between the claim to be enforced and the alleged illegality. They held that, while contractual undertakings to pay bribes are in principle not enforceable in England, the same consequence does not apply to contracts indirectly tainted by fraud or other unlawful conduct.
France: move towards reinforced control
In France, review standards with respect to public policy challenges have evolved considerably in recent years.54 In a 2004 decision concerning European competition law, the French Court of Appeal indicated that it was only going to annul arbitral awards on public policy grounds if the alleged violation was blatant, actual and concrete,55 thus endorsing what has become known as a minimalist approach. While this approach was thereafter also followed in certain cases involving allegations of criminal conduct,56 it has been criticised for failing to ensure a sufficient level of compliance with international public policy.57 This criticism has not remained without effect: in recent years, the Court of Appeal, with support from the Court of Cassation, has gradually begun to exercise greater scrutiny over awards in cases where there are suspicions of criminal conduct. This approach has been applied to cases concerning contracts allegedly induced through the payment of bribes,58 as well as to contracts for the payment of bribes.59
This new approach is, in particular, evident from a recent decision of the Paris Court of Appeal concerning a setting-aside application brought by the Republic of Kyrgyzstan in an investment arbitration case.60 In its annulment application, the state submitted new evidence suggesting that the investor had entertained close relations with the son of the former president, offshore entities had been used for the transfer of funds without economic necessity, and the investor had in an unrelated matter been convicted of money laundering. These elements constituted, in the eyes of the Paris Court of Appeal, serious, specific and concurring indicia of criminal conduct, based on which it annulled the award on public policy grounds. In explaining its decision, the Paris Court of Appeal indicated that it will exercise a comprehensive review of the facts of the case to prevent the recognition or enforcement of awards in situations where the underlying agreement may be illegal as a result of corruption, money laundering or fraud, and this even in situations where allegations of criminal conduct were considered, but rejected as unproven by the arbitral tribunal.
This approach has subsequently also been applied in enforcement proceedings, and in particular was relied upon to deny enforcement of a Swiss award, which had previously been upheld by the Swiss Federal Supreme Court.61 The Paris Court of Appeal in fact considered that the parties had not had the opportunity to explain whether the agreement underlying the dispute violated international public policy, as understood in France, and therefore ordered the parties to produce additional evidence before deciding on the enforcement application. Likewise, an English award was denied enforcement on similar grounds. In this case, the arbitrator had in reaction to allegations of bribery by the respondent first decided to suspend the arbitration, subject to a bank guarantee being provided, but later issued an award against the respondent after the bank guarantee had lapsed. While enforcement proceedings were underway in France, a French criminal court was seized of the matter, and found both the seller and an employee of the purchaser to be guilty of bribery. Following this finding, the respondent successfully requested the Paris Court of Appeal to set aside an enforcement order issued by a lower court, arguing that the recognition and enforcement of the award in France would amount to a breach of international public policy.62
While the outcome of this case was undoubtedly influenced by the fact that a French criminal court had, after the conclusion of the arbitration, confirmed the allegations of corruption in a binding manner for French courts, the decisions of the Paris Court of Appeal suggest that defences based on allegations of bribery can, in France, in principle, be raised for the first time in annulment or enforcement proceedings. As a result thereof, the judicial control of arbitral awards in cases involving allegations of criminal conduct today goes notably further in France than in England and Switzerland, where no similarly broad review of the tribunal's findings is allowed.
It is no surprise that the international fight against bribery and corruption has become a recurring issue in both commercial arbitration and in investor–state proceedings. Corruption is an abuse of entrusted power for private gain. As such, it is, by its very nature, based on exchange relations made in the shadow of the law: individuals holding influence within an organisation breach the fiduciary duties owed to their organisation for the benefit of a third party, in exchange for undisclosed advantages.
Having been made in the shadow of the law, agreements relating to or induced by bribery are prone to disputes. Arbitral tribunals and courts faced with disputes involving allegations of bribery are forced to navigate murky waters. Blameworthy conduct almost always exists on more than one side. An arbitration dealing with transactions potentially tainted by bribery typically only captures some of the elements of a complex situation involving a multitude of parties and covering different jurisdictions. Arbitral proceedings frequently run in parallel with, or precede, criminal investigations against individuals or corporate entities, which often take many years to complete.63 Therefore, arbitral tribunals that are asked to rule on contractual claims arising out of such cases very often have an incomplete view of the relevant facts and issues. Furthermore, allegations of bribery or other criminal conduct raised, or alluded to, in the course of arbitration almost always provoke a strong response from the other side, whether in the form of an outright denial, accusations of delaying tactics or counter-allegations of wrongdoing.64
Rightly, today there is a broad consensus that arbitration must not be misused for illegal purposes, and its reputation as a recognised and legitimate process for the adjudication of claims in the international arena must be preserved. At the same time, arbitral tribunals have a duty to resolve the dispute submitted to them on the basis of the available evidence in an efficient manner. In this complex situation, arbitrators need to proceed carefully, in accordance with the applicable substantive law and procedural requirements, to avoid their award being annulled or declared unenforceable. As courts in several jurisdictions have made clear, this may require arbitrators to look behind the façade of structures and transactions set up to appear legitimate, but also to consider the specific circumstances in which allegations of illegal conduct are raised in the context of an arbitration.
Thus, if corruption is alleged by one of the parties, the arbitral tribunal should require the party making such allegations to offer convincing proof thereof, and address the relevance of the allegations made for the claims pending in arbitration. This often includes assessing potential red flags, it being understood that the focus has to be on the specific transaction or transactions underlying the dispute, and on the issues relevant for its outcome. Where relevant evidence of bribery or other illegal conduct only becomes available after the termination of the arbitration, state courts in major arbitral jurisdictions have rightly made it clear that they are prepared to remit the matter to the arbitral tribunal, or to exceptionally admit fresh evidence in annulment and enforcement proceedings, to avoid a party being able to benefit from criminal wrongdoing in reliance on an arbitral award. In exercising this judicial control, national courts, like arbitral tribunals, are forced at times to walk a thin line between considerations of procedural efficiency and fairness on the one hand, and substantive justice and public policy on the other. If one lesson can be drawn from the growing body of cases and precedents dealing with such issues, it certainly is that allegations of bribery or other criminal conduct arising in the context of an arbitration have to be addressed by the tribunal, in fact and in law, and should not be passed over without discussion of their merit and relevance.
1 Anne-Catherine Hahn is a partner at IPrime Legal Ltd. The author wishes to thank Lukas Innerebner, LLM (MIDS) for kindly providing valuable research assistance for the 2019 update of this chapter.
2 See for example, the OECD Working Group's 2017 Report on Fighting the Crime of Foreign Bribery, available at < http://www.oecd.org/daf/anti-bribery/Fighting-the-crime-of-foreign-bribery.pdf> (accessed 27 April 2018), as well as press coverage on multijurisdictional settlements reached in recent cases concerning Odebrecht ( < https://globalinvestigationsreview.com/article/1158724/the-odebrecht-fact-sheet>, accessed 27 April 2018), VimpelCom ( < https://www.sec.gov/news/pressrelease/2016-34.html> accessed 27 April 2018) or Embraer ( < https://www.sec.gov/news/pressrelease/2016-224.html>, accessed 27 April 2018).
3 See also E Gaillard, 'La corruption saisie par les arbitres du commerce international', in 20 Revue de l'Arbitrage 3, 805, 816 (2017).
4 Under many systems, illegality not only creates a bar to contractual claims, but also a defence to the recovery of amounts already paid, in accordance with the adage in pari causa turpitudinis cessat repetitio, see P Schlechtriem, Restitution und Bereicherungsausgleich in Europa, vol. I (Mohr Siebeck 2000), 2016 et seqq. This in practice means that a contractor who has partially completed a project can neither claim for a payment of the outstanding remuneration, nor recover the value of work done under unjust enrichment principles. To alleviate this outcome, the 2010 UNIDROIT Principles suggest that the consequences of illegality should be handled more flexibly, depending on what appears reasonable under the specific circumstances of the case (Article 3.3.2(1) UNIDROIT Principles). For English law, a flexible approach to the recovery of unlawful payments was also proposed by the UK Supreme Court in Patel v. Mirza  UKSC 42.
5 See Hassan Awdi, Enterprise Business Consultant, and Alfa el Corporation v. Republic of Romania, ICSID case No. ARB/10/13, award, 2 March 2015; World Duty Free Company Limited v. Republic of Kenya, ICSID case No. ARB/00/7, award, 4 October 2006; Inceysa Vallisoletana v. Republic of El Salvador, ICSID case No. ARB/03/26, award, 2 August 2006.
6 ICC case No. 1110, 1963, in Yearbook Commercial Arbitration vol. XXI, 47 (A Van den Berg, Kluwer Law International 1996). The reading of Judge Lagergren's ruling in this case is a matter of controversy; see J G Wetter, 'Issues of Corruption before International Arbitral Tribunals: The Authentic Text and True Meaning of Judge Gunnar Lagergren's 1963 Award, in ICC case No. 1110', in 10 Arbitration International 3, 277 et seqq. (1994).
7 See, for example, Swiss Federal Supreme Court, 28 April 1992 (ATF 118 II 193); Swiss Federal Supreme Court, 19 February 2007 (ATF 133 II 139), at paragraph 5; Mitsubishi Motors Corporation v. Soler Chrysler- Plymouth, decision of the US Supreme Court, 2 July 1985, case 473 U.S. 614; Interprods Ltd v. De La Rue International Ltd  EWHC 68 (Comm.).
8 See, for English law, Fiona Trust Holding Corp v. Privalov (2007) UKHL 40, paragraphs 17–19; see also Interprods Ltd v. De La Rue International Ltd (2014) EWHC 68 (Comm) confirming that arbitrators do not lose their jurisdictional powers simply because the contract containing the arbitration clause is alleged to be unenforceable or voidable as a result of illegal conduct.
9 Hassan Awdi, Enterprise Business Consultant, and Alfa el Corporation v. Republic of Romania, ICSID case No. ARB/10/13, 2 March 2015; World Duty Free Company Limited v. Republic of Kenya, ICSID case No. ARB/00/7, 4 October 2006.
10 See H Wehland, chapter 8: 'Jurisdiction and Admissibility in Proceedings under the ICSID Convention and the ICSID Additional Facility Rules', in ICSID Convention after 50 Years: Unsettled Issues (C Baltag ed, Kluwer Law International 2017), 227; see Y Banifatemi, 'The Impact of Corruption on 'Gateway Issues' of Arbitrability, Jurisdiction, Admissibility and Procedural Issues', in Addressing Issues of Corruption in Commercial and Investment Arbitration, Dossiers of the ICC Institute of World Business Law, volume 13, 16 seqq. (D Baizeau, R H Kreindler eds, International Chamber of Commerce 2015); see Z Douglas, Taxonomy of Preliminary Issues Relating to Jurisdiction and Admissibility in Investment Treaty Arbitration, The International Law of Investment Claims (Z Douglas ed, Cambridge University Press 2009).
11 See T Meshel, 'The Use and Misuse of Corruption Defence in International Investment Arbitration', in 30 Journal of International Arbitration 3, 267–82 (2013); R Kreindler, 'Legal Consequences of Corruption in International Investment Arbitration: An Old Challenge with New Answers', in Liber Amicorum en l'honneur de Serge Lazareff, 383 (L Lévy, Y Derains eds, Éditions Pedone 2011); S Wilske, 'Sanctions for unethical and illegal behaviour in international arbitration: a double-edged sword?', Contemporary Asia Arbitration Journal 3, No. 2, 211.
12 See Paris Court of Appeal 21 February 2017, No. 15/01650, Republic of Kyrgyzstan v. V Belokon; Court de Cassation, 24 June 2015 Ch. C. 1, No. 14-15538.
13 Westacre v. Jugoimport, ICC case No. 7047, 28 February 1994, in 13 ASA Bulletin 2, 301 (1995).
14 Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID case No. ARB/10/3,4 October 2013; PT Prima International Development v. Kempinski Hotels SA and other appeals, decision of the High Court of Singapore, 9 July 2012, case SGCA 35.
15 See Swiss Federal Supreme Court, 21 February 2003 (ATF 129 III 320), at paragraph 5.2; Swiss Federal Supreme Court, 2 September 1993 (ATF 119 II 380), at paragraph 4c.
16 See National Iranian Oil Company (NIOC) v. Crescent Petroleum Company International Ltd,  EWHC 510 (Comm.).
17 See V Kvhalei, 'Standards of Proof for Allegations of Corruption in International Arbitration, in Addressing Issues of Corruption in Commercial and Investment Arbitration', Dossiers of the ICC Institute of World Business Law, Volume 13, 69 (D Baizeau, R H Kreindler eds, International Chamber of Commerce 2015).
18 See E Gaillard, 'La corruption saisie par les arbitres du commerce international', 20 Revue de l'Arbitrage 3, 805, 834 (2017).
19 See A J Menaker, B K Greenwald, 'Proving Corruption in International Arbitration', V Kvhalei, 'Standards of Proof for Allegations of Corruption in International Arbitration, in Addressing Issues of Corruption in Commercial and Investment Arbitration', Dossiers of the ICC Institute of World Business Law, Volume 13, 73 (D Baizeau, R H Kreindler eds, International Chamber of Commerce 2015).
20 See Westinghouse International v. the Republic of the Philippines, ICC case No. 6401, preliminary award, 19 December 1991, 1 Mealy's International Arbitration Report 1, 34 (1992).
21 See V Kvhalei, 'Standards of Proof for Allegations of Corruption in International Arbitration, in Addressing Issues of Corruption in Commercial and Investment Arbitration', Dossiers of the ICC Institute of World Business Law, Volume 13, 72 (D Baizeau, R H Kreindler eds, International Chamber of Commerce 2015).
22 See ICC case No. 3916 of 1982, (the widespread nature of corruption in Iran and the fact that the agent refused to disclose details about his activities were considered circumstantial evidence for bribery); ICC case No. 8891 of 1998, (the relatively short duration of the agency contract was deemed to be circumstantial evidence of a corrupt intent); ICC case No. 9333 of 1998, (a commission of 27 per cent of the value of the contract was considered justified in light of all circumstances); ICC case No. 12990 of 2005 (a commission of 15per cent to an intermediary together with the unusual payment method was considered as a strong corruption indicator. The parties also did not dispute that corruption was a serious issue in the concerned state, No. 13515 of 2006 and No. 13914 of 2008 (a commission of 15 to 40 per cent of the value of the contract was considered to render the contract void).
23 See W M Cremades and D J A Cairns, Corruption, International Public Policy and the Duties of Arbitrators, in ICDR Handbook on International Arbitration & ADR, 3rd ed (JurisNet, LLC 2017), 23 et seqq. 33.
24 See E Gaillard, 'La corruption saisie par les arbitres du commerce international', 20 Revue de l'Arbitrage 3, 805, 808 (2017).
25 See for example, the disclosure duties contained in EU public procurement rules, Article 57(1) Directive 2014/24/EU of 26 February 2014 on public procurement.
26 See Hilmarton v. OTV, ICC case No. 5622, final award, 1988, in Yearbook of Commercial Arbitration, Volume 19, 105 (A Van der Berg, International Council for Commercial Arbitration 1994).
27 See decisions of the Court of Appeal of Geneva, 17 November 1989, and Swiss Federal Supreme Court, 17 April 1990, in Yearbook of Commercial Arbitration, Volume 19, 214, 219 (A Van den Berg, International Council for Commercial Arbitration 1994).
28 Subsequently, enforcement proceedings were brought in France and England, first by the contractor on the basis of the first award and later by the agent on the basis of the second award. Ultimately, the agent prevailed before the High Court of Justice, and obtained payment for his claims, see Q.B. (Com. Ct.), 24 May 1999, 2 Lloyd's Law Reports 4, 222-223 (1999).
29 See Swiss Federal Supreme Court, 28 March 2001, 4C.172/2000, ASA Bulletin 2001, 807, 814, concerning a contract made in breach of embargo rules.
30 See European Court of Justice Eco Swiss China Time Ltd v. Benetton International NV, 1 June 1999, C-126/97 3055; Paris Court of Appeal, Ch. 1, 18 November 2004, No. 2002/19606 (Thales). By contrast, the Swiss Federal Supreme Court in ATF 132 III 389 considered that national differences in competition law regimes were too substantial to consider Article 101 (then still Article 81) of the Treaty on the Functioning of the European Union part of international public policy for the purposes of Swiss arbitration law.
31 See, for example, Article 40 paragraph 2 of the French Code of Criminal Procedure; § 116 of the Fiscal Code of Germany. In many Swiss cantons as well as at federal level, public officers are required to report criminal conduct of which they become aware in the exercise of their official role to the criminal authorities, see, for example, for the Canton of Berne, Article 48 EG ZSJ.
32 Fourth European Anti-Money Laundering Directive (EU 2015/849).
33 See Section 9 of the Fourth EU Directive: 'There should, however, be exemptions from any obligation to report information obtained before, during or after judicial proceedings, or in the course of ascertaining the legal position of a client. Therefore, legal advice should remain subject to the obligation of professional secrecy, except where the legal professional is taking part in money laundering or terrorist financing, the legal advice is provided for the purposes of money laundering or terrorist financing, or the legal professional knows that the client is seeking legal advice for the purposes of money laundering or terrorist financing.'; transposed into Articles 14(4) and 34(2) of the Fourth EU Directive.
34 E Geisinger and P Ducret, 'The Uncomfortable Truth: Once Discovered, What to Do with It?, in Search for Truth in Arbitration' (M Wirth and C Jodidio eds) ASA Special Series No. 35, New York 2011, 113, 129; somewhat more cautiously, T K Sprange, 'Corruption in Arbitration, in Addressing Issues of Corruption in Commercial and Investment Arbitration', Dossiers of the ICC Institute of World Business Law, Volume 13, 134 (D Baizeau, R H Kreindler eds, International Chamber of Commerce 2015).
35 Bowman v. Fels  EWCA Civ 226.
36 See Paris Court of Appeal, Ch. 1, 18 November 2004, No. 2002/19606 (Thales); L Radicati di Brozolo, L'illicéité qui crève les yeux, Rev Arb 2005/3, 529.
37 See, for example, Swiss Federal Supreme Court, 14 November 1990 (ATF 116 II 634), at paragraph 4; 27 March 2012 (ATF 138 III 322), at paragraph 4.1; 29 May 2015 (ATF 141 III 229) at paragraph 3.2.
38 Geogas SA v. Trammo Gas Ltd (The Baleares)  3 All ER 554 (HL), 228.
39 Schwebel v. Schwebel  EWHC 3280 (TCC); Reliance Industries Ltd v. Enrol Oil and Gas India  1 Lloyd's Rep. 645.
40 See Pioneer Shipping Ltd v. BTP Tioxide Ltd (The Nema) (No. 2)  AC 724 (HL); Sylvia Shipping Co Ltd v. Progress Bulk Carriers Ltd  EWHC 542 (Comm), at paragraph 54.
41 See Elektrin SA v. Vivendi Universal SA  All ER (Comm.) 365; Double K Oil Products 1996 Ltd v. Neste Oil Oyj  1 Lloyd's Rep. 141.
42 See Swiss Federal Supreme Court, 2 September 1993 (ATF 119 II 380), at paragraph 3c; Swiss Federal Supreme Court, 17 January 2013 (ATF 4A_538/2012), at paragraph 6.1; Swiss Federal Supreme Court, 26 June 2015 (ATF 4A_231/2014), at paragraph 5.1.
43 This was established in a 1993 landmark decision concerning National Power Corporation v. Westinghouse, Swiss Federal Supreme Court, 2 September 1993 (ATF 119 II 380), at paragraph 4b.
44 See Swiss Federal Supreme Court, 2 September 1993 (ATF 119 II 380); 2 August 2013 (ATF 4A_362/2013); 3 March 2014 (ATF 4A_231/2014); 29 January 2015 (ATF 4A_532/2014); 17 January 2013 (ATF 4A_538/2012); 3 November 2016 (ATF 4A_136/2016); 11 July 2017 (4A_50/2017).
45 See the decision by the Swiss Federal Supreme Court of 9 April 2015 in ATF 141 III 210, which concerned the enforceability of a foreign state court decision.
46 Swiss Federal Supreme Court, 11 March 1992 (ATF 118 II 199); Swiss Federal Supreme Court, 14 March 2008 (ATF 134 III 286) at paragraph at 2.1.
47 Swiss Federal Supreme Court, 6 October 2009 (ATF 4A_596/2008); see also Swiss Federal Supreme Court, 29 August 2006 (ATF 4P.102/2006).
48 See Swiss Federal Supreme Court, 23 September 2014 (ATF 4A_231/2014); Swiss Federal Supreme Court, 3 November 2016 (ATF 4A_136/2016).
49 See National Iranian Oil Company (NIOC) v. Crescent Petroleum Company International Ltd,  EWHC 510 (Comm.).
50 Findings of illegality do not, however, automatically result in a complete denial of claims under English law. Further to the UK Supreme Court's ruling in Patel v. Mirza  UKSC 42, illegality defences raised against contractual or unjust enrichment claims are to be handled flexibly, based on the consideration of the specific purpose of the rule that was transgressed, the impact on public policy and the proportionality of denying a remedy to the claimant.
51 In this case, suspicions of bribery had arisen in connection with the supply of military equipment from former Yugoslavia to Kuwait. A related dispute with an intermediary, Westacre, was referred to arbitration in Switzerland. Suspicions of bribery were mentioned, but not pleaded or proven in the course of the arbitration. The resulting award in favour of the intermediary was upheld by the Swiss Federal Supreme Court and ultimately also enforced in England, although additional witness evidence supporting allegations of bribery was made available after the termination of the arbitration, see Westacre Investments Inc. v. Yugoimport SDRP Holding Company Ltd (1999) QB 740.
52 Honeywell v. Meydan Group LLC  EWHC 1344 (TCC).
53 BRG Trading (UK) Limited v. Sinocore International Co Limited  EWCA Civ 838.
54 See A-M 'Lacoste, Corruption as Bar to award Enforcement in France', ASA Bulletin 2018/36, 31.
55 See Paris Court of Appeal, Ch. 1, 18 November 2004, No. 2002/19606 (Thales); L Radicati di Brozolo, L'illicéité qui crève les yeux, Rev Arb 2005/3, 529.
56 Paris Court of Appeal, Ch. 1, 10 September 2009, No. 08/L7575 (Schneider) and, for the higher court endorsing this decision, Court of Cassation, 12 February 2014, 10-17.076; Paris Court of Appeal, Ch. 1, 16 May 2017 (15/17442) (Customs and Tax Consultancy).
57 See, for example, L-C Delannoy, Le contrôle de l'ordre public au fond par le juge de l'annulation: trois constats, trois propositions, Rev Arb 2007/2, 177.
58 Paris Court of Appeal, Ch.1, 4 March 2014, No.12/171681(Gulf Leaders); Paris Court of Appeal, Ch.1, 14 October 2014, No.13/03410 (Man Diesel).
59 Court of Cassation, 13 September 2017, Indagro v. Ancienne Maison Marcel Bauche, Rev Arb, 2017/3, 900.
60 Paris Court of Appeal, Ch. 1, 21 February 2017, No. 15/01650, Republic of Kyrgyzstan v. V Belokon.
61 See Paris Court of Appeal, Ch. 1, 10 April 2018, No. 16/11182, Société Alstom Transport SA et al v. C D Ltd, and, for the preceding decision of the Swiss decision rejecting the annulment application, Swiss Federal Supreme Court, 3 November 2016 (ATF 4A_136/2016).
62 Court of Cassation, 13 September 2017, Indagro v. Ancienne Maison Marcel Bauche, Rev Arb, 2017/3, 900.
63 See, for example, the various proceedings related to investments by the Italian energy company, ENI, and its former subsidiary, Saipem, in connection with the construction of an oil and gas production unit in Algeria. In arbitration proceedings dealing with contractual aspects of this matter, the Algerian state-owned oil company, Sonatrach, has raised corruption arguments requesting the recovery of more than €160 million in commissions, which Saipem allegedly paid through a Hong Kong entity to procure the contract. While a settlement of these aspects of the case was reached in 2018, criminal charges against a number of individuals are currently still pending in Milan, see Global Arbitration Review, 28 March 2018: < https://globalarbitrationreview.com/article/1167326/saipem-settles-with-sonatrach-in-shadow-of-bribery-trial>.
64 See W M Cremades and D J A Cairns, 'Corruption, International Public Policy and the Duties of Arbitrators', in ICDR Handbook on International Arbitration & ADR, 3rd ed (JurisNet, LLC 2017), 23 et seqq., 36.