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 protection for whistleblowers, 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
Firstly, arbitral tribunals have had 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 public scrutiny. 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. Contracts induced by bribery are generally deemed illegal or at least challengeable under the applicable law, with their unwinding raising complex issues under contract and unjust enrichment law rules, particularly if 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 the investor to challenge measures which the host state may have adopted in reaction to the (alleged) discovery of illegal conduct. Investors today increasingly face the objection that their claims should already be dismissed at the jurisdiction or admissibility state on the basis that the applicable bilateral investment treaties do not afford protection to investments which 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 public officials which their client itself does not want to satisfy. 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 under investigation for corruption often subject payments to third parties to increased scrutiny as an immediate measure. This then often triggers payment claims from intermediaries, who in many cases can point to written contracts creating at least an appearance of legitimacy.
ii Expectations of users and courts
Over the past years, international arbitral tribunals have developed a heightened awareness for issues of bribery and corruption, demonstrating a clear willingness to look behind appearances created in order to identify criminal conduct and determine its potential relevance for the claims pending in arbitration (see Section II, below). However, in all of these cases, arbitral tribunals battle with a number of factual and legal challenges. 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. In such circumstances, the host state is generally keen to collect and present evidence pointing to the existence of improper conduct, without being too much concerned by the implications this may have for individual members of the former government or administration.
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 which retained the intermediary stopped payments to intermediaries because doubts regarding their legitimacy arose. 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 whether defences based on allegations of bribery are still admissible at this stage, and what standards of review courts should apply in this regard. As demonstrated below, the response to this question varies between jurisdictions, with some courts having begun to promote an enhanced judicial control in recent years (see Section III below).
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 an agreement between the parties to the dispute that an arbitral tribunal can claim jurisdiction for a specific matter in lieu of state courts. This agreement determines the subject matter and scope of the arbitration, and the arbitrators essentially act as service providers to the parties. This, therefore, raises the question of whether arbitrators may be overstepping their mandate when reviewing and ruling on issues of bribery or other criminal conduct in the context of contractual claims. However, in practice, such challenges are very unlikely to succeed.
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 illegal content. Under the widely recognized 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 1996 (the 1996 Act). Consequently, as recently confirmed in an English decision concerning an unsuccessful challenge against an award confirming one party’s right to terminate contracts on the basis of suspected bribery,8 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. Rather, this question is typically analysed at the merit stage only, whereas the arbitral tribunal in principle nevertheless retains its power to deal with the case and review the claims.
While the principle of separability is also known and accepted in investment arbitration, arbitral tribunals have in several recent 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. Whether this conclusion is reached on the basis of a separate admissibility test or on jurisdictional grounds is not always entirely clear,10 but in any case, 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 rightly been criticised for imposing a disproportionately harsh sanction on investors alleged of having 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 Particularly in light of these broader implications, it is important to understand the standards which arbitral tribunals use for assessing allegations of bribery and other criminal conduct in the course of the proceedings.
ii Power of arbitral tribunals to raise and investigate bribery
Relevance of the parties’ pleadings
In both investor–state and commercial cases, the adjudication of claims is premised on the assumption that it is the responsibility of the parties to set out, substantiate and prove their claims. Arbitral tribunals would risk an annulment on ultra petita grounds, if they were to sua sponte broaden the scope of the dispute, or to introduce additional facts and claims which 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 the Westacre case 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 the 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 appears relevant to 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 today there is a broad international consensus 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 which 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
The 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. However, it is less clear what standard of proof should be applied in cases involving allegations of bribery or other criminal conduct.17 It is generally accepted that the high standard of ‘proof beyond reasonable doubt’ typically applied 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 which 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 rely on circumstantial evidence, and that they regularly consider such evidence in cases involving allegations of bribery or other criminal conduct. However, whether or not such evidence will be sufficient is case-specific. Decisions, whether by arbitral tribunals or by courts, 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.
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. Most international agreements relating to large cross-border 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. In assessing such evidence, arbitrators have to focus on the specific contract underlying the dispute on which they have to rule and not let themselves be guided by allegations concerning illegal activities in other contracts or circumstances.23
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. Thus, 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 under the applicable tender rules.
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 the Hilmarton case, not least because of growing international harmonization in areas such as competition law and also 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 of the Swiss Private International Law Act, ‘PILA’; see also Article 9(1) of the Rome I Regulation). Additionally, courts have at times considered that the violation of foreign rules with 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 which substantially differ from, or even are in conflict with, the rules of the lex causae – much more frequently, they conclude that relevant foreign laws lead to the same conclusion as 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. The Fourth European Anti-Money Laundering Directive (EU 2015/849, ‘Fourth EU Directive’) 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 the funds involved are the proceeds of criminal activity. The implementation of this requirement into national law varies between Member States, which also have the possibility to impose stricter rules to prevent money laundering.
While the reporting duty arising from the Fourth EU Directive does not extend to the representation of clients in judicial proceedings and, thus, according to the prevailing view, in principle also not to the adjudication of claims by arbitrators, it could potentially be relevant to settlement agreements made in the course of proceedings. It is not impossible that arbitrators may, by facilitating a settlement or issuing a consent award in a situation where concrete evidence of criminal conduct was presented during the proceedings, be deemed to have become involved with an ‘arrangement’ known or suspected to facilitate the acquisition, retention, use or control of criminal property (see Section 328 of the UK Proceeds of Crime Act 2002). In a case concerning a settlement reached before the English courts, the English Court of Appeal took a narrow view of this statutory rule, holding that it was not intended to apply to consensual steps taken in an ordinary litigious context.32 Pursuant to this approach, arbitrators have no general reporting duty under anti-money laundering rules. This, in other words, allows them to claim legal privilege for settlements reached in the context of proceedings, and is in line with the general expectation that arbitration is, subject to overriding exceptions, a confidential process, by virtue of the applicable arbitration rules or the arbitration agreement.33
Nevertheless, arbitrators of course have to be mindful that the absence of a statutory reporting duty does not automatically shield them from criminal or civil liability. If an arbitrator suspects that proceedings were initiated with the specific purpose of laundering funds resulting from criminal conduct, or that the settlement is likely to result in the transfer of criminal proceeds, there is a risk that the arbitrator might become an accomplice to criminal conduct. The logical response to such suspicions is to raise them with the parties, and to step down, if no satisfactory answers are provided within reasonable notice. In fact, where an arbitration is a mere sham, the arbitration agreement itself is likely void or voidable, and the arbitrators must have the right to decline their participation, if only to avoid incurring personal liability.
III Judicial Control of Arbitral Awards in Annulment proceedings
i Approaches to the annulment or non-enforcement of arbitral awards
Ultimately, the standards which 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 NCPC; for Switzerland, Article 190 PILA; for England, Sections 67 and 68 Arbitration Act of 1996, ‘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 is defined narrowly, with a clear focus 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.34 The Swiss Federal Supreme Court applies a similar test, requiring the award to be untenable in light of fundamental principles of law.35 Foreign awards of which enforcement is sought pursuant to the New York Convention are essentially subject to the same standard of review, as far as public policy considerations are concerned (see Article V(s)(b) of the New York Convention; Article 194 PILA).
The English Arbitration Act 1996 (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 the 1996 Act), in addition to raising jurisdictional and procedural challenges (Sections 67 and 68). While this relatively broad review power is not uncontroversial, it is important to note that it does not extend to questions of fact36 nor to the application of foreign law.37 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).38 However, 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 which was previously suppressed in the arbitration in a fraudulent manner, the threshold for obtaining an annulment on this basis is high.39
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 the arbitral tribunal’s factual findings, and the conclusions drawn from the available evidence. This is a question which courts in several jurisdictions have had to consider in recent years, and to which they have responded differently. In particular, French courts have recently taken substantial steps 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.40 As described above, bribery is rarely expressly raised by the parties in the course of arbitration. While the Swiss Federal Supreme Court has made it clear that the prohibition of bribery forms part of international public policy for the purposes of annulment and enforcement proceedings,41 allegations of bribery which were known to the parties at the time of the arbitration, but not raised by them, or which were not sufficiently established in the arbitration, cannot be advanced in setting-aside applications. Consequently, there are several examples in which setting-aside applications based on allegations of illegal conduct failed in Switzerland.42 Similar standards apply with respect to the enforcement of foreign awards, although case law on this aspect is much more scarce.43
However, if new relevant facts or new evidence are discovered after the arbitral award has entered into legal force, 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 re-opened.44 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.45 On this basis, it is particularly possible to still introduce evidence resulting from criminal proceedings into the arbitration after its closure, and thus 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 tribunal’s assessment of the facts. As has been made clear in several recent cases, it 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, the illegality of which was not established in the arbitration.46
England: judicial restraint absent special circumstances
Similar to Swiss courts, English courts have taken a cautious approach in the review of arbitral awards in cases involving allegations of bribery or other criminal conduct. This approach is driven by procedural arguments specific to arbitration, but also by considerations of substantive law concerning the defence of illegality as applied under English law.47 As in Switzerland, English courts have reserved the discretion to order the annulment or non-enforcement of awards in exceptional circumstances, but shown 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 had rejected allegations of bribery which had been raised as a defence against a claim for non-performance.48 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, 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 re-opened 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.49 Thus, in a 2014 decision, the English High Court upheld a DIAC award concerning payment claims arising from a construction dispute.50 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 in particular 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 Chinese CIETAC award.51 In this case, fraud, in the form of an attempt to extract payments under a letter of credit through the submission of forged bills of lading, had been pleaded, but rejected in the course of the arbitration, on the basis that the alleged deception was 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, considered that, while enforcement may be denied pursuant to the New York Convention on public policy grounds relating to illegality, these grounds should be interpreted restrictively without revisiting the tribunal’s factual assessments absent exceptional circumstances. As part of this analysis, the English courts considered the degree of connection between the claim sought to be enforced and the basis for the alleged illegality, holding 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 a reinforced control
In France, review standards with respect to public policy challenges have evolved in recent years considerably further than in England or Switzerland.52 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’,53 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,54 it has been criticised for failing to ensure a sufficient level of compliance with international public policy.55 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, with a view to avoiding that one of the parties would otherwise benefit from corruption. This approach has been applied to cases concerning contracts allegedly induced through the payment of bribes,56 as well as to contracts for the payment of bribes.57
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 against an arbitral award ordering it to pay compensation for the expropriation of a foreign investor.58 In its annulment application, the state submitted new evidence showing 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.
The French Court of Cassation also confirmed a prior decision by the Paris Court of Appeal, holding that an English arbitral award concerning a contractual claim could not be enforced in France, because its enforcement would have allowed a party to benefit from corruption.59 In this case, allegations of bribery had been raised as a defence in the context of a contract for the sale of fertiliser between two private companies. In reaction to these allegations, the arbitrator had first decided to suspend the arbitration, subject to the respondent providing a bank guarantee, but issued an award against the respondent after the bank guarantee had lapsed. While enforcement proceedings were under way 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. 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, it appears that defences based on allegations of bribery can, in principle, be raised for the first time in annulment or enforcement proceedings. Thus, as a result, the judicial control of arbitral awards in cases involving allegations of criminal conduct today goes notably further in France than in England and Switzerland.
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 promise to breach the fiduciary duties owed to their organisation for the benefit of a third party in exchange for undisclosed advantages. In many cases, such improper exchange relations are initiated by those with power and influence, who solicit payments in situations where the other side is already in a weak position, for example, because of past breaches of law, exposing it to the risk of extortion. It is also a fact that allegations of bribery are, on occasion, raised for tactical reasons by respondents who are trying to nullify agreements that have become unattractive.
Arbitral tribunals or courts faced with defences based on allegations of bribery are consequently forced to navigate murky waters. Blameworthy conduct almost always exists on more than one side. An arbitration dealing with contractual issues of 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.60 Therefore, arbitral tribunals who 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.61
Today there is rightly 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 applicable substantive law and procedural requirements, to avoid their award from 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 transactions underlying the dispute. Where relevant evidence of bribery or other illegal conduct only becomes available after the termination of the arbitration, 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, in reliance on an arbitral award, benefit from criminal wrongdoing. 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. In this exercise, both arbitral tribunal and courts are assisted by a growing body of cases and precedents discussing not only specific legal issues, but also the broader context and implications from an international and comparative point of view. And if one lesson can be drawn from these cases, 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, instead of being passed over without discussion of their merit and relevance.
1 Anne-Catherine Hahn is a partner at Baker McKenzie.
2 See, for example, the OECD Working Group’s 2017 Report on Fighting the Crime of Foreign Bribery 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, EL and Alfa Inc 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 XXI, 47 (A. Van den Berg, ed. 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 U.S. Supreme Court, 2 July 1985, Case 473 U.S. 614; Interprods Ltd v. De La Rue International Ltd  EWHC 68 (Comm.).
8 Interprods Ltd v. De La Rue International Ltd (2014) EWHC 68 (Comm). The supplier, who had terminated the contractual relationship, through the arbitration sought and obtained a declaration confirming the legality of the termination and absence of further payment obligations. This declaration was challenged by the other party on the basis that the arbitrator had overstepped his jurisdiction.
9 Hassan Awdi, Enterprise Business Consultant Inc, 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 et seqq. (D. Baizeau/R. H. Kreindler eds, International Chamber of Commerce 2015).
11 See T. Meshel, The Use and Misuse of Corruption Defence in International Investment Arbitration, in 30 Journal of International Arbitration 3, 267 et seqq. (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 Behavior 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. Belokon; Court of 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/10/34 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. 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, No. 13515 of 2006 and No. 13914 of 2008 (a commission of 15–40 per cent of the value of the contract was considered to render the contract void); 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).
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 edn. (JurisNet, LLC 2017), 23 et seqq.
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 ed., International Council for Commercial Arbitration 1994).
27 See Decisions of the Court of Appeal of Geneva, 17 November 1989, and the Swiss Federal Supreme Court, 17 April 1990, in Yearbook of Commercial Arbitration, Volume 19, 214, 219 (A. Van den Berg ed, 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 et seqq. (1999).
29 See Swiss Federal Supreme Court, 28 March 2001 4C.172/2000 ASA Bull. 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, § 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 See Bowman v. Fels  EWCA Civ 226.
33 See 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).
34 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.
35 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.
36 Geogas SA v. Trammo Gas Ltd. (The Baleares)  3 All ER 554 (HL), 228.
37 Schwebel v. Schwebel  EWHC 3280 (TCC); Reliance Industries Ltd v. Enrol Oil and Gas India  1 Lloyd’s Rep. 645.
38 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.
39 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.
40 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.
41 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.
42 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).
43 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.
44 Swiss Federal Supreme Court, 11 March 1992 (ATF 118 II 199); Swiss Federal Supreme Court, 14 March 2008 (ATF 134 III 286) at Paragraph 2.1.
45 Swiss Federal Supreme Court, 6 October 2009 (ATF 4A_596/2008); see also Swiss Federal Supreme Court, 29 August 2006 (ATF 4P.102/2006).
46 See Swiss Federal Supreme Court, 23 September 2014 (ATF 4A_231/2014); Swiss Federal Supreme Court, 3 November 2016 (ATF 4A_136/2016).
47 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 which was transgressed, the impact on public policy, and the proportionality of denying a remedy to the claimant.
48 See National Iranian Oil Company (NIOC) v. Crescent Petroleum Company International Ltd,  EWHC 510 (Comm.).
49 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 nor 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.
50 Honeywell v. Meydan Group LLC  EWHC 1344 (TCC).
51 BRG Trading (UK) Limited v. Sinocore International Co Limited  EWCA Civ 838.
52 See A-M. Lacoste, Corruption as Bar to Award Enforcement in France, ASA Bulletin 2018/36, 31.
53 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.
54 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.
55 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.
56 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.
57 Court of Cassation, 13 September 2017, Indagro v. Ancienne Maison Marcel Bauche, Rev. Arb., 2017/3, 900.
58 Paris Court of Appeal 21 February 2017, No. 15/01650, Republic of Kyrgyzstan v. V. Belokon.
59 Court of Cassation, 13 September 2017, Indagro v. Ancienne Maison Marcel Bauche, Rev. Arb., 2017/3, 900.
60 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 that Saipem allegedly paid through a Hong Kong entity to procure contracts. While a settlement was reached in 2018 of these aspects of the case, 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, accessed 27 April 2018).
61 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 edn. (JurisNet, LLC 2017), 23 et seqq., 36.