By: Atty. Camille I. Aromas, Senior Associate
The overarching objective for bilateral investment treaties (“BITs”) is the promotion of foreign investment in the host State by way of ensuring a mechanism for the effective protection of the investor.[1] In the context of investment-related disputes, the usual scenario is that of an investor lodging a claim against a host State through investor-state arbitration. Investment treaty arbitration is thus often utilised as a tool to determine the parties’ liabilities and the investor’s entitlement to substantive protection under the relevant treaty. However, recent years have seen a steady rise in investment treaty cases where host States have defeated a claim by the investor by invoking the defence of corruption.[2] The defence consists of a general allegation that corruption attended the formation and performance of the investment, thereby precluding any claims arising from it. In most of these cases, the acceptance by the tribunal of the corruption defence has operated as a complete bar to jurisdiction, in which the tribunal had refused to hear the merits of the claim notwithstanding that the corrupt act involved a State agent.[3] In a case, the tribunal reasoned that, although it is not mandated to police corruption, it cannot afford protection to a party that has resorted to a corrupt act.[4]
This approach has been highly criticised as incentivising host States to perpetrate a corruption scheme in order to lay the basis for the future invocation of the corruption defence against an investor in their territory.[5] It is not difficult to imagine how, generally, this trend may encourage host States to exploit the investment treaty regime in order to evade their obligations under a treaty. The reasoning of the investment tribunal behind its refusal to exercise jurisdiction on account of corruption has likewise been perceived as antithetical to the reciprocal nature of investment relationships which requires a balancing of interests between the investor and the host State.[6] Thus, when a tribunal rejects an investment treaty claim at the jurisdictional stage on a finding of corruption involving both the investor and the State, an asymmetry is created wherein the investor with potentially legitimate investment claims is penalised, and the State is exonerated from any liability arising from breach of its treaty obligations and even, unjustly enriched.[7] This asymmetry potentially undermines the investment treaty regime, and yields a result that is exclusively detrimental to the investor who virtually has no other recourse to pursue its claim.[8] In contrast, it would be inconceivable for tribunals to ignore corruption at any stage of the arbitral proceeding, and to do so may undermine municipal law and treaty consent.[9]
Broadly, this essay will analyse the impact of a successful invocation by the host State of a corruption defence at the jurisdictional phase of an investment treaty claim. First, it will describe the approach adopted by investment tribunals in addressing the corruption defence. Then, it will explain why the trend of upholding the corruption defence invariably amounts to an asymmetrical treatment between the investor and the host State.
The Analytical Framework of the Jurisdictional Approach
When confronted with a claim that corruption took place in the development of an investment, tribunals will either decline to exercise jurisdiction,[10] or rule that the investment claim is inadmissible.[11] Using this approach, the tribunal will generally first look at the text of the relevant BIT to ascertain whether the investment claim falls under the range of disputes that are subject to adjudication under the treaty. The tribunal will often start its analysis with the “legality requirement / clause” of the BIT.[12] The legality clause requires the underlying investment to be made “in accordance with local laws” in order to be afforded the protection envisaged under the treaty.[13] In the language of the tribunal in Gustav Hamester v. Ghana, “it is clear that States may specifically and expressly condition access of investors to a chosen dispute settlement mechanism, or the availability of substantive protection. One such common condition is an express requirement that the investment comply with the internal legislation of the host State.”[14]
Although the matter remains controversial, the emerging consensus is that the legality clause bears on the tribunal’s jurisdiction, rather than as a substantive defence related to the merits.[15] Tribunals that share this view proceed from the premise that an illegal investment is not an investment within the meaning of, and as sought to be protected by, the BIT in question.[16] This was the bone of contention of the tribunal in the case of Fraport v. Philippines in refusing to exercise jurisdiction over the dispute. While the case did not directly involve the issue of corruption, the tribunal ruled that, because there was a breach of the local law on foreign ownership of a public utility, there was no “investment in accordance with law” to speak of and, therefore, it did not have any jurisdiction ratione materiae.[17] It bears emphasis that, for purposes of ascertaining jurisdiction, there is some consistency in case law that supports the proposition that only legality at the initiation of the investment (in contrast to illegality during the performance of the investment) bears on the tribunal’s jurisdiction. In Gustav Hamester, the tribunal ruled squarely on this issue; thus, “on the wording of this BIT, the legality of the creation of the investment is a jurisdictional issue; the legality of the investor’s conduct during the life of the investment is a merits issue.”[18] Similarly, the tribunal in the cases of Alasdair Ross Anderson, et al. v. Costa Rica,[19] Alpha Projektholding v. Ukraine,[20] and Ioannis Kardassopoulus v. Georgia[21] held that the legality clause is an element of jurisdiction. All these cases consistently and broadly recognised that illegality in the making of the investment will deprive the tribunal of jurisdiction and lead to the dismissal of the claim.
Building on the foregoing doctrinal framework, the cases below will illustrate how tribunals have dealt with the issue of corruption, either from the viewpoint of jurisdiction if the illegality affects the consent to arbitrate,[22] or the enforceability of claims arising from the underlying investment contract.
- Inceysa v. El Salvador[23]
The case involved a concession for vehicle inspection services alleged to have been fraudulently obtained by the Spanish investor Inceysa. The tribunal declined jurisdiction principally on the ground of lack of consent. It found that certain clauses in the relevant treaty require investments to be made in accordance with the laws of the host State, and the consent granted by El Salvador in the BIT is limited to such investments. Consequently, “disputes that arise from an investment made illegally are outside the consent granted by the parties and, consequently, are not subject to the jurisdiction”[24] of the tribunal.
- Metal Tech v. Uzbekistan[25]
The joint venture involving the investor Metal Tech and state-owned companies in Uzbekistan was eventually liquidated following the issuance of a resolution by the Uzbekistan government which abrogated certain exclusive rights under the joint venture. The tribunal found that the investment structure involved the payment of bribes. The tribunal unanimously ruled that it did not have jurisdiction over the dispute on account of Uzbekistan’s lack of consent under the BIT and the ICSID Convention. According to the tribunal, payments made by the investor to an Uzbek government official and the brother of the then Prime Minister of Uzbekistan violated Uzbekistan law in relation to the establishment of Metal Tech’s investment in Uzbekistan. Consequently, the investment did not comply with the BIT requirement that the investment be made “in compliance with the law at the time when it was established”[26] and therefore did not fall under the category of claims cognizable by the tribunal under the treaty in question. The tribunal also ruled that, given the nature of the investment, the investor’s claims arising from such investment were not covered by Uzbekistan’s consent. Notwithstanding the dismissal of the claim, the tribunal allocated costs to each party due to the respondent State’s implicit participation in the underlying corruption. In ruling so, the tribunal recognised that the State has participated in creating the situation that led to the dismissal of the claims.[27]
- World Duty Free v. Kenya[28]
The tribunal found the investor to have paid a bribe to the then President of Kenya for the right to build and operate duty free stores at Kenyan airports. The investor did not dispute the existence of the payment, but claimed that it was in the nature of a gift that is legitimate in Kenyan culture. The tribunal dismissed the claim and ruled that, since bribery is contrary to international public policy, it cannot uphold claims based on contracts obtained by corruption.[29] The tribunal further held that the bribe cannot be attributed to Kenya because, even though the bribe was paid to the head of state, it was paid secretly and not in the performance of his official duties.[30]
- EDF v. Romania[31]
The investor EDF filed a claim against Romania, principally alleging that various state entities conspired to attack its investment after EDF’s chairman refused to pay a bribe requested by government officials on behalf of Romania’s then Prime Minister. The tribunal unanimously dismissed all the investor’s claims against Romania holding that EDF had failed to produce clear and convincing evidence that a bribe had been requested on behalf of the Romanian government.
Consequence: Asymmetrical Treatment Between Investor and Host State
Against the factual backdrop of corruption tainting the underlying investment, an analysis of the foregoing case law demonstrates the propensity of investment tribunals to dismiss a claim at the outset of the proceeding, broadly either on the ground of the illegality of the investment, lack of consent, or violation of international public policy. As this often happens at the jurisdictional phase, one can easily conclude that the putatively aggrieved investor is effectively completely denied of relief with the dismissal of the case.[32] This approach disregards investor protection considerations,[33] and creates an asymmetry in the treatment between the investor and the host State that BITs seek to avoid.
First, in disposing of challenges to its jurisdiction, the tribunal does not ascribe any meaningful relevance to the involvement or acquiescence of the host State in the unlawful conduct, notwithstanding that both the State and the investor may have been complicit in the corrupt act. In World Duty Free, while the tribunal found that “the bribe was apparently solicited by the Kenyan President,” the existence of the bribe provided a complete defence to all the claims lodged by the investor against Kenya. Consequently, in refusing jurisdiction at the outset, the tribunal sanctions the investor’s conduct exclusively[34] and the State is entirely exculpated from liability. Host states have not even been required by tribunals to prosecute the investor in order to successfully raise their corruption defence.[35] The tribunal in Metal Tech declined jurisdiction based on a finding of corruption even though there was no showing that the host State made any effort to prosecute the government official and the individuals who perpetrated the corrupt act. Similarly, in World Duty Free, the tribunal dismissed the investor’s claim even though it found “disturbing” that the recipient of the bribe was the Kenyan President, noting precisely that there was no attempt by Kenya to prosecute its then President who, at the time of the proceedings, was no longer immune from suit.[36]
Second, there is an imbalance in the allocation of the evidentiary burden and the application of the standard of proof between the investor and the host State. In Metal Tech, the tribunal recognised that corruption is particularly difficult to establish and, on this basis, it ruled that mere circumstantial evidence would suffice for the State to satisfy the standard of reasonable certainty in order to prove corruption.[37] On the other hand, in EDF, the tribunal required clear and convincing evidence – a heightened burden of proof, for the investor to satisfy. According to the tribunal, considering that the jurisdictional inquiry is a threshold question, the standard of proof should be high and allegations of corruption are relevant to the disposition of the issue only if there is clear and uncontested evidence that corruption tainted the investment.[38] Against this standard, the tribunal refused to lend credence to the testimony of various witnesses, an email which shows the solicitation written contemporaneously with the alleged bribe solicitation, and an audio recording of the verbal solicitation.[39]
Tribunals have also added inconsistent layers to the investor’s evidentiary burden in order to hold the host State responsible. In World Duty Free, the tribunal required the investor to prove that the State was complicit in the bribery and that it was not merely a covert act performed by the official concerned.[40] This is an unrealistic and nearly an impossible burden to discharge considering that any form of corruption is almost always concealed. In EDF, the tribunal required proof that the corrupt act was not made in the personal interest of the individual soliciting the bribe, but “on behalf of and for the account of the foreign official’s government.”[41] Against this reasoning, it is inconceivable how a State can ever be held liable for corruption since it is inherently resorted to for personal benefit.[42]
Third, the manner in which tribunals apply the principle of attribution, in terms of responsibility for corruption, is decidedly skewed towards the host State. There is currently no case in international investment arbitration where a host State has been held responsible for corruption involving its government official.[43] As a scholar puts it, where “a public official’s actions in soliciting or extorting bribes from foreign investors is [in theory] attributable to the host State; but when solicitation meets acceptance . . . consummated corruption binds the investor to the acts of its agent, but the corruption of the public official is not attributable to the host State.”[44] Thus, in World Duty Free, the tribunal refused to impute knowledge of the corrupt act to the State ruling that, since the bribe was covert and accepted by a President acting outside his official capacity, the corrupt act could not be imputed to Kenya. This ruling utterly disregards the customary international law of State responsibility for the ultra vires acts of its organs as enshrined in the International Law Commission’s Articles on State Responsibility.[45] It is also inconsistent with the ruling laid down in Waguih v. Egypt to the effect that the conduct of any state organ shall be considered an act of the state even though it exceeds the authority of that organ. [46] On the other hand, the actions of corporate agents are almost always imputed to the corporate entity resulting in the deprivation of its rights under a contract, as well as treaty protection.[47]
Fourth, tribunals tend to asymmetrically treat a corruption claim in terms of the party making it. Based on jurisprudential trends, when a host State invokes the corruption defence, tribunals dismiss the investment claim from the viewpoint of jurisdiction. Hence, where corruption is involved, it is nearly impossible to reach the merits phase of the proceeding.[48] Necessarily, any allegation by the investor that the host State had itself engaged in corruption will never prosper against a finding that the investor was guilty of corruption in the same case. In contrast, when it is the investor that alleges corruption, tribunals treat the issue as a fair and equitable treatment claim, and not as a matter of jurisdiction. In EDF, the tribunal held that “a request for a bribe by a State agency is a violation of the fair and equitable treatment obligation owed to the Claimant pursuant to the BIT…”[49] Consequently, a finding of corruption on the part of the State has virtually no relevance in the investment claim, having no preclusive effect.[50] The host State may still use the fact of corruption to challenge the jurisdiction of the tribunal for other violations of the BIT.
Conclusion
Suffice it to say, the corruption defence has emerged as a potent tool for host states to defeat investor claims in cases where the contract in question was obtained through corruption.[51] The drastic and one-sided approach that tribunals have adopted in resolving the corruption issue practically eliminates all equitable considerations in favour of the investor. When the tribunal regards the investment as tainted with corruption, any licit basis for an arbitration proceeding disappears.[52] This not only yields detrimental consequences for the investor who is deprived of full access to investment treaty protection; it also creates a powerful incentive for States to cultivate a culture of corruption in order to escape liability for breach of their obligations towards the investor, or otherwise to profit from their own misconduct. Ultimately, this result divests BITs of their core purpose of protecting and promoting foreign investment because investors are deprived of an effective instrument to seek redress for an infringement of their rights by the host State.
A suggested approach to the asymmetrical treatment between the investor and the State is a nuanced treatment of corruption and a resolution of the corruption claim at the merits stage.[53] Unlike the jurisdictional approach, this will enable the tribunal to conduct “an equitable balancing exercise”[54] that considers the host State’s involvement in the investor’s misconduct as would, for instance, engage state responsibility. As the dissenting arbitrator in Fraport puts it, treating illegality as a merits issue enables the tribunal to balance the misconduct of the investor and the host State.[55] There is also some perceived benefit in conditioning the ability of host States to raise the corruption defence on certain grounds, e.g., when a State demonstrates that it has adopted measures to combat corruption, which include the prosecution of the corrupt government officials.[56]
[1] Joshua Boone, ‘How Developing Countries can Adapt Current Bilateral Investment Treaties to Provide Benefits to Their Domestic Economies’ (2011) 1 GLOBAL BUS. L. REV. 187 (which says that BITs were intended “to facilitate . . . investment flows by the opening up of secure channels for foreign direct investment . . . stabilizing the investment climate, granting protective investment guarantees, and providing neutral dispute mechanisms for ‘injured’ investors.”).
[2] See, e.g., Inceysa Vallisoletana S.L P. Republic of El Salvador, ICSID Case No. ARB/03/26, Award (2 August 2006); Metal-Tech Ltd. v Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award (14 October 2013).
[3] ibid.
[4] See, e.g., Metal Tech, para.165.
[5] R. Zachary Torres-Fowler, ‘Undermining ICSID: How the Global Antibribery Regime Impairs Investor-State Arbitration’ (2012) 52 VA. J. INT’L L. 1018, 1021–23.
[6] Andreas Kulick, ‘Corruption and other irregularities’ in James Crawford & John S. Bell (eds), Global Public Interest in International Investment Law (Cambridge University Press 2012) 329.
[7] Christopher Schreuer, ‘Unjustified Enrichment in International Law’ (1974) 22 Am. J. Comp. L. 281.
[8] Kulick (n 6) 328 (Kulick further opines that the arbitral proceeding is the only chance of the investor to pursue its interest in view of Article 27 of the ICSID which prohibits recourse to diplomatic protection).
[9] Aloysius Llamzon, ‘The Control of Corruption through International Investment Arbitration: Potential and Limitations’ (2008) 102 ASIL PROC. 209.
[10] See, e.g., Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/03/25; Award (16 August 2007) (hereinafter: Fraport v. Philippines); Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, ICSID Case No. ARB/07/24, Award (18 June 2010), para. 125 (hereinafter: Gustav Hamester).
[11] See, e.g., Phoenix Action Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award (15 April 2009).
[12] Filip Balcerzak, Investor – State Arbitration and Human Rights (Brill Nijhoff 2017) 134.
[13] ibid.
[14] Gustav Hamester, para. 125.
[15] See, e.g., Fraport v. Philippines; see also Patrick Dumberry, Gabrielle Dumas-Aubin, ‘The Doctrine of ‘Clean Hands’ and the Inadmissiblity of Claims by Investors Breaching International Human Rights Law’ (2013) 10:1 Transnational Dispute Management, p. 4 [Dumberry, Dumas-Aubin]: “A tribunal will have to decline jurisdiction over a claim when faced with an investment in compliance with a BIT’s “in accordance with the law” provision. This is indeed a matter of jurisdiction rather than admissibility.”
[16] Fraport, para. 402
[17] ibid.
[18] Gustav Hamester, para. 127.
[19] ICSID Case No. ARB(AF)/07/3, Award (19 May 2010), paras. 58-59.
[20] ICSID Case No. ARB/07/16, Award (8 November 2010), para. 297.
[21] ICSID Case No. ARB/05/18, Decision on Jurisdiction (6 July 2007), paras. 174-184.
[22] Stephan W. Schill, ‘Illegal Investments in Investment Treaty Arbitration’ (2012) 11(2) Law & Prac Int’l Cts & Tribunals 290.
[23] Inceysa Vallisoletana S.L P. Republic of El Salvador, ICSID Case No. ARB/03/26, Award (2 August 2006) (hereinafter: Inceysa).
[24] Inceysa, para. 207.
[25] Metal-Tech Ltd. v Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award (14 October 2013) (hereinafter: Metal Tech).
[26] Metal Tech, para. 194.
[27] Metal Tech, para. 422.
[28] Unlike Inceysa and Metal Tech, the corruption defence in this case was tackled by the tribunal at the merits phase.
[29] World Duty Free, para. 157.
[30] World Duty Free, para. 169.
[31] EDF (Servs.) Ltd. v. Republic of Romania, ICSID Case No. ARB/05/13, Award (8 October 2009) (hereinafter: EDF).
[32] Llamzon (n 9) 209.
[33] ibid.
[34] Kulick (n 6) 318
[35] Brody Greenwald, ‘The Viability of Corruption Defenses in Investment Arbitration When the State Does Not Prosecute’ BLOG OF THE EUR. J. OF INT’L L. (April 2015), http://www.ejiltalk.org/the-viability-of-corruption-defenses-in-investment-arbitration-when-the-state-does-not-prosecute/#more-13300
[36] World Duty Free, para. 180.
[37] Metal Tech, para. 243.
[38] EDF, para. 221.
[39] EDF, para. 255; see also Bruce Klaw, ‘State Responsibility for Bribe Solicitation and Extortion: Obligations, Obstacles, and Opportunities’ (2015) 33 Berkeley J. Int’l Law 91.
[40] World Duty Free, para. 169.
[41] EDF, para. 232.
[42] Klaw (n 39) 94.
[43] Aloysius Llamzon, ‘State Responsibility for Corruption: The Attribution Asymmetry in International Investment Arbitration’ TRANSNAT’L DISP. MGMT, May 2013, at 4
[44] Llamzon (n 43) 76.
[45] Article 7 thereof provides: “The conduct of an organ of a State or of a person or entity empowered to exercise elements of the governmental authority shall be considered an act of the State under international law if the organ, person or entity acts in that capacity, even if it exceeds its authority or contravenes instructions.”
[46] Waguih Elie George Siag and Clorinda Vecchi v. The Arab Republic of Egypt, ICSID Case No. ARB/05/15, Award (1 June 2009).
[47] Aloysius Llamzon, ‘State Responsibility for Corruption: The Attribution Asymmetry in International Investment Arbitration’ (2013) 10 Transnat’l Disp. Mgmt 1-4.
[48] Kulick (n 6) 332.
[49] EDF, para. 221.
[50] Llamzon (n 47) 38.
[51] Jarrod Hepburn, ‘In Accordance with Which Host State Laws? Restoring the ‘Defence’ of Investor Illegality in Investment Arbitration’ (2014) 5 J. INT. DISP. SETTLEMENT 531.
[52] Kulick (n 6) 319.
[53] Kulick (n 6) 330.
[54] Jason Webb Yackee, ‘Investment Treaties and Investor Corruption: An Emerging Defense for Host States?’ (2012) 52 VIRGINIA J. INT’L. L. 723.
[55] Yackee (n 54) 744.
[56] Llamzon (n 9) 208, 210.
