Is Corruption an Emerging Cause of Action in Investor-State Arbitration?

The Trans-Pacific Partnership Agreement (TPP) has attracted unprecedented public interest in investor-state arbitration—also known as investment treaty arbitration, investor-state dispute settlement, or ISDS. Sovereign nations and foreign investors may choose this process as an alternative to ordinary litigation in domestic courts, by submitting their claims before a panel of expert judges applying international law. Though some critics seem to suggest that ISDS imposes a static list of economic rules, arbitration actually applies a complex system of legal principles which balance investor security against the sovereign autonomy of host states. Over time, investor-state arbitration has proven to be an emerging space for enforcing international norms—including transparency and anticorruption. Indeed, the TPP demonstrates this growing influence of anticorruption norms in ISDS. Not only is the TPP the first multilateral trade agreement to explicitly require anticorruption commitments from its members, its ISDS chapter will also commit members to the anticorruption rules emerging in investor-state arbitration.

Since long before the earliest discussions of the TPP, arbitral panels have sometimes used anticorruption norms to interpret treaties and contracts that made no mention of anticorruption or transparency. Indeed, although no previous trade or investment treaty has obligated host states or investors to observe anticorruption standards, ISDS panels have increasingly considered corruption relevant, and even dispositive, in determining liability. This process has enabled the development of what is effectively a common law of anticorruption principles. (Although there is no doctrine of stare decisis in investor-state arbitration, arbitral decisions provide persuasive authority in future disputes, and particular decisions may gain influence and recognition comparable to precedent. An arbitral panel has discretion to consider other public international law authorities, including previous investor-state disputes, international commercial arbitration between two private companies, public international courts, and ad hoc bodies such as the Iran-US Claims Tribunal. All of these systems have helped contribute to the emerging anticorruption norms in ISDS.)

Arbitral panels considering corruption have most often treated it as a “shield”—that is, as a defense against liability. But while recent panels and commentators have questioned the merits of a “corruption defense,” recent cases hint at the emergence of a freestanding cause of action for corruption—as a sword rather than a shield. This potential shift suggests that, in addition to the the TPP’s express transparency and anticorruption terms, the ISDS chapter may offer hidden tools for anticorruption enforcement.

Corruption as a Shield

Early recognition of anticorruption norms in ISDS treated corruption as a shield for defendants by enabling them to block claims, frequently on jurisdiction grounds:

  • The first international tribunal to apply anticorruption norms was ICC Award No. 1110, in 1963. In this ad hoc arbitration, the distinguished Judge Lagergren declined to enforce a contract between a foreign investor and an Argentine businessman hired on commission to win electricity tenders, which the parties admitted was a contract to facilitate bribes. He ruled that parties “who ally themselves in an enterprise” involving “gross violations of good morals and international public policy” will “forfeit any right to ask for assistance of the machinery of justice … in settling their disputes.” Since this ruling, a range of arbitral tribunals—including the Iran-US Claims Tribunal, ICSID, and tribunals constituted under the Energy Charter Treaty and various bilateral investment treaties (BITs)—have accordingly dismissed arbitration claims arising from contracts secured through corruption.
  • Respondent host states have taken notice and advanced similar arguments. By admitting that the respondent’s own public officials engaged in bribery during the formation of the initial contract, states have argued that the contract itself was void or illegal under the governing law—thus there was no valid contract for ISDS to enforce. This defense strategy has frequently worked. In one of the best known cases, the 2006 dispute World Duty Free v. Kenya, the investor had delivered a “personal donation” (a suitcase full of cash) to Kenya’s President Moi in order to secure concessions at two international airports. When the investor later alleged Kenya had expropriated its investment, Kenya was able to use the original bribe as a defense against liability for later wrongdoing: The tribunal held that a contract based on an illegal act was unenforceable, and dismissed the claim. In the same year, the tribunal in Metaltec v. Uzbekistan refused jurisdiction after finding evidence that the disputed contract was secured by bribery, and therefore was not a legal investment under the investment treaty. (For a great discussion of this case, see the Kluwer Arbitration Blog.) Similarly, the tribunal in Inceysa Vallesoletana v. Ecuador declined jurisdiction, accepting the host state’s submission that treaty protections apply only to lawful investments, while the tribunal in Plama Consortium v. Bulgaria refused to enforce a contract for the purchase of an oil refinery that had been secured on the basis of fraudulent documentation. (In several other cases, such as Dadras v. Iran, tribunals have declined to accept a corruption defense but have hinted that they might have done so if the evidence of corruption were stronger.)
  • In Siemens v. Argentina, prior bribery enabled the host state to avoid paying a $218 million judgment initially ordered for terminating the investor’s contract. After the initial award, a joint U.S.-German investigation under their respective anti-bribery laws revealed that Siemens had secured the investment through bribes. Argentina moved to seek annulment of the award, but the eventually the parties eventually settled when Siemens admitted wrongdoing and abandoned its attempt to enforce the original ISDS award.

This “corruption defense” in ISDS has proved controversial. Professor Yackee, for example, has suggested the defense may encourage public officials to engage in corruption, or might dissuade countries from adopting clearer domestic anticorruption laws—concerns previously discussed on this blog. A corruption defense also risks undermining the jurisdiction of arbitral tribunals over otherwise compelling claims. ISDS has a clear interest in adapting to the practical realities of foreign investment, including the possibility of corruption. Perhaps because of these challenges, there is some evidence that the anticorruption defense may be on the wane. A number of recent ISDS panels have accepted jurisdiction over disputes involving corrupt contracts. For example, the tribunal in Tanzania Electric Power Supply Company v. Independent Power Tanzania rejected the host state’s argument that bribery of public officials rendered the contract void and precluded jurisdiction. Tribunals have also rightfully rejected claims where the corrupt conduct was specifically intended by investors to manipulate access to arbitral remedies, as in Phoenix v. Czech Republic.

Corruption as a Sword

Even as tribunals are now directly questioning the merits and scope of a corruption defense, an alternative use of corruption claims is beginning to emerge: the invocation of corruption as a cause of action. In most investment treaties, the standard cause of action arises where a host state fails to provide “fair and equitable treatment” to foreign investors. Tribunals interpret “fair and equitable treatment” to require protection of legitimate investor expectations, compliance with contractual obligations, due process, good faith, and freedom from coercion and harassment. Corruption would fit easily into several of these categories. Although we have not yet seen an ISDS case explicitly endorsing the theory that corrupt conduct by the host state is a violation of fair and equitable treatment giving rise to a claim for a remedy, several recent cases suggest such a development may be on the horizon:

  • Last year in Djibouti v. DP World, Djibouti withdrew DP World’s 30-year concession to operate Africa’s largest container terminal and initiated arbitral proceedings, alleging that DP World had secured the concession through bribery. Unfortunately, because the arbitration arises from a private contract rather than an investment treaty, public information is limited on the current proceedings. Even though this is a private commercial arbitration, a decision in Djibouti’s favor could offer persuasive authority for investor-state disputes arising from investment treaties.
  • Perhaps even more relevant here is the widely discussed Yukos v. Russian Federation decision, which also hints at corruption as its own cause of action. In Yukos, the tribunal found that Russia had improperly expropriated assets of an oil company. The company’s cause of action against Russia was based in part on corrupt conduct by Russian public officials, including “fabricated” legal proceedings and a “special unit” in the General Prosecutor’s Office dedicated “exclusively” to “fabricating evidence” against the company and its chairman. While the Yukos tribunal did not label these as corruption claims per se, the tribunal found this conduct established a cause of action under ISDS. Notably, Russia sought to invoke the corruption defense recognized in cases like World Duty Free, arguing that because the claimants had engaged in corrupt business dealings, the tribunal should decline jurisdiction. Instead, the tribunal found that corruption had not tainted the immediate contract under dispute, and expressly rejected the argument that an “unclean hands” doctrine constituted a “general principle of law recognized by civilized nations” that could bar access to remedies in arbitration. The tribunal awarded the staggering compensation of $50 billion against Russia. As discussed previously on this blog, the Yukos decision suggests that investors might have a valid claim against host states where a breach of conventional “fair and equitable treatment”—such as due process or transparency—overlaps with corrupt conduct by public officials. Over time, tribunals may find that fair and equitable treatment also includes a freestanding cause of action for corruption.

A shift towards corruption as a cause of action in investor-state arbitration would have several possible implications.

  • First, this shift would reinforce anticorruption norms as increasingly settled principles of public international law, providing further persuasive authority for a range of international legal bodies.
  • Second, while the anticorruption community may welcome corruption as a cause of action, a new claim might also enable governments to escape foreign investments that become unpopular, fiscally untenable, or otherwise unwanted—which would otherwise be protected under international law. Tribunals would need to interpret a corruption cause of action that is tailored to guard against misuse.
  • Third, a shift towards a corruption cause of action would suggest that ISDS tribunals have had a far more significant role in developing “public welfare” norms than is typically appreciated. Anticorruption is one of the few public welfare principles to develop through arbitration without explicit treaty support. (Environmental protection and public health regulations have seen less success—see, respectively, Germany’s recent settlement with Vattenfall and Philip Morris’s claims pending against Australia and Uruguay.) While the Transparency and Anti-Corruption chapter of the TPP does not provide any express cause of action or defense, arbitral tribunals may interpret the TPP’s unprecedented inclusion of anticorruption standards as support for considering corruption in investor-state disputes, and rejecting corruption as a defense to a tribunal’s jurisdiction.

While corruption has not yet been recognized as a cause of action in investor-state arbitration, or even as a formal defense, an increasing number of decisions indicate that ISDS tribunals may consider anticorruption an emerging international legal norm. The TPP hints at codifying this principle. These changes suggest a growing consensus that anticorruption standards cannot be artificially separated from other international legal remedies.

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