TI: ISA AL .BEST STRATEGIES

The fact that arbitrations are governed by several intersecting bodies of law makes generalisation difficult. Further challenges arise from the absence of a doctrine of precedent in international arbitration, and from arbitations not been public. This allows divergent interpretations and practices,  even when the same laws and rules are concerned.

a.the law to be used to decide the ISA substance = Applicable Law

parties choose the applicable law, through a contract/treaty, prior to the dispute arising

ISA does not have a doctrine of precedent. Accordingly, arbitrators are not bound to follow earlier decision of other tribunals. this contributes to a lack of clarity/uncertainty, and vests considerable discretion in arbitrators. However, to the extent the doctrine of precedent forms part of the applicable law, arbitrators are bound to follow it – e.g. if the applicable law is English law, arbitrators must follow authoritative English court decisions.

ISA’s jurisdiction:

is limited to resolving the specific dispute(s) that the parties have agreed to refer to arbitration, and using the law that the parties have agreed…ISAS do not have a general jurisdiction to decide whether a state’s criminal laws, including criminal laws relating to corruption, have been breached. They do not have the power to convict or acquit parties for alleged criminal offences. Arbitral proceedings lack the procedural safeguards of criminal trials, such as a judge who is independent of the parties, and the powers necessary to conduct a criminal trial, such as the ability to compel witnesses to testify. Nevertheless, tribunals can and should consider allegations of corruption, including allegations of criminal offences, in which case, ISA jurisdiction is limited to the civil consequences of alleged breaches of criminal law.

CISA:

parties often choose the law of a legal hub, such as New York or England. In the case of P&ID v Nigeria, clause 20 of the Gas Supply and Processing Agreement (‘GSPA’) specified that the contract was governed by Nigerian law and, hence, Nigerian law was the applicable law in the arbitration. Principles of international law may still be relevant in CISA, to the extent that they are incorporated into domestic law– in this case, Nigerian law

Allegations of corruption are directly relevant to the resolution of the dispute, only insofar as they may affect the validity or enforceability of the contract under scrutiny….So, if corruption is proven by a party, the tribunal will have to determine the contractual consequences, according to the applicable law….Nigeria’s belated allegation in P&ID v Nigeria is that the GSPA was obtained through the payment of bribes. most legal systems recognise that contracts obtained through the payment of bribes are either void, or voidable (uk, eu,etc) at the election of the innocent party

TISA:

The applicable law is the investment treaty itself, as supplemented by other relevant principles of international law. Domestic law is also relevant, insofar as investment treaties rely on domestic law…If the treaty does not specify the applicable law, or if a contract does not contain a governing clause, the tribunal has discretion to determine the applicable law. Tribunals will do so by reference to a range of factors, including the facts of the dispute, relevant choice of law rules, and the relevant arbitral rules

If the host state can establish that an investment was procured by corruption wrt its national laws, the TISA will not have jurisdiction to hear the case and the investors’ claims will fail.

Arbitral rules (govern procedure) 

parties may choose the arbitral rules

circumstantial evidence is sufficient to prove corruption =  ‘red flag’ approach

Exception to the criticised pple:[tribunal’s powers are limited to issues that the parties raise]:

If an allegation of corruption is made in the course of isa, isa becomes burdened with a duty to consider the allegation and to decide whether or not it is proven….ISAS power to investigate suspicions of corruption of their own motion….others interpret that arbitrators have a duty to investigate any suspicions of corruption, grounded in their duty to resolve the dispute according to the applicable law and to render an enforceable award….However, isas do not have a general mandate to investigate corruption….

exceptions= isas becomes burdened with a duty to consider the allegation and to decide whether or not it is proven:

-if relevant, isas can investigate

-if, imposed by isas’ ethical codes ; ethical codes of any member-based organisation of which the arbitrators is a member; the International Bar Association Guidelines, or the rules of the national bar association with which the arbitrator is licenced

<> COCOO CHALLENGES ISA FOR breach of the new duty to consider the allegation…, thus failing to act on suspicions of corruption 

Confidentiality of proceedings

isa secrecy has much criticism..so, why secrecy is not removed? …my opinion:  ISA is preferred [by the corrupted], over ordinary litigation, because saves them from REPUTATIONAL HARM, which is the worst harm…which would be inflicted to them in ordinary litigation.

<> ISA = PADI’S PREFERRED SETTLEMENT MACHINE

Law of the seat of arbitration

The ‘seat’ of arbitration = the domestic law, agreed by parties, to supervise the isa….thus, the seat is not necessarily the place where physically takes place (although, is usually)

all isas take place in domestic jurisdictions….except for arbitrations under the ICSID Convention: are immune from oversight by any domestic jurisdiction. are only supervised by the ICSID Convention

confidentiality

countries balance:  reporting suspicious activity, and ensuring LPP legal professional privilege

the EU Anti-Money Laundering Directives, impose a duty on legal professionals to report ml suspicions 

exceptions = lawyer’s activities not ML regulated..thus, lawyers have no duty to report ml suspicion, when :

• • –  providing legal advice wrt litigation (eg pap)…English Court of Appeal: lawyers advising parties in litigation, are excluded from the reporting provisions in the UK Proceeds of Crime Act….is yet to be tested, if this (besides to lawyers), also applies to arbitrators
  • – participating (eg providing legal advice) in a financial transaction’,
  • -participating in litigation or adr 

in UK, settlements, negotiations, out of court settlements, adr, and tribunal representation, are NOT an ‘arrangement’ for the purposes of the Proceeds of Crime Act….Furthermore, the UK Arbitration Act grants arbitrators with immunity for acts or omissions committed during their duties, unless in bad faith.

wherever arbitrators do have a duty to report suspicions of corruption or ml, by virtue of the law of the seat, this duty will be in tension with duties of confidentiality.   the confidentiality obligation of arbitrators is exempted  (via a public policy exemption)...but never yet happened, because no isa , ever, has ever reported illegal behaviour uncovered in the course of proceedings…why? because isas for secrecy…to prevent reputational harm

 ‘public policy’ [as an exemption to the obligation to enforce arbitral awards], does not mean the policies in the physical jurisdiction of proceedings, but means: justice and morality = norms that are widely held= ‘international public policy’.

domestic courts are entitled to refuse to enforce an arbitration award, if corruption has been proven…why? 

English Commercial Court’s decision in Sinocore International Co Ltd. V RBRG Trading (UK) Ltd: held: distinction between enforcing contracts for:

a.illegal conduct. this is contrary to English public policy

b.enforcing contracts tainted by illegality (e.g. induced by bribery). this is not contrary to English public policy

<> cocoo: arbitrators’  legitimacy and integrity, is the source of their wpi duty of care to the administration of justice’ , to be proactive in identifying cl,el,hrl,al….Thus, ISAS that fail this wpi duty of care, become void of legitimacy and integrity…so the isa decision is void, because for the isa decision to be valid, the isa had to be bound by the wpi duty of care 

this is also a ground for isas to refuse to decide disputes arising from corruptly-acquired investments… example, in the recent case of Spentex v Uzbekistan, a TISA cited the OECD Convention on Bribery and UNCAC to show that particular acts of bribery were contrary to transnational public policy. On this basis it refused to hear the investor’s claims

 P&ID v Nigeria

Nigeria claims that ‘a series of bribery schemes’ paid by P&ID to Ministry of Petroleum officials. Nigeria also makes allegations of money-laundering against P&ID, characterising the arbitration as a ‘sham’, Nigeria implies that the arbitration itself was an instance of money-laundering. nigeria’s central allegation is that officials within the Ministry of Petroleum obtained a private benefit by acting contrary to the interests of the Ministry and of Nigeria. There is no suggestion that Nigeria intended to engage in ml. Nigeria alleges that the arbitration was a ‘sham’. because ‘from the outset, P&ID’s intent was to transform the GSPA into a claim against the FRN [Federal Republic of Nigeria], which it could then enforce through arbitration.’  Ministry of Petroleum corruptly facilitated this plan, including by failing to contest the arbitration vigorously: ‘The Ministry of Petroleum’s handling of the FRN’s defense was .suspiciously, very lame. 

opinion: this case is better understood as bribery, than as ml

Has Nigeria alleged bribery, money- laundering or both?

is Nigeria allegation of misconduct, amount to bribery and/or ml?

opinion: even if the facts alleged by Nigeria were true,  ml is not a vehicle to legitimise illegal funds. To be able to assume that  this is an ML ISA ,is required that  both parties agreed to use isa for ml

situation where the state alleges that the investor used bribes :

this is what would have happened, if Nigeria had raised the allegations of corruption during the arbitration

 In CISA, the tribunal should apply the applicable law of the contract [In most cases, says that the contract is either void or voidable at innocent party’s election if bribery is proven]

if bribery is proven the investor’s claims will be dismissed on the grounds that the investor did not make a lawful ‘investment’ that is entitled to the protection of the treaty.

dismissed on transnational public policy ground

isa investigation of corruption, where the issue is not raised by either of the parties

Nigeria’s lawyers described the Minister of Petroleum Resources, at the time of the GSPA, as having been a “friendly” Minister who purported to commit the Government to obligations and concessions which exceeded his powers…..also….lack of a tender process prior to the conclusion of the contract, P&ID’s apparent lack of experience in the gas sector, Nigeria’s apparent failure to begin carrying out any of its obligations under the contract, once the contract had been concluded, P&ID’s offshore corporate structure, and the wider history of corruption in Nigeria’s resource sector

….should have raised suspicions of the possibility of corruption. From the documents relating to the arbitration that are publicly available, it does not appear that the tribunal took any active steps to investigate the possibility of corruption

<> cocoo:   as the isa tribunal (isat) does not want to investigate further, or properly,,,, this is a gap in the market, for cocoo to fill

there is an emerging consensus that arbitral tribunals [ISAT], are entitled to investigate suspicions of corruption of their own motion, insofar as these suspicions relate to the resolution of the dispute – for example, because such suspicions would, if proven, have implications for the validity of the contract. It is less clear whether arbitral tribunals are under an obligation to initiate such investigations.

strong reluctance by tribunals to engage with the implications of corruption. thus, only two cases in which iast have investigated corruption of their own motion

Policy analysis and a reform agenda

The case of P&ID v Nigeria highlights policy concerns about the way that investor-state arbitration intersects with corruption. These concerns arise regardless of whether Nigeria’s belated allegations of corruption are true (a question on which we take no position).

2 possible outcomes:

A/ If Nigeria’s allegations of corruption are true, then international arbitration has allowed an investor to convert a series of corrupt interactions with officials in the Nigerian Ministry of Petroleum Resources into an English court order for almost USD 10 billion in damages. Given Nigeria’s financial position, it is unlikely this amount will ever be paid in full. However, to the extent that it is paid even in part, the burden will fall on Nigerian citizens and taxpayers [WPI], not on the allegedly corrupt officials of the Ministry of Petroleum Resources.

B/ If Nigeria’s belated allegations are false, they have allowed the Nigerian state to divert attention from other questions that might otherwise be being asked – for example, questions about lack of state capacity to negotiate and manage resource contracts, and to adequately defend the state’s interests in subsequent legal disputes. 

why the tribunal in P&ID v Nigeria failed to investigate red flags of corruption?:

• –  Arbitration is a mechanism for resolving disputes based on parties’ consent. For this reason, tribunals have historically confined themselves to deciding issues raised by the parties. This is reflected in the (outdated) view that ‘it is not the duty of an arbitral tribunal to assume an inquisitorial role and to search officiously for evidence of corruption where none is alleged.’
• –  Confidentiality of arbitral proceedings: not subject to timely public scrutiny

 World Duty Free v Kenya

cisa, where worlddutyfree claims that Kenya had breached the contract to operate airport duty-free stores, and had illegally taken their property. Kenya argued that the contract had been procured by corruption and was therefore void. The investor openly conceded that it had made a payment to Kenya’s then-President, but argued that this was ‘a personal donation … to be used for public purposes’ in line with Kenyan cultural practices of gift giving. Without referring to any legal standard, the tribunal characterised this payment as a bribe.

Having established that a bribe was paid, the question was then the consequences of the bribe for the contractual dispute:

Tribunal held: states can deny the recognition/enforcement of foreign arbitral awards, based on their own conception of transnational public policy TPP.   a consensus has emerged, among states, that corruption was contrary to public policy. It cited international treaties, national court decisions and arbitral awards as evidence. tribunal decision grounds:

– TPP: claims based ‘on contract obtained by corruption, cannot be upheld’.

-the applicable law of this contract : was governed by English law and Kenyan law. The tribunal held that Kenyan law was materially identical to English law: [the contract was not automatically void but, rather, voidable at Kenya’s election]. The tribunal held that Kenya rescinded the contract through its pleadings in the arbitration

ICC Case No 1110 of 1963

This was an arbitration between two unnamed private parties, not an investor-state arbitration.  the agreed contract states that the claimant would use his influence in Argentina to obtain business for the respondent. The respondent, in turn, would pay a 10% commission to the claimant on all contracts thereby obtained. When the respondent refused to pay a commission on some of its contracts in Argentina, the claimant initiated arbitration…..so…what was the legal consequences (of bribary) for the contractual dispute?…held: a contract for bribery is contrary to international public policy, thus the arbitrator stated that he had no jurisdiction to decide the dispute

case is Metal-Tech v Uzbekistan:  a tisa

Strictly speaking, the case is not actually an example of a tribunal investigating corruption of its own motion, as the host state argued that ‘the Claimant engaged in corruption and made fraudulent and material misrepresentations, to gain approval for its investment.’

 in ISA, the parties’ written submissions and most other documents relating to the case remain confidential. 

At the hearing, the investor’s CEO admitted paying several million dollars to ‘consultants’ to engage in ‘lobbying’ around the time that investment was made. The tribunal ‘considered it its duty to inquire about the reasons for such payment.’ For this reason, it ‘exercised its ex officio powers to call for additional testimony and evidence.’…..This additional evidence raised a number of ‘red flags’ of corruption that the claimant was unable to explain. eg large amounts of the payments, the absence of explanation or documentation to support the investor’s argument that the consultants had provided legitimate services, the fact that one of the consultants was the Prime Minister’s brother, and the fact the consultants were paid indirectly through offshore companies.

On this basis, the tribunal held that ‘corruption is established to an extent sufficient to violate Uzbekistan law in connection with the establishment of the Claimant’s investment in Uzbekistan.’ Because the investment treaty required investments to be ‘implemented in accordance with’ Uzbek law, the claim failed for lack of jurisdiction.

Uzbekistan did not provide any direct evidence of receipt of bribes by Uzbek officials. This was not an obstacle for the tribunal in reaching its conclusion.

corruption allegations are raised after the ISA

the innocent party’s failure to raise allegations of corruption in the arbitration, calls for some explanation – for example, the appearance of new information that could not have been uncovered through diligent inquiries during the isa. Nigeria has argued that its failure to raise the issue of corruption in the arbitration was due to the fact that the Ministry of Petroleum Resources was also responsible for the defence of the arbitration.

can the arbitral award be reopened?

arbitral awards are final and binding on the parties

The mandate of the arbitral tribunal terminates the isa…..exceptions (=  no new evidence is allowed after the isat mandate ends) :

a.isas conducted under the UNCITRAL Arbitration Rules (on which the Nigerian arbitration rules are based), 

b.the power to correct or interpret the award does not include the power to revise the award in light of new evidence.

Courts in most jurisdictions accept corruption as a basis to set aside an award on wpi grounds

in uk: Westacre v Jugoimport:

was not an investor-state arbitration. Rather, it related to consultancy contract by which Jugoimport engaged Westacre to assist it in concluding arms sales contracts with Kuwait. When Jugoimport purported to terminate the consultancy contract, Westacre commenced arbitration. At a late stage in the arbitration, Jugoimport argued that the contract was void as Westacre had been using the consultancy fees to bribe Kuwaiti officials. Jugoimport cited circumstantial evidence that would now be regarded as ‘red flags of corruption’ – the very large consultancy fee of 15-20% on the arms sales and that Westacre was an ‘international paper vehicle’ domiciled in Panama. The tribunal took a dim view of Jugoimport’s failure to raise the issue of corruption earlier. It observed that ‘it is up to the defendant to present the fact of bribery and the pertaining evidence within the time limits allowed .The tribunal held in favour of Westacre and ordered Jugoimport to pay the fees owing under the consultancy contract.

Westacre then sought to enforce the award in the English proceedings. Jugoimport resisted enforcement of the award on the grounds that enforcement of a contract for bribery would be contrary to English public policy. Jugoimport sought to strengthen its case through new evidence in the form of an affidavit from its legal counsel purporting to contain much more detail about the corrupt relationships between the various parties to the arms deals. Westacre was successful at first instance and the case then went on appeal to the Court of Appeal.

 the Court of Appeal again held for Westacre. All three judges accepted that the supposedly ‘new’ evidence was material that Jugoimport ‘had every opportunity of raising before the arbitrators’