Corruption and the Hardly Innocent Respondent State

By Plamen Yotov, Associate at Kambourov & Partners (Sofia, Bulgaria)

“Let any one of you who is without sin be the first to throw a stone at her”, replied Jesus to the teachers of the law and the Pharisees who asked Him whether to stone a woman caught in adultery (John 8:1-8). Nowadays investors in foreign countries somehow appear to be in the unfaithful woman’s situation when facing corruption allegations in the context of investment arbitration.
While a lot of highly qualified publicists (some of whom probably close to a 38(1)(d) status as per the Statute of the ICJ – “the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law”) have shared their thoughts on the various aspects of this mine field, many issues remain unresolved or inadequately addressed, often leaving claimants and intellectually rigorous bystanders with a sense of injustice. The ever-growing lack of consistency between arbitral awards does not make the situation any better.

Jurisdiction or admissibility – that is the question
It would hardly be an overstatement to say that the jurisdiction/admissibility distinction is the equivalent of Hamlet’s dilemma for each investment arbitrator having to decide on a preliminary objection based on illegality. Some arbitral tribunals have perceived illegality in general (e.g. Inceysa Vallisoletana S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, Award of 2 August 2006, para. 264) and corruption in particular (Metal-Tech Ltd v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award of 4 October 2013, paras. 372 and 373) as a bar to jurisdiction. In contrast, others seem to treat the broader notion of illegality (including corruption) as a ground for inadmissibility of the investor’s claim (e.g. the tribunal in Plama Consortium Limited v. Republic of Bulgaria, although not using the term “admissibility” – ICSID Case No. ARB/03/24, Award of 27 August 2008, para. 146).

Criticism of the jurisdictional approach
Most of the awards declining jurisdiction in an illegality scenario are based on an “in accordance with the law” provision in the relevant investment treaty, which nominally limits the host state’s consent to arbitration only to legally compliant investments. While such an interpretative approach might seem literally accurate, thus in ostentatious obedience to Art. 31(1) of the Vienna Convention on the Law of Treaties (the VCLT), the very same provision of the VCLT mandates a good faith interpretation. The inevitable question thus follows – is it really good faith to interpret a BIT’s definition of investment so as to favor host states involved in corruption by declining arbitral jurisdiction over the dispute? Such a formalistic interpretation represents an incentive for the prospective respondent state to encourage corruption so as to dispose with future claims within the preliminary stage of the proceedings without further ado on the merits. This is hardly desirable from both a pro-investment and an anticorruption perspective.

Turning to the core object and purpose of BITs – the facilitation and protection of foreign investment, elevating the corruption defence to a jurisdictional bar undermines the latter for the sake of combating corruption of public officials. Nevertheless, there exists sufficient supranational means available for achieving the latter aim – to name a few: the United Nations Convention against Corruption, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the Council of Europe Civil Law Convention on Corruption. Thus, it appears unnecessary or at least disproportionate to engage in jurisdictional endeavours for the otherwise noble purpose of inhibiting corruption.

Inadmissibility – better or worse?
Driven by logical and substantiated considerations well beyond the realm of legal formalism (which seems to dominate the jurisdictional approach), some scholars and practitioners perceive illegality in general and corruption in particular as grounds for inadmissibility of the claim. By doing so they leave the impression that the investor is thus in a way better off and the decision looks somewhat more equitable. However, as Prof. Paulsson importantly underlined some years ago, arbitral awards on jurisdiction are reviewable, whereas a tribunal’s decisions on admissibility are not (Jan Paulsson, “Jurisdiction and Admissibility” in Global Reflections on International Law, Commerce and Dispute Resolution: Liber Amicorum in Honour of Robert Briner, ICC Publishing, 2005, page 603). Thus, dismissing a claim for inadmissibility due to corruption would actually do greater damage to the investor than declining jurisdiction, as the former arguably closes the gates to arbitration once and for all, while the latter is reparable. As far as procedural economy is concerned, it makes little sense to open the jurisdictional door for an investor just to kick him out with an inadmissibility clamour once he put a foot beyond the doorstep.

The proponents of the inadmissibility approach do advance legally sound arguments based on the clean hands doctrine and its closer or more distant relatives (nemo auditur propriam turpitudinem allegans, estoppel and good faith). Still, when judging the conduct of an investor one should also keep an eye on the relevant conduct of the respondent state. If a claim is inadmissible due to involvement in corruption, should the respective defence of the state be inadmissible as well? If we remain within the romantic context of Latin maxims, then let us remember that in pari causa turpitudinis cessat repetitio (where both parties are guilty, no one may recover). What follows is the logical and seemingly fair conclusion: where both parties are guilty of corruption, the respondent should be equally precluded from defending on the basis of the condemned act.

Another possible counter-argument of the investor could be based on laches in cases where the host state has failed to prosecute the alleged bribery for a long period of time but raises the red flag only after the investor initiates arbitration proceedings. In such a factual matrix estoppel might well have a role to play, especially considering that prosecution of corruption offences is not only a prerogative of the state, but also an obligation thereof (actually, an international one – Art. 30(3) of the  United Nations Convention against Corruption; Art. 5 of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions). There is arguably detrimental reliance on the part of the investor having effected considerable input into the host state’s economy while relying on the latter’s lenient conduct. Other general principles such as the prohibition of abuse of rights and unjust enrichment could also come into play for a claimant striving to counter a corruption-related preliminary objection by the host state.

Considering that tribunals as a rule do not raise admissibility issues sua sponte, a bar to the respondent’s corruption-based inadmissibility defence would have the effect of letting the claim proceed to the merits. Any other approach would in reality grant a legal benefit from a wrongful act to one perpetrator while denying it to another. Such an outcome would be at odds with legal principles which underlie nearly any civilized legal system which is hardly the legitimate balance that investment arbitration is aiming for.

The interim conclusion
To sum up, the answer to the jurisdiction or admissibility dilemma in the corruption context should be “Neither”. If such misconduct by the investor shall have any repercussions on the dispute, their proper environment is the merits of the case (“merits” in the narrow sense of the term, i.e. issues of state responsibility, quantum of damages, etc.).

Corruption and the merits – whose merit is it anyway?
Once an allegedly corrupt investor’s claim makes its way through the dusty road of preliminary objections, the merits appear somewhat straight-forward in terms of bribery implications. The general perception in the merits context is that in cases of proven corruption the claim may be rejected in its entirety or the compensation due to the investor may be reduced therefore. Still, considering that corruption necessarily involves the host state, should the implications of corruption on the merits be as one-sided as it appears at first sight?

It is hereby suggested that a corruption defence should defeat the claim in its entirety only in cases of initial illegality per se, i.e. when, due to ineligibility of the investor or other objective factors, the investment would not have been admitted in the host state but for the bribe. This is arguably a high threshold to meet with the burden of proof lying upon the respondent state whereas the proper evidentiary standard appears to be “beyond reasonable doubt”.

As to the amount of damages, a reduction in view of the reproachable conduct of the investor implies some punitive element within the quantum estimation. On the other side of the coin, bribery occurring as a result of bad faith conduct on the part of the state (e.g., extortion of the foreign investor or maliciously setting the scene for a corruption defence) should also, in appropriate circumstances, be capable of backfiring against the respondent in the form of a higher award of damages than would otherwise be available to the investor.

As Prof. Paulsson once eloquently wrote (Ibid.), there is a twilight zone between jurisdiction and admissibility. The above commentary shows that in the realm of investment arbitration the twilight is unfortunately becoming blurrier. Let us hope that the darkest hour is indeed just before the dawn.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Kambourov & Partners, its affiliates, employees or clients.