Corruption in Foreign Investment—Contracts and Dispute ...€¦ · a foreign enterprise, which...

Corruption in Foreign Investment—Contractsand Dispute Settlement between Investors,

States, and Agents

Hilmar RAESCHKE-KESSLER* in collaboration with Dorothee GOTTWALD**

I. INTRODUCTION

1. PLAN OF THE ARTICLE

Corruption is omnipresent. It takes place in all countries, neither being a specificproblem of developing economies nor restricted to authoritarian or transition societies.1 Totake the country of the authors, Germany, for example, since the 1990s a public perceptionhas arisen that many decisions on major public procurement contracts, on economic policyor on important investments may involve illicit payments, or at least the attempt of them.First the public was confronted with the Opel and Mannesmann scandals and later learnedthat even high-level officials like the former German State secretary of defence Holger Pfahlsor members of the national parliament were involved in corrupt practices. Aside from thisinglorious news from the so-called developed world, the serious effects that corruptioncauses to developing and transition societies cannot be ignored.2 To mention only theeconomic effects, it has been estimated that in the construction sector, depending on thecountry and the project, bribes can mount from 5% to 30% of the project costs. These sumsare not available for use in other projects where the country may urgently need them.3

Corruption is also not a recent problem.4 However, during the 1990s the extent of realand perceived corruption rose significantly throughout the world,5 becoming, according to

* Rechtsanwalt beim Bundesgerichtshof, Karlsruhe, Germany. The author may be contacted at:[email protected]

** Desk officer, Federal Ministry of the Interior, Berlin, Germany. The opinion voiced by Dr. Gottwald isher private one and not the official opinion of the Federal Ministry of the Interior.

This article is taken from Muchlinksi, P., Ortino, F., and Schreuer, C. (Eds.): The Oxford Handbook ofInternational Investment Law (Oxford University Press, 2008).

1 Transparency International, Corruption Perceptions Index (2005); Patrick Glynn, Stephen J. Kobrin,Moisés Naím, The Globalization of Corruption, in Kimberly Ann Elliott (ed.), Corruption and the GlobalEconomy (hereinafter Corruption and the Global Economy), 7 (1997); Arnold J. Heidenheimer, Michael Johnston,Victor LeVine, Political Corruption. A Handbook, (hereinafter Political Corruption), Part III, 443 (1989).

2 On positive and harmful effects of corruption in the developing world David H. Bayley, The Effects ofCorruption in a Developing Nation, and J.S. Nye, Corruption and Political Development. A Cost-BenefitAnalysis, in Political Corruption, 935 and 963.

3 Transparency International, Preventing corruption on construction projects. Risk assessment and proposedactions for project owners 2 (2005), www.transparency.org

4 History of corruption has become a well-documented field of study during the last years. Only for someexamples cf Jakob van Klaveren, Corruption as a Historical Phenomenon and Linda Levy Peck, Corruption andPolitical Development in Early Modern Britain, both in Political Corruption, 73 and 219.

5 Corruption and the Global Economy (1997).

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some scholars, even a problem “of global revolutionary force”.6 This development occurredbecause of the globalization of capital flows and a new attitude towards foreign investmentin the developing world. The problem of international corruption in the context ofinternational investment is one which is closely related to business ethics.

The following study examines the legal effects of corruption on internationalinvestment contracts. It proposes solutions for contracts and dispute resolution and aimsat a balance between anti-corruption values and the economic rationality of contracts,in particular the mutual responsibilities of the parties and the specifics of complex long-term projects.

The introduction gives an overview of the definitions of key terms, the legal scopeof the paper and the legal instruments regulating corruption in foreign investment (I).Some general characteristics of corruption cases and some systematic remarks on thetypes of problems and cases are provided under (II).

The paper examines problems related to the main contract, which is the contractualrelationship between the investor and the host state or other investors (III). It touches onproblems of dispute settlement related to the main contract (IV).

In its last part, the study deals with problems of agency agreements, which arecontracts between investors and intermediaries, mostly consultancy firms (V), and thedispute settlement problems related to these agency agreements (VI).

2. THE NOTION OF CORRUPTION AND THE NOTION OF INTERNATIONAL INVESTMENT

The study draws on an analysis of 36 cases from arbitration and litigation of the lastthree decades.7 The sample includes arbitration before ICC, ICSID, UNCITRAL, NAFTA

and ad hoc tribunals. It was selected using the following notions of investment andcorruption:

a) The term investment shall refer to foreign direct investment (FDI). According toa common definition used by the OECD and the EC, foreign direct investments are

THE JOURNAL OF WORLD INVESTMENT & TRADE2

6 Patrick Glynn, Stephen J. Kobrin, and Moisés Naím, The Globalization of Corruption, in Corruption andthe Global Economy, 7.

7 27 of the cases deal with corruption in foreign direct investments FDI-processes in a strict sense (ICCNo. 6401, HUBCO v. WADPA, Himpurna v. PLN, American Bell v. Iran, Mexico v. Metaldad, Wena v. Egypt, ICCNo. 1110, 3913, 3916, 4145, 5622, 6248, 6286, 6497, 7047, 8113, 8891, 9333, Westman v. EGT, Lunik v. Soliman,The Claude Reymond Award, The Jürgen Dohm Award, Geneva Chamber of Commerce and Industry Award of02/23/1988, Corvetina v. Clough, State Agency A v. Respondent X, Coetzee v. Paltex, Luchetti v, Peru, WorldDuty Free v. Republic of Kenya). For examining corruption cases in the FDI context, it may also be helpful, beyondthe FDI cases according to this definition, to look at other types of contracts. Similar problems may arise particularlyin the context of purchase contracts for public procurement. It must be remembered that society develops newpatterns of illegal behaviour on a constant basis, and that corruption is frequently linked to other types of crime suchas price-fixing, insider trading, tax evasion, illegal rebates, antitrust, environmental crime, money-laundering,smuggling, illegal armament trade, and fraud. Considering some of these problems may be helpful because similarproblems arise in contracts linked to these crimes. 5 corruption cases without an FDI context are therefore included(ICC No. 6474, Oil Fields of Texas v. Republic of Iran, SGS v. Pakistan, Beta v. Alpha, ICC No. 7664) as well as 2cases that deal with similar problems such as smuggling and money laundering (Soleimany v. Soleimany, ICCNo. 2730, ICC No. 5943). The cases will be quoted in the course of the article.


those made by non-residents for the purpose of establishing lasting economic ties witha foreign enterprise, which allow the investor to exercise effective influence in themanagement of that enterprise.8 The criterion of influence helps distinguishing directfrom portfolio investment.9 The concept of foreign direct investment covers not only“greenfield investment” (creation of a new enterprise) and the 100% purchase of anexisting enterprise by mergers and acquisitions. The partial purchase of an existingenterprise can also be a foreign direct investment, as far as it guarantees to the investorinfluence on the management, which is assumed when he holds a share of more than10% of the market value.10 In addition, since the development of the “new forms ofinvestment”, the concept of FDI includes also “turn-key” projects, “product in hand”,“BOT” (“Build, Operate, and Transfer”) projects or “buy-back” agreements betweencompanies or with the host States’ governments.11

b) The OECD (Art. 1.1 of the OECD Convention on Combating Bribery of Foreign PublicOfficials in International Business Transactions) defines corruption as “intentionally to offer,promise or give any undue pecuniary or other advantage, whether directly or throughintermediaries, to a foreign public official, for that official or for a third party, in orderthat the official act or refrain from acting in relation to the performance of official duties,in order to obtain or retain business or other improper advantage in the conduct ofinternational business”. This definition refers to the so-called hard corruption to publicofficials.

For the purpose of this article, a notion of corruption will be used that is broaderin two senses:

Firstly, in contrast to “hard corruption”, “influence peddling”, (“trading ininfluence”, “trafic d’influence”) will also be included. Influence peddling is the offering,giving, or promising of an undue advantage to a person like experts or consultants, whosell their influence to the government. The reason why it is not covered by the OECD

definition is that there was no international consensus whether or not influencepeddling should be established as a criminal offence. Today, a universal consensus ondisapproval of these activities seems to be easier to achieve.12 In an internationalinvestment context, influence peddling is a very frequent phenomenon and shalltherefore be included in the notion of corruption in this article.

CORRUPTION IN FOREIGN INVESTMENT 3

8 OECD, Code of Liberalization of Capital Movements, Annex A, I; European Council Directive 88/361 of24 June 1988 for the implementation of Art. 67 of the Treaty, I, and Explanatory Note 1; Giorgio Sacerdoti,Bilateral Treaties and Multilateral Instruments of Investment Protection, Hague Academy Collected Courses 269,251, 306 (1997) (hereinafter Bilateral Treaties); Paul E. Comeaux, N. Stephan Kinsella, Protecting ForeignInvestment Under International Law. Legal Aspects of Political Risk xix (1997).

9 M. Sornarajah, The International Law on Foreign Investment 4 (1994), Christoph Schreuer, DasInternationale Investitionsrecht, in Neuhold, Hummer, Schreuer (ed.), Österreichisches Handbuch desVölkerrechts (4th edition 2004).

10 This limit is used by the OECD and the IWF, Heinz Rindler, Der Schutz von Auslandsinvestitionen durchdie MIGA 5 (1999).

11 Bilateral Treaties 277, Gudrun Zagel, Auslandsinvestitionen in Lateinamerika 17 (1999).12 Influence peddling is addressed in Art. 12 of the Criminal Law Convention on Bribery of the Council of

Europe and in Art. 18 of the UN Convention against Corruption.


Secondly, the OECD definition covers only the bribing of public officials. For thepurpose of this study, the bribing of decision-makers in the business world will also beincluded as it is in several international documents.13 Most cases known frominternational arbitration deal with the bribing of public officials in their position asdecision-makers.14 With the privatization of public functions, these cases will probablybecome of greater importance in the future.

3. SCOPE OF THE STUDY

Corruption in the context of international direct investment touches on manyaspects of the legal system:

a) The debate on corruption in the foreign investment context as a criminal offencestarted in the US in the highly moral Post-Watergate atmosphere. Until then,corruption had been a criminal offence exclusively in the domestic context, due to theprinciple of territoriality and the idea that every country should be responsible for theintegrity of its own officials.15

When the US Congress passed the Foreign Corrupt Practices Act (FCPA) in 1977, theUSA were the first country worldwide that imposed serious criminal consequences onthe bribing of foreign officials. Domestic pressure by the American business communitydid not only cause several amendments to the FCPA,16 but also induced the USgovernment to press for an international anti-corruption agreement in the UN andOECD. However, only after the end of the Cold War and in a rising anti-corruptionatmosphere in Europe, the international community gave up its resistance,17 which hadbeen nursed by the fear of a hidden trade agenda,18 the wish for own business advantagesand by lack of interest.19 In the 1990s, several international conventions were concludedthat obliged the signing states to establish the bribery of foreign decision-makers as a


13 Art. 2 of the Council of Europe’s Civil Law Convention on Corruption has a definition similar to theOECD, but including private recipients of bribes: In the Council of Europe’s Criminal Law Convention onCorruption, bribery in the private sector is covered in Art. 7 and 8. The United Nations Convention refers tocorruption in the private sector in its Art. 12, the African Union Convention on Preventing and CombatingCorruption in its Art. 4. The Inter-American Convention Against Corruption if the Organization of AmericanStates (OAS) only refers to public officials (cf. Art. VI).

14 A rare exception is ICC case no. 6248 of 1990, 19 Y. B. Comm. Arb. 124 (1994) (hereinafter ICC No. 6248).15 Bruce Seymour, Illicit Payments in International Business: National Legislation, International Codes of

Conduct, and the Proposed United Nations Convention, in Norbert Horn (ed.). Legal Problems of Codes ofConduct for Multinational Enterprises, 219, 221 (1980).

16 In 1988, an amendment was passed that accepted as affirmative defence evidence that the payment is legalin the host country. However, the 1998 amendments broadened the US jurisdiction in corruption cases andincluded payments to secure “any proper advantage” and payments to officials of international organizations.

17 The US failed to establish a consensus about international corruption within the UN ECOSOC’sCommission on Transnational Cooperation and in the Committee on an International Agreement on IllicitPayment in the late 1970s. The only successful, though isolated, initiative was that the 1976 OECD Declaration onInternational Investment and Multilateral Enterprises included a clause on corruption.

18 Mark Pieth, International Cooperation to Combat Corruption, in Corruption and the Global Economy119.

19 Bruce Seymour, Illicit Payments in International Business: National Legislation, International Codes ofConduct, and the Proposed United Nations Convention, in Norbert Horn (ed.), Legal Problems of Codes ofConduct for Multinational Enterprises, 219, 227 (1980).


criminal offence. The FCPA and the criminal laws passed since then in most countries20

have, however, remained an issue of controversy.21

b) The treatment of transnational bribery in tax law has developed very similarly tothat in criminal law. Home states that accept the tax deductibility of bribes to foreignofficials economically encourage illicit practices. Abolishing the tax deductibility of foreignbribes was therefore the next important task of the OECD whose Council consented in1996 on the Recommendation on the Tax Deductibility of Bribes to Foreign PublicOfficials. One of the last countries to give up tax deductibility was Germany.22

c) Foreign investment frequently takes place in the context of internationalinvestment protection and multilateral investment guarantee agencies. If corruptionoccurs, it may be asked if the illicit background of the whole investment infects theinsurance protection given by multilateral agencies. Corruption also increases the costsof international investments, so some organizations have begun to ask about thepossibilities and benefits of corruption insurance.23

d) In the follow-up procedures after the OECD Convention 1996, the laws on unfaircompetition were strengthened as a means to combat corruption. Corrupt practices areheld to violate fair competition laws. Some countries, such as Japan, considered extendingtheir laws on unfair competition in implementation of the OECD Convention.24

e) Corruption in the international investment context may have effects ondecisions based on public law, rendering them void or avoidable, as well as perhaps notinfluencing their validity. Examples are public procurement decisions, or decisionsbased on public law related to the realization of investment, such as planning permissionsor concessions based on environmental law.

f ) Investments are today typically structured by one or several contracts betweeninvestors and the host states – in addition to, or even rather than, by concessions andother decisions of public law.25 If the investor bribed officials of the host state during thenegotiation of these contracts, the host state may claim the invalidity of the main contract.If the investor did not commit the offence himself but used intermediaries (for examplea consultancy firm) for the negotiations, disputes may arise between the intermediary andthe investor about the legality and the validity of their agreement. These disputes mayinclude claims for restitution or for damages arising from the corrupt practices.


20 For national legislation http://www.oecd.org/document/30/0,2340,en_2649_34855_2027102_l_l_l_l,00.html

21 Patrick Glynn, Stephen J. Kobrin, and Moisés Naím, The Globalization of Corruption, in Corruption andthe Global Economy 7, 18; Philip M. Nichols, Regulating Transnational Bribery in Times of Globalization andFragmentation, 24 Yale JIL 257 (1999).

22 Patrick Glynn, Stephen J. Kobrin, and Moisés Naím, The Globalization of Corruption, in Corruption andthe Global Economy 22.

23 Roundtable explores anti-corruption measures, Press release of the Commonwealth News and InformationService, Issue 214, 15 December 2004.

24 Mark Pieth, International Cooperation to Combat Corruption, in Corruption and the Global Economy119, 124.

25 Christoph Schreuer, Das internationale Investitionsrecht, in Neuhold, Hummer, Schreuer (ed.),Österreichisches Handbuch des Völkerrechts, 4th edition 2004.


g) In any of these disputes where corruption is an issue, problems may arise as tothe adequate form of dispute settlement in arbitration and litigation.

While the problems of criminal, tax, insurance and unfair competition law dependon the domestic legal context, contractual relationships between foreign investors, hoststates, and intermediaries are to be solved in an international setting, mostly usinginternational arbitration as a mechanism for dispute resolution. This article will dealwith contractual relations and with the possibilities for dispute settlement (the problemsmentioned under f and g). It will totally exclude the issues of criminal, tax, insuranceand unfair competition law and will touch on international public law only as far as it isnecessary.

4. OVERVIEW OVER REGULATIONS AND INSTRUMENTS

The international community has achieved a series of multilateral instruments sinceits efforts to address the problem of corruption in the 1990s. The earliest and mostimportant of these were signed in the OECD context: The OECD Recommendation onCombating Bribery in International Business Transactions in 1994, the OECD Recommendationof the Council on the Tax Deducibility of Bribes to Foreign Public Officials in 1996, and theOECD Convention on Combating Bribery of Foreign Officials in International BusinessTransactions. Regional efforts led to the Inter-American Convention against Corruptionadopted by the OAS in 1996, and the African Union Convention on Preventing andCombating Corruption of 2003. The European Union has adopted the Convention on theFight against Corruption involving Officials of the European Communities or Officials of MemberStates of 1997 and launched several initiatives on criminal law enforcement.26 TheCouncil of Europe passed the Criminal Law Convention on Corruption and the Civil LawConvention on Corruption in 1999. Some international bodies addressed the problem ofprevention, and passed Model Codes of Conduct, among these the Council of Europein its Recommendation on Codes of Conducts for Public Officials (2000) and the InternationalChamber of Commerce – ICC – in its Rules of Conduct for Corporate Self-Regulation of1996. The most recent and most comprehensive multilateral instrument is the UnitedNations Convention against Corruption of 2004 (entry into force: 2005).

These multilateral instruments typically do not deal with the consequences ofcorruption in private international law. The OECD Conventions and Recommendationsconcentrate on criminal law, tax law and law enforcement,27 the Inter-American,


26 Wolfgang Hetzer, Korruptionsbekämpfung in Europa, NJW 3746 (2004).27 Although, the OECD Convention mentions that private law can also be a means to combat corruption:

Art. 3 (4) reads: “Each Party can consider the imposition of additional civil or administrative sanctions upon aperson subject to sanctions for the bribery of a foreign public official.” Cf also the Revised Recommendation ofthe Council on Combating Bribery in International Business Transactions, II, which reads: “...That each Membercountry examine the following areas and, in conformity with its jurisdictional and other basic legal principles, takeconcrete and meaningful steps to meet this goal: ... vi) civil, commercial, and administrative laws and regulations,so that bribery would be illegal”. However, in the text of the recommendation there is no further reference to thisobjective.


African, and European Instruments on prevention and on criminal law. Codes ofConduct exclusively aim at prevention. The only instrument that deals with private lawin detail is the Civil Law Convention of the Council of Europe. It addresses loss causedby corruption (Art. 3-7), contracts (Art. 8), evidence, and court procedures (Art. 9-12).

The same situation is prevalent in bilateral and national instruments. BilateralInvestment Treaties (BITs), which address investment protection in situations of politicaluncertainty, regulate the admission, treatment, expropriation, and dispute settlement inthe context of international investment rather than questions of related contracts.28 Theabove-mentioned recent national legislations address foreign bribery from the point ofview of criminal law.

The legal consequences of bribery in a foreign investment context have thereforeto be solved by general national regulations of contract law in home and host states, theconflict rules of international private law and by customary international law.

II. CHARACTERISTICS OF CORRUPTION CASES IN FOREIGN INVESTMENT

Although corruption takes place in an infinite variety of constellations, all knowncases dealt with in arbitration or litigation had some features in common. A briefoverview over these general characteristics (1) seems to be appropriate, followed by thetwo principal types they can be divided into (2).

1. GENERAL CHARACTERISTICS OF CORRUPTION CASES IN INTERNATIONAL

INVESTMENT

International arbitration has dealt with the issue of corruption as early as the 1960s,and some doctrines that are still valid today have been developed at that time.Nevertheless, the “corruption eruption” of the 1990s has led to an increased number ofinternational arbitrations on the issue during the 1990s. Arbitrations now cover casesinvolving the highest ranking officials of a state, like its president or members of thecabinet, as well as the corruption of lower grades in the hierarchy, though in particularin infrastructure projects of national importance the involvement of higher grades maybe more probable.29

The most striking similarity within the analyzed group of cases is their relation toa rather limited area of foreign investments. By far the most cases deal with infrastructureprojects,30 like energy plants, telecommunication systems, or a waste landfill. The valueof the investment project may be billions of US-dollars. The next big group is the


28 Bilateral Treaties 308.29 Examples are ICC No. 7664 (Frontier AG v. Thompson), a case linked to the Elf scandal, Himpurna v. PLN,

which included alleged bribes to high ranking Indonesian politicians including President Habibie, and ICCNo. 6401, where bribes to the Philippine President Marcos were an issue.

30 ICC No. 6401, HUBCO v. WAPDA, Himpurna v. PLN, American Bell v. Iran, Mexico v. Metaldad, ICCNo. 1110, ICC No. 4145, ICC No. 5622.


purchase of armament and the construction of military training facilities,31 followed bythe exploitation of natural resources.32 Cases without relation to public procurement arerelatively rare, the few examples that are known relating to privately run petrochemicalprojects, tourism and a cotton spinning factory.33

Geographically, although corruption occurs around the world and capital flows donot only move towards the developing world but also between developed countries34

and from oil and gas producing countries to all others, most arbitrations wherecorruption was an issue refer to investments in South Asia and the Middle East.

Investors hardly ever commit illicit activities themselves. In the majority of thecases, they contract intermediaries, often agents or consultants, to act on their behalf.The advantages for the investor are obvious: he does not have to lose face to anyone,and leaves the “dirty work” to others. In addition, the agent or consultant often has hisseat in the host country or is even its national, so he is culturally and geographicallycloser to the officials of the host countries and knows more about their culture,including the habits governing corrupt practices.

2. TWO TYPES OF CASES

From a systematic point of view, most cases where corruption had been an issue inarbitration fit in one of the two following types:35

a) In the first category, the parties involved are the investor and the host state or astate owned and governed entity. They have entered into an investment agreement, forexample a joint venture, BOT- or turnkey-contract. During or after realization of theinvestment, a dispute has arisen between the parties about some conditions of theagreement. Typically the host state has not honored its contractual obligations, forcingthe investor to initiate arbitration. Often an important reason for the dispute results frominternal politics of the host state: a new government has recently come to power and isreviewing critically the acts of its predecessor government. It sheds light on the fact thatthe contract with the investor had not been concluded in a correct procedure but dueto bribery of previous government members. It therefore contests the obligation of thehost state to fulfil the contract. Economically, this is the most important type of a disputewhich, because of its frequent occurrence in relation to infrastructure projects, mayinvolve billions of US-dollars. From a legal point of view it poses complex legalproblems. From the 36 cases studied, 11 cases fall into this category.


31 ICC 7047, State Agency A v. Respondent X, Beta International Corp. v. Alpha International SA, FrontierAG v. Thompson, ICC No. 5943.

32 KBC v. Pertamina, ICC No. 6286, Westman v. EGT, Corvetina v. Clough.33 Wena Hotels v. Egypt, ICC No. 8113, Oil Fields of Texas v. Iran.34 European Commission – Eurostat: European Union Foreign Direct Investment Yearbook 2001 (2002).35 There are only very few atypical corruption cases: ICC 6286 deals with the dissolution of a consortium due

to one of the member’s illegal conduct. In the recent case Luchetti v. Peru, ICSID ARB/03/04, the tribunal had todecide on its jurisdiction on the base of the Peru-Chile BIT. This treaty would only have been applicable if aPeruvian court would not have validly settled the dispute before the ratification of the BIT. The respondent allegedcorruption in the proceedings before the Peruvian court and so contested the settlement of the conflict before thenational judiciary.


b) The other 25 cases studied belong to agency agreements. The parties – investorand agent/intermediary – have concluded an agency agreement. The agreement usuallyobliges the agent to develop intermediary activities (such as legal and fiscal advice orconsultancy) for helping the investor to obtain a certain public procurement orinfrastructure contract. The investor is to pay the agent a commission in case of success,which means if the investor gains the contract with the host state or one of its publicentities. The commission is determined by percentage of the main contract’s volume:percentages may vary greatly between 1,5 % and 33,33 % (both in ICC case no. 6497).36

After the host state has awarded the contract to the investor, there is almost always asimilar pattern: The investor refuses to pay the commission to the agent due to himunder the agency agreement. The agent then initiates arbitration. There the investorcontests that the agency agreement was null and void ab initio for its illegal content. Healleges that the real objective of the agreement was to bribe foreign officials in the hoststate, and that only part of the commission was to serve as remuneration for the serviceprovided by the agent, the greater part of the commission being due to be passed asbribes to the hands of the state’s officials in their capacity as decision-makers.

III. TYPE 1: THE MAIN CONTRACT

What are the legal problems related to the main contract between the investor andthe host state, once the host state has raised allegations of corruption and considers thecontract therefore to be invalid or unenforceable? Much is disputed in this area. Butsound solutions are required because of the immense economic impact foreigninfrastructure projects may have on the host state as well as on the investor.

An arbitral tribunal may find the main contract to be valid and enforceable, even ifit is tainted by corruption (1 and 2). The modification and adaptation of the contract bythe arbitral tribunal allows for flexible and economically adequate solutions (3). It willbe examined whether or not legal transactions that typically accompany the maincontract share its fate (4). Questions of restitution are often raised in these cases (5). Lessfrequently, claims for damages occur (6).

1. REASONS TO HOLD THE MAIN CONTRACT TO BE INVALID OR UNENFORCEABLE

The most obvious legal function of alleged corruption in a dispute betweeninvestor and host state on the main contract seem to be to support the attempt of thehost state to be relieved from its contractual obligations. Some host states simply heldthe main contract to be invalid because of corruption,37 others considered it as


36 ICC No. 6497, Final Award of 1994, 24a Y. B. Comm. Arb. 71, Facts and para. 17 (1999) (hereinafter ICCNo. 6497).

37 Federation of Pakistan through WAPDA (Secretary Water & Power) in the HUBCO case, Supreme Court ofPakistan, 20 June 2000, Arb. Int’l 439, 439 (2000) (hereinafter HUBCO v. WAPDA); PLN in the Himpurna case, FinalAward of 4 May 1999, 25 Y. B. Comm. Arb. 11, para. 113 (2000) (hereinafter Himpurna v. PLN); Arab Republicof Egypt in the ICSID Award of 28 January 2002, IntADR (www.kluwerarbitration.com).


unenforceable.38 At first sight, it seems indeed natural that a contract obtained by illegalmeans like corruption is void.

By analyzing the arguments offered by host states in arbitrations related to maincontracts, one can distinguish three reasons, each one leading to invalidity orunenforceability of the contract as a legal consequence of corruption.

a) Firstly, national laws may contain mandatory rules providing for corruption itselfas a primary reason of nullity.39 Then a contract concluded under the influence ofcorruption is ipso iure and ab initio null and void. This position is based on the idea thatcorruption is illegal and/or immoral and so courts or arbitral tribunals should not lendtheir jurisdictional power to enforce contracts infected by it (nemo auditur suamturpitudinem allegans). In such situation the host state simply deems a contract “withoutconsideration, unauthorized, illegal and fraudulent (to be) ineffective in law”,40 for“where a contract has been obtained by bribes, it shall not be enforced”.41 Herecorruption itself is regarded as sufficient reason to render a contract void orunenforceable. In a recent case, an ICSID arbitral tribunal held the main contractunencorceable for corruption under English law and the law of the host state Kenya.42

However, the main contract between host state and investor is in most cases subjectto the substantive laws of a neutral third country like Switzerland. This choice of lawby the parties made prior to concluding the main contract specifically excludes theapplication of mandatory laws of the host state by the arbitral tribunal. It is thereforeconsequent that the Swiss Federal Court has held in such circumstances the main contractto be neither illegal for breaking Swiss anti-corruption laws, nor immoral by Swissstandards or by consideration of foreign mandatory anti-corruption laws.43

b) Secondly, the invocation of invalidity of the main contract may be based not onthe national law of the host state but on international anti-corruption policy.44 Thearbitrator is obliged to render an internationally enforceable award and has to complywith international public policy (cf. Art. 5 § 2 b New York Convention). In the lastyears, the international community achieved a far-reaching anti-bribery consensus, ascan be seen from the multilateral activities on combating corruption. Anti-corruptionhas become part of not only international, but transnational public policy, just likecombating terrorism, drug trafficking or smuggling.45


38 The Islamic Republic of Iran in American Bell International v. Iran, Award in Case No. 48 (255-48-3) of19 September 1986, 12 Y. B. Comm. Arb. 292, 292 (1987) (hereinafter American Bell v. Iran); The IslamicRepublic of Iran in Oil Fields of Texas v. Iran (National Iranian Oil Company), Award in Case 43 (258-43-1) of8 October 1986, 12 Y. B. Comm. Arb. 287, 298 (1987) (hereinafter Oil Fields of Texas v. Iran).

39 Himpurna v. PLN, para. 113; World Duty Free v. Republic of Kenya, ICSID Case No. ARB/00/7, p. 49-62.40 HUBCO v. WAPDA, 439.41 American Bell v. Iran, 292.42 World Duty Free v. Republic of Kenya, ICSID Case No. ARB/00/7, p. 49-62.43 BGE 129 (2003) III, 320, 323-325,44 American Bell v. Iran, 292.45 Hilmar Raeschke-Kessler, Some Aspects of International Public Policy in International Commercial

Arbitration, Presentation in Berlin on August 20, 2004, Lalive et al, Transnational (or truly international) PublicPolicy and International Arbitration 258 (1986). This was still different in the late 1980s, cf. Bruno Oppetit, Leparadoxe de la corruption à l’épreuve du droit du commerce international, 114 JDI 5, 16 (1987).


But there is no transnational consensus on the legal consequences of corruption asfar as the invalidity of the main contract is concerned. On the contrary, one of the recentmultilateral instruments gives a strong indication that the international community doesnot support ipso iure nullity. The parties of the Civil Law Convention on Corruption of theCouncil of Europe agreed on a solution that leaves the contract valid and only gives theparties the right to have the contract declared void by a national court.46 One maytherefore conclude that the rule of ipso iure and ab initio nullity does not belong to theshared legal and moral values of civilized states and that international public policy doesnot contain this rule.

c) A third argument for invalidity is that corruption causes a defect of consent tothe respondent state. The state is not obliged by the contract concluded by its corruptofficial because it was not able to freely exercise its choice. Several internationaldocuments support this point of view. Art. 50 of the Vienna Convention on the Lawon Treaties deals with the case that the consent of a state was caused by bribery to oneof its officials, treating this as a defect of consent.47 Art. 8 (2) Civil Law Convention ofthe Council of Europe is based on the same idea, referring to the state “whose consenthas been undermined by an act of corruption”. However, the consequence of theseprovisions is not ipso iure invalidity of the contract but its avoidance on request of theparty suffering from the defect.

2. REASONS TO HOLD THE MAIN CONTRACT TO REMAIN VALID AND ENFORCEABLE

One may conclude that unless the national law applicable provides a rule of ipso iurenullity, corruption does not render the main contract invalid or unenforceable. On thecontrary, there are reasons that strongly support the validity of the main contract,particularly if high ranking officials of the host state are involved, like members of thecabinet, their deputies or even the prime minister or president of that state.

a) International law contains the fundamental principle of state responsibility,48

referring to “the accountability of states for violation of international law, and therequirement that states make reparation for such violations”.49 With the growinginternational consensus on anti-corruption, and the signing of multilateral anti-corruption conventions, hard corruption is to be considered as a violation ofinternational law. Accountability means in this context that states have to bear theconsequences of corruption and assume full responsibility for the actions of their organs.


46 Art. 8 (2) of the Council of Europe Civil Law Convention on Corruption: “Each Party shall provide in itsinternal law for the possibility of all parties to a contract whose consent has been undermined by an act of corruption to be able toapply to the court for the contract to be declared void, notwithstanding their right to claim for damages.”

47 Art. 50 of the Vienna Convention on the Law of Treaties: “If the expression of a State’s consent to be bound bya treaty has been procured through the corruption of its representative directly or indirectly by another negotiating State, the Statemay invoke such corruption as invalidating its consent to be bound by the treaty.”

48 UN provisions on State responsibility, http://www.un.org/inc/text/state_responsibility/responsibilityfra.htm

49 Paul E. Comeaux, N. Stephan Kinsella, Protecting Foreign Investment Under International Law 32 (1996).


This is obvious if the highest ranking hierarchy is involved in the corrupt acts, like headsof state or the prime minister. But it is not different, if the state is represented by corruptlower ranking officials, like heads or deputy heads of departments.50

State responsibility includes contractual responsibility, which means that the statemust in general meet its obligations as a contractual party in spite of corrupt activities ofits officials.51 The economic argument for this principle is simple: If the state could easilyavoid any obligation resulting from a contract tainted by corruption, it could profit fromits own violation of international law. Various scenarios underline this argument. Ifcorruption had the force to render a contract automatically invalid, states couldwithdraw from their obligations merely by presenting an incident of bribery, whichwould, in a world of omnipresent corruption, not be too difficult to find. In a situationwhere a government simply seeks to avoid the contractual obligations because it mayhave developed a liquidity problem, or because the price for the relevant good producedas a consequence of the main contract has changed, the state would have an easyinstrument to do accordingly. The host state could break the contract and, when theinvestor seeks compensation, have the contract invalidated. This would favour the hoststate in an unjustified way in relation to the investor and lead to irrational and unjustifiedterminations of contracts. Anti-corruption policy protects not the parties of the conflictbut the citizens and consumers who pay for corruption through higher prices and taxes.This is, however, not to be used as an argument for the invalidation of the contract.52

Invalidating the contract may lead to the economic destruction of the investment. Thismay have serious effects on the economy of the host state, including its infrastructure.Moreover, it contradicts the host state’s obligation of investment protection. Finally, ifinvestors cannot trust in the state’s responsibility towards its contractual obligations, thiswill have a negative effect on the investment climate and on the state’s attractiveness toforeign investors.

b) The doctrine of state responsibility does not lead to the nullity of the contractfor its immorality, but rather points into the direction of a remaining validity of thecontract in spite of corruption. International arbitration has so far not taken a clearposition between these two possibilities. Although states as respondents have frequentlyclaimed invalidity, only recently arbitrators have decided a case relying on this issue. TheSupreme Court of Pakistan in the HUBCO case decided on the jurisdiction only and noton the merits of the case, and the dispute was later settled outside arbitration byadaptation of the contract.53 In Himpurna v. PLN, Oil Fields of Texas v. Iran, and AmericanBell v. Iran, the arbitral tribunals found that there was no sufficient evidence of


50 Art. 4-11 Draft Articles on State Responsibility, ILC 2001; cf. Kaj Hobér, State Responsibility andInvestment Arbitration.

51 For the question if a state is liable under contracts entered into by its state-controlled entities cf. MarcBlessing, State Arbitrations: Predictably Unpredictable Solutions?, presentation at 8th IBA International ArbitrationDay Geneva, 18 March 2005.

52 World Duty Free v. Republic of Kenya p. 59.53 Hilmar Raeschke-Kessler, Corrupt Practices in the Foreign Investment Context: Contractual and

Procedural Aspects, in Norbert Horn (ed.), Arbitrating Foreign Investment Disputes 488 (2004).


corruption.54 In Wena Hotel v, Egypt, the arbitral tribunal held that the validity of thecontract was irrelevant for the existence of the claimed damages and so did not decideon the legal consequences of corruption.55 The arbitral tribunal in the Himpurna caseemitted a serious warning about the economic effects of the theory of invalidity ofcontracts,56 while the arbitral tribunal in World Duty Free v. Republic of Kenya held themain contract unenforceable, according to international public policy and nationallaw.57 It seems too early to find a consolidated position of arbitral tribunals, althoughthere seems at least to exist a certain reservation.

3. MODIFICATION AND ADAPTATION OF THE MAIN CONTRACT

If the main contract remains valid and enforceable, this does not mean thatcorruption has no effect on it. It is obvious and essential that an arbitral tribunal dividesthe legal consequences of corruption reasonably between the parties.

The party that initiates an arbitration may seek settlement of a dispute about itscontractual duties and performances in the past but it may also look for a decision relatedto its future rights and duties. This is particularly so in the context of investmentarbitration. In this context the term “modification” will be used for the changing ofrights or obligations related to the past.58 If contractual provisions need to be changedor amended, which effect for the future, this will be referred to as adaptation of thecontract.59

Contract adaptation is commonly used to deal with unforeseen developments afterthe contract has been concluded, especially in situations of force majeure and theappearance of special risks. Corruption, however, is a problem inherent in the contractfrom its beginning. It leads to a situation which has much in common with one callingfor contract adaptation. It is only discovered or at least made public at a stage after theconclusion of the contract. The parties have then to deal with a situation that in realityis unbalanced but was intended to appear to others to be fair and reasonable.

Modification or adaptation of a contract by an arbitrator, although at first sightpracticable and helpful, is a sensible process touching on the centre of party autonomy.As the basis of all commercial activity, the parties’ autonomy and freedom of choice find


54 Himpurna v. PLN, para. 118; Oil Fields of Texas v. Iran para. 25; American Bell v. Iran, para. 17.55 2nd ICSID Award of 28 January 2002, IntADR or www.kluwerarbitration.com, under the headline: “Did

the Tribunal not deal with questions submitted for its decision?”56 “When a country’s reputation as a contractual partner suffers, the terms on which it is able to attract foreign

investment and financing are impaired. ... an over-readiness by international arbitrators to accept illegality defencesmay harm an international mechanism which benefits numerous countries that rely on access to internationalfunding, technology, and trade.”, Himpurna v. PLN para. 114.

57 World Duty Free v. Republic of Kenya p. 48, p. 53.58 Cf. Norbert Horn, The concepts of adaptation and renegotiation in the law of transnational commercial

contracts, in Norbert Horn (ed.). Adaptation and Renegotiation of Contracts in International Trade and Finance7 (1985).

59 “Adaptation of a contract means the adjustment of its terms in a new situation”, Norbert Horn, TheConcepts of Adaptation and Renegotiation in the Law of Transnational Commercial Contracts, in Norbert Horn(ed.), Adaptation in International Trade and Finance 7 (1985).


their clearest expression in the contract. Intervening in the result of their negotiationswithout the consent of the parties by an arbitral tribunal can only be accepted in extremesituations.

Corruption is one of those extreme situations. It may require the modification ofa contract leading to its partial invalidation. In long-term contracts on goods or servicesthe price for each unit may contain a kickback element, as was allegedly present in theHubco-environment. There the price for deliveries which in the past have already beenperformed may be reduced expost to a fair market price and the part containing the kickback element may be invalidated. This may lead to a claim for partial restitution onbehalf of the state as buyer of goods or services. It will be discussed below whether suchclaim is to succeed.

Adaptation of a contract with effects for the future by an arbitral tribunal is a moredifficult problem. The arbitrator, in adapting the contract for the future, does not act inhis normal function that aims at emitting an enforceable award. National laws providedifferent provisions if he is able to do so.60 A general rule is missing,61 and the matterhas been disputed controversially.62 In any case, the arbitrator has to take the will of theparties into consideration. His authority is limited by the request for relief. A party mayonly seek a decision for monetary claims brought before the arbitrator and prefer torenegotiate its contractual relationship outside the arbitration proceedings or take arecourse to non-binding conciliation processes as proposed by ICC and UNCITRAL. Thearbitrator is then not allowed to exceed his power by adapting the contract for thefuture. A party may ask for a declaratory judgement that its contract with the state isvalid inspite of alleged or even proven corruption. It may request the arbitral tribunal todetermine the fair market price for goods and services it is to deliver to the state in thefuture. A state may request the arbitral tribunal to redraft certain clauses of the contractas set out in its request for relief should the arbitral tribunal not hold the contract to beinvalid in toto because of the elements of corruption present in its past relationship withthe foreign investor. It is also possible that the parties seek mere guidelines for their“complex future cooperation” from the arbitral tribunal,63 and this may be a reasonableway to deal with the situation.

The criteria for modification and adaptation have to be taken from the whole ofthe contractual and economic relationship between the parties. Starting point has to be


60 Richard Buxbaum, Modification and Adaptation of Contracts: American Legal Developments; Horacio A.Grigeira Naón, Adaptation of Contracts: An Argentine Substantive and Private International Law Outlook;Enrique P. Syquia, The Revision and Adaptation of Contracts in Philippine Law. With a Comparative Outlook atthe Law of Other ASEAN Countries; Fath El Rahman Abdalla El Sheikh, Legal Criteria for the Revision andAdaptation of International Commercial Contracts: The African and Arab Perspective, in Norbert Horn (ed.),Adaptation in International Trade and Finance 15 (1985).

61 Hilmar Raeschke-Kessler, Corrupt Practices in the Foreign Investment Context: Contractual andProcedural Aspects, in Norbert Horn (ed.), Arbitrating Foreign Investment Disputes 488, 489-491 (2004).

62 Norbert Horn, Procedures of Contract Adaptation and Renegotiation in International Commerce, inNorbert Horn (ed.), Adaptation and Renegotiation of Contracts in International Trade and Finance 179 (1985).

63 Norbert Horn, Procedures of Contract Adaptation and Renegotiation in International Commerce, inNorbert Horn (ed.), Adaptation and Renegotiation of Contracts in International Trade and Finance 182 (1985).


the will of the parties at the moment when they concluded the contract. The arbitraltribunal must also consider the role both parties have played in the corrupt activity. Ithas to assure that they do not benefit from their corrupt behaviour. Where market pricesfor goods or services are taken into relation, they must be the ones that were in force atthe time the contract had been concluded, and not those at the time of the decision.Where public tendering processes took place, the cheapest offer within the tenderingprocess can be taken into account.

An important element is the status of the contractual relationship at the timearbitration is initiated by one party. If the investor has not yet started to perform hisobligations or where performance is only at the beginning it may be a fair solution todeclare the whole contract void because of corruption. But nullity of the contract maynot any longer be fair and reasonable, once the investor has performed the major partof his obligations. Corruption is no justification to expropriate the investor without anyfair and reasonable compensation by declaring the contract to be null and void at suchlate and advanced stage of the relationship between the parties.

4. RELATED LEGAL TRANSACTIONS CONTAINING THE INVESTMENT

Any substantial foreign investment like a BOT-project does not consist only of oneagreement but normally consists of several related legal transactions between differententities or persons. Normally the act of corruption takes place by way of a separatecontract, where visible links between the corruption and the investment project are notalways easy to detect.

a) The specific contract of tacit understanding between the investor (or hisintermediary) and the deciding official of the host state (or his intermediary) on thefavour the official is to receive as “remuneration” for the business opportunities grantedby the state to the investor, relates to the inner core of corruption. This contract orunderstanding is the actual corruption agreement. This agreement is invalid ex initio forthe illegality of its content. The illegality of the transaction may result from nationalcontract laws, like art. 19, 20 Swiss OR or § 134 German Civil Code – BGB – fromnational criminal anti-corruption laws or from international anti-corruption policy. Itsillegality is part of a transnational public order as best expressed in the International LawAssociation’s resolution passed at its Delhi conference in 2002.

The invalidity of the corruption agreement is not disputed. If the official has notyet received his promised remuneration for his corrupt activities, any claim for suchremuneration must be dismissed by a court or arbitral tribunal. Neither can the investor,in case the official has already received his remuneration as an advance payment, but hasnot yet “performed” what was expected of him, sue successfully for performance orrequest his money back.

b) Secondly, complex projects on infrastructure are most often based on a



multitude of interdependent but individual contracts. Individual contracts of this typemay contain in addition to the “main contract” regulations about financing, corporatestructures or insurances. They are to be treated independently, according to the samerules as the main contract. If they were affected by corrupt means separately, they canseparately be modified.

c) Thirdly, related actions of public law are to be taken into account. In somecountries or situations, investors need concessions for the investment itself. Nearlyalways, they have to apply for administrative acts for the realization of the investment,like planning permissions or mining concessions. These actions are subject to nationalpublic law. In German administrative law, public decisions affected by corruption arenot invalid but can be revoked easily by the deciding public entity.64 The questionwhether the fate of the act of public law has any consequence on the main contract hasto be decided according to the law applicable to the main contract.

5. RESTITUTION

One of the reasons why arbitral tribunals have been restrictive in invalidating maincontracts may be that invalidity leads to very unpleasant results in restitution. Should thehost state really have to give back the whole investment, the nuclear power plant, thepetrochemical project or the cotton factory? This does neither correspond to the will ofthe parties nor to their mutal economic interests. Investors cannot simply “take back”complex long-term projects and reinstall them into a new environment withoutsignificant loss. Accordingly, recovery problems are to be solved as follows:

a) The substance of the investment – for example the power plant, the factory orthe construction – stays with the host state. Generally the main contract remains a validcausa for the investment.

b) The corruption agreement is null and void and is therefore not a causa for thebribe. However, the rule nemo auditur suam turpitudinem allegans hinders the parties of anillegal contract to recover any payment if they have already performed. This rule is todayapplied very restrictively because it favours the recipient of the illegal payment, and it istoo inflexible to solve complex conflicts.65 However, in the case of the already paidbribe the result does not seem unjust, because court protection to a claim on an illegalground must be refused.

In the case the bribe has already been paid and the official has already “performed”what was expected of him under his agreement in part or in full, there will be norestitution between the investor and the official(s) involved. The investor will not getthe bribe or its equivalent in monetary terms back. On the contrary, the official will


64 § 48 II 3 No. 1 BVwVfG.65 Staudinger-Lorenz § 817 No. 11-23; Mirko Möller, Leistungskondiktion trotz beiderseitiger

Sittenwidrigkeit? – Die Einschränkung des § 817 S. 2 BGB durch den BGH, WJN 268 (2006).


have to pass the monetary equivalent of the bribe he has received from the investor onto the state.

c) If the arbitrator is to adapt a contract, he may declare some of its conditionsunacceptable and therefore invalid because of corruption. To recall the easiest case – themarkup of prices – if he changes price provisions he would declare the exorbitant pricefor unacceptable and the market price for valid. The payments performed in order tofullfil the exorbitant price were paid without causa. If they can be identified as a quid proquo for the bribe, the rule nemo auditur suam turpitudinem allegans applies, and thepayments cannot be recovered. This is not unjust because the loss of restitution can beseen as an equivalent of the loss of restitution of the bribe and even more as a deterrentfor the bribe-payer. In more complex cases, in which the quid pro quo character cannotbe determined clearly, recovery is not excluded.66

6. CLAIMS FOR DAMAGES

In several constellations, instead of or in addition to claims for restitution, theparties may claim damages. The Civil Law Convention on Corruption of the Councilof Europe contains some relevant regulations. They regulate the obligation of themember states to provide for effective compensation mechanisms for all persons whohave suffered damage as a result of corruption (art. 3). The conditions are that therespondent has committed, authorized, or failed to prevent the act of corruption, theplaintiff has suffered a damage, and there is a causal link between the act of corruptionand the damage (art. 4). Each state has to bear responsibility for its officials (art. 5); thecompensation has to be reduced if the plaintiff contributed to the damage (art. 6), andthe damage has to be claimed within a limitation period of not less than three years(art. 7). Except for the strict limitation period in the last provision, those are generalprinciples of many national laws. However, in arbitration, claims for damages has notyet become an issue.67

IV. DISPUTE SETTLEMENT RELATED TO THE MAIN CONTRACT

With a view to dispute settlement related to main contracts, some remarks onarbitrability (1) will be followed by questions on evidence (2) and on anti-corruptionpolicy values in setting aside and enforcement procedures (3).


66 cf. Cameroon Airlines v. Transnet Limited, 29 July 2004 – High Court of Justice, IntADR orwww.kluwerarbitration.com.

67 The only known compensation case in the corruption context did not concern the damage for corruption,but is rather an expropriation case. Wena v. Egypt deals with the compensations that Wena claimed forexpropriation after the seizure of various hotels by the Egypt government. Corruption played a role as the defendanttried to contest the validity of the investment contract by allegations of corruption. However, the arbitrators didnot find that there was a connection between the validity of the contracts and the compensation for expropriationand did not decide about the corruption issue, Wena Hotels v. Egypt Award of 8 December 2000 at A, Award of28 January 2002, “Did the Tribunal not deal with questions submitted for its decision?”, both IntADR orwww.kluwerarbitration.com


1. ARBITRABILITY

Some respondents argue that corruption cases are generally not subject toarbitration because they include problems of public law and policy and issues of criminallaw.68 Some national courts have confirmed this position, like the Supreme Court ofPakistan in its 3:2 majority judgment in the HUBCO case, which found that corruptioncases required “finding about alleged criminality” and therefore were “not referable toarbitration”,69 In SGS v. Pakistan,70 the Supreme Court of Pakistan held that in thearbitration proceedings the Republic of Pakistan was restricted to “the claims based onthe terms and conditions of the agreement in question”, which meant that corruptionissues should not be discussed.71 According to this idea, a corruption case is “notcommercial dispute arising from an undisputed legally valid contract, or relatable to sucha contract”.72 One reason for such decisions may be that host states prefer thatcorruption committed by their officials is not an issue to be discussed in the forum ofinternational arbitration.

This position is not convincing. Claims out of contracts remain contractual claimseven when preliminary questions may refer to different fields such as tax, criminal andpublic law. A contract tainted by corruption remains to be a commercial contract andis therefore referable to arbitration.73 This is also the arbitral practice, which deals withcontractual cases as commercial disputes even if corruption is involved.74 ICC No. 6474was a case where the respondent alleged the arbitration agreement itself to be specifically“induced by corruption or fraud, or ... tainted by illegality”.75 The arbitral tribunalrejected this argument for lack of evidence. However, in an obiter dictum, it madeexplicitly clear that a claim on the non-performance of a contract is always a pecuniaryclaim.76

Courts of the respondent states may decide differently. In the HUBCO judgment,the Pakistan Supreme Court did not even insist on evidence of corruption butconsidered prima facie allegations of corruption as sufficient to exclude the arbitrability


68 HUBCO v. WAPDA para. 15 and 19. If the main contract is invalid, problems of the severability orseparability of the arbitration agreement may also arise, which will be examined below in the context of agencyagreements. HUBCO v. WAPDA para. 31: “It may be noted that since WAPDA accepts the validity of the arbitrationagreement ..., no issue of “separability” actually arises in this case.”

69 Id. para. 47 e).70 SGS v. Pakistan, Supreme Court of Pakistan 3 July 2002, 28 Y. B. Comm. Arb. 1312 (2003) (hereinafter

SGS v. Pakistan); in the arbitration proceedings before the ICSID tribunal, corruption was not decided upon, cfDecision of the Tribunal on Objections to Jurisdiction, http://www.worldbank.org/icsid/cases/SGSvPhil-final.pdf

71 SGS v. Pakistan para. 83.72 Id.; cf. also Robert N. Hornick, The Mihaly Arbitration, 20 Journal of International Arbitration 189

(2003).73 Id. para. 39-40; Homayoon Arfazadeh, Considerations pragmatiques sur la competence respective de

l’arbitre et du juge en matiere de corruption, 19 ASA Bulletin 672 (2001).74 Since ICC No. 3913, Award of 1981, quoted in Y. D., Observations, Coll. ICC Arbitral Awards 497 (1974-

1985) (hereinafter ICC No. 3913). Cf also Karl-Heinz Böckstiegel, Public Policy and Arbitrability, 3 ICCA Congressseries 177, 200-201 (1986).

75 ICC No. 6474 Partial award on Jurisdiction and Admissibility, 25 Y. B. Comm. Arb. 11, para. 120 (1999)(hereinafter ICC No. 6474).

76 ICC No. 6474 para. 127-129.


of the contractual relationship.77 If, according to this judgment, even an allegation ofcorruption could render an issue non-arbitrable, arbitration in a world of almostomnipresent corruption, particularly in the foreign investment context, would get closeto impossible.78

This means that the arbitrator has to take criminal anti-corruption laws intoaccount as part of the mandatory law. When corruption will be alleged by one of theparties, he has to apply the criminal law of the lex contractus. In addition, he may applythe relevant provisions of the international anti-corruption instruments which show thatanti-corruption is part of transnational public policy.79 But all of this does not abolishhis power to decide on the merits of the case.

2. EVIDENCE

The standard of proof is one of the most contentious problems of corruption casesin arbitral practice. Usually, arbitrators consider a fact as proven if there is“preponderance of evidence”, which means that the existence of a fact is more probablethan its opposite or its non-existence.80 However, for the evidence of corruption, somearbitral tribunals have demanded a higher standard of proof.81 The tribunal in theWestinghouse case, considering bribery in private law cases a species of fraud, required“a clear preponderance of the evidence”.82 In ICC No. 5622 (Hilmarton), the tribunalrequired evidence “beyond doubt”, Claude Reymond in his award from 1995 “furtherand direct evidence”.83 In the first final award of 1999 in the Himpurna case, thearbitrators required “clear and convincing proof”.84

The reasons for an elevated standard of proof are diverse. In the Westinghouse case,the tribunal argued that there is a general rule of international law that “fraud is neverlightly to be presumed”.85 However, it remains doubtful where such a rule can befound. If the idea behind this is that corruption and fraud are something startling andimprobable,86 this does not seem adequate in today’s world of omnipresent corruption.

In the Himpurna case, the tribunal held that “there is a presumption in favour of


77 HUBCO v. WAPDA para. 47.78 Nudrat B. Majeed, Commentary on the Hubco Judgment, 16 Arb. Int’l 431 (2000).79 Alexis Mourre, Arbitration and Criminal Law: Reflections on the Duties of the Arbitrator, Arbitration

International 95, 99 (2006) (hereinafter Mourre); Matti S. Kurkela, Criminal law in international arbitration – notesto arbitrators; ICC Task Force on Criminal Law and Arbitration, March 2006.

80 Abdulhay Sayed, Corruption in International Trade and Commercial Arbitration (hereinafter Sayed) 93(2004).

81 Cf. Also José Rosell, Harvey Prager, Illicit Commissions and International Arbitration: The Question ofProof, 15 Arb. Int’l 329 (1999).

82 Sayed 104.83 The Claude Reynold Award, ASA Bulletin 742, 747 (1995). Both cases relate to type two, cf. below “the

agency agreement.”84 Himpurna v. PLN para. 116. Cf also Matthias Scherer, Beweisfragen bei Korruptionsfällen vor

internationalen Schiedsgerichten, 19 ASA Bulletin 684, para. I (2001).85 Sayed 104.86 Sayed 103.


the validity of contracts; that this presumption is healthy; that it is strengthened whencontracts have provided the basis upon which many persons have acted over time, andthat a finding of illegality or other invalidity must not be made lightly, but must besupported by clear and convincing proof.”87 The tribunal, by raising the standard ofproof, did in reality not treat problems of evidence. It tried to evade the consequencesof ipso iure invalidity of the main contract. Leaving the contract valid and open tomodification (unless national laws provide for invalidity) is a methodologically moretransparent and more flexible solution.

A second group of tribunals consider the difficulties of the alleging party to provecorruption and therefore make evidence easier for the alleging party, requiring only“serious indices”88 or a situation where “no reasonable doubts remain”.89 The tribunalin ICC No. 649790 has even considered shifting the burden of proof for circumstancesthat belonged to the sphere of the claimant.91 At the end it did not do so, because therespondent’s main witness refused to tell the names of alleged beneficiaries of bribes. So,more than with standard or burden of evidence, this case dealt with the refusal of bothparties to co-operate fully with the procedure,92 the tribunal applying the general rules.

For the principle of equality of the parties, the usual standard and burden of proofshould be applied, as was done by a third group of tribunals.93 A higher or lowerstandard of proof is unjust because it leads to inequality of the parties. Corruption isnormally invoked by the respondent party that wants to evade its obligations andtherefore bears the burden of proof. If a higher standard of proof was required forallegations of corruption, this would typically give the claimant an unjust advantage. Forthe same reasons, lower standards of proof should not be applied.

3. PUBLIC POLICY VALUES IN SETTING ASIDE AND ENFORCEMENT PROCEDURES

An internationally recognized principle supports the finality of awards. Nationalcourts may only refuse the enforcement of an award, obtained in an internationalcommercial arbitration or set it aside, for issues of public policy (Art. 5, § 2 b United


87 Himpurna v. PLN para. 11688 ICC No. 8891, 127 JDI 1076, 1079 (2000) (hereinafter ICC No. 8891); « En effet, l’objet illicite est

généralement dissimulé derrière des dispositions contractuelles d’apparence anodine. C’est pourquoi les arbitresn’ont souvent autre choix que de se fonder sur des indices. Ceux-ci doivent être sérieux. »

89 Oil Fields of Texas v. Iran, para. 25.90 ICC No. 6497 para. 3-15,91 cf also José Rosell, Harvey Prager, Illicit Commissions and International Arbitration: The question of

Proof, 15 Arbitration International 329 (1999); Christopher Koch, The Sixteenth ICCA Congress – May 12-15,2002, London, 19 Journal of International Arbitration 609, 612 (2002).

92 Mourre 103.93 In ICC Case 4145, the tribunal stressed to follow “general principles of interpretation”, according to which

a fact can also be proven by circumstantial evidence, if it leads to “very high probability” – which implies that directevidence needs only to present normal probability, ICC Case No. 4145, Interim Awards and Final Award of 1983,12 Y. B. Comm. Arb. 97, para. 28 (1987) (hereinafter ICC No. 4145). In ICC Case No. 7047, the tribunal seeks tobe “convinced” of the alleged fact, a “mere suspicion” being not sufficient, ICC No. 7047 Final Award of 1994 in21 Y. B. Comm. Arb. 79 para. 54 (1996) (hereinafter ICC No. 7047). In No. 9333, the tribunal requires“conviction”, 19 ASA Bulletin 757, para. 8 (2001) (hereinafter ICC No. 9333).


Nations New York Convention),94 a notion which should refer to the national conceptof international public policy but not to domestic public policy.95 Corruption cases areto be treated applying these general rules. This means that there should be nore-opening in facts and law unless a violation of international public policy isconcerned.96 Anti-corruption values relating to hard corruption are considered as partof international public policy, whereas the banning of influence peddling is sometimesnot yet considered to be part of international public policy.97

After the enforcement proceedings in the Soleimany v. Soleimany case in England,there seemed to rise some confusion about the finality of awards. The ad hoc tribunal inthis case had considered the contract as illegal for violation of the Iranian export laws,but illegality was without effect under the applicable Jewish law. The Court of Appealrefused enforcement because an English court would not “enforce a contract governedby the law of a foreign and friendly state ... if performance is illegal by the law of suchcountry”.98 The Court pointed out that “an enforcement judge, if there is a prima facieevidence from one side that the award is based on an illegal contract, should inquirefurther to some extent”. The Court should conduct a summary examination into factsand law, including into the way the arbitral tribunal conducted the proceedings.

However, the Soleimany decision concerned an exceptional situation. It dealt witha case of open illegality, where “it was apparent from the face of the award that thearbitrator was dealing with an illicit enterprise”,99 but without any legal response in thearbitral proceedings. Normally illegality based on corruption is not obvious but disputedby one party. In such cases, where the arbitral tribunal had dutifully examined but notaccepted illegality, any re-opening in facts and law in setting aside or enforcementproceeding is to be rejected.100


94 Art. 5 § 2 of the New York Convention reads: “Recognition and enforcement of an arbitral award mayalso be refused if the competent authority in the country where recognition and enforcement is sought finds that... b) The recognition or enforcement of the award would be contrary to the public policy of that country.”

95 Emmanuel Gaillard, John Savage (ed), Fouchard, Gaillard, Goldman on International CommercialArbitration No. 1710-1711 (1999).

96 Audley Sheppard, Interim ILA Report on Public Policy as a Bar to Enforcement of International ArbitralAwards, 19 Arbitration International 217, 222 (2003).

97 OTV v. Hilmarton, High Court of Justice, 24 May 1999, 24a Y. B. Comm. Arb. 777 (1999).98 Soleimany v. Soleimany Court of Appeal, 30 January 1998, 24a Y. B. Comm. Arb. 329, para. 32 (1999)

(hereinafter Soleimany v Soleimany).99 OTV v. Hilmarton, High Court of Justice, Queen’s Bench Division (Commercial Court), 24 May 1999,

24a Y. B. Comm. Arb. 777, para. 14 (1999).100 Westacre v. Jugoimport, High Court, Queen’s Bench Division (Commercial Court), 19 December 1997,

23 Y. B. Comm. Arb. 836 para. 77-79 (1998): “...only by going behind the award and admitting further evidenceof Kuwait public policy would an English or any other enforcement court become aware that the underlyingcontract was contrary to Kuwait public policy. Given the weight to be attached to the public policy of sustainingthe finality of international arbitration awards..., it is difficult to see how enforcement of such an award could besaid to represent a lack of respect for the law of or administration of justice in Kuwait... Moreover, as a I havealready held, it does not follow that, merely because an underyling contract is void at common law because directenforcement would be contrary to public policy enforcement of an international arbitration award which treatedthat contract as enforceable would itself automatically be contrary to public policy.” Cf. also HUBCO para. 34, 35.To a different view cf. Corvetina v. dough, Supreme Court of New South Wales, IntADR or www.kluwerarbitration.com para. 14, 15 (only relating to the problem of separate hearings). In Mexico v, Metalclad, the BritishColumbia Supreme Court in a decision of 2 May 2001 re-examined the same evidence as the tribunal again,coming to the conclusion that corruption was not sufficiently proven.


V. TYPE 2: THE AGENCY AGREEMENT

The contractual relation between investor and intermediary can be influenced bytwo types of anti-corruption laws: laws that prohibit intermediaries (1) and/or laws thatcriminalize corruption (2). If the agreement is invalid and the parties have alreadyperformed, restitution problems arise (3).

1. THE PROHIBITION OF INTERMEDIARIES

a) Many countries have anti-corruption laws that forbid the activity ofintermediaries in public procurement matters. Some of them ban the activities ofintermediaries completely;101 some restrict them to registered consultant firms,102 or todomestic citizens.103 These laws have a preventive anti-corruption background and aremostly part of the legal systems of investment-importing countries. They are based onthe idea that the work of intermediaries is a typical risk for disguised corrupt activities.Although they have their explicit sanction in the field of criminal law, a state thatconsiders these practices as illegal will not be willing to enforce contracts dealing withthem. Consequently, agency agreements are likely to be held invalid within the legalorder of the host state.

b) Agents and investors frequently seek to evade these provisions by agreeing on achoice-of-law clause in favour of a neutral law that allows for intermediaries.104 Forexample, the parties in the Hilmarton case concluded an agency agreement on legal andfiscal advice in the context of a tendering process for public works in Algeries. InAlgeria, this kind of intermediary activity is illegal. The parties therefore agreed to applySwiss law.

Such choice-of-law is valid and supported by the principle of party autonomy(Art. 3 of the Rome Convention of 1980).105 The only limits to the contractual freedomof the parties are norms that call for universal application and invalidate any choice-of-law clause that seeks to evade them (international imperative rules or a priori limits).106

However, banning intermediation in public procurement is not an internationalimperative rule. On the contrary, many countries, typically the capital-exporting orhome countries of investors, do not even disapprove the intermediary’s activities.107

This finding is supported by the stance of the “validation requirement”, which


101 Algeria, Libya, Saudia Arabia (armament contracts), Syria, cf. Sayed 192-193.102 Egypt, Kuwait, Syria (exception of total ban for registered firms), cf. Sayed 194.103 Bahrain, United Arab Emirates, Kuwait, Saudi Arabia (general commercial contracts), Qatar, cf. Sayed 192.104 For definitions Sayed 169-171.105 Art. 3 § 1 of the Rome Convention on the Applicable Law to contractual relations reads: “A contract shall

be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonablecertainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the lawapplicable to the whole or a part only of the contract.”

106 Sayed 166.107 ICC 8113, Partial award on the Applicable Law of 1995, 25 Y. B. Comm. Arb 11 (2000) (hereinafter ICC

No. 8113), cf. Sayed 173-175.


means that “from two legal solutions, the judge will choose the one which favours thevalidity of an agreement” ( favour negotii).108 In ICC No. 4145, the agency agreementcontained a choice-of-law clause in favour of “the laws of the Canton of Geneva,Switzerland or country X”. These two laws were contradictory in the question ofintermediaries. The respondent held the law of country X applicable, because itprohibits the activities of intermediaries. Under Swiss law, the agreement would havebeen a legal brokerage contract. The arbitrators based their decision in favour of Swisslaw on the principle of favor negotii which calls for applying the law that renders theagreement valid.109

c) The validity of such a choice-of-law clause does not suggest that prohibitions ofintermediaries do not play any role at all. Some national conflict rules, like Art. 19 ofthe Swiss Private International Law Act, authorize the arbitral tribunal to apply a foreignmandatory law if the case has a close connection and there are preponderant andlegitimate interests for its application.110 In scholarly debate, some want to apply foreignmandatory laws generally under similar conditions.111

The prohibition of intermediaries is, however, not a law which has preponderantand legitimate interests for its applications. The Swiss Tribunal Fédéral considers onlythose laws of preponderant interest that aim at the protection of “fundamental interestsof the individual or of the human community”.112 The prohibition of intermediariesserves primarily the domestic (social, economic) interests of the host state, and istherefore not to be applied.113

The anti-corruption background of those laws does not lead to a different result.The objective of a law only cannot lead to its application in a foreign context. Mostmandatory laws relate to domestic public policy values. Applying them on this basiswould lead to a general direct application of foreign mandatory laws and so cause anunacceptable limitation of party autonomy. Considering that prohibition ofintermediaries is not an international policy value, the violation of foreign lawsprohibiting intermediaries as such remains without effect, if the parties have chosen thelaws of a neutral third country to govern their contract.


108 ICC No. 4145, 99. Cf. to this problem also Sayed 168-178 and ICC No. 8113.109 For a critical commentary on this award cf. Sayed 181-187.110 Art. 19 § 1 SPILA reads; “If, pursuant to Swiss legal concepts, the legitimate and manifestly preponderant

interests of a party so require, a mandatory provision of law other than that designated by this Code may be takeninto account if the circumstances of the case are closely connected with that law.” It is, however, already doubtfulif Art. 19 Swiss PILA is applicable if there is a valid party choice, taking into account Art. 187 PILA; cf. State AgencyA v. Respondent X, Tribunal Fédéral, 30 December 1994, 21 Y. B. Comm. Arb. 172, para. 20 (1996) (hereinafterState Agency A v. Respondent X). Art. 187 PILA reads: “The arbitral tribunal shall rule according to the law chosenby the parties or, in absence of such choice, according to the law with which the action is most closely connected.”

111 Sayed 258-265.112 Beta SA v. Alpha International Corporation, Ad hoc Award of 1989, ASA Bulletin 239, 252 (1991)

(hereinafter Beta v. Alpha)113 The Jürgen Dohm Award, ASA Bulletin 216, 233 (1993); Geneva Chamber of Commerce and Industry

Award dated 23 February 1988, ASA Bulletin 136, 141 (1988); Beta v. Alpha 352.


2. THE AGENCY AGREEMENT AS AN AGREEMENT ON ILLICIT ACTIVITIES

But it is undisputed that an agreement, whose objective is to bribe foreign officials,has an illegal objective and is null and void.114

In the frequent cases governed under Swiss law, invalidity follows from Art. 20OR. German law provides nullity for illegality in § 134 BGB. Art. 8 (1) of the Civil LawConvention on Corruption obliges the signing states to provide for regulations ofnullity.115 According to the law applicable, the arbitral tribunal may require that both116

or only one party117 have the intention to act illegally. An agency agreement aiming atcorruption is invalid because it violates international public policy. The general rulenemo auditur suam turpitudinem allegans provides that no arbitral tribunal should hold suchagreement to be valid. Any award to the contrary should be unforceable.

In cases where the parties’ conduct is not considered as illegal according to the nationallaw applicable, the contract may still be considered null and void for immorality. TheGerman Federal Supreme Court decided accordingly before foreign bribery had beendeclared a criminal offence.118 The arbitral tribunal in the first “Hilmarton” award consideredan agency agreement aiming at “influence peddling” as invalid because of immorality underSwiss law.119 States that have ratified the relevant international anti-corruption conventionsare obliged to combat bribery and therefore cannot enforce such awards.120

Contracts may be invalidated in parts, only, if the major part of the obligation is legal,the minor part being illegal. An agency agreement may oblige the consultant to furtherthe opportunities of the investor in any legal way possible and to use bribery only as lastreasort, In such case, the agency agreement does not exclusively aim at bribery. It mustthen be determined if the objectives of the contract can be separated in a legal and an illegalpart. If this is not possible, the whole agreement must be considered as invalid.121 If theconsultant did not employ any illicit means during his services on behalf of the principal,he deserves his fees. If, indeed, he did bribe officials, he does not, his contract being void.


114 ICC No. 1110 Award of 1963 10 Arb. Int’l para. 16 (1994) (hereinafter ICC No. 1110); ICC 2730 Awardof 1982 Coll. ICC Arbitral Awards 490, 494 (1974-1985); ICC 3913, 498; ICC No. 3916 Award of 1982, 111 JDI930, 933 (1984) (hereinafter ICC No. 3916); ICC 4145 para. 24, ICC No. 6286 19 Y. B. Comm. Arb. 141 para. 22(1999) (hereinafter ICC No. 6286), ICC No. 6497 para. 2; ICC No. 7047 para. 53; ICC No. 8891, 1079; State AgencyA v. Respondent X para. 23.

115 Art. 8 (1) of the Civil Law Convention on Corruption reads as follows: “Each party shall provide in itsinternal law for any contract or clause of a contract providing for corruption to be null and void.”

116 ICC No. 4145 para. 36; ICC No. 7047 para. 41; EGT v. Westman, Paris Court of Appeal, 30 September1993, Revue de l’arbitrage 359 (1994).

117 ICC No. 6248 para. 7 (morality).118 BGH NJW 1985, 2406.119 ICC No. 5622, Final Award of 1988, 19 Y. B. Comm. Arb. 105 para. 34 (1994) (hereinafter ICC No. 5622).

Note the different characteristics of the Algerian law No. 78-02 and the prohibitions of intermediaries quotedabove: While the latter prohibit any activities of agents, the Algerian law in the Hilmarton case aims at combatingthe activities above defined as trading in influence. However, this position was not accepted and the award set asideby Swiss courts, Cour de Justice Geneva, 17 November 1989, 19 Y. B. Comm. Arb. 214 (1994), Tribunal fédéraleSuisse, 17 April 1990, Revue de l’arbitrage 342 (1993); cf. also Vincent Heuzè, La morale, l’arbitre et lejuge, Revuede l’arbitrage 179 (1993).

120 Pierre Mayer, Audley Sheppard, Final ILA Report on Public Policy as a Bar to Enforcement of InternationalArbitral Awards, 19 Arbitration International 249, 261 (2003); Audley Sheppard, Interim ILA Report on PublicPolicy as a Bar to Enforcement of International Arbitral Awards, 19 Arbitration International 217, 222 (2003).

121 ICC No. 1110, para. 20.


3. RESTITUTION

Payments to fulfil an invalid contract are performed without causa. However, theprinciple of exclusion of recovery also applies here. If the investor has already paid thecommission, the agent may keep it without being obliged to render the illegal service.He may even keep the share that was determined for the foreign official if this part isnot claimed by the foreign government. Only in this way it can be ensured that thearbitral tribunal does not lend its discretionary power to the refunding of paymentsunder an illegal or immoral contract.

However, this consequence seems only legitimate if both parties consented with acorrupt intent and therefore the principal deserves the hard consequence of exclusionof recovery. Arbitral tribunals therefore frequently examine if both parties participatedequally in the violation of public policy. Only then is it ensured that “one party is notthereby enabled to reap the fruits of his own dishonest conduct by enriching himself atthe expense of the other.”122

VI. DISPUTE SETTLEMENT RELATED TO THE AGENCY AGREEMENT

What are the specific dispute settlement problems related to the agency agreement?If the agency agreement is per se null and void it has to be examined if the relatedarbitration agreement is itself invalid or if it is independent of the agency agreement (1).Agency agreements never expressly contain a consent to corrupt activities, so specialissues of evidence arise in arbitral proceedings (2). Finally, the rule of anti-corruptionpolicy values in setting aside and enforcement procedures has to be considered (3).

1. ROLE OF THE SEVERABILITY DOCTRINE

The severability (or separability) doctrine implies that the arbitration agreementremains binding in spite of the invalidity, unenforceability or termination of theunderlying contract.123 It is laid down in Art. 16 (1) UNCITRAL Model law and most ofthe institutional arbitration rules like Art. 6 (4) ICC Rules.124


122 ICC No. 1110 para. 21. Cf. also ICC No. 5622 para. 56. Without examination of the parties’ intentions ICCNo. 5943, 123 JDI 1014, 1017 (1996); ICC No. 6497 para. 2 (“the result... is not necessarily equitable ... But this islegally irrelevant”); Mourre 101.

123 Emmanuel Gaillard, John Savage (ed), Fouchard, Gaillard, Goldman on International CommercialArbitration para. 389-451 (1999).

124 16 (1) UNCITRAL Model Law reads: “The arbitral tribunal may rule on its own jurisdiction, including anyobjections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitrationclause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract.A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of thearbitration clause.” Art. 6 § 4 ICC rules reads:

“Unless otherwise agreed, the Arbitral Tribunal shall not cease to have jurisdiction by reason of any claim thatthe contract is null and void or allegation that it is non-existent, provided that the Arbitral Tribunal upholds thevalidity of the arbitration agreement. The Arbitral Tribunal shall continue to have jurisdiction to determine therespective rights of the parties and to adjudicate their claims and pleas even though the contract itself may be non-existent or null and void.”


In a much discussed award of 1963 (ICC No. 1110), Judge Lagergren held that theseparability doctrine does not apply where corruption is at stake.125 A contract thatviolated morality and international public policy should not be subject to an arbitralaward that could be enforced under the New York Convention.126 The arbitratorshould therefore deny his jurisdiction from the beginning.

Since the 1980s, however, there has been consensus within the arbitral practice thatthe severability doctrine applies also in corruption cases.127 This change reflects agrowing confidence in international arbitration as an instrument to protect internationalpublic policy.128 Indeed, the general reasons for the severability doctrine apply fully tothe needs of corruption cases. If the arbitration agreement was dependent on theunderlying contract, the arbitral tribunal would first have to examine in extenso thevalidity of the agency agreement, which will in many cases be the main problem of thedispute. If it came to the conclusion that the agreement was a contract on bribery andtherefore invalid, the tribunal could not use this result for judging on the merits of thecase, but should immediately dismiss the claim for lack of arbitrability. The examinationof the contract would until then have taken place before an arbitral tribunal that did noteven have the competence to examine the contract. Party autonomy is much betterserved if the arbitrator accepts the case and decides that the contract is null and void.129

If he gets it totally wrong, his award will be set aside or unenforceable.

2. EVIDENCE

As to the standard of proof, the same principles apply as discussed above for themain contract, which means that the general standard of “preponderance of probability”should be applied.

In cases of agency agreements, an additional problem arises. The circumstances thatdetermine the reason of their invalidity are not outside facts. It is, for example, irrelevant


125 ICC No. 1110; cf. also J. Gillis Wetter, Issues of Corruption before International Arbitral Tribunals: TheAuthentic Text and True Meaning of Judge Gunnar Lagergren’s 1963 Award in ICC Case No. 1110, 10 Arb. Int’l277 (1994).

126 ICC No. 1110, para. 3.127 ICC No. 3916, 931; ICC 4145, para. 8; ICC 5662, Final Award of 1988, para. 50; cf. also Andrew Rogers,

Rachel Launders: Separablity – the Indestructible Arbitration Clause, 10 Arb. Int’l 77 (1994); Pierre Mayer, TheLimits of Severability of the Arbitration Clause, 9 ICCA Congress Series 261 (1999).

128 Y. D., Observations, Coll. ICC Arbitral Awards 497, 498-499 (1974-1985): « Il y a cependant une évolutionsensible entre [‘attitude reflétée par la sentence rendue en 1963 dans l’affaire no 1110 qui constatait à considérer lamatière non arbitrable ... et celle qui consiste à constater la nullité du contrat que révèlent les sentences plus récentes.... les arbitres sont de plus en plus conviaincus qu’il leur appartient de sanctionner eux-mêmes les violations del’ordre public, et en particulier de l’ordre public international dont ils sont des gardiens naturels. » In Westacre v.Jugoimport, the High Court, Queen’s Bench (Commercial Court), in its decision of 19 December 1997, arguedfrom the perspective of the enforcement court with a strong support to the severability doctrine for reasons ofconfidence into arbitration: “If the issue of illegality by reason of corruption is referred to high calibre ICCArbitrators and duly denied by them, it is entirely inappropriate in the context of the New York Convention thatthe enforcement Court should be invited to retry that very issue in the context of a public policy submission.”(23 Y. B. Comm. Arb. 836, para. 71 (1998)); Mourre 98.

129 For a slightly different solution in the case that the claimant filed subsidiary claims: Homayoon Arfazadeh,Considerations pragmatiques sur la compétence respective de l’arbitre et du juge en matière de corruption, 19 ASABulletin 672 (2001).


whether or not the intermediary indeed offered bribes to public officials, and whetheror not they accepted. The only fact that decides on the validity of such contract iswhether or not the agreement (expressly or silently) contemplated the bribing of foreignofficials.

However, the parties almost never document such consensus in a writtenagreement. Witnesses who can tell about the real intentions of the parties are rare.130 Fordetermining the “real” objective and content of these contracts, the arbitral practicetherefore developed some indications that are useful as circumstantial evidence.131

First, arbitrators look at the nature of the services that the agent really performed.If it can be established that he later spent a great part of the commission on the bribingon foreign officials, it can be an indication that this is what he was supposed to do.132

On the other hand, the real and tangible performance of legal consultancy services wasjudged as an indication that the contract did not have illegal objectives.133 One tribunalaccepted a very short time appointment (2:5 months) between a consultant and aninvestor as an indication among others.134 The simple lack of any rendered servicescannot be used as an indication that the real objective of the contract was bribery,135 buton the other hand, if the agent claims that he had performed legal activities but does nothave any documentation on them, this can be an indication that his activities wereillegal.136

Similar indications arise from the circumstances of the decision by the publicauthority in favour of the principal. If it can be established that the decision was takendue to bribery of the officials by the agent, this is an indication that the parties of theagency agreement had the plan to achieve the decision in this way.137 Arbitral tribunalsparticularly discussed situations where the final public procurement price increasedwithout legitimate reason.138

If the parties agreed on an exorbitant commission, this can be an indication that thecommission is not due to stay with the agent but contains a part that is to be used as abribe. However, as the parties are free to agree on a commission beyond the marketprice, the fee is only a weak indication.139


130 Although they exist in some cases, cf. ICC 3913, 497; ICC 4145 para. 29.131 Matthias Scherer, Beweisfragen bei Korruptionsfällen vor internationalen Schiedsgerichten, 19 ASA

Bulletin 684, para. II (2001).132 ICC 1110 para. 20. Not accepted in ICC No. 5622 para. 23; ICC No. 6286 para. 22; ICC No. 7047, para, 55.133 ICC No. 6497 para. 5; ICC No. 7047, para. 42.134 ICC No. 8891,1080.135 ICC No. 4145, para. 33,136 ICC No. 3916, 932 ; ICC No. 8891, 1081; José Rosell, Harvey Prager, Illicit Commissions and International

Arbitration: The Question of Proof, 15 Arbitration International 329 (1999).137 ICC No. 3916, 932: “l’etonnante rapidité avec laquelle le demandeur avait pu obtenir des marchés pour la

societé grecque »; ICC No. 4145 para. 30.138 Refused in ICC No. 4145 para. 30.139 The defendant was successful with this indication in ICC No. 8891, 1081; it was discussed in ICC No. 6497

para. 17 (33,33 % for “extraordinary services”) and in ICC No. 7047, para. 43-44; refused in ICC 9333 para. 9 (“ilse peut que l’intermédiaire soit simplement avide”).


Finally, the identity, status, and structure of the agent can be used as circumstantialevidence. This has particularly been accepted if the agent is a former official of the hoststate.140

3. ANTI-CORRUPTION AS A POLICY VALUE IN SETTING ASIDE AND ENFORCEMENT

PROCEDURES

The principles above, holding that corruption should be treated in enforcementproceedings like other allegations and should not allow for easy re-opening ofexaminations, apply also in the cases of agency agreements. Agency agreements aimingat corruption violate international public policy and an award relating to such anagreement would be barred from enforcement.

However, setting aside an award for corruption will be only practical in exceptionalcircumstances. A situation like in the Soleimany case, where the tribunal did not takeinto account international policy because the party acted legally under the applicablelaw, is hardly imaginable in a case dealing with hard corruption. On the other hand, ifthe alleging party presents new allegations of corruption before the setting aside orenforcement court and has a valid excuse why it could not present these earlier to thearbitral tribunal in spite of its best efforts, international policy on anti-corruption wouldlead to the nullity or unenforceability of the award. In such rare situations, courts shouldbe free to re-examine the award.141

VII. CONCLUSION

1. MAIN CONTRACTS:

1.1. Where corruption is involved this paper opts for a flexible treatment of main(investment) contracts, taking the principle of state responsibility into account.

1.2. The main contract remains per se valid (unless invalidity follows from thechosen applicable law), but can be modified, adapted, or declared void by anarbitral tribunal in its award.

1.3. The investment stays where it is and keeps fulfilling its economic function, theinvestment contract remaining its causa.

1.4. Related contracts, surrounding the main contract like on financing orinsurance and related acts of public law, are independent of the main contractand have to be examined separately,


140 ICC No. 3916, 932 (“la composition de «son groupe»”). Refused in ICC No. 6497 para. 8. A friendshipbetween the agent and one of the decision-makers of the purchasing public entity is not an indication of corruption,Lunik v. Soliman, ASA Bulletin 210 para. 44 (1998).

141 International Law Association, New Delhi Conference (2002), Final Report on Public Policy as a Bar toEnforcement of International Arbitral Awards, para. 52, quoted in Hilmar Raeschke-Kessler, Some Aspects ofInternational Public Policy in International Commercial Arbitration, Presentation in Berlin on August 20, 2004.An example for these problems under the Arbitration act of South Africa is Coetzee v. Paltex, Provincial Divisionof the High Court of South Africa 8 May 2002, Digest by Lise Bosman, IntADR or www.kluwerarbitration.com


1.5. Arbitral tribunals should judge allegations of corruption on the facts applyingthe usual standard of proof, including circumstantial evidence.

1.6. In setting aside and enforcement procedures, anti-corruption as aninternational public policy value should not lead to a stricter national controlof arbitral awards and to easier re-opening of examination than is the normalstandard applied by courts in international arbitration.

2. AGENCY AGREEMENTS:

2.1. The presence of intermediaries between the investor and the host state is oneof the most typical features of corruption in international investment, but donot automatically point to corruption in a dispute between principal andagent.

2.2. Agency agreements between investors and intermediaries, containing anunderstanding about the bribing of foreign officials, are invalid. They are notaffected by the prohibition of intermediaries that exist in many national laws,but their validity is a consequence of the illegality of their objective.

2.3. What has been paid in performance of such an agreement is excluded fromrestitution.

2.4. Agency agreements, where corruption is alleged remain arbitrable because ofthe principle of severability.

2.5. Arbitral practice developed a series of indications that may be used todetermine whether or not the contract’s objective was corruption.

2.6. Awards that enforce agency agreements aiming at corruption are contrary tointernational public policy and therefore void.



TABLE OF CONTENTS

I. Introduction 1

1. Plan of the article 1

2. The notion of corruption and the notion of international investment 2

3. Scope of the Study 5

4. Overview over Regulations and Instruments 8

II. Characteristics of Corruption Cases in Foreign Investment 9

1. General Characteristics of Corruption Cases in InternationalInvestment 9

2. Two Types of Cases 11

III. Type 1: The main contract 12

1. Reasons to hold the main contract to be invalid or unenforceable 13

2. Reasons to hold the main contract to remain valid and enforceable 16

3. Modification and Adaptation of the Main Contract 18

4. Related legal transactions containing the investment 21

5. Restitution 22

6. Claims for damages 24

IV. Dispute Settlement related to the Main Contract 24

1. Arbitrability 25

2. Evidence 26

3. Public Policy values in setting aside and enforcement procedures 28

V. Type 2: The Agency Agreement 30

1. The prohibition of intermediaries 30

2. The agency agreement as an agreement on illicit activities 33

3. Restitution 35

VI. Dispute Settlement Related to the Agency Agreement 35

1. Role of the Severability Doctrine 36

2. Evidence 37

3. Anti-corruption as a Policy Value in Setting Aside and EnforcementProcedures 39

VII. Conclusion 40



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