How prior corrupt conduct by a company can limit it from subsequently pursuing legal rights and remedies

Bribery and corruption are significant risks in the context of international business transactions.  These risks are heightened for companies doing business in developing markets.

Where a transaction results in a dispute, an additional risk can arise where the bribe takers, or their successors, seek to use allegations of corruption in relation to the transaction against the other party to the dispute.  They may do so to pressure the other party to walk away from a dispute, playing upon the risk of bad publicity.  In addition to the reputational consequences, the introduction of corruption allegations in arbitration proceedings can also bring additional complexity to the proceedings and may even bar the claim.

Risk that legal rights are unenforceable

As with court proceedings, corruption allegations in arbitration proceedings may result in a claimant being unable to enforce its legal rights because the tribunal finds that:

  • the contract is null and void or voidable at the instance of a respondent;
  • it has no jurisdiction to hear the claim; or
  • the claim is inadmissible due to the corrupt conduct.

If the claim is brought under a contract, the tribunal has jurisdiction to hear the claim and determine whether or not the corruption allegations are substantiated.  If there is a finding of corruption, the tribunal may find the contract is null and void, or voidable at the election of the respondent as in World Duty Free v Republic of Kenya (World Duty Free).[1]

If the claim is brought under an investment treaty, the tribunal may decline jurisdiction or find the claim is inadmissible because the investment was not made in accordance with the law of the relevant State and thus the claim does not meet the jurisdictional requirements, as in Metal-Tech Ltd v Republic of Uzbekistan (Metal-Tech).[2]

These two cases illustrate the derailing impact an allegation of bribery can have on a claim in international arbitration.

World Duty Free

In World Duty Free, the claimant initiated arbitration against Kenya in relation to a contract to run duty free operations at Kenya’s international airports.  The Kenyan Government argued that the contract was voidable for illegality as the claimant had paid a bribe to a representative of the President to secure the contract.  Finding that there was corruption, the tribunal then found that under both Kenyan and English law, the contract was voidable for illegality due to the corrupt conduct.  The claim was dismissed.

Metal-Tech

In Metal-Tech, the investor was party to a joint venture arrangement with the Government of the Republic of Uzbekistan.  Metal-Tech brought claims for expropriation and other breaches of the Uzbek Foreign Investment Law and the Israel-Uzbekistan bilateral investment treaty (BIT).

Early in the proceedings, various “red flags” suggested that bribes were paid during the course of the joint venture.  The “red flags” included US$4 million worth of consulting contracts, where the consultants were under qualified and closely related to Government officials.  After those consultancy contracts were raised in evidence, the Tribunal required further disclosure and evidence regarding the contracts including details of the services rendered by the consultants, to whom the payments were made and the amount paid to each consultant.  Finding that there was corruption, the tribunal held that it did not have jurisdiction to hear the claim because the investment made by Metal-Tech had not been made in accordance with the law of Uzbekistan.  Thus, the claim did not meet the jurisdictional thresholds under the BIT.  Nor did the tribunal have jurisdiction under Uzbek law.

The tribunal indicated the gravity with which it considered the corruption allegations, despite the potentially unfair consequences on the claimant, stating that:

“the Tribunal is sensitive to the ongoing debate that findings on corruption often come down heavily on claimants, while possibly exonerating defendants that may have themselves been involved in the corrupt acts.  It is true that the outcome in cases of corruption often appears unsatisfactory because, at first sight at least, it seems to give an unfair advantage to the defendant party.  The idea, however, is not to punish one party at the cost of the other, but rather to ensure the promotion of the rule of law, which entails that a court or tribunal cannot grant assistance to a party that has engaged in a corrupt act”.

Conclusion

In both World Duty Free and Metal-Tech, the investor had significant claims against the respondent Government, including claims of expropriation by the respective Governments.  In both cases, corrupt conduct barred the investors’ rights to a legal remedy.

These decisions demonstrate that where bribery and corruption are used to facilitate an international business transaction, it may not only expose the company to prosecution, but it can also impact on the company’s ability to pursue legal remedies in relation to the transaction.

[1] World Duty Free (Claimant) v The Republic of Kenya (Respondent) (ICSID Case No. ARB/00/7).

[2] Metal-Tech Ltd (Claimant) v Republic of Uzbekistan (Respondent) (ICSID Case No. ARB/10/3).

 

By Georgie Farrant, Jo Delaney, Ange Sevenson and Sarah Roughead.

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