CORRUPTION IN INTERNATIONAL TRADE AND COMMERCIAL ARBITRATION

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1 International Arbitration Law Library CORRUPTION IN INTERNATIONAL TRADE AND COMMERCIAL ARBITRATION by ABDULHAY SAYED LL.B. (Damascus), LL.M (Harvard) DES, Ph.D. (IUHEI - Geneva) KLUWER LAW INTERNATIONAL THE HAGUE / LONDON / NEW YORK

2 Table of Contents Foreword - Georges Abi-Saab Preface Introduction xvii xxi xxiii Chapter 1: Judgin» Corruption in Arbitration 1 I. A Brief Outline of the Underlying Paradigm of Arbitral Decision- Making 1 II. The Main Attitudes In Evaluating Corruption 8 A. The Repressive Tendency 9 i. The Conception on The Role of Arbitrators 9 ii. Condemning Corruption: A hypothesis on the Moral Basis 11 a. Awkward Disruption of Trade 13 b. Privation to the National Community 15 B. The Indifferent Tendency 19 i. The Point of View of the Scientific Observer of Corruption 19 ii. The Point of View of the Arbitrator in Matters Involving Corruption 22 III. Concluding Remarks 24 Chapter 2: Arbitrability of Public Procurement-Related Matters 27 I. Overview 27 II. Arbitrability of Public Procurement-Related Matters 29 A. The Legal Basis of the Non-Arbitrability of Public Procurement-Related Matters 29 i. Nature of Public Procurement Laws 29 ii. Basis of Non-Arbitrability of Public Procurement-Related Matters 31 B. The Arbitrator's Initiative In Raising The Non-Arbitrability of Public Procurement-Related Matters 33 i. Arbitrability Contested by One Party 34 ii. Arbitrability Discarded by the Parties 34 C. Applicable Law on the Question of Arbitrability of Public Procurement-Related Matters 36 i. The Mandatory Nature of Public Procurement Laws 37 a. A first Approximation of the Notion of Mandatory Laws 37 b. An Inquiry Into the Mandatory Nature of Public Procurement Laws 39

3 VÜi TABLE OF CONTENTS ii. The Arbitrator's Application of the Mandatory Non- Arbitrability of Public Procurement-Related Matters 40 III. Concluding Remarks 40 Chapter 3: Corruption and the Validity of the Arbitration Agreement 43 I. Overview 43 II. Contract of Corruption and the Validity of the Arbitration Agreement 46 A. The Westacre Case 47 B. The Historical Context of Westacre 54 C. Measuring The Degree of Offensiveness of Corruption 55 D. The Quality of the Award 57 E. Separability Between Indifference to Corruption and Repression 57 III. Validity of an Agreement to Arbitrate Corruption Matters 58 A. ICC Case No of 1963: The Lagergren Award 59 B. Arbitral Disengagement from Adjudicating Corruption Contracts 65 i. The Lagergren Solution: Immoral Contracts are "Non- Arbitrable" 65 ii. The Immoral Mission of the Arbitrator 67 IV. Public Procurement Contracts Obtained by Bribery 69 A. Arbitrability of Corruption Matters in Public Procurement Contracts 69 i. Arbitrability from the Perspective of the National Judge 70 ii. Arbitrability from the Perspective of the Arbitrator 74 B. Corruption as Defect of Consent to the Public Procurement Contract 76 i. The Westinghouse Case 77 ii. Corruption as an Independent Defect of Consent 80 iii. Corruption as a Case of Fraudulent Representation 83 iv. Effect of the Defect of Consent on The Agreement 85 v. Effect of Avoidance on the Arbitration Clause 85 V. Concluding Remarks 87 Chapter 4: Evidence of Corruption 89 I. Evidence in Arbitration 89 A. Arbitral Freedom in Determining Rules of Evidence 89 B. Bürden and Standard of Proof 92 C. Direct and Circumstantial Evidence 93 D. Presumptions 94 i. Presumptions and Circumstantial Evidence 94

4 TABLE OF CONTENTS ix ii. Where Presumptions Are Found? 94 iii. Simple and Conclusive Presumption 95 E. Witness Testimony 96 i. Discretion to Weigh Testimony 96 ii. False Testimony 96 F. Documentary Evidence 97 G. The Arbitration Evidentiary Predicament 98 II. Evidence of Corruption in Arbitration 100 A. Outline of the Potentially Relevant Elements of Facts in a Corrupt Scheme 101 B. Standard of Proof in Corruption Matters 102 i. High Standard of Proof: The Westinghouse Case 103 ii. The Normal Weighing of Probabilities: ICC Case No C. Extent of Proof in Bribery Matters 106 i. Nature of Evidence to Prove a Case of Bribery 106 ii. Facts Required to Be Proved in Bribery Matters 107 a. The Case of Bribery Affecting a Public Procurement Contract 107 b. Proof of Bribery in an Intermediation Relation Proof of Common Corrupt Intention Proof of One Corrupt Intention is Sufficient Proof of the Intermediary's Corrupt Intent is Sufficient 114 D. The Arbitration Evidentiary Predicament and the Struggle Against Secrecy 116 i. The Struggle Against Secrecy in Evidence-Gathering 116 a. The Effect of Party Refusal to Bring Evidence 116 b. The Effect of Party Reluctance to Bring Evidence The Case of a Resisting Intermediary The Case of a Resisting Principal 119 c. Arbitral Activism and Impartiality 124 ii. Use of Presumptions and Circumstantial Evidence in Bribery Matters 125 a. The Nature of Services to be Rendered by the Intermediary Absence of Proof of Services The Way Services Are Performed 129 b. The Nature of Remuneration Remuneration on a Percentage Basis Disproportion Between The Percentage Promised and Services Rendered High Commission Rates 140 c. The Identity and Status of the Intermediary 145

5 X TABLE OF CONTENTS 1. Intermediary is an Acting or Former Public Official Ambiguities About the Intermediary's Internal Organization and Mode of Operation 148 d. Circumstances Surrounding the Granting of a Favorable Official Decision Increase of the Awarded Public Procurement Contract Price Stringent Public Procurement Procedures Impact of Commissions on the Public Purchasing Party's Resources 154 III. Concluding Remarks 157 Chapter 5: Choice-of-Law Problems and Corruption 159 I. Overview of the Doctrine of Party Autonomy 159 A. Party Autonomy in National Law 160 B. Party Autonomy in International Arbitration 162 i. Freedom of Choice 163 ii. Choice-of-law Constrained 164 iii. Conceptualizing The Relation Between the Choice-of-Law and its Limits 166 II. Corruption and the a priori Limits on the Choice of the Applicable Law 167 A. The Choice of a Neutralizing Law 168 i. Overview 168 ii. Between Fraude ä la Loi and Application of Mandatory Rules 169 iii. Choice-of-law Made by The parties 171 iv. Choice-of-law Determined by the Arbitrator 173 a. ICC Case No of b. The Westinghouse Case 175 c. Avoiding Prejudgment: Reserving Mandatory Laws to the Substance 177 B. The Rule of Validation Requirement 178 i. The Rule of Validation and the Parties'Choice-of-Law 180 a. Overview 180 b. Application on Corruption Relations 181 ii. The Rule of Validation and the Arbitrator's Determination of the Applicable Law 181 a. Overview 181 b. ICC Arbitration Case No c. Falling in the Prejudgment Trap 184 III. Concluding Remarks 186

6 TABLE OF CONTENTS xi Chapter 6: Application of Mandatory Laws Prohibiting Corruption 189 I. Describing Anti-corruption Laws 190 A. Anti-Corruption Laws Enacted by Importing Countries 190 i. Prevention Laws 191 a. General Definition of Intermediation 191 b. Regulation or Prohibition of Intermediation in Government Procurement 192 c. Sanctions 195 ii. Sanctioning Laws 197 a. Active and Passive Corruption 197 b. Infiuence Peddling 199 B. Anti-Corruption Laws Enacted by Exporting Countries 201 i. The US Foreign Corrupt Practices Act 201 a. Events Leading to the Enactment of the Foreign Corrupt Practices Act 201 b. Analysis of The US Foreign Corrupt Practices Act 204 c. Implementation and Efforts to Export the FCPA Model 207 ii. OECD Convention and Implementing National Legislations 212 a. Events Leading to the Signing of the OECD Convention 212 b. The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions 215 c. National Implementing Legislations 218 iii. The Council of Europe's Conventions on Corruption 225 a. The Criminal Law Convention on Corruption 225 b. The Civil Law Convention on Corruption 226 iv. The Inter-American Convention Against Corruption 228 C. An Inquiry Into The Mandatory Nature of Anti-Corruption Laws 230 i. Anti-Corruption Laws Enacted by Importing Countries 230 a. The Penal Nature of Anti-Corruption Laws 230 b. The Public Law Nature of Anti-Corruption Laws 230 c. The Mandatory Nature of Anti-Corruption Laws 231 ii. Anti-Corruption Laws Enacted by Exporting Countries 232 II. Applicability of Anti-Corruption laws In International Commercial Arbitration 232 A. The Taking Into Consideration of Foreign Mandatory Anti- Corruption Laws 234 i. The Hilmarton Case 234

7 XÜ TABLE OF CONTENTS a. The Agreement and the Development of the Proceedings 235 b. The First Arbitral Award 236 c. The Second Arbitration Award 242 d. The Hilmarton Case in England 243 ii. Two Swiss Arbitral Awards Refusing to Take Into Consideration Foreign Mandatory laws 244 iii. The Northrop v. Triad Case 246 iv. The Two Forms of the Taking Into Consideration of Anticorrutpion laws 250 a. Impossibility of Performance 250 b. Illegality Under Foreign Law 250 v. Critique of the Technique of the Taking Into Consideration of Foreign Mandatory Anti-Corruption Laws 252 B. The Direct Application of Foreign Mandatory Anti- Corruption Laws 254 i. Foreign Mandatory Law in National Legal Systems 254 a. Legal Authorization of the Direct Applicability of Foreign Mandatory Law 254 b. Consideration of Direct Application of Foreign Anti- Corruption Laws by National Judges 255 ii. Application of "Foreign" Anti-Corruption Mandatory Laws in International Commercial Arbitration 258 a. The Scholarly Debate Arguments Favoring The Application of "Foreign" Mandatory Anti-Corruption Laws Arguments Against the Application of Foreign Mandatory Anti-Corruption Laws 264 b. The Arbitral Practice Application of a "Foreign" Mandatory Anti- Corruption Law Is a Violation of Party Autonomy "Foreign" Mandatory Laws Are not Applicable in Arbitration The Anti-Corruption Law Invoked is Not Mandatory The Mandatory Anti-Corruption Law Does not Exhibit Preponderant Interest Examination of the Foreign Mandatory Anti- Corruption Law Despite Declaration of Inapplicability 273 III. Concluding Remarks 275

8 TABLE OF CONTENTS XÜi Chapter 7: Application of Universal Values Prohibiting Corruption 277 I. "Transnational" Public Policy 278 A. Origins: The Notion of Societas Mercatorum 278 B. Definition of Transnational Public Policy 281 C. Function of Transnational Public Policy 282 D. Critiques 283 E. The Application of the Universal Moral Rule 285 F. The Homology of the Moral Rule and Transnational Public Policy 286 G. Identifying Transnational Public Policy 287 II. The Foundation of the Universal Prohibition of Corruption 289 A. The Prohibition of Corruption is Essential 289 B. Prohibition of Corruption is Widely Shared 290 C. The Role of the Global Effort to Combat Corruption in Establishing Large Consensus 291 i. The Role of International Conventions 291 ii. The Work of International Financial Institutions 292 iii. The Work of the World Trade Organization 295 iv. The Work of the United Nations 296 v. The Work of Non-Governmental Organizations 299 vi. International Conferences and the Media 303 vii. Reference to a So-Called Consensus in Arbitration 306 III. The Prohibition of corruption and the Practice of Dual Inten tionality 310 A. Describing The Underlying Dynamics of Corrupt Relations 310 i. The Underlying System of Values Governing Corrupt Relations 310 ii. Techniques of Preserving Secrecy 313 iii. The Guardians of Corrupt Practices 315 a. The Central Role of Intermediaries in Corrupt Schemes 315 b. The Origin of Intermediaries' Knowledge and Experience of Corrupt Practices 318 iv. The Enforcement Predicament of Corrupt Structures 319 B. Definition of Dual Intentionality 320 i. The Apparent and Hidden Intentions 320 ii. Situations of Dual Intentionality 322 iii. Dual Intentionality and Simulation 324 C. The Legal Effect of the Practice of Dual Intentionality on the Prohibition of corruption 325 i. Dual Intentionality as a Problem of Effectiveness of the Prohibition of Corruption 326 a. Rule Effectiveness in Legal Theory 326 b. The Impact of Dual Intentionality on the Effectiveness of the Prohibition of corruption 328

9 xiv TABLE OF CONTENTS ii. Dual Intentionality as a Contra Legern Customary Rule 329 a. Dual Intentionality as a Usage of International Trade 329 b. The Usage of Dual Intentionality Transformed to a Füll Fledged Rule 330 c. The Legal Validity of Dual Intentionality and the Imperativeness of the Prohibition of Corruption 334 d. The Rule of Dual Intentionality and the Prohibition of Corruption 336 iii. Dual Intentionality as a Rule in the Legal Order of the Social Space of Corrupt Relations 337 a. For What Group the Prohibition of Corruption is Essential? 337 b. Introducing the Concept of Legal Pluralism 338 c. The Relativity of Public Policy 341 d. Towards a Pluralist Study of the Social Landscape of International Trade and Corruption The Classical Normative System of the State The Normative System of the Lex Mercatoria The Normative System of Corrupt Relations 343 IV. The Prohibition of Corruption and Dual Intentionality in Arbitration 345 A. The Degree of Proliferation of Corruption and Arbitration 344 B. Intermediation in Arbitration 348 C. Dual intentionality in Arbitration 349 i. The a posteriori Legitimation of Intermediation 350 ii. The a priori Legality of Intermediation 351 V. Concluding Remarks 353 Chapter 8: The Sanction of Corruption 355 I. Nullity of Corrupt Relations 355 A. Absolute Nullity 355 B. Who Invokes Nullity? 357 i. The Party Instigating Corruption 357 ii. The Party Driven to the Corrupt Scheme 358 a. The Briber Subject to Extortion 358 b. The Case of Bona Fide Principals Illegality Arising During Performance Illegality Arising Upon Contract Conclusion 361 iii. The Arbitral Tribunal 361 a. Allusions to Bribery Nourishing Repression 362 b. Allusions to Bribery Producing Indifference 362 iv. The State Whose Official is Bribed 364 C. The Effect of Nullity 366 i. The Effect of Nullity in Non-Performed Contracts 366

10 TABLE OF CONTENTS XV ii. The Effect of Nullity on Partially Performed Contracts 366 a. Recovery of the Things Paid 366 b. Exclusion of Recovery Definition The Resulting Paradox 367 c. Exclusion of Recovery In Contextual Perspective The Case of Intermediary Instigating Corruption The Case of Principal Instigating Corruption The Paradox Unbroken 371 iii. The Exclusion of Recovery in the Arbitral Practice 371 a. The Strict Application of the Principle of Non- Recovery 372 b. The Pragmatic Approach 373 II. Alternative Sanctions of Corruption 376 A. Ascertaining Absence of Services 376 i. The Theoretical Proposition 376 ii. The Practice 378 B. Invoking the Intermediary's Fraudulent Presentation of Evidence 380 i. The Theoretical Proposition 380 ii. The Practice 381 a. False testimony 381 b. Presentation of Forged Document 383 c. Fraudulent Maneuvers Affecting the Presentation of a Whole Case 387 III. Concluding Remarks 388 Chapter 9: Corruption, Public Policy and Judicial Review of Awards 391 I. Balancing Award Finality and Public Policy 391 II. Minimal Judicial Review 394 A. Overview 394 i. The Case of Switzerland 394 ii. The Case of the United States 396 B. Minimal Judicial Review and Corruption 397 i. Judicial Review and Corruption in Switzerland 397 a. Westinghouse 397 b. Frontier AG. v. Thomson 399 c. Westacre in Switzerland 401 ii. Judicial Review and Corruption in the United States: Northrop v. Triad 402 iii. The Problems of Surface Review 404 III. Maximal Judicial Review 405 A. Overview: The Case of France 408 B. Maximal Judicial Review and Corruption 405

11 xvi ' TABLE OF CONTENTS i. Westman 408 ii. Frontier AG v. Thomson CSF 410 IV. The Contextual Approach to Judicial Review 412 A. Contextual Review: The Case of England 412 B. Contextual Judicial Review and Corruption 413 i. Act One: Westacre Before the Queen's Bench Division 413 ii. Act Two: Soleimany v. Soleimany 414 iii. Act Three: Westacre Before the Court of Appeal 416 iv. Act Four: Hilmarton Before the Queen's Bench Division 419 IV. Concluding Remarks 420 Conclusion 423 Bibliography 429 I. Case Law Arbitral Awards National Case Law American Case Law Belgian Case Law English Case Law French Case Law German Case Law Swiss Case Law Miscellaneous 432 II. National Law Materials National Laws Pertaining to Corruption National Documents 435 III. International Documents 436 IV. V. VI. VII. VIII United Nations OECD Council of Europe World Bank and International Monetary Fund World Trade Organization Organization of American States Transparency International International Chamber of Commerce International Law Association. Miscellaneous Institute of International Law Courses at the Hague Academy of International Law Collective Works Books Articles Subject Index 471 Index of Arbitration Cases Dealing with Corruption 483

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