Arbitration of Corruption Issues in Latin American Disputes

Introduction

Corruption is an issue of increasing importance in arbitrations and post-award proceedings, particularly in Latin America, where there has been a surge of corruption-related investigations and charges in recent years, including the highly-publicised Lava Jato probe in Brazil, and other similar investigations of public and private wrongdoing in jurisdictions such as Venezuela, Peru, Argentina, and Colombia.^[2] Indeed, according to Transparency International’s Corruption Perceptions Index 2022, on a scale from zero (highly corrupt) to 100 (very clean), the Americas scored an average score of 43 for the fourth consecutive year, evidencing ‘[a] lack of bold, decisive action to fight corruption and strengthen public institutions’.^[3] The consequences of corruption are felt in the public administration and private international community alike, and have led to a proliferation of recent arbitration cases – both commercial and investor-state – in which corruption-related allegations play an important role in resolving the parties’ dispute. The arbitration community has mobilised to meet the new challenges caused by the increase in corruption-related allegations and cases worldwide, as evidenced by the International Chamber of Commerce (ICC)’s formation of a Task Force ‘Addressing Issues of Corruption in International Arbitration’ in order to explore existing and possible future approaches to dealing with allegations or indicia of corruption in arbitrations. While the ICC Task Force’s report and guidelines for tribunals are forthcoming, this chapter explores these very issues and investigates past practices, ongoing trends and areas of potential future development.

Allegations of corruption may impact arbitration proceedings at different stages, and in different respects. As described in greater detail throughout this chapter, (1) allegations of corruption may arise during an arbitration proceeding, in which a party may ask the arbitral tribunal or the tribunal may investigate sua sponte possible acts of corruption; or (2) once the arbitration has concluded and an award has been issued, courts may be confronted with how allegations of corruption (and the arbitral tribunal’s consideration – or lack thereof – of such claims) impact whether the award should be recognised and enforced, or vacated.

As discussed below in ‘Addressing corruption during an arbitral proceeding’, allegations or indicia of corruption in ongoing arbitration proceedings raise complicated questions for the arbitral tribunal as to whether they have the jurisdiction or duty to investigate such issues only at a party’s request, or should consider these issues sua sponte. A tribunal’s decision to delve into corruption considerations can give rise to a number of additional concerns, including as to the standard and burden of proof that should be applied. This chapter also addresses when courts may consider allegations of corruption in post-award enforcement proceedings. Using the developing body of case law from US courts that have been called on to consider awards from Latin American jurisdictions or involving parties from Latin America, this chapter considers the extent to which national courts are likely to defer to any findings of fact or law made by a tribunal, in light of the strong public policy against corruption.

In general, this chapter reveals that, while there have been important recent developments in how tribunals and courts alike confront issues of corruption in arbitration, the law is far from settled. There exist important, and sometimes dispositive, differences – not only across different jurisdictions where legal traditions may vary, but from tribunal to tribunal, court to court and case to case.

Addressing corruption during an arbitral proceeding

Cases involving corruption generally can be divided into two broad categories. The first category of cases – which are sometimes referred to as the ‘easy’ cases (though they are by no means all ‘easy’ to deal with) – arise when a party expressly pleads corruption-related claims and requests relief in connection therewith. In such cases, the tribunal is generally thought to possess an obligation to decide the corruption issue, since it has the ‘duty to consider and resolve public policy (and other mandatory legal) objections’ presented by the parties.^[4] The second – and procedurally harder – category of cases involves indicia of corruption potentially affecting a claim or allegation put forward by a party, but no express request by either party to address the corruption issue has been made. This second set of cases pose especially complex questions for arbitrators and counsel. This section focuses on these ‘harder’ corruption cases. In particular, the following paragraphs discuss arbitrators’ duty to investigate corruption; the standard and burden of proof that applies; and the effect of parallel domestic proceedings on an ongoing arbitration.

Arbitral tribunals’ duty to investigate corruption

There is divergent jurisprudence and doctrine concerning the question whether arbitral tribunals have a duty to investigate or address indicia of corruption that may affect the parties’ claims. Some tribunals constituted under the aegis of the ICC have held that arbitrators are only under a duty to decide corruption-related issues in the event that one or more parties expressly requests that the arbitrators do so.^[5] These tribunals generally have reasoned that a tribunal’s duty to adjudicate an issue ordinarily arises only where the parties have requested that the tribunal resolve the issue. Other tribunals and commentators have queried whether the appearance of especially grave suspicions or facts – such as indicia of corruption – may call for a different interpretation of the scope of arbitrators’ duties.

In this vein, the UK High Court held in the Minmetals Germany GmbH case that, as long as the parties’ basic procedural rights are respected, then tribunals can, on their own initiative, investigate corruption.^[6] In reaching this conclusion, the UK High Court made clear that due process requires that the parties be afforded an opportunity to review and address any proposed findings by the tribunal on the matter of corruption.^[7] Other arbitral awards – including some involving Latin American countries – have gone further, finding that arbitral tribunals are not only allowed to investigate corruption on their own initiative, but that they could be under an obligation to do so.^[8] In Glencore v. Colombia, where Glencore claimed that Colombia had breached the fair and equitable treatment and non-impairment standards, as well as the umbrella clause of the bilateral investment treaty between Colombia and Switzerland, the tribunal was confronted with facts suggesting malfeasance.^[9] In deciding how to approach these facts, the tribunal concluded that ‘provided that there are prima facie grounds for suspecting malfeasance, an international arbitration tribunal has the duty to investigate the facts, even sua sponte, and to take appropriate measures under the applicable principles of law’.^[10]

The Glencore tribunal is not alone in taking this position. The tribunal in Metal-Tech v. Uzbekistan reached the same conclusion.^[11] Moreover, certain prominent commentators favour this approach, reasoning that arbitrators’ duty to investigate corruption stems from the public policy implications of corruption, which must take precedence over the parties’ decision to elide corruption issues in their submissions to tribunals.^[12]

To be sure, risks exist in adopting either approach, including risks that relate to the validity of the arbitral award. While awards have been set aside for arbitrators’ ultra petita decisions following sua sponte orders,^[13] arbitrators’ failure to investigate potential corruption issues might also result in annulment on public policy grounds.^[14] Arbitrators will have to balance these perils when deciding how to address indicia of corruption; counsel should also consider the risks involved in requesting that tribunals address corruption issues or opposing tribunals’ sua sponte consideration of such issues.

Proving corruption

Much like fraud and other similar acts, corruption is often difficult to prove. Accordingly, the standard and burden of proof that tribunals adopt in assessing corruption allegations may be outcome dispositive. It is therefore particularly important that parties pay due heed to the question of which law governs the standard and burden of proving corruption. There is conflicting case law in this regard.^[15] On the one hand, some arbitral tribunals have looked to the lex arbitri to answer such questions on the grounds that they are evidentiary issues.^[16] On the other hand, some tribunals apply the substantive governing law to questions relating to the standard and burden of proof for corruption allegations.^[17] And still other tribunals have opted to rely on international law standards to supply the rules regarding the standard and burden of proof for corruption allegations.^[18] To date, there is no predominant view on the matter, internationally or in Latin America, and the question therefore remains open and subject to debate. Arguably, it is preferable for tribunals to have the flexibility to decide on a case-by-case basis what the governing law must be, given the differing rules that may apply in different jurisdictions and the many forms that corruption may take.

Depending on the governing law, differing standards of proof may apply to allegations of corruption.^[19] For instance, in Dadras v. Iran, the arbitral tribunal concluded that allegations of forgery required ‘the application of a standard of proof greater than the customary civil standard of “preponderance of the evidence” ’.^[20] Likewise, some ICC tribunals have applied a more stringent standard of proof to allegations of fraud or corruption.^[21] In Latin America, the Glencore arbitration is potentially instructive. There, the tribunal concluded that there was no reason to elevate the standard of proof from the ordinary preponderance of the evidence standard, which was otherwise applicable under both the relevant treaty and the arbitral rules.^[22]

Again, depending on the applicable governing law, the burden of proof may also be an open question. The leading ICSID cases on corruption recognise the general rule in international arbitrations that the party who alleges a fact has the burden of proving it (actori incumbit probatio).^[23] There have been some suggestions, however, that the burden of proof should be shifted or reversed in corruption cases. The Glencore case is instructive on the issue. There, the tribunal found no reason to depart from the actori incumbit probatio principle.^[24] Instead, the tribunal followed the Spentex award, which found that ‘shifting the burden of proof and demanding evidence from the accused party that it did not engage in corrupt acts would subject such party to a probatio diabolica’.^[25] Certain prominent arbitrators, such as Alexis Mourre,^[26] as well as others,^[27] share this same view. Other tribunals have considered reversing the burden of proof when the party allegedly involved in the scheme is capable of adducing evidence without incurring an undue burden.^[28] And still other authors favour an ad hoc approach for these cases, under the premise that the only appropriate standard would be one based on the ‘inner conviction’ of the panel, even while acknowledging the ambiguity of such a standard.^[29]

A pair of arbitrations against the Uzbek state may also provide some guidance regarding evidentiary standards and approaches for dealing with corruption. First, the Spentex award followed a ‘connecting the dots’ approach, evaluating each of the individual indicia of corruption in detail and assessing the plausibility of an inference of corruption based on stringing the dots together.^[30] The tribunal ultimately ‘connected the dots’ to find that the investor and Uzbek state officials had engaged in corruption.^[31] Second, in the Metal-Tech Ltd case, the tribunal used internationally accepted ‘red flags’^[32] and concluded that corruption occurred.^[33]

Effect of domestic procedures in an arbitration

It is not only conceivable but probable that arbitral proceedings relating to corruption will run in parallel to domestic court proceedings addressing closely connected facts, or that arbitral proceedings will follow on the heels of domestic court decisions on the matter. There is some recent Latin American jurisprudence addressing these parallel proceedings.

In the Vantage award, which related to the Lava Jato probe in Brazil, the claimant alleged that Petrobras wrongfully terminated an offshore drilling rig lease agreement and requested damages for lost profits in connection therewith.^[34] The primary issue in the arbitration was whether the lease agreement had been procured through bribery and corruption.^[35] The arbitral tribunal issued an award in Vantage’s favour, holding that even if there had been corruption in the procurement of the lease agreement, Petrobras had ratified the agreement after becoming aware of the bribery allegations.^[36] In so holding, the tribunal rejected Petrobras’ claim that a Brazilian Federal Court judgment constituted conclusive evidence of the claimant’s participation in acts of bribery.^[37]

The Concesionaria Ruta Del Sol award, also connected to Lava Jato, adopted a different view. There, the arbitral tribunal constituted under the aegis of the Bogotá Centre of Arbitration and Conciliation of the Chamber of Commerce, afforded substantial evidentiary weight to the parallel proceedings relating to the same underlying corruption.^[38]

The Glencore case, also a dispute involving Latin America, arguably lands in the middle of the other two precedents. On the one hand, the Glencore tribunal found that the pendency of criminal proceedings in Colombia was not automatically probative of corruption:

The Criminal Complaint and this procedure operate in different legal spheres, are subject to diverging standards of proof, and may reach conflicting results. The fact that the Colombian criminal system has not punished (in fact, in accordance with the available record, has not even investigated) the alleged corrupt practices surrounding the Eighth Amendment, does not preclude a hypothetical finding by this Tribunal that corruption has occurred. And vice versa.^[39]

On the other hand, the tribunal recognised that it had to consider the findings by the Colombian criminal system in evaluating the available evidence.^[40] The Glencore award sets an interesting precedent because it recognises that arbitral tribunals may be reluctant to find that corruption occurred based solely on an ongoing parallel criminal proceeding, or on judgments issues by domestic courts; but it acknowledges that such decisions could have persuasive value.

Corruption as grounds for denying the enforcement of arbitral awards

Corruption concerns at times play an important role in the post-award phase.^[41] Enforcement regimes in the Americas and around the world generally recognise that corruption may provide a basis for vacatur of an arbitral award or for refusal to recognise or enforce the award. In this regard, it is essential to distinguish between two disparate types of corruption that may play a role in the post-award judicial proceedings: (1) corruption in the procurement of the contract or investment underlying the arbitral award (which may or may not afford a basis to refuse recognition and enforcement); and (2) corruption in the arbitral proceeding itself (which typically provides a basis for the vacatur, or set-aside, of an arbitration award at the place of the seat).

Below, we analyse recent corruption-related cases in which US courts were called upon to scrutinise arbitral awards involving Latin American parties or allegations of corruption that occurred in Latin America.

Corruption procuring the underlying contract

The most common instance of corruption considerations in the post-award phase of an arbitral proceeding, particularly in the commercial arbitration context, occurs when a party seeks to avoid enforcement of an arbitral award by contending that the award contravenes public policy, because the contract or investment that gave rise to the arbitration was procured by corruption (typically, through bribery or extortion). The New York Convention, which has been signed by 169 Member States as of the date of this publication, generally provides under its Article V(2)(b) that a court may exercise its discretion and refuse enforcement where ‘[t]he recognition or enforcement of the award would be contrary to the public policy of that country’.^[42] Article V(2)(b) is considered ‘[o]ne of the most frequently-asserted bases for refusing to recognize a foreign or non-domestic award’ and has been used in corruption-related cases.^[43]

The same provision is included in other legal instruments relevant to Latin America. The Panama Convention, a multilateral agreement that regulates the recognition and enforcement of arbitral awards where both parties hail from any one of the 19 countries in the Americas that have ratified the Convention to date, provides the same grounds for refusing enforcement as in the New York Convention.^[44] Moreover, the UNCITRAL Model Law on International Commercial Arbitration (UNCITRAL Model Law), which provides states with model text for modernising their laws on arbitration procedure, also lists public policy as a ground for non-recognition and enforcement.^[45] Because many jurisdictions in Latin America have implemented the UNCITRAL Model Law (or some variation thereof) in their domestic arbitration laws, those laws often contain a version of the public policy exception as well. This is the case, for instance, in Argentina, Chile, Colombia, Mexico and Peru.^[46]

Despite this large-scale codification of a public policy exception to the enforcement of arbitral awards, and a general international consensus that corruption is contrary to public policy,^[47] how courts apply this public policy exception varies from jurisdiction to jurisdiction.^[48] A key question in this respect is the extent to which they may re-examine a tribunal’s findings. The applicable standard of review differs by jurisdiction, and can range from minimalist, where the reviewing court accords significant deference to a tribunal’s factual and legal findings, to maximalist, where the court reviews the tribunal’s findings de novo.^[49]

In the United States, the debate about the appropriate standard of review in corruption-related cases is shaped by the tension between two fundamental policies.^[50] On the one hand, US courts favour limited judicial oversight of awards in order to advance the important pro-arbitration policy embodied in the Federal Arbitration Act (FAA) and avoid relitigation of issues presented to the arbitral panel.^[51] On the other hand, US courts are standard-bearers of US public policy, and have an interest in ensuring that arbitral awards involving allegations of corruption in the underlying contract do not contravene fundamental values, undermine fair competition, and weaken the integrity of public administration.^[52] In applying these competing policies, US courts typically construe the grounds for resisting the enforcement of an award ‘narrowly’, afford substantial deference to arbitral tribunals’ findings of law and fact, and do not permit ‘re-litigat[ion]’ or reconsideration of the merits of any argument made before the tribunal.^[53] However, US courts may be more amenable to a thorough review if the arbitral tribunal fails to consider adequately the corruption issue.

Recent decisions in a case stemming from the Lava Jato probe in Brazil, Vantage Deepwater Co v. Petrobras Am, Inc,^[54] demonstrate how US courts have interpreted judicial review of an arbitral award to be ‘extraordinarily narrow’ and ‘exceedingly deferential’^[55] – despite ‘the [US’s] strong public policy against corruption abroad’.^[56] In Vantage, the Fifth Circuit explicitly rejected Petrobras’ argument that the court should consider the arbitrator’s legal findings de novo, while reviewing the arbitrator’s findings of fact only for clear error,^[57] and instead concluded that both a tribunal’s factual findings and its legal conclusions are entitled to deference.^[58] The Fifth Circuit distinguished between the review of the underlying contract and the final award, finding that the public policy exception under the New York Convention could apply if the award itself was the product of corruption, but that a claim of corruption in the underlying contract, as a substantive question of the enforceability and validity of a contract, ‘was a matter to be determined exclusively by the arbitrators’.^[59] Notably, the court held that the arbitrators’ consideration of whether corruption had been used to procure the underlying contract was entitled to deference ‘even if the arbitrators had made an error of law or fact’ in, for instance, deciding not to consider evidence of corruption.^[60]

Indeed, during the pendency of the arbitral proceedings in the Vantage case, the tribunal avoided the question of whether Vantage had, in fact, engaged in bribery; instead, it found that Petrobras had ‘ratified’ the contract after it had become aware of bribery allegations by continuing to accept the benefits thereunder, making the contract no longer voidable by Petrobras.^[61] In so doing, the tribunal rejected Petrobras’s argument that the contract was void and unenforceable because it had been procured through the bribery of foreign public officials.^[62] In the US enforcement proceedings, the US District Court of the Southern District of Texas declined to revisit the tribunal’s conclusions that ratification could cure a contract procured through bribery and that such ratification could occur even when a party was only aware of allegations of bribery.^[63]

Unsurprisingly, then, although parties ‘frequently raise’ Article V(2)(b) of the New York Convention and public policy concerns as grounds for trying to avoid enforcement of an award based on a contract procured through corruption, that defence against enforcement ‘has rarely been successful’.^[64] Specifically, where the arbitral panel considered the issue of corruption, but ‘did not find any corruption’ procuring the underlying contract, US courts are very unlikely to even consider whether the tribunal erred and corruption was present.^[65] As demonstrated by the decision of the Second Circuit in Commodities & Mins Enter, Ltd v. CVG Ferrominera Orinoco, CA, courts often consider that claims about the invalidity of a contract on public policy grounds are ‘to be determined exclusively by the arbitrators’.^[66]

To the extent other US courts follow the Vantage and CVG Ferrominera cases, a party’s ability to avoid enforcement of an arbitral award on the basis that the underlying contract was the product of corruption, practically speaking, may be extremely limited in US courts. Parties suspecting that corruption played a role in obtaining the contract at issue will need to consider whether they wish to raise such allegations during the pendency of an arbitral proceeding. On the one hand, raising these allegations risks an adverse ruling by the tribunal (finding no corruption, for example), which is then likely to be accepted as a final determination that cannot be disturbed by a US court. On the other hand, failing to raise the issue before the tribunal where it could have been raised is likely to be viewed as a form of gamesmanship and will not necessarily preserve the issue for the court’s consideration.^[67] Consequently, on balance, it may be preferable for a party to raise such allegations of corruption during the arbitration, to avoid a later finding that such arguments were forfeited. It goes without saying that, where a party was unaware of possible corruption and its impact on the underlying contract, the arbitral proceeding, or the award until after the award was issued, that party may have a better argument and there may be a greater likelihood that the court will consider the issue.

Corruption in the arbitration proceeding itself

Corruption may also taint the arbitration procedure itself. There is an international consensus that corruption on the part of a tribunal member is a violation of the arbitral process. This type of arbitrator corruption can take many forms; in the most extreme examples, it takes the form of arbitrator or arbitrators accused of accepting bribes by a party to make a particular finding in the arbitration – this (admittedly rare) form of arbitrator corruption was alleged following an ICSID arbitration between the Peruvian government and Brazilian construction company Odebrecht in connection with the above-mentioned Lava Jato probe, which culminated in the temporary detention of the tribunal members who were being investigated for allegedly accepting bribes.^[68] What is more common is ‘influence peddling’,^[69] where arbitrators are accused of bias or partiality through allegedly improper, undisclosed relationships with parties’ counsel or the appointed experts.^[70]

In instances of corruption in the arbitration proceeding itself, parties may have the choice to seek vacatur, or set-aside, of the arbitral award in the seat of arbitration, or can attempt to avoid enforcement of the award in other jurisdictions. The UNCITRAL Model Law provides that an arbitral award ‘may be set aside’ by a court if ‘the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties’, which also provides a basis on which a court can refuse enforcement.^[71] Similarly, in addition to the public policy exception in Article V(2)(b) of the New York Convention, Article V(1)(d) provides mandatory grounds for declining enforcement of arbitral awards where there are accusations of arbitrator partiality.^[72]

In conformity with these international model principles, countries have specifically enacted arbitration laws that reflect an aversion to arbitrator corruption. Specifically, the FAA – which, among other things, regulates the vacatur and enforcement of arbitral awards in the United States – expressly includes, as two of the four grounds for vacatur of an arbitral award, ‘where there was evident partiality or corruption in the arbitrators’ or ‘where the arbitrators were guilty of . . . any other misbehaviour by which the rights of any party have been prejudiced’.^[73] Article 32 of the Brazil Arbitration Act likewise enumerates the grounds on which arbitral awards may be set aside, and provides for nullification of an award that was procured by any one of three types of corruption crimes under Brazilian law (prevaricação, concussão, or corrupção passiva).^[74]

While parties have recourse against corruption in the arbitration process itself in the form of vacatur or the ability to avoid enforcement elsewhere, in practice, these are difficult allegations to raise, and there appear to be very few (if any) cases in which US courts were called on to consider in the post-award stage whether an arbitral process was itself tainted by arbitrator bribery. Such cases may involve facts that are only discovered or come to light in the post-arbitration stage, as it could be difficult to uncover evidence of corruption during the arbitration. In such instances, US courts may be more willing to consider these cases applying a de novo standard of review, accessing the facts and law anew without any deference to the underlying arbitration proceeding (which itself is accused of being defective).

Indeed, US courts have drawn a distinction between the ability to consider the impact of corruption in the arbitral award, which courts have found can be a basis to decline enforcement of an award, and the impact of corruption in the underlying contract that was at issue in the arbitration, which might not be.^[75] This is consistent with Chapter 1 of the FAA, which enumerates as one ground for vacatur ‘where the award was procured by corruption, fraud, or undue means’.^[76] To meet this threshold, some courts have held that the petitioner must establish corruption, fraud or undue means by clear and convincing evidence; demonstrate that the corruption, fraud or undue means was not discoverable upon the exercise of due diligence or during the arbitration; and prove that the fraud materially related to an issue in the arbitration.^[77] In the more-often litigated and less extreme examples of arbitrator bias or partiality, US courts generally look to the facts presented by the parties, but still remain reticent to disturb arbitral awards except in more egregious cases where there is a clear and direct financial benefit that the arbitrator stood to gain from the undisclosed relationship,^[78] although other jurisdictions may have different approaches.^[79]

Conclusion

While arbitration was originally conceived as a private method of dispute resolution, today most arbitrators and the doctrine recognise that arbitration serves a public policy function. Under this conception, corruption, which naturally threatens or damages public policy, is a key topic. The most relevant and recent arbitral awards dealing with corruption – many of which touch upon Latin American jurisdictions – illustrate that corruption may call for special treatment both during and after an arbitral proceeding.

While the proceeding is ongoing, some jurisprudence and commentary holds that arbitrators possess an obligation to investigate, even sua sponte, indicia of corruption. Doing so, however, can result in the award’s annulment on the basis that the arbitrators have acted ultra petita. Yet, the opposite approach could produce an annulment on public policy grounds. Once a party raises corruption-related issues, questions of applicable law,^[80] and standard and burden of proof arise. Given the still scarce and diverging case law dealing with corruption, there is room for arbitrators and parties to innovate in this regard.

Once the arbitral award is issued, domestic courts may be confronted with whether to vacate or enforce the award on the basis of corruption. Where the efforts to resist enforcement depend on alleged corruption in the underlying contract or allegations of corruption in the arbitration process itself, courts’ approaches may differ. When the issue relates to contracts procured through corruption, US courts often give substantial deference to the tribunal’s findings of law and facts, even where the tribunal declined to consider certain allegations of corruption. Where the allegations are that the arbitral process itself was corrupted – through arbitrator bribery or less extreme instances of corruption, such as bias or partiality – US courts may be more willing to consider and investigate the allegations anew.

Footnotes