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Alternative Dispute Resolution
Fighting Dishonest in International Arbitration
While international arbitration continues to flourish with a rapid growth of arbitral institutions and stable increase in commercial and investment cases, one may wonder whether prospects of further expansion of arbitration are indubitable and the fate of arbitration is pre-determined. However, international arbitration does not exist in a vacuum but tails after the growth and evolution of international trade, commerce and investment setting new trends, tools, and innovations. Therefore, new approaches for dealing with changing needs and problems emerge.
In this “to hunt or to be hunted” situation, Professor Born suggests choosing the former without any hesitation and encouraged the arbitration community to stress and further evolve critical advantages of arbitration, the so-called “five E’s: efficiency, expedition, expertise, even-handedness and enforceability”.1
In the light of the mentioned proclamation, it seems a convenient time to point to certain unresolved issues that could undermine the advantages of international arbitration and to explore possible solutions that could foster its attractiveness for the global community.
One such old-new challenge for international arbitration is dishonesty, which may take different forms, whether corruption, fraud, collusion or bribery. And the time has come to apply a new nuanced approach to handle allegations of dishonesty in international arbitration, as will be elaborated below.
In 2017 the UK Supreme Court has clarified the test for dishonesty, rendering that in determining whether the person was acting dishonestly, a judge must decide whether, according to ordinary standards of reasonable and honest people, what was done was actually dishonest2.
In recent years, allegations of corruption are more and more frequently raised in both litigation and arbitration proceedings, both as jurisdictional issue in the context of investment cases or that of merits in the context of commercial cases.3 Therefore, the core discussion and available practice focuses primarily on the issue of corruption, while other types of dishonesty are either not taken into account or dealt by the same approaches as corruption.
Another trend is that arbitral tribunals seem to be reluctant to grant claims on establishing facts of such dishonesty, since a traditional approach suggests a quite high threshold for an evidential burden of proof in allegations of dishonest which is, therefore, rarely achieved.
A traditional approach to the burden of proof has its roots in Ancient Rome, where the general principle of actori incumbit probatio (the burden of proof weighs on the plaintiff) was first invented. A rule, that each party shall have the burden of proving the facts relied on to support his claim or defence, is incorporated into the majority of arbitration rules. For example, Article 24 of the UNCITRAL Rules, Article 52 of ICAC Ukraine Rules.
Though arbitral tribunals admit that it’s very difficult to prove corruption since secrecy is inherent in such cases, in most instances a general rule is that the party alleging dishonest conduct bears the burden of proving fraud and corruption”.4
That said, the arbitrator may shift the burden of proof for very good reasons as an exception of the general rule once prima facie evidence is presented. For instance, in ICC Award No. 6497, the tribunal proposed shifting the burden of proof from the alleging party bringing some relevant evidence for its allegations, without all the elements being really conclusive.
Nevertheless, shifting the burden of proof from the alleging party to the opposing party in cases regarding corruption allegations remains more theoretical rather than practical tools for arbitration tribunals.5
Meanwhile, the issue of standard of proof is even more complicated, since there is an evident gap in regulating this issue. In other words, by their implied powers arbitrators have inherited discretion to fill a lacuna in the regulation of the standard of proof issue. Thus, even “if there are some missing pieces; in the right circumstances, arbitrators shouldn’t hesitate to make the logical deduction simply because the allegation is serious”6.
In the ICSID Tokios Tokelės v. Ukraine case, the arbitral tribunal singled out three possible approaches to a standard of proof that are relevant in the context of corruption allegations:
(1) A standard which requires the party making an assertion to persuade the decision-maker that it is more likely than not to be true.
(2) where the dispute concerns an allegation against a person or body in high authority, the burden may be lower, simply because direct proof is likely to be hard to find
(3) the standard is higher than the balance of probabilities.7
It is a common practice for the arbitrators to choose the “safest” third option and to apply a heightened standard of proof. For instance, in the EDF v. Romania case the tribunal stated that the party alleging corruption should produce “clear and convincing evidence” to prove its allegation of soliciting a bribe.8
Although the majority of arbitrators still support the traditional approach, if the purpose of the rules of evidence is to maintain the proper balance between commercial interests and the integrity of corruption findings in international arbitration, a higher standard of proof fails to achieve the desired effect.9
Moreover, since dishonest is a quite broad category, which includes both criminal offences and civil offences, it is critical for arbitrators dealing with allegations of dishonesty to enquire whether such allegations concern criminal (bribery, fraud, corruption) or civil (collusion) offence under applicable laws in order to avoid mixing dishonest practices which may be close in nature, but different in legal regulation.
In particular, under Ukrainian law, corruption is an activity of public officials aimed at unlawful use of their powers and related opportunities to get unjustified benefits for themselves or other individuals, as well as an offer of unjustified benefit to public officials and other individuals/entities at their demand aimed at persuading to unlawfully use their powers10.
Although malicious arrangement (collusion) and corruption (fraud, bribe) have some similar features (e.g., dishonesty, inherent secrecy, improper advantage), they belong to different areas of Ukrainian law. In particular, the malicious arrangement (collusion) is governed solely by the Civil and Commercial Codes of Ukraine, while corruption (bribery) is encompassed by criminal law.
Thus, in order to prove a corruption crime (which is a task for the state prosecutor), a higher standard of proof (admissibility of evidence) is applicable under the Criminal Procedure Code of Ukraine. Therefore, a Ukrainian court considering a criminal case has limited discretion to render a judgment of conviction establishing the committing of a crime of corruption until the prosecutor proves corpus delicti.
On the contrary, a court or arbitral tribunal considering civil cases is entitled to establish a malicious arrangement (collusion) under Article 232 of the Civil Code even without any verdict or conviction in a criminal case or investigation, but based solely on evidence provided by a party. And thus, a different standard and burden of proof apply to malicious arrangement as part of civil law and crimes of corruption as part of criminal law of Ukraine.
Through the application of the lower standard of proof, the tribunals foster one of its key advantages — even-handedness — by eliminating the risks associated with submitting international disputes to national courts, especially in those jurisdictions where proceedings may be affected by corruption or other types of dishonest conduct.
One of the examples where the tribunal diverged from traditional standard of proof in analysis of corruption allegations and applied a nuanced approach is that of the Methanex Corporation v. United States of America case. In that case, the tribunal espoused an innovative strategy as to the standard of proof in the face of corruption allegations to “connect the dots (i.e., while individual pieces of evidence when viewed in isolation may appear to have no significance, when seen together, they provide the most compelling of possible explanations of events…”.11
Every dispute resolution system needs to adapt to the changing needs of society. While in the world of litigation, procedural reform is an obligation of political forces, in the world of international arbitration, arbitrators themselves are responsible for changing the status quo of the system in which they operate.
It is not a matter of thinking, but an empirical matter that is dishonest whenever the form it takes is an antithesis to the rule of law and of having a level playing field.
While the court or tribunal may universally apply the mentioned “objective” standard in both civil and criminal cases, it is hardly a matter of contention that depending on the form of dishonesty and its classification under the law (as a criminal offence or civil tort), the judge in either the common law system or civil law system should apply different burdens and standard of proof for determining dishonesty.
Therefore, the discussed nuanced approach seems to be more flexible in dealing with combating dishonest conduct and bad faith practice, which is a trending need in many jurisdictions. And the nuanced approach does not relieve a party alleging corruption or collusion allegations of the burden to prove its claims with sufficient evidence. However, given the nature of corruption or collusion, the tribunal should be willing to give primary consideration to circumstantial evidence and existing clues, including a lack of evidence, disproportionate or unusual remuneration, and the nature of schemes employed for that particular business.
1 Alison Ross, “Born takes “Game of Thrones” message to Freshfields”, Global Arbitration Review, 16 November 2018.
2 “Re-defining criminal dishonesty: why does it matter?” Allen & Overy Litigation and Dispute Resolution Review, 6 November 2017
3 Mark W Friedman, Floriane Lavaud and Julianne J Marley “Corruption in International Arbitration: Challenges and Consequences”, Global Arbitration Review, 29 August 2017.
4 C. Lamm et al., Fraud and Corruption in International Arbitration, 10 TDM 3
5 Alekhin, Sergey and Shmatenko, Leonid, Corruption in Investor-State Arbitration — It Takes Two to Tango (March 31, 2018). // New Horizons of International Arbitration, Issue 4, Collection of Articles; 2018.
6 Constantine Partasides, ‘Proving Corruption
in International Arbitration: A Balanced Standard for the Real World’ (presented on 18 January 2011 in London at the British Institute of International and Comparative Law on ‘Impact of Bribery and Corruption on the International Arbitral Process’), 69.
7 Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18 Award, para. 124 (26 July 2007).
8 EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award, para. 232 (8 October 2009).
9 Corruption in International Arbitration, CIArb News, 08 November 2018.
10 Cf. Article 1 of the Law of Ukraine “On Preventing Corruption”
11 Methanex Corporation v. United States of America, UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits, para. 2,57 (3 August 2005)