Corruption: The use of a bribe as a defence in International Investment Arbitration. Are chocolate covered fingers a defence?


Given the surfeit of excellent sources on this topic, this note is designed to act as a succinct summary. It should (hopefully) give the reader a basic idea of the topic as a whole. Then, the reader will be able to turn to other sources for a better understanding.


Important introductory notes


  • International law is largely a consensus-based system.
  • It does not have an overarching sovereign to regulate the system and enforce penalties.
  • In an effort to ensure predictability in the international commercial sphere, states create bilateral investment treaties and multilateral investment treaties that can be conceived as contracts.
  • These agreements provide for a juridical body to arbitrate over disputes between states and investors.
  • Alternatively, some judicial bodies act as independent judicial arbitrators, for example: The Arbitration Institute of the Stockholm Chamber of Commerce.



How is corruption used as a defence in international arbitration?

A bite-sized answer would be: for an international judicial body to arbitrate between a host and an investor, there must exist an “investment”. One of the requirements of this investment is that it be “legal”. A finding of an illegality within the process of the investment, such as corruption, would deny the jurisdiction of an international judicial body. Thus, a host, should they find evidence of corruption, could use this fact to quash the jurisdiction of the judicial body to arbitrate the case.


Further, a host state may also threaten the investor, by notifying international enforcement agencies or those of the home state regarding the corrupt behavior. A court in the investor’s home state finding corruption in the host state, will lead to penalties. The finding against Niko Resources by the Alberta Court of the Queens Bench, for bribery of a number of Bangladeshi ministers to secure an oil contract, is an example of such practice.


Basis for Corruption Defence: Legality.


The principle of legality is used to legitimize the conception that a finding of corruption can void arbitration. Legality is to be understood with reference to a host states laws, those of the international community, and the principles of equity and restitution.

  1. Host state laws
    1. When an investor invests in a state, a bilateral investment treaty between the host state and the home state will often set the terms and rules of an investment. Alternatively, a multilateral or regional investment treaty (NAFTA) will set the terms and rules. Within many of these treaties, compliance with the laws of the state is a specific term, or is part of the definition of “investment”. A failure to accord with a host state’s laws, by for example: corruption, can lead to the contract being void. (p 93, Dolzer and Schreuer, “Principles of International Investment Law” Second Edition, Oxford University Press, 2012)
  2. International law
    1. In World Duty Free, and ICC Award No. 1110, the tribunal viewed bribery as contrary to international public policy (at 148, World Duty Free). The Tribunal in World Duty Free cited other tribunals and the UN General Assembly (Declaration against Corruption and Bribery in International Commercial Transactions and Article V.2 of the New York Convention and Article 36 of the UNCITRAL Model Law). We can add to this: art 50 of the VCLT.
  3. Equity and Restitution
    1. In World Duty Free, the court through s 42(1) of the ICSID Convention, applied Kenyan and British law, being the applicable law chosen by the parties. Consequently, the court had access to equity, with which they attempted to redress World Duty Free’s claim that the process was unfair. Specifically, that the finding of corruption affected it, but did not affect Kenya. The tribunal recognized this; citing Lord Mansfield in Holman v Johnson, who stated a court could not lend its aid to one who founds their action upon an illegality. Mansfield further stated: where guilt is shared, the defendant’s position is stronger. As a result, the court held the “blame,” should be apportioned to World Duty Free and not Kenya and the court then held the president’s actions were not attributable to Kenya. The contract was thus set aside at Kenya’s insistence. Lagergren’s judgment in ICC Award No. 1110 (below) supported this at 294; that a party, by dishonest conduct, should not be enriched at the expense of the other.


Basis for Precedent: ICC Award No. 1110 of 1963 by Judge Lagergren


ICC Award No. 1110 is the basis for the use of corruption defence. Here a British company contracted with an Argentinean agent to sell electrical equipment to the Argentine government. Over several years, the agent did not make any sales. The British company then contracted with another agent to whom it paid one million pounds. The following year, the original agent totaled 28 million pounds worth of sales; the original agent was also paid on commission. On arbitration, the British company admitted that the original agent was retained due to his influence with the Argentine government. Judge Lagergren declined to hear jurisdiction as the case ‘involved such gross violations of good morals and international public policy… thus jurisdiction must be declined in this case…[they] must realise that they have forfeited any right to ask for assistance of the machinery of justice (national courts or arbitral tribunal) in settling their disputes.” For a period, this was not deemed an issue. Judges chose to hear the case as a whole: retaining jurisdiction. Questions of the effect of mutual fault through corruption would be determined when analysing at the merits of the case, or when determining remedies.


Return of the Defence: World Duty Free v. Republic of Kenya


World Duty Free brought back the conception that corruption could be a defence. Here, an investor admitted to bribing the Kenyan president to acquire a ten-year concession agreement. The tribunal ruled that Kenya was entitled to avoid, and did avoid, the pleaded claims, the contract with the claimant, and that the claimant was not legally entitled to maintain its pleaded claims (as a matter of international public policy).




  1. The tribunal viewed a finding of corruption to be a jurisdictional issue, and preclude the examination of merits.


The bribe; its provider and its recipients.


Similar to ICC Award No. 1110, the tribunal (at 178) viewed the claimant to not be an innocent who was unwittingly caught up in the situation but to be a willing participant as the contract came into existence from the provision of the bribe. The bribe and contract could not be distinguished, as one proceeded from the other. This is the reasoning for corruption as a defence: if the briber was not an innocent and the corruption was deliberate and large, the act of corruption is a defence. It acts as a deterrent to investors to avoid acts of bribery at large, deliberate scale, and protect investors from small, inconsequential mistakes.


Characterization of the receiver of the bribe.


The tribunal did not view an act by the head of state attributable to the state. The tribunal reinforced that the state was on trial, not the president. However, following a point made by Zachary Torres Fowler (Undermining ICSID: How the Global Anti bribery Regime Impairs Investor-State Arbitration), the tribunal should have turned to the Draft Articles on Responsibility of States for Internationally Wrongful Acts. To paraphrase article 7 of the above treaty, activities of a person able to exercise elements of government authority, should be attributed to the government even if they were beyond his authority or illegal. The possessor of sticky fingers should not be able to assert his sticky fingers as a defence: a bribe’s recipient should be blameworthy, and here, such blame should be attributable to the state.


Effect upon wider policy.


To borrow a point from Fowler again: the tribunal, in showing that corruption and bribery are against international policy, put the entirety of blame and possible penalties upon the recipient of the bribe. Furthermore, in citing this international policy, as being linked to criminal law (at 142 and 146), they disincentive an investment company from whistleblowing unless they are sure they did not engage in corruption. A host state could threaten a company with criminal prosecution within the host state or through drawing attention to it in the home state of the investment company (see above: Nikos and Canada). Fowler believes this creates incentives for host state actors to solicit bribes, to acquire a defence against future arbitration. I would contrast Fowler’s argument here with point 178 of World Duty Free. The nature of the bribes sought by a host state actor would have to be substantial. They would be sought by powerful entities within the host state actor. On a policy view, the court was correct to apportion the blame to the company. It is easier to seek damages from international company, then a sovereign state. Additionally, an international company is more vulnerable and likely to change its operations as a result of an economic loss.



Counter to the above conception of corruption as defence.


There exist a number of interrelated and alternative points, which I believe must be understood. I would view them to rule against the conception of corruption as a jurisdictional defence. The reader may not view them to conclusively rule against the above determination. However, conception of the area as a whole would be incomplete without consideration of them.


(1) Firstly, an international court should not be too quick to absolve itself of jurisdiction or judicial responsibility.


  • Tokios Tokeles­: minor errors alleged would not suffice to remove the investment from being examined by the Tribunal; to do so would go against the object and purpose of the Treaty (BIT). If the corruption is minor, not central to the investment, and the investor is an innocent caught up in an illegality: the tribunal will retain jurisdiction.


(2) A host state should not be allowed to encourage or cultivate or engage in a behavior that would be in “bad faith”.


  • Desert Line v Yemen: “a host state which has from some time tolerated a legal situation is thereafter precluded from insisting later, against the investor, that the situation was unlawful from the beginning.” (p 95, Dolzer and Schreuer, “Principles of International Investment Law” Second Edition, Oxford University Press, 2012.) Reinforced in Railroad Development v Guatemala.


(3) Corruption should not be confused with an illegality within the BIT.


  • However, at times the distinction between the two is not clear. Corruption may be illegal if mentioned as illegal within the BIT. This is best understood with regard to the basis for the above determination. A placement of a clause within the BIT is designed to ensure the rules surrounding investment are predictable. The BIT should be viewed as a contract between two parties. What the parties do outside of that contract (for the legislature; changing national laws) should not affect the contract. For example:


  • With regard to Inceysa Vallisoletana v El Salvador: The BIT between Spain and El Salvador referred to compliance with national laws within the provisions on admission and protection, not with regard to compliance with national law and the definition of investment. Additionally, El Salvador had accepted ICSID jurisdiction on the condition that a complainant act legally. Thus, when an illegality occurred, it was not raised as a corruption defence per se. The illegality was defined in the BIT.


  • Fraport v Philippines: similar to World Duty Free, the complainant was not an innocent in an illegal situation, but an active participant, and the illegality was sourced to the basis of the contract. The complainant consciously sought to bypass restrictions on shareholdings by foreigners by way of illegal secret shareholding agreements.


(4) To further add a layer of complexity to the above conceptions, illegality may also arise if in breach of the international public order.


  • In World Duty Free there was no bilateral investment treaty between the Isle of Man (World Duty Free) and Kenya. The arbitration was exclusively based on a contract between the claimant and respondent state. Dolzer and Schreuer state that the respondent could not complain about Kenya’s violations, because bribery was contrary to the international public order and Kenya’s own laws and regulations. This allowed Kenya to void the contract. This does not wholly address the issue of a head of state’s actions not being attributable to the Kenya and thus, violations by Kenya, allowing the arbitration to proceed to merits at the very least.


Concluding Thoughts:


The basis for a BIT or any international agreement is predictability. The manner in which “corruption as a defence” is used and understood detracts from the predictability that is necessary to ensure international investment continues. This does not mean that an illegality or corruption should not have any effect. Determination of whether it should have an effect should start with its source. The international public order, or within the BIT or multilateral investment treaty would be appropriate sources.


Further Information: Where to look now?






Leave a Reply

Your email address will not be published. Required fields are marked *