Arbitration and corruption

Nigeria v Process & Industrial Development

Introduction

The explosive judgment of the English High Court in the case of Nigeria v Process & Industrial Development has highlighted difficult issues around the role of arbitration in international deals where corruption has been alleged.

The dispute concerned a 2010 deal between Nigeria and P&ID, an offshore company owned by two Irish businessmen. Other companies controlled by the men had performed various contracts in Nigeria, and despite the lack of any track record in the oil and gas business, P&ID was awarded the right to process billions of dollars of natural gas. In 2012, it brought an arbitration against Nigeria for failing to provide the promised infrastructure and gas and in 2017 was awarded $6.6bn in damages plus interest at 7%.

Following a change in government in 2015, Nigeria alleged that the deal was procured by corruption and that P&ID had effectively “fixed” the arbitration by bribing Nigeria’s lawyers.

Knowles J has now held that the original contract was indeed procured by bribery and has refused enforcement of the arbitral award, the value of which had risen to $11bn with interest. The refusal was on the basis that the award had been obtained by fraud, with one of P&ID’s owners having given perjured evidence as to how the contract came into being.

The allegation that Nigeria’s lawyers had been bribed to make sure they lost the arbitration was not upheld, but the conduct of P&ID in the arbitration was strongly criticised. False evidence had been presented and P&ID had been provided with internal documents belonging to Nigeria that were privileged but did nothing to bring this to the attention of Nigeria or the Tribunal. Knowles J concluded that “the Arbitration was a shell that got nowhere near the truth”.

Corruption and arbitration

The case highlights many of the reasons why corruption is such a big issue in arbitration:

• Many countries which Transparency International scores poorly for Control of Corruption, or which rank towards the bottom of its Corruption Perceptions Index, are precisely the areas where businesses prefer arbitration over reliance on the courts. Arbitration offers access to a neutral forum and a quality of resolution that might not be available in domestic courts.

• The confidential nature of arbitration and the fact that hearings take place behind closed doors obviously makes it a more attractive forum for disputes for those seeking to benefit from corrupt agreements.

• Some arbitrators have historically seen it as beyond their remit to investigate allegations of corruption. If a dispute arises under a commercial contract, the question as to whether that contract was procured by corruption is seen by some as outside the scope of what an arbitrator is there to determine.

• Arbitrators have fewer tools to deal with allegations of corruption than national courts, as their jurisdiction is contractual. They have no power to order documents to be handed over by third parties and so less ability to investigate allegations of criminal behaviour. And if the parties refuse to provide incriminating documents, or give perjured evidence, all the tribunal can do is draw an inference; there is no equivalent of contempt proceedings.

While the allegation was not made out, this case raises a further means by which arbitration could potentially be abused by corrupt parties. Here it was alleged that the arbitration itself was used as a means of varnishing a corrupt deal with the respectability of an award from an eminent and reputable tribunal. It was alleged that P&ID bribed Nigeria’s internal and external lawyers, effectively to “throw” the arbitration by not defending the claims properly. An arbitral award can thereby be a form of “layering”, in money-laundering parlance, converting a right under a dubious contract into a right under a respectable and official arbitral award. The same process can of course be achieved via the courts, particularly by way of “settlements” that are then encapsulated in an agreed form of court order.

The problem of enforcement and false claims

But there is another side to this, which is that an allegation of corruption can form the grounds for resisting enforcement. That of course was why the High Court was hearing this case – P&ID sought enforcement of its arbitral award and Nigeria resisted.

• The international mechanism for enforcing the majority of arbitral awards, the New York Convention, allows a state to refuse to enforce an award on “Public Policy” grounds. That can be construed quite broadly, but most states would hold that enforcing a criminal arrangement was contrary to public policy.

• This means that the losing party in an arbitration can use an allegation that the underlying contract, or arbitral award, was procured by corruption as a means to prevent it being enforced.

• In the case of Nigeria v P&ID, the allegations of corruption underlying the contract were well-founded. But unfounded allegations of corruption have been seen in enforcement proceedings, with the effect of, at the very least, delaying the enforcement of a legitimate award.

• In Nomihold v MTSF in 2011, Nomihold sold shares in a company to MTSF, and MTSF defaulted on part of the purchase price. Nomihold, advised by Simmons & Simmons, commenced arbitration, during which MTSF alleged that the company in question had obtained its assets criminally. There was no evidence for this, and it was rejected, but MTSF then resisted enforcement by arguing in court that it would assist money laundering. Ultimately the award was enforced, but raising specious allegations of criminal conduct in more than one jurisdiction delayed that enforcement.

• There are plenty of other examples of where a losing party has belatedly alleged corruption in order to try to prevent enforcement of an arbitral award.

Corruption as a bi-partite crime

One unique aspect of corruption is that, unlike fraud for example, it is a bi-partite crime. Bribes are paid in response to requests and cannot be paid without someone accepting them.

An agreement to pay a bribe is unenforceable, while an agreement procured by bribery is voidable by an injured party.

In the field of investor-state arbitration, a tribunal that accepts a state’s submission that an investor’s contract is void due to the payment of bribes may be giving the state a windfall if the investor has already performed some of its obligations.

Difficulties for arbitrators
So arbitrators, and arbitral institutions, face three challenges:

1. How to ensure that arbitration does not become a vehicle for corrupt parties to cloak their crimes in the respectability of an arbitral award;

2. How to ensure that parties cannot derail arbitrations or prevent the enforcement of perfectly proper awards through false accusations of corruption; and

3. How to ensure that states are not able to benefit from the corruption of their own officials to disclaim contracts and retain the benefits of partial performance.

Preventing arbitration being used to cloak corruption

In terms of preventing arbitration becoming a tool of the corrupt, things have moved a long way in the last ten years.

Awareness of the issue of corruption and its impact has continued to rise. Attitudes have shifted away from the idea that it is a cultural issue towards accepting that it has a hugely negative impact on developing countries. Most recently, allegations emerged in the aftermath of the 2023 earthquake in Turkey and Syria that buildings had not been constructed according to regulations as a result of bribery in the construction sector, illustrating the potential impact of corruption. Anti-bribery enforcement has increased globally over the last decade.

Some of the nervousness of tribunals to get to grips with allegations of corruption has also faded away, though obviously it depends upon the individual members of the tribunal. Fewer would see corruption as a domestic issue best left to the courts nowadays and most arbitrators are well aware of the capacity for corrupt agreements to damage the reputation of international arbitration. It is now broadly agreed that an arbitral tribunal’s jurisdiction to consider challenges to the commercial agreement before them extends to challenges that the contract is unenforceable for reasons connected with corruption. The high profile decision in Nigeria v P&ID will reinforce this.

Many arbitrators would feel very uncomfortable if there were obvious indications of corruption in the facts of a case and neither party was questioning the validity of the arrangement. Some have suggested that a new obligation be added to arbitrators’ duties, requiring them to investigate corruption where it is apparent. But it is probably still rare for tribunals to raise a corruption issue of their own volition.

Investigating allegations of corruption

Where a party to an arbitration alleges that a contract has been procured by bribery, how should a tribunal proceed? A party that raises such an allegation is likely to argue that the tribunal has no jurisdiction because the arbitration agreement itself is void for the taint of bribery. It is likely that the other side will argue that the allegation is a tactical one aimed at distracting the tribunal from the real issues.
But if the tribunal do not adequately deal with the issue, they know that their award may be unenforceable. While there have been occasional examples of clear evidence of the payment of bribes, even witnesses stating that they paid them, more often there are only indicators. Parties inevitably take steps to hide their corrupt dealings from scrutiny. This presents tribunals with the difficulty of to what extent a proliferation of indicators can form the basis of a finding of corruption. The use of complex structures of off-shore companies through which to direct payments is a classic example of a red flag for corruption risk, but in itself is not actually evidence of corruption.

One issue tribunals face when a party alleges that a contract is void for being obtained by corruption is what standard of proof to apply. No institutional rules set down the standard of proof for arbitral proceedings, leaving it to the tribunal to determine the standard of proof they deem appropriate. The position is further complicated in multi-jurisdictional matters (and particularly in arbitrations involving both civil and common law jurisdictions) where standards of proof in one jurisdiction may not have straightforward equivalents in another. Applying English law standards of proof, on issues of corruption, a tribunal could adopt:

• the common law criminal standard of 'beyond reasonable doubt', a high standard;
• the common law civil standard of 'on the balance of probabilities', a lower standard that might be thought appropriate to reflect the lack of ability to compel evidence; or
• 'clear and convincing proof', which is commonly thought to represent a position between the two.

Preventing the recipient of a bribe disclaiming the contract

The fact that the tribunal will be invited to find it has no jurisdiction if there has been corruption makes the outcome of its decision on the issue potentially very stark. In the World Duty Free v Kenya case the tribunal dismissed the claim because it was founded upon a contract procured by bribery and was therefore unenforceable. Some tribunals since then have tried to find more balanced ways of dealing with corruption where the party whose representatives accepted the bribe have received some performance. In Spentex v Republic of Uzbekistan the tribunal found the agreement unenforceable but made an order that the state make a payment representing its gain to an anti-corruption NGO.

In English law the defence of illegality to a contractual claim has also become less straightforward since the Supreme Court case of Patel v Mirza. It is sometimes possible to make a counter-claim for unjust enrichment against the party who is running the illegality defence, though it is highly fact-specific.

Where tribunals do find there to have been corruption, it may still be possible to find a middle ground where neither party can benefit from it.

Conclusions

So, what lessons should be learnt from Nigeria v P&ID?

The first is that the focus on combatting bribery has increased since the events that led to the case. It is less likely than ever to be brushed under the carpet.

The second is that arbitration provides three distinct stages at which a party can raise an allegation of corruption – when a tribunal determines that it has jurisdiction, when the merits of the case are considered and when any resulting award is to be enforced.

That is a strength when genuine issues of bribery arise, as in Nigeria v P&ID, but can be a weakness when a party deliberately alleges corruption to derail a genuine claim. Obviously a party raising the issue at the enforcement stage will face questions as to why it did not raise it before the tribunal, just as Nigeria did. If a party raised it and the tribunal ruled on it, courts in arbitration-supportive jurisdictions such as the UK will usually refuse to intervene.

If the potential difficulties of enforcing an award where one party alleges corruption sound like a reason to avoid arbitration, it is worth reflecting upon the fact that attempting to enforce an English court judgment in another jurisdiction may be every bit as difficult. Even where bilateral arrangements between states do exist, public policy tends to be grounds for refusing enforcement of foreign judgments in most jurisdictions, and an allegation of corruption is as likely to prevent enforcement of a judgment as of an arbitral award.

The Nigeria case is likely to boost efforts to address corruption risk in arbitration. In due course, we may see reform driven by the arbitral institutions, perhaps offering to assist tribunals dealing with corruption issues, or tribunals approaching courts to make use of their greater powers to compel the gathering of evidence.

It is worth remembering that much of what occurred in the Nigeria case could occur in court litigation. Indeed, the judge commented on the professional conduct of the lawyers representing P&ID in the high Court litigation and pointedly noted the extraordinary sums they were to be paid if the claim succeeded –
a perfectly permissible fee structure, but one that inevitably calls into question whether professional standards are being maintained. Whichever form of dispute resolution you choose, it is important to be alert to any red flags that may suggest any form of corruption and refuse to engage in any practices that may later appear suspect.