To Arbitrate or Not to Arbitrate: A Second Look at Concession Agreements Tainted by Corruption

The focus of this study is the effect of corruption on state contracts. Specifically, it seeks to address the effects of corruption, if any, on the respective parties' undertaking to submit to arbitration. Does corruption have the effect of nullifying the entire agreement including the arbitration clause? To facilitate the discussion, three preliminary topics have to be dealt with, but only to the extent that they are relevant to the question posed in this study. First, a brief discussion of the true nature of state contracts seems in order. In international project finance, the terms: “concession agreements,” “economic development agreement” and “state contracts” have been used extensively by different legal scholars. Some try to distinguish between the three. Others use them interchangeably. So, a subsection was devoted to clarifying the terminologies by going into the evolution of the terms and their subtle differences. This will hopefully take the reader into the heart of the issues confronting developing states and foreign investors when they enter into foreign investment agreements. Note that several legal scholars have written extensively about this area of state contracts. Some of them have written an entire book devoted solely on these issues. Thus, this subsection is not an attempt at an exhaustive discussion of these issues. However, considering the main focus and objective of this paper, they could neither be skipped nor glossed over. As a fitting compromise, the discussion was limited to the three more bothersome issues, namely: the true nature of these contracts, the proper governing law, and the remedy resorted to by the parties when the inevitable happens, i.e. when a dispute arises. Second, an overview of arbitration as a dispute resolution mechanism is needed to better understand the conflicting interests that usually crop up in arbitration cases involving state-foreign investor disputes. Nowadays, arbitration is the more preferred mode of settling disputes. While it is far from being perfect, it's been relatively effective. Be that as it may, there will be a short discussion on the advantages of arbitration. These are the same advantages that make arbitration quite popular. But since perfection is not of this world, it seems only fair to look at some of the more disturbing issues relating to arbitration as well. Why are developing states suspicious of arbitration? Is there a rational basis for their suspicions? After exploring the world of arbitration, the paper will focus next on the troubling subject of corruption and its perceived effects. Can anything good ever come out of something as bad and as repugnant as corruption? It bears emphasis that corruption does not refer only to bribery. Corruption can manifest itself in several forms. However, considering the varying cultures, a universal and exhaustive definition may be far from the offing. Although there seems to be a lack of consensus on the definition of “corruption,” there is already a consensus among all nations that “bribery” or “active corruption,” as referred to by the OECD , falls within the ambit of “corruption.” For the sake of brevity and simplicity, a section specifically dealing with the definition of corruption was omitted. It would also avoid giving the impression that the paper is about corruption. The paper is not about corruption per se. It's about the effects of corruption. What happens after corruption? From the research undertaken, it became apparent that when it comes to state contracts corruption often manifests itself through bribery. Most cases on state-foreign investor dispute that were decided by the International Chamber of Commerce (ICC) deal with allegations of corruption in the form of bribery. So, for purposes of this paper, corruption had practically been equated with bribery. But legally, the two are not synonymous. Corruption is quite a broad term compared to bribery. In certain countries, “facilitation money” or “speed money” is not a form of bribery. For other countries, like Canada, it would be considered as “bribery.” In other words, the amount could sometimes spell the difference between a “gift” and a “crime.” Again, this is not a paper on bribery per se. In the paper, the term “bribery” refers to what the host government would perceive as falling under their anti-bribery and anti-corruption laws. After discussing broadly the effects of corruption, there is a discussion on the relationship between foreign direct investment and corruption. Thereafter, there is a subsection that outlines the measures taken by the different multilateral groups in order to send the unmistakable message that corruption has to be stopped. To date, there are several treaties, laws and organizations that deal with corruption, but the paper focused only on the more important law and treaty on corruption. The final section of the paper, then, focused on the quintessential question posed by the paper, i.e. “what happens to the parties' undertaking to submit to arbitration in the event that a dispute should arise?” What happens to state contracts that were procured through corruption? And what should happen to state contracts procured through corruption?

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