Legislating against corruption in international arbitration: panacea, placebo, or neither?

In September 2024, at a reading of the Arbitration Bill in the House of Lords (HL), an amendment to the Bill was tabled by Lord Hacking to impose a general duty on arbitrators to “safeguard the arbitration proceedings against fraud and corruption“.  While support for the intention behind the proposal was unanimous, so was opposition to the amendment, which was eventually withdrawn.  The reason, ultimately, was a clash between sentiment and pragmatism.

Where the underlying transaction in dispute in an arbitration is affected by corruption, this can be raised by the parties and dealt with by the tribunal.  As Wallace LJ observed in Westacre v Jugoimport [1999] 3 WLR 811, the “principle against enforcing a corrupt bargain […] is […] almost certainly recognised in most jurisdictions throughout the world“.  If relevant to the outcome of the dispute, it is a matter of substance, falling within the purview of the tribunal.  Once the tribunal has made its determination, the public policy in favour of the finality of awards will trump the public policy of discouraging corruption (see Westacre v Jugoimport [1998] 3 WLR 770), for good reason. To seek to legislate in a way which would disrupt or override this overall position would be to attack the fundamental doctrine of kompetenz-kompetenz (as enshrined in section 30 of the AA 1996), or even the very foundational concept of arbitration itself.  In any case, legislation along these lines is arguably otiose at best, or highly undesirable at worst.

But what of a positive duty to investigate possible corruption?  The primary difficulty is resource: arbitrators are simply not well-placed to act inquisitorially in this context.  While it might be possible to carry out a “red flags”‘ analysis (as suggested by Spotlight on Corruption in submissions on the Arbitration Bill’) and raise the issue with the parties, the tribunal then walks a knife edge between ensuring each party is able to put its case properly on the one hand and maintaining impartiality on the other.  There is also a jurisdictional issue: acts of corruption may well fall outside the scope of the arbitration agreement, and attempts to legislate against that nuisance risk undermining arbitration’s consensual bedrock. Illustrating these issues is the scenario in which corruption implicates multiple parties, several of whom are not privy to an arbitration agreement.  Arbitrators will have no powers over those third parties, in terms either of rendering a final substantive award or of taking procedural steps to procure evidence.  Attempting to provide otherwise is simply unworkable.

A point of nuance arising from the scenario above, for which it may be possible to legislate, is that the “victim” will find themselves in the invidious position of arbitrating with its contractual counterparty but litigating against the “co-conspirators” in relation to the same or similar facts.  This plainly creates a raft of difficulties.  As currently drafted, section9 of the AA 1996 does not allow the courts in England and Wales to retain jurisdiction over the dispute with the contractual counterparty.  Amending that provision to provide a further narrow exception to mandatory stays in favour of arbitration would potentially be quite helpful’ (and is certainly more desirable than the alternative option of legislating to expand arbitration jurisdiction to encompass parties who did not consent to that process).

In the HL debate, Lord Hacking appeared to envision his proposal working through the person of  the parties’ legal representatives,  obliging them to “smoke out potential acts of corruption and fraud“ or assist in “rooting out corruption“ during the course of taking instructions and preparing statements. One obvious difficulty in the context of international arbitration is that ethical obligations and standards of acceptable conduct for legal professionals can vary widely between jurisdictions.  Legislative overlay imposing a top-down mandatory standard of conduct on any legal professional engaged in English-seated arbitrations (whatever their domicile) would seem rather at odds with the inherently transnational nature of the process (as well as practically requiring “buy-in” from a critical mass of economically significant jurisdictions to avoid being defeated by forum shopping).  Secondly, the resulting policy conflict with duties of confidentiality and legal professional privilege is a well-worn topic.  In addition, effective policing of such a duty arguably depends on the “innocent” party being adequately represented, as was amply demonstrated in Nigeria v P&ID [2023] EWHC 2638 (Comm) (see Legal update, English court upholds challenge to $11 billion dollar award against Nigeria finding it was obtained by fraud (English Commercial Court)).  This is particularly difficult where corruption occurs during the course of an arbitration itself (as opposed to in an underlying transaction).  In such a situation, the legal representatives of one party will either likely already be obliged to cease acting or will have abandoned their ethical principles – something any component opposing legal team will be astute to guard against in any event.  Lastly, it is virtually impossible for the tribunal to detect and address corruption or fraud where the parties before it are complicit. This  problem also afflicts the courts at the enforcement stage, as occurred in ‘Contax v KFH [2024] EWHC 436 (Comm) (see Legal update, Contax v Kuwait: Commercial Court fraud, enforcement and the Arbitration Act 1996).  While it is true that the culture has shifted from the traditional view of arbitrators being the servants of the parties, it is not feasible to require a tribunal to become adversarial to all of the parties before it.

Finally, confidentiality is an important consideration. Spotlight on Corruption’s HL submissions expressed concern about the confidentiality of arbitration being used to conceal corruption.  In the HL debates, Lord Mance suggested a finding of corruption or fraud in a final award should impose a duty on arbitrators to report it to competent authorities.  The author respectfully agrees with the wisdom of that suggestion.

Dealing with fraud and corruption is never simple.  There is scope for legislating better to facilitate tackling fraud and corruption in the context of arbitration, but in doing so it is important not to lose sight of what makes international arbitration such an attractive option for commercial parties and such an important part of the global economy.  If there is to be legislative change, it ought to be nuanced, carefully targeted, and incremental.  Ultimately, the imposition of a sweeping duty is likely to achieve little more than creating unintended problems.

Article by Ryan Hocking – first published by Practical Law