Corruption as a defense in International Investment Arbitration

By Shivansh Jolly*

The Issue

The developing jurisprudence in international investment arbitration has lately been confronted with the question of whether claims arising from contracts tainted with a blot of corruption in the international fora can be validly upheld. A classic example to describe such an instance would be where a private party in one country obtains a contract for infrastructural development in another country while illegally colluding with a minister of the host State which would prove decisive in the said contract being awarded to the concerned private party. With the contract being awarded and necessary investments being made in the host State, relationship between the parties reach a roadblock due to a possible reluctance of a new government regime to honour the terms of the tainted agreement in existence.

Possible claims may thus include compensation for loss of investment and restitution of any benefits derived by the host State from the tainted contract. In such circumstances, the defense of corruption has been hailed by host States against investment claims brought by the aggrieved private parties. While a challenge against a host State based on such contracts has raised questions of significant concern for the investors, host States are increasingly relying upon this defense to evade any and every possible liability that may befall upon them. The mischief in blindly upholding the defense of corruption in CB2_UAE_750x350favour of host States lies in the fact that host States are ‘structurally’ bound to be placed as Respondents in investor-State disputes, thereby allowing them a pre-established, and perhaps, a fail-safe defense to avoid any liability as raised in the claims. The arbitrators are hence faced with the dilemma of deciding whether an investment claim, resting on the foundation of a contract concluded in violation of fundamental principles of international public policy, can be upheld by granting an award to the claimant.

Relevant Cases

Two significant cases where such questions were raised before ICSID Tribunals which have proven to favour the host States’ defense based on charges of corruption are World Duty Free v. Republic of Kenya and Metal-Tech Ltd v. the Republic of Uzbekistan.

  • World Duty Free v. Republic of Kenya

The award of first of the two ICSID cases was released on 4th of October, 2006 which saw some of the finest arbitration experts, namely Jan Paulsson and Constantine Partasides, represent the Republic of Kenya. In the present case, after taking note of the prevailing jurisprudence on corrupt practices being the antithesis of international public policy, the tribunal held that – “In light of domestic laws and international conventions relating to corruption, and in light of the decisions taken in this matter by courts and arbitral tribunals, this Tribunal is convinced that bribery is contrary to the international public policy of most, if not all, States or, to use another formula, to transnational public policy. Thus, claims based on contracts of corruption or on contracts obtained by corruption cannot be upheld by this Arbitral Tribunal.”

  • Metal-Tech Ltd. v. the Republic of Uzbekistan

Ironically so, the award of this case was also released on the 4th of October, however, in the year 2013. The date of the present award becomes relevant to note that the Tribunal has maintained a fair amount of consistency in its approach while presiding over matters tainted with allegations of corruption. The ICSID Tribunal, in the case of Metal-Tech Ltd. v. the Republic of Uzbekistan, interestingly took conscious cognizance of how host States may begin to consider the defense of corruption as a fail-safe defense to go scot-free against proved allegations of mutually corrupt agreements. However, the Tribunal refused to uphold the claim of Metal-Tech Ltd. against the host State in the greater interest of maintaining the sanctity of “rule of law” –

“While reaching the conclusion that the claims are barred as a result of corruption, the Tribunal is sensitive to the ongoing debate that findings on corruption often come down heavily on claimants, while possibly exonerating defendants that may have themselves been involved in the corrupt acts. It is true that the outcome in cases of corruption often appears unsatisfactory because, at first sight at least, it seems to give an unfair advantage to the defendant party. The idea, however, is not to punish one party at the cost of the other, but rather to ensure the promotion of the rule of law, which entails that a court or tribunal cannot grant assistance to a party that has engaged in a corrupt act.”

  • O.L. Hungarian Oil & Gas Co. Plc v. Republic of Croatia

The recent most case which has emerged to reflect the said controversy is the case of M.O.L. v. Republic of Croatia. The investor registered this case before ICSID on the 5th of December, 2013, and the Tribunal was subsequently constituted by the 14th of April, 2014. The said case has witnessed initiation of ICSID arbitration by the investor against the State of Croatia pursuant to an Energy Charter Treaty while claiming that the host State has breached its obligations with regard to the investments made therein. The investments made by the investor were in the form of shareholdings in a government enterprise of Croatia which was proposed to be privatized. The said shareholding was awarded to the investor through a Shareholders’ Agreement dated 17th July, 2003 concluded between the former and the Croatian Government, wherein the investor acquired a 25% stake in the concerned government enterprise. Pursuant to a modification in the said Shareholders’ Agreement in January 2009, the investor’s shareholding was eventually raised to a staggering stake of 49.08%, thus making the investor as a majority stake holder in the enterprise. In response to the investment claim made, validity of the said Shareholders’ Agreement has been challenged by the present Croatian Government while alleging that the said agreement was a result of colluded act of corruption between the investor and the then Prime Minister of Croatia, namely Ivo Sanader. Republic of Croatia has thus challenged the jurisdiction of the ICSID Tribunal while arguing inter alia that no legitimate investment can be said to have existed, and that the said claim is against international public policy. It is interesting to note that though the erstwhile Prime Minister of Croatia was convicted on charges of corruption in November 2012, the said conviction has been reversed by the Constitutional Court of Croatia in July 2015, pending a retrial since September 2015.

Other Instances of Corruption

In cases of proved instances of corruption, arbitral tribunals have either declared the vitiated contracts as “void” (Iranian agent vs. Italian construction company, ICC Case No. 15668), or have refused to exercise jurisdiction over the dispute concerned (Inceysa Vallisoletana S.l. v. Republic of El Salvador, ICSID Case No.ARB/03/26). Ideally, an arbitral tribunal may resort to the established principle of “ex turpi causa non oritur actio” to declare that no legitimate rights can possibly arise from a dishonest act while mechanically dismissing the claims of investors in such peculiar cases. However, as suggested earlier, this may in turn motivate host States to place themselves in the shadow of a seemingly fail-safe defense while being participants of equal measure in the culmination of impugned contracts.


While taking a rather balanced approach, the tribunal in the case of World Duty Free v. Republic of Kenya did take note of the Claimant’s contention of being granted restitution of benefits derived by the host State from the impugned contract, however, the said claim was eventually denied. It must be noted that the UNIDROIT Principles of International Commercial Contracts provide for a relief of restitution in Article 3.3.2, irrespective of a breach of mandatory rule (either national or international) as provided in Article 3.3.1. Therefore, tribunals must take the said principle into account while dealing with claims revolving around such peculiar circumstances to hold host States equally liable for a concerted act of corruption.

Given the complexity of the issues colliding amongst themselves, the Tribunal in M.O.L. v. Republic of Croatia will be required to analyse a viable solution to deal with questions of international public policy and the scope of immunity that a host State can claim while raising a defense of corruption. While considering the enforceability of the award, the Tribunal will also be required to deal with possible violations of domestic law while exploring the prospect of granting the claims of the investor arising out of the impugned contract. Therefore, the Tribunal would be required to make a delicate balance between the said laws and the principles of “good faith” and “international public policy”, while being equally receptive to the dilemma of an investor deprived of its investments in a host State.

* (The author is studying law at Gujarat National Law University and has a keen interest in the area of dispute resolution. He can be reached at



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