ICSID Tribunal Declines Jurisdiction when Confronted with Corruption, by Antonio Delgado

On 4 October 2013, ICSID dispatched the arbitral tribunal’s award in Metal-Tech Ltd v the Republic of Uzbekistan.[1] The tribunal declined jurisdiction after finding that corruption had been established “to an extent sufficient to violate Uzbekistan law in connection with the establishment of the Claimant’s investment in Uzbekistan.”[2]

Corruption continues to be a hot topic of arbitration. The stance that arbitral tribunals should take when confronted with evidence of corruption and the standard of proof required in corruption cases has always generated great controversy. According to arbitrator Sophie Nappert, tribunals facing corruption tend to fall into two categories. The first category is tribunals that take an “eyes wide shut” approach to avoid confronting the issue with arguments such as that the respondent state failed to investigate allegations. The second category Sophie Nappert terms a “zero tolerance approach” which propounds that corruption bars the claim from going ahead.[3] The tribunal’s decision in Metal-Tech is a welcome one which falls into the second category, joining the landmark ICSID award in World Duty Free v Kenya, where the tribunal dismissed the Claimant’s case on the basis of evidence that it had procured the contract through a US$2 million bribe to Kenya’s president.[4]

The facts of the case in Metal-Tech Ltd v the Republic of Uzbekistan are as follows: the Claimant entered into negotiations with the Uzbek Government to create a joint venture to build and operate a modern plant for the production of molybdenum products. The joint venture was to be formed between Metal-Tech and two companies owned by the Uzbek Government. The Claimant was to contribute its technology, know-how, access to international markets and part of the financing needed for a new plant, while the Government companies would supply raw molybdenum and contribute with buildings and equipment.

Two years later, the parties constituted a joint venture company (“Uzmetal”) and began exporting molybdenum products. Around that period, Metal-Tech entered into a series of consulting agreements with foreign companies and a number of Uzbek individuals.

Soon after the commencement of the operations, the Public Prosecutor for the Tashkent Region initiated criminal proceedings against officials of Uzmetal on the ground that they had abused their authority and caused harm to Uzbekistan. As a result, the Government cancelled the Uzmetal’s right to export molybdenum and requested the courts to terminate the supply contracts. Metal-Tech’s partners initiated bankruptcy proceedings against Uzmetal. The company was eventually liquidated and delisted from the state registry of legal entities.[5] The Claimant then initiated arbitration proceedings before ICSID claiming that the state had breached the investment protection provisions of the Israel-Uzbekistan BIT.

During the hearing, it emerged that Metal-Tech had paid approximately US$4 million between 2001 and 2007 in consulting services. The Tribunal noted that this amount exceeded its initial cash contribution to the joint venture and amounted to nearly 20% of the entire project cost. In light of this new evidence, the Tribunal ordered the parties to introduce additional information and documents, pursuant to its powers under Article 43 of the ICSID Convention.[6]

Establishing the existence of corruption in connection with the investments implementation was essential for the tribunal’s constitution. Under art. 1(1) of the BIT, the assets that constituted the investment had to be “implemented” in accordance with Uzbek law. Therefore, if the Claimant was found to have breach Uzbek law during the investment’s implementation, its claims would be barred for lack of jurisdiction.

In the award, the Tribunal stated that apart from the amount paid for the consulting services, the following facts caught its attention:[7]

  • the consultants were not qualified to fulfil the obligations listed in the consulting contract;
  • Metal-Tech made periodic payments that were not contingent on the fulfilment of the obligations listed in the contract. The payments were automatic and their amount was predetermined; and,
  • the Claimant was unable to show that any services were actually rendered in return for the payments.

In relation to the last point, the arbitrators felt compelled to apply Article 9(5) of the IBA Rules on the Taking of Evidence in International Arbitration and draw appropriate inferences from the Claimant’s non production of evidence. The tribunal stated that it was unable to accept the Claimant’s justifications for not providing the requested evidence:[8]

While the Tribunal does not believe that the Claimant sought to conceal evidence, the inference that inexorably emerges from this death of evidence is that the Claimant can provide no evidence of services, because no services, or at least no legitimate services at the time of the establishment of the Claimant’s investment, were in fact performed. The Tribunal will bear this inference in mind when further assessing the facts.

The Tribunal analysed Uzbek law and reached the conclusion that it condemned corruption in conformity with international law and the laws of the vast majority of States. As a result, it concluded that corruption is “contrary to international public policy of most, if not all, States or, to use another formula, to transnational public policy”, citing World Duty Free v Kenya.[9]

Analysis of the evidence in the record, coupled with the Claimant’s failure to rebut the presumptions of corruption, led the Tribunal to conclude that corruption had been established to an extent sufficient to violate Uzbekistan law, in connection with the establishment of the Claimant’s investment in Uzbekistan. Consequently, the investment had not been “implemented in accordance with the laws and regulations” of Uzbekistan as required by art. 1(1) of the BIT and the dispute was not covered by Uzbekistan’s consent to arbitration under the BIT.

Whilst in World Duty Free the evidence of corruption was submitted by the Claimant, in Metal-Tech, neither the Claimant nor the Respondent adduced evidence on corruption. Instead, the Tribunal considered its duty to inquire on its own motion after facts unknown to them emerged during the hearing; in particular, the fact that Metal-Tech had paid approximately US$4 million between 2001 and 2007 in consulting services. What is important, however, is the stance adopted by both Tribunals: once facts unknown to them emerged pointing to the existence of corruption, they invited the parties to present additional submissions and evidence. In short, they actively sought to shed light and address the issue.

It is expected that in light of these two precedents, future tribunals confronted with evidence of corruption will be compelled to address the issue and draw the appropriate inferences regarding the admissibility of the claim, rather than try to ignore. The award in Metal-Tech is thus a welcome development in arbitral law and in the fight against corruption.

[1] Members of the Tribunal: Gabrielle Kaufmann-Kholer (Switzerland), John M. Townsend (US) and Claus Von Wobeser (Mexico).

[2] Metal-Tech Ltd.  v the Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award of 4 October 2013, para. 372 (“Metal-Tech”). The award is available online at http://italaw.com/sites/default/files/case-documents/italaw3012.pdf.

[3] See Global Arbitration Review, Corruption: are arbitrators up to the challenge?, 2 September 2013, Vol. 3, Issue 5.

[5] Metal-Tech, paras. 5 to 54.

[6] Metal-Tech, paras. 85 to 106.

[7] Metal-Tech, paras. 213 to 218.

[8] Metal-Tech, para. 265.

[9] Metal-Tech, paras. 292.