Blame to go around: treaty language and the corruption defense in investor-state arbitration

• Author: Tim O'Shea
• Position: Georgetown University Law Center'22
• Pages: 735-755

NOTES

BLAME TO GO AROUND: TREATY LANGUAGE AND

THE CORRUPTION DEFENSE IN INVESTOR-STATE

ARBITRATION

TIM O’SHEA*

Anyone who wants to tackle corruption must be willing to go all the

way. There are no shortcuts.

—Oby Ezekwesili

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735

II. BACKGROUND: UNCERTAINTY AND CORRUPTION IN INTERNATIONAL

ARBITRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 736

III. PROBLEM: THE CORRUPTION DEFENSE . . . . . . . . . . . . . . . . . . . . 740

A. Function and Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . 740

B. Shortcomings, Criticisms, and Proposed Alternatives . . . . . . 743

IV. PROPOSAL: INVESTMENT TREATY LANGUAGE AS A VIABLE

ALTERNATIVE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748

A. Impact of Investment Treaty Language on Arbitration . . . . . 748

B. A Proportional Proposal for Codifying Arbitral Procedures . . 750

V. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 755

I. INTRODUCTION

Billions of dollars in foreign investment are made each year under the

protection of investor-state arbitration (ISA).

1

Matthew Hodgson, Yarik Kryvoi, & Daniel Hrcka, 2021 Empirical Study: Costs, Damages, and

Duration in Investor-State Arbitration, BRIT. INST. OF INT’L AND COMPAR. L. (June 28, 2021), https://

www.biicl.org/documents/136_isds-costs-damages-duration_june_2021.pdf.

By providing a neutral forum

in which to claim the protections and safeguards afforded to them in invest-

ment treaties and contracts, ISA gives foreign investors greater certainty

and predictability in their legal rights as they pursue international deals.

2

Stephan Schill, The Virtues of Investor-State Arbitration, EUR. J. INT’L L. BLOG (Nov. 19, 2013),

https://www.ejiltalk.org/the-virtues-of-investor-state-arbitration/.

* Georgetown University Law Center’22. George Mason University Schar School of Policy and

Government’19. This article reflects the opinion solely of the author, and not of any other entity

or organization. V

C 2023, Tim O’Shea.

1.

2.

735

However, an arbitration defense which uses corruption as a tool to defang

these safeguards has become more common,

3

Arbitration and Corruption: Addressing the Elephant in the Room, MORRISON FOERSTER (May 13,

2021), https://www.mofo.com/resources/events/210513-arbitration-and-corruption-addressing-

elephant.html.

decreasing the predictability

of ISA tribunals, reducing investor confidence in their protections, and

deterring this critical investment. Arbitration rules and procedures are of-

ten inconsistent and opaque, creating uncertainties and risks which reduce

the predictability of foreign projects. This Note concurs with this dissatisfac-

tion with the corruption defense but contends that existing reform pro-

posals are insufficient or would not be effective. Instead, it argues that the

best option to address the abuse and asymmetry of the corruption defense

in ISA is by codifying treaty language which creates an even playing field by

proportionally allocating blame for corrupt practices. There are 2,500 exist-

ing investment treaties in the world today which would need to integrate

these rules, so this reform is not an instant solution.

4

Theodore Moran, Combating Corrupt Payments in Foreign Investment Concessions: Closing the

Loopholes, Extending the Tools, CTR. FOR GLOB. DEV. 9 (Jan. 2008), http://www.cgdev.org/sites/

default/files/15197_file_CombatingCorruption.pdf.

But if the interna-

tional community hopes to reaffirm the stability and reliability of arbitra-

tion for foreign investors, this is the strongest option. The inconvenience

of a long-term commitment to reform should not stand in the way of robust

anti-corruption policy.

II. BACKGROUND: UNCERTAINTY AND CORRUPTION IN INTERNATIONAL

ARBITRATION

Investor-state arbitration is an international arbitration in which one

party is a private investor and the other party is a state in which they are

investing, or some organ of that state.

5

Jonathan Bonnitcha & Alisha Mathew, Corruption in investor-state arbitration, TRANSPARENCY

INT’L 2 (Sept. 28, 2020), https://knowledgehub.transparency.org/helpdesk/corruption-in-

investor-state-arbitration.

ISA can arise under a contract specif-

ically between the investor and the state (contract-based ISA) or under an

investment treaty which contains the host state’s advance consent to arbi-

trate with any foreign investor from a given state (treaty-based ISA).

6

This

Note will not delineate major differences between these forms because this

Note’s proposal equally impacts both treaty-based and contract-based ISA.

7

There are three principal sources of law that guide a given arbitra-

tion: the applicable law of the dispute, the procedural rules controlling

3.

4.

5.

6. Id.

7. The corruption defense has been utilized in both treaty-based and contract-based ISA. Id. at

16, 18–19.

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