PROMISES UNFULFILLED: HOW INVESTMENT ARBITRATION TRIBUNALS MISHANDLE CORRUPTION CLAIMS AND UNDERMINE INTERNATIONAL DEVELOPMENT.

Author:Bulovsky, Andrew T.
 
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In recent years, the investment-arbitration and anti-corruption regimes have been in tension. Investment tribunals have jurisdiction to arbitrate disputes between investors and host states under international treaties that provide substantive protections for private investments. But these tribunals will typically decline to exercise jurisdiction over a dispute if the host state asserts that corruption tainted the investment. When tribunals close their doors to aggrieved investors, tribunals increase the risks for investors and thus raise the cost of international investment. At the same time, the decision to decline jurisdiction creates a perverse incentive for host states to turn a blind eye to corruption. Together, these distorted incentives hinder developmental goals and undermine the fight against corruption. To correct these problems, this Note proposes a framework to guide arbitral tribunals when faced with a corruption-tainted dispute. Specifically, this Note argues that when both parties participate in corruption, arbitral tribunals should invoke equitable estoppel to accept jurisdiction over the dispute. When considering the corruption claims, investment tribunals should use a contributory-fault approach that evaluates each party's role in the corrupt act to determine the final award. This framework not only helps align the investment-arbitration and anticorruption regimes but also advances developmental objectives.

Table of Contents Introduction I. The Rise of the Modern Investment Treaty A. The Purpose of International Investment Treaties B. Bilateral Investment Treaties and Investment Arbitration C. The Interplay Between Investment Arbitration and Anti-Corruption II. Investment Tribunals and the Mishandling of Corruption Claims A. The Current Mishandling of Corruption Claims B. Mishandling Corruption Claims Undermines Anti-Corruption Efforts C. Mishandling Corruption Claims Undermines International Development III. The Potential Adjudication of Corruption Claims A. The Proposed Framework B. Aligning Investment Arbitration and Anti-Corruption C. A Path Forward for International Development Conclusion INTRODUCTION

On February 24, 1998, the Kenyan government seized control of World Duty Free's stores inside the Nairobi and Mombasa International Airports. (1) The government had one goal: destroy evidence that World Duty Free obtained the contract for their duty-free stores through a bribe of approximately $ (2) million to Kenyan President Daniel arap Moi's reelection campaign. (2) After the Kenyan government seized the stores, World Duty Free, an Isle of Man corporation, initiated investor-state arbitration (3) under the bilateral investment treaty between the Isle of Man and Kenya. (4) Although the arbitral tribunal acknowledged that President Moi solicited the bribe, (5) the tribunal declined to exercise jurisdiction over the dispute because the initial deal was tainted by corruption. (6) As a result, World Duty Free lost its investment and President Moi retained the $2 million. (7) The tribunal's refusal to exercise jurisdiction over World Duty Free's case illustrates an evolving dilemma in investment arbitration. How should tribunals handle disputes tainted by corruption allegations?

Investment tribunals are empowered to arbitrate disputes between host states and investors under international legal frameworks that provide substantive and procedural protections for private investments. (8) Numerous host states, however, have argued that investments tainted by corruption or similar illegality do not qualify for protection and thus that tribunals lack subject-matter jurisdiction (9) over these disputes. (10) Arbitral tribunals have been responsive to these host states' arguments and have declined to exercise jurisdiction over disputes tainted by corruption. (11) When investment tribunals decline to exercise jurisdiction over these disputes, however, tribunals undermine their intended purpose to incentivize investment (12) and promote development. (13) To remedy this predicament, this Note proposes a framework for the adjudication of corruption claims in investment arbitration. It argues that tribunals should invoke equitable estoppel to accept jurisdiction over the dispute and use a contributory-fault approach to determine liability. (14) This framework would bolster the investment-arbitration and anticorruption regimes, thereby incentivizing investment and promoting development.

Part I traces the history of international investment treaties and discusses their intended role in promoting economic development. Part II argues that investment tribunals' mismanagement of corruption claims undermines the purpose of these treaties. It also explains how this phenomenon subverts the global fight against corruption. Part III advocates that arbitral tribunals should accept jurisdiction over disputes tainted by corruption and evaluate each party's role in the corrupt act. Ultimately, this Note presents an actionable solution to an increasingly salient issue in investment arbitration and international development.

  1. THE RISE OF THE MODERN INVESTMENT TREATY

    Since World War II, international investment has been recognized as a valuable tool for achieving economic-integration and developmental goals. (15) Achieving these goals, however, required adequate incentives and protections for investors. Bilateral investment treaties and their dispute resolution systems, commonly known as investment arbitration, provided those incentives. Section I.A highlights the history of international investment treaties and describes the developmental goals articulated at the Bretton Woods Conference in 1944. Section I.B explains the nature of bilateral investment treaties and investment arbitration. Section I.C describes the overlap between the investment-arbitration and anti-corruption regimes.

    1. The Purpose of International Investment Treaties

      International investment treaties date back to the late eighteenth century, when countries began forming treaties of friendship, commerce, and navigation to promote commercial relations between signatories. (16) The first agreement of this type was the Treaty of Amity and Commerce, (17) signed by the United States and France in 1782. (18) Although their provisions were broader than those in modern investment treaties, the early treaties had the similar goal of protecting the interests of nationals whose states were parties to the treaties. (19) For instance, these treaties sought to protect nationals' property abroad and guaranteed them favorable trading terms in exchange for conducting business in the foreign country. (20) Over the next (150) years, countries steadily formed treaties and global investment increased. (21) But after the Great Depression and two world wars, the global economy collapsed. (22)

      Western world leaders who grew weary of the bloodshed saw economic integration as the key to secure and maintain world peace. (23) In 1941, President Franklin D. Roosevelt and Prime Minister Winston Churchill laid the groundwork for this peace in the Atlantic Charter. (24) In the Charter, they articulated an international interest in reducing trade restrictions and promoting economic integration. (25) They strove to "bring about the fullest collaboration between all nations in the economic field with the object of securing, for all ... economic advancement." (26) The Atlantic Charter was premised on the theory that with a sufficient level of economic integration, the conditions that led to war in the first place might be ameliorated. This philosophy also inspired the Bretton Woods Conference of 1944. (27)

      At the Bretton Woods Conference, world leaders created the International Bank for Reconstruction and Development (which would eventually become the World Bank) and the International Monetary Fund (IMF) to help manage the global monetary system. (28) The International Bank and the IMF helped liberalize trade, which bolstered global economic growth and promoted international investment. (29) Although foreign investment cannot cure all of a society's ills, "it can provide a way to jump-start economies, a short cut to higher wages, an improved infrastructure, better schools and hospitals, and more efficient and cost effective public services." (30) Numerous provisions in the Bretton Woods Agreement specifically sought to achieve these developmental goals (31) as a means to secure peace. (32) But as the world grew more economically integrated and concerns about uncompensated expropriation increased, the international investment community demanded stronger protections for investors. (33)

    2. Bilateral Investment Treaties and Investment Arbitration

      Bretton Woods laid the foundations for the post-WWII economic order. But at the same time, some developing countries--particularly those pursuing import-substitution policies (34)--closed their doors to investment. (35) Even in countries that allowed investment, there were numerous cases of expropriation where the host government seized private property for state control. (36) The old treaties relied on norms of customary international law, which sought to generalize the legal practices of states. (37) But customary international law was too weak to protect investors because of its inconsistent enforcement and limited protections. (38) To achieve the economic-integration and developmental goals envisioned in the Atlantic Charter and enshrined at Bretton Woods, the international community needed to incentivize investment in an uncertain environment. This meant finding a tool to "provide clear rules and effective enforcement mechanisms" for investors (39) and thus reduce risks. (40)

      Bilateral investment treaties (BITs) were that tool. (41) BITs create a "legal framework to facilitate and protect those investments" (42) by imposing obligations on host states regarding the basic substantive and procedural protections states must afford to...

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