Kompetenz-Kompetenz 1The Doctrine of Kompetenz-KompetenzIn International Commercial Arbitration IntroductionInternational arbitration has been used to resolve disputes for a long time. As noted by one commentator: “Commercial arbitration must have existed since the dawn of commerce.” (Musthill, 2006) Unfortunately, another side of business transactions, corruption, has been around a long time also.
Inevitably, it has appeared in international commercial arbitration cases. This article reviews some of those cases and analyzes the evolving trends on how international arbitrators have dealt with this difficult issue. (Bribes, 1998, Martin, 1999, Levi & Raphael, 1999)Kompetenz-kompetenz refers to an arbitral tribunal’s power to determine whether it has jurisdiction to decide a controversy.( Wyss, 1997) Although the arbitrator’s power to rule on her own jurisdiction is generally recognized throughout the world, ICC case o.
1110(1963) is one of the first reported international arbitral awards dealing with corruption. The Comment will address the issue of kompetenz-kompetenz and separable doctrines. The ICC Case No. 8891 illustrating the role of the Arbitrator in the international policy issues.
Kompetenz-Kompetenz:The competence or jurisdiction of the arbitral tribunal to decide upon a contract involving corruption has been challenged in a number of arbitral awards. Probably the most well known case is ICC Case No. 1110 (Arb’n XXI (1996) 47) where the sole arbitrator, Judge Lagergren, disqualified himself as not having jurisdiction. That case has been subsequently distinguished (Wetter, 1963) on the grounds that the arbitration agreement was entirely separate and distinct from the contractual relationships of the parties.
Kompetenz-Kompetenz 2The doctrine of supremacy can be described as a principle that gives precedence to Community law over the law of the Member States within its proper sphere of competence. Thus, supremacy is not absolute per se. Hence, supremacy does not imply a universal subordination of Member State law to Community law. (MacCormick, 1995) The justification for supremacy given by the ECJ relates to the rule of law and the necessity of a coherent Community legal order.
This principle is supported by Article 16.1 of the UNCITRAL Model Law (UNCITRAL, 1985) and Article 21.2 of the UNCITRAL Arbitration Rules (UNCITRAL, 1976) which essentially say: “The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract.
A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.” As referred to in the Westinghouse case, Article 6(2) of the 1998 ICC Rules of Arbitration states: “the Court may decide, without prejudice to the admissibility or merits of the plea or pleas, that the arbitration shall proceed if it is prima facie satisfied that an arbitration agreement under the Rules may exist.”Doctrine of AutonomyThe issue of the separable or autonomy of the arbitration agreement (or clause) has been challenged in many corruption arbitral awards. Under this doctrine, the arbitration clause is separate and independent from the contract in which it is contained.
The effect of this doctrine is that the arbitration clause will survive and continue to be valid, even if the arbitral tribunal decides that the main contract is null and void because it involves bribery.Kompetenz-Kompetenz 3To illustrate the doctrine of autonomy the ICC Case no. 1110(1963), this ICC case is one of the first reported international arbitral awards dealing with corruption. It has been cited and criticized frequently for how it dealt with the Kompetenz-Kompetenz and autonomy doctrines.
This view of the case has been recently revised with a more complete understanding of what happened. (Yearbook Comm. Arb’n XXI 1996)Facts:The claimant was an Argentinean engineer who had acted as an agent for the respondent, a British company, in Argentina during the Peron era. The British firm wanted to sell electrical equipment to the Argentinean government for power plants in Buenos Aires.
Both parties agreed in 1950 to enter into an arrangement whereby the claimant would act as the agent for the respondent in Argentina. This was reduced to a series of very brief letters in which the respondent agreed to pay a total commission of 10% on the value of the order (split 5%, 2.5% and 2.5% and transferable to unnamed third parties).
This was allegedly reconfirmed in 1953 on a verbal basis.The claimant acted in such capacity until June 1955 when he was forced to go to Germany for medical reasons. Up to that point of time, the respondent had not made any sales to the Argentinean government. Then in 1958, the respondent, through a partnership, sold nearly £28 million of electrical equipment to the Argentinean government.
The partnership had retained another agent to assist in that transaction. He was paid nearly £1 million for his efforts. The claimant subsequently demanded 10% of the total sale under the 1958 sales contracts or £2.8 million based upon the commission set in the 1950 arrangements.
Kompetenz-Kompetenz 4Given the paucity of their contractual arrangements, the parties entered into a wholly separate and independent arbitration agreement prior to commencing the arbitration process.In the testimony provided at the arbitration, the respondent stated that the sole reason why the claimant was retained was “the quite remarkable degree of influence which he had with the political appointees of the Peronista Government.” Several other witnesses stated that the claimant had said that he would only retain about 2% of the commission with the remainder going to his collaborators.Neither of the parties argued that the 1950 agent contract was illicit nor necessarily invalid.
Rather, the respondent simply argued that the 1958 sale contracts awarded to the partnership and the respondent by the Argentinean Government were totally different from what was agreed upon in 1950 and allegedly reconfirmed in 1953. The claimant was not even present in Argentina when the new project was announced in 1956 and the awarding of the contracts to the respondent and its partnership could “in no way be attributed to any efforts or activities carried on by the claimant.”Opinion:The sole arbitrator, Judge G. Lagergnen, determined that the evidence “plainly established that the agreement between the parties contemplated the bribing of Argentine officials for the purpose of obtaining the hoped-for business” and that the amounts involved were huge.
Kompetenz-Kompetenz 5Judge Lagergnen examined, on his own motion, the question of his jurisdiction to decide upon a contract “condemned by public decency and morality.” He referred to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards which provided that the competent authority may refuse ex officio the recognition or enforcement of an award that would be contrary to the public policy of that country.He referred to the law of France, the seat of the arbitration or lex fori, and to Argentine law, the law of the place where the contract(s) were to be performed, lex locus solutiones. He concluded that both French and Argentine law would not allow this case to be arbitrated.
Judge Lagergnen then stated that “there exists a general principle of law recognized by civilized nations that contracts which seriously violate bonos mores or international public policy are invalid or at least unenforceable and that they cannot be sanctioned by courts or arbitrators.” He did not refer to any particular law, treaty or convention to substantiate this opinion but rather to “general principles denying arbitrators to entertain disputes of this nature.”Before providing his decision, Judge Lagergnen did note that “care must be taken to see that one party is not thereby enabled to reap the fruits of his own dishonest conduct by enriching himself at the expense of the other.” He recognized the dilemma of dealing with two parties with “unclean hands.
” He addressed this dilemma while setting the costs.He concluded that “a case such as this, involving such gross violations of good morals and international public policy, can have no countenance in any court either in the Argentine or in France, or, for that matter, in any other civilized country, nor in any arbitral tribunal. Thus, jurisdiction must be declined in this case.”Kompetenz-Kompetenz 6Judge Lagergnen decided that each party should pay its own costs and the arbitrator’s fees were to be divided equally.
Commentary:This case set the stage for dealing with corruption in international arbitral awards. Whether one agrees with the arbitrator’s disqualification of himself, the result if he declared himself competent to hear the case would likely have been the same. He found bribery and would likely have declared the contract invalid. Thus, the claimant would not have gotten his commission.
Does one therefore conclude that if the tribunal had found evidence of bribery that it would have invalidated the contract, the arbitration clause and the entire arbitration? Logic supports the application of the doctrine of separability in all instances. The parties have chosen international arbitration as their forum of dispute resolution. International treaties and national courts recognize and enforce arbitral awards. Therefore, one can only conclude that it is the arbitral tribunal’s responsibility to recognize the validity of the arbitral clause in these cases.
International Public OrderThe Community shall act within the limits of the powers conferred upon it by the Member States according to Article 5 EC. The Article is an expression of the principle of subsidiary. However, Article 5 seemingly limits the scope of power of the Community but does not give any guidance of what body should have the final say to determine whether or not theCommunity has acted within the limits of its attributed authority. The ECJ shall, according to Article 220 EC ensure that Community law is observed when interpreting and applying the Treaty.
However, as we have seen in previous chapters, the Treaty is silent on many issues such as the question of supremacy. The ECJ is therefore said to have a “gap-filling role”, in orderKompetenz-Kompetenz 7To fill the gaps where the Treaty itself gives no explicit guidance.115 through the case law of the Court it has established a constitutional structure for the European Community. (Craig and De Búrca, p.
97)The external Community competences concern the relationship between the Communities and the Member States and essentially relates to the question of Kompetenz- Kompetenz. The ECJ can declare a Community act invalid according to Article 230 EC on the grounds that a Community institution had exceeded its authority, and thereby exceeding its internal competence. Therefore, the ECJ has internal competence to declare invalid measures adopted by Community institutions. Furthermore, the ECJ has the right, according to Article 230 EC, to invalidate measures adopted by a Community institution in areas where the Community as a whole lacks competence.
To illustrate this doctrine let cite the case of Tobacco advertising (Case C-376/98)The facts of the case are the following. Germany wanted the ECJ to annul a directive on tobacco advertising. The objective of the directive was to harmonies the law relating to advertising and sponsoring of tobacco. The ECJ agreed with Germany and declared the directive invalid on the grounds of Article 5 EC that states that Community powers are limited to those specifically conferred on it.
The Court clearly held that aim of the directive was not to regulate the internal market, which was mentioned as the purpose of the directive, but designed to protect and improve public health. Public health is an area where the Community lacks authority to harmonies measures. Thus, the institutions had acted beyond their competence and thusKompetenz-Kompetenz 8The measure was consequently annulled by the ECJ according to Article 230 EC. The Tobacco Advertising case illustrated the wish of the ECJ to work against “creeping competences” of the Community.
122 It held clear that the Community cannot adopt measures that are based on legal norms other than those expressly conferred to the Community through the Treaty. Otherwise, the rule of law may well be under threat if Community measures are founded on false pretences such as in the Tobacco Advertising case where the Court regarded the real objective to be public health and not to purposely improve conditions for the internal market.Moreover, Article 308 states that the Council can take appropriate measures, acting unanimously, if an action of the Community is necessary to obtain for the course of the operation of the common market and neither the objectives of the Community nor the Treaty provide powers to take such an action. Not all articles in the Treaty provide the Community with specific legislative powers in certain fields.
An example of this is consumer protection. InitiallyConsumer protection was not enshrined in the EC Treaty.However, long before Article 153 EC (consumer protection) was adopted, the Community took actions in the field of consumer protection such as food labeling. Hence, Article 308 EC was used to give legislative power in fields before they were regulated through Treaty amendments.
The legal basis for this was of Article 308 EC. Craig and De Búrca believe Article 308 EC to provide the Community with valuable legal authority in a field where it lacks specific legislative powers. (Craig and De Búrca, p. 125.
) However, the use of Article 308 EC of the Community has been criticized by Weiler (1991) He argues that the Article has been too widely interpreted by the Community. The measure taken by the Council must be founded on an objective not expressly stated in the Treaty. The Community cannot adopt measures in conflict with the subsidiary principle.Kompetenz-Kompetenz 9Furthermore, this authority does not give a general power to the Community to act in areas that lay outside the objectives of the Treaty.
Craig and De Búrca argue that the wide interpretation used by the ECJ has not given enough limitation on the Council. (Craig and De Búrca, p. 125.)There is of course a threat of “creeping competences” if the Article is used too broadly.
Furthermore, the Community can be said to have implied powers in certain areas. These powers have already been expressly conferred to the institutions of the Community. The Community may take actions on the grounds that a certain Treaty article contains an implied power for the Community to adopt measures. Thus, the implied power signifies that there must be an underlying power on which the implied power is based.
These powers are mostly used in the field of external relations. (Craig and De Búrca, p. 125.)The paragraph will examine the standpoint of the ECJ and the dichotomized position held by the German Constitutional Court as well as highlighting the intense legal debate on Kompetenz-Kompetenz.
Role of Arbitrator The previous chapter has looked at the internal and external competences of the Community. According to Article 5 EC, the Community must act within the competences the Treaty has attributed to it. Moreover, a measure adopted by the Community can be annulled if Community institutions have exceeded their competences. However, it is far from clear where the extent of the boundaries of Community competences lay and this is often open to different interpretations.
Craig believes the crucial question to be who should have the final authority to decide whether a Community measure is intra or ultra vires. (Craig, supra note no. 2, p. 2.
)Kompetenz-Kompetenz 10The issue relates to the right of final power to decide the constitutionality of Community law. Ultimately, who holds the authority to define the legal limits of the Community? Essentially, who is the final arbiter to determine the constitutionality of Community law, the Member States or the ECJ?An arbitrator, unlike a judge in a national court, is appointed at the request of the parties having the contractual dispute. His role can therefore be viewed quite differently than a judge. Put another way: “Is the arbitrator the servant of the parties, or of the truth?”(Sighart, 1982).
The arbitrator may assume that he only needs to address the particular interests of the parties in the arbitration and need not be concerned with international policy issues.That may no longer be the case in the area of corruption. The international rule of law that bribing government officials is illegal and those charged with the administration of justice, including international arbitrators, have the responsibility to ensure that such laws are applied properly.ICC Case No.
8891(1998) (Journal du Droit International 4) illustrates this proactive approach where the tribunal considered the issue of burden of proof. According to the rules on burden of proof, it is incumbent upon the party claiming illegality to prove this fact. This classic case replays the scenario of an agent seeking payment of its commission under a consulting agreement with a company wishing to win new business in a foreign country. In looking at the contract, the arbitral tribunal took a proactive approach in establishing the evidence on whether bribery existed (Journal du Droit International 4 (2000) 1076).
Facts:Kompetenz-Kompetenz 11The reported case is short on the background of the dispute. However, one can deduce that the plaintiff was a Swiss company whose principal was a French national and that the defendant was affiliated to France. The plaintiff acted as an agent of the defendant under an agreement in which the plaintiff had the responsibility of increasing the price obtained by the defendant under two government contracts. There is no indication in the case of the particular government involved.
The defendant failed to pay the agreed upon commission of 18.5% to the plaintiff and the result was that the plaintiff initiated legal action to claim his fee. The defendant first claimed that the consulting agreement had reached the end of its term and then argued that the purpose of the agreement was corrupt thus making it void. The arbitration clause gave the arbitrators the powers of an amiable compositeur but did not specify the applicable law.
The parties agreed upon ICC arbitration.Opinion:The arbitral tribunal noted that both French law, which was closely linked to the contract between the parties because of its affiliation to the defendant and the nationality and domicile of the principal actor of the plaintiff, as well as Swiss law, the country of incorporation of the plaintiff, consider corruption as contrary to both internal public order and to international public order. If the contract was found to be illegal, the consequence would be the voiding of the contract. In analyzing the case, the arbitral tribunal confirmed that based upon the doctrine of separability, an arbitration clause in a voided contract was not affected by the nullification of the main contract itself.
The tribunal considered the issue of burden of proof. According to the rules on burden of proof, it is incumbent upon the party claiming illegality to prove this fact. The tribunal noted that in alleging corruption, this is usually a very difficult task. In fact, the illicit object of the contract is generally hidden behind apparently insignificant contractual clauses.
That is why arbitrators are left with no other choice than to analyze the clues. To review the evidence and to address the burden of proof, the arbitral tribunal, based on arbitral doctrine and jurisprudence, identified the following criteria or signs:Kompetenz-Kompetenz 12The agent inability was to submit proof activity. The refusal by the agent to provide explanations regarding his activity constituted a fortiori sign. The duration of the agent’s with the involvement in contract.
A very short duration indicates signs of corruption. The remuneration under the contract is in the form of a commission based on the amount or value of the contract signed by the business client. A particularly high rate of commission raises a flag and leads to the presumption that the intermediary is disbursing money to government officials. The tribunal noted that it is rare for a simple agent to receive commissions greater than 1% or 2%.
One needs to establish both the accepted practice regarding commissions, and compare the amounts provided to the agent with the efforts expended by him. The tribunal then analyzed the evidence based upon the above criteria. It found the following: Duration of Plaintiff’s Involvement.The duration of this particular plaintiff’s involvement in the government contracts was approximately 2 ½ months.
The arbitral tribunal found this period to be extremely short given the task assigned and felt that it was a sign of corruption. Method of Remuneration the plaintiff’s remuneration was a percentage of the increase in the contract price obtained from the government ministry. The tribunal held that this was not a determining factor and, in fact, several witnesses explained that this “success fee” method of calculation was common practice in the country rate of Commission. The commission of 18.
5% was deemed particularly high and the arbitral tribunal found that this indicated that the plaintiff was disbursing significant sums of money to third parties.Kompetenz-Kompetenz 13Agent’s Activities the activity of the agent was barely documented in the proceedings. Indeed it was hard to define exactly what the plaintiff accomplished. Given the statements of some of the witnesses, the tribunal concluded that the plaintiff’s task was to ensure that monies were paid to third parties.
The tribunal thus concluded that this was a particularly strong indication that the purpose of the consulting contract was illicit.The tribunal noted that the testimony from several witnesses provided very explicit confirmation that influential people had to be guaranteed payment if one was to win deals. The tribunal also noted the absence of the President and General Manager of the plaintiff, even though he was requested to appear in front of the tribunal. This led the tribunal to determine that he was deliberately avoiding having to testify in the matter.
There was also a series of invoices and telexes that alluded to payments to government officials. This provided further corroboration that the object of the contract was to engage in illicit activity.The convergence of all these indicators resulted in the arbitral tribunal concluding that the object of the consulting contract was to obtain from the Ministry an increase in the defendant’s contract price by handing out pots de vin or bribes to government officials. In the opinion of the tribunal, all of these signs in their aggregate left no shadow of a doubt that the intention of the parties, at the time of signing the contract, was to engage in bribery.
Kompetenz-Kompetenz 14The arbitral tribunal declared the consulting contract void and dismissed each of the claims of the plaintiff. In doing so, the tribunal referred to the growing international consensus condemning bribery of government officials. In particular, it referred to the OECD Convention of 1997 dealing with corruption. The arbitral tribunal ordered the plaintiff to pay two-thirds of the arbitration costs while the defendant was to pay one third because of its ambiguous behavior.
Finally, the arbitral tribunal noted that voiding a contract for bribery causes the party who benefited from the services to be relieved from having to pay the price agreed upon to the consultant. This was undoubtedly an unpleasant consequence but it was not sufficient to legitimize a contract whose purpose was illicit.Commentary:ICC Case No. 8891 takes a strong, proactive approach in dealing with the issue of corruption.
As the tribunal clearly stated: “To ask arbitrators who hand out justice, to condone this type of practice is inconceivable to this tribunal.” The award affirms and re-enforces the clear duty of international arbitrators to penalize parties who ignore the principles and rules of the international public order concerning corruption. The approach of this award contrasts with the more passive position taken by arbitral panels in other cases.ConclusionInternational arbitral tribunals and their administering institutes are faced with difficult and complex challenges when allegations or suspicions of corruption arise in an international arbitration.
Arbitrators must be cognizant of their obligations and properly apply them to their decisions. As shown in the reviewed arbitral decisions, the approach of the arbitrators is very decisive to the conclusions reached.Kompetenz-Kompetenz 15On the other hand, this paper also attempted to address the questions of supremacy ofCommunity law will be intertwining issue of the legal boundaries of the community. As stated by MacCormick, supremacy does not entail an all out subordination of Community law over national law nor does it imply that the national constitutions as a whole shall yield to Community law.
213 It is clear that Community law cannot take precedence over national law in a field where the Community lacks competence.The debate on competences, stemming from that of supremacy, has been a lively one, with dichotomized views expressed both by the ECJ and national courts, and amongst legal scholars. The German Constitutional Court defied the ECJ be stating that it had certainly not relinquished the authority to declare the unconstitutionality of Community acts and thereby rejected the ECJ’s claim to judicial Kompetenz-Kompetenz. Kompetenz-Kompetenz 16References A.
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