Let the Chips Fall Where They May or Where the Arbitral Tribunal Arranges Them

Insight From Hindsight Issue 25 Article

By: Gabriella Morello, Associate and Carolina Machado, Associate Hogan Lovells

Statistics from the Organization for Economic Cooperation and Development (OECD) suggest that anti-corruption provisions often contained in construction contracts are frequently ignored: Two-thirds of cases involving bribery in 2014-15 arose from construction, extraction, transportation and storage, and information and communication contracts. Importantly, many of these construction contracts are subject to the long reach of anti-corruption legislation, such as the United States’ Foreign Corrupt Practices Act (FCPA), the United Kingdom’s Bribery Act, and Canada’s Corruption of Foreign Public Officials Act. Most recently, these companies and projects have also become subject to anti-corruption regulations implemented by countries in developing regions, like Latin America and Africa.

Although corruption practices are widespread globally, construction companies and projects in developing regions have become a major focus of corruption and bribery investigations at a local and international level. Construction projects in developing countries are subject to a significant number of international players, complex and multitiered engagements, and underdeveloped local compliance and anti-corruption measures, leading to increased risks of corrupt practices and heightened attention from governmental anti-corruption bodies. Such risks are not to be taken lightly: Anti-corruption legislation under the FCPA imposes hefty criminal and civil charges against U.S. individuals and companies doing business in the U.S. and abroad, as well as companies that register securities or are required to file reports with the U.S. Securities and Exchange Commission. Further, countries like Argentina, Chile, and Brazil, among others, have implemented local anti-corruption and transparency regulations by imposing criminal and civil sanctions for bribery and failures to disclose conflicts of interest in the procurement and execution of contracts.

In light of these recent trends, Latin American companies engage in projects that are governed by local and extraterritorial anti-bribery and anti-corruption regulations, and increasingly incorporate anti-corruption clauses into their contracts. Importantly, for the construction sector — one of the industries suffering the most from pervasive corruption — many of these contracts are enforced through international arbitration. Indeed, anecdotal evidence suggests that a potentially large number of disputes resolved through international arbitration in the construction sector, involving state companies and officials in particular, involve illegality. Consequently, arbitral tribunals are constantly faced with the challenge of making decisions regarding the so-called illegality defense, “an affirmative defense resembling the common-law defense of unclean hands, which bars a claimant from recovery if he is guilty of some injustice concerning the very matter for which he seeks relief.” The arbitral tribunal’s challenge is multifaceted: First, it must decide whether to retain jurisdiction of the case despite the corruption allegations; second, it is tasked with determining the appropriate award once illegality is established; finally, it must ensure that the parties “do not use the arbitral process as a shelter to give effect to agreements tainted with corruption or obtained by bribery.” This article examines emerging trends to illegality claims and defenses, the standard of proof for corruption allegations, and the results of proving illegality.

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