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THE CRIME OF FORTIFICATION AND THE DOGMA OF IMPEDIMENT IN THE INVESTOR STATE DISPUTES (By- Yash Patil)
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THE CRIME OF FORTIFICATION AND THE
DOGMA OF IMPEDIMENT IN THE INVESTOR STATE DISPUTES
Authored By- Yash Patil
Abstract
In order to bring about the
jurisdiction of an investment tribunal, it is necessary to fulfil the
conditions of the definition of the term “investment.” In this context, the
word “investment” is defined by the contracting governments in accordance with
the bilateral investment treaties that they have in place with one another
(BIT). The basic criterion for an investment to be considered legitimate is for
it to be in accordance with the laws of the state in which it will be carried
out. The investor has the right to be treated fairly and equitably (FET), which
is required by the substantive safeguards granted through BITs as well as the
minimal standard treatment under customary international law. This right has
been bestowed to the investor. In situations when the investment was obtained
via unethical business tactics, there is room for ambiguity. Most of the time,
state authorities are complicit in the fraudulent dealings that take place.
Nevertheless, the investor is the one who is responsible for bearing the
repercussions of engaging into such an agreement. This piece of writing has
been broken up into three sections, each of which addresses a different aspect
of the question of whether or not the concept of estoppel may be used in
arbitral proceedings. In the first place, the purpose of this study is to
discuss the perspective that arbitral tribunals use while hearing cases that
include the corruption defence. In the second part of the study, the author
investigates whether or not the legal principle of estoppel may be used in
investment arbitration. In conclusion, the purpose of this research is to
investigate the proper course of action that may be taken in circumstances like
these.
Introduction
Because of the increased volume of
trade and commerce that takes place between countries, liberal economic
institutions have contributed to a higher degree of interdependence in the
global economy.[1] As a
direct consequence of expanding commerce, the need for adequate security of
assets made on foreign land becomes a topic of concern for both private persons
and national governments.[2]
The Bilateral Investment Treaties that nations have signed with one another
have helped to direct investments made on other countries territory.[3] In
point of fact, the number of investment treaties that have been finalized over
the course of the last two decades has seen a significant uptick.[4]
The recent increase in the number of bilateral investment treaties is
illustrative of the desire on the part of every state to offer investment
protection to private investors in order to entice investments.[5]
In the event that a disagreement over
the protection standards envisioned by the treaty develops, the BIT that is in
place between the contracting nations will serve as the substantive legislation
(lex specialis) that would regulate any arbitrations that are initiated.[6]
These contracting states consequently define “investment” in line with their
own standards, one of the most essential aspects of which is that an
“investment” is “it must be in invested in accordance with the legislation
of the host state.”[7]
Because of the nature of the dealings
that take place between nations and investors, there are
almost always indications of bribery
or corruption present.[8] An
investment that is predicated on corruption is considered to be illegal
according to the parameters of an investment that are outlined in the majority
of contemporary Bilateral Investment Treaties. This is because such unlawful
methods are involved.[9]
Many times, states are able to get out of their responsibilities under the
Bilateral Investment Treaty by alleging that investments are unlawful.[10]
If such a claim is shown to be true, it will have the consequence of causing
International Centre for Settlement of Investment Dispute’s tribunals to reject
jurisdiction over the dispute.[11]
It is obvious, and has been pointed
out by a number of eminent writers, that any business transaction that is
finalized on the basis of bribery and corruption would always be conducted in
secret.[12]
In contrast to a private transaction, wherein the contract is voidable at the
request of any of the parties in the event of a fraudulent transaction, in
investor-state disputes, only the investor bears the risk of entering into such
an arrangement. In a private transaction, the contract is voidable at the
request of any of the parties in the event of a fraudulent transaction. This
problem has been seen in a multitude of arbitral awards; in these cases, state
actors have initially promoted a corrupt investment, but this enables the state
to subsequently claim illegality of investment when questioned on the treatment
accorded to the investors. This is a problem because it allows the state to
avoid responsibility for its actions.[13]
If corruption is so deeply rooted in the system, there may be circumstances in
which an investor is left with no other option except to pay bribes to public
officials in order to secure the investment.[14]
This provides the state with a very handy platform from which to expropriate
the investor’s assets and then, later, allege that the investment was unlawful
on the grounds that it was founded on corrupt practices.
Therefore, the question that emerges
is why, if the state is profiting off of the investment that it has itself
authorized unlawfully, it should not be placed on the same pedestal as the
investor. This is because the state itself is engaging in criminal activity. In
this paper, we will investigate the methodology utilized by a variety of
investment arbitration tribunals and provide an in-depth analysis of that
methodology. Based on our findings, we will then propose a methodology that is
ideally suited to examine investments in a manner that is congruent with the
principles of international law.
The
Strategy Used By Tribunals In Situations Involving The Defence Of Corruption.
The approach used by tribunals in
matters involving corruption has often consisted of determining that any
investments discovered to be based on corruption are unlawful and, as a result,
refusing to exercise jurisdiction over the resulting disputes.[15]
The first of these judgements was handed out when the International Chamber of
Commerce was presiding over the proceedings. The judge who presided over the
court in International Criminal Court Case No. 1110, which was the first
prominent case to refuse jurisdiction owing to the prevalence of corruption in
the acquisition of investment, was Lagergren.[16]
He was of the opinion that such corruption, even if it were completely
essential to launch an investment in a certain jurisdiction, is unethical and
must cause the transaction to be deemed illegitimate.[17]
The fundamental line of thinking that
underpins these kinds of judgements is that corruption violates the fundamental
principles of international public policy and is thus prohibited in the
majority of legal systems.[18] “Basic
laws of natural law, principles of universal justice, jus cogens in public
international law, and the broad standards of morality acknowledged by
civilized countries” are all examples of what are referred to when
discussing “transnational public policy.”[19]
The action of the opposite party is
made irrelevant for the purpose of the tribunal's adjudication if there has
been a breach of an international public policy, since this is a concept that
is widely recognized and adhered to.[20]
Due to the fact that the investor has engaged in unethical behavior, he or she
is simply unable to file a claim in the investment treaty arbitration.[21]
To guarantee the promotion of the rule of law, which necessitates that a court
or tribunal cannot offer aid to a party that has engaged in corrupt behavior,
the goal here is not to penalize one party at the expense of the other. Rather,
the intention is to ensure that the rule of law is promoted.[22]
Therefore, regardless of whether or not the state was involved in the
corruption, the fact that the investor engaged in an unlawful conduct means
that his claims cannot be upheld since the investment is no longer protected by
the Bilateral Investment Treaty. The state emerges unscathed from the inference
of such a rejection of jurisdiction with a clean slate. The state is in the
wrong when it has either encouraged corruption or created conditions in which
engaging in corrupt behavior was essential in order to make the investment.[23]
In both of these scenarios, the state is at fault. Therefore, not punishing the
state goes against the concept of “nemo auditor turpitudinem allegans,”[24]
which essentially implies that no one may be heard to invoke his or her own
turpitude. This principle is violated when the state is not punished. As an
extension to this maxim is another one, which is called “in pari causa
turpitudinis cessat repetitio.” This maxim states that when both parties
are culpable, no one may prevent a court from participating in a dispute that
involves an illegal transaction. This maxim is an extension to this maxim. It
is not hard to understand that the traditional method of doing things results
in a contradiction in the legal system.
State officials and staff are often
complicit in engaging in corrupt activities such as making corrupt
representations and partaking in various forms of corruption.[25]
In addition, the majority of instances of corrupt investments involve the state
deliberately looking the other way for a considerable length of time while
corrupt actions are carried out.
Therefore, it is not righteous in
such instances, as recognized by many International Centre for Settlement of
Investment Disputes courts, to let the State to deploy the corruption defence
only when a claim arises against them for the infringement of investor rights.
This is because the State may be accused of violating the rights of investors.[26]
When the state deliberately ignored breaches of its own law and gave its
blessing to an investment that was not in conformity with its law, the state
would be precluded from later using those violations as a jurisdictional
defence. This is known as estopped.[27]
When the state does not bring any criminal charges against anybody, it cannot
allege that an investment was made illegally on the basis of corruption, since
this is a well-established principle.[28]
In the case of Metal-Tech v.
Uzbekistan, the respondent state, Uzbekistan, was successful in using the
corruption defence in order to avoid legal responsibility.[29]
Metal-tech has collaborated with two different businesses from Uzbekistan to
form a joint venture. The disagreement began when the joint venture failed to
disburse the owed dividends and an insinuation was made about the possibility
of filing for bankruptcy against it. The tribunal declared that it did not have
the authority to investigate the charges of bribery made against Metal-tech
because it lacked jurisdiction due to the fact that the investment made by
Metal-tech in Uzbekistan was founded on corruption.[30]
After determining that the Respondents were successful in their claim, the
court just requested that they split the expenses of the proceedings with the
opposing party since Metal-tech had made an attempt to keep those costs to a
minimum.[31] Because
of the Metal-Tech case, the amount of due diligence that international
investors do before making investments in a foreign area has significantly
risen.
Another important precedent was set
in this area by the judgement in the case of Wena Hotels vs. Egypt.
After putting all of the facts and
evidence into the record, the tribunal came to the conclusion that it could not
absolve Egypt of its responsibility because the country had failed to bring
charges of corruption against the consultants involved, despite having adequate
knowledge of the relevant circumstances.[32]
In addition, the Paris Court of Appeal has decided that it is not sufficient to
find in favor of the State based on mere claims without indicting or
prosecuting the individuals who are said to have benefited from the corruption.[33]
This decision was made. As a result, investment tribunals have taken a
conflicted stance when dealing with the anti-corruption defence put out by
Respondent States. In the next part, we will investigate whether or not the
doctrine of estoppel may be applied, as well as whether or not it is the best
course of action.
The Extent
To Which The Doctrine Of Estoppel May Be Applied.
It is a common concept of state
accountability in international law that nations may be held accountable for
the actions of its officials when such officials are exercising components of
their governmental power.[34]
As a consequence, the activities of state officials bind the state, and the
state itself may be held responsible for such actions. The viability of the
theory of estoppel as an instrument of application in international law may be
traced back to this fundamental precept. The concept of estoppel, which is
found in international law, makes it impossible for a state to retract some
assertions that it has already stated.[35]
The idea known as “nullus commodum capere de sua injuria propria,” which
translates to “no one may be permitted to take advantage of his own wrong,”
served as the inspiration for the development of this theory.[36]
Since the corruption might be ascribed to the State as well, it would be
against the international norm of logic and proportionality to offer entire
immunity to the State.
In international investment law,
there is not a lot of backing for the practice of applying the theory of
estoppel to conflicts between investors and states.[37]
Under normal circumstances, the law of estoppel does not prevent a state from
bringing up a corruption defence. When applying the theory of estoppel, there
must be a clear declaration of truth that is voluntary, unconditional, and
permitted, and that is also relied on to the opposing party's disadvantage for
the doctrine to be applicable.[38]
The taking of bribes is virtually
never made public, and the practice of corrupting public officials is almost
always prosecuted.[39]
Where a state has made positive affirmations that have triggered the acts of
investors, the theory of estoppel may be used as a rule of international law.
However, this is only the case when the doctrine is relevant.[40]
On the other hand, given the covert
nature of the dealings, it is highly unlikely that any investor would be able
to prove that they had placed undue reliance on a precise, unqualified, and
officially sanctioned statement made by the state indicating that it would be
acceptable to pay a bribe. This is because it is highly unlikely that the state
would make such a statement. It is feasible for a state to make the argument in
this instance that it cannot be held accountable for the criminal activities of
its officials if those persons are not “cloaked with governmental authority.”
This is one of the defences that a state may use. This is one of the several
defences that a state may utilize in this situation. It follows that the State
may not be held accountable for the private activities of the officials “when
the behavior is so far from the scope of their official responsibilities that
it should be equated to that of private people, not traceable to the State.”[41]
In the majority of instances, officials who engage in corrupt behavior do so in
order to further their own personal interests, which are unrelated to their
official responsibilities.[42]
The “scope of employment” of state officials
cannot be expanded to include activities that are carried out privately and for
the purpose of gaining personal advantage.[43]
The concept of public policy known as
“ex dolo malo non oritur actio,” which asserts that no court will assist
a man who founded his cause of action upon an immoral or unlawful act, is the
rationale that underpins the belief that the claimant should be held
accountable for the damages.[44]
The public, or in this instance, the
vast majority of people who pay taxes and other citizens of the nation, is who
the law is intended to protect, not the parties involved in the legal dispute.[45]
Therefore, in light of the fact that the investor is unable to substantiate his
claims without depending on an unlawful conduct, the theory of clean hands
rules that his claims cannot be upheld.[46]
The defence of a complicit state, on the other hand, is likewise founded on an
unlawful conduct for the same reasons. Therefore, as a result of extending immunity
to the state, both parties to the agreement are being treated differently
despite the fact that they share the same factual matrix.
Appropriate
Method Of Handling The Situation
There is a significant problem that
is hurting the fairness of investment treaty arbitration, and that problem is
the habit of invoking corruption as a defence in order to avoid responsibility
resulting from a violation of treaty responsibilities towards investors.[47]
It is vital for the tribunals to strike a balance between the risks posed by
both parties and to treat them in an equitable manner.[48]
In the event that the State is permitted to employ the corruption defence to
its benefit, the responsibility of entering into an agreement based on
fraudulent acts lies solely on the investor who entered into the agreement.[49]
Despite the fact that investors must not be exonerated of the wrongdoings they
have committed, they should not be the sole party to carry the whole weight of
the consequences
of the fraudulent transaction.[50]
In spite of the fact that it did not decide to alter the practice, the
Metal-Tech tribunal did admit that granting blanket immunity to the defendant
party in instances involving corruption might lead to an undesirable
conclusion.[51] In
these kinds of circumstances, the standard procedure entitles the state to
immunity from additional culpability while also allowing it to share in the
expense of any legal actions that are necessary.[52]
The corruption defence enables the
state to engage in corrupt activities during the acquisition of the investment,
to handle the investment in an unjust and arbitrary way by expropriating it,
and to subsequently use the corruption defence as a legal justification for
these acts.[53]
Therefore, in order to discourage such a mindset, it is necessary for the state
to be held to the same level of liability as private parties and to be
prevented from asserting that it is entitled to immunity in situations in which
it was the primary cause of the corruption. In such a circumstance, even when
the investment becomes illegal as a result of the rules of the Bilateral
Investment Treaty, the tribunal shall not rule out its jurisdiction
notwithstanding the fact that the provisions have rendered the investment
unlawful. Instead, one should investigate several other possibilities in order
to guarantee that all parties are subjected to the same risks and are handled
in an equal manner.
If the investment of the investor has
been actively promoted by the Host State for a significant period of time
despite being fraudulent at the time of inception, then the Host State should
not be granted the privilege of using the corruption defence simply because
certain claims of unfair and unjust treatment lie against them. This is because
using the corruption defence would give the Host State an unfair advantage.[54]
To acknowledge claims stemming from an investment that are founded on
fraudulent behavior is a violation of the fundamental norms of international
law. Permitting a state to profit from its own violations of international law
is another violation of the fundamental principles underlying this body of law.[55]
Therefore, in order to create a balance, if it can be established that
obtaining the investment without indulging in corrupt acts was impossible
or that such indulgence was induced
by the state itself, then the state shall be estopped from raising the plea of
illegality on the grounds that bribery or corruption was involved. This is
because it is impossible to obtain the investment without indulging in corrupt
acts. Consequently, in order to create a balance, if it can be established that
obtaining the level of financial reward that is bestowed upon investors ought
to be proportional to the amount of profit generated by the investment.[56]
Conclusion
When a conflict emerges between an
investor and a state in another country, there is sometimes an element of
mistrust present. The Host State is constantly on the lookout for defences
under the BIT that would allow it to escape the jurisdiction of the tribunal so
that it may avoid having to pay the compensation that is being sought. The
corruption defence is a popular strategy used by the Host State. In this
strategy, the Host State asserts that the investors engaged in fraudulent
conduct at the beginning of the transaction, which the Host State considers to
be their fault for engaging in such behavior. If a matter is brought before an
international tribunal with the intention of violating the norm of good faith,
then it is generally understood that the case will be dismissed. Because of the
charges of corruption, the investment is now unlawful under the terms of the
Bilateral Investment Treaty, and the tribunal can no longer exercise its
jurisdiction over the matter. This gives a simple platform for the state to engage
in corrupt agreements with the investors and, later, to immunize itself from
any responsibility by creating a corruption defence. Consequently, this makes
it possible for the state to immunize itself from any culpability. When a
defence like this is used, the investors are often coerced into paying bribes
to state authorities at the time of entering into an agreement by those
officials. After then, the state is able to simply treat the investors in an
unfair way by expropriating their money with the freedom of later alleging that
the investment was made in an unlawful manner.
The arbitral tribunals are obligated
to make an effort toward striking a balance between the risks that are borne by
both parties to a contract. Because the state is the only entity that may
legitimately use the corruption defence, this practice is harmful to the
interests of investors. As a result, the State ought to be judged just as
culpable, and the tribunal ought to maintain its authority to continue hearing
the conflict. The parties involved need to jointly take responsibility for
entering into a tainted agreement, and the state can't be allowed to enjoy
total immunity from blame. When a state has previously given its approval for
an investment, the legal doctrine of estoppel makes it impossible for that
state to later allege that the investment was made in violation of the law. The
claims of the investor must be acceptable before the tribunal if the Host State
deliberately overlooks any illegality in the initiation or execution of the
investment.
Article Information
THE CRIME OF FORTIFICATION AND THE DOGMA OF IMPEDIMENT IN THE INVESTOR STATE DISPUTES (By- Yash Patil)
Authors: Yash Patil
- Journal IJLRA
- ISSN 2582-6433
- Published 2022/08/10
- Volume 2
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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