Latin American Arbitration Practitioners EU Second Annual Conference (2024)
THE AUTHOR:
Júlia Puy Canut, Trainee at Gaillard Banifatemi Shelbaya Disputes
On 25 September 2024, the second annual conference of the Latin American Arbitration Practitioners EU (“LATAP EU”) was held at the Paris office of Freshfields. The conference launched with a keynote speech by Patricio Grané Labat, followed by four panels related to relevant matters for the Latin American region.
This report summarises the third panel, in which José Luis Prieto Bermejo (Freshfields), Matthieu de Boisséson (Arbitration Chambers), Agustín G. Sanz (Three Crowns), and Carla Ximena Cervantes Escamilla (ICC), moderated by María del Pilar Álvarez (Gaillard Banifatemi Shelbaya Disputes), discussed “Fraud in international arbitration: a LATAM perspective”.
Theoretical and Practical Challenges in Addressing Fraud and Corruption
To what extent does it make sense to approach allegations of corruption and fraud similarly in international arbitration? Is the methodology generally developed for corruption adequate when it comes to establishing the existence of fraud?
Mr. de Boisséson noted that it makes sense to treat both categories together since corruption is a specific form of the broader category of fraud. Arbitrators frequently face allegations of corruption and fraud. He added that it is essential for arbitrators to analyse the facts before determining the next steps in the procedure and deciding on the merits. However, Mr. de Boisséson acknowledged the difficulty in obtaining evidence that establishes any wrongdoing, as corruption or fraud are typically hidden. Therefore, arbitrators are often compelled to rely on red flags as indicators of corruption.
He underlined that red flags do not release the tribunal from its task of analysing and assessing their probative value. The fact that the standard of proof and the evidence requirements are more flexible in matters related to corruption, does not imply a reversal of the burden of proof or a reduction of it to a mere suspicion. The party making the corruption claim still needs to present solid evidence, and the tribunal must assess that evidence thoroughly before reaching any conclusions.
What is the applicable standard of proof, and what are the relevant nuances, both in terms of the type of allegations being dealt with (fraud and corruption) and the differences between civil and common law traditions, if any?
Mr. Sanz referred to the peculiarities and challenges of corruption and fraud allegations. Lawyers must be confident in their case when presenting such claims. These claims require substantial efforts on behalf of the counsel team raising them because they impose an additional responsibility on the arbitral tribunal. Therefore, it is crucial that the party bringing fraud or corruption allegations has sufficient evidence to support its case and does not use them simply as an extra argument.
Regarding the distinction between fraud and corruption, Mr. Sanz noted that the standard of proof is different as the need to establish the intent to cause harm in fraud cases is challenging. He also noted that, while civil and common law traditions do have differentiating features and legal practices, both systems have shown a tendency to converge in many aspects, and differences in nomenclature may not be as relevant in the practice of international arbitration as they used to be.
It is also important to note that when fraud or corruption is alleged in arbitration, there may be parallel proceedings before domestic criminal courts. This situation presents some difficulties for the arbitral proceedings. On the one hand, the party alleging corruption or fraud may wish to render its decision, so it may ask the arbitral tribunal to stay the proceedings. On the other hand, the tribunal must consider whether it is worth waiting for the final decision of the local courts, as in some cases courts may take years to reach a decision and, in any event, the standard of proof for each type of proceeding may not be the same, thus limiting the relevance of prior court findings.
How can arbitrators manage allegations of fraud, particularly in situations where there are overlapping criminal and arbitral proceedings?
Mr. Prieto pointed out that arbitrators must be very careful when assessing corruption or fraud allegations to avoid stretching their mandates, as their primary duty to the parties is to settle the dispute they put before them by rendering an enforceable award on the basis of the arguments and evidence that the parties are able and willing to submit (rather than using broad investigative tools to settle issues of corruption that have not been put to them with the aim of preserving the enforceability of the award against any future allegations that may fall beyond the scope of their mandate).
Regarding possible stays of arbitration proceedings in lieu of criminal proceedings, Mr. Prieto asserted that staying the proceeding due to lis pendens is not always necessary unless the outcome of the criminal proceeding is determinative to the arbitration. Mr. Prieto referred to a Spanish case where the arbitrators did not suspend the proceedings despite the allegation of corruption. After the award was issued, a criminal court rendered a decision which clashed with the findings of the award. The parties then sought to set aside the award before Spanish courts. However, Spanish courts refused to set aside the award, as they found that the arbitrator had properly justified the decision to not stay the proceedings. Mr. Prieto explained that the set aside standard in Spain regarding the interplay between arbitration and criminal proceedings is clear (i.e., that arbitrators have the duty to properly justify their decisions regarding a possible stay of the proceedings and that courts of law are not there to question the merits of such decision).
Mr. Prieto criticised the expectation that arbitral tribunals should be overly proactive in the investigation of fraud or corruption, without clear guidelines on the extent of their investigative powers. For example, in the P&ID v. Ministry of Petroleum of Nigeria case, the parties did not raise any claim of corruption during the arbitration. Although there were known corruption issues surrounding the contract and some procedural matters, those were not mentioned during the arbitration and were reasonably beyond the scope of the tribunal’s mandate. The tribunal did not investigate those issues of corruption and rendered an award. Subsequently, Nigeria challenged the award under Section 68 of the English Arbitration Act, and in the Judgment of the High Court of Justice of England and Wales [2023] EWHC 2638, 23 October 2023 the Court found that the award had been obtained through fraud and was contrary to public policy. Additionally, the High Court criticized the arbitral tribunal but did not specify what the tribunal should have done to address corruption.
This issue sparked a debate during the panel on the duty of arbitrators to investigate and the comparison between commercial arbitration and investment arbitration. Mr. Sanz noted that, in investment arbitration, it is important for States to show they have robustly investigated and prosecuted corruption cases before their own courts if they intend to use corruption as a defence in arbitration. Moreover, as a matter of public policy, corruption allegations cannot be ignored if tribunals are made aware of them.
In Mr. Prieto’s view, arbitrators must decide on the basis of what is submitted by the parties in the arbitral proceedings rather than investigate issues that are not material to the dispute at hand. Arbitrators are not obliged to investigate sua sponte. Circling back to his first point, Mr. Prieto underlined that a basic duty of arbitrators is to solve the dispute that is put to them on the basis of the evidence that the parties are willing and able to submit by rendering an enforceable award on that basis rather than paying attention to issues that could compromise the award but that have not been put to them or that are simply beyond their control. Addressing the issue of enforceability, Mr Prieto added that arbitrators that investigate fraud or corruption without the parties having alleged it and without being empowered to do so run the risk of rendering an award with extra petita findings (i.e., beyond their mandate).
Mr. de Boisséson commented that while it is important for arbitrators to render an enforceable award, they should not be overly concerned with the possibility of it being set aside.
What else can arbitrators do under the rules to handle cases of fraud? What has been the ICC practice concerning allegations of fraud?
Ms. Cervantes provided the perspective of the International Court of Arbitration (the “Court”) of the International Chamber of Commerce (“ICC”). She explained that in cases of corruption or fraud, the flexibility inherent to the arbitration proceedings allows arbitral tribunals to tailor the procedure to the specific characteristics of the case. For instance, arbitral tribunal may decide to bifurcate the proceedings when fraud allegations are connected to jurisdictional objections or to have a longer document production phase.
In circumstances where corruption or fraud are alleged, the Court can intervene at two stages of the proceeding. At the earliest stage, the Court can review the case and decide whether it is prima facie satisfied that a binding arbitration agreement exists between the parties. In many such cases, the Court has allowed the proceedings to continue, for instance, against non-signatories when there are allegations that the non-signatory used a signatory party in a fraudulent manner. The Court has also examined cases where fraud was alleged in the signing of the arbitration agreement itself. In addition, the Court pays special attention during the scrutiny of the award, ensuring that it is enforceable. Ms. Cervantes explained that there have been instances where the initial drafts of awards were not approved, and arbitral tribunals were invited to conduct a more thorough analysis of the fraud or corruption issues raised by the parties.
Ms. Cervantes also pointed out that there is no consensus in the standard of proof to be applied. Within the ICC cases, different tribunals have taken different approaches, from lowering the standard of proof to raising it. She provided examples of cases where arbitral tribunals have concluded that a higher standard should not be applied due to the general difficulty in obtaining such evidence, as the party engaging in these allegations usually seek to hide its misconduct. In one such case, the tribunal noted that when there are solid and consistent indicators of misconduct, and relevant evidence is shown, arbitral tribunals may, without shifting the burden of proof expect that the accused party present some evidence clearing it of corruption allegations.
Latin American Perspective
The panellists shared their views on the current practices in Latin America, discussing how arbitrators deal with corruption allegations and their concerns. Particularly, the concerns mostly arise in commercial arbitration, where such allegations could be used to circumvent criminal courts. In investment arbitration, there is less concern, as the proceedings, including the hearings, are public.
As a final remark, it was noted that in all these situations the law of the seat plays a crucial role in managing the proceedings. Issues of arbitrability and public policy must be taken into account.
ABOUT THE AUTHOR
Júlia Puy Canut is a qualified Spanish Lawyer with a law degree and a master’s from Universitat Pompeu Fabra (Barcelona) and an LLM in Transnational Arbitration and Dispute Settlement from Sciences Po (Paris). Júlia has acquired valuable experience in investment and commercial arbitration through her work with prominent firms such as Latham & Watkins, Eleonora Coelho Advogados, Derains & Gharavi, and Gaillard Banifatemi Shelbaya Disputes.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
