INTRODUCTION

The issues that shall be discussed in the following paper are: How far is the Tribunal entitled or bound to take into account issues of money laundering, corruption and fraud? If such issues are not pleaded, is there a danger of the Tribunal acting ultra petita? What is the enforceability of awards which contain findings relating to such issues.

It is the starting point that money laundering, corruption and fraud are criminal activities. Differences exist among writers and arbitrators as to how arbitral tribunals ought to react if and when they realize that they are faced with such activities in the case before them.

Some arbitrators and writers have taken the position that they do not have jurisdiction in such cases, because the claims are not arbitrable, or, which amounts to the same thing, because the claims are contrary to public policy or good morals.

Others have considered that the doctrine of the separability of the arbitration clause leads to the result that they do have jurisdiction and have to decide[Page149:] the merits of the case and take any illegality resulting from the criminal activity into consideration when they decide the case. The latter seems to be the dominant view today, although some writers still adhere to the former view.

Personally, I believe that either view is too much of a generalization. There may certainly be cases in which it is abundantly clear from the beginning that the whole case on both sides is of such a nature that no honest arbitrator can touch it. Whether one should refer to international public policy, morals or something else is an open problem. What is international public policy anyway? Is there such a thing, or is it left to each arbitrator to formulate his own? There seems to be consensus that, in principle, arbitrators are not bound by the international public policy or public policy generally of a particular forum, such as, e.g., that of the seat of arbitration.

In most cases, the matter will be more complicated and the issue relating to money laundering, bribery or fraud may be a side issue or may only relate to the case of one side in the arbitration, or, finally may only be revealed little by little or at a late stage in the proceedings. In such circumstances, it may be better to take jurisdiction, decide such issues as are not tainted by illegality and either refuse to deal with the other issues or decide them on the basis that the claim or defence is illegal.

By going into the substance of the claim and refusing to admit it because of its illegality, one often arrives at the same result as by refusing to take jurisdiction. A closer look at the famous award of Judge Lagergren, to which I shall come back, shows that, in fact, that is what he did, although he couched it in terms of a refusal to take jurisdiction.

1. IS THE ARBITRAL TRIBUNAL ENTITLED OR BOUND TO TAKE INTO ACCOUNT ISSUES OF MONEY LAUNDERING, CORRUPTION AND FRAUD?

So much by way of introduction. The first question that is raised is, whether the Arbitral Tribunal is entitled or bound to take into account issues of money laundering, corruption and fraud, that is, apply rules prohibiting such activities, whether found in the law applicable to the case or in some other law.

I think that we should not make too-general rules but rather have to look at specific situations to see how these issues arise in the individual case. I also[Page150:] think that we have to take into account that the three subjects mentioned above are not the only ones where problems of this nature may arise. As an example, it may be mentioned that breach of competition laws may give rise to exactly the same considerations, as became clear in the Eco Swiss case before the European Court of Justice, to which I shall come back. One may also mention illegal traffic in drugs, weapons or cultural goods and acts relating to terrorism1. Such cases, like those being discussed here, also have both a criminal law and a civil law side. It seems that an increasing number of cases involving the civil law side of competition or antitrust matters, such as the validity of contracts, are being decided by arbitral tribunals. This should be kept in mind.

The Lagergren case2 is illustrative. The Award is by Judge Gunnar Lagergren, later for many years president of the Iran-US Claims Tribunal. One gets the impression from the references to it in various writings that he just threw a glance at the case, realized its character and stated that this was not a case he would handle. That is not so.

The case was between an Argentine person, Mr X, and an apparently British company, engaged in the manufacture of electrical equipment and wishing to sell such equipment to the Argentine Government. The company agreed with Mr X that he should promote the company's interest in this matter against the payment of a commission. The company did not get the order in question but did obtain an order six years later. Mr X asked for his commission. The company, however, answered that the commission agreement only related to the first order and had lapsed. As no agreement could be reached, the parties made an agreement to submit their dispute to ICC arbitration. The parties exchanged several written pleadings, and a four-day-long hearing was held with the examination of a number of witnesses and oral argument by the parties. Only then Judge Lagergren, in his award, which is 12 printed pages long, decided that he must decline jurisdiction. But he did so only after a full discussion in the award of the substance of the case and after having stated as follows:

"However, before involving good morals and public policy as barring parties from recourse to judicial or arbitral instances in settling their disputes care must be taken to see that one party is not thereby able to reap the fruits of his own dishonest conduct by enriching himself at the expense of the other." Which he then proceeded to do. [Page151:]

Thus, he did, in fact, decide the case, although couching it in terms of declining jurisdiction, by in fact, although not formally, refusing to order the company to pay money mainly intended for bribes, but ensuring that it was not thereby obtaining an unjust enrichment. He could have come to the exact same result by taking jurisdiction and expressly making those same decisions.

Lagergren's case was a simple one, but it illustrates that it is often only after thorough investigation that the criminal character of a case appears. Other cases may be much more complicated and the criminal character of that which lies behind the various actions, documents and other facts may not be easy to ascertain and only be possible to realize far into the proceedings. It may also be that only certain parts of a case and some of the claims are of a criminal character. Where there is fraud, may only be on one side and the other party may be the innocent person that is being defrauded. In some such cases, a general rule that the arbitrators have no jurisdiction may deprive the innocent person of his right of protection.

All of this counts in favour of usually not declining jurisdiction but rather refusing to grant any claims which are of a criminal character or grant compensation where a party has been defrauded or otherwise deprived of its rights. Taking jurisdiction is, of course, not tantamount to accepting any claims that appear to be justified on the face of the contract, if the contract or the particular claim is clearly illegal. It means, e.g., accepting the claim by the other party that the contract is invalid because of its illegality.

That is what happened in the Loewe case3, also named after the arbitrator, where contracts, intended to circumvent Yugoslav currency legislation and, on the basis of a fictitious contract, obtain bank credit, were declared null and void by the arbitrators, as claimed by one party.

It was mentioned at the beginning that at least some of those who argue that the arbitrators should decide the case do so with reference to the doctrine of separability: the contract may be invalid, but not the arbitration clause. This may apply in some cases. In the Lagergren case, the arbitration agreement was a subsequent submission agreement, concluded after the dispute had arisen and, therefore, clearly separable from the original agreement. In other cases the issues which are tainted by illegality may have nothing to do with the validity of the contract itself, but may relate to side issues. In any event, it[Page152:] seems better to rely on an analysis of the character of the cases than on a theoretical and legislative doctrine which does not have application in all cases. Where morals and international public policy are involved, that seems to be a very formal and technical approach.

In the Lagergren and Loewe cases, the arbitrators took into account issues respectively of corruption and fraud. Lagergren did so of his own motion. The Loewe Tribunal did it on the basis of a claim by a party. It does not seem to have given rise to criticism that Lagergren acted of his own motion for reasons of good morals and international public policy considerations.

But may arbitrators always do that? In arbitration as well as in the courts it is a generally recognized rule that the arbitrators may not go outside the claims by the parties, ultra petita. See e.g. Article V 1(c) of the New York Convention 1958, which provides for refusal of recognition and enforcement of the award if it deals with a difference which does not fall within the terms of the submission or contains decisions on matters beyond its scope. See also Articles 34 and 36 of the Model Law.

Where the question is one of jurisdiction, it seems accepted that generally a state court may act ex officio, although where both parties appear and neither raises the question of the existence of an arbitration agreement, a court may regard their behaviour as a waiver of the arbitration clause4. With respect to arbitration, failure by a party to object to the jurisdiction of the tribunal may and usually will be taken as a waiver of any objection; see, e.g., Article 33 of the ICC Rules. Therefore, arbitral tribunals will normally not raise issues of jurisdiction of their own motion.

The acceptance of the Lagergren award may, therefore, be based upon the view that the arbitral tribunal has an independent right to invoke good morals and international public policy, regardless of the claims of relief by the parties. But the Lagergren award was based purely on an issue of jurisdiction. It is necessary to discuss what the situation is if the arbitrator goes into the merits of the case and decides issues which have not been raised by the parties.

There is no doubt that, if a party raises as a defence on the merits that a contract is invalid or that a particular claim is unjustified because it is based on acts which amount to money laundering or bribery or fraudulent behaviour, [Page153:] the arbitrators may consider and decide that issue. But if no such defence is raised, can the arbitrators then raise the issue themselves and decide the claim on that basis?

The arbitrators must, no doubt, before taking such a step, raise the issue with the parties and hear their reactions, in particular why the party, who could have raised the defence earlier, now, when his attention is drawn to it, wishes to do so? Lagergren, in fact, did draw the parties' attention to the problem he saw. If this is not done, the award may suffer from another defect, viz. that the parties have not had due process, and recognition may be denied under Article V 1(b) of the New York Convention.

2. WHAT IF BOTH PARTIES REFUSE TO TAKE UP THE ISSUES?

But what if both parties refuse to take up the issue? Can the arbitrators then take it up of their own motion, call witnesses, and request the parties to address the issue?

The question has got new relevance as a result of the decision in the Eco Swiss case5 of the European Court of Justice which concerns EU competition law. The case does not directly decide the issue, but it does give occasion to raise it also in that context, and it is illustrative of our problem.

The case concerned an award in an arbitration between Benetton and Eco Swiss. Somewhat simplified, what happened was, Benetton had terminated a license contract and distribution agreement, and Eco Swiss alleged that the termination was unlawful. Benetton was ordered in the award to pay a large amount in compensation to Eco Swiss, so it challenged the award in the Dutch courts and argued that the agreement was invalid because the agreement restricted competition and, therefore, was in breach of the prohibition in Article 81 of the EC treaty which invalidates agreements restricting competition. Benetton had not brought that defence in the arbitration, and the arbitral tribunal had not been aware of this possibility or, at least, had not raised it.

The Hoge Raad, the Dutch Supreme Court, found that it could not set aside the award on substantive grounds, as Dutch law is similar to the New York Convention. Only if Article 81 could be regarded as a rule of public policy would it be possible to set the award aside. However, the corresponding Dutch[Page154:] competition rules were not regarded as pertaining to Dutch public policy. Therefore, the Dutch Court asked the EU Court for a preliminary judgement. The EU Court decided that Article 81 was a rule of European public policy (paragraph 39). It stated further that a national court on application must annul an award which is contrary to Article 81, if its domestic law requires it to annul an award which fails to observe national rules of public policy, whether they be competition rules or rules of another character (paragraphs 37 and 41 and paragraph 1 of the Ruling).

This raises the problem how arbitral tribunals shall act when they know that they are deciding a case where international public policy may result in annulment of the award if certain rules are not considered in the award or the award may otherwise be regarded as contrary to public policy. This question arises not only where competition law is concerned but in respect of any rules having a public policy character, such as the rules on money laundering, etc., that are discussed here. If the parties do not want the arbitrators to take up the issue and decide whether in some way the outcome would be different if they did, what shall the arbitratrors then do?

The decision of the Court of Justice does not answer or even raise that question. But it does give occasion to raise it. My own answer - but not everybody may agree with me - is, that arbitrators who become aware that such problems exist must raise them with the parties, to the extent possible obtain the necessary evidence and decide them. The arbitrators have a duty to make every effort to make sure that the award is enforceable at law, see, e.g., the ICC Rules Article 35. It must be admitted that with parties who are not willing to co-operate, that is not an easy task. It is, however, the duty of the arbitrators to establish the facts of the case by all appropriate means, cf. e.g. Article 20 of the ICC Rules.

In some cases, the problem may be solved more easily. If a party resists a claim on the basis of the invalidity of the underlying contract, but his grounds are insufficient, and the arbitrators find that he could have argued that the contract was tainted by fraud but did not do it, I believe that, whether he wishes to invoke fraud or not, the arbitrators may decide the case on that basis, provided they have raised the issue with the parties. This is a question of applying the law, not of going beyond the claims raised by the parties. Jura novit curia. The party has invoked the invalidity of the contract, only not the proper ground for it. That is then supplied by the arbitrators. [Page155:]

3. THE APPLICABLE LAW

A special problem is the choice of the applicable law. Of course, failing a choice by the parties, the arbitrators today have very great freedom in that respect, cf.

e.g. Article 17 of the ICC Rules. But where a particular law is chosen, can thearbitrators apply corruption or money laundering law of another country?

This possibility exists at least under Article 7 of the Rome Convention. It provides in paragraph 1 that in certain cases effect may be given to rules of law of another country than that, the law of which is otherwise applicable. That is so if under the law of that other country its rules of law must be applied in all cases, i.e. if those rules are internationally mandatory and thus are part of the international public policy of the country. This principle may, where necessary, i.e. where the arbitrators must otherwise apply a law by which certain activities are lawful, such as, e.g., bribery, be utilized if the arbitrators find that such activities should be stopped or not given recognition in a particular case.

4. THE ENFORCEABILITY OF AWARDS

The final question is what is the enforceability of awards containing findings relating to such issues?

If the recognition or enforcement of an award would be contrary to public policy, it may be refused; see New York Convention, Article V 2 (b). It should not be forgotten that here we are talking about the public policy of the forum where enforcement is requested, not about an international public policy. The same is true if the subject matter of the dispute is not capable of settlement by arbitration under the law of that country; see Article V 2(a). Thus, awards whereby claims that are shown to rest on corruption, money laundering or fraud are admitted, may be set aside and refused recognition and enforcement by courts which do not accept such practices.

It should, however, be made clear that the provision in Article V 2 (b) does not say that the mere fact that the award contains findings on such issues results in its annulment. It depends on how the specific award decides the issues. If the award declares a contract for money laundering or a contract obtained by fraud invalid, it may well determine the consequences, such as compensation, restitution, etc. [Page156:]

Lagergren could have taken jurisdiction. He could have decided that, as a result of the invalidity of the contract, a party that had obtained unjust enrichment should pay the other party a sum of money. Loewe could have not only declared the Yugoslav contracts invalid but also decided on claims of compensation resulting therefrom. Such awards, although taking into account acts contrary to public policy, in their results would not be contrary to public policy and would, therefore, be enforceable6.

1
Cf. Lalive in ICCA Congress Series No. 3 1987 p. 284.

2
ICC case No. 1110/1963, printed in full as an annex to a comment to the case by Gillis Wetter in 10 Arbitration International (1994) 277, cf. also XXI Yearbook Commercial Arbitration (1996) 47 and Antonia Crivellaro.

3
111 Journal du Droit International (Clunet) (1984) 914, also in Collection of ICC Arbitral. Awards 1974-85, p. 490.

4
Cf. Fouchard, Gaillard, Goldman, On International Commercial Arbitration, 1999 p. 405.

5
Case C-126/97 [1999] ECR I 3055.

6
List of References: - Michael Bogdan; Book Review, 68 Nordic Journal of International Law (1999) p. 376 - Magnus Eriksson, Arbitration and Contracts Involving Corrupt Practices: The Arbitrators Dilemma, IV The American Review of International Arbitration (1993). p. 371.- Berthold Goldman, The Complementary Roles of Judges and Arbitrators in Ensuring that International Commercial Arbitration is Effective, 60 Years of ICC Arbitration, 1984, pp 269 to 274. - Kaj Hobér, Extinctive Prescription and Applicable Law in Interstate Arbitration, 2001, p.128. - Pierre Lalive, Trans-national (or Truly International) Public Policy and International Arbitration, ICCA Congress Series No. 3, 1987 p. 290. - Guiditta Cordero Moss, International Commercial Arbitration, 1999 p. 300. - Bruno Oppetit, La Paradoxe de la corruption à l'épreuve du droit du commerce international. - Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, Third Edition, 1999 p. 152.