Addressing Corruption Allegations in International and Domestic Arbitration: A Look at Recent Arbitral Awards Regarding Disputes in Peru

Over the past few decades, several countries in Latin America have experienced political and social instability, in part, because of issues related to corrupt practices.^[1] One of the biggest corruption scandals in recent Latin America history is the Lava Jato case, which originated as a criminal investigation in Brazil in 2014, but continues to have serious implications for a number of countries in the region. The Lavo Jato case uncovered a series of acts of corruption and bribery at different levels within the Brazilian government, involving payments to senior government officials for securing infrastructure contracts in favor of the Brazilian construction company Odebrecht^[2]. Likewise, as was reported in BBC news “Odebrecht executives have confessed to paying bribes in exchange for contracts not only in Brazil, but in various parts of the world.”^[3] including countries in Latin America.

Against the backdrop of the Lavo Jato case, and similar investigations, more and more arbitral tribunals are faced with the challenging task of resolving disputes that may involve corruption allegations and efforts to invalidate a contract on the grounds that it was procured by corruption. Within this context, claims of corruption are increasingly becoming a sensitive topic, which raise a variety of interesting and difficult questions in international commercial arbitration. For instance, do arbitral tribunals have jurisdiction to decide or consider allegations of corruption? If so, how should tribunals deal with issues of corruption? Which standard of proof should they apply? How should tribunals examine evidence to determine corruption? Among other issues that may play an important role in the decision of the case.

1) Do arbitral tribunals have jurisdiction to decide or consider allegations of corruption?‎

A preliminary issue  is to determine whether arbitral tribunals have jurisdiction to resolve allegations of corruption. The decision to consider criminal elements in a commercial dispute can have serious consequences for the outcome of the case. Since arbitrators do not perform judicial duties and their powers are limited by the parties’ agreement, they may be concerned about  exceeding their jurisdiction when resolving matters for which criminal judges may have exclusive jurisdiction. At the same time, arbitral tribunals cannot ignore the situation and facts before them.

Historically, arbitration was not considered a proper venue for addressing claims of corruption, the general trend in international tribunals had been to decline jurisdiction over the dispute. One notable example is the 1963 award in the Lagergren , “where [Judge Gunnar Lagergren], acting as sole arbitrator, . . .  held that he did not have jurisdiction over a contract dispute because the purpose of the contract was to secure commission payments that would then be used to bribe Argentinean officials.”^[4] Judge Lagergren pointed out that because the parties entered into an agreement that enabled a bribe, they “[had] forfeited any right to ask for assistance of the machinery of justice”^[5] to settle their disputes.

Judge Lagergren’s position was criticized in some circles for declining jurisdiction and, in effect, failing to apply the principle of separability of the arbitration clause to preserve his competence. Today, it is more widely agreed that allegations of corruption are arbitrable^[6] to the extent that they impact the underlying commercial claims. In this regard, arbitral tribunals have recognized and accepted their authority to evaluate the merits of such allegations.

2) Standard of proof applicable to corruption allegations in international arbitration

Even if tribunals accept jurisdiction to hear a case involving corruption allegations, there remains the question of the applicable standard of proof required to prove these allegations. Scholars and commentators have long discussed  what should be the best approach to assess evidence of corruption and the degree to which the evidence should be established.

Broadly speaking, there are two general trends in international arbitration, neither of which relies on precise definitions. Some tribunals consider that the standard of proof should be “circumstantial evidence” of corrupt acts; this standard is also referred to as the “red flags” approach to corruption. This is a flexible standard which requires reasonable signs of the illegal act to prove corruption. Other tribunals, emphasizing the seriousness of the accusation of corruption, have held that these allegations need to be judged to a higher standard of “clear and convincing evidence“; this heightened approach requires that the establishment of corruption be substantial and not merely reasonable inference from the circumstances.

Below we consider the general approaches adopted to assess evidence of corruption by examining two arbitral awards within the international and domestic arbitration context. The awards provide illustrations of situations in which arbitral tribunals have or have not found evidence of corruption, the criteria and perspectives of such findings, and the standard of proof applied. These two arbitration cases involve Peruvian state entities as defendants and, in both cases the tribunals addressed allegations stating that the contracts underlying the dispute were secured through corruption. The following cases are:  (i) an arbitration initiated by Rutas de Lima against the Municipality of Lima and (ii) an arbitration initiated by Mr. Jose Salazar Salcedo against the Regional Government of Cusco.

a) Rutas de Lima v the Municipality of Lima – ICC Award 2020

In Rutas de Lima, the arbitral tribunal declined to adopt a heightened standard of proof to evaluate corruption allegations. The tribunal held that, “it cannot and must not apply a high standard of proof since corrupt acts are necessarily the object of simulation, so it may be impossible to prove with certainty the existence of said actions.”^[7]Instead the tribunal expressly pointed out that it would adopt “the internationally recognized red flags method to determine whether the indications of corruption, in light of all the relevant circumstances, are sufficient to conclude that the Contract or the June 2016 Act were obtained by illegal means.”^[8] (Emphasis added).

However, as the tribunal also noted, “it is not sufficient for the tribunal to annul a contract on the grounds that there are indications that a party or its representatives made illicit payments to public officials at some point; the tribunal also has to be satisfied that the payments are in some way related to the contract signed between the parties and under which it exercises its jurisdiction” ^[9] (Emphasis added).

Interestingly, while the arbitral tribunal adopted a less stringent standard to establishing corruption in one sense, it nevertheless included an important requirement in application: specifically, the existence of reasonable evidence is not enough to determine the possible presence of corruption. Rather, it is also required that the evidence be related to the specific subject matter in dispute.

i) Background of the Dispute

On January 9, 2013, the Municipality of Lima (the “Municipality”) and Rutas de Lima SAC, an Odebrecht subsidiary (“Rutas de Lima”) entered into a Concession Agreement for the construction, operation, and maintenance of various highways in Lima for a term of 30 years.^[10]

After signing the contract, the parties established a series of agreements and modifications to the Concession Agreement, in which, among other aspects, the parties agreed to the implementation of the new Chillón Toll located in the Puente Piedra district in Lima. Based on those agreements, Rutas de Lima proceeded with the collection of the Chillón Toll rate in December 2016. However, a few days after its implementation, a series of social protests took place in opposition to the new toll.^[11] Given these circumstances, the former Mayor of Lima, Luis Castañeda Lossio, decided to cancel the collection of the Chillón toll.^[12]

ii) Following these events, in May 2017, the Peruvian press began publishing information regarding an investigation by Peruvian authorities into alleged illegal payments that Odebrecht had made to secure the Concession Agreement.^[13]The arbitral proceeding and corruption allegations

iii) In May 2018, Rutas de Lima started an arbitration process against the Municipality of Lima before the International Chamber of Commerce. The Claimant argued that the Municipality breached the Concession Agreement by canceling the Chillón Toll collection and not complying with the compensation mechanism as provided in the contract. The Respondent argued, among other allegations, that the claimant had obtained the Concession Agreement through corruption, and specifically, that Odebrecht had given money contributions for the electoral campaigns of the former Mayor of Lima Susana Villarán in exchange for obtaining the Concession Agreement.The Award

In May 2020, the arbitral tribunal issued an award in which, among other things, it declined to accept the  agreement was nullified. It held that although there were some indications of possible corruption, there was insufficient evidence to conclude that the contract has been tainted by corruption. Further, the tribunal concluded that there was insufficient evidence to infer that the corrupt payments, if they existed, would have been linked to the Concession Agreement.^[14] In consequence, the tribunal, among other things, ordered the Municipality of Lima to pay in favor of Rutas de Lima an estimated amount of S/. 230’000,000^[15] or roughly $68M.

The arbitral tribunal examined a number of points to support its decision, including:

• an ongoing criminal investigation, in which the former Mayor of the Municipality of Lima, Susana Villarán, was accused of having requested Odebrecht money to finance her political campaign in exchange for the signing of the Concession Agreement;
• the Report of the Congress Multiparty Commission in charge of investigating the alleged acts of corruption concerning concessions and projects awarded by the Peruvian State to Odebrecht, including the Rutas de Lima project. In this Report, reference is made to Odebrecht accounts detailing amounts paid with the annotation “Concessao Rutas de Lima” and the date of February 2014;
• statements by Ad Hoc Attorney Ramírez, in his capacity as defender of the interests of the Peruvian State in the Lava Jato case; and
• two ongoing prosecutor investigations, to which the tribunal did not have access, but obtained some information through the statements of the Ad-Hoc Attorney.
   

Regarding payments the Odebrecht company allegedly made in favor of the campaign of the former Mayor of Lima, the tribunal considered that it could not find a reason why Odebrecht would have illegal payments to sign a contract that had already been awarded. In this respect, the tribunal relied on the testimony of the Odebrecht representative, Jorge Barata, who denied making the payments for awarding the contract. The tribunal considered that such payments did not affect the validity of the contract. Likewise, concerning the payments on Odebrecht worksheets dated “February 2014”, the tribunal concluded that  the existence of these payments could not be confirmed, nor was there an explanation of how these payments, if they existed, could have affected the validity of the Concession Agreement since the latter was awarded in September 2012 and the worksheets were dated February 2014, i.e., almost eighteen months later.

Regarding the testimony of the Ad Hoc Attorney, the tribunal considered that he did not provide concrete evidence proving that the signing or the execution of the Contract was tainted with corruption. In his statement, the Ad Hoc Attorney referred to the criminal investigations for corruption acts against former public officials and representatives of Odebrecht in relation to the Concession Agreement, as well as to the Odebrecht payroll with references to the Rutas de Lima Project, but he did not provide any evidence that the payments were related to the Concession Agreement.

Finally, regarding the ongoing prosecutor investigations, the tribunal noted that in neither investigation, had the Prosecutor formally accused any individual for corruption crimes related to the Concession Agreement; therefore, accordingly there was no reason to declare the contract void.

While the tribunal decided to apply the circumstantial evidence approach  — and made its decision based on different circumstances discussed above, including ongoing criminal investigations, declarations or testimonies, ongoing prosecutor investigations, Peruvian state reports, among other facts– it would appear that the tribunal went one step further  regarding the applicable standard of proof: it required that those circumstances were specifically related to the contract in dispute. Because the tribunal did not find sufficient evidence in connection to the Concession Agreement, the tribunal dismissed the corruption claims and refused to declare the nullity of the agreement.

b) Jose Salazar Salcedo v the Regional Government of Cusco – Award 2015

In Peru, the treatment of corruption allegations within Peruvian arbitration proceedings has taken on particular importance concerning contracts with the Peruvian State. In this context, the following case illustrates the approach adopted by a Peruvian arbitral tribunal in addressing evidence of corruption to determine the validity of the contract in dispute.

In Jose Salazar Salcedo‎, the arbitration award^[16] includes several points worth discussing, including the role of the arbitral tribunal in dealing with evidence of corruption as well as the intervention of a non-signatory party.We will discuss both subjects in further detail below.

In this arbitration, the tribunal did not make specific reference to the type of standard of proof it would apply to determine the presence of corruption; however, in light of its ruling and the evidence, it seems evident the tribunal imposed a high standard of proof.^[17]

i) The arbitral proceeding and allegations of corruption

On July 18, 2008, the Regional Government of Cusco, a Peruvian state entity, and Mr. Jose Salazar Salcedo entered into an agreement for the periodic maintenance of various highways in Cusco (the “Contract”). For such purpose, the insurance company Mapfre provided three guarantee letters in favor of the Government of Cusco to ensure Mr. Salazar’s obligations.

In April 2010, Mr. Salazar initiated an arbitration process against the Government of Cusco before a Peruvian arbitral tribunal, where he alleged a series of contractual breaches incurred by the public entity regarding the Contract. Specifically, Mr. Salazar argued that the public entity had delayed the issuance of administrative approvals for additional works and its revision of technical files, which impeded the regular progress of work. Therefore, Mr. Salazar requested, among other things, compensatory damages.

The public entity rejected the allegations and affirmed that Mr. Salazar breached the contractual deadlines for the performance of the works; therefore, he was responsible for the payment of penalties, via the guarantees issued by the insurance company Mapfre.

On February 28, 2011, Mapfre requested to intervene in the process, through the extension of the arbitration agreement to non-signatory parties pursuant to provision 14 of the Peruvian Arbitration Law.^[18]  This provision allows the inclusion of non-signatories when such parties took part in the conclusion of the contract.  Based on this provision, Mapfre requested to be included in the arbitration, arguing that (i) the arbitration clause was closely related to the Surety Contract because, without the guarantees, the advance payments would not have been granted to the contractor, and (ii) the insurer had a very active and decisive participation during the negotiation, celebration, and execution of the Contract, in specific, by providing the funds necessary to perform the contract.

Additionally, Mapfre requested the tribunal to declare the Contract and the three guarantee letters null and void  claiming that the Contract had been procured by corruption. In support of these allegations, Mapfre argued that Mr. Salazar and some officials of the Government of Cusco had been prosecuted for corruption between 2008 and 2010 due to acts i relevant to the Contract.

On July 20, 2011, Mr. Salazar responded and held that “the insurer’s claims are based on presumptions of crimes not yet proven that cannot be determined before the judge establishes the corresponding criminal responsibilities in the pending criminal process.”^[19]

ii) The Award

In its Award, the arbitral tribunal rejected the Mapfre’s request to intervene in the process, on the grounds that Provision 14 of the Peruvian Arbitration Law was not in force at the time the insurer granted the letters of guarantee. Rather, the law in force did not include any reference to the possibility of extending the arbitration agreement to non-signatory parties. Therefore, the tribunal dismissed Mapfre’s claims. Furthermore, neither the plaintiff nor the defendant had invoked allegations of corruption, but rather a non-signatory party, the insurer Mapfre, made the allegations.

Despite the tribunal’s rejection of insurer participation in the arbitral proceeding, it declared itself competent to analyze the relevant corruption evidence that was incorporated regarding this matter within the context of applicable national laws and the arbitration agreement. The tribunal declared the Contract void, concluding that it had an illicit purpose.^[20]

Specifically, the arbitral tribunal’s decision to declare the illicitness of the contract relied on the Sentence issued by the Criminal Court of Cusco, whereby Mr. Salazar Salcedo and other public officials were convicted of illicit acts intimately related to the contract. As noted by the tribunal, the incorporation of this evidence to the process in January 2015 was not subject to objection by either Mr. Salazar or the Government of Cuzco.^[21]

The tribunal held that “even though the criminal process has the purpose of determining the individual responsibility (…) and not the nullity of contracts, the conviction may be taken as evidence to debate the legality of the contract that is the subject of the present arbitration (…) The probative value of a conviction for the crime of collusion and influence peddling cannot be set aside (…)”^[22]. (Emphasis added). In light of this criterion, the conviction became a determinative evidence for the outcome of the case.

3) Conclusion

The tribunal does not support its award on the presumption of unproven crimes, but rather based its decision on a criminal proceeding in which the judge established the corresponding criminal liability.  In this regard, the tribunal seemed to have accepted that even a “clear and convincing evidence” approach is not sufficient, relying instead on a concluded criminal proceeding with a conviction.  On this basis, the validity of the contract was affected.

Rarely will a conviction relevant to the issue at hand be available for the tribunal to consider. Further, if the issue to be decided is not merely corruption but some corrupt act specific to the transaction or contract at hand, then it may remain difficult to establish sufficient evidence to nullify a contract.  In any case, arbitral tribunals in Latin American jurisdictions such as Brazil and Peru are rising to the challenge and assuming jurisdiction to consider such allegations in so far as they relate to the contractual dispute being arbitrated.

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^{[1] Thanks to Cecilia Cahuayme-Zuniga for her contributions and guidance on Peruvian law.}

^{[2] BBC News, “Brazil’s Odebrecht corruption scandal explained” available at https://www.bbc.com/news/business-39194395}

[3] Idem.

[4] Gary B. Born, “Bribery and an Arbitrator’s Task”, available at http://arbitrationblog.kluwerarbitration.com/2011/10/11/bribery-and-an-arbitrators-task/

[5] Idem.

[6] Interview to Alfredo Bullard, available at https://www.youtube.com/watch?v=6FSsZBNJVkw

[7] ICC case Rutas de Lima v the Municipality of Lima, ‎,.Award issued on May 11, 2020 – paragraph 402, available at https://jusmundi.com/en/document/decision/es-rutas-de-lima-s-a-v-municipalidad-metropolitana-de-lima-laudo-final-monday-11th-may-2020

[8] Idem – paragraph 403

[9] Idem – paragraph 401

[10] Rutas de Lima website – Concession Agreement available at https://rutasdelima.pe/wp-content/uploads/2018/11/contrato_concesion.pdf

[11] RPP, “28 detenidos y 9 heridos en protesta contra el peaje en Puente Piedra”, available at https://rpp.pe/lima/actualidad/disturbios-y-bloqueos-en-protesta-contra-el-peaje-de-la-panamericana-norte-noticia-1021480

[12] Municipalidad de Lima website, “Alcalde Castañeda ratifica que peaje en chillón no va”, available at http://www.munlima.gob.pe/noticias/item/35575-alcalde-casta%C3%B1eda-ratifica-que-peaje-en-chill%C3%B3n-no-va

[13] Convoca, available at https://convoca.pe/agenda-propia/aparece-pago-de-odebrecht-relacionado-concesion-rutas-de-lima

[14] ICC case Rutas de Lima v the Municipality of Lima‎, Award issued on May 11, 2020 – paragraph 501 available at: https://jusmundi.com/en/document/decision/es-rutas-de-lima-s-a-v-municipalidad-metropolitana-de-lima-laudo-final-monday-11th-may-2020

[15] La Republica, “Lima pierde arbitraje contra Rutas de Lima y pagará 230 millones por peaje de Puente Piedra”, available at https://larepublica.pe/sociedad/2020/05/16/lima-pierde-arbitraje-con-rutas-de-lima-por-peaje-de-puente-piedra-y-pagara-230-millones-de-soles-municipalidad-de-lima/

[16] Award dated August 04, 2015

[17] Sandro Espinoza, “La experiencia arbitral peruana en la determinación del estándar de la prueba ante denuncias de corrupción”, available at https://arbanza.com/?p=25240

[18] Provision 14 of the “Peruvian Arbitration Law” has regulated the Extension of the Arbitration Agreement to non-signatory parties. According to this provision: “The arbitration agreement extends to those whose consent to submit to arbitration, according to good faith, is determined by their active and decisive participation in the negotiation, execution, performance or termination of the contract that includes the arbitration agreement or to which the agreement is related. It also extends to those who intend to derive rights or benefits from the contract, according to its terms”

[19] Award dated August 04, 2015, paragraph 216.

[20] Idem –  paragraph 332 and whereas fifth

[21] Idem – paragraph 322

[22] Idem – paragraph 331