LexisNexis

When arbitration and compliance meet up: analysis of their first interplay

Friday 4 March 2022

Salomé Garnier
Navacelle, Paris

Stephane de Navacelle
​​​​​​Navacelle, Paris

Julie Zorrilla
​​​​​​​​​​​​​Navacelle, Paris​​​​​

Arbitration, which is defined as a private and binding form of dispute resolution forum, in which parties agree to have their dispute settled by independent, non-governmental decision-makers (hereinafter 'arbitrators'), selected by or for the parties, applying neutral adjudicative procedures,[1] has become the preferred method of resolving cross-border disputes.[2]  

Across the world, companies are required to set up internal compliance programs to guarantee, amongst other things, the fight against corruption, the observance of international sanctions, the respect of human rights and the protection of the environment and personal data. 

Compliance, whose scope of application is constantly expanding, has become a strategic tool for companies to prevent the realization of a risk regardless of their field of activity. Compliance rules are often burdensome, sometimes straying from legal notions and often including severe enforcement actions and penalties. This is particularly true with respect to international trade, when companies having to comply with external mandatory rules and regulations to maintain contractual relationships, protect their data, and prevent financial crimes. 

As a result, questions have more than ever arisen as to the impact of growing compliance requirements on the practice of arbitration, allowing compliance to find its place in the field of arbitration. This growing importance first raises the question of the arbitrability of compliance law, then of the impact of compliance on the arbitration activity itself, and finally demonstrates that arbitrators have become actors in implementing and respecting compliance requirements. It is these different interplays that are worth examining in greater detail.

The increasing arbitrability of compliance matters

  1. Arbitrability is a condition for the lawfulness of the arbitration agreement which refers to the type of dispute that can or cannot be settled by arbitration. It answers the question of whether national laws or judicial authorities have barred certain disputes from being arbitrated and reserved these matters to national courts.[3] 
  2. Under French law, the criterions to determine arbitrability are set out in Articles 2059 and 2060 of the French Civil code. Article 2059 of the French Civil code states positively that: “All persons may make arbitration agreements relating to rights of which they have the free disposal”.[4]  Article 2060 then defines arbitrability negatively by providing that: “One may not enter into arbitration agreements in matters of status and capacity of persons, in those relating to divorce or to judicial separation or disputes relating to public bodies and institutions, and, more generally, in all matters in which public policy is concerned. However, categories of public institutions of an industrial or commercial character may be authorized by decree to enter into arbitration agreements”.[5]  
  3. According to Article 2060 of the French Civil code, arbitration is prohibited in all matters in which public policy is concerned. In theory, this provision gave the French legislator the power to limit the matters which may be arbitrated by enacting public policy laws. The objective was to protect certain areas of law deemed fundamental where arbitral jurisdiction should be excluded. Today, however, Article 2060 of the French Civil code has been somewhat cleared of its substance by specific legislative provisions and French case law[6]  which progressively allowed arbitrators to apply principles of public policy to the merits of the dispute,[7]  and even to sanction a party for violating a rule of public policy.[8]  
  4.  Although arbitration fits into the “world of contracts”, a world where the consent of parties is paramount, compliance is rather an obligation imposed on the parties.[9] It was therefore not obvious that these two fields would meet. However, the question of the arbitrability of compliance is one of the issues which arose.[10]
  5. This question must nevertheless be understood broadly as there is no general law on compliance but rather compliance is present in a vast category of fields. 
  6. The fight against corruption is a clear example of an initially rejected[11] but now widely accepted[12] issue in arbitration, materialized by an international consensus.[13]  Such matter is the prime example in which arbitration must consider compliance. In addition, in other regulated matters such as the financial and banking sector,[14] or in antitrust law,[15]  the arbitrability of these disputes is also now widely accepted. 
  7. Most probably in the future, disputes arising from the application of different compliance programs may be referred to an arbitration tribunal.

Adjustment of arbitration to the burden of compliance 

8. Arbitration has been also strongly influenced by the trend towards compliance and has had to adapt thus affecting different key arbitration principles. 

9. This is notably the case of the confidentiality principle,[16]  considered as one of most important characteristics of arbitration.[17]  This principle allows both the protection of business interest (e.g., protection of one’s reputation, protection of trade secrets etc.) and the efficiency of the arbitral process.[18] Yet, there has been calls for transparency in international commercial arbitration as it has been argued that increased transparency is necessary to assure that arbitration continues to succeed as an efficient and reliable method of dispute resolution. This need for transparency can be demonstrated by the growth of certain disclosure obligations. As an example, publicly listed companies have seen the advantage of confidentiality diminished by laws and regulations requiring disclosure of financial and extra-financial information directed at the market.[19] Compliance with such requirements is necessary to avoid any financial sanctions imposed by national rules and regulation. Greater transparency is likely to apply to the world of arbitration, as it applies to the world of compliance, but these notions are not necessarily adverse. A right balance between the interests of parties seeking confidentiality in arbitration and the need for greater transparency needs to be found.[20] 
10. In addition, arbitral institutions themselves have had to adapt to different compliance requirements imposed on them by relevant regulatory authorities. For example, data protection and cybersecurity concerns during the arbitration proceeding are new arbitration hazards that arbitral institutions will have to deal with in the future. More specifically, the ICC, one of the biggest arbitral institutions worldwide, has published a Note to Parties and arbitral tribunals[21] to provide them with all the relevant information regarding compliance obligations imposed by some regulatory authorities during arbitral proceedings (e.g., sanction regulations[22] ). In this note, it is provided that the ICC itself may be required to comply with obligations imposed by French and US authorities, should they request information.[23] It also has had to adapt to certain compliance requirements, notably in terms of payments.[24]
11. All actors of the arbitral world have been adapting to give some space to compliance requirements and thus avoid any sanctions.

The role of arbitrators in dealing with compliance matters

12. As arbitrators have become the common "judges" of international trade and commerce, it is not surprising that they come across compliance issues and requirements when handling arbitral cases. 
13. In recent years, arbitration has seen an increasing number of corruption allegations. It consequently raised different questions such as the impact of compliance on the arbitrator's treatment of corruption or even the importance of the arbitrator's knowledge of the many technical issues related to compliance law. Arbitrators have thus taken a major role in taking into consideration compliance regulations with respect to corruption.
14. Traditionally, arbitrators refused jurisdiction over disputes involving corruption issues. The ICC Case No. 1110 is a brazen example in which the sole arbitrator declined jurisdiction when a contract had been obtained through corruption.[25] This however seems to be a challenge of the past, as there is a consensus that arbitral tribunals must no longer decline jurisdiction over corruption issues.[26] 
15. To do so, arbitrators have had to comply with the internal and international rules and recommendations on the subject. For instance, arbitrators are now using the “red flag” methodology, inspired by the OECD Convention and the American Foreign Corrupt Practice Act (FCPA) of 1977 which allows arbitrators to determine the existence of a corrupt situation[27] relying on different indicators, circumstantial evidence or “red flags” that could indicate the existence of a corrupt situation.  Such indicators do not form an exhaustive and limited list but include : the fact that a contract was awarded without a call for tender even though it is required by the country's regulations, the payment of intermediaries on a commission basis, the high amount of commissions, or the circumstances surrounding their payment, the intermediary's lack of experience or qualification, the refusal to provide some documents (e.g., bank statements) etc.[28]  Yet, if such elements are with no doubt useful elements to assess the existence of illicit activities (such as corruption, money laundering etc.), arbitrators need to keep in mind that the existence of such elements should not become an irrefutable presumption of corruption.
16. In addition, arbitrators who initially lacked investigative powers are now actively taking a part in the fight against corruption by making document requests to obtain specific information.[29] Arbitrators also increasingly tend to ask questions directly to the parties to clarify their doubts.
17. In practice, arbitrators were at first very timid regarding the annulment of contracts tainted by corruption. The first case known in arbitration in which a contract tainted by corruption was set aside by an arbitral tribunal was the ICC Case No. 12990 dated December 2005.[30] 
18. Yet, arbitrators will now become more and more active in the fight against corruption. Therefore, when asked either to enforce an arbitral award or to set it aside, national courts are also playing a crucial role to avoid endorsing corruption practices.[31]  The control exercised by the national judges will push the arbitrators to be careful to render enforceable awards that do not endorse an illegal enterprise and become a real actor in the fight against corruption. With regards to the control operated by French on the violation of international public policy - the Belokon,[32] the Alstom[33] and the Sorelec[34] cases are good illustrations of the red flags techniques used by French judges to identify “serious, precise and concordant indications” of corruption and to prevent the enforcement in France of an award rendered abroad but judged to be in “manifest, effective and concrete” violation of the French conception of international public policy. 
19. Besides the corruption example, it is likely that arbitrators will have to deal with an increasing number of matters dealing with compliance and verify the correct application of laws and regulation. Thus, we are still at the beginning of the interactions between arbitration and compliance. Only time will allow us to assess the real role of the different arbitral actors, and most precisely of arbitrators, in implementing and respecting compliance requirements.
 


 


[1]“International Commercial Arbitration”, G. Born, Wolters Kluwer, Third Edition, January 2021, p. 67 (“In contemporary legal systems, international commercial arbitration is a means by which international business disputes can be definitively resolved, pursuant to the parties’ agreement, by independent, non-governmental decision-makers, selected by or for the parties, applying neutral adjudicative procedures that provide the parties an opportunity to be heard”).

[2]“2018-International Arbitration Survey: The Evolution of International Arbitration”, White & Case, 2018, p. 2 (“97% of respondents indicate that international arbitration is their preferred method of dispute resolution, either on a stand-alone basis (48%) or in conjunction with ADR (49%)”), available here: http://www.arbitration.qmul.ac.uk/media/arbitration/docs/2018-International-Arbitration-Survey-report.pdf.

[3]“The impact of Corruption on ‘Gateway Issues’ of Arbitrability, Jurisdiction, Admissibility and Procedural Issues”, Y. Banifatemi, Dossier of the ICC Institute of World Business Law: Addressing Issues of Corruption In Commercial and Investment Arbitration, 2015, para. 11 (“Arbitrability concerns the question whether national legislation or judicial authority has barred a specific class of disputes from being arbitrated, typically because the legal system in question has arrogated the power to resolve certain disputes and because parties cannot autonomously dispose of certain legal relations (e.g., patents, securities, competition law, criminal law, family law, inheritance rights etc.)”).

[4]Article 2059 of the French Civil code.

[5]Article 2060 of the French Civil code.

[6]Cass. Com., 29 November 1950, Tissot, D, 1951, p. 170 (“nullity of a submission agreement does not follow from the fact that the dispute involves matters of public policy, but only if the public policy has been infringed”).

[7]Paris Court of Appeal, 16 February 1989, Rev. Arb., 1989, p. 711.

[8]Paris Court of Appeal, 20 March 2008, Rev. Arb., 2008, p. 341 (“the arbitrator assesses his or her own competence as to the arbitrability of the dispute with regard to public policy and has the power to apply the principles and rules of public policy as well as to sanction any disregard thereof”).

[9]“Compliance et Arbitrage: un adossement (Rapport de synthèse in “Compliance et Arbitrage”)”, M.-A. Frison-Roche, Mafr, 31 March 2021 (“Indeed, it has been well recalled that arbitration is part of the “world of contracts”, a singular and bilateral world. Whereas Compliance Law is deployed in the “world of unilaterality”: the unilaterality of States, but also the unilaterality of the commitments of companies and, more generally, of crucial operators. Thus, the Law of Compliance consists of an “union” between these two blocks of unilaterality, which are on the one hand the public authorities and on the other hand the crucial economic operators”), available here: https://mafr.fr/fr/article/compliance-et-arbitrage/.

[10] “La synthèse du Colloque Arbitrage & Compliance”, M. Danis, M. Valentini, B. Cazeneuve, August Debouzy, 27 July 2019 (“Marie Danis (August Debouzy) first raised the issue of the arbitrability of compliance disputes. The arbitrability of a dispute depends on the persons involved, or on the subject matter submitted to arbitration; the difficulty lies in the fact that compliance regulations are of a very different nature, some of which are covered by domestic criminal law, others by international treaties, or even constitute rules of good conduct that have no binding effect. Case law does not consider that compliance disputes are by nature inarbitrable: the arbitrator has the power to decide whether he can sanction breaches of rules of international public policy”), available here: https://www.august-debouzy.com/fr/blog/1354-la-synthese-du-colloque-arbitrage-compliance.

[11]“Dealing with Corruption in Arbitration: A Review of ICC Experience”, Ch. Albanesi and E. Jolivet, Special Supplement 2013: Tackling Corruption in Arbitration, 2013, citing ICC Award No. 8891, Clunet, 2000, p. 1076 (“the defendant's failure to pay the claimant the commission that had been agreed upon, the arbitral tribunal relied on the testimony of several witnesses to find that part of the commission was used to influence public officials in an attempt to obtain a higher price under two public contracts. As a result, the arbitral tribunal decided that the consulting contract was void and dismissed all claims”).

[12]Paris Court of Appeal, Belokon v. Kyrgyzstan, 21 February 2017, No. 15/01650, (“Considering that the recognition or enforcement of the award, which would have the effect of giving Mr. BELOKON the benefit of the proceeds of illegal activities, clearly, effectively and concretely violates international public policy; that the annulment sought should therefore be granted”), Paris Court of Appeal, Alstom,10 April 2018, No.16/1182, (“recognition or the execution of the award which orders Alstom to pay sums intended for funding”), “Addressing Corruption in Commercial Arbitration: How Do Tribunals Evaluate and Adjudicate Contractual Relationships Tainted in Corruption?”, G J. Horvath, K. Khan in J. Risse, G. Pickrahn, et al. SchiedsVZ, German Arbitration Journal, Volume 15, Issue 3, 2017, p. 130 (“Corruption has plagued the international economic and business arena for many decades with no indication of relenting. There is an almost universal consensus that corruption is not only immoral and an “international evil”, but also detrimental to the global economy and society as a whole”), “ La corruption saisie par les arbitres du commerce international ”, E. Gaillard, Rev. Arb., 2017, p. 806 (“International condemnation encompasses not only the payment of "bribes" to foreign public officials, which is corruption in the strict sense, but also influence peddling, which consists of a party, public or private, being paid to abuse his or her influence, real or supposed, with a public authority or administration in order to obtain an undue advantage, whether or not the influence produces the desired result”).

[13]United Nations Convention against Corruption (“UNCAC” or “Convention of Merida”), 9 December 2003, available here: https://www.unodc.org/unodc/en/treaties/CAC/index.html.

[14]“Part II Substantive Rules on Arbitrability, Chapter 15 - Arbitrability in Finance and Banking”, I. Bantekas in L. A. Mistelis and S. Brekoulakis (eds), in Arbitrability: International and Comparative Perspectives, International Arbitration Law Library, Vol. 19, 2009, pp. 293-316, spec. p. 295 (“Despite their semantic differences, the language in all of these statutes clearly demonstrates the existence of a presumption that is in favour of arbitration in all matters reflecting an economic or financial interest (…)”), see also, “Financial Institutions and International Arbitration”, ICC Commission, 2016, para. 94, available here: https://iccwbo.org/content/uploads/sites/3/2016/11/icc-financial-institutions-and-international-arbitration-icc-arbitration-adr-commission-report.pdf.

[15]“Chapter 1 Arbitrability of Antitrust Law from the European and US Perspectives", in EU and US Antitrust Arbitration: A Handbook for Practitioners”, A. Mourre, Kluwer Law International, 2011 (“Arbitrability of competition law is no longer an issue (…) another reason for the general admission of the arbitrability of antitrust rules is that competition law has become the driving force of modern market economies and that it is in the best interest of the public that arbitrators apply it rather than shy away because of arbitrability concerns”).

[16]“Confidentiality in International Commercial Arbitration”, Arbitration International, L. E. Trakman, William W. Park edition, 2002, pp. 1 – 18 (“The issue of confidentiality is key to the successful practice of international commercial arbitration. The confidentiality of arbitration proceedings is a reason for resorting to arbitration, as distinct from litigation”).

[17]“2018-International Arbitration Survey: The Evolution of International Arbitration”, White & Case, 2018, p. 6 - p. 28 (“87% of respondents believe that confidentiality in international commercial arbitration is of importance. Most respondents think that confidentiality should be an opt-out, rather than an opt-in, feature”), available here: http://www.arbitration.qmul.ac.uk/media/arbitration/docs/2018-International-Arbitration-Survey-report.pdf.

[18]“Transparency and Confidentiality in International Commercial Arbitration”, S. Kumar, R. Pratap Singh, in Stavros Brekoulakis (ed), Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, Kluwer Law International, 2020, p. 470 (“[…] it can be safely concluded that there is a need to maintain a certain degree of confidentiality to protect business interests as well as the sanctity of the arbitral process”).

[19]​​​​​​​“Nouvelles tendances de l’arbitrage international”, J.-G. Betto, J. Fry, M. Henry, E. Kleiman et P. Pinsolle, RDAI/International Business Law Journal, No. 3, 2006, pp. 377-379, see Article L. 225-100-1 of the French Code of Commerce for financial information and Article L. 225-102-1 of the French Code of Commerce for extra-financial information.

[20]“Transparency and Confidentiality in International Commercial Arbitration”, S. Kumar, R. Pratap Singh, in Stavros Brekoulakis (ed), Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, Kluwer Law International, 2020, p. 481 (“There is a need to bring about a balance between the concepts of confidentiality and transparency since the former is responsible for bringing commercial parties to arbitration, whereas the latter is necessary for ensuring justice in the process”).

[21]“Note to Parties and Arbitral Tribunals on ICC Compliance”, International Chamber of Commerce, September 29, 2017.

[22]“Note to Parties and Arbitral Tribunals on ICC Compliance”, International Chamber of Commerce, September 29, 2017, p. 2, para. 2 (“Sanction regulations may be applicable to DRS activities. (…) to the sanction regimes of the United Nations (“UN”), the European Union (“EU”) and the US Office of Foreign Assets Control (“OFAC”)”).

[23]“Note to Parties and Arbitral Tribunals on ICC Compliance”, International Chamber of Commerce, 29 September 2017, p. 3, para. 12 (“Should the administration of a case, including any payment, trigger a requirement to notify French and/or US authorities under international sanctions regulations, ICC will give them the necessary notice(s). Although ICC considers confidentiality to be a key principle in ICC arbitration proceedings, it may be required to comply with obligations imposed by the French and US authorities, should they request information. In such a situation, ICC will communicate the information pursuant to its obligations”).

[24]“Note to Parties and Arbitral Tribunals on ICC Compliance”, International Chamber of Commerce, 29 September 2017, p. 3-4, paras. 14-19 (“Under their internal policies, ICC’s bank(s) may be precluded from receiving payments from, and making payments to, the parties (and other players such as arbitrators), and to ICC itself, failing formal clearance to their satisfaction from the relevant authorities. Accordingly, ICC is not in a position to guarantee payments, unless and until such formal clearance has been obtained. Among other factors, the bank(s) will have regard to the nature of the transaction, the currency used and the scope of the activities that they are required to perform”).

[25]ICC Award No. 1110, 1963, Arb. Int'l, 1994, p. 282 (“contracts which seriously violate bonos mores or international public policy […] cannot be sanctioned by courts or arbitrators” and “[p]arties who ally themselves in an enterprise of the present nature must realise that they have forfeited any right to ask for the assistance of the machinery of justice (national courts or arbitral tribunals) in settling their disputes”).

[26]ICC Case No. 4145, Yearbook Commercial Arbitration, 1987, p. 97, ICC Case No. 7047, 1994 Award, Yearbook Commercial Arbitration, 1996, p. 79., ICC Case No. 5622, Rev. Arb., 199, p. 327, § 169, ICC Case No. 5943, JDI, 1991, p. 1014, n. D. Hascher, “La corruption saisie par les arbitres du commerce international”, E. Gaillard, Rev. Arb., 2017, para. 18 (“The first, on which there is complete unanimity today, both in state case law and in the case law of the Court of arbitral jurisprudence, is that the arbitrator who finds that the contract covers a corrupt activity should not infer from it the non-arbitrability of the matter and its own absence of jurisdiction but retain its jurisdiction and declare it null and void or ineffective for disturbance of international public order”).

[27]“Addressing Corruption in Commercial Arbitration: How Do Tribunals Evaluate and Adjudicate Contractual Relationships Tainted in Corruption?”, G J. Horvath, K. Khan in J. Risse, G. Pickrahn, et al. SchiedsVZ, German Arbitration Journal, Volume 15, Issue 3, 2017, p. 130.

[28]“La corruption saisie par les arbitres du commerce international”, E. Gaillard, Rev. Arb., 2017, p. 805, spéc. p. 819.

[29]“La corruption saisie par les arbitres du commerce international”, E. Gaillard, Rev. Arb., 2017, p. 836 (“Les arbitres, libres de soulever d'office les questions de corruption si les circonstances de la conclusion d'un contrat leur paraissent suspectes, possèdent en effet de vastes pouvoirs d'investigation (…) [s]ous la seule réserve du respect du contradictoire”).

[30]ICC Case No. 12990, JDI, 2010, p. 1406, n. F. Mantilla Serrano; also published in “Tackling Corruption in Arbitration”, ICC Supplement, 2013 (“it is generally recognized under French law [...] that corrupt pacts [or contracts entered into because of corrupt practices] are unlawful”), World Duty Free Company Limited c/ République du Kenya, ICSID. Case No. ARB/00/7, 4 October 2006, para. 157 (“In light of domestic laws and international conventions relating to corruption, and in light of the decisions taken in this matter by courts and arbitral tribunals, this Tribunal is convinced that bribery is contrary to the international public policy of most, if not all, States or, to use another formula, to transnational public policy. Thus, claims based on contracts of corruption or on contracts obtained by corruption cannot be upheld by this Arbitral Tribunal”).

[31]Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958; entered into force June 7, 1959, Art. V(2)(b); Model Law on International Arbitration, 1985, Arts. 34(2)(b)(ii) & 36(1)(b)(ii).

[32]Paris Court of Appeal, Belokon v. Kyrgyzstan, 21 February 2017, No. 15/01650.

[33]Paris Court of Appeal, Alstom, 10 April 2018, No.16/1182.

[34]Paris Court of Appeal, Libyan State v. Sorelec, 17 November 2020, No. 18-02568.