A multi-billion-dollar compensation for a fraudulent music producer shows that investor-state-arbitration should be abolished
15.11.2023 – Norbert Häring
15 November 2023 | A British court has annulled an 11 billion dollar compensation award that Nigeria was supposed to pay to the company of two fortune-seekers who cheated and bribed from contract initiation to arbitration. The judge warned that the whole thing could easily have ruined Nigeria’s public finances. The investor state arbitration tribunals are very susceptible to profiteering and corruption due to excessive damages that becon.
Former music producer Michael Quinn founded the company Process & Industrial Development (P&ID) in the British Virgin Islands, together with another Irishman as his partner. As the trade magazine Global Arbitration Review reports from the judgment of a London review court, this company had bribed a Nigerian official to land the contract for the construction of a gas–fired power plant in 2010. Without having done anything else worth mentioning, the duo sued for damages before an investor arbitration tribunal in London in 2012. Allegedly, the state had not provided sufficient infrastructure to realize the project.
The arbitration tribunals usually consist of one lawyer from an international law firm nominated by the claimant and one lawyer nominated by the defendant and another nominated by the institution that houses the tribunal, who acts as the chair. As the arbitrators nominated by the parties usually – but not always – agree with those who nominate them, everything usually depends on how seriously a single person, the chairperson, takes their task and how they decide.
In the case at hand, the arbitration tribunal awarded the absurd sum of 6.6 billion dollars in “damages”. Including interest, which was also set far too high, 11 billion dollars were at stake in the review procedings. These Mickey Mouse courts are prone to such excesses, because it has become common practice to use calculation model tthat yield absurdly high profits that investors could allegedly have reaped. These hypothetical profits are the lion’s share of the damages awarded. Whether there were any costs – apart from corruption payments – is irrelevant. The arbitration industry benefis handsomely from the high stakes they create.
Nigeria failed with an initial challenge to the judgment. Then, by a stroke of good fortune, the Nigerian government found out about improper dealings by the company‘s lawyers during the arbitration proceedings and was thus able to obtain a reopening. It turned out that there had been false statements. In addition, the company‘s law firm had succeeded – presumably through bribery – in obtaining the Nigerian side‘s internal documents relating to the arbitration proceedings. This gave them an illegitimate information advantage.
Apart from this, the judge made little secret of his opinion that the size of the damages and interest was outrageous, that the arbitrator appointed by Nigeria was far too passive and that the chairman of the arbitration tribunal did not sufficiently scrutinize the calculation of damages.
Apparently, the Nigerian government had paid very little attention to the arbitration proceedings. In retrospect, this might seem grossly ncompetent. However, when you consider that it was faced with two lfortune hunters who had not made any investments in the country, this neglicence becomes understandable. Normal people that arbitration procedings with any legitimacy could award billions in “compensation” for nothing.
The London judge warned that such mistakes were inherent in the established practice of arbitration tribunals and could happen again at any time. He also stressed that it has been a close call in this case. The two criminal soldiers of fortune with their corrupt London lawyers came very, very close to relieving Africa‘s largest country of a large part of a year‘s tax revenue. If successful, the two lawyers would have walked away with several billion dollars of the bounty.
Investor arbitration is irreparably broken by perverse incentives for arbitrators and claimants, which have ensured that far too much money is regularly at stake. Decisions on compensation for expropriation belong before a proper court.
Investment treaties undermine the protection of climate and environment – including new generation treaties
19 October 2021 | In this guest column, arbitration lawyer Juan Carlos Boué presents the case of Columbia, which has included an environmental exception in their treaty with Canada. Still they were sentenced by a tribunal to pay damages to a Canadian mining company for a ruling of their highest court, which imposed mining restrictions in protected areas.
Vattenfall vs. Germany: A Disgraceful Settlement of a Scandalous Claim
16 March 2021 | On March 5, 2021, it was announced that the Germany had reached an agreement with the Swedish state company Vattenfall to settle a claim valued at up to €7 billion, over the phase-out of nuclear energy in the wake of Fukushima. The government pay Vattenfall €1.4 billion, much too much, argues Juan Carlos Boué in this guest comment.
Juan Carlos Boué: How a World Bank tribunal is plundering Pakistan
20 November 2020 | The special tribunals which allow potential or actual foreign investors to sue governments for infringements on their rights outside the regular courts are often the most criticized component of free trade agreements. Juan Carlos Boué gives an example in this guest comment, which makes it clear why this is so.
Juan Carlos Boué: The World Bank Sausage Factory
13 December 2020 | Investor State Dispute Settlement, those special tribunals which foreign investors can use to sue a host government for alleged infringement on their rights, have drawn criticism for being one sided. Investors can sue governments, but not vice versa. Arbitration counsel Juan Carlos Boue describes a case, which takes this to the extreme. An investor drags a government in front of a tribunal because the government is suing the investor at regular courts.