The Lagarde Prosecution: Will the Decision Be a Blow to Finality in Investor-State Arbitration?

International ADR

By Kenneth B. Reisenfeld & Joshua M. RobbinsFebruary 2017 | Print
On Dec. 19, 2016, International Monetary Fund Managing Director Christine Lagarde was convicted of criminal negligence for failing, as French finance minister, to appeal an adverse arbitration award against a French government-owned company. See Landon Thomas Jr., Liz Alderman & Aurelien Breeden, “I.M.F. Stands by Christine Lagarde, Convicted of Negligence,” N.Y. Times B1 (Dec. 20, 016)(available at She had faced similar charges for agreeing to refer the company’s dispute to arbitration in the first place, but was acquitted.

Lagarde’s criminal prosecution and conviction, as well as other measures governments have taken in recent months, suggest increasing peril for arbitral tribunals and government officials involved in international arbitration, particularly when it involves states or state-affiliated parties.

The conviction, which was reported on the front pages of newspapers around the world, may affect how sovereign governments and government officials respond to arbitration claims and awards made against them in the future.

Officials who might otherwise be inclined to settle, recognize, or agree to pay adverse commercial or investor-State awards may see the specter of prosecution as another rationale for agreeing to challenge the recognition and enforcement of awards issued against the government. If so, the Lagarde case could end up undermining finality in investor-State disputes by increasing the length and cost of such cases.


Lagarde’s conviction stems from her involvement in a decades-old case regarding controversial French businessman Bernard Tapie.

When Tapie was appointed as a French government minister in 1992, he was forced to divest his business interests, including his ownership of German apparel brand Adidas. The deal was handled by a subsidiary of French state-owned bank Crédit Lyonnais, which sold Adidas to a group of investors that included another Crédit Lyonnais subsidiary.

A year later, Adidas was re-sold at a much higher price, leading Tapie to claim that the bank had cheated him out of several hundred million euros in profit. Years of litigation between the businessman and the bank ensued.

In 2007, the parties agreed to refer the dispute to binding arbitration. Christine Lagarde, then the country’s finance minister and overseer of Crédit Lyonnais, signed off on the referral.

In 2008, a three-member arbitral tribunal ruled in favor of Tapie, awarding him nearly €300 million. The government, including Lagarde, chose not to pursue an appeal or annulment of the award in the French courts. It eventually emerged, however, that one of the arbitrators had extensive and undisclosed ties to Tapie and had colluded with him to influence the result of the arbitration in Tapie’s favor.

A challenge to the award was then launched, and in 2015, the Paris Court of Appeal overturned the award. The court ordered Tapie to repay the money he had collected from the Crédit Lyonnais subsidiary. The French Court of Cassation upheld this decision in June 2016.


“L’affaire Tapie” also led to a criminal investigation of Bernard Tapie’s lawyer, the corrupt arbitrator, and Lagarde, who was accused of negligence in agreeing to remove the case from the French courts and sending it to arbitration. Lagarde also was accused of negligence for failing to challenge the arbitrators’ decision, in the process disregarding advice from others in her ministry.

It had also been alleged that former French President Nicolas Sarkozy ordered the arbitration referral to reward Tapie for supporting his campaign, and that Tapie had a suspiciously cozy relationship with government officials. But Lagarde was not charged with corruption.

The French court ultimately acquitted Lagarde on the first ground, but convicted her for her failure to challenge the award. The court, however, ruled that Lagarde, a former chairwoman of global law firm Baker & McKenzie, would not be subject to prison or a fine. The case against the tainted arbitrator and lawyer remains pending.

Lagarde’s prosecution and conviction may seem surprising to U.S. observers. In the United States, government officials are typically not subject to criminal prosecution for negligence in conducting official business.

But France and many other countries do criminalize negligent official conduct, which can lead to excessive caution and delay in government decision-making. Even so, the lead French prosecutor publicly stated that the case against Christine Lagarde was “very weak.” Liz Alderman, “Lagarde Case Is ‘Weak,’ French Prosecutor Says, Raising Chances of Acquittal,” N.Y. Times B4 (Dec. 16, 2016)(available at

And it is highly unusual for a senior government official to be prosecuted for choosing not to challenge an adverse arbitration award rendered against the state, let alone for agreeing to refer a dispute to arbitration.


The Lagarde conviction is only one of several recent cautionary developments for arbitrators who may be held to heightened scrutiny for perceived criminal improprieties. In several cases, arbitrators have been targeted by civil lawsuits and criminal prosecution for misconduct in the course of their service as arbitrators.

In May 2016, the Ordinary Court of Milan, Italy, disqualified arbitrator Marco Lacchini in a €3 billion insurance arbitration based upon “serious hostility” between him and one of the parties, which has accused him of agreeing to rule adversely in return for a bribe.

The U.S. company lodging the accusation filed a suit in a U.S. federal court against the arbitrator in April 2016, under the Racketeering Influenced and Corrupt Organizations Act—RICO—as well as a separate action in a U.K. court. While the company dismissed the U.K. action, the U.S. RICO case is still pending. Tom Jones, “Arbitrator fights bribery suit in New York,” Global Arbitration Review (Sept. 8, 2016)(available at

In October 2016, the United Arab Emirates revised its criminal code to authorize prosecution and imprisonment of arbitrators who violate their “duty of fairness and impartiality.” Andrew MacCuish & Nicole Newdigate, “UAE Penal Code, Article 257: Arbitrators may now face temporary imprisonment for acting contrary to the duty of fairness and impartiality,” Mondaq (Dec. 5, 2016)(available at

The newly amended Article 257 to the UAE’s Federal Law No. 3 of 1987 (Penal Code) provides for temporary imprisonment in such cases, and may be triggered by the arbitrator’s issuance of a decision, expression of an opinion, or submission of a report that is tainted by improper bias.

Commentators have suggested that, in reaction, some arbitrators have declined to sit on tribunals seated in the UAE, and parties have begun to question the choice of UAE as a venue for their disputes. “Arbitration in Dubai: two steps forward, one step back,” Herbert Smith Freehills Dispute Resolution—Arbitration Notes blog (Dec. 9, 2016)(available at

Just last month, on Jan. 5, British arbitrator and Malaysian resident Yusuf Holmes Abdullah was sentenced to six months in jail after being convicted in a Malaysian court of submitting a false statement of independence and, thereby, misleading the Kuala Lumpur Regional Centre for Arbitration into appointing him. “Arbitrator sentenced to jail in Kuala Lumpur,” Global Arbitration Review (Jan. 5, 2017)(available at Abdullah originally had been charged with corruption, on grounds that he had solicited a $2 million payment from one of the parties in return for ruling in its favor.


Christine Lagarde’s conviction could undermine the efficient resolution of international arbitrations involving sovereign governments, as it may cause state actors to fear being put in legal jeopardy if they agree to settle arbitration claims or fail to challenge unfavorable awards.

Even before this recent development, investor-State disputes and other large-scale international arbitrations have produced extensive post-arbitration enforcement litigation. The length, cost and complexity of these proceedings create a fairly high bar for investors seeking justice.

The continuing Yukos saga is an illustration. In July 2014, an arbitral tribunal issued an award in the amount of US$50 billion dollars against the Russian government and to a group of investors in the Russian oil company Yukos. See In the Matter of an Arbitration before a Tribunal Constituted in Accordance with Article 26 of the Energy Charter Treaty and the 1976 UNCITRAL Arbitration Rules between Yukos Universal Limited (Isle Of Man) and the Russian Federation (July 18, 2014)(available at

The investors claimed that their investments in Yukos had been destroyed by a series of Russian government actions, including the prosecution and imprisonment of Yukos CEO Mikhail Khodorkovsky, aggressive tax enforcement, and forced bankruptcy of the company.

The investors then filed recognition and enforcement actions in the courts of several jurisdictions around the world. Russia responded by asking the Dutch courts to set aside the award. This litigation is pending in numerous countries.

Similarly, in investor-State arbitrations before the World Bank’s International Centre for the Settlement of Investment Disputes, best known as ICSID, states routinely seek to annul awards issued in favor of investors. Argentina alone has sought annulment of more than a dozen adverse awards. (Search on ICSID matters at

* * *

If state officials now may face criminal prosecution for failing to challenge an unfavorable award, the adoption of delay strategies and obstruction could become the norm for sovereign state officials. Unfortunately, this instinct plays directly into the hands of critics of investor-State arbitral mechanisms by undermining the speed, cost and finality of arbitration.

Practically speaking, these recent developments reinforce the significance of selecting an arbitration-friendly forum as the situs of arbitration. In investor-State investment disputes, the respondent state’s track record of respect for and compliance with prior arbitration awards should be carefully evaluated.

In light of the Lagarde case, due consideration should also be given to the state’s practice of holding its officials or the arbitrators themselves personally liable for decisions involving the arbitration.

After L’Affaire

The case: The IMF’s head is convicted, though not punished, for not appealing an arbitration award in her former role as a French finance minister.

The fallout: The case could be cataclysmic because every investor-State arbitration could be put at risk of protracted government review leading to challenges.

A less-dire assessment: The matter is a three-decades-old deal gone bad, a large case with government officials and private actors, and a corrupt arbitrator. Sure, big arbitrations involving governments are always complicated, but this at least appears to be the extreme. Regardless, the authors offer a new practice standard in light of the scandal.


Kenneth B. Reisenfeld is a Partner in BakerHostetler’s 40-lawyer International Arbitration and Litigation Practice. He has more than 35 years’ experience serving as an advocate and an arbitrator in high-profile investor-State treaty disputes and commercial arbitrations involving sovereign governments or state-controlled entities. Joshua M. Robbins, Counsel, has appeared in more than a dozen investor-State and commercial arbitrations; previously, as a federal prosecutor, he was lead counsel in 10 federal jury trials and more than 100 prosecutions, including some of the largest fraud and corruption cases in the country. The co-authors are based in the firm’s Washington, D.C. office. This article is updated and expanded from a Jan. 4 post on the firm’s blog at

Why Wait?

Get the current newsletter and
Sign up to receive exclusive content and special offers in the areas that interest you.
Copyright © 2000-2015 by John Wiley & Sons, Inc. or related companies. All rights reserved.