History & Modern Evolution of Transnational Commercial Law

Document-Id: 103350, Please cite as: "https://www.trans-lex.org/103350"

Title

Hwang, Michael Lim, Kevin, Corruption in Arbitration - Law and Reality, para. 95-100

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Article is downloadable at http://www.arbitration-icca.org/media/4/97929640279647/media013261720320840corruption_in_arbitration_paper_draft_248.pdf

Table of Contents

Corruption in Arbitration - Law and Reality

Content

Corruption in Arbitration - Law and Reality

Michael Hwang S.C. and Kevin Lim

[...]

95. Most national systems of law draw a distinction between contracts that are procured by corruption,
and contracts that provide for corruption (such joint intention to commit corrupt acts under the
contract may be expressly stipulated or may, as is more commonly the case, remain unwritten).
Contracts procured by corruption are merely voidable at the instance of the innocent party,254

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whereas contracts which provide for corruption may be considered null and void.255 The difference
between the two is that a voidable contract is "intrinsically valid" until the innocent party takes
positive steps to set it aside, whereas a contract which is null and void need not be set aside, as it is
from the outset regarded as "entirely ineffectual".256

96. For instance, under English common law, an innocent party is not compelled to set aside a voidable
contract, and may choose to "keep the contract alive and enforce it according to its terms".257If the
innocent party continues with the enforcement and performance of the voidable contract, with
knowledge of the circumstances rendering the contract voidable, it may lose the right thereafter to
rescind the contract.258Assuming the innocent party instead decides to set aside a voidable contract
procured by corruption, "it is no bar to avoidance of [such a] contract that the innocent party may
previously have committed a breach of that contract."259After rescission of the contract, restitutio in
integrum may be claimed to restore the parties to the position they would have occupied if the
contract had not been performed. However, restitutio in integrum does not require the victim of
corruption to return to the corrupt party the bribe paid to the victim’s agent; the victim is entitled to
recover the bribe from its agent and keep it.260

97. These rules governing voidable contracts determine whether a party which has been induced to enter
into a contract through corruption of its agent can rescind the contract in the third scenario
mentioned above (see [89]). World Duty Free v Kenya provides an example of a contract which was
voidable because it was procured by corruption, and was eventually set aside by the victim of
corruption, Kenya. The investor in World Duty Free was an Isle of Man corporation known as
World Duty Free Company Ltd. It initiated ICSID arbitration against Kenya pursuant to an
arbitration clause in a contract to run duty-free operations in Kenya’s international airports in
Nairobi and Mombasa, alleging that Kenya had breached the contract by, inter alia, appointing a
receiver over its operations. During the proceedings, the investor filed a memorial in which the
investor admitted to paying a US$2 million "personal donation" to Mr Daniel arap Moi, then
President of Kenya, "in order to be able to do business with the Government of Kenya". 261 The
tribunal had no doubt that this was a bribe to obtain the contract.262Consequently, it held that, under

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English law (the governing law of the contract263), the contract was voidable at the instance of
Kenya, as the contract had been procured through corruption of its agent.264Moreover, Kenya had
not waived its right to rescind the contract, since Kenya formally gave notice of its avoidance of the
contract in its counter-memorial, soon after its former President’s acceptance of the bribe from the
investor came to light in the investor’s memorial.265The contract was properly set aside, and as a
result, the investor’s claim for breach of contract was dismissed.266

98. As for contracts which provide for corruption, without either party having to take any steps to set it
aside, courts will not enforce the contract, nor will the courts provide any other non-contractual (e.g.
restitutionary) remedies arising out of the contract.267 Such contracts, as mentioned above, may be
regarded to be null and void for illegality under the applicable law.268 Moreover, the parties are
precluded from maintaining any claims founded upon the contract (whether contractual or
restitutionary in nature) by the equitable maxims ex turpi causa non oritur actio or nemo auditur
turpitudinem suam allegans (an unlawful or morally reprehensible act cannot serve as the basis of an
action in law) and in pari delicto potior est conditio possidentis (where the parties are both
blameworthy, the defendant has the stronger position).269 These maxims are expressions of the
"Clean Hands Doctrine",270which bars a claimant’s claims due to its illegal or improper conduct in
relation to those claims. Claims tainted by wrongdoing therefore will not succeed, and the loss lies
where it falls. As the Clean Hands Doctrine can be traced back to Roman law, it is also applicable
under the law of many civil law jurisdictions.271It operates, conceptually speaking, as a procedural
bar to the admissibility of a claim.272

99. Where the applicable law reflects these principles, an agreement between a principal and his
intermediary for the latter to corruptly procure a benefit from a third party is not enforceable, nor can

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money or property transferred under such an agreement form the subject of a claim.273Thus, a
corrupt intermediary which has fulfilled its duties under an intermediary agreement cannot claim his
commission from the equally corrupt principal (the above-mentioned first scenario: see [89]), for in
pari delicto potior est conditio possidentis— the defendant principal has the stronger position.
Neither can a corrupt principal recover advance payments made to an equally corrupt intermediary,
even if the latter fails to procure the contract or relevant government approvals for the principal
under the illegal intermediary agreement (the above-mentioned second scenario: see [89]).
Reasoning along these lines was employed in cases like ICC Case No. 6248 (1990) (addressing the
first scenario) and ICC Case No. 5943 (1990) (addressing the second scenario).274

100. However, if only the intermediary intends to perform the intermediary agreement illegally, and the
principal is unaware of such intention, the latter can still bring claims founded upon the contract
(whether contractual or restitutionary in nature), for in such case the contract remains lawful—"the
fact that one party intends to perform the contract in an illegal way does not make the contract itself
completely illegal"— and the principal is not in pari delicto (more accurately, he is not in any way
in delictum).275Thus, an innocent principal may be able to recover payments made to a corrupt
intermediary if, after entering into a valid intermediary agreement, the principal discovers that the
intermediary has bribed public officials in a bid to procure a contract or relevant government
approvals for the principal (the above-mentioned second scenario: see [89]).276

[...]

254See for instance the discussion of English law in World Duty Free supra note 8 at [164] (citing Panama & South Pacific etc. v. India etc. Works Company (1875) 10 Ch. App. 515; Armagas v. Mundogas [1986] 1 A.C. 717; and LogicRose Ltd v. Southend United Fc Ltd [1988] 1 WLR 1256). See also the COE Criminal Law Convention, which requires European member states to provide for civil remedies relating to, inter alia, contracts tainted by corruption, and which likewise draws a distinction between contracts procured by, and contracts providing for, corruption. Article 8(2) of the Convention provides that: "Each Party shall provide in its internal law for the possibility for all parties to a contract whose consent has been undermined by an act of corruption to be able to apply to the court for the contract to be declared void, notwithstanding their right to claim for damages." On the other hand, for contracts which provide for corruption, Article 8(1) provides that: "Each Party shall provide in its internal law for any contract or clause of a contract providing for corruption to be null and void."
255 See for instance Article 8(1) COE Criminal Law Convention supra note 254.; Article 20 of the Swiss Federal Code of Obligations (OR); Section 134 of the German Civil Code (BGB). On the Swiss Federal Code of Obligations, see F. Dessemontet and T. Ansay, Introduction to Swiss Law (Kluwer/Schulthess, 3rd ed., 2004) at p. 109. See further the Explanatory Report to Article 8(1) of the COE Criminal Law Convention (noting that: "in most European countries, the contract the cause of which is illegal is null and void."); and Oxford Handbook supra note 11 at pp. 600 and 609 (in particular, the arbitral awards cited at p. 609 fn. 114). Cf. the contrary position under English law: see Nelson Enonchong, Illegal Transactions (LLP Ltd, 1998) (hereinafter "Enonchong (Illegal Transactions)") at p. 31; Nelson Enonchong, "Effects of Illegality: A Comparative Study in French and English Law" 44(1) ICLQ 196 (1995) (hereinafter "Enonchong (Comparative)"); and H.G. Beale, Chitty on Contracts (Sweet & Maxwell, 30th ed., 2008) (hereinafter "Chitty") at [16-010] ("illegal contracts are not devoid of legal effect, but the ex turpi causa maxim entails that no action on the contract can be maintained" (emphasis added)).
256See Lord Mustill’s Expert Legal Opinion in World Duty Free supra note 8 at [164].
257See Lord Mustill’s Expert Legal Opinion in World Duty Free ibid. at [164].
258See Lord Mustill’s Expert Legal Opinion in World Duty Free ibid. at [164].
259World Duty Free ibid. at [183]. See also Barry v. Stoney Point Canning Co. (1917) 55 SCR 51.
260World Duty Free ibid. at [186] (citing LogicRose Ltd v. Southend United Fc Ltd [1988] 1 WLR 1256). See also Chitty supra note 255 at [29-156] and Oxford Handbook supra note 11 at p. 601.
261 World Duty Free supra note 8 at [66].
262World Duty Free ibid. at [136].
263There was some controversy as to whether English or Kenyan law applied owing to contradictory choice of law provisions in the contract, but the tribunal did not need to decide between either governing law clause, since Kenyan law was in all material aspects the same as English law with regard to the issues in dispute between the parties. See World Duty Free supra note 8 at [158]-[159].
264World Duty Free ibid. at [164] and [182].
265World Duty Free ibid. at [182]-[183].
266 See World Duty Free ibid. at [128], and [182]-[185].
267 Chitty supra note 255 at [16-007].
268 See [95] and supra note 255 and the referenced text.
269 Holman v. Johnson (1775) 1 Cowp. 341; Harry Parker v. Mason [1940] 2 K.B. 590. The Clean Hands Doctrine applies to both contractual and non-contractual claims: see generally Gerhard Dannemann, "Illegality as Defence Against Unjust Enrichment Claims" (2000) Oxford U Comparative L Forum 4, available at (discussing the Clean Hands Doctrine in the context of restitutionary claims); Enonchong (Illegal Transactions) supra note 255 (discussing the Clean Hands Doctrine in the context of, inter alia, contractual, restitutionary, and proprietary claims); Kreindler (Ulf Franke) supra note 6 at pp. 321-322 (citing inter alia, Section 242 German Civil Code (BGB) and the Californian decisions Camp v Mangels 35 Cal. App. 4th 620 and Bain v Doctro‘s Co. 222 Cal. App. 3d 1048); Enonchong (Comparative) supra note 255; and William Swadling, "The Role of Illegality in the English Law of Unjust Enrichment" 2000) Oxford U Comparative L Forum 4, available at .
270Lamm, Pham, and Moloo supra note 6 at pp. 723-726; Kreindler (Ulf Franke) supra note 6 at pp. 318-319.
271Dannemann supra note 269 (citing the Czech and Slovak Civil Code of 1992). See also Kreindler (Ulf Franke) supra note 6 at pp. 317-318 (citing, inter alia, ss. 242 and 817(2) of the German Civil Code (BGB)) and Lamm, Pham, and Moloo supra note 6 at p. 728.
272See World Duty Free supra note 8 at [160] and [181]; Dannemann supra note 269 (the nemo auditur turpitudinem suam allegans and ex turpi causa non oritur action maxims are "procedural and, technically speaking, not a defence but a limitation in making a claim."); Kreindler (Ulf Franke) supra note 6 at pp. 323-327; Lamm, Pham, and Moloo supra note 6 at pp. 723-726.
273Chitty supra note 255 at [16-010] and [16-177]. See for instance Apthorp v Neville (1907) 23 TLR 575 and Parkinson v College of Ambulance Ltd [1925] 2 K.B. 1.
274These cases are helpfully summarized in Crivellaro supra note 79 at pp. 128-130. Other relevant cases include ICC Case No. 3913 (1981); ICC Case No. 3916 (1982); ICC Case No. 6497 (1994); ICC Case No. 8891 (1998).
275Enonchong (Illegal Transactions) supra note 255 at pp. 292-293 and 297-299 and Chitty supra note 255 at [16- 011]. For comparative law analysis, see Dannemann supra note 269 and Enonchong (Comparative) supra note 255.
276Assuming the main contract or relevant government approvals have not yet been procured, the principal may terminate the intermediary agreement owing to the intermediary’s breach of contract (lawful performance of its obligations being impliedly, if not expressly, required under the intermediary agreement: see Kim Lewison, The Interpretation of Contracts at [7.11]), and bring an action for money had and received to recover any advance payments made to the intermediary on the basis of total failure of consideration: see Chitty supra note 255 at [12- 026], [16-011], [24-50], and [29-054]-[29-059]. Alternatively, if the main contract or relevant government approvals are initially procured, but are subsequently rescinded by the government owing to the intermediary’s corruption of its officials (see Armagas Ltd v Mundogas SA [1986] AC 717 at 744-745), the principal may thereafter bring a claim for damages arising out of the intermediary’s breach of contract. See further Enonchong (Illegal Transactions) supra note 255 .

Referring Principles

Trans-Lex Principle: IV.7.2 - Invalidity of contract due to bribery

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