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Meyer, Olaf, The Impact of Corruption on International Commercial Contracts, 2015, pp. 31 et seq.

Title
Meyer, Olaf, The Impact of Corruption on International Commercial Contracts, 2015, pp. 31 et seq.
Content
Michal Joachim Bonell - Olaf Meyer
Editors

The Impact of Corruption on International Commercial Contracts

[...]

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1.4.1.1 Treating the Main Contract as Void

Where the applicable law provides for the invalidity of a contract procured by
corruption, it cannot be enforced at court even if the principal would like to retain
the contract despite its tainted nature.
   Illegality as a legal category is probably not the right starting point for voiding
the contract: in contrast to the bribe agreement, the content of the main contract
is not illegal. The law prohibits the payment of bribes, though generally not the
performance of the contract obtained by such means. It can be observed for CHINA
that the contract would still not be declared void even if it breaches administrative
provisions or a public tender does not take place, even though this way required
by law.84 However, several reporters from the Romanic legal family considered it
possible that the illegality of the bribe agreement would penetrate through to the
cause of the main contract.85
   Several other legal systems adopt the approach that the main contract shall be
void if the payment of the bribe has had an effect on its content.86 For instance,
GERMAN jurisprudence maintained for a long time the view that the main contract
is contra bonos mores and is thus void if its content is "disadvantageous" to the

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pincipal.87 In CHINA the contract may possibly be void if the corrupt agent played
a central role in its allocation.88 In PORTUGAL public sector contracts shall be
void without the possibility of approval.89 The ITALIAN procurement law, too,
requires that the public authority terminate the contract once a final court decision
finds corruption in its negociation.90 Finally, RUSSIAN Courts have held contracts
procured by corruption void on grounds of abuse of rights where one party knew that
the agent of its counter-party had been bribed and acted to its principal's detriment.91



1.4.1.2 Voidability of the Main Contract


Assuming that the protection of the injured principal forms one of the main aims
in tackling corruption, it may be sensible to allow him to decide on the validity of
the contract rather than insisting on its invalidity. The principal could of course have
legitimate economic reasons for wanting to uphold the contract. For instance, the
contract could still be commercially profitable, despite a corruption-inflated price.
Moreover, the principal may fear that the invalidity could lead to further losses that
resulte from the inevitable delay in acquiring a new contract.
  There are numerous legal aspects that can be considered with regard to the 
voidability of the main contract. For reasons of simplicity there will be no distinction
here between whether the contract is initially pending validity but can be approved
by the principal, or whether the originally valid contract can later become invalid by
a corresponding declaration of avoidance by the principal.
  It can be seen that many legal systems allow for the rules on mistake and
fraud to be used to rescind the main contract. The fraudulent behaviour in the
above example would be present when A does not inform D of the payment to
C. Such a duty to disclose may be observed in that the bribe payment represents a
fraudulent interference with D's business organisation and thus seriously endangers
its integrity. A somewhat more complex argument could be that the fiduciary
relationship between C and D results in a duty for C to disclose the benefit
he has received, and A becomes C's accomplice and must therefore answer for
C's omission. In that case, however, difficult evidentiary questions can arise if A
maintains his reliance that C would report that receipt of the bribe.92
 
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   In the NETHERLANDS and in SWITZERLAND the rescission of the contract
may be based on the notion that D has made a mistake regarding the reliability of its
business partner A.93 Had D known that A is prone to paying bribes, he would have
never concluded the contract with him in the first place.

  In the USA the Conflict of Interests Statutes play an important role in cases
of bribery in the public sector, because they allow the federal government to void
contracts relating to a conviction under certain criminal conflicts of interest statutes.
As these statutes prohibit the mere potential of a breach of fiduciary duty, they
require no showing of actual corruption. The government may avoid the contract
even if the employee's superior has condoned the conflict of interest. While some
state courts have actually tried to mitigate the harsh consequences of these rules, the
federal courts have consistently rejected any consideration of mitigation efforts.94
  A similar result can also be observed if the case is solved via the law of agency,
ie if C has concluded the contract in the capacity of D's agent. One possible
argument for this approach is that C's power was impliedly limited and did not
allow him to conclude contracts under the influence of a bribe.95 Furthermore,
agency law often contains special rules for the situation in which the agent and
the contractual partner collusively cooperate to the principal's disadvantage. Art
2.2.7(1) UNIDROIT Principles guarantees a right to avoidance in case of a conflict
of interests between the agent and the principal, provided the third party knew or
ought to have knozn of the conflict. Also, under CANADIAN common law, A is
estopped from enforcing the contract.96
  In several jurisdictions the right to avoid a corrupt contract has even been
extended to third parties. This means that where there is a statutory basis, a third
party can intervene in the principal's decision to remain bound by the contract and
thus prevent its performance. In the CZECH REPUBLIC, the State attorney may
under certain circumstances initiate civil court proceedings to claim the invalidity
of a transfer of property where there is a public interest in determining the contract
invalid.97 POLISH law gives each bidder in a public or private tender the right to
request that the contract be invalidated if the party to that contract or another partici-
part has influenced the result of the tender in a manner violating statutory provisions
or the rules of fair dealing.98 Also in SPAIN, an injunction against performance
of a contract induced by bribery can be obtained from the court by competitors

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of the bribe-giver or any third parties holding a legitimate interest.99 However,
there does not appear to be any case law on such an avoidance of the contract by
competitors, and it is probably not advisable for theses parties to act against the
principal's intention, as they may wish to contract with him again in the future.

[...]


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[...]

1.5 Conclusion

The potential for contract law to play an important role in combating corruption is
increasingly recognised.121 Remedies such as rescissions of contracts, civil forfeiture
and damages can affect the perpetrators of corrupt agreements just as if not more
severely than criminal prosecution, since they directly target the perpetrators'

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financial assets. Therefore, the path through a civil trial could in some cases
promise a more successful outcome than would a prosecution in criminal court.
For example, civil remedies can stil be available even when the perpetrator has
avoided criminal prosecution by fleeing. Civil courts are not necessarily required to
rely on legal assistance from other states, for example when a foreign government
blocks cooperation on political grounds, but rather can render a decision based on
the burden of proof. Furthermore, a lower standard of proff ordinarily applies in
civil trials, which can decisive in corruption cases because they are notoriously
difficult to prove.
    The first finding that can be drawn from the reports is that civil courts have
so far been concerned with conspicuously few corruption cases. There are of
course differences from country to country, and whil reported court decisions are
completely absent in some jurisdictions, elsewhere there were quite a few interesting
cases to be found. Overall, however, one would certainly expect significantly more
case law on the private law issues of corruption, considering its ubiquitousness
in global commerce. The reasons for this reticence are outside the scope of this
report, but certainly necessitate further research in the future. It may be that civil
law remedies are not optimally configured, and therefore incentives to sue do not
exist for victims. Another possible cause lies in the proverbial evidentiary problems
in corruption cases. In contrast, the report from RH Kreindler and F Gesualdi as well
as many other contributions on the issue in arbitration literature show that arbitral
tribunals are quite regularly concerned with corruption cases. The preference for
resolving disputes trhough arbitration may at least partly explain why these cases
come before national courts relatively rarely.
    Concerning the implementation of public policy considerations into concrete
contractual remedies - that is, which "correct" legal consequences should result
from bribery for the purpose of acquiring a contract - only some general guidelines
can be developped out of the national reports. Ultimately, a proposal for a comprehen-
sive solution would also have to incorporate the further legal rules against corruption
of a given legal system. This involves, for example, the question here only briefly
mentioned of whether disgorgement of the bribe by means of criminal prosecution
in favour of the state or via cibil law remedies in favour of the principal is the
preferable solution. Furthermore, the enforceability of the main contract between
the principal and the bribe-giver can eventually not be decided without taking into
account, among other things, the question here excluded of whether the interests of
the parties can already be adequately protected by a duty to compensate damages. 
    The perhaps least controversial but downright striking rule of contract law
is the one concerning the fate of a contract to bribe: Here there is absolute
consensus that the rights of parties to such bribery agreements are afforded no legal
protection. Contracts which have as their object the payment of bribe money are thus
unenforceable. Of course, this also applues before arbitral tribunals, which would
instruct the tribunal to overlook the corruptive prupose of the contract. The denial of
legal protection is intended to undermine the trust between the corrupt transactors
and inspire them to abandon their illegal promises.


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   The answer to the question of the rentention of the bribe money is not quite as
obvious. Generally, the ex turpi causa  rule stands in the way of the bribe-giver's
claim for restitution, for wohm the already paid bribe money is forever lost even if
the bribe-taker does not perform his part of the illegal agreement. Exceptions to the
exclusion of claims for restitution may be made in rare cases where the bribe-giver
did not act in pari delicto. Eventually, however, the bribe-taker retains the proceeds
of the bribery only temporarily ; in some countries, the bribe money must ultimately
be disgorged to the principal, while in other countries, the bribe money must ultimately
be disgorged to the principal, while in other countries forfeiture on behalf of the
state will be ordered in the context of a criminal trial.
    In contrast, the determination of the appropriate legal consequences for the main
contract between the principal and the bribe-giver remains unsettled. Here, a wide
palette of potential legal consequences can be identified in the various jurisdictions,
ranging from ipso iure invalidity to partial maintenance of the contract. A trend can
be cautiously detected toward a solution that places the fate of the contract in the
hands of the principal as the direct victim of the corruption. The principal can then
either avoid the contract or decide to adhere to it.

  If the main contract is void or has been avoided by the principal, it remains to be
decided whether the bribe-payer should be entitled to any form of compensation
for his performance already delivered. The situation superficially resembles the
question of whether the bribe-payer can demand restitution of bribe money paid
to the agent, because there the underlying agreement is equally void. In fact, some
courts have applied the illegality defence (ex turpi causa) also to this relationship,
with the draconian result that the bribe-payer loses his entire investment while the
principal gains an unexpected windfall profit of the dame amount. More convincing,
however, would be allow the bribe-payer to recover at least proportional
compensation for his delivered performance. 


















 

84See the CHINESE report by Q Liu and X Ren for further details.
85See especially the report by E Henandez-Breton and C Madrid Martinez for VENEZUELA. On the situation under FRENCH law, see B Jaluzot and M Meiselles, 'Civil Law Consequences of Corruption and Bribery in France' in O meyer (ed), The Civil Law Consequences of Corruption (Baden-Baden, Nomos 2009) 225, 233. For a different view, cf J Karton and JD Shervill in the Canadian report for QUEBEC.
87BGH, (1989) NJW 26; BGHZ 141, 357, 361; however, the tendency is now towards the mere voidability of the contract, see BGH, (2000) NJW 511 ff.
88See the CHINESE report.
89According to the PORTUGUESE report.
90The ITALIAN report cites Art 135 Code of Procurement (Statute n 163/2006).
91Cf S Usoskin in the RUSSIAN report.
92In Grant v Gold Exploration & Development Syndicate Ltd [1900] 1 QB 233 the court held that a bribe-giver cannot seek to defend himself by stating that he delieved the agent would disclose the transaction to his principal.
93This reasoning was applied by the previous instances in BGE 129 III 320 ff (sewage case); the decision of the Higher Court of the Canton of Zurich of 17 September 2002 is discussed by E Wyss qnd HC von der Crone, 'Bestechung bei Vertragsschluss' (2003) Schweizerische Zeitschrift für Wirtschafts- und Finanzmarktrecht (SZW) 35 ff.
94See in more detail P Ala'i in the US report.
95A Berg, 'Bribery - transaction validity and other civil law implications' (2000) Lloyd's Maritime and Commercial Law Quarterly 27, 39 ff.
96See the CANADIAN report.
97See the CZECH report on the legal basis for such a petition.
98Art 70(5) of the Polish Civil Code.
99On the Spanish approach see T Rodriguez de las Heras Balell, 'A Civil Law Model for Combating Corruption in Spain' in O Meyer (ed), The Civil Law Consequences of Corruption (Baden-Baden, Nomos 2009) 239, 253.
121For instance, on the increasing role of private law remedies for asset recovery see E van der Does de Willebois and JP Brun, 'Using Civil Remedies in Corruption and Asset Recovery CAses' (2013) 45 Case Western Reserve Journal of International Law 615 ff; T Daniel and J Maton, 'Civil Proceedings to Recover Corruptly Acquired Assets of Public Official' in M Pieth (ed), Recovering Stolen Assets (Bern, Peter Lang, 2008) 243 ff.

Referring Principles
Trans-Lex Principle: IV.7.2 - Invalidity of contract due to bribery
A project of CENTRAL, University of Cologne.