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Abstract
Corruption is recognized as one of the major obstacles to the development of international trade today. There seems to be consensus that curbing corruption is a task too big to be discharged by criminal law alone and that other branches of law have to contribute their part as well. Thus, where contracts are tainted with corruption, there are genuine issues of contract law at stake that need to be decided with a view to effectively protecting victims and at the same time deterring potential wrongdoers. In this report, we shall take a look at contracts providing for bribery as well as contracts that have been procured by the payment of bribes. The analysis is tailored toward commercial contracts, including also contracts with state-owned enterprises. It shows that, interestingly, different jurisdictions have taken quite different approaches as to whether these contracts can be enforced in court. A second, though related, problem is whether the wrongdoers, after they have performed their part of the deal, should be punished by denying them restitutionary remedies for their investment.
Corruption is generally considered one of the greatest enemies of international trade. Where corruption runs rampant, fair players are prevented from accessing the market and performance and quality are excluded from competition by those who use bribery as a means of acquiring contracts. It is a problem of vast magnitude: according to a frequently quoted World Bank study, an estimated USD 1 trillion in bribes are paid each year. Corruption is said to increase the total cost of doing business globally by up to 10% and th ecost of procurement contracts in developing countries by up to 25%. This means that for the EU alone approximately EUR 120 billion, or 1% of its GDP, is lost to corruption every year.
The international community has therefore undertaken serious efforts to tackle the problem of corruption; the topic
196has been of the highest priority since the mid-1990s. Countless sets of rules have mushroomed up from this movement, establishing anti-corruption as a new, independent branch of law. At the peak of this complex regime is a series of international treaties, which have since been ratified by many of the world’s leading industrial nations. These conventions are supplemented by domestic anti-bribery legislation, with well-known examples being the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act. The legislative landscape is further complemented by a number of non-governmental initiatives—such as from NGOs, pro- fessional organisations or multinational corporations— which use their own rules, recommendations and codes of conduct to strengthen the fortifications against corruption. Anti-corruption is therefore nothing less than a prime example of a transnational legal development in which the rules set at international, national and non-governmental level are constantly intertwining with one another.
So far, criminal law has been the weapon of choice for combating corruption. The majority of the international sets of rules contain the central obligation that Member States punish the payment of bribes and related crimes. In particular, the territorial scope of domestic criminal law has been expanded by shifting the focus of attention from the country where the corrupt incident occurred to the ‘supply side’ of corruption, i.e. the home country of the bribe-giver. The OECD, aiming to create a level playing field in the international business environment, has declared this tenet (whose origins are in the American FCPA) to be the general principle of its anti-bribery convention. However, practical experience has shown that criminal law alone cannot cope with this difficult task; other branches of law must also contribute to achieving this joint objective. Combating corruption has therefore become an en vogue topic in many areas of law such as tax law and employment law, as well as when it comes to optimizing public procurement rules, in corporate governance, and in arbitration.
One branch of the law whose role in tackling corruption has thus far been underestimated is general contract law. Agreements of a contractual nature are present in many different forms of corruption. In light of the immense economic value embodied in international commercial contracts it is surprising that such little attention has been paid to the legal analysis in this area. Many national reports bemoan the rarity of reported court cases—or even the complete lack thereof— on the civil law aspects of corruption in their respective countries. And yet there are two questions that immediately spring to mind: firstly, the question of using efficient civil law remedies to provide optimal protection to the victims of corruption; and secondly, the broader question of the role of contract law in the prevention of corruption, i.e. whether and to what extent the contract law regime can deter potential offenders from corruptive behaviour.
The consequences of bribery for the contracts concerned are primarily decided in accordance with the applicable domestic contract law. There have been few efforts to harmonise this area of law at international level; the Civil Law Convention on Corruption of the Council of Europe represents the only set of rules so far that has focused entirely on the contractual aspects of corruption. However, for the most
197part these rules are limited to a general framework which grants the Member States considerable leeway in their respective transpositions and leaves many of the key questions unanswered.
Only rarely can special private law provisions on corruption be found in national legal systems. For instance, the US Racketeer Influenced and Corrupt Organizations Act (RICO) grants treble damages in particular instances of corruption. In KENYA, Art. 51 of the Anti-Corruption and Economic Crimes Act of 2003 provides that: “A person who does anything that constitutes corruption or economic crime is liable to anyone who suffers a loss as a result for an amount that would be full compensation for the loss suffered”. Also, in several jurisdictions private law rules on corruption can be found in the national legislation on unfair competition.
However, the analysis of contracts tainted by corruption usually takes place within the framework of general contract law. Illegality and immorality, fraud and mistake, collusion and restitution are among those rules that immediately spring to mind. This area of law is known to vary considerably from country to country, and moreover, it is generally perceived as very complicated and embedded with public policy considerations. How does one then get past these boundaries which impede a discussion on the most appropriate remedies in international corruption cases?
The worldwide unanimity when it comes to condemning corruption is deceptive, as there is no uniform understanding about what the term corruption means. There are indeed a near infinite number of actions that could in everyday language be branded as ‘corrupt’; yet, at a legal level an entirely different analysis may be needed in each instance. Defining its own subject matter is thus one of the greatest challenges facing the anti-corruption movement. Each concept of corruption has to overcome different obstacles: firstly, the national borders—what may be unproblematic in one area of the world may in fact trigger severe punishment in others; secondly, inter-disciplinary boundaries—corruption is not just a legal topic but is also heavily researched in other scientific disciplines; finally, the intra-disciplinary boundaries— the perspective varies between the different branches of the law, and a working definition that fits the discussion of the criminal law aspects of corruption may thus be unfit for the purposes of private law, tax law or public procurement.
Instead of attempting to provide an abstract definition of corruption for specific aspects of private law, we will instead examine which instances of bribery are typically encountered by courts and arbitral tribunals in relation to international commercial contracts. The starting point is the following (fictitious) scenario:
Contractor A of country X enters into an agreement with intermediary B (‘the Commission Agreement’) under which B, for a commission fee of USD 1,000,000 would pay, on behalf of A, USD 10,000,000 to C, a high-ranking procurement advisor to D, the Minister of Economics and Development of country Y, in order to induce D to award A the contract for the construction of a new power plant in country Y (‘the Main Contract’). B pays C the USD 10,000,000 bribe and D awards the main contract to A.
In its simplest form, a typical corrupt exchange can be seen as a triangular relationship between a principal, his agent and a bribe-giver. The selection of a principal-agent model as a starting point is not accidental; it reflects the prominent standing this model has held in the research on corruption since the 1970s. This model is especially suitable for the analysis of the private law side of corruption, as it allows for the clearest depiction of the legal relationships between the different actors. This is because such a triangular structure between principal, agent and bribe-giver also corresponds to a triangular contractual relationship in private law.
The base of the triangle is formed by the relationship between the principal and his agent. This particular relationship can take many shapes in the modern business world; an agent can be, for instance, an employee in the procurement department, but also the CEO of a large multi-national company. The terms used here are understood in a broad context. In the aforementioned example, C is the agent and the Ministry of D (where he is employed and which becomes party to the contract with bribe-giver A) is his principal. The connecting factor in all situations is that the agent acts for his principal when negotiating with the third party and should
198therefore decide not to his own advantage, but rather in the interest of his principal. The principal-agent relationship is therefore characterised by a strong fiduciary element.
The third party (A) infringes on this fiduciary relationship by secretly affording the agent with an undue advantage, which need not be in monetary form but can encompass everything that the recipient considers valuable and is suitable to cause him to undermine his loyalty: jewellery, invitations to expensive trips, even immaterial assets such as honorary titles or the granting of sexual favours. In return for such items, the agent breaches his fiduciary duty by ensuring that the bribe-giver receives preferential treatment with respect to the contract with the principal. This preferential treatment can consist of receipt of the tender, which under fair competition would have otherwise been given to another competitor; alternatively, it can also be used in instances in which the bribe-giver would have gained the tender anyway, but the bribe is paid in order to obtain better conditions.
Under this model it is therefore possible to distinguish between contracts
providing for corruption and contracts
procured by corruption. For the purpose of this report we shall refer to the contract providing for corruption between bribe-giver and bribe-taker as the ‘bribe agreement’; the contract between the principal and the bribe-giver that has been procured by corruption is referred to as the ‘main contract’. Although one could say that both contractual relationships are tainted with corruption, they are not necessarily subject to the same legal consequences. The following shall focus particularly on the enforceability of both of these contracts. In contrast, questions of compensation for corruption— though likewise immensely important in practice—must unfortunately be left aside.
Instances of corruption in practice are often much more complex than can be expressed with a simple three-person framework like the one just introduced. Corruption is a topic that features a multitude of variations and is often connected with additional problems that, although not necessarily present in all instances of bribery, must nevertheless be borne in mind in the abstract search for appropriate legal consequences in the relationship between the parties to a bribe.
The first additional problem concerns the manner and form in which the bribe is paid. In international trade it is likely that the relevant parties will not know each other personally and will therefore not be sure whether they can trust one another. It goes without saying that the bribe-giver cannot openly approach his business partner’s agent and offer him a bribe. Rather, the illegality of these activities requires that the bribe results from a careful and subtle approach. Accordingly, negotiations concerning bribery often feature intermediaries (like B in the example) in order to ease the transaction. Such middlemen often appear as ‘consultants’ or ‘brokers’ for their employer. Consulting services are common in international trade and can be a sensible approach, for instance with respect to the political or economic situation in the target country or with respect to regional customs and practices. However, amongst the herd of consultants are black sheep whose main or sole activity consists of funnelling bribes to influential people. These people have at their disposal both the political contacts as well as the know-how for such covert transactions.
The legal structure of this exchange often follows the same pattern: A hires B to initiate the conclusion of a contract with D. The precise activities expected of him are described only very superficially in the consultancy agreement. The intermediary usually receives a generous contingency fee for his services—it is an open secret between the parties that parts of this fee will be forwarded as bribes to influential persons on the opposite side. The contracting company will often not want to know the details in order to be able to claim plausible deniability and thereby protect itself from prosecution.
Furthermore, it is to be noted that, contrary to a widespread cynical view, corruption is by no means a ‘victimless crime’. Quite in contrast, many bear the brunt of its consequences. The direct effect is felt first by the principal, who often pays an inflated price for the contract with the bribe-giver. In the
199aforementioned example A would not resort to bribery if he could not gain an advantage that would be at least equal to the value of the bribe paid to C. In practice the resulting loss is probably even much greater than the amount paid as a bribe.
However, the financial loss to the principal is typically not the end of the story: corruption also has indirect negative effects on further parties. If (as in the example) D is a state or a government contractor, it has to cover its additional costs resulting from the inflated price through tax increases or by deducting the amount from other important infrastructure projects. On the other hand, where the victim is a private business, the additional costs will usually fall within the principal’s price calculation and will thereby be passed on to its customers; the price of the products will increase. In both cases, the costs of corruption will thus ultimately be borne by everyone.
A further group of victims can be said to be the competitors of the bribe-giver who, due to the illicit payment made by their rival, have lost the chance to acquire the main contract with the principal for themselves. Market survival depends on at least occasional success in acquiring contracts, as otherwise one quickly loses a position on the market. If there is no chance for bidders to acquire contracts through honest competition, they are then left with the choice between just two undesirable alternatives: either to voluntarily retreat from the market or to enter the competition for the highest bribe. This dilemma forms the basis for why particular sectors have such great problems in containing widespread corruption after it has initially occurred.
Because of this situation it is to be expected that the competitors observe with particular criticism the question of the enforceability of a contract that has been purchased via bribes. If the law does not punish the bribe-giver but instead allows him to retain the contract, it sends a devastating signal to all other market participants to equally resort in the future to such illegal methods. The situation is further complicated by the lack of sufficient protection in the form of damages claims for competitors; there are practically no court decisions in which a competitor has successfully claimed compensation from his corrupt rival.
Ultimately, corruption can also create considerable harm on the bribe-giver’s side. It is easy to overlook the fact that a bribe-giver is not necessarily an economic unit, but, as in the case of a multinational enterprise, can encompass a number of different interest groups. A possible example is that, despite explicit company policy to the contrary, an overambitious manager pays a bribe to secure a contract; then the company and its shareholders are also victims of this corruption if, after the crime has been discovered, the affected contract falls through and, moreover, the prosecution leads to a severe fine. This internal conflict of interests forms the background to the current boom of anti-corruption compliance, which aims at reducing the risk of liability through organisational measures.
A relatively new problem is posed by the question of how the liability for these types of damages can be resolved vis- à-vis the company’s shareholders. In this respect the focus of the international discussion has thus far been on US law. A 2010 report by Reuters refers to 37 such proceedings within a 4-year period, 26 of which were settled out of court. Here the claimants were seeking compensation for the (in some cases extensive) decline in share price, which was linked to investigations resulting from the American Securities and Exchange Commission’s allegations of bribery. An in-depth discussion of the legal circumstances cannot take place here, but nonetheless it must be noted that a decision in contract law on the effectiveness of the main contract creates additional and so far unresolved questions regarding the lia- bility for the resulting losses.
The bribe agreement between an agent and a bribe-giver takes place in the shadows of the corruption triangle. The light cast on the other contractual relationships within the triangle means that they are concluded in an open environment, whereas the illegality of the bribe agreement requires darkness to cover the conspiracy and secrecy of the negotiations in which the bribe-giver and agent come together, as well as the subsequent exchange of the benefits.
200It is clear that the law must not serve to protect crooks in the performance of their corrupt intentions. Contracts providing for corruption are therefore unenforceable in any court of law. This applies not only to the direct promises of bribes from A to C but also to the commission agreement between A and the intermediary B, so far as the actual task is to arrange the payment of bribes. In terms of the extent of the level of corruption of these contracts, there is no difference. Despite some national variations in the dogmatic underpinnings of nullity there appears to be universal agreement with respect to the outcome. One can thus identify the nullity or unenforceability of contracts providing for corruption as a transnational principle of law.This principle is clearly expressed in Art. 8(1) Civil Law Convention on Corruption: “Each Party shall provide in its internal law for any contract or clause of a contract providing for corruption to be null and void”. In a similar vein, the Trans-Lex Principles, a scientific project administered at the University of Cologne that sees itself as a systematic collection of principles of transnational commercial law, provides that: “Contracts based on or involving the payment or transfer of bribes (“corruption money”, “secret commissions”, “pots-de-vin”, “kickbacks”) are void”.It can be observed at national level that the justification for rendering bribe agreements null and void is mainly based on two approaches that are closely related with each other, namely the arguments of illegality and immorality. The concept of illegality is coupled with the notion that a transaction cannot be enforced when it violates mandatory statutory prohibitions. There can be no doubt that the criminal law provisions that penalize corruption represent such statutory prohibitions, as the actions required to perform the bribe agreement are exactly those that trigger liability under criminal law. The immorality argument, on the other hand, is much broader and can play an independent role to set aside a contract in cases of corruption if the contract at issue slips by way of exception through the criminal law net, for instance because the legal system does not prohibit the payment of bribes abroad or particular forms of influence peddling. The overview of the different legal systems does however show that there is not always a sharp dogmatic distinction between illegality and immorality, but rather that both grounds for nullity are given alongside one another and often at the same time.It can be observed that the various legal systems offer different approaches towards rendering the bribe agreement null and void. In the Romanic legal family the effectiveness of the bribe agreement fails due to its illegal and immoral cause. Other legal systems expressly state that contracts are void if they are illegal, or contrary to public order, or violate common moral principles. Under the Common Law there appears to be more leeway in deciding the individual case on the grounds of violation of public policy. That being said, here too, the courts will generally deem a bribe agreement unenforceable.There is no difference of outcome with respect to whether widespread corruption is present in one part of the world, even if paying bribes is considered necessary in a special area in order to do business. Although it indeed may some- times be possible to consider regional customs when assessing the immorality and illegality of a contract—for instance when it comes to the accepted boundaries for gifts or hospitality—this does not at all mean that widespread corruption in a country could legitimise the payment of bribes per se. All national reporters responded negatively to the question of whether the contract between A and B could be effective under the exceptional circumstance that B’s task to facilitate the bribery of public officials constitutes a generally accepted business practice in that country.
Parties to these contracts are of course aware that they cannot rely on the court to enforce their expectations. There have in fact been instances in which one of the parties took advantage of this in order to defraud the other, for example by paying him with counterfeit money. However, usually there are more or less stable extra-legal enforcement measures that give sufficient motivation to the parties to adhere to their—legally invalid—promises. For instance, they may hope to repeat the lucrative exchange of favours if they prove trustworthy to their partners the first time, or they are simply afraid of their retaliation.
Nonetheless, the parties often give their transactions a legal gloss by using mock agreements in order to justify the flow of cash. For example, the agent receives a highly lucrative ‘consultancy agreement’ even though he is not actually
201to provide any consultancy services. Such a method is often used in engaging intermediaries because their written contracts foresee, in principle, the provision of legitimate services such as consultancy or lobbying. Arbitral tribunals have already had to decide on several cases in which an intermediary sought payment of his commission for facilitating the main contract and the bribe-payer then invoked the nullity of their agreement because it actually aimed at the payment of bribes. The claims for payment have so far always been rejected in all instances in which the arbitral tribunal was convinced that the contract with the intermediary actually served to camouflage corrupt enterprises.
The invalidity of the bribe agreement is to be taken into account
ex officio by the court. The parties cannot waive its application, as the invalidity is not ordered for their protection but rather for the protection of greater common values that cannot be disposed of by agreement. Such an approach is also applicable in arbitral proceedings where the tribunal must acknowledge the invalidity of the contract even if neither of the parties had pleaded this aspect. This was the situ- ation in the well-known
Lagergren award, in which the sole arbitrator rejected the claim from a contract for the bribery of Argentine public officials.
Anyone can invoke the invalidity of a contract providing for corruption, including the parties to the agreement themselves. This means that the bribe-giver can refuse to pay the intermediary the commission for the acquisition of the desired contract, referring to its corrupt nature. Some authors and arbitrators have expressed their discomfort with this result. They perceive the benefit to the bribe-giver as being doubly unfair, as he not only betrays the other party to the main contract by bribing his agent, but he also obtains the main contract without having to pay the intermediary if the consultancy contract is voided. Thus, the law seems to work to the advantage of the most dishonest of all parties.
However, economists have shown that undermining the trust between bribe-payer and intermediary does have an appeal because neither side can then have faith in receiving their counter-performance. This ability to deprive the other party of its expectations has the desirable effect of destabilising a potentially corrupt relationship. The Paris Cour d’appel rightly recognised this when it decided:
The parties’ awareness of the immoral or illicit aim of the contract, required by jurisprudence, is not meant (whatever its actual consequences may be) to lessen the rigor of the sanction of nullity; on the contrary, it aims at reinforcing it by protecting the contracting party who has nothing to reproach himself with as to the conclusion of the contract; the application of the above-mentioned adage aims at preventing performance of an immoral or illicit contract by depriving the party which first executes it of all protection.
The invalidity of a commission agreement because of intended bribery is to be distinguished from the situation in which a client employs an intermediary and later refuses to pay the promised commission because the use of intermedi- aries is generally prohibited in the country in which the main contract is to be procured. Several countries have in fact provided for such a general prohibition as a means of preventing corruption. In
OTV v Hilmarton the claimant had procured a contract in Algeria for the defendant even though Algerian law prohibited the use of intermediaries. However, the procurement contract was subject to Swiss law and thus presented the arbitrator with the question of whether the Algerian prohibition was relevant to this contract. This is clearly a conflict of laws problem, namely with regard to the application of overriding mandatory provisions of a third country. The respective national conflict rules often grant the court some discretion on whether to consider the foreign laws in the individual case. In this respect the national reports differ as to whether a general prohibition of intermediaries, without evidence of a corrupt purpose of the contract, deserves acknowledgment independent of the applicable law.
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The invalidity of the bribe agreement does however give rise to the further question of the fate of those elements of the agreement that have already been performed. The unwinding of an illegal contract falls within the realm of restitutionary remedies. As a general principle, something that has been received on the basis of a legally void contract has to be returned. According to this notion, it thus appears that the invalidity of the agreement could allow A to demand the return of the bribery payment from C or from the intermediary B.
However, domestic law contains an important exception to this principle of restitution, namely the venerable maxim
ex turpi causa non oritur actio. In other words, the parties to the contract should not receive the return for their performance if the invalidity of the contract results
contra legem or
contra bonos mores. The legal system’s disapproval of the illicit contract is thus not extinguished by the failure of claims for performance, but continues on the level of unjust enrichment. The roots of this illegality defence can be traced back to Roman law, though it has since grown to feature different extents of rigorousness and numerous exceptions in the various legal systems.
The payment of bribes represents a very clear case of
causa turpis, and the majority of legal systems do in fact exclude the bribe-giver’s claim to reimbursement. For instance, the ENGLISH national report refers to a case in which the payment of a bribe to an Indian public official did not lead to the conclusion of the desired contract; the claim for reimbursement of the money paid as a bribe failed due to the illegality defence. In GERMAN law this rule has been codified in § 817 sent. 2 BGB; here, the courts have also rejected claims for reimbursement of bribes.
At first glance it would appear that the exclusion of repayment in instances of bribery leads to an absurd result: the corrupt agent does not have to return the bribe to the bribe- giver, and as such, it seems that the law rewards him for his corruptibility. The invalidity of the bribe agreement therefore appears to present him with no disadvantages if he has already received the bribe. In contrast, the bribe-giver is doubly punished, as the law denies him the enforcement of the corrupt agreement as well as the reimbursement of the bribe.
However, the approach does require further explanation, as the striking imbalance between the parties is certainly intentional: the party who performs first is faced with the risk of the entire loss of its performance. In turn, there is no incentive for his contractual partner to fulfil his part of the agreement, as he does not need to expect either claims for performance or reimbursement; he can thus breach the agreement without fear of consequence. Both parties have reason for doubting the honesty of their partners in crime, as both will have already demonstrated that they are willing to use illegal means to cheat their joint contractual partner, namely the principal. However, they nonetheless have to trust each other, because the law offers no protection to their agreement. The one-sided distribution of the economic risk of advance performance thus illustrates that the law intends to undermine the relationship of trust between two poten- tially corrupt parties.
A further reason for the failure of the claim for restitution can also be given: it would surely be unsatisfactory if the bribe-giver could rely on assistance from the court in seeking to undo illegal payments. Excluding the claim for repayments thus protects the integrity of the courts, which dishonest parties should not be allowed to use as an instrument to facilitate their wrongdoings. In other words, the law does not help those who venture outside of the law, or as the great English humourist
A.P. Herbert translated the
ex turpi causa rule: “
A dirty dog will get no dinner from the Courts”.
The illegality defence in cases of corruption can be said to be basically sound law. It is based on the clean hands maxim as well as on specific preventative considerations. However, most jurisdictions will not enforce the rule with absolute rigor but give the judge room to take into consideration all the circumstances of an individual case. The question thus arises of whether in cases of corruption there could be exceptional circumstances that support the restitution of bribery payments.
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The idea of prevention and the aspect regarding the protection of the court’s dignity both assume that each party has knowingly acted in a reprehensible manner. Where each party has to equally accept the accusation of unlawful behaviour, it is justifiable that the loss remains where it has occurred:
in pari delicto potior est conditio possidentis. However, this maxim can be questioned in instances in which the performing party is not—or is only minimally—guilty, i.e. has not acted
in pari delicto.A conceivable example would be a mistake of a party regarding the legality of its behaviour, although from a semantic perspective we probably would not speak of bribery if the payer did not knowingly pursue a corrupt intent. In AUSTRIA, a claimant was reimbursed with the payment he made in an unsuccessful attempt to be appointed consul general of an African republic. This was despite the fact that Austrian law contains in § 1174(1)(1) ABGB the principle that there can be no return of that which was given to facilitate a tort. It seems as if the court was not convinced that the claimant in this case had entirely understood that his money should have served to cause the responsible public officials to make a decision in his favour and was not merely a donation towards worthy causes in that country.
A further example for a situation that allows for the exceptional restitution of a bribe is that the payer was incapable of understanding the reprehensibility of his actions. In a GERMAN decision from 1917 the court held, albeit obiter, that it is possible that the claim for reimbursement could be open to a mentally deranged woman who had paid a public official in order to receive a place in a care home, as she could not have breached good morals on account of her condition. In another GERMAN case a foreigner was deceived by a dishonest compatriot, who convinced him that a residence permit in Germany could only be obtained via bribery. The fraudster offered to arrange the payment, but eventually kept the money for himself. In contrast to the first example, here the payer was at least aware that the payment was illegal. Nonetheless, the judge was very generous in his decision to permit the claim for restitution because the payer was clearly unfamiliar with the circumstances in Germany and, as a result, was exploited by the fraudster.
Furthermore, exceptional circumstances may result from the payer’s particular predicament and therefore make him appear to be worthy of protection. For instance, one could hardly speak of corruption where the money has been solicited by the agent by means of a serious threat. From a semantic perspective, corruption requires the bribe-giver and bribe-taker to cooperate voluntarily with one another. The POLISH report gives a hypothetical example of parents who bribe a doctor so that he may be quicker in taking care of their seriously ill child. Nobody would judge the parents for their behaviour under such circumstances. However, the crucial case may be that an agent has solicited a bribe by threatening to not award the contract. Such behaviour could result in a financial predicament for a business if it depends on the contract or has already made considerable investments that it cannot afford to lose. However, does this mean that it has to succumb to the threat and may pay the bribe? At present there has been no court decision that acknowledges the right to corruption for reasons of economic self-defence; in fact, such a suggestion seems preposterous, as there is always the option to report the blackmailing agent to his principal and thus restore fair conditions.
The UNIDROIT Principles suggest a flexible approach towards permitting the recovery of the bribe. Where the applicable law does not expressly prescribe the effects of the infringement of a mandatory provision upon the contract, the parties shall have the right to exercise such remedies under the contract as are reasonable in the circumstances. The illustration to this rule suggests that if A has hired B to make the bribe payment, but B has not yet paid the bribe to the corrupt officials, then A may be granted the right to recover the bribe from B if he decides to no longer pursue the illegal purpose and withdraws from the contract. Such a right of repentance is known in the Common Law as
locus poenitentiae. The intention is clear: a golden bridge should be built for the remorseful businessman in order to allow him to return to just behaviour. This exception in the UNIDROIT Principles was included at the end of the drafting process after only brief discussions on the content. However, the rule is not unproblematic, as although the purpose is well-intended, it can result in the reverse in practice. This is because such a rule increases the motivation for the intermediary to expedite the payment of the bribe, as he can thereby secure his commission. Thus, even though the maxim
ex turpi causa is intended to impede the performance of the corrupt arrangements, this golden bridge exception would give the bribe-giver a means of putting pressure on the intermediary to perform his part of the agreement.
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There is an additional argument against the use of the illegality defence in cases of corruption, namely that the recipient of the bribe would be unlawfully enriched. It seems as if several legal systems would have difficulties with the notion that the agent could profit from the illegal agreement. After all, is it not a fundamental principle of justice that crime must not pay?
Nevertheless, this argument falls somewhat short, as the exclusion of restitution affects only the bribe-giver’s claim to the bribe; it does not indicate whether the bribe actually remains the bribe-taker’s property. As several national reports confirm, it is often possible to draw on other branches of the law to ensure that in such cases the unlawfully gained profit can be disgorged.
Several jurisdictions pursue this particular objective by providing that the profits gained from criminal activity are to be forfeited to the treasury. Art. 3(3) OECD Convention stipulates that in cases of bribery of foreign public officials the bribe is subject to confiscation and seizure. A similar rule is contained in Art. 31 UNCAC. CHINA and POLAND adopt this approach towards withdrawing the bribe from the recipient.
However, there is a second potential candidate to make claims for the bribe, namely the betrayed principal. Many legal systems allow the principal to claim against his disloyal representative for that which has been gained from the dis- loyalty. Such claims in private law often have priority over the state’s right of confiscation. In GERMANY, for example, there have been many changes in the legal situation surrounding this subject, and whereas the Reichsgericht (Imperial Court) used to favour the confiscation of bribes over private claims, nowadays the principal’s right to recovery has precedence, supplemented by forfeiture of the proceeds of bribery to the state treasury if the principal does not exercise his right.
The legal basis for a claim to recovery can be formed by a duty to account for profits arising from the contractual relationship between the principal and his agent. Such a duty often exists in the Common Law jurisdictions, but it is in ENGLAND where the discussion surrounding the exact form of the duty has recently been reignited. The essence of the discussion focuses in principle on whether the claim is merely of a contractual nature or whether the fiduciary holds the bribe as constructive trustee for his principal. The latter approach would have particular advantages should the agent become insolvent, but also in situations in which the agent has invested the bribe and gained a profit. In
AG for Hong Kong v. Reid the Privy Council, applying the law of New Zealand, had accepted a constructive trust to the principal’s benefit. Accordingly, the latter could thus have instant access to land that was purchased by the bribe-taker using the bribe. Although the decision received a positive reception in England, the Court of Appeal later favoured the opposite interpretation in
Sinclair Investments v Versailles Trade Finance, as the “fact that the breach of fiduciary duty owed to the beneficiary resulted in the profit should not necessarily mean that the profit is treated as the property of the beneficiary”. This ruling would leave the principal merely with a claim for equitable compensation in a sum equal to the value of the bribe or commission. Since then, the Supreme Court had the last word on this issue and clearly decided for the solution whereby a bribe or secret commission received by an agent is held by the agent on trust for his principal. Their Lordships considered that, given that the concern about bribery and corruption generally has never been greater than it is today, the law should take a particularly stringent position in relation to a claim against an agent who has received a bribe or secret commission.
The principal’s claim for recovery under GERMAN law had a varied past, however its result is widely recognised today. The exact legal basis is still disputed: contractual fiduciary duty,
negotiorum gestio, or, in the case of public officials, an obligation to hand over gifts as a reflex response to the general prohibition on accepting presents. A similar situation can be observed in SWITZERLAND, where there is controversy in doctrine regarding the correct legal basis for the claim, but support exists from the Federal Supreme Court and leading doctrine for a contractual duty of the bribe-taker to pass on the bribe advantage to the principal based on the law of agency, employment contract law or the law on simple partnerships.
Nevertheless, not all legal systems feature a claim against the fiduciary to account for profits. In a recent English
205decision a Russian shipping company sued its former senior officers for dishonestly entering into shipping transactions which were against the interests of the principal. Two of the former officers allegedly received bribes. The Court found that under RUSSIAN law a bribe is not recoverable unless the claimant can show that he suffered a loss.
Whereas the invalidity of a bribe agreement between A and C or of a commission agreement between A and B amounts to a transnational legal principle, there is a much more colourful spectrum of opinions regarding the suitable consequences for the main contract between A and D. In principle, there are three different solutions to consider. Firstly, the contract could, just like the bribe agreement, always and under all circumstances be void. Secondly, it would also be possible to lay the decision in the injured principal’s hands and allow him to choose between the invalidity of the contract or continuing with its performance despite the corruption. Finally, the third approach would consist of treating the contract as binding, thereby effectively limiting the rights of the principal to other remedies such as damages or price reduction.
Each of these three solutions can actually be observed in practice. All in all, however, there seem to be relatively few court decisions in this area. One may speculate that, in light of the commercial value at stake, the parties to these contracts would rather avoid judicial clarification and instead seek an amicable solution. This would be all the more likely in international trade, as the invalidity of the contract often does not benefit either party. The lack of judicial tuning of this problem is reflected to some extent in the national reports, as several reporters avoided clearly determining one particular dogmatic solution for their respective national law.
International sets of rules contain just initial starting points for the question of how to correctly deal with contracts obtained via bribery. Art. 8(2) of the Civil Law Convention of the Council of Europe says on the matter: “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.” However, there is a lack of clarity concerning the exact requirements for declaring a contract void. Further imprecision can be seen in the wording chosen in Art. 34(2) UNCAC: “In this context, States Parties may consider corruption a relevant factor in legal proceedings to annul or rescind a contract, withdraw a concession or other similar instrument or take any other remedial action.” In contrast, the UNIDROIT Principles are clearer with regard to the principal’s right to elect provided that at the time of the conclusion of the contract he was unaware of the payment of the bribe. Lastly, in the field of public international law, Art. 50 of the Vienna Convention provides: “If the expression of a State’s consent to be bound by a treaty has been procured through the corrup- tion of its representative directly or indirectly by another negotiating State, the State may invoke such corruption as invalidating its consent to be bound by the treaty.”
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 was required by law. 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.
206Several 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. 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 principal. In CHINA the contract may possibly be void if the corrupt agent played a cen- tral role in its allocation. In PORTUGAL public sector contracts shall be void without the possibility of approval. ITALIAN procurement law, too, requires that the public authority terminate the contract once a final court decision finds corruption in its negotiation.
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 result 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 submits he relied on C reporting the receipt of the bribe. 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. 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.
A similar result can also be observed if the case is solved via the law of agency, i.e. 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. Furthermore, agency law often contains special rules for the situation in which the agent and the contractual part- ner 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 known of this conflict. Also, under CANADIAN common law, A is estopped from enforcing the contract.
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
207contract invalid. 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 participant has influenced the result of the tender in a manner violating statutory provisions or the rules of fair dealing. Also in SPAIN, an injunction against performance of a contract induced by bribery can be obtained from the court by competitors of the bribe-giver or any third parties holding a legitimate interest. 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 these parties to act against the principal’s intention, as they may wish to contract with him again in the future.
The final question requiring clarification is whether there are certain circumstances imaginable under which the main contract can remain valid, i.e. D remains, in spite of the precontractual corruption between A and C, bound to perform. In comparison to the two aforementioned models, this solution is featured more seldom in literature and practice, but there do appear to be particular situations in which the tainted main contract can nonetheless remain in force.
For example, Art. 3.3.1 UNIDROIT Principles provides a maximum of flexibility in determining the reasonable remedies. For instance, the rest of the contract can remain (with suitable changes) if grounds for invalidity affect just a part of the contract. In cases of corruption this would mean that the main contract could possibly remain if just a definable part was influenced by the bribe. The interests of the injured party could then be protected via an appropriate reduction in price.
The SWISS Federal Supreme Court has already used a different reason for deciding in favour of the bribe-payer. In this case the subject-matter of the contract was the disposal of sewage, and performance had already taken place over some time before it was discovered that bribes were paid in order to secure the contract. Furthermore, the evidence indicated that the bribe had not influenced the content of the contract—the principal would have paid the exact same price irrespective of the bribe. The Federal Supreme Court initially held that the contract was neither illegal nor
contra bonos mores. Art. 20(1) of the Swiss Law of Obligations (OR) provides for the nullity of contracts only where the content itself is illegal or
contra bonos mores. The circumstances of its conclusion, on the other hand, are subject to other rules such as those on fraud. However, the principal could rescind the contract due to the fraud concerning the non-disclosure of the bribe. The court maintained, however, that in cases of long-term contracts rescission under Swiss law would have effect only
ex nunc, i.e. the contract remained valid until the moment it was rescinded. Applying this rule to the case at hand, the court avoided the difficulties that arise when winding-up long-term contracts. However, the court also noted that had the bribery influenced the contract price, a judicial adaptation of the contractual equilibrium would have been possible.
Finally, it remains to be considered whether the parties to the contract can themselves agree to a rule on the appropriate legal consequences in cases of bribery. In recent years, anti-corruption clauses have become increasingly widespread in international commercial contracts and can already be considered among the typical boilerplate clauses. Where such clauses only grant the user a right to terminate the contract in cases of corruption, they will likely never achieve an inde- pendent meaning, since such a right typically already exists under the applicable contract law, provided that the contract is not thereafter already
ipso iure void. This also explains why such clauses, as far as we can see, have so far played no role in jurisprudence.
However, the ICC is now going its own way with its Anti-Corruption Clause, published in 2012, in that voidability of the main contract is not foreseen here as the primary legal consequence. Instead, the party convicted of bribery first has the right to cure the defect and save the contract by taking necessary remedial actions, such as cooperation in the clearing-up of the incident, the suspension of staff involved, and the correction of the detrimental economic effect on the other party by, for example, an adjustment of the contract price. Only after there has been failure to perform such remedial actions or such are impossible to perform does the party affected by the corruption have the right, at its discretion, to terminate the main contract. However, even termination shall have effect only for the future, as the amounts due at the time of termination remain payable if permitted by the applicable law. Thus, a distinct statement of the drafters can be abstracted from the clause, to the effect that avoidance of the contract is generally not the correct way to punish corruption.
A particular question arises if the main contract between the principal and the bribe-giver is void under statutory law or if the principal rescinds the contract: what happens with respect to the performance already rendered? As a general rule, the
208principal receives everything back that he has already paid under the voided contract. However, should the bribe-giver also be granted restitution of what he has given under the contract? Or does the
ex turpi causa rule apply to this contractual relationship, too? In the latter case, the outcome under the aforementioned example would be that D could, without charge, retain A’s performance.
An overview of the jurisprudence from the different jurisdictions shows that there is no uniform answer to the question of unwinding the main contract in cases of bribery. For instance, American courts have shown their willingness to deny restitution to the bribe-giver. In the leading decision
Grand v. New York a contract for cleaning services at a city reservoir was rescinded after the bribery payments came to light, which was also after the cleaning had been performed. The court permitted the City of New York to demand the repayment of the entire sum (approx. USD 840,000) and denied the claimant compensation for the services he had performed. The judge justified this strict approach as neces- sary to deter manipulation of public tenders.
The bribe-payer also left empty handed in
World Duty Free v. Kenya. The case gained particular notoriety due to its unusual facts: The claimant in this case disclosed, with no sense of wrongdoing, the payment of bribes used to obtain the approval to run duty free shops at two airports in Kenya. Local authorities later withdrew the claimant’s control over his stores. Thereupon, he demanded restoration of posses- sion and compensation. The arbitral tribunal came to the decision that, under the laws of England and Kenya that applied to the contract, the host country had effectively avoided the contract due to bribery; the claimant therefore had no contractual rights available to him. However, it is to be noted that the arbitral tribunal was not asked the further question of whether compensation for the lost investment (approx. USD 27,000,000) was available. The arbitral award thus left open whether possible claims for unjust enrichment were also excluded alongside claims for performance.
In contrast, some courts in other cases have admitted claims for restitution of what has been performed. For example, in ENGLAND the bribe-giver can, in principle, demand reimbursement of the performance, though the amount of the bribe is to be deducted. The Supreme Court of the TURKS AND CAICOS ISLANDS was also confronted with the question of the effect of bribery on unwinding a contract for land. In principle, there was to be a return of the performance that had been received: the bribe-giver would have received the purchase price back in exchange for the retransfer of the ownership of the land. However, the peculiarity in this case was that the property had since been charged to a mortgage fund. The defendant could not return the land without encumbrance, and accordingly, the Court ordered rescission without restitution.
In ICC Case No. 11307 of 2003, the parties had concluded a contract for maintenance of the claimant’s national air fleet and the respondent had performed these services over many years. The claimant avoided the contract after discovering that bribes had been paid and demanded the repayment of the sums already paid (approx. USD 55,500,000). SOUTH AFRICAN law was applicable to the contract. The arbitral tribunal permitted the claim on these grounds, but gave compensation to the respondent in respect of the services that had been performed. The amount was calculated by deducting from the total price of the contract the commission (approx. USD 8,400,000) paid by the respondent to an external advisor to secure the contract. The difference, according to the tribunal, represented the proper commercial price for the work and services received by the claimant; in other words, the bribe-giver in this case received not only his expenditures but was also entitled to retain a ‘fair’ profit margin from the bargain as well as a contribution to his regular overheads. An English court later remitted the award, because the tribunal had not given the parties a fair opportunity to consider and address the issue of quantification of the fair value of defendant’s services under the contract. However, in doing so, the court remarked obiter that the bribe-payer should not be entitled to keep the profit from the contract.
The UNIDROIT Principles—in line with a general trend that can be observed at the international level—opt for a flexible approach with respect not only to contracts tainted with corruption but to illegal contracts in general, in so far as restitution may be granted where it is reasonable in the
209circumstances of the case, taking into account, among other things, the purpose of the rule infringed by the contract, the seriousness of the infringement and the parties’ knowledge of the facts.
At first glance it would appear that denying the bribe-payer restitution of what he has performed under the main contract is reasonable: If one compares the situation here with the bribe agreement, then the question of guilt can be answered much more easily. If, in relation to B and C, A suf- fers a permanent loss of his performance where both parties have acted illegally, it does not appear to be immediately evident that he should be in a better position vis-à-vis the law- abiding D by having a claim to restitution of the performance he has rendered or compensation for the value of his performance.
Unlike the parties to the bribe agreement, however, the parties to the main contract have not acted
in pari delicto, a factor which fundamentally changes the policy considerations in this case. In contrast to the payment of a bribe, the performance of the main contract is neither illegal nor immoral—from this latter perspective it displays a degree of neutrality. The extent of the pre-contractual wrong does not actually increase with the performance of the contract, and neither party suffers additional loss.
Therefore, the exclusion of restitution can at most be justified as an instrument that punishes the corrupt bribe-giver and deters others from choosing this illegal path. Such a punishment would certainly have to be taken seriously in light of the conceivable financial consequences. However, what renders this concept unconvincing is its lack of proportionality. The permanent loss of the bribe under the contract providing for corruption can be justified, as the sum at issue directly correlates to the illegality of the act—the higher the amount of the bribe, the more criminal energy is invested by the wrongdoer and the more extensive are usually the losses caused by the act. The performance of the main contract, however, lacks such a relationship. It is merely a matter of coincidence whether the payment of a bribe is discovered at the start of the performance of the main contract and the bribe-giver’s loss thus remains limited, or whether the incident comes to light only once the contract has already been performed in full. If the extent of the sanction no longer relates to the illegality of the act, then the result is over-deterrence, i.e. the costs of deterring corruption would start to outweigh the benefits.
In turn, there is no apparent argument for why the principal should not have to pay for the performance received under the contract. It is indeed true that the law, by means of the illegality defences, allows the corrupt agent to make a windfall profit (at least in the short term), if he does not have to return the bribe to the bribe-giver. However, the law contains other mechanisms by which the agent’s short term profit can be forfeited to the benefit of the principal or the state treasury. This does not apply to the principal’s profit, as he would permanently keep the performance without the justification of the need to protect the victim. Not only would the principal be motivated to wait until he has received full performance before invoking the invalidity of the contract, he would even have to hope that his employees accept bribes and could be so motivated to enter into particular transactions prone to corruption that he would not focus too greatly on ensuring compliance of his agents.
Perhaps one might go even further and argue that the same flexible approach should be taken even where the main contract is null and void
ab initio because both parties knew or at least ought to have known of the corruption. Reference may be made again to the following hypothetical case:
Company A of country X enters into an agreement with intermediary B under which B would pay, on behalf of A, USD 10,000,000 to C, a high-ranking procurement advisor to D, the Minister of Economics and Development of country Y, in order to induce D to award A the contract for the construction of a new power plant in country Y. The Minister knows or at least ought to have known of the bribe paid to C but nevertheless—or maybe precisely because of that— awards the contract to A. However, when A has almost completed construction of the power plant, in country Y a new government comes to power which claims that the contract is null and void because of corruption and refuses to pay the outstanding 50% of the price.
In view of the improper conduct of both parties, obviously neither party should be entitled to any remedy under the contract. Yet what about restitution?
The traditional and still prevailing view is that the parties should be left where they are—
in pari causa turpitudinis cessat repetitio. In other words, the government would get the almost completed plant for half of its price. Would this be a fair and equitable solution? One may very much doubt it, but what is more important is that at both domestic and international level there is an increasing tendency to overcome the traditional rigidity concerning the restitutionary remedies to be granted not only in cases of corruption but with respect to illegal contracts in general.
Two particularly significant examples in international and domestic case law amply confirm this. Firstly, in the ICC
210case No. 10518 of 2001 and 2002, the dispute concerned a contract for the construction of an industrial facility in a South-East Asian country. When the constructor requested payment for the work carried out, the purchaser objected that the constructor had won the contract by bribing the purchaser’s leading advisers and was therefore bared from requesting the payment due under the contract. The arbitral tribunal agreed that as a consequence of the corruption the constructor had lost any contractual remedy but nevertheless granted the constructor restitution for its out-of-pocket expenses. In its opinion, given the magnitude of the sum involved, to deny the constructor in the case at hand any compensation for the work done would not be in accordance with the principle of proportionality. Note that the law applicable to the substance of the dispute was the law of the state of New York and—as is particularly relevant for the present discussion—the arbitral tribunal based its decision, which is a clear departure from the traditional all-or-nothing-approach
in pari delicto cases, on a decision rendered back in 1968 by the New York Court of Appeal in
Gerzof v. Sweeney.
In that case a taxpayer requested the annulment of a contract for the construction of an electric generator, which a municipality of the state of New York had entered into with a manufacturing company following a competitive bidding won by the company thanks to the payment of a bribe. While the court of first instance held that, in accordance with the traditional and still prevailing rule under New York law, the municipality should retain the generator and was entitled to recover the full price it had paid the manufacturing company, the Court of Appeals reversed the decision, and ordered the company to pay the municipality only the difference between the price the municipality had actually paid the company and the lower price it would have paid if the bidding had not been vitiated.
In his opinion Chief Judge
Fuld pointed out that “
justice demands that even the burdens and penalties resulting from disregard of the law be not so disproportionately heavy as to offend conscience” and that in the case at hand the company would suffer an excessive loss (and the municipality gain an excessive advantage) if the company was to return the entire price and the municipality keep the generator for free.
Following the same line of reasoning with respect to the hypothetical case mentioned before, it seems reasonable to grant the foreign company an allowance in money for the work done corresponding to the value the (almost) completed construction has for the government and in turn to grant the government restitution of any payments it or its predecessor has made exceeding this amount.
Indeed, the granting of restitutionary remedies to both the bribe-giver and the bribe-taker even in
a pari delicto case appears under the circumstances justified for at least two reasons: first and above all, it would not be fair to let the government have the (almost) completed works which may be worth an enormous amount of money for significantly less than the agreed price; second, governments, far from being dissuaded from accepting bribes when awarding important contracts, may even be encouraged to do so if they know that by invoking at a later stage the bribery they are able to shift the entire loss resulting from the illegal transaction to the foreign company.
By the way, this is also the approach taken by the UNIDROIT Principles with respect not only to contracts tainted with corruption but to illegal contracts in general, and in a report submitted to this Congress an eminent international arbitrator and expert in corruption cases (
R.H. Kreindler) concludes that the flexible approach taken by the UNIDROIT Principles may be seen as a first step towards breaking what is known as the ‘paradox of corruption’ and, for this reason, every practitioner involved in international dealings and commercial relations should welcome it as a potentially innovative tool.
The potential for contract law to play an important role in combating corruption is increasingly recognised. Remedies such as rescission of contracts, civil forfeiture and damages can affect the perpetrators of corrupt agreements just as much if not more severely than criminal prosecution, since they directly target the perpetrators’ financial assets. Therefore, the path through a civil trial could in some cases promise a more successful outcome than would a prosecution in a criminal court. For example, civil remedies can still 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 proof ordinarily applies in civil trials, which can be 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
211few corruption cases. There are of course differences from country to country, and while 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
R.H. 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 through 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 developed out of the national reports. Ultimately, a proposal for a comprehensive solution would also have to incorporate further legal rules against corruption in any given legal system. This involves, for example, the question only briefly mentioned here of whether disgorgement of the bribe by means of criminal prosecution in favour of the state or via civil 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 ultimately 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 pro- tected 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 applies before arbitral tribunals, which would refuse to acknowledge claims arising from such contracts even if both parties instructed the tribunal to overlook the corruptive purpose 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.
The answer to the question of the retention 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, so that the bribe money already paid 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. Ultimately, 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 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 validity of the contract. It is possible to detect a cautious trend 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 same amount. More convincing, however, would be to allow the bribe-payer to recover at least proportional compensation for his delivered performance.