Corruption in Contracts: Burden and Standard of Proof, and Consequences of Positive Findings
Issues of corruption in contracts may arise in arbitration proceedings, as well as in court proceedings before, during or after an arbitration. This article focuses on the situations where corruption is raised as an issue in arbitration proceedings.
As global corruption becomes more sophisticated, arbitrators have an increasingly important role in the fight against it.[2] Judge Lagergren issued an award in ICC Case No.1110 in 1965[3] by which he declared himself incompetent to rule in an arbitration where issues of corruption and illegality had been raised. Practice and jurisprudence have taken a very different stance since that award. It is now standard practice in international arbitration for tribunals to investigate such issues and to determine their impact on the contract, the proceedings, and the claims and counterclaims raised by the parties. In fact, tribunals consider being bound by a duty to act in such manner, even on their own motion.
Corruption is not easy to prove, while determining the impact of a positive finding of corruption can be a very onerous exercise. And there are no universal definitions of bribery and corruption. On the contrary, there are as many different definitions as there are manifestations of the problem itself. One popular definition that covers a broad range of corrupt activities is the “abuse of public or private office for personal gain”.[4]
It has become axiomatic in international arbitration that the burden of proving an issue generally lies with the party raising it. On this line, corruption must be proved by the party making the relevant assertion. But it is difficult and complicated to determine how much proof is required before a tribunal can make a finding of corruption.
Bribery is not easily proven as it is often undocumented, happens behind closed doors, without witnesses, and the involvement of both sides, actively or passively, is usually a good reason for both to remain bound by a pact of omerta (silence). However, corruption does not require direct evidence. It may be inferred from circumstantial evidence[5] and such proof is equally strong as direct evidence.
In common law jurisdictions, the civil standard of proof is “more likely than not”.[6] In relation to issues of bribery and corruption, there are different opinions as to whether the standard of proof should increase or decrease. Some commentators suggest that, where there is a reasonable indication of corruption, the burden of proof should shift to the allegedly corrupt party to establish that the legal and good faith requirements were duly met.[7] On the other hand, such approach would impose an enormous burden on that party, as the proof required of it, may also very likely be unavailable.
A different approach was adopted in the Impurna California Energy v. PLN arbitration,[8] where the tribunal observed the following:
“[t]he members of the Arbitral Tribunal do not live in an ivory tower. Nor do they view the arbitral process as one which operates in a vacuum, divorced from reality. The arbitrators are well aware of the allegations that commitments by public-sector entities have been made with respect to major projects in Indonesia without adequate heed to their economic contribution to public welfare, simply because they benefited a few influential people. The arbitrators believe that cronyism and other forms of abuse of public trust do indeed exist in many countries, causing great harm to untold millions of ordinary people in a myriad of insidious ways. They would rigorously oppose any attempt to use the arbitral process to give effect to contracts contaminated by corruption. But such grave accusations must be proven. There is in fact no evidence of corruption in this case. Rumours or innuendo will not do. Not obviously may a conviction that some foreign investors have been unscrupulous justify the arbitrary designation of a particular investor as a scapegoat. ”
On the other end of the spectrum, some argue that the standard of proof should increase for issues of corruption. Thus, in the EDF (Services) Limited v. Romania arbitration, the tribunal held that the seriousness of the accusation of corruption demanded “clear and convincing evidence”.[9] In other words, the tribunal appeared to recognize that the standard of proof required for establishing corruption was somehow higher than the normal civil standard.
The matter remained unsettled in England for several years.[10] In Re B (Children) [2008] 4 All ER 1, it was held that the civil standard of proof remains unchanged, even concerning issues that may constitute serious criminal offences.[11] This means that the burden of proof remains with the party raising the issue of corruption, and corruption is proved if the evidence shows that it is more likely than not, as with any other issue. But despite the position in English law, studies have shown that most arbitration tribunals tend to apply a higher standard of proof for corruption.[12]
The consequences of a positive finding of corruption will depend on the law applicable to the contract and the circumstances under which the corruption took place. Under English law, a contract to carry out a corrupt act is void ab initio.[13] It is treated as non-existent and a tribunal that makes such a finding in relation to a contract is bound to dismiss the claims arising from or in relation to that contract.
An important development came from the English judgment in Patel v. Mirza [2016] UKSC 42. The Supreme Court adopted a different approach to the question of when a defendant can rely on the defence of illegality. A claimant will not ordinarily be debarred from enforcing a claim for unjust enrichment simply because the money he seeks to recover was paid for an unlawful purpose, though there may be rare cases where enforcing such a claim might be regarded as undermining the integrity of the justice system. According to Lord Toulson, the approach to the question should be as follows (paras.116 & 120):
“116. It is not necessary to discuss the question of locus poenitentiae which troubled the courts below, as it has troubled other courts, because it assumed importance only because of a wrong approach to the issue whether Mr Patel was prima facie entitled to the recovery of his money. In place of the basic rule and limited exceptions to which I referred at para 44 above, I would hold that a person who satisfies the ordinary requirements of a claim in unjust enrichment will not prima facie be debarred from recovering money paid or property transferred by reason of the fact that the consideration which has failed was an unlawful consideration. I do not exclude the possibility that there may be particular reason for the court to refuse its assistance to the claimant, applying the kind of exercise which Gloster LJ applied in this case, just as there may be a particular reason for the court to refuse to assist an owner to enforce his title to property, but such cases are likely to be rare…
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120. The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system (or, possibly, certain aspects of public morality, the boundaries of which have never been made entirely clear and which do not arise for consideration in this case). In assessing whether the public interest would be harmed in that way, it is necessary a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, b) to consider any other relevant public policy on which the denial of the claim may have an impact and c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts. Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way. The public interest is best served by a principled and transparent assessment of the considerations identified, rather by than the application of a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate. ”
Contracts with a legal purpose, which are procured by corruption, are not void but voidable under English law. This means they can be put to an end at the instance of the innocent party. Fraud may be irrelevant, unless it materially induced the contract.[14] Where bribery (or other instance of fraud or misrepresentation) does not cause the consent to a contract of the party on whom such fraud was practiced, it does not render the contract voidable.[15]
In the 2006 investment arbitration between World Duty Free v. Republic of Kenya, it was proved that there was a payment of a bribe by the claimant to the president of Kenya to do business with the Government of that country. That is, the bribe was paid to secure that the particular investment would be made. The tribunal found that the bribe was not procured by coercion or oppression or force, nor by undue influence, and there was no hostage factor. On that basis, it declined to grant relief to the claimant.[16] The decision was severely criticized for not being in line with basic international law principles, such as that the actions of the president are attributable to the state.[17] Also, because it allowed the government to escape liability by invoking its own corrupt behaviour.[18]
It is important to stress that a voidable contract is not put to an end automatically. It remains enforceable unless and until the innocent party elects to bring it to an end.[19] Where the innocent party elects to bring it to an end, the contract is cancelled ab initio. If the innocent party does not rescind the contract, then the contract survives and will be enforced according to its terms.[20]
Where bribery takes place after the contract is entered or in circumstances that do not amount to procurement, the innocent party may bring it to an end as from the moment of discovery, but not ab initio. This may be crucial in determining the remedies that may be available to the parties, as is shown below. Nonetheless, the innocent party must give credit to the other party for any right to damages accrued before the decision to end the contract.[21] The purpose of rescission is to put the parties to the position in which they were before the contract was concluded.[22]
In any event of bribery – other than a contract for an illegal purpose – the innocent party has a choice: to affirm the contract or accept the repudiation and bring the contract to an end. The right to rescind or terminate may be lost, amongst others, by reason of delay.[23] If the contract has been partly executed, the right must be exercised promptly.[24] Where the innocent party affirms the contract, expressly or impliedly, its right is exhausted.[25] The innocent party’s insistence on performance constitutes such affirmation.[26]
The innocent party may be entitled to a period for considering its position, as long as it does not affirm the contract. However, the innocent party must consider that, during that period, the breach giving it the right to terminate may be overtaken by another event which prejudices its rights under the contract, such as its own breach. Also, that the defaulting party may resume performance of the contract and thus end any continuing right of the innocent party to elect termination. The validity of such election is judged on the date of the election. If, following a breach, the innocent party becomes aware of the facts giving it the right to terminate and makes an express or implied representation that it will not exercise that right, it will be found that the innocent party chose to affirm the contract. Once the contract is affirmed, the affirmation is irrevocable.[27]
This is also the position under Cyprus law. In Bulk Oil v. Electricity Authority,[28] the innocent party failed to exercise its right to terminate the contract. It rather insisted that the contract should have been performed, up to the point when the contract became ipso facto terminated. The Court held that the innocent party’s right to terminate was lost when the contract became terminated. It also lost any rights it may have had to compensation which depended on the exercise of the right to terminate (p.1288).
These matters explained in length in Tigris International v. China Southern Airlines Company [2014] EWCA Civ 1649. The English Court of Appeal considered the consequences of the termination of a contract for alleged surreptitious dealing between one party and another party's agent. It found the following (paras.143-144 & 187):
“143. … the remedies available to the principal of an agent bribed or offered a secret commission by his counterparty include the following. If the agent is bribed to enter into the contract the principal may rescind it i.e. avoid it ab initio, provided that counter restitution can be made and the right has not been lost e.g. by delay. This is rescission properly so called – an equitable remedy. If, after the contract has been entered into, the agent is bribed in the course of its performance, the principal may bring it to an end as from the moment of discovery i.e. for the future. The same applies if the bribery was effected at the time of the contract but for some reason (delay, impossibility of counter restitution, rights of bona fide third parties etc.) rescission ab initio is impossible: Logicrose at 1260F. At law bribery, whether at or after contract, amounts to a repudiatory breach by the bribing party which, on discovery, his counterparty may accept as bringing the contract to an end. Whether that is because bribery is a stand-alone ground for termination, or the obligation to restrain from it an incident or an implied term of every contract is debatable and, for present purposes, does not matter.
144. Whether or not Tigris was entitled to avoid the contract ab initio is of potential significance for present purposes. If Tigris was so entitled it can claim the return of its deposit. If it was only entitled to accept a repudiation or rescind for the future such that the contract subsisted until it did so it must give credit for any right to damages that accrued before such acceptance. I consider this further below…
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187. CSA contends that Tigris has already received credit for the deposit and cannot recover it again. Even if it is assumed that CSA was in repudiatory breach of the ASA, and that Tigris had validly terminated it in consequence, the contract was not brought to an end until 4 December 2009 at the earliest, or possibly 27 November 2009. By that time, however, Tigris was already in breach of its obligation to take delivery under the ASA, as it had been since July. Tigris would only be released from its prospective obligations and would remain liable for those which had accrued. CSA’s accrued right to damages was not affected by Tigris’ later acceptance of CSA’s repudiation, if that is what it was. Accordingly CSA had, as at 4 December, a right to damages which accrued on 31 July or 27 August. As Lord Diplock put it in Berger & Co Inc v Gill & Duffus SA [1984] AC 382,390:
“[The termination of the contract] had the consequence in law that all primary obligations of the parties under the contract which had not yet been performed were terminated. This termination did not prejudice the right of the party so electing to claim damages from the party in repudiatory breach for any loss sustained in consequence of the non-performance by the latter of his primary obligations under the contract, future as well as past. Nor did the termination deprive the party in repudiatory breach of the right to claim or to set off, damages for any past non-performance by the other party of that other party’s own primary obligations, due to be performed before the contract was rescinded””
The principles mentioned above can also be demonstrated by reference to the facts and findings in ICC Case No.21142, in which a final award was issued on 5 May 2017. This case concerned a dispute between a contractor and a public authority in relation to the design, construction and 10-year operation of a plant. Disputes had arisen between the parties, which were referred to ICC arbitration during the operation stage. Eventually these disputes were settled. Shortly after the settlement was signed, evidence came to surface that certain officials of the public authority in question had received large amounts of bribes from the contractor. Criminal proceedings were initiated, in which the contractor appeared as a witness for the prosecution. The officials were imprisoned.
While criminal proceedings were pending, other officials took up the administration of the plant, who demanded from the contractor to continue performing under the contract but stopped all payments to the same. Subsequently the contractor terminated the contract and brought a second ICC arbitration, claiming payment for work done and loss of profit. The respondent authority asserted that all contractor’s claims should have been dismissed because of the admitted bribery. At the same time, it brought counterclaims, demanding the return of the amount that was paid under the settlement agreement and damages.
In the arbitration, it was admitted that the contractor had made payments to the respondent’s officials. But the claimant’s position was that these payments were extorted by the officials, with threats of causing serious economic harm to the claimant. The claimant insisted that it had received no benefit whatsoever in return. Evidence of the corruption was limited. The parties could not even agree on the amounts and dates of payments. At the hearing, it was revealed that the first payment was made a few months after the initial contract was signed. Several other payments were made subsequently, including a payment just a few weeks after the settlement. All payments were made in cash. In one instance, the cash was delivered to an official at a local pharmacy. In another, one of the officials travelled to Greece, received a sealed envelope outside the airport, and flew back to Cyprus two hours later. Some of the money was traced in foreign bank accounts of the officials and their relatives. It was obvious that bribery would not be proved without the contractor’s evidence.
The tribunal found no evidence that the original contract or the settlement were procured by bribery. To the contrary, the original contract was obtained by a competitive tender for which the contractor was duly qualified and submitted the most competitive bid. As for the settlement, the facts showed that it was a concession of the claimant, it was not illegal and there was no evidence tending to show that it was procured by bribery. The proximity between the settlement and the bribes was not such as to give rise to an inference that the latter procured the former. The tribunal refused to make such a finding based on assumptions. Accordingly, the tribunal decided to award the claimant compensation for all work that had remained unpaid. But it refused to award damages for loss of profit resulting from the termination, holding that allowing such claim would amount to allowing the contractor to benefit from its own wrong, namely, to agree to make the bribery payments to the respondent’s officials. All counterclaims were dismissed, and costs were awarded in favour of the claimant.
The award demonstrates how important the difference is between a contract that may be avoided ab initio and one that may be put to an end from the time of discovery of the breach. It also shows that an act of bribery, even without proof that it was done for procuring a contract, may be detrimental to the remedies available to a party in an arbitration. Lastly, in this case, unlike World Duty Free, the public authority did not manage to escape all liability by invoking the corrupt behaviour of its own officers.
Agis Georgiades,
Partner, CGA Cyprus[1]
[1] LLB, LLM, DipIM-ADR, DIN, FCIArb, CIArb Accredited Mediator, Barrister (of Lincoln’s Inn), Advocate (CBA); agis@georgiades-law.com.
[2] Emmanuel Gaillard, “The emergence of translational responses to corruption in international arbitration” Arbitration International, 2019, 31, 1-19.
[3] Available at: https://www.trans-lex.org/201110/_/icc-award-no-1110-of-1963-by-gunnar-lagergren-yca-1996-at-47-et-seq-/.
[4] Taken from OECD Paper “Corruption: A Glossary of International Criminal Standards”, available at: http://www.oecd.org/corruption/anti-bribery/39532693.pdf, p.19.
[5] Fen Farming Co Ltd v. Dnsforf (No.2) [1973] STC 484.
[6] Secretary of State for the Home Department v. Rehman [2001] UKHL 47, para.55.
[7] Karen Mills, “Corruption and Other Illegality in the Formation and Performance of Contracts and in the Conduct of Arbitrations Relating Thereto”, ICCA Congress Series, No.11 (Kluwer: 2003), p.295.
[8] Final Award, 4 May 1999, para.118.
[9] Award, 8 October 2009, paras.71 & 72.
[10] See for example: Bater v. Bater [1950] 2 All ER 458.
[11] The matter is not yet clear in Cyprus. See: Λειβαδιώτης ν. Μιχαήλ [1999] 1(Γ) Α.Α.Δ. 1778.
[12] Michael Hwang S.C. & Kevin Lim, “Corruption in Arbitraiton – Law and Reality”, Herbert Smith-SMU Asian Arbitration Lecture, 4 August 2011, para.31.
[13] Matthew Gearing & Roanna Kwong, “The Common Law Consequences and Effects of Allegations or a Positive Finding of Corruption”, Chapter 10, pp.158-166, in ICC Institute of World Business Law Dossier “Addressing Issues of Corruption in Commercial and Investment Arbitration”, p.160; Chitty on Contracts, Vol.Ι (London: 13th ed., 2008, Sweet & Maxwell), paras.1-080 – 1-082, 16-008 – 16-010 & 16-204 – 16-206.
[14] Pollock & Mulla, Indian Contract & Specific Relief Acts (New Delhi: 12th ed., Butterworths), pp.564-566.
[15] Ibid., p.545.
[16] Tamar Meshel, “The Use and Misuse of the Corruption Defence in International Investment Arbitration” 30 J. Int. Arb. 3, pp.275 & 276.
[17] Ibid., p.278; and Bruce W. Klaw, “State Responsibility for Bribe Solicitation and Extortion: Obligations, Obstacles, and Opportunities” Berkeley Journal of International Law, Vol.33, Iss.1 [2015] Art.5, pp.70-72 & 93.
[18] Ibid., p.279; and Joshua Robbins, “A Secret Weapon, But for Whom? Investment Disputes Under the Trans-Pacific Partnership’s Anti-Corruption Chapter” Kluwer Arbitration Blog, 24 August 2016, pp.2-3.
[19] Ibid., pp.551 & 567.
[20] Gearing & Kwong (above), p.160.
[21] Gearing & Kwong (above), p.162.
[22] Ibid., p.161; and Pollock & Mulla (above), pp.552-554.
[23] Ibid., p.162.
[24] Pollock & Mulla (above), p.548.
[25] Ibid., p.547.
[26] Ibid., pp.559-561.
[27] Adam Robb, Jess Connors & Patrick Hennessy, “Termination: The Pitfalls” October 2014, D173, Society of Construction Law, paras.363-371; and Chitty (above), paras.37-216 – 37-219 & 37-242 – 37-247).
[28] [2001] 1(B) C.L.R. 1277.