Introduction

Arbitral tribunals are increasingly being called upon to determine allegations of corruption in the commercial context. In these circumstances, it is often assumed that the consequence of a positive finding of corruption must be that the commercial transaction is held to be void. After all, corruption is a prominent problem that is universally condemned.1However, this is not always the correct assumption. Although allegations of corruption once proven can most certainly lead to a contract being held void, there are other situations in which the legal outcome is not so inflexible. We examine these issues below.

The Relevance of the UK Bribery Act 2010 or its Equivalent to Civil Law Remedies

Before we focus on corruption, it is relevant to mention that we do not attempt to equate corruption to broader cases of illegality, which can affect a contract in a variety of ways. For present purposes, corruption means wrongdoing as a result of a bribe or a broader advantage caught by the Bribery Act 2010 or its equivalent.2

The Bribery Act 2010, which came into force on 1 July 2011, replaced an archaic body of law with a comprehensive anti-bribery code.3Under the Bribery Act, a bribe is described as a "financial or other advantage"4: (i) to bring about or reward an improper performance of a relevant function; or (ii) that is made in the knowledge or belief that acceptance of the advantage would constitute improper performance of a relevant function. It sets out four principal offences: active bribery (the offering, promising or giving of a bribe),5passive bribery (requesting, agreeing to receive or accepting a bribe),6the bribery of foreign officials,7and the failure of commercial organisations to prevent bribery.8

The final "corporate criminal offence" is a novel feature that requires commercial organisations to implement anti-bribery measures or face fines for failing to do so.9Save for the "corporate criminal offence", similar versions of the other three offences can be found in the anti-corruption legislation of other common law jurisdictions such as Hong Kong (i.e. the Prevention of Bribery Ordinance, Cap 201) and Singapore (i.e. the Prevention of Corruption Act, Cap 241).10

On a plain reading, the Bribery Act or its equivalent simply concerns criminal law and should in theory be irrelevant in the context of civil claims, which fall to be determined by reference to the common law.11We discuss this further in the next section. However, the impact of the Bribery Act arguably extends beyond just the criminal law.12At a general level, the UK Supreme Court recently referred to the Bribery Act (among other international conventions) as creating an expectation for "the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission".13While this can simply be read as an endorsement of the wider policy considerations underpinning the universal prohibition of corruption, it can also signal the increasing relevance of the Bribery Act in the civil context. For example, claims in the civil context could be strengthened by parallel criminal investigations or proceedings, as well as concluded criminal prosecutions.

In practice, as a result of the "corporate criminal offence", we have already seen a growing use of covenants or representations and warranties in commercial contracts that specifically refer to the Bribery Act or its equivalent. The insertion of anti-bribery terms in commercial contracts, such as a clause which states that neither the corporate nor its employees have made, offered or promised any payment or gifts that contravene the Bribery Act or its equivalent, is intended to set up the possible defence that it had in place adequate procedures designed to prevent persons associated with it from committing bribery.14

The Elements of a Bribe in a Civil Claim

We consider the position under English law. The English civil law concept of bribery is based on the principal-agent model. In civil claims (distinct from the criminal regime governed by the Bribery Act), a bribe means the payment of a secret commission in which the person making the payment: (i) makes it to the agent of another person with whom he is dealing; (ii) makes it to that person knowing that that person is acting as the agent of the other person with whom he is dealing; and (iii) fails to disclose to the other person with whom he is dealing that he has made that payment to the person whom he knows to be the other person's agent.15

Put another way, a bribe is "a commission or other inducement which is given by a third party to an agent as such, and which is secret from his principal".16So long as the secret payment or inducement gives rise to a potential conflict of interest between the agent and its principal, the test for whether that payment or inducement constitutes a bribe is satisfied.17It is then unnecessary to prove that the bribe was paid with a corrupt motive,18and it also gives rise to an irrebuttable presumption that the agent was influenced by the bribe.19It is also not necessary to show an actual bribe; an attempted bribe will suffice.20A claim that is advanced due to the existence of a bribe is commonly regarded as a claim in tort although some may be categorised as a contractual or an equitable claim.21

The Consequences and Effects of a Positive Finding of Corruption

As a general matter of English law, contracts to carry out a corrupt act are void whilst contracts procured by corruption are voidable.

Contracts to carry out a corrupt act are illegal at formation. They are considered illegal at the point at which they are entered into because such contracts cannot be performed without committing an illegal act.22The legal consequence of such contracts is that they will be regarded as void ab initio or unenforceable.23Benefits or losses lie where they fall based on the principle in pari delicto potior est conditio defendentis.24The parties are not entitled to the assistance of a court or a tribunal in unravelling the consequences of their fundamentally illegal bargain.

Actual examples of contracts to carry out a corrupt act are hard to come by as one would presume these are seldom put in writing or placed before courts or tribunals. However, a contract may be entered into for a sham purpose, the real intention being bribery. For example, a contract to pay commission to intermediaries or pay consultants for services rendered may be a façade designed to conceal the real intention that is to channel bribes to officials.25

On the other hand, a contract procured by corruption is voidable at the instance of the innocent party.26It is enforceable and remains enforceable unless or until the innocent party chooses to bring it to an end. If the contract is brought to an end, then the parties are, to the extent possible, to be restored to the position they would have occupied if the contract had not been made.27If the innocent party elects not to rescind the contract, then it survives and will be enforced according to its terms. This is important as it may disadvantage the innocent party if the contract were avoided, for example, if the innocent party has no alternative provider or market prices for the underlying have moved against it since the conclusion of the contract.

A straight-forward application of the remedies available in contracts procured by corruption was seen in Panama & South Pacific Telegraph Co v India Rubber, Gutta Percha & Telegraph Works Co.28The defendant works company agreed to lay cables for the plaintiff telegraph company, the price being payable in instalments against certificates given by the telegraph company's engineer. The engineer, who was separately engaged to lay other cables for the works company, then also agreed to lay the cables which formed the subject matter of the transaction between the works company and the telegraph company. The engineer would receive payment as and when the works company received the instalment payments from the telegraph company, which was dependent on the issuance of the engineer's certificates. The Court of Chancery Appeals (James and Mellish LJJ) held on the facts that the telegraph company was entitled to rescind the contract and claim back from the works company the money paid under the contract. According to James LJ, there had been a fraud on the works company. In his view, "a surreptitious sub-contract with the agent is regarded as a bribe to him for violating or neglecting his duty".29

In Logicrose Ltd. v Southend United Football Club30a contract granting the plaintiffs a right to operate a market on a piece of property owned by the defendant football club was negotiated between the plaintiffs and the chairman of the defendant. The fact that the chairman received a secret commission from the plaintiffs was not disclosed to the other directors of the defendant until after the contract was entered into, at which point the secret commission was also largely accounted for to the defendant. Millett J held that the defendant was entitled to rescind the contract ab initio and make restitutio in integrum.31In other words, the defendant would be bound to return the benefits received under the contract to the plaintiff. However, the defendant would not be bound to treat the bribe paid by the plaintiff to the chairman as a benefit of the contract.32

As noted by Michael Joachim Bonell and Olaf Meyer, it may simply be "a matter of coincidence whether the bribery is discovered at the start of the performance of the main contract and the bribe-giver's loss is limited, or whether the bribe is discovered once the contract has already been performed in full".33Accordingly the timing of the discovery of the corruption is relevant to the extent of the possible recovery. Nevertheless the following excerpt from the judgment of Males J in UBS v KWL is instructive:

The purpose of rescission or avoidance is to restore the parties, so far as possible, to the position in which they were before the contract in question was concluded. There may come a point at which such restitution in integrum is impossible, such that the remedy of rescission is no longer available, but the court has a degree of flexibility in order to ensure that practical justice is achieved. 34

Aside from rescission of the contract, an innocent party in these circumstances has a right of recourse against both the recipient of the bribe (i.e. the bribed agent) and the briber, who are jointly and severally liable for (i) the amount of the bribe as money had and received; or (ii) damages in the tort of fraud, pursuant to which the innocent party can recoup the loss sustained as a result of entering in to the transaction procured by bribe.35These remedies are alternative, not cumulative.36

In Fyffes Group Ltd v Templeman,37the innocent party claimed the following relief as against the briber: (i) the amount of the bribe; or (ii) damages in tort for fraud; or (iii) an account of profits made. Toulson J noted that the first two reliefs were available to the innocent party as a matter of law. As to the third relief, Toulson J remarked that "there is no direct authority on the point and the text books tend to imply that there is no such remedy as against the briber"38but that "there are cogent grounds, in principle and in practical justice" for allowing this remedy.39However, it was held that the circumstances of the case did not give rise to the remedy of an account of profits because the innocent party would have entered into the transaction with the briber in any event.40

It is relevant to note that where anti-bribery terms are incorporated into the contract, there may also be a claim for contractual damages arising out of the breach of this term of the contract (to the extent there is no double recovery).

Finally, the English Court of Appeal in Tigris International NV v China Southern Airlines Company Ltd & Ano41recently considered the legal position with regards to corruption in the performance of a contract. After examining the English legal authorities on bribery, Clarke LJ summarised the position as follows:

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 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.42

Therefore, in the case of bribery committed during the performance of the contract, the innocent party must give credit for any right to damages that accrued before the decision was made to bring the contract to an end.43

The Effect of Corruption on the Arbitration Agreement

The doctrine of separability means that an arbitration agreement is treated as separate from the contract in which it is contained.44Therefore, even if the contract is found to be null and void (due to corruption or otherwise), it does not necessarily affect the arbitral tribunal's jurisdiction arising from the arbitration agreement.45This general position is very widely accepted. However, the application of the doctrine of separability is not absolute, and there may be instances where the arbitration agreement is also found to be impeached. As the House of Lords explained:

The doctrine of separability requires direct impeachment of the arbitration agreement before it can be set aside. This is an exacting test. The argument must be based on facts which are specific to the arbitration agreement. Allegations that are parasitical to a challenge to the validity to the main agreement will not do.46

In ICC Case No. 6401, the arbitral tribunal noted:

There may be instances where a defect going to the root of an agreement between parties affects both the main contract and the arbitration clause. An obvious example is a contract obtained by threat. With regard to the impact of bribery, it would remain to be seen whether bribery, if proved, affects both the main contract and the arbitration clause and renders both null and void. 47

In order to avoid the jurisdiction of the Tribunal, the party must show that illegality goes to the root of the arbitration agreement. In O'Callaghan v Coral Racing Ltd, 48the Court held that the arbitration agreement could not be separated from the main contract because the main contract was null and void pursuant to the Gaming Act 1845. As the transaction was "not in law a contract" or one that could be enforced, no legal consequences could flow from the transaction. Accordingly, the arbitration agreement was treated as part and parcel of the void main contract and could not survive independently. As Richard Kreindler remarked in the context of this case, "in short, the arbitration agreement itself was a sham, if not necessarily intentionally a sham".49

An Overview of Conflict of Law Considerations in the Context of Corruption

The law that is chosen to determine the allegation of corruption can have a significant impact on whether a positive finding of corruption is reached. By way of illustration, the provisions of the United States Foreign Corrupt Practices Act 1977 do not apply to any facilitating or expediting payments to a foreign official where the purpose is to expedite or to secure the performance of a routine governmental action by a foreign official.50In contrast, the same type of payment will be regarded as a bribe under the Bribery Act.

While an awareness of this issue is important, we are not suggesting that a conflict of law analysis is required in each and every claim involving allegations of corruption. It is an offence in almost every jurisdiction to pay a bribe.51Indeed, a "conflict" only arises if the approach to the illegal conduct differs under the relevant applicable laws.

In cases involving allegations of corruption, there are four possible laws that may apply: (i) the law of the seat; (ii) the law of the agreement to arbitrate; (iii) the substantive law of the contract; and (iv) the law of the place of performance of the illegal act. If they all conflict as regards their approach to corruption, then the arbitral tribunal will have the unenviable task of ascertaining through conflict of laws rules (out of the four options available) which law should apply to determine the issue.

The dynamics relevant to the resolution of conflict of laws issues is best explained by reference to case law. In Fiona Trust and Holding Company v Skarga and others,52the English Court of Appeal needed to decide if the bribery allegations pleaded as claims in tort should be governed by English law or Russian law. Under English law, the amount of the bribe and the loss following the bribe are recoverable. Under Russian law, the amount of the bribe is not recoverable if no loss has been suffered as a result. At first instance, Andrew Smith J found that there were two instances of bribes but that the English law governed contracts subsequently entered into did not result from those two bribes and that Russian law applied because the most significant events connected to the bribery took place in Russia. As he had found that the transactions were not entered into as a result of the bribes, accordingly no loss has been suffered and the claims failed under Russian law. This decision was upheld by the Court of Appeal.

Conclusion

An award upholding an allegedly corrupt contract may be challenged at the enforcement stage on public policy grounds.53In this regard, particular reference should be made to the majority decision of the Court of Appeal in Westacre Investments Limited v Jugoimport-SDPR Holding Limited in which it was upheld that, without fresh evidence, there was no basis for refusing to enforce an arbitral award where the issue of bribery had been made, entertained and rejected by the arbitral tribunal.54The position under English law was also briefly considered by Ramsey J in Honeywell International Middle East Ltd v Meydan Group LLC, a case in which allegations of bribery were raised only on enforcement.55Ramsey J concluded (obiter):

It follows that whilst bribery is clearly contrary to English public policy and contracts to bribe are unenforceable, as a matter of English public policy, contracts which have been procured by bribes are not unenforceable. It follows that I do not consider that Meydan has real prospects of successfully contending that recognition or enforcement of the Award should be refused on the basis that it would be contrary to public policy, if contrary to my previous conclusion, the Contract had been procured by a bribe.56

This reflects the pro-arbitration and pro-enforcement approach that we have come to expect from the English Courts.

Finally, it is worth mentioning that although the above provides a roadmap of the issues that an arbitral tribunal may need to consider as a result of allegations of corruption, an arbitral tribunal also needs to bear in mind that there may be circumstances in which reporting obligations can be triggered. If this were to occur, it would lead to an examination of the appropriate applicable laws including pertaining to confidentiality to which the relevant tribunal member is subject.

1
United Nations Convention Against Corruption (2003).

2
The definition used by Transparency International, a non-governmental organisation that monitors corruption in the international arena, is the "the abuse of entrusted power for private gain", which can be sub-categorized into grand, petty and political corruption.

3
One of the main criticisms of the previous legal landscape was that the Prevention of Corruption Act 1906 might give rise to a potential defence to the offence of foreign bribery. See OECD Working Group on Bribery in International Business Transactions, "United Kingdom: Phase 2bis" in Report on the Application of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the 1997 Recommendation on Combating Bribery in International Business Transactions, 2008. The Bribery Act addressed this loophole.

4
Bribery Act 2010, ss 1, 2 and 6.

5
Bribery Act 2010, s. 1.

6
Bribery Act 2010, s. 2.

7
Bribery Act 2010, s. 6.

8
Bribery Act 2010, s. 7.

9
Ibid.

10
There is no de minimis exception for each of the Bribery Act 2010, the Prevention of Bribery Ordinance (Cap 201) and the Prevention of Corruption Act (Chapter 241).

11
For an overview of the English common law position, see Fiona Trust & Holding Corporation v Yuri Privalov [2010] EWHC 3199 (Comm), paras 70-73; Novoship (UK) Ltd v Mikhaylyuk [2012] EWHC 3586 (Comm), paras 104-111.

12
See for example, the commentary in Born, "Bribery and an Arbitrator's Task", Kluwer Arbitration Blog, 11 October 2011.

13
FHR European Ventures LLP and others v Cedar Capital Partners LLC [2014] UKSC 45, para 42.

14
Bribery Act 2010, s. 7(2).

15
Industries & General Mortgage Co Ltd. v Lewis [1949] 2 AER 573, p.575G.

16
Anangel Atlas Compania Naviera SA v Ishikawajima-Harima Heavy Industries Company Limited [1990] 1 Lloyd's LR 166, p.171.

17
Novoship (UK) Ltd v Mikhaylyuk [2012] EWHC 3586 (Comm), para 106; Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm), para 67; Fiona Trust & Holding Corporation v Privalov [2010] EWHC 3199 (Comm), para 73.

18
Industries & General Mortgage Co Ltd. v Lewis [1949] 2 AER 573, p.575H; Fiona Trust & Holding Corporation v Privalov [2010] EWHC 3199 (Comm), para 72.

19
Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm), para 68; Fiona Trust & Holding Corporation v Privalov [2010] EWHC 3199 (Comm), para 72.

20
See Lomnicka et al., Chitty on Contracts, 31st ed., para 16-168, citing Nayyar v Denton Wilde Sapte [2009] EWHC 3218, para 92.

21
Fiona Trust and Holding Company v Skarga and others [2013] EWCA Civ 275, para 2.

22
Lomnicka et al., Chitty on Contracts, 31st ed., para 16-008.

23
English cases have used the terms "void ab initio" and "unenforceable" interchangeably: Nelson Enonchong, "Effects of Illegality: a Comparative Study in French and English Law", International & Comparative Law Quarterly 44, no. 1 (1995): 196-213. Cf. Lomnicka et al., Chitty on Contracts, 31st ed., para 16-008.

24
Lomnicka et al., Chitty on Contracts, 31st ed., para 16-180.

25
In ICC Case No 6497 of 1994 the arbitral tribunal found a high degree of probability that the objective of Product Agreement Q was to channel bribes to officials in country X: Carolyn B. Lamm, Brody K. Greenwald, and Kristen M. Young, "From World Duty Free to Metal Tech: A review of International Investment Treaty Arbitration Cases Involving Allegations of Corruption", ICSID Review 29, no. 2 (2014): 328-349, p.339.

26
Michael Hwang S.C. and Kevin Lim, "Corruption in Arbitration - Law and Reality" (expanded version of Herbert Smith-SMU Asian Arbitration Lecture, Singapore, 4 August 2011), para 95, citing Panama v India Rubber (1874-75) L.R. 10 Ch. App. 515; Armagas v Mundogas [1986] 1 A.C. 717; Logicrose Ltd. v Southend United Football Club [1988] 1 W.L.R. 1256.

27
Logicrose Ltd. v Southend United Football Club [1988] 1 W.L.R. 1256.

28
Panama & South Pacific Telegraph Co v India Rubber, Gutta Percha & Telegraph Works Co. (1874-75) L.R. 10 Ch. App. 515.

29
Ibid, p.527.

30
Logicrose Ltd. v Southend United Football Club [1988] 1 W.L.R. 1256.

31
Ibid, p.1263F.

32
Ibid, p.1264C.

33
Michael Joachim Bonell and Olaf Meyer, "Private International Law: the Effects of Corruption in International Commercial Contracts" (presentation, XIX International Congress of Comparative Law 2014, 21 July, 2014).

34
UBS AG v Kommunale Wasserwerke Leipzig Gmbh [2014] EWHC 3615 (Comm), para 720.

35
Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 para 71, citing Mahesan v Malaysia Government Officers' Co-operative Housing Society Ltd [1979] A.C. 374, p.383.

36
Ibid.

37
Fyffes Group Ltd v Templeman [2000] 2 Lloyd's Rep. 643.

38
Ibid, p.668.

39
Ibid, p.672.

40
Ibid.

41
Tigris International NV v China Southern Airlines Company Ltd & Ano [2014] EWCA Civ 1649.

42
Ibid, para 143.

43
Ibid, para 144.

44
Sutton et al., Russell on Arbitration, 23rd ed., para 2-007. Arbitration Act 1996, s. 7.

45
See generally, Michael Hwang S.C. and Kevin Lim, "Corruption in Arbitration - Law and Reality" (expanded version of Herbert Smith-SMU Asian Arbitration Lecture, Singapore, 4 August 2011), paras. 91-93.

46
Fiona Trust and Holding Corp v Privalov [2007] UKHL 40, para 35.

47
ICC Case No. 6401, as referred to in "Chapter 10: Defenses" in Foreign Investment Disputes: Cases, Materials and Commentary, 2nd ed., ed. R. Doak Bishop, et al., (Kluwer Law International, 2014), pp.897-964.

48
O'Callaghan v Coral Racing Ltd, The Times, 26 November 1998.

49
Richard Kreindler, "Aspects of Illegality in the Formation and Performance of Contracts" in International Commercial Arbitration: Important Contemporary Questions, ICCA Congress Series no. 11, (London 2002), ed. Albert Jan van den Berg, (Kluwer Law International, 2003), pp.209-260.

50
The Foreign Corrupt Practices Act 1977, 15 U.S.C. §§ 78dd-1(b), 78dd-2(b) and 78dd-3(b).

51
As of 1 April 2015, there are 140 signatories to the United Nations Convention against Corruption.

52
Fiona Trust and Holding Company v Skarga and others [2013] EWCA Civ 275.

53
Michael Hwang S.C. and Kevin Lim, "Corruption in Arbitration - Law and Reality" (expanded version of Herbert Smith-SMU Asian Arbitration Lecture, Singapore, 4 August 2011), para 106.

54
Westacre Investments Limited v Jugoimport-SDPR Holding Limited [2000] QB 288, p.316.

55
The party alleging corruption did not participate in the arbitration.

56
Honeywell International Middle East Ltd v Meydan Group LLC [2014] EWHC 1344 (TCC), para 185.