Claimant (contractor) and Respondent (owner) entered into a contract for the construction of an industrial facility in a South East Asian country. The contract was governed by New York law. Disputes arose between the parties relating to the performance of the contract. In the course of the arbitration proceedings commenced to resolve those disputes, Respondent raised a threshold issue, alleging that Claimant was barred from obtaining relief as it had won the contract by bribing Respondent's advisers and had failed to disclose information on the bribes and secret commissions paid to them. In an initial phase of the arbitration, the arbitral tribunal considered these allegations and rendered a partial award, in which it found that the existence of bribery did not make the contract unenforceable or prevent Claimant from pursuing its claims. In a second phase, the arbitral tribunal ruled that the appropriate remedy was to allow Claimant to recover its out-of-pocket expenses but no profit.

_____

Le demandeur (l'entrepreneur) et le défendeur (le maître de l'ouvrage) avaient conclu un marché pour la construction d'une usine dans un pays d'Asie du Sud-Est. Le contrat était régi par la loi de New York. Des différends se sont élevés entre les parties à propos de son exécution. Au cours de la procédure d'arbitrage engagée afin de les régler, le défendeur a soulevé une question préliminaire, arguant que le demandeur ne pouvait obtenir réparation car il avait remporté le marché en versant des pots-de-vin et des commissions secrètes à ses conseils et omis de divulguer des informations à ce sujet. Dans la phase initiale de l'arbitrage, le tribunal arbitral a examiné ces allégations et rendu une sentence partielle dans laquelle il concluait que l'existence de pots-de-vin ne privait pas le contrat d'effet et n'interdisait pas au demandeur de faire valoir sa cause. Dans une seconde phase, le tribunal arbitral a considéré qu'il convenait d'autoriser le demandeur à recouvrer ses débours, mais aucun bénéfice.

_____

El demandante (contratista) y el demandado (propietario) celebraron un contrato para la construcción de una instalación industrial en un país del Asia Sudoriental. El contrato estaba regido por la ley de Nueva York. Entre las partes surgieron controversias relacionadas con la ejecución del contrato. Durante los procedimientos de arbitraje iniciados para resolver dichas controversias, el demandado planteó una cuestión previa al alegar que el demandante no podía obtener reparación por haber conseguido el contrato sobornando a los asesores del demandado y por haber omitido información acerca de los sobornos y comisiones secretas pagadas a los mismos. En la fase inicial del arbitraje, el tribunal arbitral consideró estas alegaciones y procedió a dictar un laudo parcial en el que concluía que la existencia de soborno no hacía inejecutable el contrato ni impedía al demandante continuar con sus demandas. En una segunda fase, el tribunal arbitral dictaminó que la solución apropiada era permitir que el demandante recuperara sus desembolsos realizados en dinero de bolsillo, pero ningún beneficio.

'IV. Legal analysis

The first issue to be decided with respect to [Respondent]'s affirmative defense is: "did Claimant pay bribes or secret commissions to agents, employees or advisors of Respondent?" ... In the generic sense, it is clear that it did. [Suspect 1] was an employee of [Respondent] and [Suspect 2] was an advisor. Each of them received money payments ("bribes") from [Claimant].

However, [Respondent]'s affirmative defense goes farther. It asks the Tribunal to find that [Claimant] committed "commercial bribery" within the meaning of N.Y. Penal Law, §180.00 (McKinney 1999). The Tribunal agrees that New York substantive law, "excluding rules of private international law that form a part of the law of New York and that lead to the application of the law of any other jurisdiction" governs [the contract] ... The result is that the conduct at issue here is to be judged by New York substantive law and that the law of [the South East Asian country] is excluded. Indeed, this was recognized by the Parties in the Terms of Reference which state: "The law to be applied to the merits of the dispute is the law of the State of New York, USA." ...

As the Tribunal has stated, [Claimant] is guilty of bribery in the generic sense. It does not follow, however, that it is guilty of a violation of Section 180 of the NY Penal Law. That is a different and a far more difficult issue. Under Section 180 questions arising from the activities of [Suspect 3] raise issues as to the "consent" of [Respondent], of which he was not only President Director but also a prominent participant in the series of negotiations that led to [the Contract]. Furthermore, there are questions of attribution of knowledge: Is [Suspect 4 (president of Claimant)]'s knowledge to be attributed to [Claimant]; is [Suspect 3]'s to [Respondent]?

In view of the absence of any definitive New York case deciding these and other important issues, the Tribunal has determined not to decide the question of whether the bribery here was Section 180 bribery. To decide that question is unnecessary because the Tribunal has concluded, in view of the instant facts, that the remedy should be the same irrespective of whether the bribery here is a generic bribery or a Section 180 bribery.1

A. New York law permits the Tribunal to fashion a remedy

The Tribunal does not agree with [Respondent] that the only remedy permitted by New York Law for breach of Section 180 of the NY Penal Code is the complete rejection of the guilty party's claim for any payment for work done pursuant to a contract that was in some measure tainted by the unlawful payment. New York law, in the view of the Tribunal, permits it to fashion a remedy other than that sought by [Respondent].

First, it is a general principle of law that the imposition of punishment should be governed by the doctrine of proportionality. In public international law this doctrine measures the legitimacy of a national response to aggressive acts of a neighbor. In criminal justice, as Sir William Gilbert put it in song, the object is "To make the punishment fit the crime". In Gerzof v. Sweeney, et al. , 22 NY 2d 297, 306 (1968), Chief Judge Fuld, writing for an unanimous court, said: "Justice demands that even the burdens and penalties resulting from disregard of the law be not so disproportionately heavy as to offend conscience".

Second, the Parties have not placed before the Tribunal any case that is remotely similar to the instant case. This case has unique factors not found in any cited case. The bribery did not involve the corporate decision maker; there is evidence pointing to knowledge of, and perhaps participation in, the bribery by the CEO of [Respondent]; the magnitude of the claim that is sought to be trumped by the bribery defense is more than $59 million, an amount significantly larger than was involved in any case put before the Tribunal; and the real parties in interest are, on the part of [Claimant], its creditors who obviously played no part in the bribery.2

In the case of Gerzof v. Sweeney, et al. , 16 N.Y. 2d 206 (1965), a taxpayer of the Village of Freeport brought an action pursuant to Section 51 of the NY General Municipal Law seeking to annul a contract for an electric generator that had been awarded to the defendant Nordberg Manufacturing Co. ("Nordberg").

The lower courts found in favor of the defendants. On appeal, the Court of Appeals, in an unanimous opinion written by Judge Fuld, held that there had been a violation of Section 103 of the Municipal Law providing "that a contract for public work is to be awarded to the lowest responsible bidder ... after advertisement for sealed bids". Id. at p. 208.

The Court of Appeals held that "for all practical purposes, the competitive bidding requirement required by the statute was effectively eliminated" because the bid proposal contained conditions that only Nordberg could meet. Id. at p. 211. The case was remanded "to the Supreme Court, Nassau County, for the entry of judgment in favor of the plaintiff in accordance with this opinion". Id. at p. 212.

On remand, the Supreme Court found that the electric generator in question should remain the property of the Village and that the Village should have judgment against Nordberg for the amount the Village paid for the generator ( $757,625. On appeal to the Appellate Division, the lower court's judgment was modified by a proviso that after paying the judgment Nordberg "should have the option of removing the generator at its own expense upon notice to the village and upon posting a $350,000 bond to indemnify the village for the cost to it over and above $757,625 of purchasing and installing an equivalent generator ..."3

The case then went to the Court of Appeals where Judge Fuld, by then Chief Judge, again wrote the opinion for an unanimous Court. Judge Fuld's opinion begins by the statement that this was a case of first instance:

We have not previously been called upon to fashion a remedy appropriate to a case such as this, where an illegal and void contract for public work, entered into in defiance of the competitive bidding statute (General Municipal Law, §103) has been performed in full on both sides. We have, however, dealt with the situation, one step removed, in which the municipality has consumed or had the full benefit of illegally purchased goods for services but the vendor or supplier has not been paid. We have repeatedly refused, in such cases, to allow the sellers to recover payment either for the price agreed upon or in quasi-contract ..."4

Judge Fuld's opinion continues:

There was, therefore, justification ( and precedent ( for Special Term's decision directing Nordberg to repay the full purchase price of $757,625 and allowing the Village to retain the machinery which had been installed and was in operation. We conclude, nevertheless, though the patently illegal conduct of the defendants entitles them to little consideration, that the amount to be awarded should be less than that. We may adopt this course, in the unusual circumstances of the present case, without disturbing the salutary rationale and policy underlying such decisions as Albany Supply & Equip. Co. v. City of Cohoes, N.Y.2d 297. The sheer magnitude of the forfeiture that would be suffered by the defendant Nordberg, as well as the corresponding enrichment that would enure to the Village of Freeport, under Special Term's determination adds an element to this case not to be found in any of those in which the principles we have been discussing have been applied.5

and

A more appropriate alternate remedy is available on the record before us, a remedy which takes into account both the wrong done to the Village by the defendants' callous disregard of the competitive bidding statutes and our policy of depriving sellers of any incentive to participate in such a violation. In point of fact, the remedy, lying well within the domain of equity, impresses us as one uniquely suited to circumstances of this case.6

The Court held that Nordberg shall pay to the Village "the difference between the $757,625 paid to Nordberg and the $615,685 which the Village would have paid if it had accepted the low bid of Enterprise for the 3,500 kilowatt engine the Village had earlier set to procure. That difference is $144,940. ..."7

The Tribunal notes that a significant factor in the Court's decision was the existence of untainted bids that allowed it to measure accurately the actual injury caused to the Village. In the instant case there are a number of untainted bids for the Project that may well furnish similar reference points here.

Finally, the Tribunal recognizes that the Gerzof case does not involve a Section 180 bribe. However, it views the principles announced by the decision as being general principles of New York law. As such, they are applicable to the instant proceedings.

In concluding this analysis, a short discussion of [a professor]'s testimony is appropriate. He was [Respondent]'s expert witness and testified mainly on matters of ethics. It is significant that [Respondent] recognized by sponsoring [the professor] as a witness that ethical considerations have a bearing on the issues to be decided in Phase I. For the purposes of this Award his most significant testimony was during his cross-examination by [counsel for Claimant] which involved a discussion of Judaic law. During the course of this examination, [the professor] agreed that "Jewish law focuses primarily on the prohibition against the acceptance of a bribe rather than focusing on the giving of a bribe" ... and that there is "a positive commandment to pay a worker for the value of his time".8 When asked to balance the ethical weight of bribery against that of failure to pay a debt, he testified:

The Chairman: You say in that situation the ethical weight of bribery outweighs the weight of failure to pay the debt you owe?

The Witness: I don't come down easily in terms of this, because, you know, it's ( you have two competing ethical propositions in this situation here.

I think from my point of view the bribery really was the catalytic event in this contract being secured and really tainted the whole commercial transaction from the outset.

I guess I would have to say the bribery and its consequences to me ( I don't say this glibly and I don't say it easily ( predominate in how I make my analysis.

Is that responsive?

The Chairman: Yes, it's responsive. Go ahead. ...

B. In fashioning a remedy the Tribunal does not act as "amiable compositeur"

The Tribunal is fully aware that in this Arbitration it has no authority to act as amiable compositeur and it has no intention of so acting in Phase II when, within the context of the entire case, it will fashion a remedy for the bribery that it has found exists. In fashioning that remedy, the Tribunal will be following a practice of common-law courts developed over many centuries by taking into consideration the "equities", i.e. what is fair and just as between the parties. This is precisely what Chief Judge Fuld did in Gerzof and what [Respondent] itself introduced into the record of this Arbitration by calling an ethicist as an expert witness. If the ethical aspects of this matter were irrelevant, why should the Arbitrators be instructed in ethics?

What the Tribunal will do in fashioning a remedy in Phase II is what New York courts do every day. It will take into account all the relevant aspects of the facts and the law in reaching its award.

V. The award

On the basis of its study of the record in this arbitration and the legal arguments presented by the Parties both orally and in writing, the Tribunal unanimously rules as follows:

A. Answers to the issues to be determined

It answers these issues:

1. It finds that [Claimant] did pay bribes or secret commissions to agents, employees or advisors of [Respondent].

2. It finds that such bribes or secret commissions do not bar [Claimant]'s right to pursue claims in this Arbitration.

3. It finds that such bribes or secret commissions do not render [the Contract] unenforceable.'

1
The Tribunal notes that [Respondent] also relies on Black v. MTV Networks Inc. , 576 N.Y.S. 2d 846 (App. Div. 1991). …In Black, MTV relied upon "gifts" made by Black to its employees as the basis for terminating a consulting contract that Black had entered into with MTV. The Court concluded that "the non-disclosure of those dealings served to permit the employer, MTV, to terminate the agreement at issue". Id. at 848. This case does not add to the analysis of the matter in controversy here. The instant arbitration does not involve the termination of a contract; it involves the question whether a contract was void ab initio and whether one of the contracting parties can retain work performed under the contract without making any payment with respect thereto. Thus, the line of authority argued here by [Respondent] adds nothing to the analysis that flows from the Tribunal's conclusion that [Claimant] is guilty of bribery in the generic sense or to the fashioning of a remedy to compensate [Respondent] appropriately for that bribery.

2
[Claimant] is currently in bankruptcy and any award would go to the Trustee in Bankruptcy for distribution to its creditors.

3
22 N.Y. 2d 297, 298 (1968).

4
Id. at p. 304.

5
Id. at pp. 305-306.

6
Id. at p. 307.

7
Ibid.

8
… [The professor] answered the question: "The business of not paying what you owe somebody is serious stuff in the Bible, isn't it?" The answer was "Very much so." …