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. The remedy for bribery

The Parties are far apart on the issue of what under New York law is the appropriate remedy to be applied for the bribery that all Parties agree took place here. [Respondent]'s original position was that the only remedy permitted under New York law is the complete rejection of the guilty party's claim for any payment for work done pursuant to a contract tainted by unlawful payments. The Tribunal declined to accept this position in its Award Phase I and in Phase II [Respondent] urges an alternative remedy suggested by the Gerzof case. This remedy is designed to compensate [Claimant] only for its out-of-pocket expenses so as to ensure that [Claimant] would make no profit from the tainted [contract].

The remedy suggested by [Claimant] is at the other end of the spectrum. It would allow [Claimant] to recover the cost of its work plus any profit, subject only to the deduction from that amount of the bribes paid by [Claimant]. Lead Counsel for [Claimant] ... arguing from a New York Court of Appeals case ( Donemar Inc. v. Molloy, et al. , 212 N.Y. 360 (1930) ( stated the rule: "Donemar says you take out the secret commission and you allow the party to otherwise recover the net contract price once you've backed out the secret commission." ... In effect [Claimant's counsel] was asserting that the remedy was to let [Claimant] recover what it was entitled to under the Contract minus the amount of the bribes paid by it.

A. The evolution of New York law with respect to bribery

Both the courts and the legislature of New York have dealt harshly with "commercial bribery". As early as 1905, the Legislature made it a misdemeanor to give or receive such a bribe. The background to this legislative action was explained by the Appellate Division in Sirkin v. The Fourteenth Street Store, 108 N.Y.S. 830, 833-34 (1908):

The corrupt practice of secretly offering bribes to servants, agents and employees, to induce them to place contracts for their masters or employers, had spread to such an alarming extent in this State that its viciousness and dishonesty and demoralizing tendencies attracted the attention of the Legislature at its session in 1905 and led it to declare it to be a misdemeanor to give or receive such a bribe[.]

The legislation referred to in Sirkin was N.Y. Penal code §180 which provided:

A person is guilty of commercial bribery in the second degree when he confers, or offers or agrees to confer, any benefit upon any employee, agent or fiduciary without the consent of the latter's employer or principal, with intent to influence his conduct in relation to his employer's or principal's affairs.

Both §180 and the Sirkin case apply to "commercial bribery" irrespective of whether the contract or activity in question is in the public or the private domain. Neither suggest that there is to be any distinction drawn between "commercial bribery" in the public contract sphere as compared with "commercial bribery" in the private sphere. The remedy articulated in Sirkin was based on the principle that a contract "made in violation of a penal statute … is prohibited, void and unenforceable, whether executory or executed". 108 N.Y.S. at 388.

In 1960, the holding of Sirkin was accepted and applied by the Court of Appeals in McConnell v. Commonwealth Pictures Corp. , 7 N.Y. 2d 465 (1960). As in Sirkin, the McConnell Court held that "acts of bribery" brought the briber "within the rules of our precedents forbidding court assistance to bribers". Id. at 497. The Court continued "we are not working here with narrow questions of technical law. We are applying fundamental concepts of morality and fair dealing not to be weakened by exceptions." Ibid. ...

B. The Gerzof decision

In 1968 the Court of Appeals decided Gerzof v. Sweeney, et al., 22 N.Y. 2d 297. This case, upon which the Tribunal relied in its Award Phase I, departed from the Sirkin-McConnell rule in that it allowed the briber to make some recovery from the bribee.1 In reaching this result, Chief Judge Fuld writing for a unanimous Court took into consideration the "equities" of the case before him. In deciding what is the appropriate remedy here, the Tribunal will follow this common-sense and common-law approach.

The Gerzof case was brought by a taxpayer against the Mayor of the Village of Freeport and the Nordberg Manufacturing Co. The latter sold a 5,000 kilowatt generator to the Village, which had originally wanted only a 3,500 kilowatt generator. The sale was achieved by Nordberg's improperly convincing the Board of Trustees of the Village that the 5,000 kilowatt generator was required. Since Nordberg was the only supplier of the larger generator, its bid of $757,625 was accepted by the Village. The trial court held that Nordberg must return the $757,625 purchase price and that the Village could retain the generator. The Appellate Division, holding that the generator was returnable, modified the trial court's judgment by allowing Nordberg to remove the generator after repayment of the purchase price and posting a bond.2

The Court of Appeals in a unanimous opinion written by Chief Judge Fuld held that, although there was justification under New York law for the decision of the lower court,3 a different remedy should be applied. In crafting such remedy, the Court first rejected an alternative proposed by Nordberg:

Nor would it be sufficient to limit the judgment to the alternative amount proposed by Nordberg. Pointing out that its own bid on a 3,500 kilowatt machine exceeded the bid of its competitor Enterprise, by 8.6%, the defendant suggests that it be required only to refund to the Village a sum equal to 8.6% of the price paid for the illegally purchased 5,000 kilowatt machine. This would result in the entry of a judgment against Nordberg of about $65,000 which, the defendant states, is what the court could presume to be a reasonable profit plus selling expenses. Such a disposition, which would do little more than deprive the seller of its profit, would reduce to negligible proportions the hazard of selling to a municipality in violation of the bidding regulations.4

It then went on to state its "more appropriate alternative remedy":

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 the circumstances of this case.

. . . . . . . . .

We may estimate the ensuing loss to the Village by taking 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 out to procure. That difference is $141,940. To the sum just mentioned we should add the difference between what it cost the Village to install the Nordberg machine and what it would have cost it to install the one offered by Enterprise. The trial court's finding that none of the construction and related costs incurred by the Village could be allocated to the installation of the engine must be stamped as error. The defendant Nordberg itself introduced into evidence the expert opinion of qualified engineers that the costs of installing its engine was $36,696 greater than the amount the Village would have had to expend for installing the Enterprise machine, and no one else testified to a lesser figure. We may assume that the amount furnished by Nordberg's own witnesses is conservatively stated. The total of the two items mentioned is $178,636, and the judgment against the defendant Nordberg should be modified so as to direct payment of this sum to the Village, together with interest at the rate of 3% Per annum ( which is consistent with the rate (3.2%) payable by the Village on the bonds it issued to finance the acquisition of the generator ( computed from December 16, 1964, the date on which Nordberg received the final installment of the purchase price.5

C. The Parties' position on remedy

[Respondent] has proposed a remedy that would have the effect of limiting any recovery by [Claimant] to its out-of-pocket expenses. This remedy would deprive it of any profit. [Claimant] has proposed that the remedy be simply the deduction from the contract balance owed by [Respondent] of the amount of the bribes ( a total of several million dollars.6 Its arguments in favor of its solution were stated at some length in the concluding oral argument by its Lead Counsel ... Essentially [Claimant's counsel] made three points. Each will be discussed below.

1. [Respondent] and [Claimant] were both responsible

The first argument of [Claimant], as the Tribunal understands [Claimant's counsel]'s closing argument, is that the bribery scheme was either initiated by [Suspect 3], the President of [Respondent], and [Suspect 5 (Claimant's agent)] in whole or that the scheme was at least the joint creation of [Suspects 3 and 5] on the one hand and [Claimant] officers on the other. ...

The record may fairly be read to establish that [Suspect 3] was a possible bribee but that is not proof that he was the author of the bribery scheme. That position was filled by [Suspect 4]. Hence, the Tribunal must conclude that [Claimant] has not established by the preponderance of the evidence that [Respondent] or any of its officers had anything to do with the "hatching" of "this whole plan of bribery". The record created by the Parties establishes that the initial plan to bribe originated within [Claimant]. Probably, at a later date, [Suspect 3] had a significant involvement but he has not been proven to be an initial participant in origination of the scheme.

2. The actual damages to [Respondent] were small

Another point made by [Claimant's counsel] in his summation was that "the actual damages sustained by [Respondent] as a result" of the bribery are "measurably small". … Presumably this observation relates to monetary damages. In any event, the record does not support this conclusory statement. It must be conceded that the initial bribe, which was directed to the securing of [the contract], does not seem to have caused any monetary damage to [Respondent]. [Respondent's Vice-President Director], who made the decision to accept the [Claimant's] bid, appears to have independently reached the conclusion that the contract price of $102,000,000 was a fair price and, presumably, that price was no higher and may have been lower than the bid of other contractors competing for the job.

However, to say that the actual damages were "measurably small" is to ignore the persuasive and continuing effect of the bribery. [Suspects 1 and 2], as well as [Suspects 3 and 5], remained on the scene and had an influence on many events subsequent to the effective date … of the Contract. Moreover, in perhaps a subtle but nevertheless a significant manner, the bribery would seem to have necessarily affected the functioning of the [Respondent] team charged with the responsibility of managing this large and complex project.

The pervasive and continuing effect of the bribery may be seen in the following events which may fairly be viewed as being influenced by the bribery. Arranged chronologically, the following episodes may be cited …

The chronology set forth above notes five episodes covering a span of 19 months when [Claimant] bribery appears to have had a substantial monetary impact on the Project. Taking into account the presumption that the Tribunal must apply against [Claimant] which had initiated the bribery scheme and the evidence in the record, the Tribunal concludes that the effect of the bribery was continuous and that it caused significant monetary and other damages to [Respondent].

3. The comparative misconduct defense

A third argument presented by [Claimant's counsel] in his summation can best be described as "comparative misconduct". During his argument, [Claimant's counsel] posed this rhetorical question: "Where is [Respondent's] acknowledgement of responsibility for the misconduct of its executives?" … He then goes on to list the misconduct in question. He deals first with [Suspect 3] citing his long-term relation with [Suspect 5] … and claiming that [Suspect 3] created the bribery scheme. ... He then deals with [Respondent's Vice President Director] stating that he "chose to ignore that [Suspect 3] was up to no good and that [Suspect 5]'s relationship with [Suspect 3] was all too cozy and chummy". ... [Respondent's Vice President Director], [Claimant's counsel] asserts, was presented as a person of high ethics thus deflecting "attention from the fact that the … companies [in Respondent's parent group] and [Respondent] were a corrupt mega enterprise run with corruption in its blood". ... Finally, he notes the "phony contracts for approximately $72 million, acknowledged by [Respondent's Vice President Director] in his own handwriting, to make the audit of [Respondent] come out better", and observes that [Respondent's Vice President Director] was the "creator of $55 million in rollovers so that the banks would see and would fund overstated invoices so that he could apply the excess of those invoices over cost to the capital responsibilities of his boss … to put his capital into this project". ...

Accepting for the sake of argument, [Claimant]'s thesis that [Claimant] and [Respondent] were both corrupt entities and that both indulged in illegal and immoral practices, what legal consequences should the Tribunal draw? [Claimant] has not attempted to fit its argument into a legal framework. Two possible legal approaches deserve comment. First, [Claimant] may be suggesting a concept similar to outlawry, i.e. that both Parties are outside the law. This concept does not aid [Claimant]'s case. As outlaws, both Parties would be deprived of the protection and benefits of the law. The obvious result should be, therefore, that the Tribunal would leave them where it finds them, a result that does nothing for [Claimant] which seeks affirmative relief. Moreover, the fundamental objection to this analysis is that outlawry is no longer a condition accepted by modern legal systems. Under modern legal systems, each person, no matter how evil or corrupt, remains under the law.7

Second, [Claimant's counsel] may be suggesting the concept of in pari delicate. This is, of course, a concept that is still alive and well. It applies only, however, to comparison of fault in the same transaction. It allows consideration only of the acts of [Claimant] and [Respondent] that took place within the framework of the [contract] transaction. What [Respondent's Vice President Director] did is unrelated to that transaction. What he did in unrelated transactions, whether [the owner of Respondent's parent group] is a corrupt man, etc. are irrelevant to this Award. Acts that have no connection with [the contract] cannot mitigate or excuse [Claimant]'s conduct. If [Claimant] had established, as [Claimant's counsel] argued, that [Suspect 3] was the author or co-author of the bribe scheme, the result would be different and [Claimant's counsel]'s position would be a very powerful one. However, [Claimant] has failed to meet its burden of proof of establishing that proposition by a preponderance of the evidence.

4. The Gerzof case does not control

In his summation, [Claimant]'s Lead Counsel argued that the Gerzof case, while it was very important in Phase I, is of lesser importance in Phase II and certainly is not controlling.

While that wisdom from New York's highest court in Gerzof is valuable, I submit to you it is less instructive in Phase II than it was in Phase I, because in Phase I the issue that was before you was the application by [Respondent] that in fact you deprive [Claimant] of all of its entitlement to any monies at all because of the existence of the bribery that they uncovered. Therefore Gerzof was very helpful to you and all of us in resolving Phase I.

However, once that issue of forfeiture was resolved by you in Phase I, the critical differences between the facts in Gerzof and the facts in this case render the particular formula adopted by the Gerzof court to be less helpful. …

Instead of Gerzof, [Claimant] suggests that the Tribunal should find the remedy for the bribery in Donemar, Inc. v. Malloy, 252 N.Y. 360 (1930).

If you are looking for a New York case that will afford a more relevant and appropriate remedy and approach to how you deal with the circumstances in Phase II, we respectfully recommend that you turn to an old case from the

'20s but that's been followed regularly and cited as well recently, and that's the Donemar versus Malloy case, which is a Court of Appeals case …

Simply stated, Donemar says you take out the secret commission and you allow the party to otherwise recover the net contract price once you've backed out the secret commission. …

Finally, [Claimant]'s Counsel states expressly the remedy proposed by [Claimant] for this case.

We have already offered to you that remedy in this case. We have already said to you that we will acknowledge that it would be an appropriate remedy for you to reduce our recovery by the $2 million that was paid by [Claimant] to [Suspect 5], a part of which he kept for himself and the majority of which he passed on to [Suspects 1 and 2].

And the reason that we do that is consistent with the logic of Donemar, which I would respectfully submit to you is in fact very important logic. And that is you could assume ( even though it may not be factually true, you may assume, I think that if [Claimant] had $2 million in its contract price it could afford to give [Suspect 5] for the elicit [sic] purpose for giving this money to [Suspects 1 and 2], then it didn't need that in its contract price and that the contract price was thereby loaded by the amount of that payment, coming directly from the language in Donemar. …

D. The remedy chosen by the Tribunal

The Tribunal finds that [Claimant]'s proposed remedy, which would allow [Claimant] to recover costs plus profit minus the bribe, is inconsistent with New York precedent. First, the Donemar case8 does not support [Claimant]'s position. In that case, which involved the sale of goods, the buyer sued the seller to recover the amount of a bribe alleged to have been paid by the seller to an employee of the buyer in order to obtain a favorable settlement of a disputed claim for the goods sold to buyer. The only issue was the entitlement of the buyer to recover the amount paid to the employee with respect to the settlement. The jury found that the seller had sustained only nominal damages; the Appellate Division affirmed. On appeal, the Court of Appeals reversed and remanded. In its opinion Judge Pound stated the question before the Court:

The question of law is: What is the position of the vendor of property who pays a secret commission to a person whom he knows to be an agent of the vendor in effecting a settlement?"9 (Underscoring supplied.)

The Court concluded that the buyer had suffered damages ( the amount of the bribe ( if there had been a corrupt agreement. It reversed and remanded the case for a jury to determine if there had been such an agreement.

Needless to say, all that was in issue there was a bribe with respect to a settlement. The only possible recovery was the amount of the bribe. Clearly, that case is not very instructive here.

Second, one of the holdings, as well as the underlying rationale, of the Gerzof case, reject the remedy proposed by [Claimant].

In Gerzof, defendant Nordberg argued that it should "be required only to refund to the Village a sum of 8.6% of the price paid for the illegally purchased 5,000 kilowatt machine. This would result in the entry of a judgment against Nordberg of about $65,000 which, the defendant states, is what the court could presume to be a reasonable profit plus selling expense."10 The Court rejected this remedy stating: "Such a disposition, which would do little more than deprive the seller of its profit, would reduce to negligible proportion the hazard of selling to a municipality in violation of the binding regulations."11 In place of Nordberg's proposed remedy, the Court granted $178,636 in damages, and awarded approximately 2.7 times the profit of $65,000 estimated by Nordberg.

Moreover, Nordberg's remedy does not meet the essential requirement of a remedy in a bribery case. The remedy must deprive "sellers of any incentive to participate in such a violation".12 In a case where a contract value of $102,000,000 is at issue, there is little disincentive in a remedy for bribery that is limited to the amount of the bribe. Clearly, such a remedy would reduce to near zero the hazard of securing a large construction contract through commercial bribery. On the other hand, the remedy that the Tribunal adopts, one that allows no profit to the briber, is surely a powerful disincentive. Corporations do not thrive on costs plus zero contracts.

After having considered all the arguments presented by the Parties and the facts of this case, the Tribunal has unanimously concluded that the appropriate remedy is that proposed by [Respondent] which is based on the Gerzof case and, in effect, would allow [Claimant] to recover its out-of-pocket expenses for the Project but no profit. This result is consistent with the essence of Gerzof in that it is fair to the victim and acts as a strong disincentive to engage in bribery.'

1
The Gerzof case is discussed at considerable length in Award Phase I …

2
The Court of Appeals rejected the Appellate Division's remedy: "In our view, though, there is no warrant for allowing Nordberg this opportunity to recoup its loss or for subjecting the Village power system to the disruption and uncertainty that would result from dismantling the present installation. The courts should not invite unpredictable consequences of this kind. We must regard the machinery as unreturnable, as were the goods or services for which payment was denied in the cases cited above (22 N.Y.2d p. 304, 292 N.Y.S.2d 644, 239 N.E.2d 523)." (Underscoring supplied.) 22 N.Y. 2d. 297, 306.

3
Judge Fuld wrote: "There was, therefore, justification ( and precedent ( for Special Terms 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." Id. at 305.

4
Ibid.

5
Ibid.

6
[Claimant] has conceded that at least the $2,000,000 of "security payments" and the $430,000 increase in its bid for the effluent plant should be deducted.

7
In United States v. Hall, 198 F.2d 726, 727(28 (2d.Cir.1952), Judge Clark wrote: "Apparently outlawry was imported into our criminal law with some early vigor, but during the nineteenth century was either abolished or fell into disuse. It was unknown on the civil side of the court, and of course today has only an historical interest." Footnotes omitted. As Justice Clark noted in footnote 2, p. 728, N.Y. Rev. Stat. Pt. IV. e. II, Tit 7, Sec. 20, p. 745 abolished outlawry in New York save on indictment or conviction for treason.

8
252 N.Y. 360 (1930).

9
Id. at 364.

10
22 N.Y. 297, 305.

11
Ibid.

12
Id. at 306.