Global Development

Background

Within a procurement process carried out by Bariven SA, a subsidiary of Venezuelan national oil and gas company Petróleos de Venezuela, SA (PDVSA), Wells Ultimate Service LLC obtained a purchase order and subsequently entered into a purchase contract regarding the sale and delivery of two large engines for use on drilling platforms. Bariven failed to pay approximately $12 million of the purchase price. Wells thus triggered arbitral proceedings under the ICC Arbitration Rules, seated in the Hague and subject to Dutch law, claiming for payment of the outstanding amounts.

Bariven argued that the agreement had been awarded to Wells due to a corruption scheme to which Wells was a party and was therefore void under Dutch law. Essentially, Bariven indicated that several individuals linked to Wells had intervened in the procurement process, including former employees of Bariven, and had pleaded guilty on charges of corruption and bribery in pending criminal proceedings in the United States.

After the proceedings had ended, some new facts came to light, notably that former Bariven employees had accepted bribes to ensure that the companies included in the panels within Bariven’s procurement procedures were all related to a certain individual, linked to Wells, so as to guarantee that one of those companies would win the bid.

The Arbitral Tribunal indicated in its award dated 23 March 2018 that although there were some facts raising doubts in connection to the procurement process, the gravity of the accusation of corruption demanded clear and convincing evidence. Bariven not having met this standard, was ordered to pay the purchase price plus interest, as well as costs, to Wells for failing to honour the purchase contract.

Bariven applied to the Hague Court of Appeals to set aside the arbitral award

Meanwhile, Wells applied for the attachment of bank accounts belonging to Bariven in Portuguese banks before the competent court of first instance. The attachment was granted and around € 11,5 million were seized. Simultaneously, Wells applied for the recognition of the award in Portugal before the Lisbon Court of Appeals.

Bariven opposed both the attachment and the recognition proceedings and informed the respective courts that an action to set aside was pending in the Hague. The attachment proceedings were then transferred to the Court of Appeals and consolidated with the recognition proceedings.

Following the opposition to the attachment, the Court of Appeals ordered a rogatory letter to be sent to Spain to collect evidence regarding certain facts brought forward by Bariven in its opposition. On 25 December 2018, the Court of Appeals decided to stay the recognition proceedings under article VI of the New York Convention and article 56(2) of the Portuguese Arbitration Law (‘PAL’)¹, noting that it would, for the time being, wait for the results of the rogatory letter and for the decision of the Hague Court of Appeals before deciding on the request for recognition.

Wells then applied for security pending stay of the recognition proceedings. Bariven opposed the application.

The decision of the Reporting Judge of the Court of Appeals of Lisbon on the application for security

Under Portuguese procedural law, in certain cases the Reporting Judge may issue a singular decision, and any Party that disagrees with such decision may request a collective decision on the same subject. In this particular case, the Reporting Judge issued a singular decision on 25 March 2019, rejecting the application for security².

In sum, the Reporting Judge considered that security should not be granted if it is likely that the award will be set aside at the seat of the arbitration, and even more so when it is likely that, even if the award is not set aside, it will be denied recognition on grounds of Portuguese international public policy. This is notably due to sufficient evidence towards the fact that the contract on which the award is based and the enforcement of which is being sought was obtained due to a corruption scheme.

The Reporting Judge began by identifying the scope of its analysis by stating that the Court’s mission was (i) to assess the probability of the award being set aside, with consideration of the facts that the Arbitral Tribunal had at its disposal when it handed down the award, as well as (ii) the probability of recognition being denied on grounds of public policy; in this case, in light also of the evidence meanwhile legitimately produced.

The Reporting Judge then referred to the facts considered as proven by the Arbitral Tribunal and to the reasoning contained in the award. He then concluded that only the very high threshold of burden of proof applied by the Tribunal lead the same to hold that the facts considered as proven in the award were not sufficient to conclude for the existence of corruption. According to the Reporting Judge, proof of corruption cannot be rendered impossible by recourse to excessively rigorous standards applicable to evidentiary issues, quoting numerous sources³. The facts considered as proven by the Arbitral Tribunal pointed strongly to the conclusion that the contract under analysis had been obtained due to the corruption of employees of PDVSA (including Bariven) and the arguments presented by the Arbitral Tribunal to sustain its decision to the contrary were not in the least convincing.

The Reporting Judge then went on to say that the award itself mentions that if it had considered corruption as proven, under Dutch law the purchase order would have been null and void, which is the same result that would be achieved through application of principles of transnational public policy. It is therefore not unlikely, in the Reporting Judge’s view, that the award will come to be set aside by the Dutch courts.

The Reporting Judge then went on to say that even though the Arbitral Tribunal stated that, in respect of the consequences of the nullity of the contract, Dutch law does not have punitive nature and does not recognize the unclean hands doctrine, this would not dispense Bariven from the obligation to reimburse the amounts delivered under the contract. The Lisbon Court of Appeals was now analysing whether the award should be recognised, and this was not a question of reimbursement but rather an award ordering fulfilment of a contract, which the Reporting Judge considered may be set aside. And, in any case, in recognizing a foreign award, it is the international public policy of the State of Portugal that applies, and not Dutch law. Although recognizing that under Portuguese law a contract entered into in detrimental terms due to the behaviour of employees is not automatically null and void⁴ this in no way means that the Portuguese legal order ‘lives well’ with the civil effects of contracts obtained through corruption. On the contrary, when the corrupting party seeks to enforce the contract, the legal order must refuse the means to do so, e.g. to collect the fruits of criminal behaviour.

The Reporting Judge then referred to the recommendations of the International Law Association in its report on the topic of public policy as a ground for refusing recognition and enforcement of foreign arbitral awards, notably to Recommendation 3(c)⁵, whereby

When the violation of a public policy rule of the forum alleged by a party cannot be established from a mere review of the award and could only become apparent upon a scrutiny of the facts of the case, the court should be allowed to undertake such reassessment of the facts.

The Reporting Judge then went on to state that condemnation of corruption is, according to numerous Portuguese authors, a precise example of Portuguese international public policy principles, concluding that the facts considered as proven by the Arbitral Tribunal point to the conclusion that the contract was obtained through corruption of Bariven’s employees. The Reporting Judge concluded, as such, that there is no doubt that under the exception of international public policy of the State of Portugal, recognition should not be granted.

As this was the probable outcome, the Reporting Judge concluded that security was not to be granted.

The decision of the Court of Appeals of Lisbon on the application for security

Following this decision, Wells filed for an application for the matter to be subjected to a collective decision by the Lisbon Court of Appeals, requesting the revocation of the singular decision of the Reporting Judge and the replacement thereof by another, granting security.

The Lisbon Court of Appeals, in its judgement issued on 10 October 2019⁶, addressed all the arguments brought forward, analysing in detail the arbitral award and the decision of the Reporting Judge, considering, in essence, that:

• The decision of the Reporting Judge had demonstrated that the Arbitral Tribunal itself had described an impressive number of grave, precise and coherent indications pointing towards the conclusion that the contract under analysis had been obtained as a result of the corruption of a criminal organisation created precisely to procure contracts, in Bariven’s detriment;
• In light of such indications, it would be expected that the Arbitral Tribunal would have concluded precisely in this way, but this did not occur because the Arbitral Tribunal considered each fact individually without analysing the evidence as a whole;
• The award, besides demanding ‘devil’s proof’ (probation diabolica), had clearly insufficient reasoning, yet another circumstance indicating that it would probably be set aside⁷;
• The Reporting Judge was incorrect in considering that State courts, when deciding on set aside actions, should only consider the facts available to the tribunal when the same rendered the award, when in fact the dominant view has been that evidence obtained during the set aside proceedings should also be considered; but that this incorrection only strengthened the reasoning of the Reporting Judge’s decision;
• The essential issue to be considered is whether a State court may allow a criminal organisation to obtain coercive enforcement of a contract procured by corruption, the only possible answer being in the negative, because if it could not, the State court would become another link in the chain of an organisation aimed at carrying out criminal acts of corruption, whereas the fact is that condemnation of corruption is a principle of international public policy;
• When the control of the State courts is aimed at confirming if the result of the award is manifestly incompatible with the principles of international public policy of the State where recognition is being sought, as indicated by the Reporting Judge and recognised by numerous authors and case law, the analysis of the dispositive segment of the award may not be sufficient. An analysis of the rationale followed by the arbitral tribunal may be required and this is not, as put forward by Wells, the same as re-trying the dispute or re-examining the factual and legal conclusions of the award. As sustained by eminent authors, the prohibition of revision on the merits must be understood – specifically in the context of the exception of public policy – merely as the lack of power of the State court to replace the arbitral tribunal’s decision by its own decision, even if the arbitral tribunal has committed an error in fact or in law.

The Lisbon Court of Appeals thus concluded that the decision of the Reporting Judge was correct, confirming that no security should be provided.

Final comments

According to numerous sources⁸, on 22 October 2019 the Hague Court of Appeals set aside the award, precisely because the underlying contract was procured through corruption. Considering the evidence of corruption put forward by Bariven, upholding the arbitral award in those circumstances ‘would be irreconcilable with public policy’.

As per information available to date, the Lisbon Court of Appeals has not yet issued its final decision on the request for recognition of the award, although it would be expected that, in light of all the above, recognition will most likely be denied.

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