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Contracts obtained by means of bribery: should they be void or valid?
Published online: 20 December 2008 Ó Springer Science+Business Media, LLC 2008
Abstract This paper argues that contracts obtained by means of bribery should be valid. Nullity and voidability decrease the incentive for voluntary disclosure, assist corrupt actors with enforcing their bribe agreements and provide leeway for abuse. Thus, they run counter to effective anti-corruption. It is argued that other instruments are more suitable for preventing corruption. Keywords Bribery Á Contracts Á Nullity Á Private law Á Validity Á Voidability JEL Classiﬁcations G34 Á G38 Á K12 Á K14 Á K42
Asia media: Taipei city government annuls EMG arena deal The Taipei City Government announced yesterday it would annul a contract with scandal-ridden Eastern Multimedia Group (EMG) to run the Taipei Arena after EMG chairman Gary Wang was indicted on Monday for allegedly bribing city government ofﬁcials to win the nine-year contract. The city government announced it would form a special team to run the arena before ﬁnding a new operator through a new public tender. ‘The group won the bidding illegally, and the city government has to annul the contract. We will protect the rights of consumers and companies,’ Taipei Mayor Hau Lung-bin said yesterday after a municipal meeting at Taipei City Hall.1
See Asia Media (15 August 2007: ‘‘Taipei City Government annuls EMG arena deal’’), http://www.asiamedia.ucla.edu/article-eastasia.asp?parentid=75998, downloaded on 21 August 2007.
M. Nell (&) Department of Economics, University of Passau, Innstraße 27, 94032 Passau, Germany e-mail: firstname.lastname@example.org URL: http://www.uni-passau.de/lambsdorff
ece. […] The move also denies Eurocopter. This paper deals with the question of how governments (and. ‘[The] Council cancelled the contract bid won by Siemens Nigeria because of the current investigation against the company relating to corrupt practices. corporations) should deal with contracts that were obtained by means of bribery. to some extent. India prohibits middlemen in military deals.bbc. after complaints about the bidding process and allegations of illegal use of middlemen. See also Suddeutsche Zeitung (8/9 December 2007: ‘‘Indien storniert ¨ ¨ großen Auftrag fur EADS’’). […] The Nigerian government cancelled a 128. 123 .’ information and communications minister John Odey said.stm.timesonline. […] Eurocopter’s contract was suspended in June after allegations that agents that it used had links to an army general. the European defence and aerospace group. including ministers. 3 See TimesOnline: (7 December 2007: ‘‘Blow for EADS as India cancels deal for 197 Eurocopter aircraft’’). […] Eurocopter said it would reapply for the contract depending on any fresh criteria from the Indian Army.uk/tol/business/industry_sectors/engineering/article3013247. http://news. £532. in Nigeria between 2001 and 2004.co.4 m naira ($1. downloaded on 14 December 2007.683) contract with Siemens for the supply of circuit breakers and other power generation accessories on Wednesday.1 m.3 1 Introduction Bribes are usually paid by one party with the aim of obtaining an economic advantage from another party. […] Mr Yar’Adua [Nigeria’s President] ordered the investigation into allegations that Siemens paid 10 m euros in bribes to ofﬁcials. £122.’ Mr Odey said.160 Eur J Law Econ (2009) 27:159–176 BBC news: Nigeria suspends siemens dealings Siemens was found guilty of paying bribes to Nigerian ofﬁcials and ﬁned 201 m euros ($248 m. for reasons to be discussed. ‘[The] Government will not have any dealings with Siemens Nigeria in terms of contracts until the investigation is concluded and the company is exonerated or otherwise. Suddeutsche Zeitung Nr. http://business.co.uk/1/hi/ business/7130315. The economic advantage regularly involves the conclusion of a contract whose legal fulﬁllment is the intended result. 28. jump to the conclusion that such contracts ought to be 2 See BBC News (6 December 2007: ‘‘Nigeria suspends Siemens dealings’’). a supplier to the Indian Army.3 m) by a Munich court on 4 October. p. 283. the world’s largest maker of civil and military helicopters. A Nigerian anti-corruption agency has since begun investigating former ministers alleged to have taken bribes.2 Times online: Blow for EADS as India cancels deal for 197 Eurocopter aircraft The Indian Army yesterday scrapped a $600 million (£295 million) deal for 197 helicopters with Eurocopter. While one may. a chance to fulﬁll an order pipeline estimated at $2 billion. ¨ downloaded on 14 December 2007. Government ofﬁcials said that they would issue a new tender next year after ending exclusive talks with the subsidiary of EADS.
the decisive criterion for the contract’s legal status is afﬁrmation. arguing that corruptive contracts should be valid. In corruption cases. In economic crimes. The three legal systems aim at different objectives. this paper derives different results. pp. bribe agreements lead to an inﬂated purchase price for the contracting body. as is required in a system of voidability. pp. If a contract is thereupon declared void. Rather. Thus. especially to be borne by the bribe-giving contractor. That is. This particularly holds in public tenders. The same is commonly true for bribe agreements as these secret agreements between one party and another about the giving or promising of an illicit beneﬁt in return for unjustiﬁed preferential treatment infringe upon criminal law or violate good customs (Ax and Schneider 2006. collusive agreements between ﬁrms geared to limit competition are usually in breach of competition law and are therefore void. p. ¨ p. 103. The protection of the contractual partners’ legal estate is clearly secondary in a system of nullity. 73–87. Moreover. However. in principle. as illustrated also by the above cases.. also explain 4 Usually. pp. 123 . In fact. 198–199).g. This certainly is in the interest of the losing bidders. By doing so. the system of nullity is targeted on protecting collective interests such as those in the community of values and in fair competition by refusing legal effectiveness of a contract that is deemed immoral and anti-competitive due to it being induced by bribery (Meyer 2007. Hence. the system aims at preventing corruption by making bribery a risky business because the briber loses his legal entitlements to the contract’s beneﬁts and proﬁts. 73–88). the contract is void if not afﬁrmed by one contractual party. 81–88). 87. being the focus here. Similarly. For instance. nullity and voidability are not imperative legal frameworks for dealing with a contract obtained by means of bribery. the system of nullity seeks also to protect the legal estate of competitors that lost out due to bribery. this means that it is void as long as its validity is not induced. Above all. if a contract is said to be voidable. p.Eur J Law Econ (2009) 27:159–176 161 void. Generally. the government or a business ﬁrm inviting tenders for a contract) that is the directly harmed party. 95–97). such a contract could. contracts induced by such very bribe agreements ¨ are oftentimes void (Schluter 2005. a contract can be void. especially if the contract is already at a late stage of performance. and it is valid when afﬁrmed by that party. in a system of nullity. pp. this means that a contract tainted with bribery is void as long as the party seen to be harmed by the illicit bribe agreement does not afﬁrm the contract (Ax and Schneider 2006. 95). In contrast. these costs. Meyer 2007. Schluter 2006. p.4 Albeit widespread. Bribery usually violates statutory prescriptions laid out in ofﬁcial contracting terms. these costs are accepted for protecting the community of values and fair competition. the corruptive contract is inalterably binding and enforceable without the requirement of advance afﬁrmation. it is the contracting body (e. 129). But it involves substantial costs for the contractual parties. commonly new tenders have to result (Ax and Schneider 2006. voidable or valid (Ax and Schneider 2006. In other words. also be valid. a contract is void when it violates speciﬁc statutory prescriptions.
The protection of collective interests. In contrast. It can refuse afﬁrmation if the beneﬁts associated with nullity outweigh its costs and can afﬁrm the contract if does not. 96). in a system of validity it is primarily the contractor’s legal estate that is protected. If the contracting body as the harmed party wishes to cancel the contract. The general public. let us consider the following exemplary case (Fig. for preventing corruption or for protecting the harmed parties’ legal estate. This conclusion. One may thus infer that validity is not adequate for protecting collective interests.162 Eur J Law Econ (2009) 27:159–176 ¨ nullity’s presumptive powers for preventing corrupt wrongdoing (Schluter 2005. 1). B’s director D is in charge of preparing the bid. of losing bidders or of the contractor’s legal estate is subordinate (Meyer 2007. 233). it is argued that the harmed parties’ and competitors’ legal estate can be protected in other ways that avoid the major drawbacks associated with the systems of nullity and voidability. The contractor B is one of the bidders. p. the system of validity may well be better suited for curbing corruption than nullity or voidability. As will be shown in the subsequent sections. The contracting body is given the right to decide whether to annul the contract or to continue it based on a simple cost-beneﬁt calculation. p. 1 Voluntary disclosure and due diligence 123 . as well as the contractor have to submit to this decision. Employee E is commissioned by A to solicit and evaluate the bids and to award the contract. Moreover. The contracting body A invites tenders for a contract involving the construction of several apartment buildings. however.1 Voluntary disclosure and due diligence For illustrating the effects of nullity. it can only do so via a contractual notice of dismissal. 2 Void or valid?—nullity and its effects 2. the losing bidders. Accordingly. D offers E a bribe which the latter readily Contracting Body (A) report? Contract Contractor (B) report? due diligence? defects makes rules makes rules defects Employee (E) Bribe Agreement Director (D) Fig. in a system of voidability the protection of the contracting body’s legal estate is prioritized. Both price and quality are relevant for the contract award. is premature.
the system of nullity is often seen as superior to voidability or validity ‘‘because the bribing party does not only lose its bribe. A conviction of E and/or D is mostly not a precondition. A can lodge considerable claims for refund as well as for damages.. the ¨ induced contract. p. 84). Third. Second. as the damaged party. 277) puts it: ‘‘A bidder’s knowledge that such contracts rest on shaky ground may be a further inducement against corrupt conduct. As stated in the introduction. E harms A’s interest and legal estate (Ax and Schneider 2006. even though he may act in the ﬁnancial interest of B. Due to the secret bribe agreement. The contract is made between A and B. This illicit behavior stems from D and E having low opportunity costs of committing the crime. p. 85). Despite B’s efforts to prevent bribery. Both agents act without the consent and authorization of their respective principals. investments made by B. Otherwise.g. B may thus speciﬁcally prohibit bribery by D and closely attend to its duties of supervision to ensure D’s compliance. the perceived image of a clean government or business enterprise spurring (foreign direct) investment). p. Their opportunity costs of participating in the crime by abetting or tolerating it are too high (e..e. It sufﬁces if a civil court ascertains the bribe agreement (Ax and Schneider 2006. This is not the whole business. Moreover. the returns for both D (e. E and D agree to add the bribe to the purchase price. Or. Would B expose D if he found out about his agent’s wrongdoing? Maybe not if he knows that his reporting will lead to the contract being void. He thereby acts mala ﬁde towards A. p. 275). does not result in nullity. does not afﬁrm the contract. p. by deﬁnition.g. In other words. D acts mala ﬁde. D may nevertheless ﬁnd a loophole. B loses the contract and thus the proﬁts accruing from it. e. 2007).’’ This is certainly a crucial point. that has been the motive for corruption’’ (Schluter 2005. First. Nullity takes effect at the time the bribe agreement between E and D is veriﬁed by a court via a ‘‘balance of probabilities’’ (Pope 2000. 123 . Validity. D exceeds his empowerment to act as B’s representative. To ‘price in’ the bribe.Eur J Law Econ (2009) 27:159–176 163 accepts. E breaks his ﬁduciary duties by taking a bribe from D for awarding the contract in return.g. transaction-speciﬁc investments (i.6 Voidability passes into nullity only if A. for instance. 233). B may 5 6 For a similar constellation see Acker et al. in physical assets or human capital tailored speciﬁcally to the transaction with A) could largely be sunk because there may be no or only a secondbest use for them in transactions with other business partners (Riordan and Williamson 1985.. but also its economic advantage. though. getting a pay rise or being promoted by B for securing the contract) and E (the bribe money) from the illegal action exceed the returns from legal activity. Thus. From the perspective of preventing corruption on the bribe-giving side. (2007). The bribe agreement is struck secretly between E and D. Nullity entails substantial costs and risks for B. while oftentimes B cannot do the same (Acker et al.. the three systems differ from each other in one important aspect. Under these circumstances. Williamson 1985). especially in public procurement. the beneﬁt derived from being an honest member of society. the contract is valid. as Pope (2000. owing to the inﬂated purchase price.5 A and B are not implicated in the bribe agreement.
In other words. while the same ﬁrms may do so if contracts were valid. B hardly has an incentive to report D’s deviance. For example. However. This also holds for the system of voidability. e. It is only the system of validity that really induces B to report D’s misdemeanor. assists with uncovering corruption by means of voluntary disclosure. This is counterproductive as corrupt deals. by nature. Because it is difﬁcult for B to anticipate A’s decision. and that does not undermine criminal and civil law’s deterrent and preventive powers. some ﬁrms will not report if contracts are void. B has to reckon with losing the contract and has a bigger incentive to remain silent about D’s misconduct.g. involve a high degree of secrecy. All else being equal. let us further assume that validity results in x out of n companies to report their employees’ misdemeanor. Neither would he have to fear civil action taken against him because this would necessitate B’s disclosing. at the same time. y out of n companies.y = z depends on the weights attached by each single (heterogeneous) ﬁrm to its other targets. Nevertheless. Nullity and voidability ultimately also lower the deterrent and preventive effect of both criminal and civil law. they. Let us assume for the moment that such a contract was valid. This is especially true for voidability since A can cancel or 7 With the ever-present threat of making a penal report B will in most instances easily be able to ditch D—in order to avoid risky malevolence potentially also with a ‘golden handshake’. If it is likely that A deems nullity beneﬁcial. As a result. Therefore. the safest bet is to maintain silence. the ﬁrm wants to position itself as a socially responsible and law-abiding corporation with zero tolerance for employee misconduct. if the contract was void. Thus. On the other hand.. Obviously. nullity tips some ﬁrms’ decision in favor of non-reporting. avoid the costs and risks that would be associated with nullity. corporate social responsibility or preference for compliance. the magnitude of x . effective anti-corruption signiﬁcantly depends on relevant information given by insiders and whistle-blowers or by people of the (work) environment of the bribe-giver. 123 . A similar train of thought applies to A. among other factors. it stands to reason to argue that some ﬁrms’ reporting will be crowded out by contracts being void. however. and the contracts’ value. say. x would drop to. Rates of random detection are usually low and prosecution and conviction of those involved are difﬁcult and tedious. D may feel pretty safe that he will not be prosecuted and convicted. In contrast to nullity.164 Eur J Law Econ (2009) 27:159–176 rather decide to seek private and covert compensatory and disciplinary measures against D in order to avoid the contract being void by law. also ﬁnancial reasons play a role. on the one hand. what happens with a contract that was obtained by illicit means. do not offer B a real incentive for voluntary disclosure once D’s wrongdoing is detected by B. while nullity and voidability create an incentive for B to prevent corruption by instigating due diligence measures.7 Seen from a different angle: A ﬁrm’s choice to report is determined. If voluntary disclosure leads or is likely to lead to the contract being void. the legal systems of voidability and validity tend to result in A’s failing to instigate comprehensive systems of due diligence since A can. In other words. by non-ﬁnancial reasons. These involve. at any rate.
1993. Voluntary disclosure on part of A is supported by both systems.Eur J Law Econ (2009) 27:159–176 165 maintain (afﬁrm) the contract at will and assert claims for damages against B. or if it is hard for B to make claims for damages in the event that A decides to terminate the contract (Acker et al. at the same time. time. A could have a decided interest in E’s venality because this gives it the opportunity to induce the contract’s nullity at any time. be absorbed by claims for damages. could be a valuable ‘opting-out clause’ for A. A can expose E. Penal deterrence and prevention by civil law are again undercut. Nullity thus reinforces A’s incentive for secrecy. The possibility of inducing nullity of a contract because it is tainted with corruption. do not play a role for A’s decision.. his renegotiating power could remain high compared to that of B. Furthermore. thereby achieving integrity by contractual partners in future dealings. A may be well-positioned in justifying his move on the grounds that withdrawing from a contract that B tried to obtain by illicit means is necessary even if it comes at a loss in order to send a strong and unmistakable signal to other potential wrongdoers. A’s power to exercise a holdup against B in the current deal—i. 1994). could cover losses stemming from the contract’s cancellation by reallocating budget expenditures. Not only with regards to the purchase price. The costs of nullity. because A.g. then. This is. such as other ongoing or future dealings with B that A may not want to jeopardize by being too ‘pushy’ (Farrell and ˆ Maskin 1989.e. 123 . assert claims for damages against both B and E and afﬁrm/ continue the contract. 2007. However. materials used or dates of completion. while nullity motivates preventive measures it. though. Putting considerations of repetition and veriﬁability aside. However. Abreu et al. In a private law system applying nullity or voidability. The only (ﬁnancial) reason for A to apply due diligence would be for fear that bribe agreements harming its legal estate would not be prevented or detected otherwise. using the threat of terminating the contract. However. Obviously. In essence. this would not be well received by the tax-payers.. This can be a very valuable option. Benoıt and Krishna 1993). it is difﬁcult for B to forcefully counter A’s hold-up.8 8 Even if A has already spent a great deal of resources and money. The risk and costs associated with nullity. in principle. The systems of voidability and validity countervail these adverse effects. while B has already made considerable transaction-speciﬁc investments. coupled with ensuing claims for damages. p. Since irregularities are oftentimes detected only long after the initial bidding. or the veriﬁability of A’s investments (Aghion et al. reduces A’s incentive for voluntary disclosure. may still be too high. materials and personnel dedicated to the tender). in a system of voidability the threat of inducing nullity by refraining from afﬁrming the contract can be used by A to try renegotiating with B parts of the contract. A may prefer to cover up the affair and manage it behind closed doors rather than to expose E. thereby depriving B of his legal entitlements to the contract’s beneﬁts and proﬁts—signiﬁcantly depends on the amount of resources A has himself already spent (e. One important caveat has to be kept in mind. various factors play a crucial role for A’s ability to effectively renegotiate the contract.g. to some extent. A’s argument towards the general public could be: Short-term losses are outweighed by long-term gains. 1511).. especially if the contract is already at a late stage of performance. particularly if A wants to back out of a contract that runs the risk of becoming too expensive or that is ﬁercely criticized by opposition (Stremitzer 2007). if these costs are still comparatively low. even though they can. e. Probably. but beyond that.
This runs counter to an honest commitment to tackling corruption among bureaucrats.2 billion in that case. in some tenders. Less cynically. Still. The contract. to inquire into possibilities of canceling the contract.und Sportvermarktungsgesellschaft. however. it is not evident that ‘‘civil law should […] clearly state that contracts which are obtained through corrupt means are enforceable only at the discretion of the state’’ and that the government should be enabled ‘‘to decide […] whether or not to be bound by a contract tainted by corruption’’ (Pope 2000. ¨ ¨ See Suddeutsche Zeitung (13 December 2007: ‘‘Made in Austria’’). EADS threatened to sue for damages in the amount of EUR 1. the story underscores the point that corruptive misconduct can.’’10 Against this background. at that time. The inquiry commission’s ﬁndings prompted the last coalition-government. The sales order in the amount of EUR 2 billion was reached in 2002 between EADS and the former conservative government. director of the ﬁrm Creativ Promotion Werbe. 276). A may even have an explicit interest in the corruptive behavior of E in order to come into the possession of a valuable optingout clause or to have signiﬁcant bargaining power in renegotiations with B at a later stage. was subject to a parliamentarian inquiry due to alleged irregularities in the ﬁghter jets’ procurement. The wife of indicted. come in quite handy for a contracting body in order to opt out of an objectionable contract or to increase its renegotiation power. Suddeutsche Zeitung Nr. and now-suspended for misuse of authority. Mrs. a ﬁrm providing marketing services. E’s venality may come in surprisingly handy for A. 4. Wolf was. led by the social democratic party that always ﬁercely opposed the ﬁghter jets’ purchase.600 EUR loan from EADS-lobbyist Erhard Steiniger. Der Spiegel ¨ (18 April 2007: ‘‘Streit um Euroﬁghter: EADS droht Osterreich mit Klage’’). Austrian major general Erich Wolf obtained an 87.9 It certainly cannot be claimed that the former Austrian government either abetted or took a permissive stance towards the irregularities involving the purchase of the Euroﬁghters. Wolf was limited partner and authorized signatory of that ﬁrm. the new government regards this as waste of money and wants to cancel the order. Mr.166 Eur J Law Econ (2009) 27:159–176 Put cynically. p. Rather. 10 123 . Finally an ‘amicable settlement’ was reached involving the reduction of the 18 ﬁghter jets to a number of 15 for lower unit costs. (Former) Austrian ﬁnance minister Norbert Darabos was able to successfully renegotiate the contract also because of the suspected irregularities. p. This is supported by a recent case involving the purchase of 18 Euroﬁghter (Typhoon) ﬁghter jets by the Austrian government from aerospace corporation EADS. at some time. he was also a member of the committee that evaluated the purchase of the ﬁghter jets. the future possibility to cancel a contract (or to credibly threaten with cancelation) may sometimes even tend to result in a contracting body’s (government’s) failing to seriously exercise due diligence and to rather pursue windowdressing. As one commentator puts it: ‘‘The pattern is well known: The old government orders expensive toys. Validity would strip a contracting body (government) of such abuse 9 ¨ See Die Presse (6 April 2007: ‘‘Euroﬁghter: U-Ausschuss deckt dubiose Geldﬂusse auf’’). However. 287. own translation.
To see how. Andvig 1995. Lambsdorff and Teksoz 2005. by organized crime groups (della Porta and Vanucci 1999. 2 Private enforcement 123 . bribes are oftentimes not paid directly but through elaborate schemes involving offshore accounts and third persons. D. 98. now promises or pays the bribe with B’s explicit knowledge and consent. 2. Greif 2006. They must employ methods to make their agreements self-enforcing. but also B. Besides. however. opportunism may be cut off by threats to life or physical condition. or E does not award the contract after having received the bribe. In the extreme case. because obfuscation of corruption usually requires the quid to be separated in time from the quo. it is now not only D and E who have low opportunity costs of engaging in bribery. And in rougher environments. 232–236. the bribe is not paid by D after the contract was awarded.Eur J Law Econ (2009) 27:159–176 167 and more adequately promote due diligence than the systems of nullity and voidability. That is. Certain social structures facilitate economic exchange by embedding individuals in trusted relationships (Granovetter 1992. RoseAckerman 1999. often use intermediaries as a way to credibly link the two parties (Aburish 1986. Corrupt parties lacking trust in each other. p. for instance. Moody-Stuart 1997. Kingston 2007). Bray 2005). corrupt actors are forced to explore private safeguard mechanisms against opportunism. backed. 2. Pre-existing social relationships may lay the foundation for economic exchange by providing the required protection from opportunism. where E again acts mala ﬁde towards A by agreeing to take a bribe and harms A’s interest and legal estate. With respect to the bribe agreement. Various forms of institutional solutions come into play. for example. Ogilvie 2004. pp. E may also claim that changes in the contract’s form or the maintenance of silence of others who also want a piece of the Contract Contracting Body (A) Contractor (B) defects makes rules gives order to bribe defects enforcement? Employee (E) Bribe Agreement Director (D) Fig.2 Private enforcement of bribe agreements Since courts usually reject the enforcement of bribe agreements. let us again consider the framework depicted in Fig. Gambetta 1993). Nullity and voidability may also help in the private enforcement of the bribe agreement. both D and E can behave opportunistically.
but also in the probing of the legitimacy of many contracts that Siemens obtained both in the US and abroad. The Saudi retaliated and demanded a multimillion ‘payment of compensation’. E may know that B uses inferior building materials and can make anonymous tips to the building inspection agency. downloaded on 14 November 2007. D may claim that continuing payment as agreed upon was impossible because ﬁnancial controls were tightened and thus stops payment or procrastinates E. extorted Siemens. Lambsdorff and Nell 2007). If a contract induced by means of bribery is valid. 12 See (BGH.11 If Siemens had not acceded to the payments. As an insider. Lambsdorff and Nell 2007. E cannot use the threat of nullity or voidability to enforce the bribe agreement. In 2004. in fact. E may be able to throw up enough dust or have sufﬁcient political clout to evade criminal charges.1999—VII ZR 132/97). Siemens prematurely terminated a contract with a Saudi distributor. Neuburger is said to have testiﬁed that. The omnipresent risk of nullity and voidability hovers above D like the sword of Damocles and ensures compliance with the bribe agreement.12 11 See Berliner Zeitung (15 December 2006: ‘‘Diesem Spuk ein Ende machen’’). Former chief ﬁnancial ofﬁcer Heinz¨ Joachim Neuburger is said to have testiﬁed to German prosecutors that the Saudi. Similar to the private enforcement mechanisms discussed above. In any case.berlinonline. 6. http://lexetius. http://www. in some jurisdictions E may be conceded leniency if he self-reports (Gneuß 2002. as he can strike back.5. Buccirossi and Spagnolo 2005.168 Eur J Law Econ (2009) 27:159–176 cake necessitate a higher payment. E may know that B and D are implicated in other corruption cases. 234–236. his threat to expose the deal if B or D should not adhere to the bribe agreement— therefore raising the risk of nullity or voidability—then carries weight. However.html.de/wirtschaft/ unternehmen/516089.de (31 ¨ January 2006: ‘‘Siemens hatte Geheimcode fur Schmiergeld’’).html. backﬁre. Many other ways of opportunism are conceivable (Lambsdorff 2002. 123 . thereupon. In the worst case. Against this background.fcgi/2006/1215/wirtschaft/0005/index.bin/dump. Siemens paid EUR 50 million to the Saudi. In other cases. http://www. the ensuing SEC investigations would have likely resulted not only in severe corporate penalties. de/berliner-zeitung/archiv/. he may even enjoy outright immunity from prosecution.netzeitung. Similarly.871. the omnipresent risk of nullity or voidability may ensure that a bribe agreement goes off without a hitch. 2006. This is also supported by another corruption case from Germany. nevertheless. Moreover. If Siemens would not pay. pp. B and D cannot afford to scare off E. E may have information that he can use against both B and D. E may have information on violations of environmental or safety regulations that can constitute the basis for nullity or voidability. For instance. and Netzzeitung. Nell 2007). Or.com/1999. cheating him can. the system of validity is clearly to be preferred to either nullity or voidability. But even if B and D do not have to reckon with E’s self-reporting. the Saudi is said to have threatened to accord the American Securities and Exchange Commission (SEC) documents revealing illegal payments made by Siemens in the late 1990s ¨ concerning Saudi Telecom contracts. downloaded on 20 November 2007. That the risk of anonymous tips is signiﬁcant is corroborated by the following case involving German behemoth Siemens. Outright exposure on E’s part is unlikely if criminal and disciplinary penalties are severe.
in May 1993. however. the Federal Court of Justice’s ruling is to be welcomed because it preserves the incentive for mutual betrayal and hence supports anti-corruption. The district court dismissed the architect’s and acceded to the ﬁrm’s claim. that the architect would have neither stopped the payments nor reported the bribe agreement if he had known that the contract was void. The case ended up in court. 123 . Thereupon. the contract was valid. The exact reasons for the architect’s reporting were not revealed in court.34 (EUR 0.edu/article-eastasia. It substantiated its verdict by saying that the contract was obtained by means of bribery and was thus void.000 (EUR 2. 96).ucla. This is supported by the fact that the architect stopped paying the bribes in February 1993 and the ﬁrm stopped paying the installments only two months later. advance payments to the architect amounting to DM 100. the contracting body may be interested in protecting its own legal estate rather than that of competitors— especially if terminating a contract would involve considerable sunk costs—and remains silent about the bribe agreement to avoid nullity (or afﬁrms the contract. The ﬁrm ﬁred the director and canceled the redevelopment contract. the Federal Court of Justice annulled the appellate court’s judgment. Disputes concerning the bribe agreement are likely. p. http://www. It ruled that while the redevelopment contract was obtained by means of bribery.’’13 In many cases.84) million while the ﬁrm claimed back the installments amounting to DM 1. and the city government has to annul the contract. An architect promised the ﬁrm’s director a monthly bribe amounting to DM 5. Since the bribe agreement did not result in a higher purchase price. In the contract. Rather. The appellate court conﬁrmed the district court’s sentence. the ﬁrm suddenly stopped paying the installments. if 13 See AsiaMedia (15 August 2007: ‘‘Taipei City Government annuls EMG arena deal’’). referring to incomplete and poor services on part of the architect. Against this background. so the Federal Court of Justice ruled (Meyer 2007. downloaded on 21 August 2007. 2. The director readily accepted the offer and the architect got the contract. possibly at the director’s ordering. a contract obtained by means bribery by one ﬁrm is annulled to protect competitors (and consumers). In 1999. But.asp?parentid=75998.68 (EUR 1. asiamedia. the contract per se was not illicit since the architect’s services were accounted for pursuant to the ofﬁcial Fee Structure for Architects and Engineers. Running the risk of losing a contract worth several millions just because of disputes about a few thousand of euros simply does not pay. though.000) once a month were agreed upon. the architect informed the ﬁrm about the bribe payments to its director. But at times. Taipei Mayor Hau Lung-bin justiﬁed the Taipei City Government’s step to annul the contract with EMG by saying that ‘‘the group won the bidding illegally.500) if he was awarded the contract.000 (EUR 50.Eur J Law Econ (2009) 27:159–176 169 A German ﬁrm owning several apartment buildings in 1992 invited bids for a redevelopment contract. The architect claimed residual fees amounting to DM 3. We will protect the rights of consumers and companies. the differences concerning the bribe agreement could have easily been settled.3 Competitors and impugnment As highlighted in one of the three news at the very top of this paper.67) million. It stands to reason.
Signatories of such agreements (in our case A. pp. and vice versa (Søreide 2007. Oftentimes. 101). for example. Besides protecting C’s legal estate. giving C the chance to (re-) bid for the contract. via a negative declaratory judgment. demand or accept bribes. 101–103). 14 123 . however. The question then is whether ﬁrms that presumably or knowingly lost out due to bribery should be able to impugn (i. there is also an economic argument in support of rescission proceedings by means of impugnment.14 Penalties in case of violation of the agreement may entail ﬁnes. offer. contractual penalties. an integrity pact ‘‘is a tool aimed at preventing corruption in public contracting. debarment. p. p. downloaded on 11 November 2007. collude with competitors to obtain the contract. 3 Impugnment it is allowed to by the legal system). 1 is extended by a direct competitor C of B (Fig. the original principal-agent constellation depicted in Fig. In the end. would comply with this. B and C may be in a prisoner’s dilemma. To answer this question. But. There are various means to assist ﬁrms in overcoming this dilemma. In Germany. for instance. http://www. or engage in such abuses while carrying out the contract. Collectively.e.org/global_priorities/public_contracting/integrity_pacts. contest) a contract obtained by a competitor by means of bribery. B and C) in essence pledge themselves on pain of penalties not to pay. Rather. B obtains an edge over C. for instance. these are just idle means of restitution (Meyer 2007. also so-called integrity pacts have been used quite frequently in (public) procurement (Boehm and Olaya 2006). The possibility to impugn a contract tainted with corruption. offer. and also the right of competitors to Following Transparency International. corporate (criminal) liability.. both B and C may end up paying bribes to win the contract. both B and C have an incentive to bribe. including.’’ See Transparency International.transparency. Recently. 3). C’s legal estate would be more effectively protected if the contract was rescinded ab initio (from the beginning) or terminated ex nunc (for the future). demand or accept bribes in the bidding for a public contract. C could sue for damages or ﬁle for injunctive relief (Meyer 2007. 338).170 Contracting Body (A) Contract Eur J Law Econ (2009) 27:159–176 Contractor (B) Competitor (C) Impugnment? defects makes rules makes rules defects Employee (E) Bribe Agreement Director (D) Fig. or loses by refraining from bribery when C bribes. B and C are better off by not engaging in or abetting bribery because they increase their joint proﬁt. It consists of a process that includes an agreement between a government or a government department (at the federal. national or local level) and all bidders for a public contract. It contains rights and obligations to the effect that neither side will: pay.
16 See The New York Times (25 August 1988: ‘‘Losing Bidder Contests Contract Involved in Pentagon Case). Another reason for not formally complaining was ‘‘Concern about future business cooperation’’ (31%).’’ As a consequence. The signatories’ right to contest the validity of a corruptive contract increases an integrity pact’s effectiveness. putting him in the position to contest the contract in court. Amid federal investigations into alleged bribery by one of its competitors. Fearing that C may really contest the contract. was held up by Comptek Research Inc. In the survey. ‘‘even if convinced that a competitor had been favoured on an illegitimate basis. if A or B report their agents’ wrongdoing.S.html?res=940DE4DA133EF936A1575BC0A96E948260. 15 123 . was eliminated during the ﬁrst round of competition for a Navy contract involving a Marine Corps system for controlling and directing tactical aircraft in combat. Hence. executives of Norwegian exporting ﬁrms were asked why ﬁrms do not formally complain about corruption.com/gst/fullpage. Still. downloaded on 20 November 2007. However.. even if C was convinced that B paid bribes to obtain the contract. Comptek Research Inc. leading to considerable costs for Norden Defense Systems. ﬁled a protest with the General Accounting Ofﬁce. there are strong arguments that also militate against the usefulness of competitors’ right to contest corruptive contracts in court.’s protest. voluntary disclosure on the acts of corruption in their ranks on the part of both A and B becomes less likely.15 Related to our discussion. participants in an integrity pact have more incentive to really abide by the rules and not to engage in corruption. Comptek Research Inc. http://query. Twelve percent of the 82 respondents cited ‘‘lack of proof’’. C has the necessary evidence. For the whole survey see Søreide (2006). because it steps up the consequences for potential wrongdoers as it may result in the loss of legal entitlements to the contract’s proﬁts. Again. impugnment has similar effects as nullity or voidability: Some ﬁrms’ reporting will be crowded out by the possibility that contracts are declared void by court due to C’s contestation. a Buffalo-based producer of military electronic equipment.16 In 1988. This is also substantiated by a case involving irregularities in U. In other words. Pentagon procurement. the contract. C may lack the evidence necessary to convincingly prove the case in court. On the one hand. This is because the unveiling of the bribe agreement between E and D would give C the evidence necessary for contesting the contract made between A and B. This is supported by a survey carried out by Søreide (2006) in 2004. some ﬁrms will not report if contracts may end up being void. Norden Defense Systems. while the same ﬁrms may do so if C did not have the right to contest the tainted contract between A and B.Eur J Law Econ (2009) 27:159–176 171 contest a contract in court if it was knowingly obtained by means of bribery by one of the bidders (impugnment). That is. voluntary disclosure on the part of A and B of their agents’ wrongdoing becomes less likely. p.nytimes. which should have been awarded to Norden Defense Systems in July 1988. The protest contended that the investigations have shown that illegal acts were committed during the selection process and that those acts ‘‘render invalid any award resulting from the process. many ﬁrms would not react against it because of the difﬁculties of proving the case in court’’ (Søreide 2007. 340).
but valid. In our case. An effective anti-corruption strategy has to entail consequences for all who try to seek inﬂuence by giving bribes. in our stylized setup player C) to contest a contract that a competitor (allegedly) obtained by means of bribery (Norden Defense Systems. Second. Rather. nullity and voidability only punish those who successfully obtained a contract. Having to fear recourse not only by A. B and D would likely comply with the bribe agreement instead of scaring off E. crowd out honesty. and not only of those who were successful in doing so.S. Navy) and B to voluntarily disclose their agents’ wrongdoing.172 Eur J Law Econ (2009) 27:159–176 Clearly. but also with making tip-offs to C. if irregularities are suspected in the bidding stage. but now also by C. in our stylized setup player B) can impair the incentive for A (U. Navy have revealed their agents’ wrongdoing. As a result. Third. the view is held that they guarantee the protection of the legal estates of the harmed parties. For these reasons. nullity and voidability assist corrupt actors with enforcing their bribe agreements. especially for the contracting body. Nullity and voidability are neither imperative for preventing corruption nor for protecting the legal estates of the harmed parties. This ultimately reduces the deterrent and preventive powers of criminal and civil law. Yet. if they had known that Comptek Research Inc. E can now threaten B and D not only with public disclosure or with making anonymous tips to the building inspection agency. Moreover. these should be probed and the contract award postponed. But at least it seems justiﬁed to state that risking the halt or loss of a multimillion contract may. First. though. at the same time. nullity and voidability undermine due diligence since the option to terminate or renegotiate a contract on the grounds of corruption can be very valuable. avoid the disadvantages of nullity and voidability. the case also corroborates the main point made before: The right by a ﬁrm (Comptek Research Inc. Finally. I argue that contracts obtained by means of bribery should neither be void nor voidable. maybe not. the right to contest a corruptive contract may also assist corrupt actors with privately enforcing their bribe agreements. Fourth. those who make a report on corrupt conduct of their employees are punished by seeing contracts being void or voidable. These are important aspects. Nullity and voidability have several considerable disadvantages.S. The unsuccessful but nevertheless corrupt are not punished. thereby stabilizing rather than breaking up corrupt deals. 123 .. in the end. would ﬁle a protest with the General Accounting Ofﬁce and halt the whole process for several months? Probably yes. there are instruments that have similar preventive and protective effects but that. voluntary disclosure becomes less likely. particularly of the contracting body and of competitors. Would Norden Defense Systems or the U. that render their usefulness for anti-corruption contestable. 3 Policy implications Nullity and voidability of contracts induced by bribery are adjudicated signiﬁcant powers for preventing corruption as they entail substantial costs and risks for the bribe-giving party.
as Lambsdorff (2007. Severability refers to a provision in a contract which states that if parts of a contract are held to be illegal or otherwise unenforceable. say.org/vdp for more information. 2004). Similar incentive-compatible concessions are not possible in the case of nullity or voidability. (Lambsdorff 2007: 15). as are nullity and voidability. ﬁfty percent if B voluntarily discloses acts of corrupt conduct of D. it would inﬂict a contract penalty. Moreover. Debarment. 15) points out. 123 . especially if B exercised due diligence and hence did nothing wrong. The pending penalty also urges B to exercise due diligence (Noll 2001. debarment may not be proportionate to the severity of the offence. severability deserves close attention. 14–15). thereby protecting (at least to some extent) its legal estate. p. it shares some of the disadvantages of nullity and voidability. There is no in-between that maintains the incentive for reporting. the materialization of the bribe agreement between D and E usually sufﬁces to induce nullity or voidability of the contract. 18 See http://www. The same train of thought in principle applies to contract penalties. is that it can be reduced in the case of voluntary disclosure. Either the contract is void or not. if designed improperly. all other contractual elements nevertheless remain valid. It induces B to exercise due diligence in a similar fashion. Moreover. Whether or not B exercised due diligence does not play a role in this outcome.Eur J Law Econ (2009) 27:159–176 173 Corporate (criminal) liability. One advantage of corporate liability. As 17 If the contract penalty accrued to A. can also reduce the incentive for voluntary disclosure if no clear guidelines exist on how to deal with a ﬁrm that proactively reports acts of wrongdoing. However. for instance. Here. the contract penalty can be paid to the losing bidder C. Corporate liability is a collective punishment. The incentive for B to report D can be sustained.worldbank. determines when and to what extent a corporation is liable for acts of corrupt conduct of its employees (Lederman 2000). Contract penalties are proportionate while nullity and voidability in many cases are not. 277–306). One advantage over nullity and voidability is that contract penalties can be designed such to reﬂect the economic advantage obtained by corruption (Lambsdorff 2007. pp. Finally. Similar concessions are again not possible with nullity or voidability. there would be an adverse incentive. These oblige a contractual party to pay a ﬁne if it does not fulﬁll its obligations. speciﬁc clauses can also be applied that formulate that the contract penalty is reduced by. however. The World Bank’s voluntary disclosure program is a case in point. Moreover. As a bribe agreement commonly violates statutory prescriptions laid out in (ofﬁcial) contracting terms. A would beneﬁt from its own organizational failure and may thus allow E to take bribes so as to demand the payment. But such potential disadvantages of debarment can be cleared out whereas this would be elusive in the case of nullity or voidability. pp.18 Corrupt contractors in World Bank-ﬁnanced contracts are not debarred if they voluntarily report acts of wrongdoing and work with the World Bank on measures to prevent future misconduct (Williams 2007.17 Debarment (exclusion) as an administrative remedy available to a government that prevents or disqualiﬁes contractors from obtaining new contracts is yet another tool available in the anti-corruption arsenal. for instance.
Severability implies that a bribe agreement only renders the price agreement void or voidable while the rest of the contract remains valid. the contracting authority for the Allianz Arena. In 2006. Because severability only affects the price agreement. However. nullity or voidability may also be necessary. debarment and (keeping some caveats in mind) severability serve the purpose of curbing corruption in a better way. contract penalties or severability seem to be more promising avenues towards anti-corruption. Wildmoser. Karl-Heinz Wildmoser. Following several civil proceedings. contract penalties. 137–138). Aside from such special cases. To prevent corruption. Moreover. Wildmoser. Jr. Illicit construction projects in nature reserves. In 2005. the German Federal Court of Justice rejected the appeal and Mr. if contracts were obtained by means of threats to life and physical condition. He was released on bail pending his appeal. it is argued here that there are considerable problems inherent to nullity and voidability that make their preventive powers disputable. Jr. was director of the ¨ Allianz Arena Munchen Stadion GmbH. and in return received EUR 2. Jr. had to pay back EUR ¨ 2. In 2004. pp. a football stadium in the North of Munich.174 Eur J Law Econ (2009) 27:159–176 discussed. I argue that nullity and voidability are not imperative for anti-corruption. with inside information that enabled the company to win the contract. Jr. In fact. Wildmoser. Wildmoser. Acknowledgment The author is grateful to the comments made by two anonymous referees. various means and instruments are widely discussed. 123 . p. it largely avoids the considerable disadvantages that nullity or voidability entail. the equivalent of the bribe he accepted. should be annulled and the buildings erected demolished. The economic advantage regularly involves the conclusion of a contract whose legal fulﬁllment is the intended result. for instance. Still. Among these. He awarded the construction contract at an inﬂated price. in 2007. Other instruments such as corporate (criminal) liability. Other instruments such as debarment. According to present German adjudication. was indicted for corruption in connection with the awarding of the construction of the Allianz Arena. Jr. this was subject to a ruling made by the higher regional court in Munich. 97). was convicted and sentenced by a Munich court to four and a half years in prison. it may not be the adequate instrument in some cases. the higher regional court in Munich independently ruled that only the price agreement is void while the other parts of the contract remain valid (Meyer 2007. is since serving his sentence (ZRFG 2006. though. nullity and voidability as legal ways to deal with contracts obtained by means of bribery.8 million from Alpine. 4 Conclusion Bribes are paid by one party with the aim of obtaining an economic advantage from another party.8 million to the Allianz Arena Munchen Stadion GmbH. 97). the construction contract would have had to be void because the bribe agreement led to a higher purchase price. However. p. corruption usually leads to an inﬂated purchase price because the bribe is oftentimes ‘priced in’. Alpine. provided the Austrian construction company. Germany (Meyer 2007.
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