ARBITRATION JOURNAL @sivscrie Lorin Qsearch EN RU Analytics Interviews News Reviews Cases Editorial Board About ‘ain / Nowe / Corruption in Contracts: Burden ang Standard of Prof, and Consequences of Postve Fngings Corruption in Contracts: Burden and Standard of Proof, and Consequences of Positive Findings ‘ssues of corruption in contracts may arse in arbitration proceedings, as wll asin court proceedings before, during or after an arbitration. Ths ate focuses onthe stustions where corruption Isralsed as an issue in arbitration proceedings 1s elobal corruption becomes more sophisticated, arbitrators have an increasingly portant role inthe fight against [2] Judge Lageraren sued! an ward in IC Case No.1120 in 1965/3] by which he declared himself incompetent t rule in an arbitration where issues ofcortupton and ilegalty had been raise. Practice and jurisprudence have taken a very afferent stance since that award, Is now standard practic in international arbitration for tribunals to investgate such isues and to determine their impact an the contact, the proceedings, and the claims and counterclaims raised by the paris. In fac, ribunals conser being bound by a duty to actin such manner even on thir own mation Corruption s not easy to rove, while determining the Impact ofa positive finding of corruption can be a very onerous exercise And there ate no Universal dafitons of bribery and corrupton. On the contrary there are as many ciffrent definitions as there are manifestations ofthe problem set (One popular definition that covers abroad range of corrupt activities isthe “abuse of public or private office fr personal aid) thas become axomatiein international arbitration tht the burden of proving an issue generally les with the party casing it. On thi line, corruption ‘must be proved bythe party making the elevant assertion. But is ficlt and complicated to determine how much proaf i required before a tribunal can make 3 finding of corruption. ‘Beery i not easy proven ast often undocumented, happens behind closed doors, without witneses, and the invivement ofboth sides, actively or passive, I usual good reason for both to remain bound by a pac of omerta lence}. However, corruption does not require dvect evidence. fe may be lnerred rom circumstantial evidences] and such proof i equaly strong as direct evidence. In common law jursctions, the cl standard of proofs “more likely than not") In relation to Issues of bribery and corruption, there ae diferent ‘pinion as to whether the standard of proof should increase or decrease. Some commentators suggest that, where there isa reasonable indication of corruption, the burden of or00f shoud shit o the allegedly corrupt party to establish thatthe legal and good flth requirements were duly met] On the other hand, such approach would impose an enormous burden on that party, 3s the proof required oft, may also very likely be unavalabie. |Adferent approach was adopted inthe Impurna California Energy PLN arbiation, |) wiere the tribunal observed the following: “Tune member ofthe ArbtalTbunal do not ive in an ivory tower Nor do they view the arbitral process as one which operates in a vacuum, divorced from cea, The arbitrators are well aware ofthe allegations that commitments by public-sector entitles have been made with respec o major projects Jn Indonesia without adequate heed to their economic contribution to puble weltae, simply because they benefited a few infuental people. The arbitrators bliove that eronysm and other forms of abuse of public trust do indeed evs in many countries, causing great harm to untold milions of ‘ordinary people in 2 myriad of insicious ways. They would rigorously oppose any attempt to use the arbitra process to give effect to contacts ‘contaminated by corruption. But such grave accusations must be proven. There isin fact ro eicerce cf corugtan inthis case, Rumours or ineweno willnot ca. Not obviously may 2 conviction that some foreign investors have been unscrupulous justly te arbitrary designtion ofa particular investor as scapegoat.” (on the other end ofthe spectrum, some argue thatthe standard of proof should ineoase for issues of corruption, Thos, inthe EDF (Services Limited Romania arbitration, the trbunal hel that the seriousness of the accusation of corruption demanded “lear and convincing evidence") In other ‘words, the tribunal appeare to recognize that the standard of proof require for establishing corrustion was Somehow higher than the normal cil stands, ‘The mater remained unsetie in England for several years(0) In Re (Chilren [2008] 4 Al 1, i was held thatthe chil standard of proof remains unchanged, even canceming issues that may constitute Serious criminal offences] This means thatthe burden af poof remains with the party casing ‘the lsu of corrupson, and corruption f proved ifthe evidence shows tat ts more Hely than not, a with any thar lesue, But despt the postin in English aw, studies have shown that most arbitration tribunals tend to apply a higher standard of proof for corupton (12) ‘The consequences of a poste finding of corruption will depend on the law applicable to the contact and the circumstances under which the corruption took place. Under English law a contract to carry auta corrupt acts void ab inio|13] tis teated as nor-eistent anda tribunal that makes such finding in relation toa contrat bound to emis the clam ariing from orn rlaton to that contrac. ‘an important development came from the Enalish udement in Patel v Mirza [2016] UXSC 42 The Supreme Cour adopt a ferent approach tothe question of when a defendant an rely an the defence of ileal. A caimant will not axdinanly be debarted from enforcing a etm for unjust, enrichment simply because the money he seek to recover was pald for an unlawful purpose, though there may be rare cases where enforcing such 2{alm might be eegerde as undermining the Integy of the justice system, According to Lord Toulon, the aporeac (paras:16& 120}: 12 queston shoul be a follows “116. tis not necessary to ascuss the queston of locus poenitetiae which troubled the courts Below, 3 thas troubled other cours, because it aesumed importance only bacause ofa wrong aparoach tothe cue whether Mr Patel vas prima facie antitled tothe recovery of his money In place of the basicrue and mited excepcons to wile refered a para 44 above, would hol that person uo satisfies the ordinary requirements ofa daim in rust errctment wal not prima face be debarred from recovering money paki or property transferred ky reason ofthe fac thet the consiceration which has fled wasan unlawful consideration | do not exclude the possibilty tat there may be particulr reason for the court to refuse its assistance to the claimant, applying the kind of exercise which Gloster LI apple in this case, just as there may be a particular reason forthe court to refuse to {assist an owner to enforce his le to property, but such cases ar likly to Berar. 120, The essental rationale ofthe Mlegalty doctrine is that would be cortary tothe public terest to erforcea dalmif to doso woukd be harm tothe Integy ofthe legal system (or, possibly, certain aspects of public morality, the Boundaries of which have never been made ently clear and which do ot ars for consideration in this case mn assessing whether the public interest would be harmed in tht wa, it is nacessarya) to conser the Underlying purpose ofthe probation wich has een transgressed and whether that purpose wll be erhanced ky deri cf the claim, b) to conser ary other relevant public policy on which the denial ofthe daim may have an impact and «to conser whether devia ofthe dam woud be a roportonate response to the les besirginmind that puniskment isa matter forthe criminal courts Within that framework, varius factors may be relevant, but ft would be a mistake to suggest thatthe court free to decide a cate in an undecipinad way The public Interests best served by principled ang transparent assessment ofthe consideration denied rather by than the applicason of formal approach capable of producing res hich may appear arbitrary, unjust or disproportionate,” contracts with lngal purpose, which ate procuted by coruption, ae not ved but voldable under Engle lw. This means they can be put to an end at the instanceof the innocent party. Fraud may be relevant, unless it materially induced the contract] Where bribery (or other instance of fraud or rmisrepresentation) doesnot cause the consent to a contract of the party on wom such fraud was practiced, it does not render the contact viable, us) Inthe 2005 investment arbtration between World Duty Free Republic of Kenya, twas proved that there wae a payment ofa bribe by the claimant to the president of Kenya to do business with the Government of that county. Thats, the bribe was paldto secure thatthe parccular investment would be ‘made The troual found thatthe bribe was not procured by coercion or oppression or free, nor by undue influence, and there was no hostage factor. on principles, such a thatthe actions ofthe president are atributble tothe state(17) also, because it allowed the government to escape lablity by Invoking its own corrupt behaviour 8) at basis, it decined to grant rele to the claimant [L6) The decision was severely eisced for not Being inline with basi international la itis important to sees that avoidable contract isnot put to an end automaticaly It remins enforceable uness and until the innocent party elects to bring it toan end" where the innocent party eects to bring itt an end, the contact is cancelled ab nto. the imacent party doesnot rescind the contract, then the contact survives and wl be enforced according to stems [20] Where bribery takes place after the contracts entered or in circumstances that do not amount to procurement, the imcent party may bring to an ‘end a rom the moment of sicovery, but nat a no. This may be erin determining the remedies that maybe avaible to the partes, 3s shown below: Nonetheless, the innocent party must give credit tothe other party for any ight te damages acrued before the decision to end the contrat (2), The purpose of rescision so put the parties to the poston in which they were before the contract was concluded [22] In any event of bribery ~ other than a contrat fran illegal purpose -the innocent party has a choice: to atfim the contract or accest the repudiaton and bring the contrat to an end. The right to rescind or terminate maybe les, amongst others, by reason of eelay|23] the contrat has been party evecuted the right must be exercised promptly [24] Where the innocent party affims the contiet, expressly or impliedly, Ks right i eahausted (25) The Innocent partys insistence on performance constitutes such affirmation. (26) ‘The innocent sary may be ened toa period fr considering its position, 2 long ast does not effi the contrat. However, the innecent party must consider that, during that period, the Breach giving it the ight to terminate may be avertaken by another event which p contact, such a8 its own breach, Also, that the defaulting party may resume performance ofthe contract and thus end any continuing right ofthe Innocent party ta eect termination, The validity of sch elections judged onthe date afte election. fllowinga breach, the Innecent party becomes facts giving the right to terminate and makes an expres or implied representation that it wil not exercise that right it wil be found that ‘the innocent party chose to arm the contrat. Once the contracts affirmed, the aiemation iservecable (27) ices ts its under the ‘This 80 the postion under Cyprus aw. n Bult Electric Authorty.{28] the innocent party fale to exercise Is righ to terminate the contract, te rather insisted thatthe contract should have Been performed, up tthe point when the contract became ipso facto terminated. The Cour held that ‘the innocent party's rant to terminate was lst when the contract became terminated. It also lost any right t may have had to compensation which ree of te right to terminate (p.1288), ‘These matters explained In langtn In Tigris International w China Southern Aires Company [2014] EWCA Cw 1649. The English Court of Appeal considered the consequences of the termination ofa contract for allaged surreptitious dealing between one party and another party's agent. It found the following (paras. 143-148 & 187) “143, .. the remedies avallable tothe principal ofan agent bribed or offered a secret commision by his counterparty include the following. Wthe agent [sbrbed toenter into the cortrac the princpalmay tescind it La, avd it ab ita proved that counter restution can be made and the ight has not ben lost eg by delay This recission properly 20 caled~ an equitable remedy after the certract has been ertered nt, the agent isbxbed inthe course ots performance, the princnl may brig toan end as from the moment of cscovery i. forthe future, The ame applies ifthe bribery was celected at the time of the contract but for some reason (delay, imposibity of counter restitution, rights of bon fide third parties et.) rescission abInit is inpossibe:Loglerse at 1260F. At lw bribery, whether ator ater contract, amounts to & repudatory breach by the bribing party whe, on iscovery, his counterparty may accept as bringing the contract to an end. Whether that is because bribery is a stand-alone ground for termination oF the obligation to restrain fom tan incident or an implied term of every contracts debatable and, fr present purposes, des nat matter. 144. Whether or nt Tigris was entla to avoid the contract ab into of potential signicance fr present purposes. Tigris was so entitled it can aim es return of ts deposit ft was only entitled to accept a epuclation or rescind forthe future such thatthe contract subsisted unt ‘must gve credit for any ight to damages that accrued before such acceptance. consider this further below. 187. CSA contends that Tis has already received credit forthe deposit and cannot recover it again. Even if itis assumed that CSA wasinrepuditory breach ofthe ASA, and that Tigris had vali terminated tin consequence, the contract was not brought to an end until 4 December 2009 atthe ‘atest, of possibly 27 Novernber 2008, By that ime, howe, Tigris was already in breach of ts obligation to take delhvery under the ASA, 2s i had since July Tigrls woul only be released from its prospective obligations and would remain lable for those whieh had acerued. CSAs acerued right to damages was not affected by Tis’ later acceptance of CSAS repuclation, If thats what it was. Accordingly CSA had, as at 4 December, a right to Garages which accrued on 31 July or27 August As Lord Diplock putin Berger & Co Inc v Gill & Dufus SA [1984] AC 382,390: “The termination ofthe contrat] had the consequence i law tha all primary obligations ofthe partes under the contract whieh had not yet been performed were terminated. This termination dd nt preiudce the right of the party so electing to claim damages fom the party in cepudiatory breach for any las ustined in consequence ofthe nn performance by the latter of his primary obligations under the contrac, future ae well ¢gast. Nor did the termination deprive the party inrepudatery breach ofthe right to claim orto set off damages for any past non-performance by the other party of that other party's own primary obligations, due to be performed before the contrat was rescinded”™ ‘The pinlpies mentioned above can aso be demonstrated by rlerence tothe facts and fining in ICC Case No.21142, in which final award wasissued in relation tothe design, construction and 10,year operation 250 disputes were cor and 3 public author fon S May 2017. This case concerned a dspute between 2 cr ofa plant. Disputes had arsen between the partes, which were refered to ICC arbitration during the eperaon stage. Eventual settled. short after the settlement was signed, evidence came to surface that certain officals ofthe public authority in question had receives large mounts of bribes from the contractor, Criminal proceedings were inated, in which the contractor appeared as a witness forthe prosecution, The offal wer imprisoned Wile criminal proceedings were pending, other officals tok up performing under the contract but stopped al payments tothe same, Subsequently the contractor terminated the contract and brout plant, who demanded from the contractor to continue arivation, claiming payment for work done and iss af profit. The respondent authority asserted that all contractor's aims should have been Gismissed because of the adrvtted bribery, At the seme time, it brought counterclaims, demanding the return of the amount that was pid under the settlement agreement and damages. In the arbitration, it was admit thatthe contractor had made payments to the respondent's ofc. Bu the daimant’s poston was that these payments were extorted by the ofc, with threats of causing serious economic harm to the claimant, The claimant insisted tat it had received no benefit whatsoever in tum. Evidence ofthe corruption was Imited. The partes could not even agree on the amounts and dates of payments. At the hearing, it was revealed thatthe st payment was made 2 few months after the inital contract was signed, Several other payments were made subsequent inclusing a payment just afew weeks after the setiement. All payments were made in ash In one instance, he ash was delivered to an oficial ata local pharmacy, In another, one ofthe officials travelled to Greece eceved a sealed envelope outside the airport, and lew back to Cyprus ‘wo hours later. Some ofthe money was taced in foreign bank accounts of the ofcials and their elatves. t was obvieus that bribery would not be proved wit ‘out the contractor's evidence jbunal found no evidence thatthe orginal contractor the settlement were procured by bribery To the contrary, the orignal contact was obtained by a competitive tender for which the contractor was duty quaifled and submited the most competitive bia. As for the settlement, the facts showed that it was a concession ofthe claimant, t was not legal and there was no evidence tending to show that I was procured by bribary. The proximity erounal refused to make between the settlement and he bribes was not such as to give rise to an inference that the later procured the former. The such finding based on assumption. Aecorcnay the tribunal decides Yo award the e'siman compensation forall work that had remained unpaid at it refused to award damages fr lss of profit resulting from the termination holding that allowing such cain would amount to allowing the contractor to benef from is own wrong, namely, o agree to make the bribery payments tothe respondents oficial. ll counterclaims were dismissed, and costs were avarded in favour of ‘The award demonstrates how impertant the ference is between a contrat that may be avoided ab ntioand one that may be put to an en from the time of discovery of the breach, Italo shows that an act of bribery, even without pro that twas done for pracuring a contrac, may be detrimental to the remedies avaliable to a partyin an aritation. Lay, in ths cat, une World Duty Free the publ authorty dd not manage to escape ll ably byinvokng the corrupt behaviour ofits own officers. Partner, CGA Cyprus! 11] U8, LLM, Dip ADR, DIN, FIAT, IAD Accredited Mediator, Barrier (of incl’ Inn), Advocate (CBA aushPgsoriadesny.com, {2} Emmanuel Gall, “the emergence of tensationa responses to corruption in international arbtation® Arbitration Internatfonal, 2019, 2, 12] Aalable at hts fw ranslex ong /203120/ fice award.no 110 of 1969 by-gunnar lagergten.ya- 1996-247 sen. 18) Token from OECD Paper “Corruption: A Glossary of International Criminal Standards”, avaiable at hte /uww ceed or/eaeugton/ant bery/30532693 pf, 19.15} Fen Farming Cot Dasfor (No.2) [1973] STC 484 ‘Scertary of state for the Home Department v. Rehman [2001] UKHL7, para 55 |Z) Karen Mils, “Corruption and Other legality inthe Formation and Performance of Contracts and in the Conduct of Arbivatons Relating hereto, ICCA Congres Series, No.1 (Kluwer: 2003), p.295, 18) Final Aware 4 May 1998, para.18, 19] Award, 8 Cctober 2009, paras.72& 72 {10} See fr example: ater v. Baer [1950] 2A ER ASB. 11) The matters not yet learn Cyprus. See: AeBaBudng ¥, Maha [2999] 219) A.A, 1778 12] Michael Hwang S.C. & Kevin Lm, “Corruption In Aritalton ~ Law and Realy, Herbert Sith-SMU Alan Arbitration Lecture, 4 August 2011, pat 13) Matthew Gearing & Roanna Kwong, “The Common Law Consequences and Elects of Allegations ora Postve Finding of Corruption” Chapter 10, p.158-165, in IC Instat of Word Business Law Dosser “Addressing Issues of Coruption a Commercial and Investment Arbitation, 160; City on Contras, Vol. (London: 13° ed, 2008, Sweet & Maxwe!), paras 1-80 ~1-082, 16-008 ~ 16-010 & 16-208 ~ 26-206. 14 Pollck & Mulia, Indian Contract & Specific Rei Acts (New Delhi: 12" ed, Butterworths} p. 564-566. US) ie, 9585 18) Tamar Meshal, The Use and Misuse of the Corruption Defence in International Investment Arbitration” 304, nt. Arb 3, 9p.275 & 276 117) lid, 9.278; and Brace W. Klaw, “State Responsibly for Sribe Solictaton and Extortion: Obligations, Obstacles, ane Opportunites” Berkeley Journal of international Law, Vo33, 1 [2015] Ar, pp.7072 & 93, 18) thi, p.279; and Joshua Robbins, “A Secret Weapon, But for Whom? Investment Disputes Under the Trans-PalNe Partnership's Ant-Corrupion| ‘Chapter’ Kluwer Arbitration Blog, 24 August 2036, pp.2-3. 119 be. pp 551 & 567 20] Gearing & Kwong (above), p60, 23] Gearing & Kwong (above), p62. 122] be, p.A6%; and Poiock & Mulla (above, pp 552-554 231 We, pace 124) Pollock & Muli (above, 548, 125) ie, 9.587 28 Ie, pp59564. {21} Adam Rebb, Jess Connors & Patrick Hennessy, "Termination: The Piel” October 2014, 0173, Society of Construction Law, pares. 363-371; and Chit (above), paras.37-216~37-218 & 37-242~37-287), 28) 2001) 118) CL. 1277. ‘calitics Interviews News Reviews Cases Editorial Board About Privacy alcy