Contracts Tainted by Corruption: Does Dutch Civil Law Augment the Criminalization of Corruption?
© Springer International Publishing Switzerland 2015
Michael Joachim Bonell and Olaf Meyer (eds.)The Impact of Corruption on International Commercial ContractsIus Comparatum – Global Studies in Comparative Law1110.1007/978-3-319-19054-9_1010. Contracts Tainted by Corruption: Does Dutch Civil Law Augment the Criminalization of Corruption?
(1)
Academy of Public Management, Safety and Law, The Hague University of Applied Sciences, Johanna Westerdijkplein 75, 2521 EN The Hague, The Netherlands
(2)
Erasmus School of Law, Erasmus University Rotterdam, Burgemeester Oudlaan 50, 3062 PA Rotterdam, The Netherlands
Abstract
This paper assesses the extent to which solutions under Dutch civil law complement and augment the public policy objectives underlying the criminalization of corruption in international business transactions. To this end, it explores the contractual and non-contractual consequences of contracts tainted by corruption as well as the rules of private international law that come into play with regard to such “corrupt” contracts under Dutch law.
The paper shows that contractual consequences with respect to contracts that are the ultimate result of “successful” acts of bribery, are gravely inconsistent with the public policy underlying criminalization. In addition, it explains that the traditional value-neutral approach of Dutch conflict of laws not only reduces the opportunity for courts to consider the “better law” in cases concerning corrupt contracts but also does not preclude forum shopping for a more amendable system by corrupt actors. The implications of the interrelationship between Dutch substantive law and Dutch private international law means that correction mechanisms as do exist under the Dutch conflict rules, are strongly interwoven with Dutch substantive civil law. Therefore, for as long as Dutch substantive law falls short, Dutch private international law is also limited as a tool in fighting corruption.
This paper emphasizes that Dutch Civil Law cannot remain isolated from the public policy underlying the criminalisation of corruption. The objective of bribery is, after all, the acquisition of an agreement or contract, in a manner that ultimately undermines the market as well as political and social institutions. By highlighting key areas where developments in Dutch private law and private international law are critically needed, this paper contributes to the growing discussion about the role of private law in the fight against corruption from the perspective of Dutch Law.
10.1 Introduction1
Corruption remains one of the pressing global problems of our times. There has been considerable progress made in developing an international regulatory framework that repudiates corruption.2 This is an important and salutary first step that deserves to be lauded because of the normative space it has created for global strategies to fight corruption.3
The recently released EU Anti-Corruption report4 however draws attention to the critical need to move firmly into a second phase of fighting corruption. Seventy-six percent of European participants feel that corruption is widespread in their country.5 The European Commission estimates the cost of corruption at EUR120 billion per year.6 The negative effects of corruption on the “licit” economy, on public administration structures, and on the everyday lives of citizens pose a threat to global security and undermine the stability of the international trading system.7
A central achievement of the current legal framework is the criminalization of corruption particularly in commercial transactions. Criminalization however places a monopoly on initiating sanctions for corrupt offences on state authorities. The fact that grand scale corruption is often characterized by the involvement of government officials, the elite in society and multinational corporations may result in conflicts of interests where a state is unwilling or unable to tackle corruption.8 For this reason, strategies that bypass administrative structures compromised by corruption and encourage transparency by engaging a broader set of actors in the fight against corruption have a vital role to play in moving the fight of corruption forward.9 This means looking beyond traditional state centred approaches to fighting corruption to exploring the role of private actors, private remedies and alternative sanctioning mechanisms.10
An important aspect of such a shift to more effective strategies to fight corruption is the link between private law and crime prevention.11 Corruption is not an end in itself but a means to an end. The objective of bribery is the acquisition of an agreement or contract, in a manner that ultimately undermines the market as well as political and social institutions.12 This raises the question of the response of private law to contracts tainted by corruption.
The overriding public policy issues underlying corruption call for consistent approaches in criminal and civil law solutions to corrupt activity. This paper aims to assess the extent to which solutions under Dutch civil law complement and augment the public policy objectives of criminalization. To this end, the paper adopts a two pronged approach. First, it assesses the extent to which contractual and non-contractual consequences of contracts tainted by corruption under Dutch law are consistent with the public policy underlying the criminalization of corruption. Second, it examines Dutch rules on private international law that come into play where the legal transaction involves international elements to review how contracts tainted by corruption are treated. The choice of law rules designate the applicable law in such cases and thus affect the civil law consequences, while rules on international jurisdiction and the recognition and enforcement of foreign judgments are also an integral part of the Dutch approach to corruption in civil law matters.
Section 10.2 of this the paper addresses the public policy foundation for civil consequences for corruption under Dutch law. Section 10.3 outlines the general civil law consequences while Sect. 10.4 covers private international law aspects. Section 10.5 concludes with observations on the sufficiency of the position of Dutch law regarding contracts tainted by corruption in the fight against corruption.
10.2 Foundation for Civil Consequences for Corruption
The repudiation of bribery in both public and private transacting is the foundation of civil consequences for corruption. Any activity resulting from a criminally prohibited act is against public policy. The criminalization of public and private bribery in the Netherlands is established by its ratification of several international instruments as well as under the provisions of the Dutch Penal Code (DPC). Contracts tainted by corruption have to be examined within the context of this overriding legal framework.
Netherlands is a party to the major regional and international conventions regulating international corruption. These include the Convention on the Protection of the European Communities Financial Interests; the EU Convention on the Fight against Corruption involving officials of the European Communities or officials of the EU Member States; the EU Council Framework Decision against Corruption in the Private Sector; the Criminal Law Convention on Corruption of the Council of Europe; the Civil Law Convention on Corruption of the Council of Europe; the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions; the United Nations Convention against Transnational Organized Crime; and the United Nations Convention against Corruption.13 These instruments along with provisions of the Dutch criminal and civil code set the foundation for civil remedies in the Netherlands.
10.2.1 Criminal Law
The term used for “corruption” in the Dutch Penal Code (DPC) is “bribery” (omkoping). The DPC criminalizes the active (giving of bribes) and passive (receiving of bribes) bribery of public officials, judges, as well as private actors. Contracts that result from prohibited corrupt activity either in the public14 or private sphere are thus the result of criminal activity.
Art 177 DPC prohibits the active bribery of public officials. Whoever “gives a gift, makes a promise or offers a service to a public official with the intention of influencing such a public official to do or omit from doing something contrary to his or her public duty will be liable to incur a prison sentence of no more than 4 years or a fine.”15 This prohibition and sanction of active bribery also applies to influencing former public officials or persons to be appointed as public officials.16
Any exchange that is of value to the recipient constitutes a gift within the meaning of Art 177 DPC. The Dutch Supreme Court has held that this would include not just a promise of money,17 but also non-monetary promises such as a sexual favor.18 Particular provision is made with respect to the active bribery of judges. Where a person is guilty of active bribery to influence the judgment of a judge, such a person is subject to a higher prison sentence of 6 years or a fine in the fourth category.19 The passive bribery of public servants and judges is also prohibited. Arts 362–363 of the DPC provide that prison sentences or fines will be imposed on any official who accepts20 or asks for21 gifts, promises or services, knowing or reasonably suspecting that it is given to influence his or her behavior. Again special provision is made in the case of the asking for, or acceptance of a gift, promise or service by a judge where the highest penalty of up to 9 years or a fine of the fifth category may be imposed.22
Corruption is a criminal offence in the private sector as well. Private bribery became a criminal offense after the addition of Art 328ter to the DPC. Art 328ter DPC criminalizes both the active and passive bribery of private sector agents or employees. It is a criminal offence for a person to give or request a bribe to another person who is not a public official and who is employed or acts as an agent, in such circumstances the person giving the bribe could reasonably assume that the agent was acting in violation of the requirements of good faith and would conceal the acceptance of the gift or promise from his/her employer or principal.
With the criminalization of bribery under the Dutch criminal code it is clear that any contract that results from a bribe given to an employee or agent whether in the public or private sector is the result of criminally prohibited behavior. It stands to reason that the rationale behind the criminalization of public and private bribery should extend to the consequences that they trigger.
10.2.2 Civil Law
The two major international instruments that have specific provisions dealing with the civil law effects of corrupt offences are in force in the Netherlands. These are the United Nation Convention against Corruption (UNCAC) and the Civil Law Convention (CLC). Both instruments address the question of the validity of contracts tainted by corruption as well as the damage suffered as a consequence of the corrupt act.
The UNCAC entered into force in the Netherlands in November 2006. Art 26 of the UNCAC requires that participant states establish the liability of legal persons for the offenses of corruption established under the Convention including civil liability.23 The UNCAC also requires that parties of the convention must ensure that their domestic laws provide for corruption as a vitiating factor in contracts tainted by corruption24 as well as establish the right to compensation for damages resulting from acts of corruption.25
The CLC entered into force in the Netherlands in April 2008. Art 8 requires that under Dutch law any contract providing for corruption shall be null and void. It also requires that parties whose consent has been undermined by an act of corruption shall be able to apply for such a contract to be declared a nullity in a court of law. Furthermore, the CLC requires that Dutch law shall provide “for persons who have suffered damage as a result of corruption to have the right to initiate an action in order to obtain full compensation for such damage.”26 This compensation should ensure that any “material damage”27 suffered by the person who has been betrayed by an act of bribe-taking by a person in a position of trust, or who has suffered “lost profits” or other “non-pecuniary” loss, is compensated by the courts.
Art 4(1) of the CLC requires that three conditions must be fulfilled in order for the damage caused by corruption to be compensated. First, it must be established that the defendant has committed or authorized the act of corruption, or failed to take reasonable steps to prevent the act of corruption. Second, that the plaintiff has suffered damage; and third, that there is a causal link between the act of corruption and the damage.
The effect of the above instruments on Dutch civil law has been commented upon by the Dutch Parliament.28 The Dutch government considers that neither the CLC nor the UNCAC require novel legal remedies within the domestic law that are specifically directed at corruption.29 Parties whose free consent to a transaction is influenced by error or fraud attributable to an act of corruption and who would not have entered into the contract but for the act of corruption, are given the right to sue for remedies by seeking the nullity of the contract. The validity of such contracts could also be questioned for being contrary to good morals and public policy. In addition, the government noted that the requirement under Art 3 of the CLC concerning material damage, loss of profits and non-pecuniary loss were satisfied by provisions under the Dutch Civil Code (DCC).30 The requirement for a causal link between the act of corruption and the damage suffered by the plaintiff as well as joint and several liability under Art 4 CLC was also considered to be satisfied by the provisions of Dutch law.31
Furthermore, the Dutch government noted that with respect to the right to claim compensation for damage suffered under Art 6:162 DCC an action may lie in tort for the “violation of a right, an act or omission violating a statutory duty or a rule of unwritten law pertaining to proper social conduct”.32 Such a tortious act renders the perpetrator liable to a claim for damages for pecuniary loss and loss of profit,33 or disgorgement of profits (winstafdracht)34 in favor of the person who has suffered damage. Furthermore, damages can be claimed where the agreement is rescinded (ongedaanmaking).
This overview of Dutch criminal and civil law provisions provides the framework within which the specific provisions of the DCC dealing with contracts tainted by corruption and the remedies provided with respect to the relationships between the bribe-giver, the bribe-recipient and the person whom the bribe-recipient represents, are examined in the following section.
10.3 General Civil Law Consequences
The civil consequences of corruption on contracts are considered below with respect to the validity of the contract between the bribe-giver and bribe-recipient; the contract between the bribe-giver and the principal of the bribe-recipient; as well as the effect of nullification on the bribe money paid. Also discussed is the right of the principal to compensation for damage suffered as a result of the corrupt activity.
10.3.1 Contract Validity
It is helpful to distinguish between three relationships in discussing the validity of contracts tainted by corruption.35 The first is the relationship between the person who pays a bribe (the bribe-giver) and the person who receives a bribe while acting in a position of trust to negotiate in the best interest of a third party (the disloyal agent or bribe-recipient). Examples of such agreements are contracts for special fees, kickbacks, consultancies and commissions entered into to influence the acquisition of business or other favor. This agreement is characterized as the primary contract because it evidences the payment of a bribe and kicks-off the sequence of actions and contracts that are tainted by this original act of bribery.
The second relationship is the relationship between the bribe-giver and the party in whose interest the bribe-recipient negotiated with the bribe-giver (the principal or employer). The contract that results from the successful bribery exchange between the bribe-giver and the principal or employer of the bribe-recipient can be characterized as the secondary contract because it results from the successful execution of the primary agreement to give a bribe.
The third relationship is that between the principal and the disloyal agent. The relationship between the principal and the agent is the catalyst for the corrupt exchange. Without such a grant of trust there would be no basis for the bribe-giver to negotiate with the agent, nor would a secondary contract that binds the principal to the bribe-giver come into existence.36
The criminalization of private bribery under the provisions of the DPC renders contracts tainted by corruption subject to the challenge of invalidity. Furthermore, Art 8 CLC provides that Dutch law should ensure that any contract or clause of a contract providing for corruption should be a nullity. Statutory provisions that have an impact on the effect of bribery on the validity of contracts tainted by bribery are found in Book 3,37 Book 638 and Book 739 of the Dutch Civil Code (DCC).
10.3.1.1 The Primary Contract
The primary contract between the bribe-giver and the bribe-recipient may give rise to legal disputes as for example where a commission is not paid to the bribe-recipient who influenced the acquisition of a contact for the bribe-giver. Here, the question is whether a claim can be made on the basis of such a contract. This will only be the case if the primary contract is considered a valid contract under Dutch law. Art 3:51 DCC provides that “a ground for annulment may always be invoked at as a defense against a claim or legal measure based upon the juridical act.” Such an annulment has retroactive effect to the time the performance of the contract.40
The DCC provides the grounds upon which contracts tainted by corruption may be declared unenforceable. There are two primary categories (1) invalidity as contrary to public order and morality under Art 3:40(1) DCC and (2) invalidity on ground of being contrary to mandatory law under Art 3:40(2) DCC.
With respect to invalidity on ground of public order Art 3:40 (1) DCC provides that “A juridical act which by its content or necessary implication is contrary to good morals or public policy is a nullity”. There is no definition of “good morals” or “public order” in the DCC. An evaluation of what constitutes either of these grounds will depend on the public standard of morality as discerned by the courts of law.41 With the enactment of Art 328ter DPC as well as the international rules criminalizing private bribery to which the Netherlands is a party, bribery in private contracting can be considered as contrary to public order in the Netherlands. For this reason under the courts will annul any contract to give or receive a bribe and deny claims based on such a contract.42
In addition to 3:40(1) DCC, Art 3:40(2) DCC renders any act that violates a mandatory statutory provision a nullity. Art 3:40(2) is directed at the conduct of the parties engaging in private bribery and does not expressly prohibit the contract to give or receive a bribe.43 With the passage of Art 328ter of the DPC, entering into an agreement to give or receive a bribe in a private transaction is itself clearly prohibited by the law. This implies that as far as the contract to give a bribe is concerned, the statutory prohibition of Art 328ter DCC renders it prohibited by mandatory law.44
10.3.1.2 The Secondary Contract
Art 328ter DPC applies to the conduct of giving and receiving a bribe and does not address the contract that comes into being between the bribe-giver and the party to whom the bribe-recipient owes a duty of loyalty (the secondary contract). Since there is no statutory prohibition of this contract, the provisions of Art 3:40(2) DCC dealing with agreements that are in violation of a statutory prohibition will not apply to such a secondary contract. Yet, this secondary contract between the bribe-giver and the principal of the bribed agent is the result of a successful act of bribery. Can the principal seek for nullification on the grounds that the contract is contrary to public order and therefore a nullity on the grounds of Art 3:40(1) DCC? Such a claim will only be possible where the principal is able to show that there was a defect of consent that undermined his/her freedom of consent. Any agreement that suffers from a defect in consent may therefore be annulled.45 A principal may seek to avoid the contract by establishing grounds that show a defect of consent unless it can be shown that the principal expressly directed that a bribe be solicited, or that the principal had ratified such contract.
The principal could argue that the contract was entered into without full information or wrong information about the state of affairs relating to the contract. Art 6:228 DCC provides that a contract which has been entered into under the influence of an error and which would not have been concluded had there been a correct assessment of the facts, may be nullified (a) if the error is due to information given to the other party, unless the other party could assume that the contract should have been entered into irrespective of such information or (b) if the other party, in view of what he knew or ought to know regarding the error, should have informed the party in error.
The principal would in effect be claiming that the contract was entered into as a result of erroneous information about the manner under which the contract came into being. There is no dispute about the terms and conditions of the contract. There is no error as to the contents of the contract. However, there was arguably an error about the “attributes” of the other party.46 This raises the question whether there was an intention by the principal to enter into a contract with the bribe-giver whose identity, rather than being that of a reliable business partner, was one of a party that had taken active steps by offering a bribe to undermine and sabotage the principal’s interests.
The principal could also argue that the contract was entered into in error if he can show that the bribe-giver had deliberately withheld the information about the bribe. Art 6:228(b) DCC offers relief on the ground of error where the party who paid the bribe knew or ought to have known that this constituted, for the principal, information that may lead to the contract not being concluded had there been a correct assessment of the facts. However, Art 6:228(b) is only applicable where there is a “duty to inform”.47 As de Savornin Lohman argues, such a duty to inform would not arise where the knowledge of the agent can be imputed to the principal.48 If it can, then the employer is deemed to have been aware of all the circumstances relating to how the transaction came into being.
Typically cases involving bribery usually involve a direct agent who is the intermediary between the principal and the bribe-giver. There would in general be no restriction to the power of representation granted.49 It is indeed that very power of representation, the direct nature of the agency, which gives the agent the necessary leverage, the direct authorization, to be considered as the party with whom the bribe-giver negotiates.
Nonetheless, there is a threshold under which the knowledge of the agent will not be imputed to the principal. If this is the case, a claim for error on the basis of a lack of information under Art 6:228 DCC with respect to the secondary contract can be made. Art 3:61(2) DCC sets the threshold for the apparent authority of an agent. Where the circumstances are such that a reasonable person can assume sufficient authorization given by the principal to the agent, the threshold for apparent authority is met and the principal cannot claim not to have knowledge of the acts of the agent. On the other hand, where a principal can show that the actions of the agent or intermediary were expressly forbidden in such a way as to make it reasonable for parties contracting with the principal to assume that the agent was acting in a disloyal manner and contrary to the wishes of the principal, then there can be no apparent authority within the meaning of Art 3:61(2) DCC.
In summary, on its face, the secondary contract is a valid contract. However where a principal who has entered into a contract with the bribe-giver can show a defect of consent, such a principal can rely on Art 6:228(a) or (b) to assert that he would not have entered into the contract on the same terms or at all if he had known the truth of the bribery transaction between the bribe-giver and the agent. This defect of consent would render the secondary contract invalid.
10.3.2 Restitution of Bribe Money
With regards to the contract between the bribe-payer and the bribe-recipient, it is clear that any payment on the basis of a null transaction is an undue payment within the meaning of Art 6:203 DCC because there is no valid contract that justifies the payment. The Dutch Supreme Court in Lotisico ruled that an agreement that is entered into contrary to the law is a nullity and as such has no legal consequences, and that the return of what is unjustifiably given can be demanded.50 Every party to a contract that has no legal ground has the right to have the agreement “undone”. As such the bribe-giver and the bribe-recipient of an annulled bribery contract are entitled to the restitution of their performance. Art 6:203 DCC anticipates three sorts of performances in the making of an undue payment, ie, the reclaiming of a “good”,51 the restitution of money,52 and the reversal of performance of another kind.53
However, as de Savornin Lohman has pointed out, if the bribe-giver is entitled to a return of the bribe as an undue payment, the bribe-recipient is also by the same logic entitled to some form of return for his performance under the contract.54