Corruption in International Commercial Contracts – A Portuguese Substantive and Private International Law Perspective
© Springer International Publishing Switzerland 2015Michael 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_12
12. Corruption in International Commercial Contracts – A Portuguese Substantive and Private International Law Perspective
School of Law, University of Lisbon, Rua Professor Vieira de Almeida 1-1 Esq., 1600-664 Lisboa, Portugal
Luís de Lima Pinheiro
The contribution examines the effects of corruption on the validity of bribery contracts and on the validity and binding force of contracts obtained through corruption in international trade, and the consequences of invalidity. Regarding the contracts obtained through corruption, the main focus is in private law contracts, but issues raised by corruption in administrative contracts are also briefly addressed.
The analysis is made in the perspective of Portuguese substantive law and of choice of law rules that, in the Portuguese legal order, determine the laws applicable to international bribery contracts, to international main contracts and to claims for unjust enrichment, as well as the effects of anti-corruption rules contained in laws which are not primarily applicable.
The suitability of the solutions provided or allowed by Portuguese law for tackling problems arising from corruption in international commercial contracts is evaluated in the light of the interests of the parties involved and of the implementation of the anti-corruption policies of the States. Difficulties arising from the enforcement of the law and the need for clarification and for improvement of some solutions are acknowledged.
12.1.1 Introductory Remarks
The huge economic impact of corruption is well known. According to a 2012 OECD’s statement, it is estimated that the cost of corruption equals more than 5 % of global GDP (US$ 2.6 trillion, World Economic Forum) with over US$ 1 trillion paid in bribes each year (World Bank).1
Corruption, however, is not only detrimental to the economy, but also to the political and moral well-being of countries. In effect, it is a cancer in the social body, which deviates the public officials from the pursuance of public interests, threatening political stability and government legitimacy, prevents or slows down economic development, diverts resources from the satisfaction of collective needs to private appropriation, and undermines ethical standards in society.2
All countries are affected by this cancer, and Portugal is no exception. According to the Corruption Perception Index 2014 of Transparency International,3 corruption in the public sector ranks Portugal at 31st position in an increasing scale of corruption out of 175 countries and territories surveyed, ex aequo with Botswana, Cyprus and Puerto Rico.
Although more visible in the public sector, corruption also occurs in the private sector, namely when an agent or manager of an enterprise violates his professional ethics by favoring a third party against the interests of the principal.
Action to fight corruption has been taken by States, Intergovernmental and Supranational Organizations and Non-Governmental Organizations. States have primarily resorted to Criminal Law to prosecute and sanction corrupt behavior. In Portugal, corrupt conducts are criminalized in a very comprehensive way, including corruption in international trade and in the private sector (below Sect. 12.1.2). The enforcement of this legislation has, however, met many difficulties. Administrative Law tools have also been used to prevent and sanction corruption, namely special rules on public procurement, anti-bureaucratic measures, disciplinary sanctions for corrupt public officials and supervision by the Court of Audit (Tribunal de Contas).
Several Intergovernmental Organizations have been active in fighting corruption, namely the UN, the OECD, the World Bank and the Council of Europe. The same may be said, at a supranational level, of the EU. Some of these organizations have adopted International Conventions fostering the definition of international standards on the matter.
Portugal is party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of 1997,4 to the Council of Europe Criminal Law Convention on Corruption of 1999,5 and to the United Nations Convention against Corruption of 2003,6 but not to the Council of Europe’s 1999 Civil Law Convention on Corruption.7 Portugal is also party to the Convention drawn up on the basis of Art K.3 (2)(c) of the Treaty on European Union on the Fight Against Corruption Involving Officials of the European Communities or Officials of Member States of the European Union of 1997.8
Many Non-Governmental Organizations are engaged in this matter, namely Global Financial Integrity, Global Witness and Transparence International. Reference shall also be made to the UNCAC Coalition of Civil Society Organizations, which is a network committed to promoting the ratification, implementation and monitoring of the United Nations Convention against Corruption. Specifically in the field of international trade, the International Chamber of Commerce has adopted the ICC Rules on Combating Corruption 2011 and drafted the ICC Anti-Corruption Clause which is available for international contracting.
Private law issues of corruption have received less attention than criminal and administrative aspects. Nevertheless, there are many private law issues involved in corruption, not only in the private sector but also in the public sector. The invalidity of bribery contracts, and its consequences, as well as the civil responsibility claims of honest competitors who have suffered losses due to corruption, are common issues. The invalidity or non-binding effect to the innocent party of the contract obtained through corruption (main contract) is also an issue which may arise in both sectors, but which is dealt with differently regarding private law contracts and administrative contracts in those systems, such as the Portuguese, which draw a clear distinction between these categories.
The role of private law, in respect to these issues, is not only to protect private rights and interests of persons who have suffered losses due to the corrupt behavior of others, but also to implement the public policies pursued by the State in its combat against corruption.9
The present contribution is not aimed at tackling all the private law issues of corruption, but only those concerning international commercial contracts. Furthermore it will not deal with the issue of corruption in contracts subject to arbitration, which has already generated an extensive bibliography.10
The approach chosen has a substantive aspect, concerning mainly contract and agency law (Sect. 12.2), but without ignoring the specificity of administrative contracts (Sect. 12.3), and a Private International Law aspect, concerning namely the determination of the law applicable to the bribery contract and to the main contract and the effect to be given to mandatory rules of other laws (Sect. 12.4).
Before addressing these issues, it will be useful to scrutinize briefly the Criminal Law regimes applicable to corruption, since these regimes are decisive in the delimitation of the concept of corruption and fundamental for the application of rules on the invalidity of the contracts concerned.
12.1.2 Corruption as a Criminal Offence
Within the framework of the Criminal Code [Código Penal], corruption is a criminal offence only in the public sector. A distinction is drawn between passive corruption and active corruption.
Passive corruption is defined as the requirement or acceptance by a public official of a pecuniary or non-pecuniary advantage for himself or for a third party – or the promise thereof – for committing a particular act or omission (Art 373). The sanction is attenuated if the act or omission is not contrary to the duties of the office and/or if the advantage benefits a third party.
Active corruption is defined as the offer or promise to a public official, or a third party by designation or with the public official’s knowledge, of pecuniary or non-pecuniary advantage for committing an act or omission (Art 374). In this case as well, the sanction is attenuated if the act or omission is not contrary to the duties of the office and/ or if the advantage benefits a third party.
Furthermore, the requirement or acceptance by a public official, or the offer or promise to a public official or third party by designation or with the public official’s knowledge, of an undue advantage for himself or a third party, in the exercise of his functions or by virtue of them, is a criminal offence, even if no act or omission is carried out. An exception is made for conduct that is socially appropriate and in conformity with local usages and customs (Art 372).
In these articles, the expression “public official” includes officials of the European Union, regardless of their nationality and residence, as well as public officials of other Member States of the European Union; and officials of public law international organizations of which Portugal is a member, where the infraction occurred totally or partially in Portugal (Art 386(3)).
The requirement or acceptance of a pecuniary or non-pecuniary advantage – or the promise thereof – for the abuse of influence over a public entity with the purpose of obtaining a favorable decision, and the offer or promise of such an advantage with the purpose of obtaining an illegal favorable decision, is also a criminal offence (Art 335 – traffic of influence).
However, certain corruption practices in the private sector can activate provisions of the Criminal Code, such as the commitment of the crime of betrayal of trust [infidelidade] by the person in charge of the disposition, administration or supervision of the pecuniary interests of others (Art 224).
A special regime with aggravated sanctions applies to holders of political office and high public office (Arts 16-18 of the Lei no 34/87 of 16 July, as amended by the Leis nos 41/2010 of 3 September and 4/2013 of 14 January).
Another special regime applies to corruption in international trade and the private sector (Lei no 20/2008, of 21 April). This regime only applies if the conduct is not sanctioned more severely by another legal regime (Art 6(1)).
According to this regime, the active corruption of a public official or holder of political office, national or foreign, in order to obtain or maintain a transaction or other undue advantage in the international trade, is a criminal offence (Art 7). This charge applies to conducts occurring in Portugal, aboard Portuguese ships and airplanes and, in principle, to the conduct of Portuguese nationals (including corporations seated in Portugal) and foreigners present in Portugal, even if it occurred in a foreign country (Art 3(a) and Art 4 of the Criminal Code).
The active or passive corruption of a private sector “worker” to commit an act or omission in breach of his functional duties is also a criminal offence (Arts 8 and 9). Members of corporate bodies and independent professionals “serving” a private sector entity are deemed to be “workers” for this purpose (Art 2(d)). This charge applies mainly to conducts occurring in Portugal or aboard Portuguese ships and airplanes (Art 4 of the Criminal Code) and, in principle, to acts committed by corporations or against corporations seated in Portugal (Art 5(1)(g) of the Criminal Code) and by national public officials, holders of national political office and the Portuguese officials of international organizations even if the event occurred in a foreign country (Art 3(b) of Lei no 20/2008).
Therefore, when fulfilling some prerequisites, corruption is also a criminal offence if committed in a foreign country:
However, Portuguese criminal law is only applied to conducts occurring outside Portuguese territory when the offender has not been tried in the country where the conduct occurred or has failed to comply with the judicial sentence (Art 6(1) of the Criminal Code).11
in the public sector, where committed by a Portuguese national, including corporations seated in Portugal, or by foreigners present in Portugal;
in the private sector, where committed by corporations seated in Portugal, holders of national public or political office, and Portuguese officials of international organizations.
In light of this special regime, the Industrial Property Code’s prohibition of unfair competition (Arts 317 and 318) – which is not deemed a criminal offence but an illegality sanctioned by a “fine” that is not convertible to imprisonment in case of non-payment – does not seem to play a significant role in the context of corruption in international commercial contracts. The issue of civil responsibility claims for losses caused by unfair competition will not be dealt with in the present contribution.
12.2 Substantive Issues Raised by Corruption in Private Law Contracts
12.2.1 General Remarks
There is no statutory regulation in Portugal dealing specifically with corruption in private law contracts. Therefore, general rules, namely of contract and agency law, apply. As far as I know, the regime applicable to corruption in private law contracts has not been studied in Portugal. For this reason, the views expressed below are the result of my own personal reflections.
A distinction will be drawn between the bribery contract and the main contract, ie, the contract obtained through bribery. The bribery contract is concluded between the person interested in obtaining a contract and a public official or “worker” of a private entity. In it, the bribe-taker, in exchange for a pecuniary or non-pecuniary benefit, undertakes an act or omission that promotes or facilitates the conclusion of the main contract between the bribe-giver and the public or private entity.
12.2.2 Bribery Contract
Regarding the bribery contract, the relevant general rules are those concerning illegal and immoral contracts. The content of domestic bribery contracts contravenes mandatory rules of criminal law; therefore, these contracts are void (Art 280(1) of the Civil Code) and subject to the consequences laid down in Arts 286 and 289–291 of the Civil Code.
Hence, the effects of the infringement are governed by the general rules governing legal transactions (Arts 280 and 289 ff of the Civil Code), which specify the type of invalidity and the precise consequences of the invalidity. By promoting legal certainty and foreseeability, this legal approach seems to work better than giving a wide margin of discretion to the courts, as the UNIDROIT Principles of International Commercial Contracts do in Arts 3.3.1(2) and 3.3.2. It does not exclude, however, a certain margin for adaptation of the legal regime to particular circumstances.
The provision regarding the illegality or immorality of the parties’ common purpose (Art 281 of the Civil Code) does not seem to play an independent role in this context, since the issue of illegality or immorality always arises in relation to the contract’s content.
12.2.3 Main Contract
188.8.131.52 Situations in Which Corruption May Interfere with the Main Contract and the Private or Public Law Nature of the Main Contract
Corruption may interfere with the main contract in two types of situations.
In the first type, the main contract is concluded in breach of duties of public office by a public official or of professional duties of a manager of a corporation or partnership, an employee or an agent, in principle, to the detriment of the public entity, corporation, partnership, employer or the principal and with the knowledge of the other contracting party. In the broad sense, we may refer to the bribe-taker who intervenes in the conclusion of the main contract as an “agent” and to the holder of the interests that are negatively affected as a “principal”. Unlike the bribery contract, the content of the main contract is, in principle, legal and moral. The breach of ethics concerns the circumstances under which the main contract is concluded and the negative consequences arising therefrom to the “principal”.
In the second type of situation, there is no intervention of a bribe-taker in the conclusion of the main contract. There is, however, undue influence from a bribe-taker over the person who concludes the contract. Depending on the circumstances, the conduct of the bribe-taker can have varying criminal relevance. Namely, it can constitute a crime of corruption or of traffic of influence or not amount to a criminal offence at all.
184.108.40.206 Situations in Which the Bribe-Taker Intervenes in the Conclusion of the Main Contract
It is doubtful whether the general rule on immorality of contracts applies when the main contract is a private law contract. In effect, unlike German law (Art 138 of the Civil Code), the Portuguese Civil Code’s provisions on the immorality of contracts deal only with the content and common purpose of the contract (Arts 280(2) – keeping in mind the Art’s title – and 281). Nevertheless, the legal literature is not unequivocal in this respect.12
The applicability of Art 280(2) to the main contract could cause difficulties in cases in which the “principal” is interested in keeping the contract, since void contracts are not confirmable.13 On the other hand, Art 281 is clearly not applicable to the main contract, since it would require the contractual parties (ie, the principal and the bribe-giver) to share a common illegal or immoral purpose, which is not, in principle, the case.14
Therefore, it seems that the rules concerning the “authority of agents” shall be applied. However, we must bear in mind that the relationships between “agents” and “principals” can assume different natures and be subject to different regimes.
In pure domestic relationships, in which the “agency” relationship is directly subject to Portuguese law, the solution is clear where the bribe-taker is a stricto sensu voluntary agent of the principal. The conclusion of the main contract in the name of the principal breaches the agent’s duty of loyalty and, for this reason, amounts to an abuse of authority.15 Since the bribe-giver has prior knowledge of this abuse, the main contract has no binding effect on the principal as long as it is not ratified by him (Art 268(1) applicable ex vi Arts 1178(1) and 269 of the Civil Code). The ratification presupposes that the principal has knowledge of the abuse, particularly of the bribery contract. The bribe-giver may fix a time-limit for the ratification, in which case the ratification is deemed to be denied if it does not take place within the time-limit (Art 268(3) applicable ex vi Arts 1178(1) and 269 of the Civil Code).
The Civil Law Convention on Corruption and the UNIDROIT Principles adopt different approaches. According to the Convention, the internal law of contracting States shall provide for the possibility for all parties to a contract whose consent has been undermined by an act of corruption to apply for the contract’s avoidance (Art 8(2)). The UNIDROIT Principles provide, in cases of conflict of interests, that if a contract concluded by the agent involves a conflict of interests with the principal, of which the third party knew of or ought to have known, the principal may avoid the contract (Art 2.2.7(1)). In corruption cases, it would appear more appropriate to subject the binding effect on the principal to his ratification rather than treating the contract as effective until the principal avoids it.
The regime of voluntary agency seems to be directly applicable to contracts concluded by employees as agents of their employers (Art 115(3) of the Labor Code). In the absence of a special regime, the applicability by analogy of these solutions to other “agent”/“principal” relationships should be evaluated in the light of the nature of those relationships and of systematic coherence with their regime.
As far as Portuguese law is concerned, there is no voluntary agency relationship between managers and the corporation or partnership (so-called representação orgânica). However, there is an analogy between agents’ abuse of authority and managers’ abuse of authority. A manager’s authority is functionally subordinated to pursuing the interests of the corporation or partnership as an agent’s authority is functionally subordinated to pursuing the interests of the principal. The application by analogy of Art 269 of the Civil Code does not systematically contradict the regimes governing the binding effect of contracts concluded ultra vires by managers (Arts 192(3) and (4), 260(1)–(3), and 409(1)–(3) of the Code of Commercial Companies; see also Art 996(2) of the Civil Code), which is a different but related problem.
Therefore, with the adaptations that may be necessary, the above-mentioned solution should apply, to main contracts concluded by corrupt managers.16
220.127.116.11 Situations in Which the Bribe-Taker Influences the Person Concluding the Main Contract
In purely domestic private law contracts, the mere existence of a bribery contract between a party to the main contract and an “agent” who influenced the other party to the main contract (the innocent party) does not trigger the invalidity of this contract. The contract will only be invalid if the conduct of the “agent” constitutes dolus malus or, otherwise, caused an error regarding other essential elements for the formation of the innocent party’s will.
Dolus malus presupposes that the “agent” has employed illegitimate suggestions or artifices in order to mislead or maintain in error the innocent party, or has breached a duty of information in order to avoid that error, and this error was determinant in the conclusion of the contract. In this case, the contract may be annulled by the innocent party (Arts 253 and 254 of the Civil Code).
Where the prerequisites of dolus malus are not met, the invalidity of the contract can, under some circumstances, result from an error on the motives which determined the innocent party’s will.17 This is the case, in first place, where the conduct of the “agent” has resulted in an error of the innocent party regarding the identity or the qualities of the bribe-giver, or the identity or qualities of the object of the contract, in cases where the bribe-giver knew, or ought to have known, the essentiality of those elements for the innocent party. In this case, the innocent party may annul the contract (Arts 251 and 247 of the Civil Code).18
The innocent party may also annul the contract where its conclusion has been determined by an error regarding other essential elements for the formation of his will, known by the bribe-giver, in such a way that the claim of performance of the contract is severely contrary to good faith principles (Art 252(2) of the Civil Code – error on the basis of the contract).19 It seems that the innocent party may also plead the contract adaptation according to criteria of equity and that the bribe-giver may oppose the annulment by accepting the adaptation of the contract under these terms (Art 437 ex vi Art 252(2) of the Civil Code).20