© 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_2
2. New Wine in Old Bottles: Corrupt Foreign Contracts in Canadian Private Law
Faculty of Law, Queen’s University, Macdonald Hall, 128 Union St, K7L3N6 Kingston, ON, Canada
Faculty of Law, Queen’s University, Kingston, Canada
The Canadian criminal law on foreign corruption recently experienced great upheaval, as Canada worked to bring its legislation up to international standards following years of inadequate substantive law and lackadaisical prosecutions. Canadian private law, by contrast, has remained highly stable on paper, but longstanding doctrines have been effectively applied to modern, internationalized forms of corruption.
The chapter begins with an overview of the general criminal law doctrines relating to corruption, then discusses the Corruption of Foreign Public Officials Act and its application in practice, including the first conviction of an individual under the Act in 2013. It then turns to private law, surveying the tort and equitable remedies available to victims of corruption, and finally the contract law doctrines applicable to corrupt contracts.
Since Canada is a mixed jurisdiction, the chapter contains an internal comparative element. The Canadian common law and Quebec approaches are compared, and revealed to be more similar than one might expect. Modern Canadian common law tort and equitable remedies, and the corresponding provisions of the Code civil du Québec, provide a range of means by which both direct and indirect victims of corruption can recover compensatory damages. They also serve social objectives by providing for disgorgement of corruptly-acquired gains in most cases. The contract law doctrines relating to illegality and agency have become more flexible over time, so as to permit courts to enforce or not enforce contracts or severable parts of contracts as justice dictates.
The Canadian legal system has lagged in its response to foreign corruption. Corrupt acts committed by Canadians outside Canada were not criminalized until the Corruption of Foreign Public Officials Act (CFPOA)1 was enacted in 1999. Even after the CFPOA’s enactment, Canada’s record of lackadaisical prosecutions and inadequate substantive law on foreign corruption continued to be criticized. A set of amendments to the CFPOA made in 2013 finally brought Canada into compliance with its obligations under international law, although not all of the amendments have taken affect. The first conviction and sentencing under the CFPOA did not occur until 2014.
With respect to private law, recourse for victims of corruption continues to be governed by longstanding and broadly-applicable principles of tort, unjust enrichment, contract, and agency law. Curiously, although Canada helped to shape the European agenda by participating in the elaboration of the Civil Law Convention on Corruption,2 an equivalent Canadian regime has not developed.
Canada’s lack of any specific private law response to foreign corruption is particularly troubling, given the extent of Canadian firms’ involvement in cross-border contracting. Construction and resource extraction – which are particularly susceptible to corruption due to the frequent involvement of government officials in approving projects and assessing tenders – are two of Canada’s largest industries.3 A recent study by Ernst & Young found that 20 % of Canadian executives believe bribery and corruption are widespread among Canada’s businesses that transact internationally.4 Fortunately, Canada’s ancient private law doctrines have proven sufficiently flexible to permit courts to deal effectively with the modern challenges of foreign corruption.
In this chapter, we give an overview of the criminal and other public law consequences of foreign corruption, then focus in greater detail on the private law doctrines that can be used to deal with corrupt contracts. We use the term “corrupt contract” in a broad and non-technical sense. It encompasses any agreement tainted by corruption, including contracts formed for a corrupt purpose (such as agreements for an agent to pay a bribe on behalf of her principal) and contracts procured by corruption (such as those where consent is “bought” with a bribe or a threat).
Since Canada is a federal state and a mixed jurisdiction, this chapter contains an internal comparative element. For matters governed by federal law, which include criminal law and competition law, Canada has a single, unified approach. By contrast, matters within the jurisdiction of the provinces, which includes the law of obligations, are governed by the Code civil du Québec in Quebec but by common law in the other provinces and the three territories. For each area of Canadian private law under discussion, we review and compare the common law and Quebec approaches and find that the differences are not as significant as one might expect.
2.2 The Canadian Criminal Law of Foreign Corruption
Canadian private law doctrines and remedies for corruption are best understood within the context of the criminal law. Typically, civil actions for corrupt acts have followed criminal prosecutions and have relied on the facts determined during those prosecutions. This section first describes the criminal law doctrines applicable to both domestic and foreign corruption. Second, it examines the recently-overhauled CFPOA, the primary legislative response to foreign corruption, and assesses recent and ongoing prosecutions for foreign corruption in Canada. While the amendments made to the CFPOA in 2013 bring Canadian law in line with international standards, the extent of the government’s commitment to bringing prosecutions under the CFPOA remains unproven.
2.2.1 Corruption as a Criminal Offence Within Canada
Criminal law is under the exclusive jurisdiction of the federal government and applies equally in Canada’s common law and civil law jurisdictions. Most criminal law is codified in the Criminal Code,5 which establishes several activities related to corruption as criminal offences. In general, the Criminal Code applies only to conduct that occurs “within” Canada. Some relevant exceptions will be described as they arise.
Canadian law criminalizes corrupt acts in both the public and private sectors. The Criminal Code contains a series of provisions that deal with the corruption of federal and provincial legislators and officials involved in the administration of justice, as well as other public officials at all levels of government. It also describes several corruption offences that apply equally in the public and private sectors, as well as miscellaneous criminal offences that may be committed in the course of corrupt acts but that apply broadly to public and private dealings.
Before proceeding to describe the individual offences, it is worth noting six features of the Criminal Code that apply to all relevant offences. First, both natural persons and legal persons (“organizations”) are subject to prosecution under the Criminal Code.6
Second, for all relevant offences, including those involving corruption of foreign public officials, the general common law standard of intent applies. The accused must have acted “intentionally or recklessly, with knowledge of the facts constituting the offence, or with wilful blindness toward them”.7 Organizations may be criminally liable for offences that involve fault. If any senior officer (eg, a director) of a corporate defendant intentionally, recklessly, or with wilful blindness participates in a corrupt act or allows it to occur, the company is guilty.8 However, other senior officers would not be personally guilty unless they were themselves wilfully blind to the corrupt acts.
Third, Canada recognizes the crime of conspiracy, whereby co-conspirators are liable to the same punishment as a person convicted of an offence.9 Conspiracy also has an extraterritorial component; a person in Canada who conspires with a person outside Canada to do anything that constitutes an offence in that place is deemed to have conspired to commit the offence in Canada; those outside Canada who conspire with persons in Canada to commit an offence under the Criminal Code are deemed to have conspired in Canada.10
Fourth, any person convicted of a crime under the Criminal Code may be required to pay a fine, in addition to any prison term (in the case of a natural person).11 The amount of the fine is generally left to the discretion of the judge, and there is no maximum.
Fifth, both natural persons and organizations convicted of offences are subject to forfeiture of property that the prosecution proves, on a balance of probabilities, is the proceeds of the crime.12 If the offence did not relate to the property, proceeds of crime may still be subject to forfeiture if the prosecution demonstrates the property to be such proceeds beyond a reasonable doubt.13 Courts may order forfeiture of property outside Canada or, more commonly, a fine in lieu of forfeiture.
Finally, if an organization is convicted of an offence, the court may order probation for the organization. Unlike for natural persons, courts may require organizations under probation to take measures such as making restitution, establishing policies and procedures to reduce subsequent offences, and providing to the public information about the offence, the sentence, and the organization’s plan to prevent subsequent offences.14
184.108.40.206 Corruption of Public Officials
Criminal Code section 119 makes it an indictable offence (colloquially, a felony) for holders of judicial offices and legislators to corruptly accept anything of value for anything done or omitted in their official capacity, and for any person to corruptly offer such benefits to a holder of judicial office. Section 120 creates a similar set of offences prohibiting payment or acceptance of bribes to any public officers, including police and anyone employed in the administration of criminal justice, so long as the bribe was made with the intent to interfere with the administration of justice. The term “corruptly” is not defined in the Criminal Code, but has been held to mean “designed wholly or partially for bringing about the effect forbidden by the section”.15 It does not require that a payment be given “dishonestly”.16
Sections 119 and 120 describe the most serious category of corruption-related crimes. A broader offence of “fraud on the government” is established by section 121. Section 122 is the mirror image provision; it criminalizes fraud or breaches of trust by public officials in connection with their duties. Section 123 relates to the corruption of municipal officials, which includes any member of a municipal council or anyone who holds an office under a municipal government.17 The last provisions of the Criminal Code dealing specifically with corruption of public officials are sections 124 and 125, which make it a crime to sell or purchase an appointment to or resignation from an office, and to influence or negotiate appointments or dealings in offices.
220.127.116.11 Secret Commissions
The offence of a secret commission involves undisclosed payments to and from agents and other activities by agents intended to deceive their principals.18 This section is raised frequently in cases of corruption and applies equally whether the dealings in question involve the public or private sectors. However, it does not deal with corruption per se, but rather with the faithlessness of agents. For the purposes of section 426, “corruptly” means simply “secretly and without the required disclosure”; there is no requirement of a corrupt bargain.19
Under this section, it is an indictable offence to corruptly offer or demand a benefit for doing or not doing any act relating to the affairs of an agent’s principal, or to give to an agent or receive as an agent any false receipt in which the agent’s principal has an interest with the intent to mislead the principal. Section 426 applies equally to those directly involved in the corrupt acts and those who are knowingly privy to the acts.20 For the purposes of this section, “agent” and “principal” are broadly construed – they can mean simply “employee” and “employer”21 and the agent need not have a specific principal at the time the prohibited offer to pay or accept a secret commission is made.22
18.104.22.168 Property Offences
The Criminal Code creates several property-related offences that provide opportunities to prosecute persons who engage in corrupt conduct where the conduct itself is difficult to prove. These provisions, criminalizing possession, trafficking, and laundering of the proceeds of crime, were part of the 2001 amendments to Canada’s anti-foreign bribery laws intended to ensure that they encompassed proceeds from the bribery of foreign officials outside Canada.
It is an offence to possess any property or proceeds of property knowing that it was obtained from the commission in Canada of an indictable offence or an act or omission anywhere that, if it had occurred in Canada, would have constituted an indictable offence.23 Similarly, it is an offence to traffic in such property or proceeds, to possess it for the purpose of trafficking, or to import it into or export it from Canada.24 All of these offences are indictable offences if the property is worth more than CAD 5,000, and summary offences (colloquially, misdemeanors) if the property is worth less than CAD 5,000. Laundering the proceeds of crime may similarly be charged as a summary or indictable offence.25
22.214.171.124 Other Related Offences Under the Criminal Code
Several other offences exist under the Criminal Code that do not directly deal with corruption, but which may be charged in situations involving corruption. All of these pertain equally to private persons and public officials, and to private and public dealings.
The most obvious such offence is fraud, which is frequently added as a charge in corruption prosecutions. Criminal fraud occurs where any person defrauds the public or any person of any property, money or valuable security, or any service.26 Fraud is an indictable offense if the subject matter of the offence exceeds CAD 5,000; otherwise, the defendant may be charged with an indictable or summary offence at the prosecutor’s discretion.27 Recipients of bribes who hold positions of trust may be also charged with criminal breach of trust.28
Corruption often involves the drafting of false or misleading documents or accounts, usually to conceal unlawful payments. Two broadly-defined indictable offences may be invoked: forgery and falsification of books and documents. Forgery occurs when a person makes or alters a document, knowing it to be false, with intent that it should be used as genuine or that a person should, believing that it is genuine, do or refrain from doing anything.29 The place where the document was forged is immaterial; it can be done in or outside of Canada.30 Trafficking, use and possession of forged documents are also criminal and subject to the same punishment as forgery.31 Falsification of books and documents occurs when, with intent to defraud, a person destroys, alters, falsifies, or, omits or alters material from a document.32
Finally, persons demanding bribes or other corrupt payments often use coercive tactics. Intimidation may be charged with other corruption-related offences, but it also provides a means to prosecute those who unsuccessfully demand bribes or where the receipt of improper payments cannot be proven beyond a reasonable doubt. Intimidation encompasses a wide variety of violent or threatening acts employed without lawful authority to compel someone to abstain from doing anything that she has a lawful right to do, or to do anything that she has a lawful right not to do.33 Intimidation is subject to greater penalties when committed with the intent to provoke a state of fear in a journalist or participant in the justice system.34 Accordingly, threats to those who might reveal or prosecute corruption may be dealt with under this provision of the Criminal Code.
Our analysis thus far has concentrated on offences from the Criminal Code. However, corrupt acts may violate other statutes, such as the Competition Act; of these, we will only discuss the most important source of corruption-related offences outside the Criminal Code – the CFPOA.
2.2.2 Corruption of Foreign Officials as a Criminal Offence – The CFPOA
Until 1999, when the CFPOA came into force, corrupt acts committed by Canadians abroad were not illegal in Canada. The shift is attributable to international law obligations Canada took on in the 1990s and 2000s, most prominently the Convention on Combating Bribery of Foreign Public Officials 35 (“OECD Convention”).36
126.96.36.199 Development of the CFPOA and Related Canadian Law
The CFPOA created three new criminal offences in Canada: bribery of foreign public officials, possession of property or proceeds from such bribery, and laundering of those proceeds.37 In 2001, Canada enacted amendments to incorporate sections 4 and 5 of the CFPOA into the Criminal Code, expanding the definitions of possessing and laundering the proceeds of bribery to include proceeds from the bribery of foreign public officials.38
The 1999 and 2001 versions of the CFPOA were criticized for failing to meet Canada’s international law obligations under the OECD Convention and other treaties. In 2011, Transparency International, the OECD Working Group on Bribery in International Business Transactions (“OECD Working Group”), and an Organization of American States Committee of Experts issued reports that found Canada’s legislative and institutional framework to be lacking in several major respects,39 including:
In response, Canada significantly amended the CFPOA in 2013, bringing the country closer in line with international standards and attracting praise from the OECD and Transparency International.43 The changes included increasing the maximum sentences applicable to offences related to bribery of foreign public officials, eliminating the facilitation payments exception to the bribery offence, creating a new offence related to falsification of books and records, expanding the jurisdiction of the CFPOA to apply to all Canadian nationals, adding a protection against double jeopardy, and removing the words “for profit” from the definition of “business” to ensure applicability to all legal persons including not-for-profit organizations.44 The amendments received royal assent (the last step in the enactment of legislation) in June 2013. The only amendment not yet in force is the provision eliminating facilitation payments as an exception to the offence of bribing a public official. It will come into force on a date yet to be fixed. The delay is intended to allow Canadian companies sufficient time to adjust to this change.45
Canada had dedicated insufficient resources to investigating and prosecuting CFPOA offenses. Decisions on whether to prosecute may have been influenced by Canada’s foreign policy priorities or national economic interests. At the time of these reports, there had been only one conviction under the CFPOA, of Hydro-Kleen Group.40
The sanctions imposed were insufficient.
The definition of “business” in the CFPOA was too narrow, including only for-profit enterprises. Canada was the only party to the OECD Convention with this limitation.41
The CFPOA included an exception for facilitation payments.
Jurisdiction was limited to cases with a “real and substantial” connection between the offence and Canada, leaving Canadian nationals insufficiently subject to the CFPOA.42
Canada had not taken sufficient steps to raise awareness of the requirements of the CFPOA among Canadian firms, promote compliance programmes, or train tax examiners on the detection of foreign bribery.
The 2013 amendments appear to satisfy the requirements of the OECD Convention and Canada’s other international law obligations; however, subsequent reports by international groups such as the OECD Working Group will also take into account actual prosecutions under the amended law.46 For example, it is too soon to tell how the reasonable expenses defence, discussed below, will evolve through case law.
188.8.131.52 Scope of Application of the CFPOA
Under the CFPOA, the general Criminal Code definition of “person” applies, so that all natural and legal persons may be guilty of all offences under the CFPOA.47 Since the essence of the CFPOA is its extraterritorial effect, it provides a wide geographical scope of application and, in practice, employs nationality rather than territoriality jurisdiction. Technically, the CFPOA does not derogate from the Criminal Code’s territorial jurisdiction rubric – that is, it applies only to offences committed in Canada. However, any offence under the CFPOA or a conspiracy to commit one of those offences is deemed to have been committed in Canada if the person is a Canadian citizen or permanent resident or a legal person “incorporated, formed or otherwise organized under the laws of Canada or a province”.48
If the accused has already been tried for the same conduct outside Canada, her right to invoke protections against double jeopardy is preserved.49 However, she may not invoke double jeopardy if she was not present and was not represented by counsel at the trial outside Canada and she was not punished in accordance with the sentence imposed outside Canada.50
The CFPOA applies only to acts committed “in the course of a business”, which would seem to restrict the ambit of the Act. However, “business” is defined so broadly that nearly any activity qualifies: “any business, profession, trade, calling, manufacture or undertaking of any kind carried on in Canada or elsewhere”.51 This definition is broader than that in the OECD Convention (which encompasses only to bribes made in the conduct of “international business”).52 Thus, for example, the CFPOA would apply to a bribe paid to a foreign public official in Canada to obtain a contract to build a foreign embassy in Canada.53 The CFPOA defines “foreign state” and “foreign public official” in a similarly expansive manner, consistent with the definitions in OECD Convention Arts 1.1 and 1.4.
184.108.40.206 Offences Under the CFPOA
The heart of the CFPOA is sections 3 and 4, which created two new indictable offences: bribery of foreign officials and falsification of books and records for the purposes of bribery or hiding bribery. The CFPOA does not contain an intent element, so the general Criminal Code standard of mens rea applies, including the provisions on agent and corporate liability. The CFPOA also makes no specific provision for fines or forfeiture of proceeds of crimes; however, the discretion of judges to impose forfeiture or fines under the Criminal Code applies.
Section 3 defines the offence of bribery, which includes the following essential elements: the offence is committed by a person (individual or organization); any benefit is given or offered or agreed to be given or offered directly or indirectly; the act is done with the intent to gain a business-related advantage; the benefit is given to a foreign public official (or to any person for the benefit of a foreign public official) to induce the foreign public official to do or not do something in his official capacity or to induce the official to use his position to influence any acts or decisions of the foreign state or public international organization for which the official performs duties or functions.
Until the final 2013 amendment comes into force, the facilitation payment exception applies, such that a payment does not constitute a bribe if it is made to “expedite or secure the performance by a foreign public official of any act of a routine nature that is part of the foreign public official’s duties or functions”.54 Accordingly, facilitation payments made to a foreign public official for routine acts do not – for now – constitute bribery.
Conduct that would otherwise constitute bribery does not constitute an offence if the benefit is (i) permitted or required under the laws of the foreign state or public international organization or (ii) to pay prescribed reasonable expenses incurred in good faith by or on behalf of the foreign public official.55 For example, reasonable expenses for marketing or the performance of a contract will not constitute offences, but entertainment and other “softer expenses” may be criminal.56 The burden to demonstrate that the payments are not permitted or required under the law of the foreign state remains with the prosecution.57
The second offence created by the CFPOA relates to the falsification of books, records, accounts, statements, and the like. It was implemented pursuant to OECD Convention Art 8.58 Section 4 of the CFPOA makes it a crime to establish or maintain any documents, accounts or records, make unrecorded transactions, or knowingly use false documents for the purpose of bribing a foreign public official, hiding that bribery, or obtaining or retaining any business advantage.
220.127.116.11 Prosecutions Under the CFPOA
CFPOA-related investigations are normally undertaken by the International Anti-Corruption Unit (IACU) of the Royal Canadian Mounted Police (RCMP), Canada’s national police force. The IACU was established in 2008 and concentrates on investigations of transnational bribery and other forms of corruption involving foreign public officials, as well as the laundering of proceeds of foreign corruption in or through Canada. The IACU also raises awareness about the CFPOA and provides anti-bribery training. It has two teams, based in Ottawa and Calgary, with approximately 115 staff members.
As of October 2014, four prosecutions under the CFPOA have resulted in convictions or guilty pleas. The first successful prosecution under the CFPOA involved Hydro-Kleen Group Inc., an Alberta-based oil pipeline maintenance company, which pleaded guilty to bribery on January 10, 2005, and was ordered to pay a fine of CAD 25,000. The president of Hydro-Kleen, another employee, and the company itself were charged with two counts of bribing a US immigration officer who worked at the Calgary airport. Charges against the employee and the president of the company were stayed. In July 2002, the immigration officer pleaded guilty to accepting secret commissions, received a 6-month sentence, and was deported to the US.
The second successful prosecution under the CFPOA was the first to involve a plea bargain. Niko Resources Ltd, a publicly traded oil and gas exploration and production company based in Calgary, Alberta, pleaded guilty to bribery under the CFPOA in June 2011, and was fined CAD 9.5 million.59 Niko provided the State Minister for Energy and Mineral Resources of Bangladesh with a Toyota Land Cruiser for his personal use and a trip to Calgary to visit an energy exposition, with a stop-off in New York for his family. The investigation commenced after a Bangladesh newspaper published an article exposing the corrupt acts. In addition to the fine, Niko received a 3-year probation order, requiring the company to implement a compliance program to be reviewed by an independent auditor.60
A third company, Griffiths Energy International Inc., based in Calgary, self-reported and pleaded guilty in January 2013 to an offence under the CFPOA. Griffiths paid a CAD two million bribe to officials of the government of Chad in order to secure an oil and gas contract. Griffiths was fined CAD 10.35 million.
The most important prosecution under the CFPOA to-date is R v Karigar – the first to go to trial and the first to lead to the conviction of an individual.61 In 2013, the Ontario Superior Court found Nazir Karigar guilty of offering a bribe to a foreign official under section 3(1)(b) of the CFPOA. In 2005, Karigar, an Ottawa businessman with strong connections to India, acted as an agent of Cryptometrics Canada and agreed to offer a bribe to secure a contract for the supply of facial recognition technology to Air India for its passenger security system. Ultimately, Cryptometrics’ contract bid was unsuccessful.
What is unusual in this case is that there was no evidence that any financial advantage was actually given; only that Karigar conspired to offer at least USD 450,000 to decisions makers in the state-owned Air India and an Indian cabinet minister. However, there was a sufficient paper trail to show an intention to make the payments. Karigar was convicted largely on the evidence of a Cryptometrics executive who received immunity for his cooperation. This case provides several insights into the judicial application of the CFPOA:
In 2014, there were approximately 35 active investigations under the Act.67 Of these, two high-profile investigations are worth mentioning. In the first, Blackfire Exploration, a Calgary-based mining company that operates in Mexico, is being investigated for allegedly bribing the mayor of a town in the Mexican state of Chiapas to prevent protesters from interrupting the company’s mining operations.
Conspiracy: The reach of the bribery offence under section 3(1) of the CFPOA extends to a conspiracy to offer a bribe to a foreign official, regardless of whether the bribe is actually paid. The actus reus of the crime is the agreement to pursue an unlawful object. The court explained that, if the RCMP were required to obtain proof of someone receiving a bribe in a foreign country, it could put “foreign nationals at risk and would make the legislation difficult if not impossible to enforce and possibly offend international comity”.62
Scope of “agree”: Section 3(1) includes an agreement between two parties to offer a bribe to a third-party foreign official who was not party to the agreement. The court found that the legislation’s objectives would not be fulfilled if “agreement” were limited to agreements between the giver and the receiver of a bribe.
Scope of “foreign public official”: Foreign public official includes officials of state-owned enterprises, in this case, Air India officers.
Jurisdiction: Karigar was convicted under the pre-2013 jurisdiction provisions of the CFPOA, which required a “real and substantial link” between the offence and Canada. Here, the factors in favour of the Canadian court’s jurisdiction included: Karigar was a long-term resident of Canada who worked for a Canadian company, the bribe was intended for the advantage of a Canadian company (Cryptometrics), and if the contract had been awarded, most of the work would have been done by Canadian employees. These criteria are still relevant for offences committed before June 2013.
Penalties: Karigar was the first CFPOA prosecution not to involve a guilty plea, so it represents the first judicial interpretation of the penalty provisions of the CFPOA. The court considered domestic fraud and bribery cases, finding that deterrence is a dominant consideration in sentencing,63 and that serious fraud requires a penitentiary sentence of 3–5 years.64 Government officials gave evidence at Karigar’s sentencing hearing on the challenges of pursuing prosecutions under the CFPOA, Canada’s international reputation for leniency in CFPOA cases, and the theory that significant penalties for the bribery of foreign officials would make companies doing business abroad take heed.65 While the court mentioned Canada’s treaty obligations under the OECD Convention, it dismissed the suggestion that the context surrounding the CFPOA should bear on the sentence.66
In the second, Montreal-based SNC-Lavalin, one of the world’s largest engineering firms, is under investigation for at least two instances of international bribery (as well as other domestic bribery schemes). First, SNC-Lavalin is accused of having participated in a corrupt bidding process for the construction of a bridge in Bangladesh. This investigation was initiated at the request of the World Bank, a significant lender in the construction of the bridge.68 SNC-Lavalin is also accused of having bribed officials in the deposed regime of former Libyan dictator Muammar Gaddafi. An ongoing civil suit against SNC-Lavalin relating to the Libyan transactions will be discussed below.
2.3 Corrupt Contracts in Canadian Private Law
Aside from the CFPOA, Canada has no statutes or common law doctrines that deal specifically with foreign corruption. As a result, the private law consequences of corruption in cross-border contracts continue to be addressed entirely through well-established legal doctrines developed in a domestic context. This section describes the civil consequences of corruption under Canadian law, first considering the causes of action that may be invoked by victims of corruption (which may sound in contract, tort/delict, or equity), and then considering the consequences of corruption for the validity and breach of corrupt contracts.
In contrast to criminal law, private law matters are subject to provincial jurisdiction; accordingly, they may vary from province to province. In practice, however, there is significant uniformity. In Canada’s nine common law provinces and three territories, similar common law principles apply.69 In Quebec (which represents slightly less than a quarter of Canada’s population and 20 % of its gross domestic product), private law matters are governed by civil law, in particular the Code civil du Québec (CcQ).70 One might expect some divergence between Quebec and the common law provinces, but the relevant provisions of the CcQ are similar to (and in some cases based on) the equivalent doctrines in Canadian common law. Quebec law will therefore be examined in less detail than Canadian common law, with a focus on highlighting the (relatively few and minor) differences between them.
It is worth noting at the outset that criminal liability does not extinguish civil liability; res judicata cannot be raised as a defence to civil suits following criminal prosecutions.71 In practice, civil suits in Canada related to incidents of corruption have directly followed criminal prosecutions.72 No verdicts have yet been rendered in civil suits following the four successful CFPOA prosecutions. Such suits are likely to increase in the future.
Of particular note are two active civil suits related to the SNC-Lavalin cases discussed above. SNC-Lavalin investors have filed class actions in Ontario and Quebec courts seeking CAD one billion in damages for significant devaluations of their investments following SNC-Lavalin’s prosecution under the CFPOA for illegal payments to the Gaddafi regime in Libya. The plaintiffs allege SNC-Lavalin misrepresented the adequacy of its internal controls and financial procedure, the compliance of its financial statements with generally accepted accounting principles, and the compliance of SNC management with the company’s Code of Ethics and Business Conduct, leading to an inflated share price and damages to the plaintiffs after the truth was revealed. The Ontario Superior Court of Justice certified the Ontario action as a class proceeding in 2012 and the Quebec Superior Court authorized the Quebec class action in 2014; both lawsuits are ongoing.73
SNC-Lavalin itself is suing a consultant and a former executive for damages for their alleged involvement in a plot to smuggle Muammar Gaddafi’s son to Mexico. SNC-Lavalin’s claim, filed in Quebec Superior Court, alleges that the consultant conspired to commit illegal acts involving funds belonging to SNC-Lavalin that were diverted and used without permission. In a separate suit, SNC-Lavalin is suing a former executive to recover money paid by the executive to an interior design firm in 2011 to decorate a condominium owned by Gaddafi in downtown Toronto. In 2013, the court granted SNC-Lavalin’s motion to seize the former executive’s shares in the company to satisfy a portion of the damages claimed.74 Further details of these suits are not publicly available and SNC-Lavalin declined to comment.75
2.3.1 Private Law Remedies for Victims of Corruption
Canadian common law provides a range of remedies that victims of corruption can invoke against the payers and recipients of improper payments. These are largely derived from English common law, and English judgments continue to be regularly cited by Canadian courts, especially in areas where there is little domestic case law.
The causes of action are largely divisible into those that sound in tort (for which the normal remedy is compensatory damages) and those that sound in equity (for which the normal remedy is restitutionary, such as return of a bribe received or disgorgement of any gains from corruption). A plaintiff may raise both tort and equitable causes of action, and both compensatory and restitutionary remedies may be awarded in a single suit, but plaintiffs may recover only the higher of compensatory and restitutionary damages. After considering the tort and restitutionary remedies in turn, this section will discuss the vicarious liability of employers or principals for the faults of their employees or independent contractors. Finally, it will describe the statutory remedies available to indirect victims of corruption. Where possible, comparisons will be made between Canada’s common law and civil jurisdictions.
18.104.22.168 Tort Causes of Action
The primary tort cause of action available to victims of corruption is for bribery, the definition of which is similar to that of the criminal offence of secret commissions. In general, this tort provides a remedy for a principal whose agent demanded or accepted a secret commission in relation to the principal’s affairs. Note that agency in the strict sense is not required; the payer or recipient of the secret commission need only have a duty of trust, loyalty, or confidence to the victim of the corruption.76 Within Canada, a series of leading judgments of the Ontario Court of Appeal77 have adopted the definition of civil bribery set down in a 1949 decision of the English High Court:
By making out these elements, the plaintiff sets up an irrebuttable presumption both that the payment was made with a corrupt motive79 and that the agent was influenced by the bribe.80 The motive or “corruptness” of the bribe-giver is irrelevant; she may even have been unaware that the recipient did not intend to disclose the payment.81 On this point, the Ontario Court of Appeal held in Ruiter Engineering & Construction Ltd v 441734 Ontario Ltd:
For the purposes of the civil law, a bribe means the payment of a secret commission, which only means (i) that the person making the payment makes it to the agent of the other person with whom he is dealing; (ii) that he makes it to that person knowing that person is acting as the agent of the other person with whom he is dealing; and (iii) that he fails to disclose to the other person with whom he is dealing that he has made that payment to the person whom he knows to be the other person’s agent.78
Perell describes the rationale for the law’s focus on secrecy of the payment, rather than its illegality per se. For a person with a duty of loyalty to use his position to obtain a benefit, “the onus is on the person with the duty […] to prove that there was no secrecy and that his gain was permitted after full and fair disclosure of all matters likely to influence the conduct of the employer, principal, partner or beneficiary.”83
[…] one contracting party shall not be allowed to put the agent of the other in a position which gives him an interest against his duty. The result to the agent’s principal is the same whatever the motive which induced the other principal to promise the commission. The former is deprived of the services of an agent free from the bias of an influence conflicting with his duty, for which he had contracted and to which he was entitled.82
A second private cause of action is the tort of unlawful interference with economic relations. Any unlawful means that interfere with a valid business relationship may qualify, but this tort is frequently invoked in corruption-related cases, especially by the employers of employees who receive unlawful payments such as secret commissions. The elements of unlawful interference with economic relations are as follows:
Victims of corruption may also invoke three broader torts that do not require a prior illegal act. The first is civil conspiracy to injure, which occurs when two or more persons join in a concerted action knowing that injury to the plaintiff is likely, and injury does result.85 Most cases of civil conspiracy do not involve corruption, although it has been invoked in some corruption-related suits.86 The conduct need not be unlawful, but if it is unlawful, as would be the case with all corruption-related conspiracies, the conspirators are liable even if they merely should have known that injury to the plaintiff was likely.87
the plaintiff has a valid business relationship with another;
the defendant knows about the plaintiff’s business relationship;
the defendant intentionally interferes with the business relationship;
the interference is by way of unlawful means;
the interference is the proximate cause of the termination of the plaintiff’s business relationship; and
the plaintiff suffers a loss.84
The second broader tort is that of fraud. Historically, civil fraud was limited to situations such as the falsification of business records; however, plaintiffs have recently been successful in invoking fraud against embezzlers or employees who use corporate funds to fund lavish lifestyles.88 The civil definition of fraud is derived from its criminal law counterpart. To be liable for civil fraud, the defendant must knowingly or recklessly make a representation of fact that was false at the time it was made, the representation must have been material, there must have been reliance on the representation by the plaintiff, and the representation must have caused damages.89
Finally, plaintiffs may invoke the tort of knowing assistance of the breach of a fiduciary duty. This tort is typically invoked by a principal against a defendant who paid a bribe to the principal’s agent.90 The defendant will be held liable for knowing assistance where: (a) there is a fiduciary duty, (b) the fiduciary breaches that duty fraudulently and dishonestly, (c) the stranger to the fiduciary relationship had actual knowledge of the fiduciary relationship and the improper conduct, and (d) the stranger participated in or assisted the fiduciary’s improper conduct.91
The breach of fiduciary duty that forms the basis for knowing assistance need not have been criminal. Conduct that is merely “morally reprehensible” and possessed of a “dishonest quality” suffices.92 Moreover, in Air Canada v M&L Travel Ltd, the Supreme Court of Canada held that the “actual knowledge” requirement may be met by recklessness and wilful blindness on the part of the stranger to the fiduciary relationship.93 Accordingly, liability for knowing assistance requires only that the defendant knew of or was wilfully blind to the fact that the fiduciary was acting dishonestly in respect of the beneficiary’s affairs.
All of the common law tort causes of action listed above lead to the same remedy: compensatory damages. Such damages are generally calculated based on the quantum of losses suffered as a result of the transaction that would or would not have occurred but for the instance of corruption. Primary victims of the bribe, such as the principal of an agent who accepted a kickback, typically sue under the tort of bribery, and can recover the difference in value between the transaction they ought to have entered into and the transaction they actually entered into, along with other consequential damages.94 Secondary or indirect victims, such as other companies who submitted a tender and would have been awarded a contract but for the corrupt payment, can recover the value of the lost business.95
As noted in the introduction, the law of obligations is governed by the common law in most Canadian provinces and territories, but by the CcQ in Quebec. While the tort regime described above applies to the common law, in Quebec those involved in corruption may be liable under the CcQ’s general tort liability provision. Art 1457 provides that all persons are liable for any injuries caused by their faults. Quebec courts have interpreted Art 1457 such that the results are broadly similar to the common law remedies described above.
22.214.171.124 Equitable Remedies
Compensatory damages will not always prevent the payer and the recipient of a secret commission from profiting from their crime, and in some cases the primary victim of the crime suffers only nominal losses. Accordingly, primary victims of a secret commission often claim equitable remedies in the alternative – both may be pleaded, but plaintiffs can only claim the higher of the two, not both. Secondary victims, such as competitors in the industry who did not receive a contract that they ought to have been awarded, are generally limited to compensatory tort damages as described above.
In particular, courts may find that an agent, in paying or receiving a secret commission, breached a fiduciary duty or was unjustly enriched. In both cases, the recipient of the secret commission may be required to disgorge the amount of the payment and judgment may be entered against the payer of the commission in the same amount. They may also be required to disgorge any additional gains realized from the corrupt contract. In other words, damages given under these equitable remedies are made on a restitutionary, rather than compensatory, measure. The recovery of these funds may be supported by the imposition of a constructive trust. The elements of breach of fiduciary duty and unjust enrichment, and the operation of constructive trusts, will be discussed in turn.
Faithless fiduciaries must not only compensate their beneficiaries for any losses incurred as a result of a breach of fiduciary duty but must also disgorge any gains from the breach. In cases involving corruption, Canadian common law courts have frequently found that employees and other agents are fiduciaries of their employers or principals – they have imposed fiduciary duties even in cases where the fiduciary nature of the relationship was not explicitly agreed between the parties.
A recent example that shows this principle in operation is Enbridge Gas Distribution v Marinaccio, where the defendant was an operations supervisor for the plaintiff.96 He engaged in a multi-year fraudulent scheme, hiring fake contractors and approving invoices totalling CAD 6.5 million to do maintenance work on the plaintiff’s property. No work was ever done; Marinaccio divided the proceeds of the scheme with two co-conspirators who posed as contractors.97 Although Enbridge reached a settlement with Marinaccio, the court held that his co-conspirators were jointly and severally liable for the full amount of Enbridge’s losses for having committed the tort of knowing assistance in breach of a fiduciary duty.98