The Civil Law Consequences of Corruption Under South African Law




© 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_15


15. The Civil Law Consequences of Corruption Under South African Law



Tjakie Naudé 


(1)
Private Law, University of Cape Town, Middle Campus, Kramer Law Building, Rondebosch, 7707 Cape Town, South Africa

 



 

Tjakie Naudé



Abstract

South Africa has a fairly robust legislative framework to tackle corruption and is also party to several international conventions against corruption. The common law of contract regards the bribe agreement as void and the main agreement procured by corruption as voidable due to improperly obtained consensus. Whilst the bribe-giver would in principle not be entitled to claim restitution of the bribe, the rules on restitution are flexible and aimed at equitable outcomes. There are still some questions on the common law of contract and delict relating to bribery which would benefit from guidance by the courts, including in relation to restitution in respect of the main agreement. Public procurement contracts procured by corruption are likely to be challenged under administrative law. Legislation requires that contracting authorities cancel such contracts. Unsuccessful tenderers have locus standi to challenge procurement tender awards, inter alia on the basis of corruption. They as well as parties involved in contracts may claim damages on several different bases if fraud or corruption can be proved. There is a perception that corruption is endemic in public procurement tender processes and that enforcement of anti-corruption legislation should be improved. It is to be hoped that the current review of the public procurement legislation would lead to less complicated and clearer legislation, as the current regulatory framework is overly complicated and difficult to police. Corruption must be addressed on various fronts, including through concerted information campaigns emphasising the deleterious effects of corruption.



15.1 Introduction


It is a well-known fact that corruption detrimentally affects everyone in society.1 In the case of government contracts, corruption results in the diversion of government funds away from the most cost-effective and meritorious bid and away from the real needs of the country, to the detriment of the most vulnerable citizens. In this way and others, corruption impacts on the state’s duty to protect and promote human rights, including the rights to equality, human dignity, freedom, security of the person, administrative justice and socio-economic rights, such as the rights to education, housing and healthcare.2 Corruption impacts on the right to equality, for example, as it discriminates against those who cannot afford or rightly refuse to practise it, and “so denies them access to public services and the due benefits of the rights given by the Constitution”.3

The South African Constitutional Court has stated that corruption

blatantly undermines the democratic ethos, the institutions of democracy, the rule of law and the foundational values of our nascent constitutional project. It fuels maladministration and public fraudulence and imperils the capacity of the State to fulfil its obligations to respect, protect, promote and fulfil all the rights enshrined in the Bill of Rights. When corruption and organised crime flourish, sustainable development and economic growth are stunted. And in turn, the stability and security of society is put at risk.4
The court also pointed out that corruption discourages foreign investment and aid and “is a key element in economic under-performance and a major obstacle to poverty alleviation and development”.5 It also fuels elitism and a growing wealth gap.

Corruption in governmental and non-governmental contracts also prejudices the unsuccessful competitors of the bribe-giver, who are unable to compete with the bribe-giver on the basis of lawful competition and free enterprise.6 In addition, the shareholders of companies affected by bribery are prejudiced. For example, the innocent company whose employee accepted a bribe may have lost the opportunity of a more advantageous contract than the one concluded with the bribe-giver or suffered loss due to over-charging by a corrupt service provider.7

If corruption is not addressed effectively, it may become systemic in society. As Squires J said in S v Shaik, 8 corruption

can truly be likened to a cancer, eating away remorselessly at the fabric of corporate probity and extending its baleful effect into all aspects of administrative functions, whether State official or private-sector manager. If it is not checked, it becomes systemic and the after-effects of systemic corruption can quite readily extend to the corrosion of any confidence of anyone who has a duty to discharge, especially a duty to discharge to the public, leading eventually, and unavoidably, to a disaffected populace. One can, hopefully, discount the prospects of it happening in this country. But it is that sort of increasing disaffection which leads, and has led in other parts of our continent and elsewhere, to coups d’etat or the rise of Populist leaders who, in turn, manipulate politics for even greater private benefit.
Corruption is a serious problem in South Africa. In 2011, the head of the Special Investigating Unit reported to Parliament that between R25 and 30 billion9 (about 20 % of the government’s annual procurement budget) was lost to “corruption, incompetence and negligence”.10 Some reported cases also demonstrate the scourge of corruption in tender awards and there have been several high-profile corruption scandals.11 The current President himself is suspected of receiving bribes in a controversial international arms deal involving European suppliers who allegedly paid bribes, but ironically the President has openly acknowledged in speeches that the country has a problem with corruption and undertook to address it.12 South Africa ranks at 72nd out of 177 countries on the 2013 Corruption Perceptions Index of Transparency International, well below four other African countries, namely Botswana,13 Namibia,14 Rwanda15 and Ghana.16 South African companies are also active in a number of other countries perceived as very corrupt,17 yet there has been no prosecution that went beyond the preliminary stage or request for international cooperation in respect of the country’s foreign bribery offence,18 whereas it is likely that unlawful political and economic considerations may have contributed to this state of affairs.19 The OECD Working Group (when considering implementation of the OECD Anti-Bribery Convention20) recently raised various concerns with enforcement, such as the resources available to prosecutors, the lack of cooperation between police and prosecutors from the outset of investigations, public perception of political interference with the National Prosecution Authority, and of serious reprisals against whistle-blowers, as well as that large fines were only imposed on juristic persons in a small number of cases.21 However, at least the enforcement situation is not completely dire. For example, 746 KwaZulu-Natal civil servants were reported to the police in the 2012/2013 financial year for corruption involving more than R30.8 million, of which 546 were sentenced to imprisonment.22 Civil society, opposition political parties and the courts also play a role in the fight against corruption. For example, a court challenge by the non-governmental organisation, Freedom under Law, against the decision to withdraw corruption charges against former Crime Intelligence boss, Richard Mdluli, resulted in charges being reinstated against him.23 The Democratic Alliance, the main opposition party, is also gearing up to bring a court challenge to the decision to drop corruption charges against President Jacob Zuma.24

South Africa has a fairly good legislative framework to tackle corruption.25 Firstly, it should be noted that South Africa is a signatory to the following conventions aimed at tackling corruption: the UN Convention against Corruption,26 the UN Convention against Transnational Organised Crime,27 the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions,28 the African Union Convention on Preventing and Combating Corruption29 and the Southern African Development Community Protocol against Corruption.30

The Constitution of the Republic of South Africa also has a clear anti-corruption stance. Inter alia, it provides that state officials must exercise their administrative capacity “impartially, fairly, equitably and without bias”, that public procurement must take place “in accordance with a system which is fair, equitable, transparent, competitive and cost-effective”31 and that government must be accountable, responsive and open.32 In addition, the Constitutional Court has held that “[t]he Constitution is the primal source for the duty of the State to fight corruption” given that “corruption has deleterious effects on the foundations of our constitutional democracy and on the full enjoyment of fundamental rights and freedoms”.33 The Court therefore affirmed the state’s duty under the Constitution and binding international agreements to create an independent body to fight corruption.34 As a result, it declared as unconstitutional the legislation creating the Directorate for Priority Crime Investigation (“the Hawks”) within the South African Police Service as that body was not independent enough (which legislation also disbanded the very effective Directorate of Special Operations (“the Scorpions”), that was located within the National Prosecution Authority and that was sufficiently independent).35

A range of “public law” legislation aims to give effect to the state’s duty to prevent and tackle corruption.36 For example, the Prevention and Combating of Corrupt Activities Act (hereafter “the PRECCA”) provides for various offences relating to corruption, including offences relating to public officers,37 to foreign public officials (defined fairly widely),38 to contracts (in both the private and public sectors),39 to procuring and withdrawal of tenders40 and to acquisition of private interests in contracts, agreements or investments of a public body.41 The Act also provides for offences relating to accessories to or after an offence and attempt, conspiracy and inducing another person to commit an offence.42 Section 3, which, in addition, creates a general offence of corruption, provides that:



  • Any person who, directly or indirectly-

    (a)

    accepts or agrees or offers to accept any gratification from any other person, whether for the benefit of himself or herself or for the benefit of another person; or

     

    (b)

    gives or agrees or offers to give to any other person any gratification, whether for the benefit of that other person or for the benefit of another person,

    in order to act, personally or by influencing another person so to act, in a manner-

    (i)

    that amounts to the-

    (aa)

    illegal, dishonest, unauthorised, incomplete, or biased; or

     

    (bb)

    misuse or selling of information or material acquired in the course of the exercise, carrying out or performance of any powers, duties or functions arising out of a constitutional, statutory, contractual or any other legal obligation;

     

     

    (ii)

    that amounts to-

    (aa)

    the abuse of a position of authority;

     

    (bb)

    a breach of trust; or

     

    (cc)

    the violation of a legal duty or a set of rules,

     

     

    (iii)

    designed to achieve an unjustified result; or

     

    (iv)

    that amounts to any other unauthorised or improper inducement to do or not to do anything,

     

     
is guilty of the offence of corruption.

Juristic persons can also be guilty of offences under the Act. Burchell explains that the South African Criminal Procedure Act43 imputes to a juristic person “the crimes of persons acting on instructions of a director or employee of the corporate body, in the exercise of the director or employee’s powers, in the performance of the director’s or employee’s duties or ‘in furthering or endeavouring to further the interests’ of the corporate body”.44 The latter phrase in the legislation covers the situation where the director or servant acted beyond his powers or duties.45 Burchell suggests, however, that the South African principles on corporate criminal responsibility need review.46 He argues for application of the “organisational theory of collective responsibility, founded in both the outward manifestation of the policy and practices of the corporation and an evaluation of whether the stated policy of the organisation is actually adhered to in practice”. He also refers with apparent approval to the Australian Criminal Code Act, under which the corporation may also be liable where the board of directors or a senior manager “expressly, tacitly or impliedly authorised or permitted the commission of the offence”.47 In addition, an Australian corporation would be “held to have actively committed the conduct elements of an offence when their occurrence was caused by or encouraged by the culture of the corporation”.48

There is a presumption in the PRECCA that the person who agreed to accept gratification from or give gratification to certain officials or persons did so for a corrupt purpose, where the state can show that it was not able with reasonable certainty to link the agreement to accept or give the gratification “to any lawful authority or excuse on the part of the person charged”, “in the absence of evidence to the contrary which raises reasonable doubt”.49 In addition, it is no defence that the accused did not have the power, or did not intend, or failed to perform the act in relation to which the gratification was offered or accepted.50

This Act also provides for extra-territorial jurisdiction. If an act alleged to constitute an offence occurred outside South Africa, a South African court has jurisdiction in respect of that offence, if the person to be charged is a South African citizen or resident or was arrested in South Africa or its territorial waters or on a ship or aircraft registered in South Africa or is a South African company or any body of persons in South Africa.51 In addition, offences under the Act are deemed to have been committed in South Africa if the act affects or is intended to affect a public body, business or any person in South Africa, or if the person committing the act is found to be in South Africa and is not extradited by South Africa.52

The Act further provides that a court may order that the particulars of persons or enterprises convicted of an offence in respect of corrupt activities relating to contracts or to procuring and withdrawal of tenders (as well as that of related parties) be endorsed on the Register for Tender Defaulters.53 This has the effect that any agreement with the convicted person or enterprise may be terminated by the National Treasury,54 which may also lead to liability for damages.55 In addition, endorsement on the Register would lead to exclusion from tender processes.56 However, it appears that only the particulars of very few persons have been included on the Register.57

Conviction of corruption also leads to a disability to hold certain positions or offices58 and may lead to liquidation of the company involved.59

Another statute worth mentioning is the Prevention of Organised Crime Act60 (POCA) which, in the context of bribery, entitles the state to confiscate the bribe paid or offered, as it amounts to property instrumental in, and not merely incidental to the commission of the offence of corruption.61 If the prosecutor can prove on a balance of probabilities that the property is either the instrumentality of the offence or the proceeds of crime, there is no need for a criminal conviction to obtain asset forfeiture.62

As this contribution will focus on the civil law consequences of corruption, it could just be mentioned briefly that legislation and other initiatives in South Africa also create measures which may assist in the prevention of corruption.63 Apart from the public procurement legislation regulating the tender process,64 general accounting and financial reporting requirements and anti-money laundering legislation spring to mind.65 Publicly listed companies, state-owned entities and entities with a certain “public interest score” must also have social and ethics committees, who are tasked with (inter alia) monitoring the company’s activities in relation to the reduction of corruption and in terms of the goals and purposes of the “OECD recommendations regarding corruption”.66 Therefore these committees are tasked with (inter alia) monitoring the company’s progress in relation to adequate ethics and compliance programmes or measures for preventing and detecting bribery. In addition, subordinate legislation and self-regulation in certain industries have placed limitations on the practice of giving gifts.67

Before addressing the private law consequences of corruption in Sect. 15.3 and further below, some definitions and terminology will be set out in the next part below.


15.2 Definitions and Terminology



15.2.1 Definition of Bribery and Corruption


Corruption is not easy to define, and views may differ in different societies on whether a gift or other benefit amounts to corruption or not.68 The current President of South Africa, previously accused of corruption, has been reported in the popular press as suggesting that only the “Western paradigm” regards corruption as criminal.69 Nevertheless, there is a growing consensus internationally, including in Africa, on the essence of the wrongful act of corruption.70

In Arrow Altech Distribution (Pty) Ltd v Byrne and another,71 it was held that giving gifts to current and potential clients, including DVDs, alcohol purchases, gift baskets and tickets for sports event are prima facie contraventions of the PRECCA.72 The court rejected the argument that “it was a cut-throat industry and that such practices were widespread” and added that: “I appreciate that small tokens of gratitude or generosity might well fall under the de minimis non curat lex rule but the amounts involved were such as to take it outside the application of such a defence”.73

As a result, the court refused to grant relief to an employer who extensively used such gifts to woo customers and who sought to enforce a post-employment restraint of trade against former employees.74 The court held that “the maxim that a party must approach the court with clean hands has endured from time immemorial and seems apt in these circumstances”.75


15.2.1.1 Definition Under the Common Law of Contract76


In Plaaslike Boeredienste (Edms) Bpk v Chemfos (Bpk),77 a leading case on the effect of bribery under the common law of contract, the court held that bribery occurs where one party (the bribe-giver) gave or promised the agent (in a wide sense78) of another party (the principal) a secret benefit (such as a gift or compensation), without the principal’s knowledge, with the intention of influencing the agent in favour of the donor in relation to the business or affairs of the agent’s principal.79

Subsequently, the Supreme Court of Appeal in Extel Industrial (Pty) Ltd v Crown Mills (Pty) Ltd 80 identified the elements of bribery (as a ground for voidability of the main contract) as

(i) a reward (ii) paid or promised (iii) by one party, the briber, (iv) to another, the agent (who may be an agent in the true sense or merely a go-between or facilitator), (v) who is able to exert influence over (vi) a third party, the principal (vii) with the intention that the agent (viii) should induce the principal (ix) without the latter’s knowledge and (x) for the direct or indirect benefit of the briber (xi) to enter into or maintain or alter a contractual relationship (xii) with the briber, his principal, associate or subordinate.81
It is therefore not necessary to prove that the innocent party suffered any prejudice – the conclusion of the contract itself is the harm.82


15.2.1.2 Definition Under Criminal Law


As noted above, the general offence of corruption under the PRECCA is committed when a person “directly or indirectly gives or agrees or offers to give to any other person any gratification, whether for the benefit of that other person or for the benefit of another person, in order to act, personally or by influencing another person to act, in a manner that amounts to the abuse of a position of authority…or the violation of a legal duty or a set of rules”.83


15.2.2 Typical Fact Patterns


Bribery can take a number of forms. In some instances, the briber influences an innocent potential contracting party’s agent through an inducement such as a secret profit to the agent. The agent then contracts on behalf of his innocent principal with the briber. The hallmark of the bribe in this case is the secret nature of the gift.84

A somewhat more complex fact pattern exists where an agent (A1) is authorised to contract on behalf of his principal (P) with a third party’s agent (A2), acting on the third party’s behalf, but unbeknown to the two principals, A1 pays a bribe to A2, in order to secure the contract at a specific price. The question then arises whether the innocent third party may rescind the main contract with P as it was induced by bribery, even though P was not aware of the bribe himself. This will be discussed in Sect. 15.4.1 below.


15.2.3 Terminology


The agreement between the bribe-giver and bribe-taker will be referred to as the bribe agreement. The agreement procured as a result of the corruption will be referred to as the main agreement. The concept “agent” will at times be used here in a wide sense to include any person in a fiduciary position, such as an employee or director of a company.


15.3 Contracts Providing for Corruption



15.3.1 Invalidity of Agreement to Pay a Bribe


The bribe agreement between the bribe-giver and bribe-taker is clearly invalid for being illegal under the South African common law of contract. Not only is such an agreement prohibited by statute,85 and for that reason illegal and unenforceable, but it has also always been generally regarded as immoral (contra bonos mores).86 The maxim ex turpi causa non oritur actio prevents an action for enforcement of the bribe agreement.

A party seeking to enforce the bribe agreement would not be able to rely on the fact that payment of bribes has become a generally accepted business practice in their business context.87 It remains an illegal practice.

If the bribe-giver pays an agent a fee in return for the agent agreeing to pay a bribe to a third party’s agent (the bribe-taker), the agreement between the two agents constitutes the illegal bribe agreement. However, the initial agreement between the briber and agent is concluded for the illegal purpose of facilitating the conclusion of the bribe agreement and so is also illegal and void. The definition of the “general offence of corruption” in s 3 of the PRECCA is also wide enough to encompass conclusion of such an initial agreement.88

South African law does not prohibit the use of intermediaries in procurement contracts or international commercial contracts in an effort to prevent corruption.


15.3.2 Restitution of Bribe to Bribe-Giver?


Under South African law, the bribe-giver would generally not be entitled to restitution of the bribe upon rescission of the bribe agreement.89 The maxim in pari delicto potior est conditio defendentis (the “par delictum rule”) excludes a claim for restitution.

Whereas South African courts recognise that the par delictum rule may be relaxed when it is necessary to prevent injustice or to promote public policy,90 it is unlikely that the bribe-giver would be entitled to claim restitution of the bribe purely on this basis. Public policy demands that the heinous crime of bribery be treated “with abhorrence” and prevented as much as possible and to take away the briber’s risk of losing his bribe money and gaining no advantage in return would just increase corruption. It is generally not unjust for the plaintiff to lose the bribe itself.

In one case, a division of the High Court recognised that the “principle that courts should not, as a matter of public policy, enforce contracts involving the perpetration of illegal acts in friendly foreign countries, was a sound and salutary one which ought to be adopted and applied in South African courts” and this principle influenced the court to hold that the par delictum rule should also not be relaxed on the facts of that case.91 This consideration may be relevant in the case of the bribery of foreign public officials in contravention of the PRECCA and the rules of the foreign country involved.

Are there, however, any conceivable exceptions under which the bribe-giver may be entitled to restitution of the bribe from the bribe-taker? In Limbada v Dwarka,92 the court noted obiter that the bribe-giver may perhaps obtain restitution of the bribe at the forthcoming trial, in view of the qualifications placed upon the par delictum rule in Jajbhay v Cassim.93

If the bribe-giver (say a foreigner) was unfamiliar with the law prohibiting bribery (including with the OECD Anti-Bribery Convention) and was fraudulently misled in this regard by the bribe-taker, could the bribe-giver rely on absence of knowledge of wrongfulness and therefore absence of intention/dolus in respect of the payment of the bribe and argue that the parties were in fact not in pari delicto or, at least, that “simple justice between man and man” justifies relaxation of the par delictum rule?94 Could a similar argument be made if the bribe was paid under duress or undue influence? There is apparently no South African case law directly on point, although cases on other types of illegal contract allowed restitution where the person to whom the consideration was given “has a species of power over the other, so that the latter does the act under coercion” and “it is a case of oppressor and oppressed”, or where there was fraudulent misrepresentation.95

There is authority, however, that the English law rule that money paid for an illegal purpose may be recovered where the contract has not yet been performed (thereby recognising a locus poenitentiae or opportunity to repent), does not form part of South African law.96

The bribe-giver may in any event not have a chance to get restitution if the payment of the bribe comes to the attention of governmental authorities, who are entitled to confiscate the bribe anyway under the asset forfeiture legislation.97

In addition, if asset forfeiture does not take place, the bribe-taker’s principal, if innocent of corruption, could also legitimately claim the bribe under the common law of agency, which obliges the agent to account to his/her principal for any profits and advantages “which in any way came to [the agent] in connection with the agency”, including secret profits like a bribe.98 In this context, there is obviously no imputation of the knowledge of the corrupt agent to the innocent principal.

A court would order an agent to render a full account on proof that the agent agreed to a bribe, regardless of whether the bribe was received.99 Durand v Louw 100 held that “where a principal consents to his agent receiving his remuneration from the other side, without specifying the amount thereof, the agent is entitled to receive and retain only such remuneration as is usual and customary; if he receives more than that, he is bound to account to his principal for the surplus, and failure on his part to do so will amount to the acceptance by him of a secret bribe or commission, involving forfeiture to his principal of the entire commission received by him”.

A similar rule on secret profits and bribes applies to anyone in a fiduciary relationship to another, including to employees, partners and directors.101 In Ganes and Another v Telecom Namibia,102 the court explained that this is not a claim for damages, but that the “bribes or secret commissions received in the course of [an employee’s] employment or by means of his employment in breach of his fiduciary duty to the employer are deemed to have been received for his employer”.103 Outside the established categories of fiduciary relationships, a court will hold that a fiduciary relationship exists with the same rule as to secret profits if there “is evidence of a mutual understanding that one party has relinquished its own self-interest and agreed to act solely on behalf of the other party”, regardless of whether there is contractual privity in a narrow sense between the parties.104


15.4 Contracts Procured by Corruption



15.4.1 Main Agreement Voidable at Instance of Innocent Principal Under the Common Law of Contract


The South African common law clearly recognises that the main agreement between the bribe-giver and the bribe-taker’s innocent principal is voidable at the instance of the latter.105 The principal who comes to know that its agent was involved in bribery in relation to the main contract may therefore decide to rescind or uphold the main contract. Rescission takes place extra-judicially.

It was held in Extel Industrial (Pty) Ltd v Crown Mills (Pty) Ltd that to treat the main contract as void as opposed to voidable at the behest of the innocent principal would be “to punish the innocent for the sins of the guilty”.106 It would also limit the innocent principal to remedies against the briber and bribe-taker, which may be worthless.107

The South African common law of contract therefore recognises bribery as one of the four specific grounds of voidability on the basis of improperly obtained consensus (the other three being misrepresentation, duress and undue influence).108 The Appellate Division in Plaaslike Boeredienste (Edms) Bpk v Chemfos (Bpk) 109 explained the voidability of the main agreement at the instance of the innocent principal on the basis that the contract was obtained by “an immoral and illegal act”.110 The court specifically cautioned that it was not correct to base the right to rescind the contract on “fraud”, but rather on the unlawfulness of the method used to induce the principal to conclude the contract.111 Similarly, in Extel Industrial (Pty) Ltd v Crown Mills (Pty) Ltd the court held that the similarities between bribery and the other three grounds of voidability “must not, however, disguise the differences that do exist, in particular the abhorrence with which the law views the conduct of a briber, which in turn may have repercussions elsewhere”.112

In Extel Industrial (Pty) Ltd v Crown Mills (Pty) Ltd,113 the Supreme Court of Appeal held that once bribery was proved, the briber wishing to enforce the main agreement bears the evidential burden of showing that the bribery was unrelated to the main agreement.114 In this regard the court distinguished between two types of agreements following upon the bribery agreement. There would obviously be a causal link between the bribery and “the particular transaction contemplated by the bribery agreement which is concluded as a direct and immediate result thereof”.115 Questions of causation become more pertinent in relation to the general contractual relationship established as a direct result of the bribery which leads to later agreements. The court held that where “the agreements sued upon are of the very kind contemplated when the bribery was conceived”, there would be a sufficient causal link.116 On the facts, the immediate cancellation by the innocent principal of the main contracts once the bribery was discovered, showed the causal relationship between the bribery and such later agreements.117

It is arguable that the mere fact that the innocent party’s consent to contract has been obtained improperly through the heinous crime of bribery should justify the rescission of the contract, even if the innocent party admits that he would have concluded the contract in any event, but on other terms.118

A contracting party who wishes to rescind based on bribery must do so within a reasonable time after becoming aware of the bribery, as otherwise he may be held to have elected to uphold the contract.119

It is clear that South African law generally does not resort to notions of mistake or the limited nature of the agent’s power to bind his/her principal as justification for the voidability of the main agreement. Nevertheless, an alternative construction could be that an agent normally does not have the power to conclude a contract influenced by a bribe on behalf of his principal, so that the contract could be regarded as void for lack of authority, whereas the principal may however ratify the agreement. However, it is conceivable that in some cases the agent did have authority to enter into the contract, but not to receive a bribe, in which case the contract is not void for lack of authority, but still voidable for being induced by bribery, unless the briber can show that there was no causal link between the bribe and the main contract.120

Of course, the guilty knowledge of the agent bribe-taker cannot in this context be imputed to the principal who is unaware of the bribery and wishes to rescind the main contract after discovering the bribery, as the “common law rule as to the imputation of knowledge by an agent to his principal can never be stretched to cover the situation where the agent is engaged in an activity to the detriment of his principal which he would of necessity have kept secret from him”.121

As noted before, the situation may conceivably arise where an agent (A1) is authorised to contract on behalf of his principal (P) with a third party’s agent (A2), acting on the third party’s behalf, but unbeknown to the two principals, A1 pays a bribe to A2, in order to secure the contract at a certain price. The question then arises whether the innocent third party may rescind the main contract with P as it was induced by bribery, even though P was not aware of the bribe himself.

In Randbank Bpk v Santam Versekeringsmaatskappy Bpk,122 the court confirmed the voidability of an insurance contract due to fraudulent misrepresentations by omission on the part of the appellant’s representative at the time of conclusion of the contract (even though the appellant was unaware of the misrepresentations).123 Although there is apparently no case law on whether unauthorised bribery should be treated similarly to unauthorised fraudulent misrepresentation in this context, it is submitted that it should be, as long as the agent paid the bribe while fulfilling the functions to which he was appointed (the conclusion of the contract on behalf of the principal). The court in Randbank explained that where one of two innocent persons must suffer for the fraud or negligence of a third person, the one who authorised him to act should bear the prejudice.124 The court added that where a principal authorises an agent to conclude a contract, which is then obtained through a fraudulent or corrupt act, the principal, when claiming the benefits of the contract, must accept the contract with the taint (Afrikaans “smet”) that may cling to it as a result of the agent’s conduct, even if the principal is not involved in that conduct at all.125 Steyn CJ approved of the following passage from an English case:

Every person who authorises another to act for him in the making of any contract undertakes the absence of fraud in that person in the execution of the authority given as much as he undertakes for its absence in himself when he makes the contract.126
An arbitral tribunal applying South African law has held that an employer of the bribe-giver may be held responsible for the bribery, and would therefore have to accept rescission by the innocent third party whose agent received the bribe, if the employee paid the bribe in the course and scope of his employment.127 The tribunal’s reasoning in this regard is not set out in any depth in the reported decision. The vicarious liability of an employer or principal for loss caused by bribery on the part of his employee or agent is discussed below in Sect. 15.5.1.


15.4.2 Validity of Main Agreement in Some Circumstances


There is apparently no South African case law on whether the principal would be entitled to rescind merely a part of the agreement tainted by corruption. Nevertheless as the agreement is voidable at the instance of the principal, there does not appear to be a reason why rescission could not occur only in respect of the affected part if it is severable from the rest.

To prevent corruption, s 75 of the Companies Act128 provides that directors must disclose personal financial interests in matters to be considered at board meetings and may then not take part in the consideration of the matter and must not execute any document on behalf of the company in relation to the matter, unless specifically requested or directed to do so by the board.129 If the director failed to disclose the personal financial interest in a matter, the relevant decision by the board or transaction or agreement approved by the Board would however be valid if ratified by an ordinary resolution of the shareholders. A court may also, on application by any interested person, “declare valid a transaction on agreement that had been approved by the board, or shareholders as the case may be, despite the failure of the director to satisfy the requirements of this section”.


15.4.3 Unwinding the Main Contract in Terms of the Common Law of Contract


Restitution by the innocent party should not be regarded as a prerequisite for the rescission itself, but a consequence of rescission and, in principle, a prerequisite for a claim for restitution against the other party.130 In Extel Industrial, the Supreme Court of Appeal stressed that where the rescinding party, through no fault of his/her own, cannot make physical restitution of the performance by the bribe-giver, eg because such performance was in the form of delivery of perishables, this in itself is no bar to rescission of the agreement on the basis of improperly obtained consensus.131

As noted above, however, a court will generally not grant restitution to the innocent party unless the latter tenders restitution, in order to prevent unjustified enrichment.132 But the innocent party may be excused from making restitution where equity requires this.133 In a leading case on fraudulent misrepresentation, Feinstein v Niggli,134 the court held that

the deterioration in condition or the depreciation in value of the subject-matter of the contract while in the representee’s possession will usually not preclude restitutio if that occurred in the ordinary course of events, or through its being used in the normal way as contemplated by the parties, or through some inherent defect or weakness in the subject-matter itself, and was not due to any fault of the representee…. Even where the deterioration or depreciation is due to the representee’s fault, restitutio is not necessarily precluded, for the Court may allow him to adjust the deficiency by a monetary compensation.135
However, in Extel Industrial,136 the court in an obiter dictum went even further than cases like Feinstein v Niggli, by suggesting that it would have been extremely difficult for the bribe-givers to show entitlement to the value of the perishables they delivered on the basis of equity or justice, given that it was arguable that their conduct was “so scandalous, so morally reprehensible that no court should come to their assistance”.137 The court emphasised that the rules on restitution are “founded on equitable considerations138 and went on to say that:

[i]f the briber is disqualified from claiming either performance (because of the maxim ex turpi causa non oritur actio) or restitution (because of the par delictum rule) from the party he bribed, there is no apparent reason why he should be treated more leniently when he seeks restitution from the party he duped. It is true that in the one case the agreement is void and in the other it is voidable, but that in itself is no reason for refusing him relief in the one case but granting it to him in the other, since his conduct in both instances is equally culpable. In both instances there may of course be circumstances justifying a relaxation of the rule which would otherwise disqualify him from claiming restitution.139
The court also pointed out that the bribers’ argument that it could claim the purchase price as that reflected the value of the perishables comes down to saying that the principal “could only rescind the contract by performing the contract”.140

The obiter dicta in Extel laying down a general rule that the bribe-giver would generally not be entitled to restitution could perhaps be criticised on the basis that there is insufficient reason to disadvantage the perpetrator of bribery so much more than the perpetrator of fraud or duress (even though arguably bribery is more morally reprehensible, certainly according to the court in Extel). It is therefore possible that a court would in future decide that the point of departure should still be mutual restitution, but that the innocent party may be excused from restitution where this is reasonable, as in the case of fraud, duress and undue influence. In many instances, the bribe-giver’s performance under the main agreement would be very valuable and it would be unfair if the innocent party can get restitution of its own performance and keep the bribe-giver’s performance without paying anything for it.141

What is more, the general principle that the innocent party (who rescinded a voidable contract) may sometimes be excused if restitution is no longer possible has been criticised, inter alia because it creates “an unfair cumulation of risk on the part of the person committing the fraud”, whereas such a penal element “is foreign to the realm of private law”.142 Visser argues that if physical restitution is not possible, the value of the performance must always be restored and that the delictual claim for damages could be used to prevent the innocent party from having to bear the consequences of the fraud.143 This implies, for example, that if the performance by the bribe-giver has perished due to no fault of the innocent party, the innocent party must pay the value of the performance as restitution, but may then claim that amount back as delictual damages. However, the innocent party should at the least be excused from restitution if the impossibility to make restitution is attributable to the other party (such as where the goods perished due to an inherent defect).144

On the other hand, the danger of corruption becoming systemic, its serious harmful effects as well as the strong anti-corruption stance in the Constitution and legislation probably justify a stricter restitution regime than that applicable to the other three specific grounds of voidability for improperly obtained consensus, along the lines suggested in the Extel case. Accordingly, on balance, the point of departure should be that the bribe-giver is not entitled to restitution, but that the court retains discretion to relax that rule if necessary to prevent injustice and to promote public policy.

Of course, if both parties to the main agreement were aware of the bribe, the par delictum rule would prevent a claim for restitution, but, as noted above, there is also a possibility of relaxation of the rule where it is necessary to prevent injustice and to promote public policy.145


15.4.4 Impact of Administrative Law and Constitutional Law on the Validity of Public Procurement Contracts Procured by Corruption


State organs and similar entities often conclude commercial contracts, typically after following a tender process.146

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