© 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_1
1. The Impact of Corruption on International Commercial Contracts – General Report
UNIDROIT, Via Panisperna, 28, 00184 Rome, Italy
Centre of European Law and Politics, University of Bremen, Universitätsallee GW 1, 28359 Bremen, Germany
Corruption is recognized as one of the major obstacles to the development of international trade today. There seems to be consensus that curbing corruption is a task too big to be met by criminal law alone and that other branches of law have to contribute their part as well. Thus, where contracts are tainted with corruption, there are genuine issues of contract law at stake that need to be decided with a view to effectively protecting victims and at the same time deterring potential wrongdoers. In this report, we shall take a look at contracts providing for bribery as well as the contracts that have been procured by the payment of bribes. The analysis is tailored toward commercial contracts, including also contracts with state-owned enterprises. It shows that, interestingly, different jurisdictions have taken quite different approaches as to whether these contracts can be enforced in court. A second though related problem is whether the wrongdoers, after they have performed their part of the deal, should be punished by denying them restitutionary remedies for their investment.
Corruption is generally considered one of the greatest enemies of international trade. Where corruption runs rampant, fair players are prevented from accessing the market and performance and quality are excluded from competition by those who use bribery as a means of acquiring contracts. It is a problem of vast magnitude: according to a frequently quoted World Bank study, an estimated USD1 trillion in bribes are paid each year.1 Corruption is said to increase the total cost of doing business globally by up to 10 % and the cost of procurement contracts in developing countries by up to 25 %. This means that for the EU alone approximately EUR120 billion, or 1 % of its GDP, is lost to corruption every year.2
The international community has therefore undertaken serious efforts to tackle the problem of corruption; the topic has been of the highest priority since the mid-1990s. Countless sets of rules have mushroomed up from this movement, establishing anti-corruption as a new, independent branch of law. At the peak of this complex regime is a series of international treaties, which have since been ratified by many of the world’s leading industrial nations.3 These conventions are supplemented by domestic anti-bribery legislation, with well-known examples being the US Foreign Corrupt Practices Act (FCPA)4 and the UK Bribery Act.5 The legislative landscape is further complemented by a number of non-governmental initiatives – such as from NGOs, professional organisations or multinational corporations – which use their own rules, recommendations and codes of conduct to strengthen the fortifications against corruption.6 Anti-corruption is therefore nothing less than a prime example of a transnational legal development in which the rules set at international, national and non-governmental level are constantly intertwining with one another.
So far, criminal law has been the weapon of choice for combating corruption. The majority of the international sets of rules contain the central obligation that Member States punish the payment of bribes and related crimes. In particular, the territorial scope of domestic criminal law has been expanded by shifting the focus of attention from the country where the corrupt incident occurred to the supply side of corruption, ie the home country of the bribe-giver. The OECD, aiming to create a level playing field in the international business environment, has declared this tenet (whose origins are in the American FCPA) to be the general principle of its anti-bribery convention.7 However, practical experience has shown that criminal law alone cannot cope with this difficult task; other branches of law must also contribute to achieving this joint objective. Combating corruption has therefore become an en vogue topic in many areas of law such as tax law8 and employment law,9 as well as in optimizing public procurement rules,10 in corporate governance,11 and in arbitration.12
One branch of the law whose role in tackling corruption has thus far been underestimated is general contract law.13 Agreements of a contractual nature are present in many different forms of corruption. In light of the immense economic value embodied in international commercial contracts it is surprising that such little attention has been paid to the legal analysis in this area. Many national reports bemoan the rarity of reported court cases – or even the complete lack thereof – on the civil law aspects of corruption in their respective countries.14 And yet there are two questions that immediately spring to mind: firstly, the question of using efficient civil law remedies to provide optimal protection to the victimsof corruption; and secondly, the broader question of the role of contract law in the prevention of corruption, ie whether and to what extent the contract law regime can deter potential offenders from corruptive behaviour.
The consequences of bribery for the contracts concerned are primarily decided in accordance with the applicable domestic contract law. There have been few efforts to harmonise this area of law at international level; the Civil Law Convention on Corruption15 of the Council of Europe represents the only set of rules so far that has focused entirely on the contractual aspects of corruption. However, for the most part these rules are limited to a general framework which grants the Member States considerable leeway in their respective transpositions and leaves many of the key questions unanswered.
Only rarely can special private law provisions on corruption be found in national legal systems. For instance, the US Racketeer Influenced and Corrupt Organizations Act (RICO) grants treble damages in particular instances of corruption.16 In KENYA, Art 51 of the Anti-Corruption and Economic Crimes Act of 2003 provides that: “A person who does anything that constitutes corruption or economic crime is liable to anyone who suffers a loss as a result for an amount that would be full compensation for the loss suffered”. Also, in several jurisdictions private law rules on corruption can be found in the national legislation on unfair competition.17
However, the analysis of contracts tainted by corruption takes place usually within the framework of general contract law. Illegality and immorality, fraud and mistake, collusion and restitution are among those rules that immediately spring to mind. This area of law is known to vary considerably from country to country, and moreover, it is generally perceived as very complicated and embedded with public policy considerations.18 How does one then get past these boundaries which impede a discussion on the most appropriate remedies in international corruption cases?
1.2 Corruption and International Commercial Contracts
1.2.1 On Defining Corruption
The worldwide unanimity when it comes to condemning corruption is deceiving, as there is no uniform understanding about what the term corruption means. There are indeed a near infinite number of actions that could in everyday language be branded as “corrupt”; yet, at a legal level an entirely different analysis may be needed in each instance. Defining its own subject matter is thus one of the greatest challenges facing the anti-corruption movement.19 Each concept of corruption has to overcome different obstacles: firstly, the national borders – what may be unproblematic in one area of the world may in fact trigger severe punishment in others; secondly, inter-disciplinary boundaries – corruption is not just a legal topic but is also heavily researched in other scientific disciplines; finally, the intra-disciplinary boundaries – the perspective varies between the different branches of the law, and a working definition that fits the discussion of the criminal law aspects of corruption may thus be unfit for the purposes of private law, tax law or public procurement.
Instead of attempting to provide an abstract definition of corruption for specific aspects of private law, we will instead examine which instances of bribery are typically encountered by courts and arbitral tribunals in relation to international commercial contracts. The starting point is the following (fictitious) scenario:
Contractor A of country X enters into an agreement with intermediary B (“the Commission Agreement”) under which B, for a commission fee of USD1,000,000 would pay, on behalf of A, USD10,000,000 to C, a high-ranking procurement advisor of D, the Minister of Economics and Development of country Y, in order to induce D to award A the contract for the construction of a new power plant in country Y (“the Main Contract”). B pays C the USD10,000,000 bribe and D awards the main contract to A.
1.2.2 A Basic Model of Corruption
In its simplest form, a typical corrupt exchange can be seen as a triangular relationship between a principal, his agent and a bribe-giver. The selection of a principal-agent model as a starting point is not by accident, but reflects the prominent standing this model has held in the research on corruption since the 1970s.20 This model is especially suitable for the analysis of the private law side of corruption, as it allows for the clearest depiction of the legal relationships between the different actors. This is because such a triangular structure between principal, agent and bribe-giver also corresponds to a triangular contractual relationship in private law.
The base of the triangle is formed by the relationship between the principal and his agent. This particular relationship can take many shapes in the modern business world; an agent can be, for instance, an employee in the procurement department, but also the CEO of a large multi-national company. The terms used here are understood in a broad context. In the aforementioned example, C is the agent and the Ministry D (where he is employed and which becomes party to the contract with bribe-giver A) is his principal. The connecting factor in all situations is that the agent acts for his principal when negotiating with the third party and should therefore decide not to his own advantage, but rather in the interest of his principal. The principal-agent relationship is therefore characterised by a strong fiduciary element.21
The third party (A) infringes on this fiduciary relationship by secretly affording the agent with an undue advantage, which need not be in monetary form but can encompass everything that the recipient considers valuable and suitable to cause him to undermine his loyalty: jewellery, invitations to expensive trips, even immaterial assets such as honorary titles or granting sexual favours.22 In return for such items, the agent breaches his fiduciary duty by ensuring that the bribe-giver receives preferential treatment with respect to the contract with the principal. This preferential treatment can consist of receipt of the tender, which under fair competition would have otherwise been given to another competitor; alternatively, it can also be used in instances in which the bribe-giver would have nonetheless gained the tender, yet the bribe was paid in order to obtain better conditions.
Under this model it is therefore possible to distinguish between contracts providing for corruption and contracts procured by corruption. For the purpose of this report we shall refer to the contract providing for corruption between bribe-giver and bribe-taker as the “bribe agreement”; the contract between the principal and the bribe-giver that has been procured by corruption is referred to as the “main contract”. Although one could say that both contractual relationships are tainted with corruption, they are not necessarily subject to the same legal consequences. The following shall focus particularly on the enforceability of both of these contracts. In contrast, questions of compensation for corruption – though likewise immensely important in practice – must unfortunately be left aside.23
1.2.3 Advanced Concepts of Corruption in International Commercial Cases
Instances of corruption in practice are often much more complex than can be expressed with a simple three-person framework like the one just introduced. Corruption is a topic that features a multitude of variations and is often connected with additional problems that, although not necessarily present in all instances of bribery, must nevertheless be borne in mind in the abstract search for appropriate legal consequences in the relationship between the parties to a bribe.
22.214.171.124 The Use of Intermediaries
The first additional problem concerns the manner and form in which the bribe is paid. In international trade it is likely that the relevant parties will not know each other personally and will therefore not be sure whether they can trust one another. It goes without saying that the bribe-giver cannot openly approach his business partner’s agent and offer him a bribe. Rather, the illegality of these activities requires that the bribe results from a careful and subtle approach. Accordingly, negotiations concerning bribery often feature intermediaries (like B in the example) in order to ease the transaction.24 Such middlemen often appear as “consultant” or “broker” for their employer.25 Consulting services are common in international trade and can be a sensible approach, for instance with respect to the political or economic situation in the target country or with respect to regional customs and practices. However, amongst the herd of consultants are black sheep whose main or sole activity consists of funnelling bribes to influential people. These people have at their disposal both the political contacts as well as the know-how for such covert transactions.
The legal structure of this exchange often follows the same pattern: A hires B to initiate the conclusion of a contract with D. The precise activities expected of him are described only very superficially in the consultancy agreement.26 The intermediary usually receives a generous contingency fee for his services – it is an open secret between the parties that parts of this fee will be forwarded as bribes to influential persons on the opposite side.27 The contracting company will often not want to know the details in order to be able to claim plausible deniability and thereby protect itself from prosecution.
126.96.36.199 The Victims of Corruption
Furthermore, it is to be noted that, contrary to a widespread cynical view, corruption is by no means a “victimless crime”. Quite in contrast, many bear the brunt of its consequences. The direct effect is felt first by the principal, who often pays an inflated price for the contract with the bribe-giver. In the aforementioned example A would not resort to bribery if he could not gain an advantage that would be at least equal the payment of the bribe to C.28 In practice the resulting loss is probably even much greater than the amount paid as a bribe.
However, the financial loss to the principal is typically not the end of the story: corruption also has indirect negative effects on further parties. If (as in the example) D is a state or a government contractor, it has to cover its additional costs resulting from the inflated price through tax increases or by deducting the amount from other important infrastructure projects. On the other hand, where the victim is a private business, the additional costs will usually fall within the principal’s price calculation and will thereby be passed on to its customers; the price of the products will increase. In both cases, the costs of corruption will thus ultimately be borne by everyone.
A further group of victims can be said to be the competitors of the bribe-giver who, due to the illicit payment made by their rival, have lost the chance to acquire the main contract with the principal for themselves. Market survival depends on at least occasional success in acquiring contracts, as otherwise one quickly loses a position on the market. If there is no chance for bidders to acquire contracts through honest competition, they are then left with the choice between just two undesirable alternatives: either to voluntary retreat from the market or to enter the competition for the highest bribe. This dilemma forms the basis for why particular sectors have such great problems in containing widespread corruption after it has initially occurred.29
Because of this situation it is to be expected that the competitors observe with particular criticism the question of the enforceability of a contract that has been purchased via bribes. If the law does not punish the bribe-giver but instead allows him to retain the contract, it sends a devastating signal to all other market participants to equally resort in the future to such illegal methods. The situation is further complicated by the lack of sufficient protection in the form of damages claims for competitors; there are practically no court decisions in which a competitor has successfully claimed compensation from his corrupt rival.30
188.8.131.52 Shareholder Lawsuits
Ultimately, corruption can also create considerable harm on the bribe-giver’s side. It is easy to overlook that a bribe-giver is not necessarily an economic unity, but, as in the case of a multinational enterprise, can encompass a number of different interest groups. A possible example is that, despite explicit company policy to the contrary, an overambitious manager pays a bribe to secure a contract; then the company and its shareholders are also victims of this corruption if, after the crime has been discovered, the affected contract falls through and, moreover, the prosecution leads to a severe fine.31 This internal conflict of interests forms the background for the current boom of anti-corruption compliance, which aims at reducing the risk of liability through organisational measures.
A relatively new problem is posed by the question of how the liability for these types of damages can be achieved vis-à-vis the company’s shareholders. In this respect the focus of the international discussion has thus far been on US law. A 2010 report by Reuters refers to 37 such proceedings within a 4-year period, 26 of which were settled out of court.32 Here the claimants were seeking compensation for the (in some cases extensive) decline in share price, which was linked to investigations resulting from the American Securities and Exchange Commission’s allegations of bribery.33 An in-depth discussion of the legal circumstances cannot take place here, but nonetheless is to be considered that a decision in contract law on the effectiveness of the main contract creates additional and so far unresolved questions on the liability for the resulting losses.
1.3 Contracts Providing for Corruption
1.3.1 Invalidity of Agreements to Pay a Bribe
The bribe agreement between an agent and a bribe-giver takes place in the shadows of the corruption triangle. The light cast on the other contractual relationships within the triangle means that they are concluded in an open environment, whereas the illegality of the bribe agreement requires darkness to cover the conspiracy and secrecy of the negotiations in which the bribe-giver and agent come together, as well as the subsequent exchange of the benefits.
It is clear that the law must not serve to protect crooks in the performance of their corrupt intentions. Contracts providing for corruption are therefore unenforceable in any court of law. This applies not only to the direct promises of bribes from A to C but also to the commission agreement between A and the intermediary B, so far as the actual task is to arrange the payment of bribes. In terms of the extent of the level of abjection of these contracts, there is no difference. Despite some national variations in the dogmatic underpinnings of nullity34 there appears to be universal agreement with respect to the outcome. One can thus identify the nullity or unenforceability of contracts providing for corruption as a transnational principle of law.35
This principle is clearly expressed in Art 8(1) Civil Law Convention on Corruption: “Each Party shall provide in its internal law for any contract or clause of a contract providing for corruption to be null and void”. In a similar vein, the Trans-Lex Principles, a scientific project administered at the University of Cologne that sees itself as a systematic collection of principles of transnational commercial law, provides that: “Contracts based on or involving the payment or transfer of bribes (“corruption money”, “secret commissions”, “pots-de-vin”, “kickbacks”) are void”.36
It can be observed at national level that the justification for rendering bribe agreements null and void is mainly based on two approaches that are closely related with each other, namely the arguments of illegality and immorality. The concept of illegality is coupled with the notion that a transaction cannot be enforced when it violates mandatory statutory prohibitions. There can be no doubt that the criminal law provisions that penalize corruption represent such statutory prohibitions, as the actions required to perform the bribe agreement are exactly those that trigger liability under criminal law. The immorality argument, on the other hand, is much broader and can play an independent role to set aside a contract in cases of corruption if the contract at issue exceptionally slips through the criminal law net, for instance because the legal system does not prohibit the payment of bribes abroad or particular forms of influence peddling. The overview of the different legal systems does however show that there is not always a sharp dogmatic distinction between illegality and immorality, but rather that both grounds for nullity are given alongside one another and often at the same time.37
It can be observed that the various legal systems offer different approaches towards rendering the bribe agreement null and void. In the Romanic legal family the effectiveness of the bribe agreement fails due its illegal and immoral cause.38 Other legal systems expressly state that contracts are void if they are illegal, or contrary to public order, or violate common moral principles.39 Under the Common Law there appears to be more leeway in deciding the individual case on the grounds of violation of public policy. That being said, here, too, the courts will generally deem a bribe agreement unenforceable.40
There is no difference of outcome with respect to whether widespread corruption is present in one part of the world, even if paying bribes is considered necessary in a special area in order to do business. Although it indeed may sometimes be possible to consider regional customs when assessing the immorality and illegality of a contract – for instance when it comes to the accepted boundaries for gifts or hospitality – this does not at all mean that widespread corruption in a country could legitimise the payment of bribes per se. All national reporters responded negatively to the question of whether the contract between A and B could be effective under the exceptional circumstance that B’s task to facilitate the bribery of public officials constitutes a generally accepted business practice in that country.
Parties to these contracts are of course aware that they cannot rely on the court to enforce their expectations. There have in fact been instances in which one of the parties took advantage of this in order to defraud the other, for example by paying him with counterfeit money.41 However, usually there are more or less stable extra-legal enforcement measures that give sufficient motivation to the parties to adhere to their – legally invalid – promises. For instance, they may hope to repeat the lucrative exchange of favours if they prove trustworthy to their partners the first time, or they are simply afraid of their retaliation.42
Nonetheless, the parties often give their transactions a legal gloss by using mock agreements in order to justify the flow of cash. For example, the agent receives a highly lucrative “consultancy agreement” even though he is not to actually provide any consultancy services. Such a method is often used in engaging intermediaries because their written contracts foresee, in principle, the provision of legitimate services such as consultancy or lobbying. Arbitral tribunals have already had to decide on several cases in which an intermediary sought payment of his commission for facilitating the main contract and the bribe-payer then invoked the nullity of their agreement because it actually aimed at the payment of bribes.43 The claims for payment have so far always been rejected in all instances in which the arbitral tribunal was convinced that the contract with the intermediary actually served to camouflage corrupt enterprises.44
The invalidity of the bribe agreement is to be taken into account ex officio by the court. The parties cannot waive its application, as the invalidity is not ordered for their protection but rather for the protection of greater common values that cannot be disposed of by agreement. Such an approach is also applicable in arbitral proceedings where the tribunal must acknowledge the invalidity of the contract even if neither of the parties had pleaded this aspect. This was the situation in the well-known Lagergren award, in which the sole arbitrator rejected the claim from a contract for the bribery of Argentine public officials.45
Anyone can invoke the invalidity of a contract providing for corruption, including the parties to the agreement themselves. This means that the bribe-giver can refuse to pay the intermediary the commission for the acquisition of the desired contract, referring to its corrupt nature. Some authors and arbitrators have expressed their discomfort with this result. They perceive the benefit to the bribe-giver as being doubly unfair, as he not only betrays the other party to the main contract by bribing his agent, but he also obtains the main contract without having to pay the intermediary if the consultancy contract is voided.46 Thus, the law seems to work to the advantage of the most dishonest of all parties.47 However, economists have shown that undermining the trust between bribe-payer and intermediary is appealing because neither side can then have faith in receiving their counter-performance. This ability to deprive the other party of its expectations has the desirable effect of destabilising a potentially corrupt relationship.48 The Paris Cour d’appel rightly recognised this when it decided:
The invalidity of a commission agreement because of intended bribery is to be distinguished from the situation in which a client employs an intermediary and later refuses to pay the promised commission because the use of intermediaries is generally prohibited in the country in which the main contract is to be procured. Several countries have in fact provided for such a general prohibition as a means of preventing corruption. In OTV v Hilmarton 50 the claimant had procured a contract in Algeria for the defendant even though Algerian law prohibited the use of intermediaries. However, the procurement contract was subject to Swiss law and thus presented the arbitrator with the question of whether the Algerian prohibition was relevant to this contract. This is clearly a conflict of laws problem, namely with regard to the application of overriding mandatory provisions of a third country.51 The respective national conflict rules often grant the court some discretion whether to consider the foreign laws in the individual case. In this respect the national reports differ as to whether a general prohibition of intermediaries, without evidence of a corrupt purpose of the contract, deserves acknowledgment independent of the applicable law.52
The parties’ awareness of the immoral or illicit aim of the contract, required by jurisprudence, is not meant (whatever its actual consequences may be) to lessen the rigor of the sanction of nullity; on the contrary, it aims at reinforcing it by protecting the contracting party who has nothing to reproach himself with as to the conclusion of the contract; the application of the above-mentioned adage aims at preventing performance of an immoral or illicit contract by depriving the party which first executes it of all protection.49
1.3.2 Restitution of the Bribe – The Illegality Defence
The invalidity of the bribe agreement does however give rise to the further question of the fate of those elements of the agreement that have already been performed. The unwinding of an illegal contract falls within the realm of restitutionary remedies. As a general principle, something that has been received on the basis of a legally void contract has to be returned.53 According to this notion it thus appears that the invalidity of the agreement could allow A to demand the return of the bribery payment from C or from the intermediary B.
However, domestic law contains an important exception to this principle of restitution, namely the venerable maxim ex turpi causa non oritur actio. In other words, the parties to the contract should not receive the return of their performance if the invalidity of the contract results contra legem or contra bonos mores. The legal system’s disapproval of the illicit contract is thus not extinguished by the failure of claims for performance, but continues on the level of unjust enrichment. The roots of this illegality defence can be traced back to Roman law, though it has since grown to feature different extents of rigorousness and numerous exceptions in the various legal systems.54
The payment of bribes represents a very clear case of causa turpis, and the majority of legal systems do in fact exclude the bribe-giver’s claim to reimbursement.55 For instance, the ENGLISH national report refers to a case in which the payment of a bribe to an Indian public official did not lead to the conclusion of the desired contract; the claim for reimbursement of the money paid as a bribe failed due to the illegality defence.56 In GERMAN law this rule has been codified in sec 817 Sentence 2 BGB; here, the courts have also rejected claims for reimbursement of bribes.57
184.108.40.206 Reasons for Excluding Restitution
At first glance it would appear that the exclusion of repayment in instances of bribery leads to an absurd result: the corrupt agent does not have to return the bribe to the bribe-giver, and as such, it seems that the law rewards him for his corruptibility. The invalidity of the bribe agreement therefore appears to present him with no disadvantages if he has already received the bribe. In contrast, the bribe-giver is doubly punished, as the law denies him the enforcement of the corrupt agreement as well as the reimbursement of the bribe.
However, the approach does require further explanation, as the striking imbalance between the parties is certainly intentional: the party who performs first is faced with the risk of the entire loss of its performance. In turn, there is no incentive for his contractual partner to fulfil his part of the agreement, as he does not need to expect either claims for performance or reimbursement; he can thus breach the agreement without fear of consequence. Both parties have reason for doubting the honesty of their partners in crime, as both will have already demonstrated that they are willing to use illegal means to cheat their joint contractual partner, namely the principal. However, they nonetheless have to trust each other, because the law offers no protection to their agreement. The one-sided distribution of the economic risk of advance performance thus illustrates that the law intends to undermine the relationship of trust between two potentially corrupt parties.
A further reason for the failure of the claim for restitution can also be given: it would surely be unsatisfactory if the bribe-giver could rely on the assistance from the court in seeking to undo illegal payments. Excluding the claim for repayments thus protects the integrity of the courts, which dishonest parties should not be allowed to use as an instrument to facilitate their wrongdoings.58 In other words, the law does not help those who venture outside of the law, or as the great English humourist AP Herbert translated the ex turpi causa rule: “A dirty dog will get no dinner from the Courts”.59
220.127.116.11 Room for Exceptions
The illegality defence in cases of corruption can be said to be basically sound law. It is based on the clean hands maxim as well as on specific preventative considerations. However, most jurisdictions will not enforce the rule with absolute rigor but give the judge room to take into consideration all the circumstances of an individual case. The question thus arises of whether in cases of corruption there could be exceptional circumstances that argue for the restitution of bribery payments.
18.104.22.168.1 Varying Levels of Fault
The idea of prevention and the aspects on the protection of the court’s dignity both assume that each party has knowingly acted in a reprehensible manner. Where each party has to equally accept the accusation of unlawful behaviour, it is justifiable that the loss remains where it has occurred: in pari delicto potior est conditio possidentis. However, this maxim can be questioned in instances in which the performing party is not – or is only minimally – guilty, ie has not acted in pari delicto.
A conceivable example would be a mistake of a party regarding the legality of its behaviour, although from a semantic perspective we probably would not speak of bribery if the payer did not knowingly pursue a corrupt intent. In AUSTRIA, a claimant was reimbursed with the payment he made in the unsuccessful attempt to be appointed consul general of an African republic.60 This was despite the fact that Austrian law contains in sec 1174(1)(1) ABGB the principle that there can be no return of that which was given to facilitate a tort. It seems as if the court was not convinced that the claimant in this case had entirely understood that his money should have served to cause the responsible public officials to make a decision in his favour and was not merely a donation towards worthy causes in that country.61
A further example for a situation that allows for the exceptional restitution of a bribe is that the payer was incapable of understanding the reprehensibility of his actions. In a GERMAN decision from 1917 the court held, albeit obiter, that it is possible that the claim for reimbursement could be open to a mentally deranged woman who had paid a public official in order to receive a place in a care home, as she could not have breached good morals on account of her condition.62 In another GERMAN case63 a foreigner was deceived by a dishonest compatriot, who convinced him that a residence permit in Germany could only be obtained via bribery. The fraudster offered to arrange the payment, but eventually kept the money for himself. In contrast to the first example, here the payer was at least aware that the payment was illegal. Nonetheless, the judge was very generous in his decision to permit the claim for restitution because the payer was clearly unfamiliar with the circumstances in Germany and, as a result, was exploited by the fraudster.
Furthermore, exceptional circumstances may result from the payer’s particular predicament and therefore make him appear to be worthy of protection. For instance, one could hardly speak of corruption where the money has been solicited by the agent by means of a serious threat. From a semantic perspective corruption requires the bribe-giver and bribe-taker to cooperate voluntarily with one another. The POLISH report gives a hypothetical example of parents who bribe a doctor so that he may be quicker in taking care of their seriously ill child. Nobody would judge the parents for their behaviour under such circumstances. However, the crucial case may be that an agent has solicited a bribe through the threat to not award the contract. Such behaviour could result in a financial predicament for a business if it depends on the contract or has already made considerable investments that it cannot afford to lose. However, does this mean that it has to succumb to the threat and may pay the bribe? At present there has been no court decision that acknowledges the right to corruption due to economic self-defence; in fact, such a suggestion seems preposterous, as there is always the option to report the blackmailing agent to his principal and thus restore fair conditions.
The UNIDROIT Principles suggest a flexible approach towards permitting the recovery of the bribe. Where the applicable law does not expressly prescribe the effects of the infringement of a mandatory provision upon the contract, the parties shall have the right to exercise such remedies under the contract as are reasonable in the circumstances. The illustration to this rule suggests that if A has hired B to make the bribe payment, but B has not yet paid the bribe to the corrupt officials, then A may be granted the right to recover the bribe from B if he decides to no longer pursue the illegal purpose and withdraws from the contract.64 Such a right of repentance is known in the Common Law as locus poenitentiae. 65 The intention is clear: a golden bridge should be built for the remorseful businessman in order to allow him to return to just behaviour. This exception in the UNIDROIT Principles was included at the end of the drafting process after only brief discussions on the content.66 However, the rule is not unproblematic, as although the purpose is well-intended, it can result in the reverse in practice. This is because such a rule increases the motivation for the intermediary to expedite the payment of the bribe, as he can thereby secure his commission. Thus, even though the maxim ex turpi causa intends to impede the performance of the corrupt arrangements, this golden bridge exception would give the bribe-giver a means of putting pressure on the intermediary to perform his part of the agreement.
22.214.171.124.2 Recipient’s Enrichment
There is an additional argument against the use of the illegality defence in cases of corruption, namely that the recipient of the bribe would be unlawfully enriched. It seems as if several legal systems should have difficulties with the notion that the agent could profit from the illegal agreement. After all, is it not a fundamental principle of justice that crime must not pay?67
Nevertheless, this argument falls somewhat short, as the exclusion of restitution affects only the bribe-giver’s claim to the bribe; it does not indicate whether the bribe actually remains the bribe-taker’s property. However, as several national reports confirm, it is often possible to draw on other branches of the law to ensure that in such cases the unlawfully gained profit can be disgorged.
Several jurisdictions pursue this particular objective by providing that the profits gained from criminal activity are to be forfeited to the treasury. Art 3(3) OECD Convention stipulates that in cases of bribery of foreign public officials the bribe is subject to confiscation and seizure. A similar rule is contained in Art 31 UNCAC. CHINA, POLAND and the RUSSIAN FEDERATION adopt this approach towards withdrawing the bribe from the recipient.68
However, there is a second potential candidate to make claims for the bribe, namely the betrayed principal. Many legal systems allow the principal to claim against his disloyal representative for that which has been gained from the disloyalty. Such claims in private law often have priority over the state’s right of confiscation.69 In GERMANY, for example, there have been many changes in legal situation surrounding this subject, and whereas the Reichsgericht (Imperial Court)70 used to favour the confiscation of bribes over private claims, nowadays the principal’s right to recovery has precedence, supplemented by forfeiture of the proceeds of bribery to the state treasury if the principal does not exercise his right.71
The legal basis for a claim to recovery can be formed by a duty to account for profits arising from the contractual relationship between the principal and his agent. Such a duty often exists in the Common Law jurisdictions, but it is in ENGLAND where the discussion surrounding the exact form of the duty has recently been reignited.72 The essence of the discussion focuses in principle on whether the claim is merely of a contractual nature or whether the fiduciary holds the bribe as constructive trustee for his principal. The latter approach would have particular advantages should the agent become insolvent, but also in situations in which the agent has invested the bribe and gained a profit. In AG for Hong Kong v. Reid 73 the Privy Council, applying the law of New Zealand, had accepted a constructive trust to the principal’s benefit. Accordingly, the latter could thus have instant access to land that was purchased by the bribe-taker using the bribe. Although the decision received a positive reception in England, the Court of Appeal later favoured the opposite interpretation in Sinclair Investments v Versailles Trade Finance, as the “fact that the breach of fiduciary duty owed to the beneficiary resulted in the profit should not necessarily mean that the profit is treated as the property of the beneficiary”.74 This ruling would leave the principal merely with a claim for equitable compensation in a sum equal to the value of the bribe or commission. Since then, the Supreme Court had the last word on this issue and clearly decided for the solution whereby a bribe or secret commission received by an agent is held by the agent on trust for his principal.75 Their Lordships considered that, given that the concern about bribery and corruption generally has never been greater than it is today, the law should take a particularly stringent position in relation to a claim against an agent who has received a bribe or secret commission.