11 March 2019

Arbitration and Corruption

The 2019 ASA Conference on Arbitration and Corruption revealed that this topic raises various issues that still need to be tackled appropriately. This contribution gives a short overview on some of the most important issues.

What is corruption?

Dealing with corruption in the field of arbitration means that a situation exists in which issues of corruption need to be adjudicated, either directly or indirectly, because of their impact on contracts. This means that the players involved – namely the arbitrators and the parties – will be looking for a definition of corruption.

Finding a general definition is already not an easy task, which is further complicated if one needs to find a definition that applies in the specific case. Many of the international instruments are not directly applicable, but only contain undertaking of the signatories to provide for certain features in their laws. Furthermore, corruption is often an issue of criminal law. Hence, in arbitral proceedings which are concerned with civil law claims, the arbitrators and the parties are suddenly faced with the problem that they need to determine the applicable criminal law.

This raises a number of difficult issues that cannot be dealt with in detail here. My conclusion is that this "cross-over" between civil and criminal law – even though this exercise may be intellectually interesting – is one of the core challenges.

Is there a need for civil law definitions of corruption?

One possible approach to tackle this challenge would be to develop definitions and international instruments dealing specifically with the civil law aspects of corruption. Indeed, in such a scenario, the established rules and approaches on how to determine the applicable (civil) law in arbitral proceedings would apply to issues of corruption.

There are indeed such approaches. Art. 4a of the Swiss Unfair Competition Act defines active and passive corruption as acts of unfair competition. The Act provides for civil and criminal law remedies so that this definition can be viewed as being (also) of a civil law nature. There is also the Civil Law Convention on Corruption issued by the Council of Europe on 4 November 1999 which entered into force on 1 November 2003. Yet, the reach of the Convention is relatively limited.

What happens to tainted contracts?

One of the main issues discussed in relation to corruption is the effect a finding of corruption has on contracts. A distinction has to be drawn between contracts providing for corruption and contracts whose consent has been undermined by an act of corruption (see e.g. Art. 8 of the Civil Law Convention on Corruption.

It seems relatively undisputed that the first category of contracts, namely those providing for corruption, are null and void. This goes hand in hand with the general principle that illegal contracts are not valid (e.g. Art. 20(1) of the Swiss Code of Obligations ("CO"). Furthermore, it means that courts and arbitral tribunals must not enforce such a contract ex officio.

The situation with regard to the second category of contract, i.e. those whose consent has been undermined by an act of corruption, is more complex. Art. 8(2) of the Civil Law Convention on Corruption says that each party should have the possibility to apply to the court for the contract to be declared void. This reflects the principle that such a contract is not void ab initio, but voidable at the request of the innocent party. This is the approach taken by most national legal systems.

Under Swiss law, contracts whose consent has been undermined by an act of corruption are indeed not viewed as having illegal content. However, the innocent party may rely on the rules on defects in consent (Art. 23 et seqq. CO), including fundamental error and fraud) and assert that it would not have concluded the main contract if it had known about the corruption. The innocent party is not bound by such a contract if they declare that they not to honor the contract within one year of the date on which they discovered the error or fraud (Art. 31 CO).

Who gets the money?

A further difficult issue is the question of who gets the money payable, or paid, under a contract providing for corruption. Since both parties to such a contract were involved directly or indirectly in the corruption, the question creates a dilemma. The position is relatively obvious if the contract has not yet been performed. In this case, the bribed party may not enforce its "claim for the bribe".

If the contract providing for corruption has already been performed entirely or partially, the questions becomes more complex. In principle, one would assume that the bribing party may claim the restitution of the bribe because it was paid without any legal cause. However, many legal systems exclude the right to claim restitution in such a situation. Under Swiss law, Art. 66 CO says that no right to restitution exists in respect of anything given with a view of producing an unlawful or immoral outcome. In common law jurisdictions, the "clean hands" doctrine has similar effects.

The exclusion of restitution may lead to inappropriate outcomes since the illegality hits only one side of the equation. Some legal systems such as the one of the England and Wales therefore provide that illegality of a contract does not automatically exclude a claim for the restitution of any payments made under the contract. Furthermore, to avoid this situation, most legal systems allow the government to forfeit the bribe.

What is next?

This short overview shows that the issues to be addressed are numerous. The increased attention the topic has received recently will without doubt lead to further developments. But where will this lead us? First, there should be an effort to establish sound definitions of corruption that can readily be applied in civil cases. Second, we might want to reconsider the position with regard to contracts whose consent has been undermined by an act of corruption. Third, the entire issue of restitution needs further consideration.

Our Dispute Resolution Team will be happy to answer any further questions you may have.

Author: Christian Oetiker

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