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This article first appeared in the July/August 2011 issue of Procurement and Outsourcing Journal and is reproduced with their kind permission.

The Bribery Act 2010 came into force on 1 July 2011. Readers will doubtless be aware that the Act creates a number of criminal offences on the payment and acceptance of bribes, this includes a new strict liability offence for failure of a commercial organisation to prevent bribery, subject to a defence of having in place adequate procedures. In this article we seek to address the wider commercial implications of bribery and conviction for an offence under the Bribery Act 2010.

We consider the legal implications of bribery where an employee of a company (the “briber”) has paid a bribe to the employee of a company (the “victim”) and the victim has entered into a contract (the “underlying contract”) as a result.

A contract entered into as a result of a bribe may be unenforceable

The law regarding the status of a contract which has been entered into because of the payment of a bribe is unclear. The underlying contract may be void ab initio on the basis that it was entered into without the victim’s authority (Bowstead & Reynolds on Agency, 19th Ed, Sweet & Maxwell, Articles 23, 73 and 96, Heinly v Jyske Bank (Gibraltar) Ltd [1999] Lloyd’s Rep Bank. 511, 521 (Nourse LJ); Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246). However there is authority that the underlying contract will not be automatically void, and that the contract itself is validly formed (World Duty Free Company Limited v The Republic of Kenya (46 ILM 339(2007) (an arbitration)).

If the underlying contract is not void ab initio the payment and acceptance of a bribe may affect the enforceability of the rights of the parties to the contract. The extent to which the parties’ rights under the underlying contract will be affected may depend upon the manner in which the bribe was paid, and the manner in which it was received.

Illegality

A court will not assist a party in the enforcement of rights obtained via its illegal act. In general the maxim of “ex turpi causa non oritur actio” provides that a party who enters into a contract with an improper object cannot enforce its rights under the contract.

For the maxim to apply the illegality must go to the heart of the contract. Although the illegal act is the payment of the bribe and not the contract itself, the illegal act of paying the bribe could “taint” the contract which the bribe induced.

Tainting will occur where it can be shown that a party was aware of illegality at the time of contracting. Where tainting occurs the maxim will apply. As such a party with knowledge of the illegality at the time of contracting will not be able to enforce its rights under the underlying contract (Fisher v Bridges (1854) 3 E. & B. 642 and Spector v Agenda [1973] Ch 30, [1971] 3 All ER 417). When the maxim applies it does not automatically render the underlying contract void. The underlying contract will remain valid until and unless steps are taken to set it aside.

The contractual rights of a party who has no knowledge of any illegality at the time of contracting will remain enforceable.

When will a party be aware of the illegality?

A party will be aware of illegality if it is aware of the payment/acceptance of a bribe before contracting. Clearly if a party is a natural person, it will be fairly straightforward to identify circumstances in which he would be aware of a bribe. It is less immediately obvious if a party is a legal person other than a natural person (e.g. a company).

As a company is a legal construction, it does not have a body or a mind of its own. It will therefore not be able to pay or accept a bribe without the assistance of a natural person. Typically a bribe will be paid/accepted by an employee of a company, but when will an employer be deemed to have been aware of the illegality?

This will depend on whether the employee will be deemed to be acting as its employer or simply as an individual. If a company personally pays or accepts a bribe it will unavoidably be aware of the illegality, and will be unable to enforce its rights under the underlying contract.

For a company personally to pay or accept a bribe it is necessary for its guiding mind to have intended it to do so (Lennards Carrying Co v Asiatic Petroleum [1925] AC 705).

Only the Board of Directors, the Managing Director and perhaps other superior officers who perform the management functions of a company and speak and act as the company can be the company’s guiding mind (Tesco Supermarkets Ltd v Nattrass [1971] 2 All ER 127).

Therefore if the employee who pays or accepts a bribe (in relation to their employment) is sufficiently senior to constitute the company’s guiding mind, the company itself may be deemed to have paid/accepted the bribe.

However the employee’s role does not definitively identify the guiding mind of a company. Not every act of a senior corporate officer is attributed to his/her employer (for example buying a pint of milk or robbing a bank).

Whether a sufficiently senior employee (“officer”) will be a company’s guiding mind will depend on whether they are deemed to be acting as the company or as a private individual.

The briber

When a senior officer of a company pays a bribe with the intention of obtaining its employer an advantage it is very likely that the officer will be deemed to be representing his employer.

The employer may therefore be deemed to be aware of the illegality and consequently unable to enforce its rights under the underlying contract.

The victim

Accepting a bribe for personal benefit would be a clear and very serious breach of the officer’s fiduciary duties to his employer. However, whether a court will impute the knowledge of an errant senior officer to his employer (in the position of the victim) is not clear. In reality a court’s decision is likely to turn on the specific facts of the case in hand. The more persuasive the argument that a senior officer was on a frolic of his own, the less likely it is that his knowledge will be imputed to his company.

If the victim is unaware of the illegality at the time of entering into the underlying contract it will be entitled to enforce its rights under the underlying contract.

Bribery involving an employee who is not a director

A company will not be imputed with knowledge of its employees’ actions, other than those of senior management as discussed above. A company could however become aware of illegality if one of its senior officers (the controlling mind) was to become aware of the illegal act of one of the company’s employees. Whether a company will be aware of illegality arising from the act of an employee is a matter of fact. A company will clearly be aware of any illegality where it orders or encourages an employee to commit bribery.

Both parties aware of the bribe

If both the briber and the victim were deemed to be aware of the payment/acceptance of a bribe both parties would be aware of the illegality and consequently unable to enforce their rights under the underlying contract.

The rights of any third parties under the underlying contract, to the extent that they were ever enforceable, will remain enforceable (so long as the third party was not aware of any illegality relating to the contract at the time of its creation).

Right of the victim to rescind

A principal who discovers that his agent or officer has obtained or arranged to obtain a bribe from the other contracting party is entitled (in addition to the civil remedies available below) to apply to court to have the contract rescinded ab initio.

What can a party do to protect itself against liability?

Companies will naturally be keen to avoid a situation in which they can be compelled to perform a contract without the opportunity of enforcing their own contractual rights.

Naturally the most desirable situation would be to prevent bribery occurring in the first place. However even the most conscientious company could fall foul of the actions of a rogue senior officer.

An effective remedy against a briber being trapped in a contract which is unenforceable from its perspective is the inclusion of a contractual term which causes a contract to be dissolved if it is discovered that the contract was entered into as a result of bribery. Of course, it may not be attractive to parties for a clause to this effect to appear in a contract.

An additional, powerful but perhaps unattractive possibility is to provide that a contract is of utmost good faith. This would cause the contract to be automatically void ab initio if it was discovered that the contract was entered into as a result of accepting a bribe. But this may be double-edged as all parties are then under a duty of full disclosure.

Liability beyond the Bribery Act 2010

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Besides the penalties provided for upon conviction under the Bribery Act 2010 (custodial sentences of up to ten years and fines without limit) there are a number of additional potential consequences following the payment of a bribe.

Proceeds of Crime Act 2002 (“POCA”) - Criminal

Part 2 of POCA provides the Crown Court and in certain circumstances the Magistrates Court with the power to make confiscation orders for the “Benefit” that a convicted defendant has obtained as a result of its criminal conduct. Benefit is defined widely in the Act and can effectively be summarised as anything of monetary value which the defendant has obtained as a result of committing an offence. Crucially, benefit has been deemed to include not only the profits realised by a criminal venture but the entire turnover of the venture (Luigi Del Basso & Bradley Goodwin v R [2010] EWCA Crim 1119 in the COA). Thus, a bribe of £100,000 paid to induce a contract worth one million pounds could result in a confiscation order for £1.1 million.

If the underlying contract is not void ab initio it will remain enforceable from the perspective of an innocent party. A convicted defendant could therefore find itself having to perform the contract without being able to keep any payment made to it in connection with the contract.

POCA - Civil

Part 5 of POCA also empowers the Director of the Serious Fraud Office to apply to the High Court for a civil recovery order to recover property which is, or represents, property obtained through unlawful conduct.

These powers are exercisable regardless of any criminal proceedings which may be under way. It is not necessary to allege a specific criminal offence or establish that an offence has been committed. If a court is on the balance of probabilities satisfied that property has been obtained through unlawful conduct, it will make an order for its recovery.

Other civil remedies

A number of potential claims will arise against the briber and the bribed employee.

It is a well established principle that a victim of bribery will be able to recover by means of a personal claim the amount of the bribe from either the briber or the bribed officer. (Mahesan S/O Thambiah v Malaysia Government Officers’ Co-operative Housing Society Ltd [1979] AC 374, [1978] 2 All ER 405).

It may be possible for the victim to recover in tort from the briber or the bribed officer any losses it sustained as a result of entering into the underlying contract (Petrotrade Inc and others v Smith and others [2000] All ER (D) 264) (Logicrose Ltd. v Southend United Football Club Ltd [1988] 1 W.L.R. 1256).

The victim may claim for either equitable compensation or an account of profits from the bribed officer. The claim arises from the officer’s breach of his fiduciary duties (Murad v Al-Saraj [2005] EWCA Civ 959). A claim for dishonest assistance could also be brought by the victim against the briber.

If the underlying contract is not void ab initio a victim of bribery might also be able to make a claim for damages under its contract with the briber if there has been a breach of an express or implied term.

Debarment from public contracts

Article 45(1) of the EU Public Sector Procurement Directive (Directive 2004/18/EC) requires that an entity which has been convicted of corruption shall not be permitted to participate in public contracts. Regulation 23 of the Public Contracts Regulations 2006 (SI 2006/5) implements Article 45 in England. If a company or a senior officer of a company is convicted of an offence in connection with bribery, the company will be debarred from entering into public contracts.

A conviction for bribery therefore has very serious implications for companies which regularly tender for and undertake public contracts.

It is important to note that the conviction of a company under s.7 of the Bribery Act 2010, “failure of commercial organisations to prevent bribery” will not result in compulsory disbarment. This is because s.7 is not a substantive bribery offence. But such disbarment will be discretionary.

What a party can do to protect itself from liability

It is not possible to avoid the rigours of POCA. Self reporting to the regulator has not thus far resulted in more lenient confiscation/recovery orders.

Insurance

As a matter of public policy, it is generally difficult to obtain insurance against the imposition of a criminal, civil or regulatory fine. This is subject to some exceptions, for example where the liabilities arise through the negligence or breach of duties by a company’s directors and officers which do not result in liability which is personal to the company itself (Safeway Stores Ltd & Ors v Twigger [2010] EWHC 11 (Comm)). It is however possible, in principle, to obtain insurance to protect against an insured’s losses arising from bribery committed by others such as liabilities to bribed parties and/or the imposition of confiscation orders under POCA.

Recovery from employees

A company which has been fined for an offence which it is deemed to have committed personally by the identification/guiding mind principle above will not be able to recover the cost of the fine from its employee or officer (Safeway Stores Ltd & Ors v Twigger [2010] EWHC 11 (Comm)).

However, a company could attempt to recover a loss it suffered as a result of vicarious liability arising from the act of one of its employees. The viability of attempting such a recovery will depend upon the assets of the employee in question.

Conclusion

The effect(s) of bribery reach far beyond the penalties provided for by the Bribery Act 2010. In particular, the potential for all benefit under a contract to be confiscated under POCA is a very stringent penalty. In addition, the prospect of debarment from public contracts is a very strong incentive not to infringe for those whose business depending on successful bidding for such contracts.

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