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Enforceability of contract procured by corruption

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The English High Court ruled in National Iranian Oil Company v Crescent Petroleum Company International Ltd & Crescent Gas Corporation Ltd [2016] EWHC 510 (Comm) that there is no English public policy that would preclude enforcement of a contract procured by corruption (as opposed to a contract illegal in itself, such as a contract to pay a bribe). Under English law, a contract procured by bribery is voidable at the instance of the innocent party.   

National Iranian Oil Company (NIOC) and Crescent Petroleum Company International (Crescent Petroleum, a UAE entity) entered into a long-term gas supply and purchase contract. The contract was governed by Iranian law and referred all disputes, including disputes in relation to the validity of the contract, to arbitration. In 2003, Crescent Petroleum purported to assign the contract to its subsidiary Crescent Gas Corporation Ltd (Crescent Gas). In 2009, Crescent Petroleum and Crescent Gas (Crescent entities) commenced LCIA arbitration proceedings against NIOC claiming that it had breached its obligation to deliver gas under the contract.

In the arbitration, NIOC argued that the contract was not enforceable because it was procured by a bribe. The LCIA tribunal considered evidence of corruption in the arbitration, including at a 30-day evidentiary hearing. The tribunal rendered an award in favour of the Crescent entities ruling that the contract was valid and binding and that NIOC had been in breach since 2005. On the issue of corruption, the tribunal found that, although there was an attempt to bribe, there was no evidence that the contract was tainted by it and there was no evidence of imbalance in the parties' agreement.

NIOC challenged the award in the English High Court under s67 (lack of substantive jurisdiction) and s68 (award procured by fraud or contrary to public policy) of the English Arbitration Act 1996 (the EAA). NIOC contended that the award was not valid under English law because it resulted from a contract procured by Crescent's corruption, such that enforcement should be denied on public policy grounds (s68(2)(g) of the EAA). NIOC did not rely on any fresh evidence of corruption and argued that, although the arbitral tribunal dismissed the allegations of corruption, the court considering English public policy may take a different view. It also argued, albeit creatively, that even if the attempt to bribe failed, the contract was tainted by Crescent's misconduct, and that the taint was sufficient to deny enforcement.

Burton J ruled that NIOC's challenge was unarguable and had "no reasonable prospect of success".

No English public policy requiring court to refuse to enforce a contract procured by bribery

The principal issues before the High Court on the public policy argument were, in essence:

  • Is an award contrary to public policy if the underlying contract was procured by corruption (as opposed to the subject matter of the contract itself being illegal)?
  • Can the court reopen public policy issues if they have already been considered and decided by the arbitral tribunal?

On the first issue, Burton J agreed with Honeywell International Middle East Ltd v Meydan Group LLC [2014] EWHC 1344 (TCC), drawing a distinction between the enforcement of: (i) contracts to commit an illegality; and (ii) contracts procured by an illegality. While the former are void, the latter are only voidable at the election of the innocent party with counter-restitution and can accordingly be enforced. The judge noted that there is certainly no English public policy requiring the court to refuse enforcement of a contract which has been preceded, and is unaffected, by an unsuccessful attempt to bribe, on the basis that such contract is allegedly tainted. Introducing a concept of tainting of a contract which is otherwise legal and enforceable would create uncertainty and undermine party autonomy.

On the second issue, the judge agreed with previous decisions of the English courts which generally refuse to reopen the findings of an arbitral tribunal, absent "fresh evidence" or save in "very exceptional circumstances" (see, eg, Westacre Investments Inc v Jugoimport-SDRP Holding Company Ltd [1999] QB 740). Critically, the allegations of bribery were considered and rejected by the arbitral tribunal "after full consideration and evidence" in the arbitration. Burton J ruled that there was no basis to reopen the tribunal's decision on this point because there was no fresh evidence of corruption and no exceptional circumstances that would justify doing so.

Comment: The case confirms previous case law, including Honeywell and Westacre, that there is no English public policy requiring an English court to refuse enforcement of a contract procured by an illegality (to be contrasted with contracts that are illegal per se – for example, a contract to pay a bribe). Where a contract is procured by an illegality, it is merely voidable at the instance of the party innocent of the illegality (in this case, NIOC) as opposed to being automatically void and therefore unenforceable for being contrary to public policy. Here, the contract could have been avoided by NIOC if it had correctly argued that the contract was voidable (but it does not appear to have done so). By contrast, if the tables were reversed and it was NIOC who sought to enforce its rights under the contract against Crescent entities, the latter could not have resisted enforcement because they were not the "innocent" party.

While Burton J held that the court would not interfere with a contract even if one or more of the parties had committed criminal acts for which they could be prosecuted, he considered the claimant's counsel's arguments based on recent international conventions to outlaw bribery and the increase of legislation to criminalise it.  However, these arguments were not sufficient to persuade the court to change English public policy on the enforcement of a contract procured by bribery. 

It is worth remembering however that under the English Bribery Act 2010, it is a criminal offence to offer a bribe (even if the bribe is not accepted). Moreover, any proceeds from a contract procured by bribery may constitute criminal property and be covered by money laundering rules. UK companies and foreign companies carrying on business or a part of their business in the UK are caught by the English Bribery Act 2010.  

Parties who are considering making corruption allegations before the English courts in order to resist enforcement of a contract should bear in mind that the evidentiary threshold for proving corruption is high; direct evidence is often unavailable and circumstantial evidence may be insufficient. Moreover, once corruption allegations are made, and regardless of the outcome of these assertions, the commercial relationship between the parties will likely be irreparably compromised.  

This case is also a useful reminder that, where issues of corruption had been considered by an arbitral tribunal, fresh evidence is required in order to reopen the arbitrators' decision before the English courts. The threshold for challenging an award on public policy grounds under s68 of the EAA is very high and the English court will not conduct a review on the merits of an arbitral award.

Further Information

This case summary is part of the Allen& Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey, or tel +44 20 3088 3710.