What States Should Know About The Contractual Consequences Of Bribery

Bribery. States often have to decide to exit or continue with contracts procured by bribes paid to public officials.   Bribery gives rise to various types of claim.   We have previously covered claims to recover the value of the bribes (and profits made as a result of bribery) from either a bribe-paying contractor or a bribe-receiving public official.   This tip-sheet focusses on the consequences for a contract procured through bribery.

Rescission. Rescission means a contract is void and is set aside as if it never existed.  It is usually available for bribery. Following rescission, both parties have to account to the other for any benefits received under the contract, for example the proper value of partially or fully completed works, or for services provided.  The state does not, however, have to account for the amount of the bribe, if it has been recovered.  Rescission is often beneficial to a state, particularly where it has lost an asset under a contract for little in return.    Care must, however, be taken.  Returning benefits that have been received may be unwelcome in some circumstances, for example where the bribe was paid to procure a sale of a state-owned asset that subsequently declined in value below the price paid.

Termination. Contracts procured by bribery can usually be terminated, under their express terms or in law.  Unlike rescission, there is usually no requirement to account for benefits that have been received prior to termination.  It is often important to weigh whether a contract should be rescinded or terminated.  Termination procedures and their specified consequences are sometimes unwelcome.
Re-negotiation.  Governments discovering bribery may on occasion decide not to rescind or terminate a contract.  Perhaps the bribery was an isolated example of wrong-doing by a few individuals in an otherwise reputable company.  Perhaps the works are absolutely vital or the practical consequences of termination undesirable.  In these cases, a Government may choose to re-negotiate the contract or accept compensation, to a degree that adequately reflects the wrongdoing that has taken place.  A re-negotiation will often involve representations by the contractor that it has disclosed all wrong-doing, with severe consequences if those statements are untrue.

Damages (Compensation). A contractual claim for losses suffered by a state as a result of bribery will be available on termination, although not for rescission.  The victim state has a choice. It is always entitled to recover the amount of the bribe, plus interest.  Alternatively, it can recover compensation for the financial losses it has suffered.  The latter approach might be taken, for example, where a contractor pays a bribe to win a contract which it then performs poorly, causing loss or requiring significant cost to put the problems right.  The choice can be made at any time before judgment is finally given, and is (of course) usually determined by what would lead to the largest recovery.

What about waiver? Termination or rescission rights typically have to be exercised reasonably quickly after a state becomes aware of the bribery. If they are not, the termination rights can be lost by inaction, requiring the state to continue to perform the contract.  However, the state's right to seek compensation for financial loss would remain (at least within applicable limitation periods). The risk of a waiver can be problematic in circumstances where there is credible information about bribery available to the Government department responsible for the project, the contract is ongoing, and a criminal investigation is underway which will take some time to complete. In these circumstances, the instinct to await the outcome of the criminal process creates a risk that termination rights will be lost.

Making decisions on a case by case basis. The correct contractual response to bribery will depend on the individual facts and circumstances.   But states must often make decisions quickly, with incomplete information and against a backdrop of a contractor asserting aggressively that no wrongdoing has taken place and termination would lead to substantial losses which will be claimed.  The appropriate reaction will depend on consideration of a range of factors.  

Please contact Jamie Humphreys, at jhumphreys@cooley.com or +44 207 556 4419, or Prina Patel, at ppatel@cooley.com or +44 207 556 4551, if you require further assistance.

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