The 9th International Anti-Corruption Conference
EFFECTIVE USE OF LEGAL AND ASSET-TRACING REMEDIES FOR CORRUPTION
CIVIL LEGAL REMEDIES
JOSEPH R. PROFAIZER
WILMER, CUTLER & PICKERING
I. Overview of Legal Remedies for Corruption
A. Example based on an actual case of corruption by a foreign
In 1990, Big Tex Energy Incorporated, which is doing limited business
in Ruritania, learns of a potentially lucrative opportunity to enter
into a joint venture with the government of Ruritania to explore and
develop oil reserves. The joint venture is to be called Ruritanian
Energy. To increase the likelihood of being awarded the contract, Big
Tex hires Frantz Schwartz, an individual with close ties to the
Ruritanian government. With the assistance of Schwartz, Big Tex sets
up meetings with members of the Ruritanian government, including the
Energy Minister. At those meetings, the president and vice-president
of Big Tex bribe the Energy Minister and two other officials $5
million to award the joint venture to Big Tex. The money is wired to
a Swiss bank account, and the new joint venture agreement is signed in
1991. The agreement contains a number of favourable terms for Big
Tex, and provides for arbitration in New York in the event of a
dispute. During the next four years, Big Tex makes a number of
smaller payments to other government officials to ensure that the
terms of the contract continue to be favourably interpreted. For
example, under contracts signed pursuant to the joint venture
agreement, New Ruritanian Energy must buy expensive oil development
equipment from subsidiaries of Big Tex in the United States.
In 1995, New Ruritanian Energy discovers new oil reserves. In 1997,
Big Tex sells its share of Ruritanian Energy at a substantial profit.
Big Tex then moves all of its assets out of Ruritania and into Texas
and New York.
B. Legal issues to be considered
Prior to determining what legal action, if any, it wants to pursue,
the government (or any potential claimant) must consider certain key
- What is the legal harm suffered?
The Ruritanian government claimant has suffered various types of
legally cognisable harms, including:
- unfair contract terms (for example, deadlines and payment schedules)
- unfair contract price
- unnecessary purchase of products or services
- lost profits from sale of product and sale of business
Damages in other cases may include compensation for shoddy performance
or for defective product(s) which cause injury to others.
- Does the contract contain a valid dispute resolution mechanism?
The two basic types of dispute resolution clauses are:
- an arbitration clause
- a forum selection agreement
Big Tex's contract with the Ruritanian government contains an
arbitration clause. Therefore, if the clause is still valid and
applicable, the parties should be required to arbitrate their
- What are the potential remedies?
- criminal (punishing the offenders)
- administrative remedies (e.g., banning company or country from doing
business in the state as a result of governmental investigations)
- civil (getting compensation for damages)
Effective civil remedies may change the economic priorities in the
fight against corruption. Criminal penalties seek to deter and punish
individuals who have engaged in corruption. Although civil suits may
have this effect, as well, they focus on a different economic dynamic:
getting back lost money and recovering compensation for harm done.
For purposes of this conference, I will primarily consider available
civil legal remedies. Of course, civil remedies should be pursued in
parallel with criminal and administrative penalties, where
- Where are the assets located?
- where the assets are no longer located in the jurisdiction, then
arbitration or a suit in the contractor's home court may be more
Big Tex has moved all of its assets outside of Ruritania. Therefore,
the Ruritanian government should compare the availability of damages
from a lawsuit brought locally versus arbitration or a suit brought in
the contractor's home jurisdiction.
- Who are the parties that may be sued?
- bribing company (Big Tex)
- bribe recipient(s) (Minister of Energy and other officials)
- directors and officers of bribing company in their individual
capacities -- Director and Officer insurance may exclude dishonesty
- professionals involved in drafting documentation (e.g., the attorneys
representing Big Tex).
- What are the sources of potential legal remedies?
The potential civil legal remedies will depend on choice of law
clauses, if any, conflicts of law principles, and the jurisdiction in
which the suit is brought. Therefore, a potential claimant may seek
relief based on:
- domestic law
- law of foreign contractor
- public and private international law -- But note that most multilateral treaties
generally provide for criminal and not civil penalties
II. Potential Avenues for Civil Remedies
One of the most important decisions that a potential claimant faces in
evaluating its civil remedies is to decide where, and by whom, the
dispute will be decided. There are three fundamental choices: 1)
arbitration, 2) litigation in the courts of the host country, and 3)
litigation in the contractor's home country. This choice often
determines the dispute's eventual outcome. See Gary B. Born,
International Arbitration and Forum Selection Agreements: Planning,
Drafting and Enforcing (Kluwer 1999).
A. Actions Pursuant to Arbitration Provisions in Underlying Contract
Against Foreign Contractor
Increasingly, international contracts provide for arbitration as the
dispute resolution mechanism. This may be due to a number of reasons,
including the parties' desire for a neutral forum, considerations of
cost and speed, the perception of competence of and control over the
decision-makers, concerns about confidentiality, and the ease of
enforceability under the United Nations Convention on the Recognition
and Enforcement of Foreign Arbitral Awards (the "New York
Convention"), to which more than 120 countries are now members.
- Scope of arbitration agreement and the choice of law clause. The
remedies available to a party invoking an arbitration clause may
depend on the scope of the arbitration clause and which law the
parties have provided for in their agreement.
- Scope of the arbitration clause. Critical to the arbitration
agreement is the "scope" of an arbitration clause. For example, will
the parties submit disputes bearing any conceivable connection to
their contractual relations or will they limit the arbitration only to
disputes over the express terms of the parties' agreement? This can
be especially important because a "narrow" arbitration clause may
prevent a party from bringing claims of fraud and corruption in
arbitration. Subject to local law, a clause which may catch both
contract and tort claims linked to a commercial contract may read:
"The parties shall submit to binding arbitration, under the Rules of
Arbitration of the International Chamber of Commerce in force at the
date of the request for arbitration, for the resolution of any
disputes relating to this contract. The tribunal shall consist of [a
sole/three arbitrators]. The place of the arbitration shall be
[town/city]. The language of the arbitration shall be [language]."
- Choice of law clause. Remedies will depend on the law the parties
have chosen, if any. U.S. courts increasingly allow arbitration of
most civil claims. Shearson/American Express, Inc. v. McMahon, 482
U.S. 220, 238, 242 (1987) (RICO claims arbitrable). A typical choice
of law clause might read:
"This contract and all issues relating to it shall be settled in
accordance with the laws of [country or state]."
- Possible legal obstacles to arbitration
- Separability of arbitration clause. The law of the United States,
like the law of most jurisdictions, provides that "except where the
parties otherwise intend . . . arbitration clauses are 'separable'
from the contracts in which they are embedded...." Prima Paint Corp.
v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402 (19--67).
- In The Republic of the Philippines v. Westinghouse Electric Corp.,
714 F.Supp. 1362 (D.N.J. 1989), the U.S. District Court held that the
Philippine government's claims against Westinghouse, an American
corporation, arose out of a contract for construction of a nuclear
power plant and were subject to arbitration. The fact that the
company allegedly bribed the Marcos regime to get the construction
contract did not constitute fraud that invalidated the arbitration
- Non-arbitrability doctrine. Some countries' courts may refuse to
allow arbitration of corrupt transactions. However, a Swiss arbitral
tribunal held that it had jurisdiction to deal with bribery claims in
a case involving the Marcos family. See Gary Born, International
Commercial Arbitration in the United States (Kluwer 1994).
- Cost of arbitration proceedings. A claimant must pay
administrative expenses and arbitrator(s)' fees up front. But he may
recover those costs if he wins (See, e.g., ICC Rules, Article 31(3)).
B. Actions in Host Country's Courts Against Contractor
- Possibility of civil suit in local courts of country where project
is located. Depending on the issues discussed below, a government or
government entity may bring a civil suit in the local courts of the
country where the project is located. As noted above, however,
litigation against contractor in host country courts may violate an
arbitration agreement or the forum clause in the underlying contract.
- Possible Civil Remedies in Host Country's Courts.
above in II.A.1.b. and III below, civil remedies depend on choice of
law (or, in the absence of a clause, conflicts of law principles).
The principles for these remedies may, in certain cases, be similar to
the U.S. principles discussed below (although punitive damage awards
are unlikely). For example, in Germany, the Federal Supreme Court has
held that contracts resulting from bribery actions are null and void
under section 138 BGB, the German Civil Code, as conflicting with
"bonos mores." 94 BGHZ 268, 271.
- Compensatory damages for poor performance/shoddy product. One
reason to bring a suit in local courts (as opposed to in arbitration)
would be to include claims for damage to third parties, perhaps from
personal injury or products liability. For example, a state or state
entity might claim damages for collapse of buildings in an earthquake
due to failure to comply with standards as a result of corruption.
- Forfeiture statutes. Compare 28 U.S.C. § 2514
("A claim against the United States shall be forfeited to the United
States by any person who corruptly practices or attempts to practice any fraud against the
United States in the proof, statement, establishment, or allowance
thereof."); U.S. v. ACME Process Equip. Co., 385 U.S. 138, 87 S.Ct.
350 (1966) (a government may, as a matter of public policy, avoid a
contract that is tainted by fraud, kickbacks, conflicts of interest,
- Possible obstacles to bringing a suit in the host state's courts.
When deciding whether to bring a suit in its own courts, a host state
should consider a number of legal and non-legal factors. The most
important, of course, is whether the contract with the foreign
contractor included an arbitration or forum selection clause (as
discussed above). Other significant considerations include political
issues such as publicity and politisation, and legal issues such as
court delays or lack of judicial expertise. In addition, a host
country should consider the ease or difficulty in enforcing its local
judgement in another country's courts, if there are assets located
- Without a multilateral treaty such as the Brussels and Lugano
Conventions or a bilateral treaty, a local judgement may be difficult
to enforce. Although the United States is a member of the New York
Convention, it is not a party to any international treaties on
enforcement of judgements. Thus, a foreign party seeking to enforce a
foreign judgement must meet the requirements of the law of the state
in which it seeks enforcement.
C. Actions Against Contractor in Contractor's Home State
- Possibility of civil suit against contractor in its "own backyard.
" A key reason why a foreign party may want to bring a suit in
the contractor's home state is because the defendant's assets are
located there. (See example in section I. above).
- Choice of law principles. As discussed in II.A.1.b. above, civil
remedies depend on a choice of law clause (or, in the absence of a
clause, conflicts of law principles). A foreign party bringing a suit
in a contractor's home state courts should note that mandatory laws of
that jurisdiction may apply. In the United States, for example,
courts may apply certain mandatory rules of law or public policy even
where the parties have agreed to non-U.S. law. See Govett American
Endeavor Fund Ltd. v. Trueger, 112 F.3d 1017 (9th Cir. 1997) (where
illegal acts were committed in California, the defendant could not
avoid RICO by choosing law of Jersey, a foreign jurisdiction). In
addition, although punitive damages are more difficult to obtain in
breach of contract cases, a U.S. court is generally more likely to
award exemplary damages than an arbitrator.
- Possible civil remedies. Potential civil remedies under U.S. law
are discussed in more detail in section III below. However, U.S.
courts have faced civil RICO suits predicated on the Foreign Corrupt
Practices Act on at least two occasions:
- In Dooley v. United Technologies Corp., 803 F.Supp. 428 (D.D.C.
1992), the District Court held that the FCPA does not apply to foreign
corporations, and therefore the FCPA could not serve as a predicate
act in a civil RICO case.
- In Environmental Tectonics v. W.S. Kirkpatrick, Inc., 847 F.2d 1052
(3d Cir. 1988), aff'd on other grounds, 493 U.S. 400 (1990), a U.S.
competitor of another U.S. company who allegedly bribed the Nigerian
government to obtain a foreign military contract brought RICO claims
which were predicated in part upon violations of FCPA. The court
determined, in a conclusory paragraph, that the competitor had
standing to bring RICO claims against the U.S. company.
- Possible legal and other obstacles.
There are a number of legal
and other obstacles which may discourage a foreign government or
entity from bringing a suit in U.S. courts, including:
- Litigation against contractor in host country courts may violate
arbitration agreement/forum clause in underlying contract.
- Home court bias v. advantages of some local tribunals (e.g., no
- Cost (contingent fees or creative fee structures; opportunity for
- Waiver of immunity and exposure to counterclaims under the Foreign
Sovereign Immunities Act (28 U.S.C. §§1602 - 1610).
- Other judicial costs, such as extensive discovery.
- Related party litigation: suits by third parties. Third parties
other than the government contractor have brought suits in U.S. courts
on various occasions. The courts have generally been reluctant to
allow these suits to proceed.
- Suit by distributor or employee of bribing company. A distributor
of GE products in Peru could not bring RICO claim against GE due to
the distributor's alleged refusal to co-operate with GE in its scheme
to secure and retain contracts through bribery and extortion of public
officials. J.S. Service Center Corp. v. GE Techncial Services Co.,
937 F.Supp. 216, 226 (S.D.N.Y. 1996); Dooley v. United Technologies
Corp., 803 F.Supp. 428 (D.D.C. 1992) (employee sued his employer, its
parent corporation and others, alleging that they engaged in a bribery
scheme to sell helicopters to Saudi Arabia and that he was demoted due
to his refusal to participate).
- Suit by individual in government. Minister of Tourism and
Information of Jamaica could not bring RICO claims against advertising
firm for alleged injury to reputation and status resulting from
dissemination of false information regarding bribery. Abrahams v.
Young & Rubicam Inc., 79 F.3d 234, 237 (2d Cir.), cert. denied, 519
U.S. 816 (1996).
D. Actions Against Recipient of Bribe
- Possible fora
- Probably not possible to invoke arbitration agreement
- Third parties (i.e., the recipient of the bribe) not generally bound
by arbitration clause
- Host state's courts
- Local law
- Local attitudes
- Political will
- Place where bribe was deposited
- Depends on local jurisdictional powers
- Possible claims (Depends on applicable law)
- Damages for breach of duties
- Possible legal and practical obstacles
- Locating assets that can be enforced against
- Political issues
- Subjecting state to foreign jurisdiction
III. Potential Civil Remedies Under U.S. Law
Under U.S. law, a claimant might be able to seek the following legal
remedies for corruption:
- Foreign Corrupt Practices Act ("FCPA"). Although the FCPA provides
for criminal and civil provisions, there is no private right of
(civil) action under the FCPA's anti-bribery or accounting provisions.
Lamb v. Philip Morris, Inc., 915 F.2d 1024, 1027-30 (6th Cir. 1990),
cert. denied, 498 U.S. 1086 (1991) (anti-bribery provision; no private
right of action in favor of domestic tobacco producers); Citicorp
Int'l Trading Co. v. Western Oil & Refining Co., 771 F.Supp. 600, 606-
07 (S.D.N.Y. 1991) (antibribery provision; no private right of action
for shareholders allegedly injured by corporation's attempt to bribe
foreign officials); J.S .Service Center Corp. v. GE Techncial Services
Co., 937 F.Supp. 216, 226 (S.D.N.Y. 1996); Shields ex rel. Sundstrand
Corp. v. Erickson, 710 F.Supp. 686, 688 (N.D. Ill. 1989) (accounting
provision); Eisenberger v. Spectex Indus., Inc., 644 F.Supp. 48, 50-51
(E.D.N.Y. 1986) (accounting provision).
- Rescission/setting aside of contract (on theories of fraud,
illegality, etc.). A contract is invalid and may be set aside where
it was product of a bribe or other corruption. Chuidian v. Philippine
National Bank, 734 F.Supp. 415, 418 (C.D.Cal. 1990) citing California
Civil Code § 5111 (contract invalid or rescinded where tainted with
corruption, illegality or fraud); Banker's Trust Co. v. Litton
Systems, 599 F.2d 488 (2d Cir. 1979) (contract illegal and
unenforceable where contract obtained through bribery). In addition,
a party may seek the forfeiture of paid and unpaid proceeds of
contract. S.T. Grand, Inc. v. City of New York, 38 A.D.2d 467, 330
N.Y.S.2d 594 (N.Y.Ct.App. 1st Dep't. 1972) (but note violation of
established mechanism for bidding).
- International standards. Council of Europe's Multi-Disciplinary
Group on Corruption: proposal requiring the parties to adopt national
legislation which would treat as null and void any contract made in
order to facilitate the receiving of illicit payments or other illicit
advantages. New Criminal Law Provisions Against the Corruption of
Public Officials, Council of Europe: Multidisciplinary Group on
Corruption (GMC), 14th Sess. 1, 18 (1995); Paolo Bernasconi, About the
Necessity of an International Convention Preventing and Combating the
Corruption of Public Officials (Draft Summary), arts. 2, 6, 8, 10
- Reformation of unfair terms of contract. A party may seek to
reform certain terms in a contract where that contract was induced by
fraud. Hartman v. Prudential Insurance, 9 F.3d 1207, 1209 (7th Cir.
1993). Alternatively, a party may seek compensatory damages for unfair
terms or excessive price of a contract where there have been
fraudulent representations by the other party. The damages may be
measured by the difference between the fair price without the bribe
and the bribe-induced price. Schank v. Schuchman, 212 N.Y. 352, 106
N.E. 127 (N.Y.Ct.App. 1914).
- Compensatory damages for poor performance/shoddy product. Where
the foreign contractor poorly performed the contract (but got away
with it due to corruption) or where the foreign contractor produced a
shoddy product, the contractee could seek compensatory damages for the
- However, since there must be a valid arbitration agreement before
compelling a party to arbitrate, it is unlikely that tort damage to
third parties could be submitted to arbitration.
- Equitable claims such as restitution, accounting, or a constructive
- a. The bribe-payor and bribe recipient may both be liable for
repayment of the amount of the bribe. Continental Management, Inc. v.
United States, 208 Ct.Cl. 501, 527 F.2d 613, 620 (1975) (common law
right of government to sue bribors for amount of bribes paid to
government employees; "the amount of the bribe provides a reasonable
measure of damage, in the absence of a more precise yardstick."); City
of New York v. Joseph L. Balkan, Inc., 656 F.Supp. 536 (E.D.N.Y. 1987)
(city stated common law cause of action against contractors for
alleged bribery of city sewer inspectors); United States v. Cripps,
460 F.Supp. 969 (E.D.Mich. 1978).
- In most states, a claimant would be able to ask for the
establishment of "constructive trust" for the proceeds of bribes.
Chicago Park District v. Kenroy, Inc., 78 Ill.2d 555, 402 N.E.2d 181
(Ill. 1980); see Jackson v. Smith, 254 U.S. 586 (1921) (party who
participates in breach of fiduciary duty must disgorge all profits
made as a result of wrongful conduct, without regard to whether the
plaintiff suffered a corresponding loss). Party could then trace the
proceeds of the bribe.
- Similarly, a claimant may ask for an accounting for the proceeds
of the bribe. County of Cook v. Barrett, 36 Ill.App.3d 623, 344
N.E.2d 540 (Ill.Ct.App. 3rd Div. 1976); United States v. Carter, 217
U.S. 286 (1910).
- Since the United States does not allow tax-deductibility for
bribes, any benefits gained must also be returned. See Carter v.
Berger, 777 F.2d 1173 (7th Cir. 1985) (defendants must surrender tax
benefits received as a result of bribing public officials); People ex.
rel. Daley v. Warren Motors, Inc., 500 N.E.2d 22 (Ill.App. 1986).
- Remedies from breach of a statutory duty/breach of claims under
- The OECD Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions lacks any specific
civil enforcement mechanisms. However, Article 3(3) of the OECD
Convention does possess a civil principle - the
forfeiture/disgorgement/restitution of the benefits of a bribe. It
"Each party shall take such measures as may be necessary to provide
that the bribe and the proceeds of the bribery . . . or property the
value of which corresponds to that of such proceeds, are subject to
seizure and confiscation or that monetary sanctions of comparable
effect are applicable." (emphasis added).
- "Proceeds of the bribery" is defined as "profits or other benefits
derived by the briber from the transaction or other improper advantage
obtained or retained through bribery." Commentary 21.
- Forfeiture under the OECD is not necessarily consistent with the
FCPA, because it could result in civil fines that exceed the US$10,000
maximum civil penalty under the FCPA.
- Difficulty with tracing and measuring the "benefits" attributable
to the bribe, and when such benefits are to be measured (early in the
project or later?).
- Exemplary/punitive damages. Under certain statutes, a claimant has
a right to triple damages as a matter of law. (E.g., RICO, 18 U.S.C.
§ 1964(c)). Likewise, under the common law, a claimant may be
entitled to punitive damages. However, international arbitral
tribunals are less likely than U.S. courts to award exemplary or
punitive damages against a party.
IV. Importance of Proper Preparation and Organisation
A. Litigation Realities
- Time consuming, expensive, mere possibility of success
B. Need for Focussed, Disciplined Client Representatives as Part of
- Possesses confidence of superiors and with authority to act
- Identifying/organising witnesses and documents
- Realistic assessment of chance of success
- Likelihood of publicity
C. Selecting and Managing External Advisers
- Knowledgeable of law of forum and dispute resolution options
- Knowledgeable of international law
- Knowledgeable of local and international political realities
- Prepared to deal with publicity concerning matter
4 CARLTON GARDENS
LONDON SW1Y 5AA ENGLAND
TEL: + 171 872 1000
FAX: + 171 839 3527