Commission Agreements and Illegal Payments

Foreign contractors and suppliers operating in Malaysia and indeed in many other countries may sometimes attempt to enter into and execute contracts with the use of agents, consultants and other intermediaries who assist them in tender processes as well as in negotiating and on odd occasions performing contracts. Typically, these consultancy or service agreements provide that in the event of a dispute that these shall be submitted to arbitration in Switzerland for settlement under Swiss laws.

Switzerland has historically been one of the favoured venues for international commercial arbitration. Arbitrations which have and still do take place in Switzerland relate not only to contracts between European corporations, but also to contracts made in East-West trade or contracts between parties in the Northern and the Southern hemisphere.

Some of the most important decisions on international arbitration are made by Switzerland’s highest court, the Federal Supreme Court. In addition, due to the leading role of Switzerland in international arbitration, the Court’s decisions are frequently relied upon by arbitral tribunals in international arbitrations outside Switzerland.

It is fair to say that generally disputes concern the consultants’ entitlement or otherwise to a fee or commission. To escape from payment of such fees or commissions, the contractor or supplier will often resort to the argument that the contract was illegal under the applicable law. But be forewarned that such arguments will not always be supported and may in addition result in greater losses as highlighted in the case of Siemens AG who reportedly having more than 2,700 such business commission agreements with facilitators around the world had to face costs exceeding USD 3 Billion in fines and legal fees for contravening the international convention banning foreign bribery, a pact signed by most of the world’s industrial nations.

Swiss arbitral tribunals and the Swiss Supreme Court will not uphold contracts that are flawed by illegality in the same way Malaysian or British Courts would find such contracts unenforceable. However, it is for the party which alleges the illegality to prove it to the tribunal or court. Similarly if evidence of illegality exists at the time of the arbitration, it must be produced in the arbitral proceedings. A party which holds back such evidence, even if it is self-incriminating, and then later rely on it to attempt to overturn the award in the event of an unfavourable outcome of the arbitral proceedings will more than likely have their application rejected. But where a party misleads the arbitral tribunal and such is later discovered as in the example which follows the courts can rule that the original arbitral award may not stand.

In 1989, France approved the export of new French built warships to Taiwan. China objected to the export and a few months later, in accordance with the wishes of a French minister, France withdrew their export approval for the warships.

In 1990, Thales, the French manufacturer of the warships, entered into an agreement with Frontier AG, a company registered in Switzerland, engaging them as agents. In accordance with the agreement, Frontier was to receive remuneration amounting to one per cent of the eventual sale value of Thales contract with Taiwan for its assistance in relation to securing sale of the warships. The main player behind Frontier AG was an individual named Alfred Sirven who was a high level manager with the French oil company ELF.

In 1991, the French government revised its position and gave final approval for the export and sale of the warships by Thales to Taiwan. The contract between Thales and Taiwan was concluded on 31 August 1991 for a purchase price in the region of USD 2.5 billion.

Thales subsequently refused to pay Frontier, who commenced ICC arbitration as a result of Thales refusal. In the arbitration, Thales argued that the purpose and aim of the contract was in fact for Frontier to secure the services of Mr Edmond Kwan, a consultant of ELF in China. Mr Kwan was to use his considerable political connections to persuade the Chinese to withdraw their opposition to the sale of the warships to Taiwan. Thales contested that the contract was void as its object was influence peddling.

In 1996, the tribunal rendered its award, ordering Thales to pay the contractual fee to Frontier. The tribunal found that Frontier had provided the services which were due under the contract by assisting Thales, through Edmond Kwan, to ease Chinese opposition to the sale of the warships. The tribunal accepted that influence peddling was unlawful but found that it had not been proven that influence peddling had actually occurred.

Thales subsequently initiated criminal proceedings in France against Mr Kwan and others for giving false testimony before the arbitral tribunal. On 1 October 2008, the French authorities ceased their investigation due to the death of Mr Sirven’s and due to there being insufficient evidence against the others being investigated. The French authorities however did conclude that Sirven had given false testimony during the arbitration in Switzerland.

In 2008, Thales eventually managed to bring a request for review of the 1996 arbitral award before the Swiss Federal Supreme Court on the basis of the findings of the French authorities. The French investigation had shown that the real objective of the contract between Thales and Frontier was not to lobby for the sale of the warships in China, but rather to persuade a French minister, who wanted to avoid retaliation measures by Mainland China, to reconsider his objections to the sale. Thales contended that commissions had therefore been paid by Frontier to Mr Sirven and a woman who had private relations with the minister. Mr Sirven had represented to the arbitral tribunal that Mr Kwan had been the only beneficiary of a commission; however it was uncovered that he had implicated Mr Kwan merely for the purposes of the arbitration. The Swiss Supreme Court ruled that it had been established that Mr Sirven had orchestrated an influence peddling scheme to the detriment of the French authorities. He had misled the arbitral tribunal and was therefore guilty of procedural fraud. In the opinion of the Supreme Court, Mr Sirven’s untruthful testimony had had a direct influence on the tribunal’s award. Consequently, the Supreme Court annulled the award and remanded the matter to the original arbitral tribunal or a new tribunal to be constituted in accordance with the ICC Rules.

In another case in which the parties’ identities have been held back a Swiss and Taiwanese party entered into a business commission agreement in respect of the Swiss company winning a contract to manage and conduct maintenance on a power generation facility located in Taiwan. Again the Agreement provided that any dispute would be resolved through arbitration in Switzerland under Swiss law.

In accordance with the arbitration provisions of the agreement, the Taiwanese consultant later commenced arbitration against the Swiss company under the Swiss Rules of International Arbitration to obtain payment of his commission. The arbitral tribunal found for the Taiwanese consultant in their partial award and also found that the consultancy agreement was valid.

The Swiss company brought the matter to the Swiss Federal Supreme Court for revision of the partial award, the time limit for the setting aside of the award having already expired. The Swiss company pleaded before the Supreme Court that the agreement had an illegal content as it contemplated bribery, and they produced new evidence to support their claims.

The Swiss Federal Supreme Court turned down the application of the Swiss company, as the prerequisites required under Swiss law for a review of the award had not met. According to the Court, the evidence could have been produced in the arbitration hearing all along and was not new as had been claimed. The arbitration resumed and the arbitrators rendered a final award in favour of the Taiwanese consultant.

The Swiss Company again sought to have the final award set aside on the grounds that it breached public policy. They again depended on the same evidence on which they had previously sought the court to set aside the partial award. The Court dismissed the application. It found that the principal could and should have produced the evidence purportedly showing bribery during the arbitration. The Court also ruled that it would not review on its own motion the validity of private law contracts.

The Swiss Company again raised its public policy defence in the subsequent enforcement proceedings in Switzerland instigated by the Taiwanese consultant. The court ruled that arguments which could have been raised in setting aside proceedings could no longer be raised at the enforcement stage.

Although the two examples above and Siemens incident relate to foreign companies, it is not only foreign companies engaging in such practices in Malaysia who need to consider the consequences on entering into such agreements. Malaysia has introduced its own legislation which makes it illegal for Malaysian companies to obtain contracts employing such practices abroad.

Section 22 of the Malaysian Anti-Corruption Commission Act 2009 represents Malaysia’s legislative contribution to the international effort to criminalize such conduct. The provision stipulates that any person who by himself, or by or in conjunction with any other person gives, promises or offers, or agrees to give or offer, to any foreign public official, or being a foreign public official, solicits, accepts or obtains, or agrees to accept or attempts to obtain, whether for the benefit of that foreign public official or of another person, any gratification as an inducement or reward for, or otherwise on account of:

The foreign public official using his position to influence any act or decision of the foreign state or public international organization for which the official performs any official duties;

The foreign public official performing, having done or forbone to do, or abstaining from performing or aiding in procuring, expediting, delaying, hindering or preventing the performance of, any of his official duties; or

The foreign public official aiding in procuring or preventing the granting of any contract for the benefit of any person,

Commits an offence, notwithstanding that the foreign public official did not have the power, right or opportunity so to do, show or forbear, or accepted the gratification without intending so to do, show or forbear, or did not in fact so do, show or forbear, or that the inducement or reward was not in relation to the scope of his official duties. Shall on conviction be liable to an imprisonment for a term not exceeding twenty years and a fine of not less than five times the sum or value of the gratification or ten thousand ringgit, whichever is the higher.

For the purpose of the offence, foreign public official defined as includes any person who holds a legislative, executive, administrative or judicial office of a foreign country whether appointed or elected. Apart from that it also includes a person who exercises a public function for a foreign country and any person who is authorized by a public international organization to act on behalf of that organization.

In addition, the provision covers any act of aiding and abetting in the commission of the offence, conspiring to commit the offence or attempting to commit the offence. Some countries will argue that it is their culture in giving gifts which on their own way may denote respect, appreciation or gratitude, without specifying large and small gifts or the value of the gifts. Thus, in Malaysian, we have within our legislation, that evidence of custom is inadmissible as a defence to an offence of bribery of a foreign public official.

To summarise companies and individuals paying illegal commissions for projects are now subject to the growing legislation making such commission payments illegal. Although a party to such an agreement may see a loop-hole to escape making payment to the agent by claiming that the agreement cannot be enforced as it is for the carrying out of an illegal act that by claiming such a defence it may be exposing itself to prosecution under the growing global laws.