International public policy and suspension of enforcement of an ICC award on the grounds of corruption

The following is a contribution from Ms. Maria Psarra, Trainee Lawyer, LL.M Private International Law (University of Athens).

KEY WORDS:   International Commercial Arbitration – Law 2735/1999 – International Court of Arbitration of the International Chamber of Commerce – ICC - suspension of enforcement of an arbitral award – proceedings for annulment of arbitral award - international public policy– prima facie evidence - corruption

DECISION NUMBER:  595/2014

COURT: Court of Appeal of Athens 

LEVEL:  Appellate Court

PUBLISHED IN:  T.N.P. ISOKRATIS (D.S.A.)

A. FACTS OF THE CASE

The proceedings before the International Court of Arbitration of the International Chamber of Commerce (hereinafter ICC) related to a contract for supply of security systems, commonly known as C4I, for the Olympic Games held in Athens in 2004. The contract was concluded between the Hellenic Republic and the ‘Contractor’, a foreign company which has its seat in the US. Immediately after the conclusion of the contract, the Contractor subcontracted the execution of the most functional and economically important part of the project, corresponding to 71% of the total project budget, to a Greek subsidiary - the ‘Subcontractor’ - of a German engineering and electronics conglomerate company (Siemens). The performance of the contract did not progress smoothly. Specifically, the project was not completed on time, resulting, under the pressure of lack of time, to the acceptance of certain subsystems for use during the Olympic Games, despite the initial commitment of the contractor to deliver the project as a whole. Finally, by a series of amendments to the contract the delivery day was set on 29-10-2008, i.e. after the lapse of more than four years after the Olympic Games.

Finally, at the request of the Contractor, the dispute that arose was resolved by the ICC. Τhe arbitral tribunal rejected the plea of nullity of the contract raised by the Hellenic Republic pursuant to a) Law 2957/2001 (Government Gazette A 260/12.11.2001) for the ratification of the Council of Europe Civil Law Convention on Corruption, signed in Strasbourg on 4 November 1999, (b) in accordance with Articles 147 and 149 Civil Code, (c) in accordance with Articles 174, 178 and 179 of Civil Code and (d) pursuant to Law 5227/1931 "on intermediaries" and  by a final decision on 02.07.2013 partially upheld the claims of the Contractor and ordered the Hellenic Republic to pay the Contractor the total amount of 39,818,595 euros (the rest of the amount due for the execution of the contract, compensation and VAT) plus statutory interest from the service of the award.

In the light of the above, the Hellenic Republic filed to the Court of Appeal of Athens an application for suspension of execution of the 2-7-2013 (CASE - ICC) final decision of the ICC, pending the decision on the application for annulment that the Hellenic Republic had filed before the said Court, invoking, among others, that the execution of the arbitral award is contrary to international public policy.

B. RULING

Suspension granted.

C. LEGAL BASIS

According to Article 34 of Law 2735/1999 on International Commercial Arbitration[1] an arbitral award may be set aside by the court specified in Article 6.2 only if: (a)…(b) The court seized by an application for the setting aside shall also decide ipso iure whether: (i) …(ii) the award is in conflict with the international public policy as defined in Article 33 of the Civil Code. Pursuant to the Court of Appeal violations of public policy exists when “the violation of public policy  stems directly from the content of the arbitration award in its entirety, i.e. not only the operative part, but also from its reasoning” and that award is “[contrary] to the fundamental rules and principles that reflect social, economic, civic, political, religious, moral and other beliefs”.     Moreover according to Article 6.2 of Law 2735/1999 competent to decide on the application for setting aside provided by Article 34.2 is the Court of Appeal, in the jurisdiction of which the award is rendered. Under Article 35.3 of Law 2735/1999 the application for setting aside does not suspend the enforcement of the award. Provided that the application is admissible according to Article 34, the competent court may order, according to the procedure for interim measures, such suspension, with or without conditions, until such time as a final decision is issued on the application, if it considers that there is a prima facie evidence for one of the grounds alleged to be well-founded. 

Specifically, CoA held that there is a prima facie evidence of violation of the international public policy – Article 33 of the Civil Code –. Specifically it held inter alia that:  

“…although the aforementioned contract had been concluded between the applicant [Hellenic Republic] and the defendant [Contractor], the Subcontractor company, a subsidiary of a German company, both of which (the subsidiary and parent company) are active in the public procurement sector in Greece for many years, had active participation, not only in performance but also in negotiations which led to the award of this project.”

“During the period 2002-2007, i.e. the period of the negotiations for the award and progress of the contested contract, executives of both the parent company, and its subsidiary company, had been implicated in acts of corruption of persons exercising influence to the related decisions,  in order to achieve the award of the public contracts to them [ Contractor and Subcontractor], to who (persons) they paid sums of money, amounting to 10% of the object of contract (8% senior officials and 2% on political figures).”

“The revelation of these illegal practices and methods of the executives of the Contractor and Subcontractor in the undertaking and execution of projects in Greece, caused political controversy and investigation of any responsibility of politicians from the Commission of Inquiry of the Parliament and prosecution for felonies have already been exercised.  … A publication in the Government Gazette A 164/2012 of the Ministry of Finance 07085EX2012 Decision, followed, which includes the Settlement Agreement between the Hellenic Republic and SIEMENS, by which all matters related in any way with corruption activities were resolved”.

“Moreover, the former General Manager of the Subcontractor was convicted by the Magistrate court of Munich for two cases concerning bribery of public officials of another member state of the European Union (Greece) in nine months' imprisonment for each case and total imprisonment of one year. The above Court in the -/09 judgment, held that the General Manager, in order to accelerate the acceptance of individual sections of the C4I project and influence the responsible civil servants , which he did not know by name, in separate discussions with the treasurers of the two major political parties (PASOK and New Democracy), by the end of 2003, agreed to distribute to those political parties sums of money, amounting to at least a double-digit million euros,  to exercise the necessary pressure on the public officials adjacent to these political parties, so that these officials can exercise their discretion in a manner in which , in doubtful cases, they would decide, possibly in breach of their duties, in favor of the Contractor and Subcontractor companies”.

“Based on the above evidence it is speculated that the value of the project, as budgeted based on the offer of the defendant [Contractor], increased by 10 %, i.e. the amount required for the bribery of politicians and public officials, in order for the latter, when concluding the contract and the amendments of this contract, and during the delivery stages of the individual parts of the project, to keep a favorable attitude for the Subcontractor and consequently the Contractor and the illegal surcharge passed on the Hellenic Republic (Applicant) and ultimately passed on to Greek citizens.”

“The speculated conduct of investment corruption, mainly through the bribery of public officials, both in the phase of the award and in the execution and delivery of the project in question is not only contrary to the fundamental socio-economic, civic and moral concepts underlying values of the society in  Greece, but also to the  internationally prevailing principles of the objective management and legitimate and integral functioning of public services and transparency and fair competition in public procurement. Under the foregoing circumstances, the consequences which will be generated by the execution in the lex fori of the  7.2.2013 final decision of the International Court of Arbitration, with the payment to the defendant of the amount due and compensation for the said project, whose award conditions, approval and acceptance, are subject of an ongoing criminal investigation , involves the disruption values of the society in the country and therefore makes the enforcement of that decision in the lex fori contrary to international public policy, as defined above”.

D. COMMENTS

In international legal scholarship the issue of corruption has been extensively addressed in recent years. The main subjects focus 1) on the sua sponte investigation or not into the issue of corruption, 2) the burden of proof, 3) the existence of sufficient or prima facie evidence, 4) its effects on the contract concluded, and 5) its effects on the setting aside of the arbitral award.

The suspension proceedings before CoA of Athens focused on the fifth and particularly whether it is probable that the aforementioned evidence of corruption which resulted in the conclusion and subsequent modifications of the supply contract render the enforcement of the arbitral award contrary to international public policy. To that end, it is observed that a large number of authorities support the view that the existence of corruption acts runs contrary to international public policy, even to a so called transnational public policy.

The most cited examples are 1) the arbitral award rendered in ICC Case No. 1110 (1963) where Judge Lagergren stated in paragraph 20: “Whether one is taking the point of view of good governance or that of commercial ethics it is impossible to close one‘s eyes to the probable destination of amounts of this magnitude, and to the destructive effect thereof on the business pattern with consequent impairment of industrial progress. Such corruption is an international evil; it is contrary to good morals and to international public policy common to the community of nations”. 2) The ICSID award in case No. ARB/00/7, World Duty Free Company Limited v The Republic of Kenya, which states in paragraph 157 that “In light of domestic laws and international conventions relating to corruption, and in light of the decisions taken in this matter by courts and arbitral tribunals, this Tribunal is convinced that bribery is contrary to the international public policy of most, if not all, States or, to use another formula, to transnational public policy. Thus, claims based on contracts of corruption or on contracts obtained by corruption cannot be upheld by this Arbitral Tribunal”.

Our attention is now focused on the decision of the CoA on the setting aside of the arbitral award and whether the abovementioned probable findings suffice to render the enforcement of the contested arbitral award contrary to  international public policy.

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[1] See, K.D. Kerameus, The New Greek Law on International Commercial Arbitration, Revue Hellénique de Droit International, 2/1999, pp. 583 et seq. An official translation in English and French is available in pp. 586 et seq.