In recent setting aside proceedings, The Hague Court of Appeal had to decide whether an arbitral award issued in proceedings under the International Chamber of Commerce (ICC) Arbitration Rules had to be set aside due to the fact that the award was contrary to public policy.(1)
In its assessment, the Hague Court of Appeal took a bold approach. The court overturned the arbitral tribunal's ruling on a number of aspects. The decision demonstrates that while the court is conscious of the competence and authority of arbitral tribunals, it will assess a case individually and fully when it comes to public policy and does not shy away from making decisions contrary to those made by an arbitral tribunal. However, it remains to be seen whether this decision will be upheld in (potential) Supreme Court proceedings.
It is likely that the result would have been the same had Wells applied for recognition of the arbitral award, since the test in recognition proceedings is virtually the same as in setting aside proceedings.
After a procurement process, Wells Ultimate Service LLC obtained a purchase order from Bariven SA, a subsidiary of Venezuelan national oil and gas company Petróleos de Venezuela, SA (PDVSA) and entered into a purchase contract regarding the sale and delivery of two large engines for use on drilling platforms. After delivery of the engines, the purchase price of approximately $12 million was left unpaid by Bariven.
Wells initiated arbitral proceedings under the ICC Arbitration Rules, in which it claimed payment of the purchase price. Pursuant to the applicable general terms and conditions, the seat of the arbitration was The Hague and the applicable law was Dutch law.
Bariven asserted that the purchase agreement had been entered into under the influence of corruption and was therefore void under Dutch law. Bariven brought forward that various people connected with the purchase order, including former employees of Bariven, had pleaded guilty on charges of corruption and bribery in pending criminal proceedings in the United States. While Wells itself was not indicted in the criminal proceedings, three companies registered at the same address as Wells were. Wells also shared the same registered agent as 25 other companies, all belonging to a person (X) indicted in the criminal proceedings in the United States. X was also the father of the president of Wells. Further, Wells had entered into numerous related party transactions with various companies indicted in the criminal proceedings. After the arbitration, a number of new facts came to light, including that former Bariven employees had accepted bribes to make sure that vendor bidding panels would exist exclusively of companies relating to X so that any of these companies would certainly win the bid.
The arbitral tribunal decided upon two important procedural issues. First, it found that, although it was conscious of the fact that it is difficult to prove corruption, the seriousness of the accusation of corruption demanded clear and convincing evidence and could not be shown to exist by arguments based on speculation or by merely alleging indications of the existence of corruption. Bariven therefore had to prove that the purchase order had been obtained under the influence of corruption.
Second, the arbitral tribunal excluded certain arguments from Bariven regarding the existence of corruption derived from documents produced following a procedural order. The arbitral tribunal noted that the procedural order had been issued at a late stage of the proceedings (after the final hearing) when the discussion about virtually all of the arguments was materially finalised. The procedural order pertained to a specific issue (overpricing); Bariven was not allowed to rely on the documents produced under the procedural order to substantiate other arguments for reasons of due process. According to the tribunal, it had been up to Bariven to raise these arguments in an earlier stage of the arbitration.
The arbitral tribunal concluded that although the way in which Wells had obtained the purchase order raised questions, corruption had not been sufficiently proven. It thus ordered Bariven to pay the purchase price plus interest and costs to Wells for failing to honour the purchase contract.
Bariven applied to The Hague Court of Appeal to set aside the arbitral award.
Legal framework: Dutch arbitration law
Article 1036 of the Code of Civil Procedure stipulates that the determination of due process in arbitral proceedings falls within the competence of the arbitral tribunal.
Pursuant to Article 1039 of the Code of Civil Procedure, the rules on the furnishing, admissibility and appraisal of evidence, as well as the division of the burden of proof, are at the arbitral tribunal's discretion, unless the parties have agreed otherwise.
Article 1065 of the Code of Civil Procedure exhaustively lists the grounds for setting aside an arbitral award. As a rule, setting aside proceedings cannot be used as a de facto appeal; an arbitral award will not be assessed on its merits, but rather only on formal grounds, subject to reasons of public policy. As such, in assessing the grounds for setting aside an award, the Supreme Court has held that courts must act with restraint.
Under Dutch law, an arbitral award is contrary to public policy (Article 1065(1)(e) of the Code of Civil Procedure) when it is in violation of imperative law of such fundamental nature that compliance thereof cannot be hindered by procedural restrictions.
Appeal court rules differently on corruption issue
The Hague Court of Appeal reiterated a 1997 Supreme Court decision that the Dutch legal order objects to legal effect being given to contracts entered into under the influence of corruption. The court held that this principle is equal to imperative law of such fundamental nature that compliance thereof cannot be hindered by procedural restrictions. Therefore, an arbitral award giving legal effect to a contract entered into under the influence of corruption must be set aside for reasons of public policy.
According to the court, the decisive criterion is whether the contract would not have been concluded, or concluded under the same conditions, had the corruption not occurred. In that circumstance, the contract cannot be seen separately from the corruption.
The court took into consideration the general rule that setting aside proceedings cannot be used as a de facto appeal but decided that this rule must be viewed as a procedural restriction that cannot prevent compliance with the prohibition of corruption. Further, the court held that the importance of an effectively functioning arbitral administration of justice must yield to the importance of preventing corruption. Therefore, the court decided to independently assess whether the purchase contract was concluded under the influence of corruption.
In its assessment, the court not only took into consideration the facts determined by the arbitral tribunal, but also facts that had transpired after the award was rendered. Further, the court decided that it was not bound by the arbitral tribunal's decision to exclude certain evidence. The court acknowledged that the determination of due process falls within the competence of the arbitral tribunal but considered the decision of the arbitral tribunal to exclude evidence in this case to be a procedural restriction that must yield to the interest of preventing corruption.
As regards the burden of proof, the court considered the standard of clear and convincing evidence applied by the arbitral tribunal in its assessment of the accusation of corruption to be too stringent. The court noted that parties who commit the offence of corruption generally do everything in their power to conceal the corrupt behaviour; therefore, providing direct evidence of corruption will be difficult. For this reason, the court ruled that evidence that a contract is entered into under the influence of corruption can be found in evidence of corruption in the relationship between employees of the parties to that contract, especially in the circumstance that the party accused of corruption leaves the possibility to adequately rebut the accusation unused. The court expressly allowed circumstantial evidence.
Applying this standard, the court concluded that there were strong indications that the purchase contract had been entered into under the influence of corruption, and that the contract would not have been concluded, or not concluded under the same conditions, had the corruption not occurred. Wells also did not supply a substantive explanation of the facts and statements brought forward by Bariven. Under these circumstances, the court decided that not setting aside the arbitral award would lead to legal effect being given to a contract concluded under the influence of corruption, which would be contrary to public policy. Therefore, the court set aside the arbitral award.
Endnotes
(1) The Hague Court of Appeal, 22 October 2019 (ECLI:NL:GHDHA:2019:2677).
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