Dr. Markus Schöner June 23 2014 Bribes can invalidate purchase agreement and result in compensation claims CMS Germany | White Collar Crime - Germany Dr. Markus Schöner White Collar Crime FactsDecisionCommentThe Federal Court of Justice recently ruled (V ZR 305/12, May 9 2014) that the payment of bribes can invalidate a purchase agreement which has been influenced by such bribes and result in claims for compensation. In so finding, the court overruled an earlier judgment handed down by the Frankfurt Higher Regional Court.Facts The claimant was a wholesaler for foreign press products. Its former head of sales sold magazines to the defendant on the claimant's behalf. The defendant paid an additional sum per magazine to the head of sales' private account. The defendant sold the magazines through various channels, notably online, earning six-figure sums. The magazines were returned merchandise (ie, mostly magazines returned by retailers), which was to be destroyed and for which the claimant had received a refund from its suppliers.The appeal court held that the claimant was not entitled to compensation because title in the magazines had validly passed to the defendant and because the head of sales had acted with apparent authority. It did not find that the defendant and the head of sales had colluded. In the court's view, the payments to the head of sales did not invalidate the purchase agreements. The defendant had not intentionally bribed the claimant's head of sales. Further, there was no evidence that the agreements for supplying the defendant were in breach of any legal ban or that they were unethical.Decision The Federal Court of Justice overruled the appeal court decision and referred the matter back to the appeal court to be reheard.The Federal Court of Justice upheld the appeal court's finding that the bribery payments did not preclude the title in the magazines from passing validly to the defendant because an apparent authority was sufficient in this respect. The impression given had been that the sale of the magazines had fallen within the scope of the head of sales' commercial power of attorney. In entering into the agreement to pass the title in the magazines to the defendant, the defendant had not colluded to the detriment of the claimant in order to acquire the remaining magazines, which were no longer destined to be sold. The Federal Court of Justice held that the defendant was entitled to assume that the remaining magazines were being sold regularly by the claimant's head of sales. Thus, the court held that the agreement for additional payments to be paid to the head of sales did not invalidate the transfer of title in the magazines.However, unlike the appeal court the Federal Court of Justice assumed that the purchase agreements were invalid and therefore considered that the defendant could be liable under the law regarding unlawful enrichment. It reasoned that the defendant acquired the magazines unlawfully because under Section 138(1) of the Civil Code, the purchase agreements between the defendant and the claimant were invalid. The defendant had therefore increased liability under Section 819(1) of the code. The defendant was aware that the sale of the magazines was unethical and that it would render the transaction invalid, as borne out by the defendant's own submission.The defendant was therefore liable to compensate the claimant for the distribution loss which had arisen, because the claimant was facing claims from its suppliers for repayment of the purchase prices refunded following the alleged destruction of the magazines, as the defendant, having sold the magazines, was unable to return them.Under the increased liability for unjust enrichment rules pursuant to Sections 812(1)(1)(1), 819(1), 818(4) and 285(1) of the Civil Code, the claimant was also entitled to demand that the defendant release the proceeds from selling the magazines.CommentThe reasoning by which the Federal Court of Justice found that the agreement governing the transfer of title in the magazines which were sold regularly was valid and that the purchase contract affected by the bribe was invalid is unconvincing. Nonetheless, the decision strengthens the rights of companies that have been damaged by bribery payments.For further information on this topic please contact Markus Schoner at CMS Hasche Sigle by telephone (+49 40 37 63 00), fax (+49 40 37 63 040 600) or email ([email protected]). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.