The Hague Court of Appeal
In October 2019, the The Hague Court of Appeal set aside an International Chamber of Commerce (ICC) award on the ground that the arbitral award gave legal effect to a contract that was concluded under the influence of corruption, therefore violating public policy (for further details, please see "The Hague Court of Appeal sets aside ICC award because underlying purchase contract was procured by corruption").
The Supreme Court has now reinstated the award and avoided the tricky issue of whether a setting-aside court may independently investigate corruption in the formation of the contract.
Instead, the Supreme Court salvaged the award by finding that the tribunal had given a second, independent justification for the award. A central point of discussion was whether the fact that the second ground was mentioned only as an obiter dictum in the arbitral award stood in the way of its ability to uphold the award.
The two parties in the proceedings, Bariven SA (a subsidiary of the Venezuelan state oil and gas company Petróleos de Venezuela SA (PDVSA)) and the Texan company Wells Ultimate Service LLC (Wells) entered into an agreement concerning Wells's sale and delivery of two large engines specifically designed for PDVSA's drilling platforms. The purchase price of approximately $12 million was, however, left unpaid by Bariven.
The purchase agreement contained an arbitration clause, pursuant to which arbitration would take place in The Hague under the rules of the ICC. The contract was governed by Dutch law.
Wells commenced arbitration proceedings against Bariven, claiming payment of the purchase price. The arbitral tribunal upheld the claim, primarily on the basis of Bariven's obligation under the contract to pay for the delivered engines.
The tribunal concluded that Bariven had not succeeded in proving that the agreement between the parties had come into existence under the influence of corruption. Subsidiarily, however, the tribunal also acknowledged in an obiter dictum that even if the purchase agreement were to be declared void, the same amount would be due to Wells in the form of compensation, as the value of the engines would then somehow have to return to Wells in order to undo the contract. The tribunal found that a possible invalidity of the purchase agreement could not possibly result in Bariven being able to keep the goods without any form of compensation.
When Bariven instituted setting-aside proceedings before the The Hague Court of Appeal, the Court focused exclusively on the question of whether the arbitral award, by upholding an agreement concluded under the influence of corruption, was to be regarded as contrary to public policy (one of the five exhaustive grounds that article 1065 of the Dutch Code of Civil Procedure (DCCP) provides to set aside an arbitral award).
The central question for the Court, therefore, was whether the purchase contract did indeed result out of corruption even if the tribunal had not found this. The Court held that combatting corruption is a principle of such fundamental nature that the pursuit of it cannot be hindered by procedural restrictions. On this basis, it independently reassessed the arbitral award and its procedural decisions with regards to the admission of evidence and concluded that the contract had come into being illegitimately, and set aside the award on that basis.
Before the Supreme Court, Wells claimed that the The Hague Court of Appeal had failed to recognise that the operative part of the arbitral award rested on two grounds that supported the claim independently of each other – namely, Bariven's obligation arising out of the contract, and the obiter dictum acknowledging the right to compensation on the basis of unwinding of the contract. Consequently, the grounds for setting aside should have been directed at both elements present in the award and should not have exclusively focused on the validity of the contract.
In her conclusion, Advocate General De Bock advised to dismiss the appeal in cassation, convinced of the fact that the obiter dictum could not independently carry the tribunal's decision to uphold Wells's primary claim for payment of the purchase price (which was the core of the operative part of the award).
The Supreme Court, however, took the opposite view and expressly emphasised that the qualification of a passage as obiter dictum is irrelevant in assessing whether it independently and sufficiently supports the operative part of the tribunal's decision. In fact, it found that the reasoning by the tribunal with regard to undue payment independently supported the obligation to pay the amount claimed by Wells.
The Supreme Court, therefore, concluded that a successful annulment of the arbitral award would have been possible only if both of the grounds for the arbitral award could be successfully challenged. Bariven also had failed to invoke a ground for annulment against the arguments of the arbitral tribunal relating to Bariven's obligation to compensate Wells for the value of the delivered engines. As a result, a substantive part of the arbitral award, which could support the operative part, remained in place. This convinced the Supreme Court to reinstate the arbitral award.
It is peculiar that the Supreme Court did not comment on the The Hague Court of Appeal's bold approach of applying the public policy ground of article 1065(1)(e) of the DCCP. It would have been interesting to see whether, in absence of an additional argument upholding the tribunal's award, the Supreme Court would have followed the reasoning of the The Hague Court of Appeal, confirming that giving legal effect to a contract entered into under the influence of corruption represents a violation of imperative law of such fundamental nature that:
- compliance therewith cannot be hindered by procedural restrictions; and
- the substantive reassessment of the formation of the contract by the setting aside court that it justified.
For further information on this topic please contact Jeroen van Hezewijk or Eleonora Di Pangrazio at Freshfields Bruckhaus Deringer LLP by telephone (+31 20 485 7000) or email ([email protected] or [email protected]). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.