Introduction
Background
Anti-corruption clauses and risks of non-validity
Useful element of a compliance system
Clauses should be taken seriously


Introduction

Anti-corruption clauses in supply agreements, other distribution agreements or joint venture agreements are becoming increasingly common in Germany. The objective of the companies using such clauses is to protect against corrupt behaviour of business partners and ensuing risks of administrative fines and damage claims, as well as impending image loss. Many such clauses are in breach of statutory rules on general terms and conditions or other requirements of German law - notably data privacy protection law. Nevertheless, the use of moderately structured (and valid) anti-corruption clauses can reduce legal risks considerably.

Background

Contractual clauses in which parties undertake to comply with statutory provisions – in particular, anti-corruption and competition law – are becoming more common. Unlike in Anglo-American legal practice, until recently anti-corruption clauses (also referred to more broadly as compliance clauses, if they also cover other fields of law) were rare in German legal practice. However, the globalisation of business transactions and the far-reaching scope of UK and US anti-corruption laws have had a considerable influence on this development.

For example, Section 7 of the UK Bribery Act provides for an unlimited fine for an entity if an associated person offers a bribe and the entity has failed to implement adequate procedures to prevent such corrupt behaviour. In this context, the Guidance of the UK Ministry of Justice recommends contractual anti-corruption standards within the supply chain as adequate procedures. The US Foreign Corrupt Practices Act, jointly published by the Securities and Exchange Commission and the Department of Justice, recommends contractual compliance standards in connection with the review of business partners. Further, the International Chamber of Commerce (ICC) addressed the issue in 2012 and published a model anti-corruption clause. The ICC encourages undertakings to incorporate the proposed clause into their contracts so as to reduce the risks of corruption in relation to agents, advisers, distributors, contractors, suppliers and joint venture parties.

Few are aware that many of the clauses used in practice are invalid under German law because they are not in line with the statutory rules on general terms and conditions.

Anti-corruption clauses and risks of non-validity

In most cases, anti-corruption clauses (or more broadly, compliance clauses) oblige the often economically weaker contracting party to comply with certain regulations and standards. This can also involve compliance with ethical codes of conduct for suppliers, or even compliance with foreign statutory law (eg, the UK Bribery Act). In case of a violation, the other party may terminate the contract or claim damages. In addition, extensive inspection and auditing rights are often granted in favour of one party in the case of suspected breaches of the other party. The auditing rights in many cases are not in line with the strict German data privacy protection standards; moreover, the general contractual obligation to comply with certain provisions and standards frequently constitutes an unreasonable disadvantage of the other party and is therefore invalid under German law. For example, unreasonable disadvantage could be assumed if one of the parties is contractually obliged to comply with certain foreign legal rules (eg, the UK Bribery Act) if in the specific case the rules are not statutorily applicable. Also, the widespread provision according to which a supplier is expected to assume liability for its sub-suppliers, irrespective of fault, is likely to be invalid if the clause qualifies as general terms and conditions. A contractual clause can qualify as general terms and conditions if a clause has not been negotiated between the parties and the user of the clause has not seriously put up the clause for negotiation regarding its contracting partner. This also applies if other clauses in the contract have been negotiated between the parties.

Useful element of a compliance system

As entities and directors are liable not only for employee breaches but also, in individual cases, for attributable breaches of their business partners, the use of moderately structured anti-corruption clauses is generally recommended. Such clauses can constitute a useful element of a compliance system, as long as the invalidity risks are taken into account. The clauses can help to increase awareness of the need to comply with certain standards. For this purpose, it may be sensible for a contractual provision to explicitly demand compliance with certain statutory rules in connection with a right of termination for cause. In particular, medium-sized companies – an important tier of German industry – have yet to familiarise themselves fully with the issue of compliance and are thus often unaware of the legal prerequisites of corruption offences or competition law. Moreover, compliance clauses have the important side effect – at least, in conjunction with other compliance measures – of reducing the risk of directors becoming personally liable for potential regulatory breaches should corrupt practices or price fixing take place at the subordinate employee level. This applies, in particular, in terms of liability for administrative fines pursuant to Sections 130 and 30 of the Administrative Offences Act and – in the case of members of executive bodies – civil liability pursuant to Section 43(2) of the Limited Liability Companies Act and Section 93(2) of the Stock Corporation Act. In order to reduce liability risks, the clauses should be accompanied by other elements of an effective compliance system (eg, business partner screening, training courses and frequent audits).

Clauses should be taken seriously

Even if many of the anti-corruption clauses (or compliance clauses) currently in place are likely to be invalid, they should be taken seriously by the parties to which they are addressed. The validity of these provision depends on the individual case, which can ultimately be decided only by a court. Moreover, German legislation on general terms and conditions does not always apply (eg, if the contract is not governed by German law in the first place, or if the clause has been negotiated between the parties and thus does not constitute general terms and conditions).

The clauses should be subject to legal review by the parties to which they are addressed - in particular, if they oblige one party to pass on the obligations to its own business partners in the supply chain. This has the effect of sharing the liability risks and is thus also beneficial for the party itself. However, the contracting party should refrain from passing on invalid clauses to its own business partners. Legal review can bring clarity in this regard. In many cases – from the economically weaker party's perspective – it is at least worth attempting to renegotiate clauses that are likely to be invalid so that the individual duties can be passed on to other business partners.

For further information on this topic please contact Tobias Teicke at CMS Hasche Sigle by telephone (+49 40 37 63 00), fax (+49 40 37 63 040 600) or email (tobias.teicke@cms-hs.com).

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