ICC award against a PDVSA subsidiary annulled for non-conformity with public policy of the seat of arbitration

Takeaways:

• To protect enforceability, an arbitral award must conform to the fundamental principles of public policy in the seat of arbitration.
• The arbitral tribunal’s “clear and convincing evidence” standard of proving corruption was too stringent, in the view of the reviewing court.
• Procedural rules and due process considerations should not have impeded the arbitral tribunal from considering evidence that related to the fundamental legal principle, codified in the Dutch Civil Code, that a contract concluded through corruption must not be given legal effect.

In the arbitration proceeding, the tribunal placed the burden of proving corruption through “clear and convincing evidence” squarely on Bariven, reasoning that “the seriousness of the accusation of corruption demands clear and convincing evidence.” Thus, to successfully assert its defense of non-payment under the contract, Bariven had to prove “that corruption existed” in concluding the purchase contract. Bariven placed on the record documents from a US criminal proceeding that showed Wells was part of a Venezuelan businessman’s bribery scheme, for which he had pled guilty foreign bribery and tax charges before US federal court.

Moreover, after the final hearing the arbitral tribunal requested documents, consisting of Wells’ purchase invoice from the machinery supplier and bidding documents that Bariven received with the tender, to evaluate the pricing of the machinery. Over Bariven’s objections, the tribunal disregarded the documents for purposes of considering whether they demonstrated corruption. The tribunal reasoned that due process barred consideration of the evidence, outside of the discrete pricing analysis, at that late stage of the proceeding.

In the award, the arbitral tribunal questioned the legitimate nature of Wells’ conduct but ultimately decided the allegations were “not sufficiently concrete” to satisfy the burden of proof.

In the annulment proceeding, the Dutch court found error with legal and procedural aspects of the award.

The reviewing court was guided by the fundamental principle of Dutch law that agreements created through corruption should not be given legal effect. Insofar as “clear and convincing evidence” meant that corruption could only be determined on the basis of direct evidence (here, that the purchase order was concluded through the payment of bribes to Bariven employees), the court concluded that too strict a standard was applied. The decisive question was whether the agreement would not have been concluded, or would not have been concluded under the same conditions, if the corruption had not taken place. The court explained that actual corruption need not be shown where circumstantial evidence provided “strong indications” that the contract was procured through corruption.

The court also found error in the ICC tribunal’s decision not to consider certain evidence of corruption on the procedural basis that the evidence was untimely. While the court recognized that an annulment procedure should not be used as a disguised appeal, it cautioned that a limitation of procedural law should not prevent compliance with a fundamental rule of law such as the prohibition of corruption. Exercising the discretion granted to it under Dutch law, the court independently assessed whether the purchase agreement was concluded under the influence of corruption, reviewing all facts and evidence anew.

The court annulled the award, as the factual evidence provided strong indications of corruption and Wells had failed to provide any substantive explanation for the discrepancies and inconsistencies in the evidence. In the court’s opinion, the purchase agreement would not have been concluded without corruption, or not under the same conditions. This finding was incompatible with public order, requiring the arbitral award be set aside. The arbitral tribunal’s decision that it lacked jurisdiction over Bariven’s counterclaim for overpricing the machinery in the purchase contract was left intact.

The annulment decision in Wells Ultimate Service LLC v. Bariven S.A. of the Court of Appeal of the Hague is available here (in Dutch).