Rescission of Contracts and Revocation of Licenses As Means to Combat Corruption

Article 34 of the UN Convention Against Corruption (UNCAC) generally requires that each State Party “take measures … to address the consequences of corruption.” In recognition of the fact that government contracts and licensing processes have been among the areas most prone to corruption and bribery–and of the fact that the threat of criminal punishment may not be a sufficient or even viable deterrent to such corruption–UNCAC Article 34 further declares that “States Parties may consider corruption a relevant factor in legal proceedings to annul or rescind a contract, withdraw a concession or other similar instrument or take any other remedial action.” Although that second sentence of Article 34 is not mandatory, State Parties–particularly demand-side countries with an unfortunate reputation for corruption in government contracting (such as Kenya, Guinea, Indonesia and Philippines) should adopt that principle into their national laws.

Law providing for the nullification of contracts or concessions procured through corruption would be a strong deterrent to bribe-paying by firms. Although such bribery is already illegal, in some cases criminal punishments are simply insufficient to deter corrupt practices conducted in demand-side countries. Often the threat of sanctions is low, and even though some companies have been hit with substantial sanctions, this loss has been mitigated by the profits acquired by the operation of the tainted contract or license. And a company might think twice before acceding to a bribe demand from a lower-level public official (or even a high-level official) if the company knows that, by paying the bribe, they may be putting the whole contract in jeopardy if the government later decides it wants to reneg on the deal. Moreover, if a demand-side country were to adopt a law that allows for nullification of any government contract or concession procured through corruption, it would send strong signals to that international community that this country will no longer tolerate these corrupt practices.

Of course, as with any legal reform, there are legitimate concerns about adopting the second sentence of UNCAC Article 34, but these can usually be addressed:

  • First, a law allowing for nullification of tainted contracts might well create heavy workload for the agency or court responsible for assessing these cases. This implies that countries will need to invest in capacity building prior to full adoption of such a law.
  • Second, when a country amends its anticorruption law to create a legal basis for rescission of tainted contracts or licenses, the country must ensure that all contracts and licenses are subject to this regulation, and the country’s anticorruption enforcers must be consistent in assessing every government-related contract and license, so as to prevent any unfair or political bias.
  • Third, the law should mandate that each individual contract or license proceeding disclose clearly and in advance that corruption is grounds for rescission of the contract or revocation of the license. This would prevent companies from being able to bring State-Parties before arbitration due to rescission of tainted contracts or corrupted licenses, such as what happened in Guinea.
  • Fourth, although countries should fully adopt Article 34’s recommendation for future contracts or licenses, this rule should not be implemented retroactively. Retroactive application, particularly in a country where bribery has been pervasive, would be too disruptive and costly, as it might entail undoing hundreds of contracts and licenses.

Admittedly, adopting the recommendation in the second sentence of UNCAC Article 34 might seem unrealistic in demand-side countries where it has historically been almost impossible to facilitate a business deal without bribing a public official. This is probably why, in reality, most of UNCAC’s State Parties have not adopted this recommendation. But when it comes to combating corruption, countries must be dynamic, progressive and proactive in finding a set of laws that would best support their anticorruption strategies. Article 34 suggests one powerful, promising approach. If enforced effectively, it may not only increase deterrence, but change the culture of corruption that so often surrounds government contracting and licensing.

4 thoughts on “Rescission of Contracts and Revocation of Licenses As Means to Combat Corruption

  1. I agree with the proposal and approach you provided. This approach could be a breakthrough in changing corrupt culture in many developing countries. What I think to be really interesting in your piece is the fourth point on how to adopt the second sentence of UNCAC Article 34, i.e. not to implement it retroactively. Living in a developing country, I realize that providing comfort and certainty to investor is not an easy thing to do.
    In addition, if implemented, i find it necessary for the judicial institution in the relevant country to be “clean” and just; to make sure that every decision that annuls a contract or revokes a license is accountable.

  2. Pingback: Corruption Currents: Interpol Issues Red Notice for Yanukovych | Guess Who Leads the Bribery World?Guess Who Leads the Bribery World?

  3. This is a really compelling idea, Shinta. Is there any concern that, particularly in demand-side countries where corruption is endemic, this law could be used as a means of actually further extracting bribes from corporations? Within countries in which governments have already taken a tough stance against corruption, having convincingly signaled not only to foreign corporations but even more importantly having made clear to its own public servants that it will not tolerate bribe-taking, I think the rule you advocate could be the coup de grâce for bribes in procurement contracts. However, in countries where the incidence of bribe-demands in relation to government contracts is high, this law could end up being a way for lower level officials to extract bribes prior to the granting of a contract (companies may still be willing to pay bribes if they determine that a) their chances of winning the contract are probably zero if they absolutely refuse to bribe anyone; b) there are government incentives to having the contract fulfilled so there’s a chance the government will be hesitant to rescind the contract) and then higher level officials can use this law to demand further payments later on, different contractual terms, etc. by holding the threat of contract rescission over the head of the corporation.

    Your post also make me think of Anna’s Dec 19th post, in which she discusses the value of thoroughly investigating bribery. Similarly, this law would benefit by adopting a clear position mandating that before rescission could take place, a full investigation into the bribe payment and subsequent disclosure of findings is required.

  4. I think this proposal has a lot of potential. I do wonder, however, about ripple effects. For example, what happens to subcontracts? If Company A pays a bribe to a government to get a contract to build a school, and then contracts (without corruption) to brick suppliers and sheet metal suppliers etc… would those subcontracts also be nullified if the main contract is? If not, you could end up with some pretty silly results (where company A is now sitting on tons of brick with no school to build). However, if they are nullified as well, you could leave many international companies more hesitant to work in developing countries if some of their contracts might suddenly be nullified due to no fault of their because some other entity was corrupt somewhere in the procurement chain.

    Similarly, would there be a ‘point of no return’ beyond which contracts could no longer be nullified? again thinking of construction, if the corruption were only discovered when the building is halfway built, would it benefit the country to then cancel the contract?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s