Beginning from the simple and indisputable premise that those harmed by corruption should be able to do something about it, Professor Abiola Makinwa of the Hague University of Applied Sciences develops a novel approach to attacking the ubiquitous problem of corruption in public procurement. To appreciate it, take an example. Suppose government awards a contract to a company to build a road so farmers in the region can more easily and cheaply bring their products to market. Suppose further that thanks to corruption the road is either never built or it quickly becomes impassable. Who suffers most from the construction company’s failure to perform the road building contract? Who has the greatest stake in remedying the wrong?
The answer to both questions is clearly “the farmers,” yet as Professor Makinwa explains in a paper written for the Open Society Foundations’ Justice Initiative project on what civil society can do to step up enforcement of the anticorruption laws, the farmers have no legal right to sue for breach of contract. This holds whether the farmers live in a country governed by the civil law or the common law. In both, the general rule is that only parties to a contract can sue for its breach. Hence, in the case of the breach of the contract between the government and the road contractor for the contractor’s failure to build the road, only the government can haul the contractor into court.
But while that’s the general rule in both common and civil law systems, both systems recognize that there will be times when the principal beneficiary of the contract is a third-party and both permit the parties to a contract to give that third-party a right to sue for its breach. When in a public procurement there is an easily identifiable group of beneficiaries, like the farmers in the example, why shouldn’t these third-party beneficiaries have the right to sue? Professor Makinwa makes a strong case that they should while at the same time suggesting ways to ensure including third-party rights in public contracts does not result in a litigation free-for-all. Governments and civil society groups looking for ways to bolster the enforcement of the anticorruption laws would do well to examine her proposal carefully.
Professor Makinwa’s paper is the seventh in a series commissioned by the Open Society Justice Initiative on civil society and anticorruption litigation. It follows earlier ones on i) standing by GAB editor-in-chief Matthew Stephenson, ii) civil society litigation in India by Vidhi Centre for Legal Policy Director Arghya Sengupta, iii) private suits for defrauding government by Houston Law School Professor David Kwok, iv) private prosecution in the U.K. by Tamlyn Edmonds and David Jugnarain, v) damages for bribery under American law by this writer, and vi) public trust theory by Professor Elmarie van der Schyff, a professor of law at South Africa’s North-West University. The papers are all available here.
Interesting and useful information Rick. And thanks for references to all of the papers. I look forward to reading and re-reading some of them.
There are many issues that need to be linked to this idea, including human rights. One issue I wanted to highlight concerns the need for and universal right to report on corruption and blow the whistle on corruption by any aggrieved party.
I agree that a more victims-rights approach is very much needed. An additional often overlooked inter-related issue, sometimes related to litigation but always to the universal rights to access to information and report on corruption, is how to protect whistleblowers and others (like the farmers you mention) who want to blow the whistle on corruption or access information.
Those who want to access information, report on corruption or blow the whistle need litigating attorneys to protect their due process and free speech rights, as well as their identity, jobs and personal security. Giving whistleblowers and victims like farmers practical, secure and effective formal and informal whistleblower mechanisms and real-world protection is very important and would help promote victims rights and expose more corruption at the same time. The laws in most countries and in most international institutions, like the UN and World Bank, still don’t provide these rights, protection or rewards.
Let’s make sure we have the right laws and policies in place to protect the rights of those who expose and report on corruption and that we have lawyers ready and willing to stand by their side through litigation or otherwise. (Lawyers representing whistleblowers will need their own protection in some countries.) Providing them both protection and incentives is clearly the way to go.
Inserting a sleeping third-party beneficiary clause into public contracts is, in short, a brilliant idea. There are, however, a few issues that might arise.
1) The paper states that the clauses should only be triggered when there is sufficient evidence of corruption/fraud, which would then give the third-party the standing to sue on the contract. My question is, where would the evidence come from? If the third-party cannot start the process of discovery until the clause is triggered, then under what circumstances would there be sufficient evidence?
2) What would the remedies be? Let’s say that the third party beneficiaries of a road project are the inhabitants of an isolated village. A contract is signed between the company and the government and that contract is fraudulent and the road is never built. Suppose the inhabitants of the village had reasonable expectations that it would be built and they sue. They win on the merits – then what? Is the country ordered to make another contract with another company? Is the population of the village reimbursed in some way? The typical remedy is for money damages. Would Professor Makinwa prefer specific performance (ordering the road be built)? It’s not entirely clear to me from the article.
3) Defining the third-party beneficiaries may be more difficult than it seems. After all, we are talking about the provisioning of public goods, and determining who within that public stands to benefit “enough” would be a difficult thing to do on a case-by-case basis, so it might be difficult to write boilerplate language. However, certain contracts might already contain community development agreements (CDA). In those cases, the third-party beneficiaries could be defined by the ‘community’ in the CDA.
The idea is innovative and compelling, and I look forward to seeing how it is further flushed out.
The OSJI paper is very interesting – I have generally considered corruption a matter of criminal law, or as mentioned in the above comment, as related to human rights law. The concept of using civil suits to address corruption seems like a very useful tool in contexts in which the government is unwilling or unable to prosecute corruption as a crime. However, I would like to know specifically how this method would ensure that this will not end in the “litigation free-for-all,” beyond Professor Makinwa’s suggestion of making the third party beneficiary clause a sleeping clause. It seems that a very large range of people could potentially become third party beneficiaries, especially if they need not be specifically identified beforehand. Also, while the “sleeping clause” aspect is meant to prevent this free-for all, I wonder if requiring a “threshold of evidence of corruption or fraud” in order to trigger the clause would actually impede the intended form of litigation. It seems like there is a delicate balance there between empowering third party beneficiaries and preventing frivolous suits.
To Keith, yes, absolutely agree. Promoting a legal framework that gives the ‘indirect victim’ the incentive, legal right and necessary protections to challenge acts of corruption is KEY to promoting the efficacy of the fight against corruption. Paul Carrington, for example, makes the case for a global ‘False Claims Act’ style instrument that can incentivize ‘like moths to the light’ victim plaintiffs. Civil society, nongovernmental organizations and community based action initiatives should indeed focus on the development of such ‘incentive platforms’ as a central part of their agenda. Kudos to the Open Society and GAB for pushing this issue to the fore-front in their ‘Legal Remedies for Corruption’ project.
Michael, very true. In most cases the indirect victim (such as the ‘farmer’ in my example) will NOT have the means or wherewithal to produce evidence of corruption. What the Sleeping Third Party Beneficiary Clause does is to give the identified beneficiary automatic standing to piggyback evidence of bribery that may be unearthed in a criminal or other investigation to same extent that the direct parties to the contract can do so.
As regards, results? In my book, the real success of a Sleeping Third Party Beneficiary Clause would occur where it is never triggered into operation but has instead acted as one more incentive for compliance with anti-corruption rules. If it IS triggered, it provides legal standing and a seat at the negotiating table with respect to any settlements reached (FCPA or otherwise). It also provides an easily identifiable group to which agreements to contribute to anti-corruption initiatives in a settlement agreement can be directed. I refer to the interesting post by Spalding: Reaching Bribery’s Victims (Part 3) available at https://globalanticorruptionblog.com/2014/06/19/reaching-briberys-victims-part-3/. Settlements, not court cases, are after all the more likely enforcement outcome in foreign bribery cases. Having said this, crossing the ‘legal standing’ Rubicon makes ALL the other options you itemize at least theoretically possible.
Defining the third-party beneficiaries? You say ‘certain contracts might already contain community development agreements (CDA). In those cases, the third-party beneficiaries could be defined by the ‘community’ in the CDA.” I say, ‘Brilliant!’
Thank you for these very helpful comments Michael. I will certainly consider them further as I flesh out this idea.
Thank you very much for this post!
Prof. Makinwa’s idea contributes to allowing civil society to be a direct party to a procurement contract and this could be beneficial for fighting corruption in several ways;
1) As mentioned in Prof. Henderson’s comment, the farmer becomes the whistleblower and the expected benefits of setting an institution that makes the farmer a whistleblower might be achieved even before any formal protection mechanisms are created. Enabling an outsider of a contract to be a whistleblower fits with empirical proof provided in the paper by Dyck, Morse, Zingales (Who blows the whistle on corporate fraud? 2010). This papers shows that the majority of the whistle blowers in the analyzed cases of corporate fraud were not the internal governance actors but stakeholders (mainly employees), regulators and newspapers. In corruption cases, regulators should not be expected to perform as whistleblowers therefore it is important to compare employees and journalists to the farmer in our example. Although employees have certain rights to whistleblower protection, they might still fear to be on a blacklist for potential employers after blowing the whistle. The paper argues that journalists gain reputation by blowing the whistle however this could also taint them for the future and they might be denied from access to information in future occasions. As these potential negative consequences of whistleblowing did not stop these actors from blowing the whistle in reported cases, maybe the farmer, even without any special protection, could still be expected to blow the whistle and start a litigation process. Other than a journalist or an employee, the farmer has concrete benefits from the timely and correct actualization of a procurement contract. Also it could be assumed that a farmer would be well-informed that starting a litigation process against corruption has future benefits, so whistleblowing could bring more and better public services for the future.
2) It is also important to read the idea of a sleeping third-party-beneficiary clause from the perspective of deterrence. Increasing the number of monitoring actors might create incentives for avoiding corruption since it potentially increases the risk of being brought to court.
3) The idea of including the civil society directly in the procurement contract would also be a novel approach to an established public choice view that would argue that the civil society could be involved in this discussion simply by not voting for the same government agents in the next election. However, making the civil society a direct party to the procurement contract allows the civil society to react faster by almost providing a short-cut for raising their voice against an unjust contract. On a broader perspective, it could even be expected that, in a political environment where there is competition between political parties, the number of times the sleeping third-party beneficiary clause is triggered against one party can contribute to the political campaigns of an opposing party. This would create additional incentives for public agents to avoid corruption.
This is an interesting premise that raises further speculative opportunities. Is it possible to safeguard the hitherto unknown benefit of the the third party, by bringing them into a new type of contract, from the beginning of future transactions?
What if the bidding process involved an indication of the 3rd party beneficiaries of any underlying transaction? Would this not mean that there would be an immediate improvement in the quality of the said bid? Surely the knowledge that there could be litigation consequences, not just to the owner of the contract , but also to any declared beneficiaries of the contract, would change every element of the scoping of the transaction?
So look at the benefit all round. A greater level of diligence in preparing for a bid, a mindset of flawless execution to ward off potential litigation and an increase in societal goodwill, as communities and other 3rd parties become an interested part of the contract process. The biggest benefit of this proposition would of course be the new standard of transparency that this would introduce into general business norms. Would this have a knock on effect on other areas of business and or society? Probably. And so the logic could play on, untill we get into broad shift in what are accepted as business norms and societal norms, for the benefit of the host economy,to what at the moment is just my reflex thoughts inspired by the ingenuity of Mrs Makinwa’s article.