Update: commercial contracts

Progress of the Act

The Bribery Act received Royal Assent on 8 April 2010 and its implementation is due at the end of a three-month notice period which will start when the secretary of state for justice publishes the statutory guidance under section 9 of the Act 'about procedures that relevant commercial organisations can put in place to prevent persons associated with them from bribing as mentioned in section 7(1)'.

The Ministry of Justice has published such guidance only in draft and has conducted a consultation in relation to that draft guidance.

While the Act is controversial and its implementation has been delayed twice, it would be more controversial if it were not now implemented.

The Act's genesis is the UK's ratification of the OECD's Bribery Convention (Command Paper number: Cm3994) in 1998. That threw light on the UK law's non-conformity with the convention and the OECD has since criticised the UK's failure to bring its law into line, even as recently as February 2011 when it warned that British firms might face 'international sanctions'.

The coalition government now has little choice but to implement the Act, especially given the additional controversy of the failure of the Serious Fraud Office to pursue an inquiry into allegations of bribery by BAE Systems on the Al-Yamamah arms deal, and the fact that the bribery bill was pushed through very quickly before last year's election with cross-party support.

Many have criticised the Act, particularly its failure to distinguish between different sizes of business and different types of activity, some of which are not caught by similar legislation; for example, facilitation payments '“ legitimate payments to speed up or enable processes '“ are not criminalised under the US Foreign Corrupt Payments Act or the OECD's Bribery Convention, but are prohibited under the new Act. Nevertheless, it is unthinkable that the Act could be revisited or ignored.

Consequently, we now know the framework of the legislation and are able, without need for any delay, to prepare ourselves for the commencement of the four new offences:

Section 1: bribing another person '“ 'offers, promises or gives a financial or other advantage to another person and'¦ intends the advantage'¦ to induce a person to perform improperly a relevant function or activity' or 'reward a person' for such improper performance;

Section 2: being bribed '“ 'agrees to receive or accepts a financial or other advantage' related to such improper performance;

Section 6: bribing a foreign public official; and

Section 7: failing to prevent bribery by associates '“ 'a relevant commercial organisation'¦ is guilty'¦ if a person'¦ associated with [it] bribes another person intending'¦ to obtain or retain business [or a business advantage] for [it]'¦ [without] a defence'¦ that [the commercial organisation] had in place adequate procedures designed to prevent persons associated with [it] from undertaking such conduct'.

Impact on solicitors

Given the integrity with which solicitors are required to conduct themselves, and given that bribery is currently (until the implementation of the Act) both a common law offence and a criminal offence under the Prevention of Corruption Acts 1889 to 1916, the risk of a law firm or a solicitor committing any of the first offences should not be higher than the current risk and should not cause undue concern. That is not to invite complacency; a quick look at the headnote for Romy Nayyar and others v Denton Wilde Sapte and Advani [2009] EWHC 3218 (QB), in which a senior executive of a law firm became involved in a client's bribe, illustrates how the risk can arise and that no one is immune.

What is new though is that the law firms may commit the section 7 offence of failing to prevent bribery by associates unwittingly if an employee, agent, supplier, consultant (for example, a person assisting a law firm to set up or complete business in another country or to acquire a property or to win a tender) bribes, where the law firm has failed to implement 'adequate procedures' to prevent such bribery.

We now know the need to implement 'adequate procedures' will be key and the draft guidance indicates that law firms, especially those reliant on third parties and those in risky jurisdictions, should take action now and not wait until the finalised guidance has been published and the three-month notice period has started running.

Adequate procedures

The draft guidance sets out six principles which are intended as a starting point for the procedures that commercial organisations should put in place to prevent bribery:

1. Risk assessment.

2. Top level commitment.

3. Due diligence.

4. Clear, practical and accessible policies and procedures.

5. Effective implementation.

6. Monitoring and review.

While the Ministry of Justice is working on this guidance 'to make it practical and comprehensive for business'¦ and effective for all sectors' at the very least, solicitors will need to embrace each of those principles. That is likely to involve:

(a) amending file opening and closing procedures to assess the risk that bribery has occurred or will occur;

(b) internal policies and procedures being adopted and implemented throughout the firm by senior management;

(c) due diligence as to the risks of clients involving the firm in bribery or agents, consultants, advisers and other third parties bribing others in connection with the firm's business;

(d) education of all staff, especially fee earners, and;

(e) ongoing review of the effectiveness of such policies.

Ultimately, the risk, if reputational risk is insufficient motivation to take such actions, is of imprisonment for up to ten years and of unlimited fines. Such penalties can be imposed on firms and on individuals and, as Lord Justice Thomas in R v Innospec made clear, will be severe: 'Companies who are guilty of corruption should be treated no differently to others who commit [burglary or rape].' Disqualification from directorship and from practice is also a likely consequence for individuals.

The Law Society has not yet published any guidance but is considering some events around the country to roadshow guidance to solicitors on how to deal with the new Act. We do not know when the clock will start ticking '“ all the MoJ has said is it will 'come forward with further details in due course'.

Effect on commercial contracts

Given that every commercial organisation bears the same risks described above and will need to implement its own 'adequate procedures', our clients' commercial contracts inevitably must be tailored to act as a defence in the event that bribery occurs.

The risk comes not only from a commercial organisation's own employees but also from its agents and associates, as well as from its suppliers and customers. The ease with which an accusation of bribery can be made and the disastrous costs of even an unfounded accusation, in terms of damage to reputation and the cost of repair or defence of the client's brand or even livelihood, justifies real caution.

The range of protective mechanisms which the ideal contract should contain is exemplified by a range of public sector contracts (for example, the NHS standard form conditions of contract contain specific provisions relating to the Prevention of Corruption Acts).

Draftsmen should consider:

1. Positive and direct obligations to prevent corruption. For example, obligations:

(a) not to offer or accept bribes or to commit any Bribery Act offence;

(b) to disclose immediately all bribes, offers of bribes or suspicions of bribery or corruption; and

(c) to use all reasonable endeavours to prevent bribes (including by adoptingadequate procedures in accordancewith the Act and by following the section 9 guidance).

2. Warranties and representations '“ the contracting parties will be asked to warrant and/or represent on entering into a contract, that:

(a) they have not committed any Bribery Act offence;

(b) they are not aware of any such offence having being committed;

(c) they have never been involved in any bribery or dishonesty. This is particularly relevant in the field of public contracts where conviction of offences involving 'active bribery' can result in mandatory debarment from public contracts under the EU Public Procurement Directive (article 45, 2004/18/EC); and

(d) they have disclosed to the other party all commissions and other payments paid or received in connection with the contract.

3. Rights of termination '“ in the event that any Bribery Act offence has been committed, the innocent party should have the right by contract to terminate the agreement, with the benefit of an indemnity against the costs of, and consequent on, such termination.

4. Rights to remove those complicit in the offences '“ as the right of termination may be a blunt tool to deal with the problems (and indeed may even be counter-productive or no solution), the contracting parties ideally should have the right to require that the guilty party terminate the employment, contract or involvement of any guilty employee, subcontractor or other associate.

5. Recourse where the bribery has resulted in a loss to the innocent party '“ the innocent party will benefit from an indemnity for the loss caused by the offences including for the costs of legal and other professional advice on investigations, prosecutions and civil actions. Bribery may have significant tax and accounting consequences, especially where it continues over a long period.

6. Rights to information '“ contracts ideally will contain information rights to ensure that, in the event of any suggestion of an offence, the innocent party is able, without any barrier, to investigate the matter and to obtain all relevant information to enable it to consider its options.

7. Warranties and indemnities on acquisitions '“ M&A lawyers should be looking to extend their already comprehensive standard form warranties to include particular warranties as to offences under the Bribery Act in acquisition agreements.

8. Shareholders' agreements, partnership and LLP agreements and joint ventures '“ co-owners of businesses should look to enshrine within their agreements:

(a) adherence to the principles of anti-corruption (and all laws prohibiting it) with rights to terminate in the event of material breaches of those principles (and laws);

(b) rights of veto in respect of acts which are in breach of those principles; and

(c) duties of disclosure as to the reasons for all accounting entries and an overall duty to account properly and honestly for all transactions.

Not all contracts will require all such mechanisms but it will be a rare contract where a solicitor feels that there is no practical risk. The skill, as ever, is tuning the protection to the risk without preventing or rendering more difficult ordinary business transactions, while also considering that the client may use the contract to evidence its adequate procedures.