First "follow-on" claim for bribery damages unsuccessful, but law on side of disadvantaged rivals, says expert

Out-Law News | 03 Nov 2014 | 10:59 am | 3 min. read

A Jordanian firm was not entitled to 'follow-on' damages from a competitor which was awarded a contract after paying illegal bribes to authorities in Iraq, the English High Court has ruled.

Innospec had previously admitted to paying the bribes in separate criminal proceedings in the US; leading to a civil claim in England from rival Jalal Bezee Mejhel Algaood and Partners (JBMA) that it would have otherwise won the contracts. However, in a lengthy judgment, the High Court said that JBMA did not establish any of the three matters needed for its claim to succeed.

Commercial disputes expert Stuart McNeill of Pinsent Masons, the law firm behind Out-Law.com, said that the case was the first example of a claim for follow-on damages of the type that exist in cartel claims on the back of admitted bribery. He said that JBMA's lack of success was down to the facts of this particular case and did not mean that future claims of this nature would be unsuccessful.

"While Innospec will be rightly relieved at the decision, the claim failed on its facts, not on the law," he said.

"Almost all of the judgment is taken up with an analysis of the evidence; with no commentary on the law of unlawful means conspiracy, the very basis for the claim. As such, it will be of little comfort to other parties that have paid bribes, to the detriment of third party competitors. Damages claims based on bribes are very much alive – they just did not get off to the best of starts," he said.

Follow-on damages are a regular feature of competition cases, where they often involve customers of cartels claiming for over-charging, reduced margins and reduced sales volumes. A company that lost out on a contract because a rival paid a bribe could potentially be entitled to damages based on a claim of conspiracy to injure by unlawful means. In order to be successful, the innocent company would have to show that the 'unlawful means' - in this case, the bribe - was the instrument which was used to cause the damage.

JBMA had accused Innospec, its employees and agents, of damaging its business by bribing officials within the Iraqi Ministry of Oil (MOO) between 2003 and 2008. They claimed that, as a result of this bribe, the MOO purchased Innospec's fuel additive rather than their own at a cost to JBMA of over $26.5 million. Innospec had already been charged with and pleaded guilty to offences under the US Foreign Corrupt Practices Act in Iraq and Indonesia over the same period. Innospec denied that bribes or the promise of bribes in the form of "after-sales service fees" (ASSFs) led to the award of the relevant contract.

In its judgment, the High Court found that Innospec had made various illegal payments to the Iraqi authorities. However, those payments did not influence the MOO's decision to continue using Innospec's product or not to change to JBMA's lower octane product, not least because the Iraqi refineries were not yet able to use JBMA's product. In addition, an agent of Innospec's had kept money that had been transferred to him by the company, rather than using it to pay bribes.

"Whilst I accept that bribes were promised to unidentified MOO officials to facilitate the 2008 [agreement], I do not accept that [three named officials] were being corrupted systematically by [the agent] to persuade them not to support further purchases of [JBMA's product] or that there was some anti-[JBMA] faction in the MMO," the judge said.

"The reasons for further purchases of [JBMA's product] not taking place at that time were the genuine ones referred to in the previous paragraph, not concocted reasons induced by the promise of bribes. The bribes which were promised were essentially the sort of 'oiling the wheels' to ensure a contract was performed smoothly which seems to have been endemic in Iraq ... Even if there had been corruption of MOO officials to persuade them not to support [JBMA's product], it is important to bear in mind that corruption was not causative of the loss claimed," the judge said.

Stuart McNeill said that the judgment also showed the need for companies claiming follow-on damages to "check their own houses are in order before embarking on litigation".

"The judge was clearly not impressed that JBMA too had paid so-called 'after sales service fees' to the Iraqi government as part of its extra-contractual arrangements," he said. "The court would have been prepared to discount the claim, even if it had been successful, by 30% to reflect the chance that JBMA's contract too would have been terminated due to these illegal payments."

"It did not help that JBMA's key witness, an intelligent and sophisticated businessman, claimed not to know that the ASSFs paid by JBMA were illegal, while at the same time characterising the same type of payments made by Innospec as bribes," he said.