Shark Attacks & Professional Courtesy

I have a friend who is a lawyer and he recently purchased a home on the North Shore of Long Island. He is an avid swimmer and I warned him that he needed to be careful swimming in some areas, because of shark sightings. He quickly responded by saying he had nothing to fear because, out of professional courtesy, the sharks wouldn’t dare come near him.

That’s probably why some of my best friends are lawyers.  They tell the best lawyer jokes.

A couple of them have also reminded me, with all humor aside, that just because the ethics and compliance programs of several large multinationals are overseen by the legal department does not mean that the multinational is ethical, or necessarily compliant.  We all like to view our corporate lawyers as the “protectors”, with staunch principles and a sense of decency, but that is not always the case.

The Board and Senior Executive Team is in the best position to ensure that the legal department is managing its operations, and various disputes, in an ethical and compliant manner.

We’ve all heard the controversial examples over the past few years, involving lawyers and their ethical lapses.  One of the most poignant is the Keppel Offshore & Marine scandal, where a senior member of its legal team admitted to drafting contracts for bribe payments that were ultimately received by foreign officials in Brazil.

However, direct involvement in unethical payments to foreign officials might be only one issue of concern, when it comes to the legal department.   Another might be a lawyer’s complicity in the unethical acts of others, especially those at an executive level.

Every word has consequences. Every silence, too.

Jean Paul Sartre

One example where this can occur, and which receives little attention, is in the area of commercial disputes and the use of arbitration.   Many multinationals include arbitration clauses in their commercial agreements with contractors and joint venture partners, and there is a certain amount of prestige for the financial centers who play host to the arbitral tribunals (e.g. Singapore, Dubai, London, etc.).

It’s an important litigation alternative, which is not free from transgressions, as stated by Dr. Stephan Wilske in his paper, International Arbitration and Its Dark Sides, In Particular Corruption.  And, due to the confidentiality of the arbitration process, it tends to succeed in “averting the scrutinizing gaze of the public”.

A couple of months ago, a colleague came to me with a hypothetical case involving what he described as tainted evidence that was used in an arbitration hearing.  He wasn’t looking for a legal opinion, but just wanted my view as to what the lawyers should have done when confronted with the questionable evidence.

The hypothetical is presented below, along with the feedback (non-legal opinion) that I presented to my colleague.

Hypothetical

Two Joint Venture (JV) partners, Party A and Party B, were located in a developing nation.  Party B was unsatisfied with the progress of the JV and sought to have it dissolved on the grounds that Party A was not meeting its obligations under the JV agreement.

Party B commenced legal action in the country where both JV partners were headquartered, while Party A progressed with invoking the arbitration clause included in the JV agreement.

During the early days of the dispute, Party B sent a request to a Foreign Official (FO) in the country where both partners were headquartered, asking if the FO could revert the assets, initially held by Party B, from the JV back to Party B.  This request was ignored for approximately seven months.

Approximately four months into the dispute, Party A gave the FO “something of value”, which the FO accepted, even though it was illegal under the anti-bribery and anti-corruption laws of the country where the JV partners were headquartered.   The purpose or motive for the gift was irrelevant.  The mere acceptance of something of value (which was substantial in this case) was enough to warrant sanctioning of the FO, and Party A, under the laws of the jurisdiction in which both were located.

No one knew of the gift to the FO, other than the executives of Party A and their legal representatives (approx. nine external lawyers and two senior internal lawyers at Party A).  In fact, the gift would remain a secret for several years.

Seven months after the dispute began and approximately two months before the first arbitration hearing was to begin, the FO provided a response to Party B regarding their request to have the assets of the JV reverted back to Party B.  In a rather long-winded position paper the FO denied Party B’s request.

Now, the FO’s decision not to revert the assets wasn’t required.  In fact, regardless of the gift from Party A (three months before his decision), the FO could have chosen not to make any decision at all, until the end of the arbitration, in order to avoid the perception of a potential conflict (with either party).   However, he made an official decision in his capacity as a government official charged with overseeing such matters.

The FO’s decision was included as evidence, along with volumes of other material, in the arbitration hearings that were held offshore.   All of Party A’s legal representatives were aware of the gift that was given to the FO.

The decision by the FO featured in the arbitral tribunals award opinion, along with a discussion of the other evidence presented, where they ruled in favor of Party A and held that the JV continued to exist.

My Feedback

Well, my initial thought was, holy cow, that’s one heck of a hypothetical!  I then went on to share my initial non-legal feedback on the matter.

Obviously, this was a case where the legal team was complicit in the acts of executives from Party A company.   While the gift may not have been illegal in the country where Party A executives lived, it was illegal in the country where the JV was located and at least one of the executives of Party A was an officer of the JV.

As I explained to my colleague, I’m not aware of the ethics code for lawyers in the developing nation in question, but certainly in most jurisdictions lawyers are prohibited from participating in conduct that could be illegal or allowing a client to conduct fraud.

The hypothetical, as presented, suggests that the legal team allowed both ethical lapses to occur, which is troubling.

It’s not clear what degree the decision, with respect to the reversion of assets, played in the award by the arbitral tribunal.  However, it did feature in the opinion and represented a significant part of the evidence submitted by Party A.

This hypothetical outlines a situation that should not be permitted by a Board.   More enhanced training of legal representatives is required in order to ensure that they do not allow such ethical lapses.  Although, I’m not sure that training would have helped in this situation.  The lawyers appear to have completely forgotten their professional obligations.

As far as what I would have done?  Well, I would have avoided providing a gift to the Foreign Official, in light of the likely illegality and conflicts that would be created.

Your views on this hypothetical are welcome.