Consultancy agreements and allegations of illegality

by Matthias Scherer

Contractors and suppliers operating abroad often conclude contracts with agents, consultants and other intermediaries who assist them in tender processes as well as in negotiating and performing contracts. Typically, these consultancy agreements provide that disputes are to be submitted to arbitration. Most disputes concern the consultants’ entitlement to a fee. In these disputes, the principal often argues that the contract was illegal under the applicable law. This notably occurred in two cases which led to two recent decisions of the Swiss Federal Supreme Court on applications to set aside or revise arbitral awards.

In the first case, a Swiss and a Taiwanese party had entered into a consultancy agreement in respect of a contract which the Swiss party wished to obtain for managing and maintaining an electricity plant in Taiwan. On the basis of the agreement, the Taiwanese consultant later initiated arbitration under the Swiss Rules of International Arbitration to obtain payment of his fees. The arbitral tribunal found in a partial award that the consultancy agreement was valid.

The Swiss principal applied to the Swiss Federal Supreme Court for revision of the partial award, the time limit for the setting aside of the award, which would have been the ordinary remedy in such a case, having already expired. The principal contended before the Supreme Court that the agreement had an illegal content as it contemplated bribery, and produced new evidence to support its claim. The Court denied the request, as the prerequisites under Swiss law for a review of the award were not met. Indeed, according to the Court, the evidence could have been produced in the arbitration and was therefore not new. The arbitration resumed and the arbitrators eventually rendered a final award in favour of the consultant.

The principal sought to have the final award set aside on the grounds that it breached public policy, relying on the same evidence on which it had previously sought to rely in its request for review of the partial award. The principal further argued that the Supreme Court must examine the alleged nullity of a contract on its own motion. The Court however dismissed the application. It found that the principal could and should have produced the evidence purportedly showing bribery during the arbitration. The Court also ruled that it would not review on its own motion the validity of private law contracts.

The principal again raised its public policy defence in the subsequent enforcement proceedings in Switzerland. The competent cantonal court however ruled that arguments which could have been raised in setting aside proceedings could no longer be raised at the enforcement stage.

In another dispute between a consultant and a principal, the Swiss Federal Supreme Court admitted the principal’s request to set aside an arbitral award due to procedural fraud. In the highly publicized Thales v Frontier AG matter, the award was annulled and the matter remanded to the arbitrators. The facts of the case are summarised below.

In 1989, France authorised the export of new F-3000 frigates to Taiwan. Mainland China objected to the export and a few months later, upon request of a French minister, France withdrew the export authorisation. In 1990, Thomson CSF (which later became Thales), the manufacturer of the frigates, entered into an agreement with Frontier, a Swiss company, to act as its agent. According to the agreement, Frontier was to receive remuneration amounting to 1% of the value of Thomson CSF’s contract with Taiwan for its assistance in relation to the sale of the warships. Behind Frontier was Alfred Sirven, a high ranking manager with the French oil company Elf Aquitaine. Subsequently, in 1991, the French government reversed its previous position and gave its final approval for the sale of the ships. The contract between Thomson and Taiwan was concluded on 31 August 1991 for a purchase price of approximately USD 2.5 billion.

Thomson however refused to pay Frontier, which initiated ICC arbitration as a result. In the arbitration, Thomson contended that the objective of the contract was in fact for Frontier to solicit the services of Edmond Kwan, a consultant of Elf Aquitaine in China, in order that he use his political connections to persuade the Chinese to cease their opposition to the sale of the warships to Taiwan. Thomson argued that the contract was void as its object was influence peddling. Messrs Sirven and Kwan, as well as other witnesses, were heard by the arbitral tribunal.

In 1996, the tribunal rendered its award, ordering Thomson to pay the contractual fee to Frontier. The tribunal found that Frontier had provided the services which were due under the contract by assisting Thomson, through Edmond Kwan, to appease Chinese opposition to the sale. The tribunal admitted that influence peddling was unlawful but found that it had not been proven that influence peddling had occurred. Thomson subsequently initiated criminal proceedings in France against Mr. Kwan and others for giving false testimony before the arbitral tribunal. On 1 October 2008, the French authorities ceased their investigation as a result of Mr. Sirven’s death and because there was insufficient evidence against the other actors. The French authorities however concluded that Sirven had indeed given false testimony during the arbitration.

On 17 December 2008, Thales (formerly Thomson) brought a request for review of the 1996 arbitral award before the Swiss Federal Supreme Court on the basis of the findings of the French authorities. The French investigation had shown that the real objective of the contract between Thomson and Frontier was not to lobby for the sale of the warships in China, but rather to persuade a French minister, who wanted to avoid retaliation measures by Mainland China, to reconsider his objections to the sale. Commissions had therefore been paid by Frontier to Mr. Sirven and a woman who had privileged relations with the minister. Mr. Sirven had represented to the arbitral tribunal that Mr. Kwan had been the only beneficiary of a commission, however it was uncovered that he had implicated Mr. Kwan merely for the purposes of the arbitration. The Swiss Supreme Court ruled that it had been established that Mr. Sirven had orchestrated an influence peddling scheme to the detriment of the French authorities. He had misled the arbitral tribunal and was therefore guilty of procedural fraud. In the opinion of the Supreme Court, Mr. Sirven’s untruthful testimony had had a direct influence on the tribunal’s award. Consequently, the Supreme Court annulled the award and remanded the matter to the original arbitral tribunal or a new tribunal to be constituted in accordance with the ICC Rules.


Several conclusions can be drawn from these two cases. The first is that arbitral tribunals and the Swiss Supreme Court will not uphold contracts that are flawed by illegality. However, it is for the party which alleges an illegality to prove it. Another conclusion to be drawn is that if evidence of illegality exists at the time of the arbitration, it must imperatively be produced in the arbitral proceedings. A party therefore cannot hold back evidence, even if it is self-incriminating, and rely on it in subsequent annulment or enforcement proceedings in the event of an unfavourable outcome of the arbitral proceedings. On the other hand, if a party misleads the arbitral tribunal, as could be uncovered in subsequent criminal proceedings, an arbitral award may not stand.

By Matthias Scherer and Sam Moss



Kluwer Construction Blog

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