The issue of whether a payment to a principal’s representative constituted a de facto secret commission was recently the subject of a UK High Court’s decision on an application to set aside an arbitration enforcement order.
In Honeywell International Middle East Limited v. Meydan Group LLC, a sub-contractor was invited to tender by the employer’s representative and sub-contract nominator. The latter had drafted tender documentation requiring the successful tenderer to pay it a cheque of 400,000 AED [$109,000] in respect of “total lithography charges” (tender and contract documentation). Prior to nomination, a consultant engineer who was also involved in the tendering process, considered this requirement to be unusual and having queried it with the sub-contractor sent an email to a senior member of the employer’s staff expressed to be “for your eyes only” and pointed out that 400,000 AED appeared to be “curious and particularly high and seemed to me to indicate irregular arrangements.”
In his witness statement, the engineer stated: “I thought I should bring these payment arrangements to the attention of (the employee) with whom I already had a dialogue.” Despite this no further action was taken, apparently on account of a failure to appreciate the significance of the payment.
In due course, the termination, of what had then become a direct contract, was the subject of an arbitration which the employer failed to contest (due to its ultimately unsuccessful contention that it was not the named party to the dispute). In the meantime, the employer had commenced proceedings against its former representative and the former main contractor for alleged irregularities in connection with the administration of the initial contract.
The employer subsequently and belatedly sought to set aside the arbitration enforcement order on a number of grounds, one of which was that the “lithographic” payment amounted to a secret commission. Unsurprisingly, the sub-contractor argued that as the payment obligation appeared in the employer’s own tender documentation, which had been copied to it; and that as a senior member of its own staff had been given prior notification of its existence, the payment could not be characterized as a secret commission.
The Court duly held that there was no real prospect of the employer establishing that the payment amounted to a secret commission (the other main ground for dismissing the challenge related to the doctrine of separability which prevents an arbitration agreement from being collaterally impugned).
The decision involves and illustrates the often thorny issue as to what extent a counterparty is expected to establish the legitimacy of certain ambiguous or suspicious contractual obligations or payments, particularly, those to third parties. Plainly, alarms bells were ringing that the “lithographic” payment to the employer’s representative and sub-contract nominator appeared to be for an excessive amount. Consequently, it was fortunate that the issue was expressly flagged up by the consulting engineer with a senior member of the employer’s staff. Otherwise, the case could well have assumed a different complexion.
The case provides a salutary warning that ambiguous or suspicious payment obligations should be clarified between the parties at the outset and at an appropriate level of seniority to avoid, at the very least, potential embarrassment.
A copy of the High Court’s decision is here (in pdf).
Alistair Craig is a commercial barrister practicing in London.