BETWEEN : FULLERTON NOMINEES PTY LTD t/as WESTERN REFRIGERATION 74

Contract - Appellant engaged respondent as its agent in an overseas business venture - Appeal against successful claim of respondent for payment of outstanding commission payable under agency contract - Whether contract enforceable - Agency contract provided for payment of bribes, termed "invisible costs", to foreign officials by the agent - Whether contract illegal - Whether illegal provisions for "invisible costs" can be severed from the contract - Payment of bribes pervades the whole agency contract

Appellant (Defendant) : Mr R E Birmingham QC & Mr W J Clements

1 KENNEDY J: I have had the benefit of reading in draft the reasons to be published by Ipp J, with which I am in agreement. I also agree with the orders proposed by him.

2 It was accepted by Mr I Thaib, a witness called on behalf of the respondent, that payment to Government officers for the granting of licences or permits is not permitted in Indonesia. That this was the position was not challenged by the respondent, and clearly an agreement providing for the payment of bribes to Indonesian public officials in order to secure the contract for the appellant offends public policy. It is of some interest to note in this respect that, by the Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999, the Commonwealth Parliament made it an offence for a person to provide a benefit with the intention of influencing a foreign public official in the exercise of that official's duties in order to obtain business. A penalty of imprisonment for 10 years is provided. The Act has not yet been proclaimed.

3 In my opinion, the provision in the agreement for the "invisible costs" cannot be regarded as of minor significance in the context of the whole agreement. It went, in my view, to the substance of the transaction - see North v Marra Developments Ltd [1981] HCA 68; (1981) 148 CLR 42, at 60. It is not for the court to rewrite the parties' agreement to enable them to sever the illegal portions of the contract.

4 I agree with Ipp J that there was evidence in this case that the "invisible costs" were paid. But, even had they not been paid, the contract would still have been illegal, the intention of the parties having been to facilitate the contract by bribing officials - see Neal v Ayers [1940] HCA 21; (1940) 63 CLR 524, at 528, 531.

5 The appellant carries on a refrigeration business and, as part of that business, constructs and commissions abattoirs. The respondent is an Australian citizen who carries on business as an agent of Australian companies wishing to do business in Indonesia. In January 1993, the appellant and the respondent entered into a contract (the "agency contract") whereby the respondent agreed to act as the appellant's agent in assisting it to obtain a contract ("the abattoir contract") that the appellant hoped to enter into with an Indonesian company, PT Bina Krunia Allam Nusantra ("BKAN"), for the construction and commissioning by the appellant of an abattoir complex in Indonesia.

6 In terms of the agency contract, the appellant undertook, in effect, to pay the respondent $180,000 by way of commission for the services to be rendered by him in assisting the appellant to obtain the abattoir contract. In addition the appellant undertook, in effect, to pay the respondent certain "invisible costs" up to a maximum amount of $360,000. What the parties meant by "invisible costs" was an important issue at the trial and is of significance in this appeal. The monetary consideration provided for by the abattoir contract was in US dollars and the various amounts payable to the respondent under the agency contract were almost entirely to be calculated by reference to percentages of the abattoir contract price. Accordingly, in these reasons, unless otherwise stated, any reference to dollars should be taken to be to US dollars.

7 After the abattoir contract had been entered into, various disputes arose between the appellant and the respondent. These resulted in the respondent suing the appellant for the balance of the commission and the invisible costs which the appellant had agreed to pay the respondent under the agency contract. The appellant's defence was based principally on the contention that the provisions relating to the respondent expending money on "invisible costs" were, in reality, provisions relating to bribes that the respondent was to effect in procuring the entering into of the abattoir contract. It followed, according to the appellant, that the agency contract was illegal and void or, at least, unenforceable and it had no obligation to pay any amount to the respondent. The appellant counterclaimed for repayment of $81,000 (being part payments in respect of commission and invisible costs) that it had paid the respondent pursuant to the agency contract. The basis of the counterclaim was that the agency contract was illegal and, hence, void: therefore, anything paid by the appellant thereunder should be returned to it.

8 The learned trial Judge found that the phrase "invisible costs" was indeed a euphemism for bribes which the respondent was to pay on the appellant's behalf to various Indonesian officials. Nevertheless, his Honour considered that the provisions relating to the bribes were severable from the agency contract as a whole. In addition, the learned Judge found that the respondent had not proved that he had paid any amount in respect of "invisible costs" and, in any event, he had no claim against the appellant in respect thereof.

9 The learned Judge found that the appellant had paid the respondent $81,000 (made up as to $21,000 in respect of commission and $60,000 in respect of invisible costs). His Honour considered that the $81,000 should be offset against the $180,000, being the total amount of commission payable by the appellant under the agency contract. Accordingly, he awarded judgment in favour of the respondent in the sum of $99,000 (being $180,000 less $81,000); this sum being, apparently, the amount found to be owing in respect of commission. The respondent's claims based on reimbursement of moneys paid in bribes failed. The appellant's counterclaim failed as well.

10 On appeal, the appellant repeated its contentions that the provisions of the agency contract relating to invisible costs were not severable and the agency contract, as a whole, was unenforceable. These arguments were resisted by the respondent, who cross-appealed, claiming at least part of the invisible costs on the basis that under the agency contract he was entitled thereto. The cross-appeal depended, to an extent, on the appeal - if the agency contract in its entirety were to be unenforceable, the cross-appeal would fail.

11 The abattoir contract was entered into after the agency contract had been made. Accordingly, its terms cannot be used to construe the agency contract. The abattoir contract is nevertheless relevant to the respondent's claims: by the agency contract, commission and invisible costs became payable to the respondent upon the entering into of the abattoir contract and the payment of the deposit required thereunder.

12 The total amount the respondent was to receive from the appellant pursuant to the agency contract was a maximum of $1,040,000. This was made up of $180,000 in respect of commission, $360,000 being the maximum payable in respect of invisible costs expended, and a "mark-up" of $500,000. Something needs to be said briefly about this "mark-up". The abattoir contract was partly to be financed by an Australian entity known as Export Finance and Insurance Corporation ("EFIC"). The leading director of BKAN was one Sasmita. Sasmita and the appellant agreed (fraudulently) to inflate the agreed price of $1,800,000 for the abattoir contract by $500,000 to enable BKAN to borrow a further $500,000 from EFIC to assist it in financing the transaction. Neither the appellant nor the respondent suggested that this particular illegality had a bearing on the result of the appeal.

13 In terms of the abattoir contract, BKAN was to pay the appellant (or procure that the appellant be paid) US$2,982,987, this being the total contract price made up as follows:

14 The agency contract was found by the learned trial Judge to be partly written and partly oral. The written part consisted of a "Memorandum of Understanding" dated 6 January 1993. The Memorandum of Understanding relevantly provides:

"Party B [the respondent] is to solely represent Party A [the appellant] for the BKAN project, for which an agreed 10% (ten percent) commission on [the appellant's] quoted F.O.B contract price will be paid by Party A to Party B. This commission is to be disbursed progressively once supply contract [i.e. the abattoir contract] is signed and deposit monies are received.

'Invisible costs' for the BKAN project is not to exceed 20% of the F.O.B project quotation price. These Invisible costs are to be the responsibility of Party B and disbursed accordingly.

In respect to the disbursement of project monies to Party B, [the respondent] shall invoice [the appellant] for the progress claims against the agreed commission and invisible costs relevant to the project in question. It is agreed that any remaining funds from the invisible costs are to be equally shared between both Parties A and B at the completion of the project.

Party A agrees to provide operational funding to Party B for the purpose of:

1. Obtaining the L/C facility from the client (BKAN).

2. Assist client in obtaining all relevant Government of Indonesia authorisations.

3. Assist client in complying with EFIC requirements.

The agreed value of Party A's contribution to Party B's ongoing costs associated with the securing of L/C and negotiation of final Supply Contract for the BKAN project shall be as follows:

being total sum of Three thousand, eight hundred and twenty-eight Australian dollars (A$3,828.00) payable on or before Friday 8th January 1993."

The "quoted F.O.B contract price" was $1,800,000. The respondent's commission of $180,000 represented 10 per cent of the sum of $1,800,000. The invisible costs of up to $360,000 represented 20 per cent of $1,800,000.

15 The learned Judge made no express finding as to what constituted the oral part of the agency contract. It is not difficult, however, to ascertain from his Honour's reasons what he considered to be the terms orally agreed. The learned Judge said:

"I find, as a matter of probability, upon the evidence as a whole, that the [respondent] represented to the [appellant] and the [appellant] acted in the belief that the invisible costs were moneys to be used to bribe Indonesian government or banking officials to facilitate the progress of the contract for the construction and commissioning of an abattoir in Indonesia."

It is apparent from his Honour's reasons that he regarded this representation as a term of the agency contract and it is apparent from the evidence that the parties intended this to be the case. The payment of invisible costs was a matter expressly provided for in the Memorandum of Understanding and by the representation the respondent stated that he would use the invisible costs for bribes. The appellant agreed with the respondent that the invisible costs should be so utilised.

16 There was an issue between the parties as to what the learned Judge meant by the use of moneys to "bribe Indonesian government or banking officials to facilitate the progress of the contract for the construction and commissioning of an abattoir in Indonesia." Mr McGowan, counsel for the respondent, submitted that this was a finding that the respondent was to use the moneys for invisible costs only after the abattoir contract had been entered into and that the invisible costs were not to be expended to procure the abattoir contract. He sought to support this submission by relying on that part of the Memorandum of Understanding that referred to funding for:

"1. Obtaining the L/C facility from the client (BKAN).

2. Assist client in obtaining all relevant Government of Indonesia authorisations.

3. Assist client in complying with EFIC requirements.

He submitted that the four matters referred to all related to services to be rendered after the making of the abattoir contract. There are, however, several factors that militate against acceptance of this submission.

17 At the outset, it is to be noted there was no evidence to support it. In other words, there was no evidence that the respondent was expected to or called upon to perform any service after the abattoir contract was entered into, and there was also no evidence identifying the need for such a service.

18 The terms of the Memorandum of Understanding itself are inconsistent with the proposition that services were to be rendered by the respondent after the making of the abattoir contract. The requirement under the Memorandum of Understanding that the respondent invoice the appellant for progress claims "against the agreed commission and invisible costs relevant to the project in question" indicates that the parties contemplated that progress claims would include payment for commission and reimbursement of invisible costs. As the Memorandum of Understanding expressly provides, "progress claims" are to be met "progressively once supply contract is signed and deposit monies are received". No time was expressly provided by the abattoir contract for the payment of the deposit but the inference is that it was required to be paid immediately. Accordingly, as the invisible costs were to be repaid by the appellant "progressively once supply contract is signed and deposit monies are received", the strong inference is that the invisible costs were to be incurred before the abattoir contract was entered into. Invisible costs would hardly be required to be repaid upon the entering into of the abattoir contract and the payment of the deposit if they were only to be incurred after the making of the abattoir contract. Indeed, the respondent himself testified that he told a representative of the appellant that the invisible costs were "to be paid automatically once supply contract is signed and once I receive the letter of credit of $50,000".

19 Further, there is nothing in the content of the four matters to which reference was made that indicates that they involved services to be performed after the abattoir contract was entered into. Indeed, the fact that the last item concerns the "[n]egotiation of the final supply contract" suggests that the first three items precede the making of the contract.

20 The respondent denied that invisible costs were, in effect, bribes. Further, he did not contend that the invisible costs were to be paid to facilitate the progress of the abattoir contract after it had been entered into. His evidence in this regard was extremely vague and difficult to understand, as was the evidence of other witnesses called on the respondent's behalf in connection with this issue. Their evidence in this connection was rejected by his Honour. It is nevertheless not without relevance that, when one of the respondent's associates (who was called by the respondent to testify) was asked whether invisible costs included "costs associated with contract preparation and negotiation", he replied in the affirmative and said, "That is for the result of our work." (My emphasis).

21 The respondent testified that invisible costs were costs that he paid to consultants whose identity would remain confidential to him. His Honour did not accept that testimony. When asked whether invisible costs were known in Indonesia as bribes, the respondent said, "People may call them that, but that's not what I or my consultant refer it as." Part of the respondent's testimony appeared to accept that he had paid "consultants" before the contract was entered into. He referred to certain payments made by him in the following terms: "So you cannot say that anything that I paid [the consultants] before the BKAN project was not for the BKAN project because it was an ongoing, flowing thing." This evidence was consistent with the respondent's statement of claim which alleged that invisible costs were to be paid in connection with the "engagement of such Indonesian consultants and agents as the [respondent] sought [sic] fit in order to secure such a contract". In essence, the respondent's case was that the invisible costs were to be paid by him prior to the making of the abattoir contract.

22 The finding by the learned Judge that invisible costs were intended to be bribes means that he accepted the evidence of Mr Dallimore on behalf of the appellant that the respondent told him that "in order to do business in Indonesia, it would be necessary to pay bribes to various government officials who could facilitate matters if so induced". As the learned Judge said, "The [appellant] was, therefore, prepared to charge the customer and pay over to the [respondent] an amount of US$360,000 to be used to pay bribes ... " His Honour expressly referred to evidence that the respondent "had informed [the appellant] that the invisible costs represented bribes necessarily to be paid to Indonesian officials so as to ensure that the project upon which the parties were to embark could go ahead". He also noted that the appellant alleged that "the term [invisible costs] meant bribes for Indonesian officials, both governmental and banking". It is plain, in my opinion, that in making the finding that he did, namely that the invisible costs were "to facilitate the progress of the contract for the construction and commissioning of an abattoir in Indonesia", his Honour was merely restating the evidence led on behalf of the appellant, namely, that the invisible costs had to be paid to ensure that the abattoir contract could successfully be agreed.

23 In my opinion, the learned Judge, in stating that "the invisible costs were moneys to be used to bribe Indonesian Government or banking officials to facilitate the progress of the contract for the construction and commissioning of an abattoir in Indonesia", intended to make a finding that the invisible costs were moneys to be used to bribe Indonesian Government or banking officials to facilitate the progress of negotiating the abattoir contract. In other words, it was a term of the agency contract that the invisible costs were to be paid as inducements to persons in Indonesia to facilitate the negotiation of the abattoir contract.

24 The learned Judge was not satisfied that bribes had in fact been paid by the respondent as part of his services as the appellant's agent. His Honour came to this conclusion on the ground that "there is no evidence which would support any such finding". With respect to his Honour, that finding is open to question.

25 Immediately after stating that he was not satisfied that bribes were paid, his Honour noted that "there is evidence that the [respondent] orally gave to the [appellant] details of payments allegedly made by him to various officials, which were noted by Mr Dallimore, as I have mentioned". These were payments of invisible costs to certain government officials in Indonesia. Once his Honour had made the finding that the invisible costs were, in fact, bribes, evidence from the respondent himself that he had made payments of invisible costs to the identified officials was evidence that moneys were used for bribes. Additional evidence that bribes were paid was forthcoming from the invoices which the respondent sent to the appellant, claiming payment for invisible costs disbursed.

26 For the reasons that I later set out, however, I do not think it necessary to make any firm finding on this issue.

The consequences, in law, of the invisible costs provisions

27 Under the agency contract, the respondent was to earn his commission by assisting in bringing the abattoir contract into existence, and was to do so, at least partly, by bribing persons in Indonesia. That is to say, it was a term of the agency contract that the effecting of those bribes was to be part of the services to be rendered by the respondent. A contract in such terms is to be regarded as having been entered into for the purpose of effecting a breach of the laws of Indonesia.

28 The legal principles relating to such a contract are well-settled. In Foster v Driscoll & Ors [1929] 1KB 470, a partnership agreement to smuggle whisky into the United States in conflict of the laws of that country was held to be unenforceable. Lawrence LJ said (at 510):

"On principle however I am clearly of opinion that a partnership formed for the main purpose of deriving profit from the commission of a criminal offence in a foreign and friendly country is illegal, even although the parties have not succeeded in carrying out their enterprise, and no such criminal offence has in fact been committed ... The ground upon which I rest my judgment that such a partnership is illegal is that its recognition by our Courts would furnish a just cause for complaint by the United States Government against our Government (of which the partners are subjects), and would be contrary to our obligation of international comity as now understood and recognized, and therefore would offend against our notions of public morality."

This passage is of importance in two respects. Firstly, it expresses the principle that a contract that provides for the commission of a criminal offence in a foreign country with which Australia is not at war is illegal. Secondly, it expresses the principle that the consequence of illegality (and unenforceability) follows even though the parties do not implement the contract and no criminal offence is in fact committed.

29 Sankey LJ was of a similar mind, saying (at 521):

"[I]n my view an English contract should and will be held invalid on account of illegality if the real object and intention of the parties necessitates them joining in an endeavour to perform in a foreign and friendly country some act which is illegal by the law of such country ... "

Sankey LJ agreed with Lawrence LJ that the contract was unenforceable, even though the whisky which was to be smuggled into the United States never left Scotland.

30 Foster v Driscoll was expressly approved by the House of Lords in Regazzoni v KC Sethia (1944) Ltd [1958] AC 301. That case concerned the sale of Indian jute bags to the plaintiff, who intended to reship the bags to South Africa, contrary to an Indian statute which imposed an embargo on trade between India and South Africa. Lord Reid stated (at 324) that "the crucial fact in this case appears to me to be that both parties knew that the contract could not be performed without the respondent's procuring a breach of the law of India within the territory of that country". His Lordship observed (at 323) that the contract should be held to be unenforceable, "because from the beginning the contract was tainted so that the courts of this country will not assist either party to enforce it" and (at 325) stated that he agreed with what Lawrence LJ had said in the passage from Foster v Driscoll (at 510), to which I have referred above. Lord Keith (at 327) said:

"In the present case I see no escape from the view that to recognise the contract between the appellant and the respondent as an enforceable contract would give a just cause for complaint by the Government of India and should be regarded as contrary to conceptions of international comity. On grounds of public policy, therefore, this is a contract which our courts ought not to recognize."

31 Accordingly, the House of Lords held that the contract was unenforceable, despite the fact that the contract was never implemented (the jute bags were never shipped to South Africa, as the defendant had repudiated the contract shortly after it had been entered into).

32 This approach was followed, generally, in Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 75 ALR 353: in particular, McHugh JA observed (at 459) that, "[the courts of Australia] will not enforce an action on a contract which, though lawfully made in Australia, was made for the purpose of violating the laws of a friendly country."

33 I turn now to the question whether that part of the agency contract relating to the invisible costs (that is, the bribes) was severable from the rest of the contract.

34 Generally, if performance of a contract depends wholly or substantially upon an illegal consideration, the contract as a whole will be unenforceable. The illegality then infects the whole of the contract: DJE Constructions Pty Ltd v Maddocks [1982] 1 NSWLR 5 (at 21) per Samuels JA. As Street CJ observed in the same case (at 11), the doctrine of severability is not available to save an integral term of an agreement (see also South Western Mineral Water Co Ltd v Ashmore [1967] 1 WLR 1110 (at 1120) approved by the Privy Council in Carney v Herbert [1985] AC 301 (at 315)). In Brooks v Burns Philp Trustee Co Ltd [1969] HCA 4; (1969) 121 CLR 432 Kitto J (at 438), after noting that questions of severability are often difficult, and tests that have been formulated as useful in particular classes of cases are not always satisfactory for cases of other kinds, said:

"[I]n some cases - and I think this is one - the intended reciprocity of obligation between promises is sufficiently clear to necessitate an inference that the legal validity of each promise is a condition of the operation of the other."

35 In my opinion, applying these tests, the provisions in the agency contract concerning invisible costs cannot be severed from the contract as a whole. I have already pointed to the fact that the commission payable by the appellant was for services to be rendered by the respondent that included the bribing of officials. This means that the performance of the agency contract depended substantially upon an illegal consideration. Moreover, there was an intended reciprocity of obligation between the promise to pay commission and the duty to bribe officials. The sum of $180,000 payable in respect of commission is a globular sum and the agency contract does not identify (and there is no way of identifying) how much of the commission is consideration for the services to be rendered by the respondent involving the bribing of officials. The integral character of the invisible costs provisions underlies the fact that, on the evidence of Mr Dallimore - implicitly accepted by the learned Judge (as I have already pointed out - it was necessary to pay bribes to the officials concerned to ensure that the abattoir contract would be entered into). In other words, the successful entering into of the abattoir contract, on which payment of the commission depended, was in turn dependent, at least to a degree, on the payment of bribes.

36 In my opinion, the entire agency contract was tainted by the invisible costs provisions and those provisions cannot be severed from the whole. The payment of the bribes pervades the entire agency contract.

37 In the circumstances, in my view, the contract falls squarely within the principles expressed in Foster v Driscoll and Reggazoni v KC Sethia (1944) Ltd and the entire agency contract is unenforceable. As explained, even if it were to be assumed that no bribes were in fact paid to Indonesian officials, the agency contract remains unenforceable. Accordingly, I would not accept the arguments advanced by Mr McGovern.

38 I did not understand Mr Birmingham to press the argument that the appellant was entitled to an order requiring the respondent to pay the appellant the $81,000 that had been paid pursuant to the agency contract. In my view, on the authorities to which I have referred, it would be against public policy to afford the appellant any relief in respect of such a claim. The appellant is in pari delicto: Parkinson v College of Ambulance [1925] 2 KB 1; South Australian Cold Stores Ltd v Electricity Trust (SA) [1965] HCA 67; (1965) 115 CLR 247 at 263 - 264.

39 Accordingly, I would uphold the appeal and set aside the decision of the learned Judge. I would dismiss the respondent's claims against the appellant and would dismiss the appellant's claims against the respondent. I would dismiss the respondent's cross-appeal.

40 WALLWORK J: I agree with the reasons for judgment of Ipp J. There is nothing I wish to add.