This post is from Sherbir Panag (MZM Legal Advocates & Legal Consultants in Mumbai, India).
The Government of India unilaterally terminated  a Euro 556 Million contract with the Anglo-Italian helicopter manufacturing company AgustaWestland on the 1st of January 2014 for breach of the pre-contract integrity pact on the basis of allegations of bribery. Similarly in March 2012 the Ministry of Defence (which is incidentally the Ministry concerned in the AgustaWestland case as well) cashed a bank guarantee put forth by the Israeli Military Industries and blacklisted six companies  amidst allegations of bribery and breach of the pre contract integrity pact. A similar blacklisting  was also imposed by the Ministry of Agriculture for a period of 5 years on M/s Dow Agro Sciences India Pvt. Ltd in the year 2011. The operative term in the above cases is the ‘allegation of bribery’ or rather the assumption of bribery after which consequences have ensued.
What is a Pre-Contract Integrity Pact?
‘Pre-Contract Integrity Pact’ or ‘Integrity Pact’ is a tool that was developed by Transparency International  to help governments, businesses and civil society fight corruption in the field of public contracting where the scope of abuse is immense owing to the large value of contracts. The ‘Pre-Contract Integrity Pact’ establishes binding obligations on both parties, those being the State or its instrumentalities and the commercial organisation.
As the name suggests these obligations become effective from the stage of bidding itself that is prior to the contract and remain in force thereafter as well. The Central Vigilance Commission of India in a document  explaining the nature of ‘Pre-Contract Integrity Pacts’ states that failure to implement the Pre-Contract Integrity Pacts’ , would result in public officials being subjected to penal action and bidders would face cancellation of contracts, forfeiture of bonds, liquidated damages and blacklisting. Such action does not require a criminal conviction but can be based on “no-contest” after the evidence is made available or there can be no material doubts. Pre-Contract Integrity Pacts are gradually being widely used by the State and its instrumentalities in all areas of public contracting.
The Ministry of Finance, Government of India in a circular titled ‘Use of Integrity Pacts by Ministries / Departments – Implementation of Administrative Reforms Commission’ provided a draft of a Pre Integrity Contract . A perusal of this draft puts forth the following salient points:
- Commitments to not engage in any form of bribery either directly or through any agents or third parties on the part of the bidder
- Commitments to not accept any form of bribes or demand any bribes and to treat all bidders fairly by the Buyer (Government)
- A declaration by the bidder that no previous transgression occurred in the last three years before the signing of the Pact with any other company in any country with respect to corrupt practices.
- Clause 6 of the Pact lays down sanctions for violation which include cancellation of the contract if awarded, confiscation of the security deposit, debarment, recovery of sums so illegally paid, applicable damages with interest, so on and so forth.
- The Buyer (Government) will appoint Independent Monitors in consultation with the Central Vigilance Commission to have an objective review of the implementation of the Pact.
- The Pact extends to a period of 5 years after complete execution of the contract.
Why should companies take Pre-Contract Integrity Pacts seriously?
The cases discussed above and a perusal of the text of the pact, puts forth a situation that companies must take stock of whereby companies have faced the consequences whether it be blacklisting or contract termination, without the investigation being completed or a trial commencing or an ensuing conviction from such trial. Why should companies engaging in public procurement with the Indian State be worried:
- Allegation of bribery: Firstly, as stated above the provisions of the pre-contract integrity pact become operative on the allegation of bribery. In AgustaWestland’s case, India began investigating the matter after proceedings commenced in Italy which the Indian media reported. Thus, news travels and there is no caution that a media house has to exercise in reporting an allegation of bribery as it technically still remains an allegation.
- Simple procedure: No strict procedure per se is in place to invoke the provisions of the pre-contract integrity pact and nor is there any guidance in this regard as to what the State must follow. The procedure to be followed would merely be to ensure conformance with the principles of natural justice namely audi alteram partem i.e, to hear the other party, which in this case would take the form of a show cause notice. When the State considers the evidence is conclusive enough to invoke the provisions of the pre-contract integrity pact still remain unclear.
- Time frame of action: The time frame in which the action is taken against the company is considerably faster than the regular legal process in India. In AgustaWestland’s case, the allegations came forward in early 2012 and in less than 2 years action was taken. In the case of the blacklisting by the Ministry of Defence, the allegations emerged in May 2009 and by March 2012 the blacklisting was effectuated. This as compared to the time frame of investigations and trials in India which can go into over 10-15 years is something to take note of. Companies’ earlier taking advantage of the tortoise pace of the Indian legal system would come onto the receiving end of the same when they would challenge it in adverse action initiate against them in the courts.
- Checks foreign bribery: Through the Integrity Pact the State is also plugging the loophole of a prevention of a foreign bribery clause (Indian law does not prevent foreign bribery, though a bill is pending in Parliament) by stating that no transgression viz a viz corruption has taken place in any country for a stipulated period before the signing of the pact.
- Plethora of remedies: If the State terminates a contract in furtherance of the pre-contract integrity pact, it would in no way be precluded from concurrently blacklisting the company or forfeiting deposits or cashing bank guarantees or claiming damages. The use of one remedy would not prevent another from being put into motion.
- Still open to criminal prosecution: While remedies the State has for an act of bribery by a company under the Pre-Contract Integrity Pact remain essentially contractual and administrative in nature, an action or invocation of a clause from the pact (termination, penalty, blacklisting) would in no way preclude criminal prosecution for these offences. Such action would not constitute a plea bargain or settlement of any kind, but would be independent of the criminal law machinery of the Indian state.
This notwithstanding, a company would have grounds to challenge the State’s action when it invokes a breach of the pre-contract integrity pact before a higher court, but it’s definitely not going to be an easy battle nor will the result be immediate.
In light of recent actions in India, companies engaged in public procurement / public contracting need to take Pre-Contract Integrity Pacts more seriously and not view them as a mere procedural requirement before signing the contract. Further, companies should also consider the impact that proceedings / investigations / disclosure in one jurisdiction may have in another and should address the risks of the same. With public pressure against corruption mounting and proactive media houses in India reporting instances of corruption, companies need to do a major re-think on the economic viability of bribing in India and the consequences that may follow.