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Ferqe - Agency and Arbitration under Ethiopian Law

A principal-agent relationship is like a tripartite contract where the agent enters into any legal transaction on behalf of the principal. Art 2199 of the Civil Code defines agency as “a contract whereby a person, the agent, agrees with another person, the principal, to represent him and perform on his behalf one or several legally binding acts.” Such an authority can be conferred by court or by agreement of the parties.

If it is given by agreement of the parties, it can be either implied or express. The agent is expected to act in strictest good faith and diligently. He must avoid collusion with the third party to avoid conflict of interest. Art 2187(1) orders the cancellation of the agency contract if there is conflict of interest. The agent is accountable to the principal and must confine his/her acts with the scope of authority conferred. Art 2202(1) says that if the scope of the agency is not expressly known, it has to be fixed according to the nature of the transaction.

The scope of agency can be general (Art 2203 in conjunction with 2204) or special agency (Art 2205). An agent cannot sign bill of exchange, effect a settlement, invest capitals, alienate or mortgage real estate, make donations, bring/defend actions or sign arbitration agreement without special authority given to him/her.

For the services offered, the agent is entitled to contractual remuneration. Nevertheless, if remuneration is not stipulated in the contract, “the agent shall not be entitled to remuneration unless he carried out the agency within the scope of his professional duties or where such remuneration is customary” (Art 2220(1)).   

Needless to emphasize, the relation between the agent and the third party is based on the original contract between the principal and the agent. The main theme of this essay is not to talk about the agent-third party relation, but the principal-agent contractual agreement. It is unlikely that the principal-agent agreement will be signed without remuneration. Consequently, if the principal and the agent disagree on any matter, they can resolve their dispute by court litigation or arbitration.

There are some perils we should take note of when dealing with agency contract. Primarily, the risk of collusion threats the whole agency principal relationship. For example, the principal cannot know if the agent collides with the third party and jeopardize his pecuniary benefit. At any time in the contract, the agent can reveal his bad faith.

Suppose the principal finds out that the agent has taken unnecessary amount of money, because he collided with the third party; consequently, disagreement arises on the amount of the payment. The principal decided to unilaterally terminate the contract. In case dispute arises, they have conceded to take their case to arbitration. Arbitral submission is a contract where by the parties to a dispute entrust its solution to a third party, the arbitrator, who undertakes to settle the dispute in accordance with the principles of law (Art 3325/1/).

The principal affirmed that he will not be obliged to enter into further agreement with the third party, and, eventually, want the contract to be cancelled. He asked to be restituted, because the agent cheated him, he is overwhelmed by his conduct and could not trust his agent anymore. 

The agent brought his case before an arbitral tribunal claiming that he is entitled to “sufficient” remuneration; interim measures so that the principal can be enjoined not to alter the name with which his bank account exists; the illegitimacy of cancelling the existing contract with the third party.

The principal stood up for his position that he has found out that the agent has acted beyond his scope of authority. In fact, the principal said that the agent has managed to solicit extra money, which is, normally called “ferqe”, which is illegitimate and out of their agreement. The agent has failed to act in good faith, which he proclaims to install. Therefore, he should not be obliged by a contract that was entered by mistake with the third party.

The principal further challenged the jurisdiction of the tribunal. He said that “ferqe” amounts to bribery; Ethiopian law must avoid the arbitrability of such heinous crime. The agent upholds his position that he did not take ferqe and the principal is aware of it. He did not do it to cheat the principal and their previous business relationship tells the fact that the principal had a deep embedded trust.

The question that I want to frame is what would a duly constituted arbitral tribunal do if such a thing happens? Would allegation of ferqe arbitrable under Ethiopian law? Normally, parties resort to arbitration to avoid the frustration caused by judicial litigation. Arbitration is formed by the parties’ agreement. Should such a private entity be accountable to the public interest? What should an arbitral tribunal do to avoid being a safe-haven for such misleading acts, if that is the situation?

Such kind of bribery can be labeled as private bribery, because no public official involved and took illicit money when discharging his obligation. Private corruption is directed to private individual entrusted with the furtherance of private interests. ICC publication on private bribery says that this kind of corruption does not meet the same challenge as with corruption in public officials.

In the memorandum of the ICC to the OECD Working Group on Bribery in International Business Transaction, ICC states that private-to-private corruption, even though it does not affect directly public trust… it undermines the smooth functioning and credibility of free, open and global competition. By adding artificial and unwarranted elements to the cost of business, it distorts the terms of exchange of international business transaction and penalizes loyal market participants.”

When it comes to arbitrability, ICC case 1110 demonstrated the traditional approach, i.e. international arbitral tribunals faced with bribery have to decline jurisdiction. Usually, the degree of criminality involved is the main reason why the arbitral tribunals decline jurisdiction when faced with bribery. The modern international arbitration, on the other hand, holds private bribery arbitrable (see National Power Corp. v. Westinghouse, BGE 119 II 380; Hilmarton v. OTV, ICC case 5622; ICC case 3961; ICC case 8891). The growing acceptance of such a matter relies on the doctrine of separability and competence-competence.

Concisely, the doctrine of separability and competence-competence is this: separability talks about the separation between the underlying agreement and the arbitral submission; hence, the arbitration agreement has to be upheld even though the main contract is tainted by bribery; whereas, the doctrine of competence-competence is the arbitral tribunal’s competence to determine its own competence. These two doctrines stand behind the reasons why arbitral panels assert their jurisdiction. Ethiopian practice does not sufficiently show the arbitrability of ferqe or related issues. However, we can deduce from the international arbitral practice about the things considered when dealing with bribery.

In international arbitral practice, after affirming their jurisdiction, what matters most is how evidence is taken. How should prima facie evidence be taken into account? Where lays the burden of proof? The burden of proof that has to be applied in issues involving corruption is vague. There are situations that it will be decided upon case-by-case basis. Whether or not it has to be decided beyond doubt is open for debate. It is, however, alleged that the burden of proof is on the party alleging private bribery.

When the tribunal does not have investigative tools, the heightened standard of proof places difficulty to overcome bribery to be found by a tribunal. Also, the tribunal can order documentary evidences to be produced. A party’s refusal to allow the tribunal access to such documents may lead the tribunal to draw an adverse inference about the existence of bribery.

With regard to witnesses, the arbitral tribunal can assess the evidentiary value of statements made by witnesses. The character of the witnesses, his or her interest in the outcome of the controversy, his or her independence from the parties is important factors in weighing witness testimonies.

When it comes to circumstantial evidences, it has to be examined in light of the parties’ real intentions. Vague contractual terms have to be interpreted in accordance with the contract interpreting tools. For example, disproportionate fees, unusually high commission can be an indicator of the existence of private bribery. The agent’s refusal to disclose his activities can be a circumstantial evidence to determine the arbitrability.

My position is that bribery should not be arbitrable at all, whether or not it is private. What the arbitrator should see is the real intention of the party taking bribery: taking unfair private advantage. ­Protecting fair competition is the interest of the public.

Arbitration should not allow the parties to escape criminal conviction for the sake of maintaining the independence of the tribunal and the duty owed to the parties’ agreement. The arbitrator should decline jurisdiction if they ever face the issue of ferqe. Issues are said to be arbitrable or not due to their significance and public policy status. I believe preserving the health of the business is a public policy issue; therefore, not arbitrable.

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Sunday, 14 July 2024