Double Agent: Responsibility For Payment Of A Bribe And Conflict Of Interest

Our recent updates " Fraudulent misrepresentation by a bank and the ISDA Master Agreement" and " Construction and rectification: the consequences of rescission and making good the defects in drafting of back-to-back confirmations under the ISDA Master Agreement" considered aspects of the judgment of Mr Justice Males (the Judge) in litigation between the banks UBS, Depfa and LBBW, and the German water company Kommunale Wasserwerke Leipzig GmbH (KWL).

In this further article, we consider one of the key aspects of the Judge's findings as between UBS and KWL, namely that UBS was legally responsible for a bribe paid to one of KWL's directors despite having no actual knowledge of it. The case sheds light on the law in relation both to bribery and agency.

Factual background

The full background is set out in "Fraudulent misrepresentation by a bank and the ISDA Master Agreement". In summary, the dispute between the parties centred around various STCDOs entered into by KWL with each of the banks. Of these, the transaction which was the subject of much of the judgment was the STCDO agreed between UBS and KWL. KWL was advised and introduced to UBS by a Swiss entity, Value Partners.

KWL received an upfront premium of US$21.1 million for entering into that transaction, a fact of which one of its directors, Mr Heininger, was aware, but which was not known to its other director or its Supervisory Board.

The premium was paid into an account in the US in KWL's name, but over which Value Partners had complete control. Value Partners appropriated the money, paying a proportion of it to Mr Heininger, who was therefore bribed by KWL's own adviser, with KWL's own money. This aspect of the story behind the litigation was uncovered some years ago, and has been the subject of criminal proceedings in Germany.

There was therefore no dispute between the parties at trial that Mr Heininger was paid a bribe in connection with the conclusion of the STCDO transactions, the Judge describing bribery as "an evil practice towards which the law takes a particularly stringent attitude."

Disputed issues in relation to the bribe

KWL asserted that the STCDO between it and UBS was voidable (and had been avoided) on the basis that the law should treat the key protagonists from Value Partners (Mr Senf and Mr Blatz) as agents of UBS for the purposes of bringing about the STCDO transaction, and that UBS was to be fixed with knowledge of the bribe on that basis, despite having no actual...