Oil & Gas: Remedy granted against agent for corruption in winning drilling unit contracts

In HPOR Servicos de Consultoria Ltda v Ocean Rig UDW Inc. and Another Company [2018] EWHC 3451 (Comm), the Commercial Court was asked to deal with the consequences of, non-disclosure of, past corruption by an agent in relation to subsequent contracts to act as an agent to secure drilling unit contracts. The Commercial Court affirmed that non-disclosure was a serious breach of the agent’s obligations resulting in forfeiture of its agent’s fees.

Facts

The Claimant, HPOR Servicos de Consultoria Ltda (“HPOR”), was an SPV incorporated in Brazil and controlled by Mr Padilha. The Defendants were two companies incorporated in the Marshall Islands, the first defendant was the shareholder of the second defendant company that provided services for offshore oil and gas exploration.

In 2011, the Defendants entered into an agency agreement with URCA Offshore Ltda (“URCA”) to assist with two tenders for drillship contracts (the “URCA Agency Agreement”). URCA was controlled by a third party but acted at all material times in accordance with Mr Padilha’s instructions. Under the URCA Agency Agreement 2% commission was to be paid by the Defendants to URCA in the event that a drilling contract was obtained. URCA would then pay the 2% commission to Mr Padilha.

In 2011, Petrobras confirmed the award of two, three year drilling contracts to the Defendants (these were later extended for another three years until 2018). Subsequently, the URCA Agency Agreement was terminated and the parties entered into two agency agreements that were re-structured to involve HPOR (together the “New Agency Agreements”). Pursuant to the New Agency Agreements, HPOR would receive 2% of the day rate Petrobras paid by way of hire. The commission payment would survive termination of the New Agency Agreements. At the time that the New Agency Agreements were entered into, the Defendants were aware that Mr Padilha was acting for other drilling companies. The Defendants were not informed that Mr Padilha had previously paid bribes to Petrobras executives to advance the commercial interests of two of the Defendants’ competitors.

Between 2012 and 2015, the Defendants paid HPOR the fees agreed under the New Agency Agreements. The total paid for the two drilling rigs was USD 16,666,029.50. The Defendants stopped making payments to HPOR after April 2015.

When the major corruption investigation, ‘Operation Car Wash’ began, the Defendants grew concerned about their position in Brazil. The Defendants provided Mr Padilha with a number of opportunities to disclose any corrupt activities. In July 2015, Mr Padilha confessed to one of his acts of corruption. However HPOR failed to disclose to the Defendants that, in fact, Mr Padilha had admitted to the Brazilian authorities his involvement in two corrupt deals. In September 2015, Mr Padilha’s past corruption and involvement with Operation Car Wash led the Defendants to terminate the New Agency Agreements. Mr Padilha was subsequently found guilty of bribery and money laundering.

The Defendants commenced an arbitration to require HPOR to forfeit remuneration obtained before and after the termination of the New Agency Agreements.

The Tribunal’s Decision

The Defendants were successful in arguing it was appropriate to order that, by way of remedy for breach of fiduciary duty, HPOR, as agent, should forfeit and/or become liable to account for its own contractually earned/accrued remuneration.

The majority of the Arbitral Tribunal comprised of Sir Bernard Eder, Sir Jeremy Cooke and Mr Richard Siberry QC, found (Mr Siberry QC dissenting) that HPOR was in deliberate breach of its fiduciary duties immediately upon entering the New Agency Agreements. In particular, the Tribunal found that Mr Padilha’s failure to disclose his corrupt relationships with Petrobras executives destroyed the relationship of trust and confidence between the Parties.

The majority of the Tribunal considered that the suggestion by HPOR that Mr Padilha’s past corruption was not related to the fiduciary relationship created by the New Agency Agreements was “unrealistic and unsustainable”. Nevertheless, the majority also agreed that Mr Padilha worked “actively, extensively and closely with [the Defendants] to secure the extension of the Drilling Contracts…”. Therefore, HPOR was ordered to forfeit the remuneration it received for its services under the URCA Agency Agreement and the New Agency Agreements.

The transcript of the Commercial Court’s decision provided details of the reasoning of Mr Siberry QC’s dissenting judgment in the arbitration:

1. “Mr Padilha could not have owed fiduciary duties to [the Defendants] prior to the conclusion of the Agency Contracts.
2. Once the Agency Contracts were concluded HPOR was in a fiduciary relationship with [the Defendants] and owed duties, including to inform [the Defendants] of [their] past misdeeds.
3. If the URCA Agreement had not been terminated [the Defendants] could not have terminated that contract on the basis of Mr Padilha's past misdeeds.
4. It was through Mr Padilha's efforts that a valuable extension of the Drilling Contracts was obtained and further assistance was provided.
5. Upon signature of the Agency Contracts “HPOR acquired an indefeasible right to commission at 2% on all day rate payments … a right which survives (lawful) termination of the Agency contracts by [the Defendants]”.
6. None of the authorities relied on by the majority in support of their conclusion that [the Defendants] were entitled to repayment of fees already paid support “the proposition that a principal who agrees to pay an agent commission on receipts under a contract which is (or in this instance, must be taken to have been) procured by the honest endeavours of the agent, must repay the commission honestly earned with the full knowledge and consent of the principal because the agent, in breach of fiduciary duty has failed to disclose past misdeeds which may affect (and in this case did affect) the ongoing relationship between the principal and the third party and which justified termination of the agency contract.”
7. He considered that “to disallow HPOR's claims for commission due under the Agency Contracts and to allow [the Defendants’] counterclaim, would involve a significant and somewhat draconian extension of the law relating to remedies for breach of fiduciary duty.”

The Commercial Court’s Decision

HPOR appealed the award to the Commercial Court, arguing that there was a mistake of law made by the Tribunal.

Mrs Justice Cockerill started by addressing the basis on which the majority of the Tribunal had concluded that the Defendants were entitled to repayment of HPOR’s fees. She concluded that the majority had erred because it based its reasoning on the conclusion that an account of profits was available. The remedy of account of profits was not relevant in this case because HPOR had not received sums which should have been paid to the Defendants nor had HPOR misused any of the Defendants’ property. She referred to the case of Murad v Al-Saraj [2005] EWCA Civ 959; [2005] WTLR 1573, 85:

“an account of profits […]is a procedure to ensure the restitution of profits which ought to have been made for the beneficiary and not a procedure for the forfeiture of profits to which the defaulting trustee was always entitled for his own account. […E]quity does not take the view that simply because a profit was made as part of the same transaction the fiduciary must account for it.”

The Commercial Court concluded that, to the extent that the appeal challenged the grounds for the repayment, it had succeeded. The issue in dispute concerned when an agent is entitled to retain contractual remuneration and the remedy for this issue did not lie in an account of profits.

The Commercial Court also found that forfeiture is applicable to an agent’s remuneration regardless of whether a fee has already been paid, and it is available in all classes of breach. Mrs Justice Cockerill considered that HPOR committed breaches which went to the root of the contract from the start of the relationship between the parties. The fact that Mr Padilha had provided valuable services to the Defendants in obtaining the drilling contracts was irrelevant in considering whether the remedy of forfeiture was available because he had provided those services whilst committing a continuing breach of duty.

It was decided that HPOR’s behaviour amounted to a serious breach of contract because from the outset of the contractual relationship, Mr Padilha had concealed his breach of duty and precluded HPOR from providing disinterested advice. Therefore, the Commercial Court upheld the majority of the Tribunal’s decision that the remuneration paid to HPOR and Mr Padilha be forfeited. Although it was found that the majority of the Tribunal had erred in considering that the remedy of the account of profits was available, the same outcome was achieved by operation of the remedy of forfeiture.

Commentary

‘Operation Car Wash’ continues to result in a significant amount of arbitration and litigation, as participants in the oil and gas industry seek to deal with its financial consequences.

In this case, an arbitral tribunal and the Commercial Court have clarified that non-disclosure of past-corruption is capable of amounting to a serious breach of an agent’s fiduciary obligations permitting termination of the agency contract for repudiatory breach. Further, in those circumstances, any fees paid to the agent may be recovered through the law of forfeiture.

The Commercial Court’s decision serves as a reminder of the importance of an agent adhering to its fiduciary duties. In particular, and in the context of this judgment, full disclosure is required of any past admissions or allegations of corruption, secret commissions or bribes that might damage the principal. Failure to disclose such allegations would put the agent’s interests in conflict with the principal’s interests, which would be a breach of fiduciary duty by the agent.