How Petrobras found itself bound by a corrupt contract

Perhaps no prosecution has ever documented bribery more pervasively than Brazil’s Operation Car Wash. When an economy’s dominant enterprise is built on corrupt contracts, few foreign investors or suppliers can be untouched. The question now playing out in arbitration is when those corrupt contracts must be honoured.

To exploit its epic offshore oil strikes, Brazil’s national oil company, Petrobras, entered agreements a decade ago for a fleet of ultra-expensive, ultra-deepwater drillships. In 2015-16, the company reneged on many of its commitments, citing seemingly irrefutable corruption. At least three of the drillship contractors filed arbitrations for breach of contract.

In December, Petrobras defeated a confidential claim in Brazil by the private equity owner of Sete Brasil Participacoes. But in mid-2018, an American Arbitration Association panel awarded Vantage International Drilling $622m. That award is still subject to a confirmation fight in a Houston federal court, making public a fascinating legal debate.

Investigators alleged that Vantage, after falling out of the competition, won a $1.6bn contract thanks to its agent Hamylton Padilha, among others, paying $31m in bribes to Petrobras executive Jorge Zelada, among others. Mr Padilha paid a $20m fine to compensate Petrobras as part of his 2015 plea agreement. Mr Zelada got 12 years in prison following his 2016 conviction. In early 2018, Vantage announced a $5m agreement in principle to settle Foreign Corrupt Practices Act charges with the US authorities.

Petrobras argued that the findings of the Brazilian courts constitute conclusive proof of corruption, and render the contract void from the start. Vantage countered that Petrobras needed to prove that Vantage knowingly paid bribes without Petrobras’s knowledge, and induced Petrobras to sign a contract it would not have swallowed otherwise. Even then, bribery would not make the contract void, but merely 'voidable' – and subject to ratification by the victim. On Vantage’s account, Petrobras was perfectly happy with the agreement until the bottom dropped out of the oil market in late 2014.

Writing for the tribunal, arbitrators William Park and Charles Brower saw no convincing evidence that Vantage was aware of the bribery. But most crucially, they found that Petrobras gladly renewed and amended the pact in late 2013, after it was fully aware of the scandal from its own audit as well as press reports. The result was to ratify the old contract, and to form a new contract untainted by bribery or by the involvement of tainted actors.

What is more, wrote the arbitrators, Petrobras had waived its right to assert corruption as a defence, and was estopped from doing so. By the same logic, the panel rejected Petrobras’s $102m counterclaim for bribery under the doctrines of ratification and estoppel. The majority said it would reach the same conclusions under either English or maritime law.

In a sharp one-sentence dissent, Petrobras’s arbitrator cited due process concerns. Petrobras says it will fight the award, stressing that “the drilling contract was procured by corruption” and that Brazil’s Supreme Court has recognised Petrobras as a victim of the corruption.

Michael D Goldhaber serves as US correspondent for the International Bar Association. He has been tracking the world’s largest disputes since the turn of the millennium. Email: michael.goldhaber@gmail.com