The Hidden Cost of a Bribe: Void Contracts, Unenforceable Awards and Lost Business

Why a bribe that seems to “work” can leave a company with no legal protection, heavy penalties, lost customers and a damaged name

The “Easy Fix” That Isn’t

To some, a bribe looks like a shortcut. Paying an official to make a problem disappear, or slipping money to someone to secure a contract, can seem quick and convenient. On paper, a RM100,000 bribe to win a RM1 million contract might even look like a good deal.

The reality is very different. Neither the bribe nor the benefit it buys is safe from the law. This article explains the hidden costs a company faces when corruption touches its business: contracts the courts will not enforce, arbitral awards that can be overturned, and a long list of financial, commercial and human consequences.

1. A Contract to Pay a Bribe Is Void

Under section 24(e) of the Contracts Act 1950, an agreement is void if the court regards its consideration or object as immoral or opposed to public policy. A contract built on bribery or the sale of influence falls squarely within this rule. The leading Malaysian case is a dispute over a bridge that was never built.

Case Spotlight: Merong Mahawangsa Sdn Bhd & Anor v Dato’ Shazryl Eskay bin Abdullah [2015] 5 MLJ 619 (Federal Court)

The facts: The Government planned a bridge to replace the Johor-Singapore Causeway. A company asked an individual to use his services to secure the award of the project for a consortium in which it held 60 per cent. In a letter of undertaking dated July 1998, it acknowledged that the project had been awarded in principle through his services and promised to pay him RM20 million by November 1998. The money was never paid, and he sued for it. In his own pleadings and witness statement, he said he had used his influence and close relationships with named Federal Ministers to procure the project. The project was later scrapped by the Government.

The lower courts: The High Court found nothing wrong with his “services”, but dismissed the claim because the project had been withdrawn. The Court of Appeal went further and ordered the company to pay the full RM20 million, reasoning that the “award” had never been withdrawn, only the project.

The Federal Court’s decision: The Federal Court unanimously allowed the company’s appeal. It held that:

It is contrary to Malaysian public policy for a person to be paid to use his position and influence to obtain a benefit from the government. Selling influence breeds corruption and undermines public confidence in government.
Since he had admitted to influence peddling, it was plain that the consideration was unlawful and the letter of undertaking was void. His claim should have been dismissed on that ground alone.
It does not matter whether the officials targeted were actually open to influence. An agreement of this kind tends to corrupt public decision-making regardless.
The court described as preposterous the argument that such agreements must be acceptable in Malaysia because awarding contracts to cronies was said to be widespread.
Courts are bound to take notice of illegality at any stage, even if it has not been pleaded, and must refuse to enforce the contract.

A useful distinction: The Federal Court noted that the rule is against the sale of influence, not against having influence or using legitimate intermediaries. Having good working relationships with officials is not itself wrong. What public policy forbids is charging money to use that influence to obtain benefits from people in public positions.

Nobody wins in a corrupt bargain

Notice what happened in Merong Mahawangsa: the company that promised RM20 million ended up paying nothing. That may look like a win for the company, but the Federal Court made clear that when illegality defeats a claim, the defendant receives an undeserved windfall. It is not because the defendant has the merits on its side, but because the law will not assist anyone who founds a claim on an illegal act.

For businesses, the lesson cuts both ways. An agent or “consultant” promised a success fee for using connections cannot rely on the courts to collect it. Equally, a company that pays such fees has no legal protection if the deal goes wrong. Corrupt arrangements exist entirely outside the protection of the law.

A bribery allegation must be proved, and may backfire

Case Spotlight: Wong Hon Leong David v Noorazman bin Adnan [1995] 3 MLJ 283 (Court of Appeal)

The facts: A company director agreed to pay a man RM268,888 to help speed up the conversion and sub-division of the company’s land, because the man said he knew the Menteri Besar of Selangor. The man wrote to the Menteri Besar, and the letter came back marked “Disokong” (supported). The director paid RM100,000, and the application was later approved. When the director refused to pay the balance, he was sued. He argued, among other things, that the money was really a bribe and the agreement was illegal.

The decision: The Court of Appeal entered judgment against the director. It stressed that a charge of bribery is serious, even in civil proceedings, and must be backed by convincing evidence. There was no independent evidence. The director had not lodged a police report at the time and only did so in the middle of the court hearing, after the judge pointed out that none had been made. The court treated the bribery story as an afterthought. The trial judge had even warned that, by raising this defence, the director was effectively admitting to having paid a bribe himself.

The later twist: Twenty years later, in Merong Mahawangsa, the Federal Court expressly overruled Wong Hon Leong on the illegality point. It held that the Court of Appeal had wrongly treated the matter as a simple question of whether there was consideration, instead of asking under section 24 of the Contracts Act whether paying for influence with the Menteri Besar was against public policy.

The lessons: First, a party alleging corruption must have real evidence and should raise it promptly. Second, a party that claims it paid a bribe may be admitting to a crime. Third, after Merong Mahawangsa, the courts will look much more carefully at any fee paid for using connections to obtain government approvals.

2. When Your Own People Are Bribed

A different situation arises when a company is the victim. Suppose a supplier bribes your purchasing officer to accept inflated prices. Here the law distinguishes between:

a contract to pay a bribe, which is itself a contract to commit a crime and is void, and
a contract procured by a bribe, such as the inflated supply contract, which is not automatically void but can be cancelled by the innocent party once it discovers the bribe.

The book explains that the Singapore High Court drew this distinction in Indian Bank v Green Mint Pte Ltd and others, where borrowers argued that a loan had been obtained by bribing the bank’s officer. The innocent bank could choose whether to cancel the contract. If it did not, both sides remained bound. The court added that it would be wrong to use public policy to stop the victim of a bribe from enforcing the contract if it wishes to. The English courts take the same view, for example in Hurstanger Ltd v Wilson, a secret commission case, and in Honeywell International Middle East Ltd v Meydan Group LLC.

Case Spotlight: PT International Nickel Indonesia v General Trading Corporation (M) Sdn Bhd [1978] 1 MLJ 1 (Court of Appeal, Singapore)

The facts: A timber supplier sued a mining company for about M$373,586 owed for timber delivered under four purchase orders. The two companies had done 35 deals worth over S$3.6 million. The buyer claimed that the prices were nearly double the fair market price because its own purchasing officer had conspired with the supplier’s commission agent, taking a secret cut on each purchase and bypassing the proper competitive bidding process. The buyer counterclaimed about S$1.47 million.

The lower courts: The supplier was given summary judgment without a full trial.

The decision: The Court of Appeal allowed the buyer’s appeal and sent the case to trial. It held that if the buyer’s allegations were proved, it would have a good defence and a counterclaim exceeding the supplier’s claim. The court explained that:

A contract made by an agent under the influence of bribery can be cancelled by the principal.
The person who bribed the agent is liable, together with the agent, for the principal’s losses.
A contract between the briber and the person bribed is illegal and cannot be the basis of a claim in court.
The victim can recover the inflated part of the price from the supplier, separately from its claim against its own corrupt employee.

The lesson: A company that discovers its staff were bribed is not stuck with the deal. It can refuse to pay, cancel the contract and claim back its losses, but it must be ready to prove the corruption at trial.

Getting the money back

In Mahesan v Malaysian Government Officers Co-operative Housing Society Ltd, as described in the book, the director and secretary of a housing co-operative took a bribe of MY$122,000 from a man who had bought land for MY$456,000 and then resold it to the co-operative for MY$944,000, a gross profit of MY$488,000. The director was convicted of corruption. The co-operative then sued to recover both the bribe and its loss. Under the law then in force, it had to choose one claim, and the Privy Council allowed it to recover the higher amount, but not both.

That law, section 30(1) of the Prevention of Corruption Act 1961, allowed an employer to recover a bribe as a civil debt from either the agent or the person who paid it. It has since been repealed. The book notes that the MACC Act does not expressly provide a similar civil remedy, so a company’s claim today would rest on general common law principles.

3. Arbitral Awards Tainted by Corruption

Many commercial disputes are resolved by arbitration rather than in court. Corruption fares no better there. Under section 37 of the Arbitration Act 2005, an award that conflicts with the public policy of Malaysia may be set aside, and the Act makes clear that an award induced or affected by fraud or corruption is in conflict with public policy. This follows the approach of the UNCITRAL Model Law, which leaves each country to define its own public policy. Malaysia has been explicit on the point.

The English position, as described in the book, is somewhat different. England’s Arbitration Act 1996 has no express provision allowing an award to be set aside for corruption. In National Iranian Oil Company v Crescent Petroleum Company International Ltd, the English court refused to set aside an award that was challenged on the ground that the arbitration agreement had been procured by corruption. The arbitrators had found that a corrupt payment was discussed but never made. The court recognised that English public policy prevents enforcement of an illegal contract, such as a contract to pay a bribe, but held that there is no English public policy requiring a court to refuse to enforce a contract merely procured by bribery.

4. The Business Costs of Corruption

Reputation and share price

Few examples are as striking as Rolls-Royce plc. According to the book, its shares fell sharply in 2014 when news broke that the UK Serious Fraud Office was investigating it for corruption. It later settled corruption cases with authorities in the UK, the United States and Brazil, gaining worldwide notoriety. The company reported the largest loss in its history at the time, about £4.6 billion, one of the biggest corporate losses in British history, and its chief executive issued a public apology.

The damage even spilled over to an unrelated company. Rolls-Royce Motor Cars Limited, the BMW-owned carmaker that shares the famous name but has no connection with the aircraft engine maker, was reported to have suffered negative publicity simply because of the shared brand.

Lost business and blacklisting

Companies linked to corruption risk having their contracts terminated or suspended. In March 2021, Petronas was reported to have suspended its 60 per cent-owned subsidiary, Deleum Primera Sdn Bhd, from its tenders and contracts until further notice, following reports of alleged unethical and integrity issues. The suspension came after two of the subsidiary’s senior executives were interviewed by the MACC over an alleged scheme involving work for Petronas Carigali.

Many organisations now require business partners to declare that they are corruption-free before any deal is signed, and carry out due diligence before bringing suppliers on board. A company with a corruption record, or without proper anti-corruption controls, may simply be left out of the pool of suppliers that others are willing to hire.

Higher costs

When contracts are won through corruption rather than merit, everyone pays more:

Overpaying for poor work. Transparency International reported that collusion on stadium projects for the 2010 FIFA World Cup added an estimated more than US$1 billion to the costs borne by local municipalities.
Higher operating costs. Paying bribes to reach project milestones adds unnecessary costs.
Fixing bad work. Incompetent contractors chosen through corruption may leave defects that require rectification and new contractors.
Higher financing costs. When project costs are inflated, the amount that has to be financed rises too.

The book also cites the Association of Certified Fraud Examiners’ 2020 report, which found that corruption offences such as bribery, conflicts of interest and extortion cause businesses a median loss of US$200,000.

Heavy financial penalties

Under Section 17A(2) of the MACC Act, a company convicted of corruption faces a fine of at least ten times the value of the bribe, or RM1 million, whichever is higher. The sums can be enormous:

In Serious Fraud Office v Rolls-Royce plc and another, the company paid about £510 million: about £258 million in profits given up, about £239 million in penalties and about £13 million in the Serious Fraud Office’s costs.
In Public Prosecutor v Rosmah binti Mansor, an individual case, the High Court imposed ten years’ imprisonment and a fine of RM970 million, described in the book as the highest fine ever imposed for a corruption offence in Malaysia. At the time the book was written, the case was pending appeal.

5. People Go to Prison

Section 17A exposes not only companies but also their officers to prosecution and imprisonment. Companies have lost top executives to corruption convictions:

The former chairman and chief executive of Kellogg, Brown & Root, one of the world’s largest engineering and construction firms, was sentenced to 30 months’ imprisonment in 2012, according to the US Department of Justice.
In April 2022, a former managing director of Goldman Sachs was convicted in the United States of conspiring to commit bribery, circumvent internal accounting controls and launder money in connection with the multibillion-dollar scheme involving 1Malaysia Development Berhad (1MDB).
In Malaysia, Pristine Offshore Sdn Bhd became the first company charged under Section 17A, over a bribe of RM321,350 allegedly given for a subcontract from Petronas Carigali. Its former director was separately charged with bribery.

6. The Costs Nobody Talks About

Beyond fines and headlines, corruption quietly damages a business in other ways:

Hidden cost	What it means for the business
Unfair contract terms	A bribed project manager may agree to onerous terms that the company must still honour, even at extra cost.
Loss of competitiveness	Money spent on bribes is not spent on better products, better service or staff training, so the business falls behind.
Losing talent	Capable and ethical people do not want to work for companies with a bad record, and ethical partners may walk away.
Ongoing scrutiny	Authorities keep past offenders on their radar, and investors and lenders think twice before getting involved.
Civil liability	An incompetent contractor hired through corruption can cause delays that lead to compensation claims, or unsafe work that injures people and triggers lawsuits.

Practical Checklist: Protecting Your Business

Never pay for influence. Do not agree to success fees for anyone whose “service” is using connections with officials to secure contracts or approvals.
Scrutinise consultants and agents. Ask exactly what legitimate work they will do, and pay only for genuine, documented services.
Protect your procurement. Use competitive bidding, separate duties and approval levels so that no single officer can inflate prices.
Act quickly if you discover a bribe. Get legal advice on cancelling affected contracts and recovering the bribe or your losses, and gather evidence early.
Report promptly. A report made only after a dispute begins may be dismissed as an afterthought.
Check your partners. Carry out due diligence and require anti-corruption declarations before signing deals.
Remember arbitration offers no hiding place. Awards affected by corruption can be set aside in Malaysia.
Invest in adequate procedures. A strong anti-corruption programme is far cheaper than fines, lost contracts and a damaged reputation.

Conclusion

A bribe may seem to solve a problem today, but it creates many more tomorrow. The contract it was meant to secure may be void. Any award won through it may be overturned. The company may face fines of ten times the bribe or more, lose customers and financiers, see its share price fall, and watch its senior people go to prison.

The book observes that many companies prosecuted for corruption already had anti-corruption programmes on paper. What makes the difference is rigorous enforcement and a genuine commitment from the top to stamp out corrupt practices. With Section 17A in force, the true cost of a bribe is simply too high for any business to bear.

Cases and Sources Referred To

Merong Mahawangsa Sdn Bhd & Anor v Dato’ Shazryl Eskay bin Abdullah [2015] 5 MLJ 619 (Federal Court)
Wong Hon Leong David v Noorazman bin Adnan [1995] 3 MLJ 283 (Court of Appeal), overruled on the illegality point by Merong Mahawangsa
PT International Nickel Indonesia v General Trading Corporation (M) Sdn Bhd [1978] 1 MLJ 1 (Court of Appeal, Singapore)
Mahesan v Malaysian Government Officers Co-operative Housing Society Ltd (Privy Council), as described in the book
Indian Bank v Green Mint Pte Ltd and others [2022] 4 SLR 634 (Singapore High Court)
Hurstanger Ltd v Wilson and another [2007] EWCA Civ 299
Honeywell International Middle East Ltd v Meydan Group LLC [2014] EWHC 1344 (TCC)
National Iranian Oil Company v Crescent Petroleum Company International Ltd and another [2016] EWHC 510 (Comm)
Serious Fraud Office v Rolls-Royce plc and another [2017] Lexis Citation 3
Public Prosecutor v Rosmah binti Mansor [2022] 9 CLJ 83
Contracts Act 1950, s 24(e), and Arbitration Act 2005, s 37
Association of Certified Fraud Examiners, 2020 Report to the Nations, and Transparency International, Regulating Private Sector Corruption (2018)

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