You are owner and President of Gulf Trading Company. Your firm became involved in the Moza Island Project back in the early 1980's through a collaboration with a large, influential multinational-corporat.ion located in the Middle East. The joint venture, known as Gulf Sargam, hoped to use Gulf Trading company's contacts to secure large construction contracts. Meanwhile, the multinational provided all the technical, administrative and support staff, including the General Manager Joe Fernandes. Gulf Trading and the multinational had initially contributed capital of 51% and 49%, respectively, but'profits were divided ifito 55% and 45% shares, respectively.

In January of 1983, the regional government decided to modernize the living -Lacii.iti-es on Moze Island. Located 150 miles 'to the southeast of t,.Ae. Yiation's capital, Moza contained most of the country Is major liquefied petroleum gas plants. The government invited bids from international construction firms in early 1983.

In April, the government awarded the mechanical subcontract to Gulf Sargam for $3 million. This contract amounted to almost ten times the company's original capital of $305,000. You felt that the estimated profit of $300,000 seemed dangerously low for a project spanning 18 months in a remote location. However, Joe, your General Manager, persuaded you to go ahead with the project because of the potential for future work. Joe then selected Tom Johnson to serve as Moza Island Project Manager for Gulf Sargam.

To protect its interests, the government employed a prominent consulting firm to supervise the Moza Island Project. Habib Sharif was Construction Consultant. He had final authority on every aspect of the project, including approvals of equipment, finish work, variations and change orders. Disagreements between the contractors and the construction consultant could only be resolved through a complex civil arbitration system administered by the government at its mainland capital.

From the beginning, Tom, your Project Manager, noticed that Habib Sharif , the government Is Construction Consultant,- often went out of his way to enforce the contract 'specifications for Gulf Sargam. At Moza Island, Habib consistently interpreted contract clauses to the advantage of the government, insisting upon absolute compliance with even the smallest details. Habib routinely delayed Gulf Sargam's construction drawings and then returned them for correction of minute flaws. Only rarely did Habib approve Gulf's work the first time. In defense, Tom filed claims for reimbursement of.the additional costs incurred by Gulf Sargam due to these delays.
On the other hand, Habib seemed extremely tolerant with the general contractor and each of the other subcontractors. He approved their work from his office without even visiting the job site. A year into the job, a space frame structure that was made of lightweight aluminum erected by the general contractor crashed to the ground. Fortunately, no one was hurt. Habib attributed the mishap to metal fatigue and not to shoddy workmanship.

A familiar picture began to unfold. Most construction consultants in the region expected to gain personally from their work, but none asked for an outright bribe. The consultant normally initiated the move with subtle "feelers" and awaited a response from the contractor. If a favorable reaction did not materialize, the consultant sent stronger signals, each-causing more disruption to the contractor's work than the earlier one. However, Tom had faced this situation in several earlier projects and managed to avoid paying a bribe in each case through a combination of diplomacy and skill.

As owner and President of Gulf Trading Co., you had strong feelings on the subject. The fact that gratuities were often paid in the Middle East did not'seem to you to make it right to pay them. The practice existed simply because corporations paid when asked. No law said that you must pay. Taking part in a corrupt system seemed immoral. and served only to perpetuate the corruption. Giving in would set a precedent for all your other operations. You had to make it clear to Habib Sharif that the company would not play by those rules. Perhaps if you held fast, the man would see that you meant it. He would come around.

However, by June 1985, Gulf Sargam had incurred costs on an additional 9,000 man hours due to delays in approval of drawings and rejection of site work by Habib. Gulf had filed variation claims totalling $300,000, but not a single one had been approved. By early 1986, the delays imposed on the firm had slowed the entire Moza Island project, but Habib refused to waver. Tom's crew found themselves six months behind schedule with the situation worsening every day.

At a chance meeting at the island club,, Tom decided to confront Habib directly in order to resolve the matter before the end of the contract. Habib remarked that the general contractor and the other "subs" had taken "good care" of him and he had reciprocated their gesture -accordingly. He expressed surprise that Gulf Sargam had not followed the same policy, a common Middle Eastern practice that remained essential for the smooth execution of a project.

But Habib claimed that it was not too late for Gulf Sagram. He had the authority to approve variation claims up to a total of $800,000 and Gulf Sagram could still make a profit. The cost of the consideration would equal $80,000, or ten percent of the claims approved for payment. Habib also pointed out that he had every right to enforce the contract's ten percent penalty should Gulf Sagram fail to complete the job on time. Tom repeated company policy on such financial arrangements, but said he would relay Habib's information to higher authorities.

In June of 1986, you review this scenario. Gulf Sargam has completed the Moza Island contract six months behind schedule. Habib might impose the contract's penalty clause, adding -another potential $300,000 to the firm's losses. Even without the penalty, your net loss amounts to $575,000 against an estimated profit of $300,000. Tom considered the situation hopeless. He said the firm must accede to Habib's request in order to recover its losses.

Joe Fernandes agreed. He reminded you that as an employee of the multinational he was obliged to take all possible steps to avoid losses to his parent company. Since Gulf Sargam had exhausted all other avenues, Joe told you to endorse the payment to Habib. He then underscored his government's interest in the performance of joint ventures. The government monitored financial results regularly, and a loss of this size would be difficult to explain.. Joe's arguments are, compelling but you do' not feel comfortable with them.