Arbitration award set aside for serious irregularity - a spotlight on the role of arbitration in large value claims involving state entities

Application under section 68 of the Arbitration Act 1996 for serious irregularity

The Federal Republic of Nigeria v Process & Industrial Developments Ltd [2023] EWHC 2638 (Comm) was a rare successful application under section 68 of the Arbitration Act 1996 to set aside an arbitration award for serious irregularity. This was an unusual case involving widespread claims of bribery and corruption, and the judgment makes interesting commentary that the case raises issues of wider importance that touch on “the reputation of arbitration as a dispute resolution process”.

Background

Nigeria entered into a gas supply and processing agreement (the GSPA) with Process & Industrial Developments Ltd (P&ID). Under the GSPA, Nigeria would supply wet gas to be processed by P&ID and transferred back to Nigeria. The GSPA was stated to be for a 20-year duration, however it seems that not much happened – it was common ground that Nigeria did not supply any wet gas to be treated, and P&ID did not build any gas treatment works.

In the third year of the GSPA, P&ID commenced arbitration proceedings and the Tribunal found Nigeria liable to P&ID for repudiatory breach of the GSPA and made an award for damages of USD6.6bn with interest at the rate of 7%.

Section 68 challenge

Nigeria applied to set aside the award under section 68 of the Arbitration Act 1996 on the ground of serious irregularity affecting the Tribunal, the proceedings or the award. Subsection (2) lists the kinds of irregularity which would cause substantial injustice, and Nigeria relied on ground (g): “the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy."

Nigeria made widespread allegations of bribery, corruption and perjury – the judgment notes that Nigeria made “almost every allegation it could”. The judge found three irregularities that amounted to fraud by which the awards were obtained contrary to public policy:

1. False evidence. P&ID relied in the arbitration on evidence it knew to be false. Specifically, a witness statement purported to “explain how the GSPA came about” but contained no mention of bribery that took place at the time.
2. Continued bribery. The court concluded that bribes or corrupt payments were made during the arbitration process to the person who had been bribed at the time of the GSPA.
3. Retention of Nigeria’s privileged documents. P&ID came into possession a large number of Nigeria’s internal legally privileged documents and retained them so it could monitor Nigeria’s position and awareness of matters as the arbitration progressed. The court concluded that “at least some were plainly subject to legal professional privilege”.

The court then went on to consider whether these irregularities caused substantial injustice to Nigeria i.e., would the outcome of the arbitration have been different had the irregularities not occurred. Although this test has a high threshold, the judge had “no hesitation in concluding that Nigeria suffered substantial injustice”:

• The arbitration would have been completely different, and in ways strongly favourable to Nigeria, had the Tribunal known about the bribes made when the GSPA was being entered into. It would have brought into issue whether the GSPA had been procured by fraud and so was voidable.
• Discovery of the concealment of the bribes would have altered the Tribunal’s approach to the rest of the P&ID witness evidence.
• The nature and scale of the privileged documents and P&ID’s conduct meant Nigeria’s right to confidential access to legal advice was “utterly compromised” throughout the arbitral process and it was effectively denied an important part of that process. Had the Tribunal known, its approach would have been very different.

The final consideration for the court was whether Nigeria had lost the right to object under section 73(1)(d) of the Arbitration Act 1996 by continuing to take part in the arbitral proceedings without raising an objection in circumstances where it was aware that these grounds existed or would have been discoverable with reasonable diligence. P&ID argued that there were a number of red flags that should have caused Nigeria to investigate the position and it should have put in issue during the arbitration whether the GSPA had been preceded by payments to Nigerian officials and whether it had been procured by corruption.

The court disagreed and the judge accepted that Nigeria did not know, and could not have discovered with reasonable diligence, when it took part in the arbitration of the grounds for its objection. The court concluded that P&ID was not going to reveal the truth about the bribery and it was monitoring Nigeria’s awareness of the truth by retaining the privileged documents. The judgment recognises that Nigeria did take advice from English lawyers who suggested carrying out an investigation into P&ID’s conduct around the deal and Nigeria did open such an investigation. However, the court concluded that this would not have enabled an allegation of bribery and did not demonstrate that reasonable diligence required Nigeria to look for bribery.

While the court did not accept all of Nigeria’s allegations, it succeeded on its section 68 challenge with the court accepting the awards were obtained by fraud and contrary to public policy.

Judge’s comments about the arbitral process

Given the conclusions reached by the court about the irregularities, the court’s decision that Nigeria’s challenge should succeed seems unsurprising. However, this is a significant decision for arbitration not just because it is an unusual example of a challenge succeeding on the grounds of public policy but also because of the judge’s comments about arbitration. The conclusion of the judgment highlights the perceived risk that, even in cases with a tribunal of the greatest experience and expertise, arbitration as a process “becomes less reliable, less able to find difficult but important new legal ground, and more vulnerable to fraud” in cases where the value is so large and where a state is involved. The judge highlighted four issues that the arbitration community should think about:

1. More intervention from the tribunal? One significant area of concern was Nigeria’s failure to properly participate in the arbitration. The judge said it was clear throughout the arbitration that Nigeria's lawyers were not getting instructions and failing to put necessary points to quantum experts in cross-examination, and Nigeria’s experts had not done the required work. The judge raised the issue of whether the Tribunal should have been more direct and interventionist, or asked questions of Nigeria's legal representatives. The difficulty for arbitrators is that there is variety in the representation of parties, and there may be good reasons why lawyers are acting in a certain way. It is also difficult for arbitrators to be interventionist as they could be seen as ‘descending into the arena’ and making them susceptible to challenge as a result. While some arbitral rules allow for arbitrators to take a more inquisitorial approach, such as the ICC, others indicate the tribunal’s role is to determine issues.
2. Greater visibility of arbitrations involving states? Another concern for the judge was confidentiality. Unlike the court system, the arbitral process is private so there is no public or press scrutiny of what is going on. The judge raised a question about how suitable this process was where what is at stake is public money amounting to a material percentage of a state's GDP or budget, and questioned if greater visibility in arbitration involving a state or state-owned entities was justified.
3. Is litigation-style disclosure required? The judge concluded that it was the disclosure or discovery of documents that ultimately enabled the truth to be reached in this case – that process had been “remarkable and crucial”. In most arbitrations (and in this case in particular) disclosure is more limited than disclosure in commercial litigation in England and Wales.
4. Professional standards and ethics and contract drafting? The judge was concerned that there was “a complete imbalance” in the process of drafting the GSPA, and queried whether the process had been appropriate for a 20-year, multi-billion US dollar project raising wider questions about the legal processes of contractual drafting.

Comment

When the judgment was handed down towards the end of last year, unsurprisingly it provoked much commentary. As a few months have passed and ‘the dust has settled’, arbitral practitioners have had a chance to reflect on the detailed judgment and its impact on the arbitration world.

The judgment certainly provides some food for thought for arbitration practitioners but also raises the important question of whether the arbitration process is well-equipped to counter corruption. Some of the issues raised in the case are concerning and indeed the judge noted an intention to pass the judgment to the Solicitors Regulation Authority and the Bar Standards Board.

However, some in the arbitration community may also query whether the points raised justifiably point to a conclusion that arbitration is at risk (or at least more at risk than litigation) to being vulnerable to fraud or corruption. After all, it seems reasonable to assume similar issues could have occurred in litigation. By way of illustration, the judge’s comments around contract drafting, while undoubtedly a consideration in this case, highlight an issue that would seem to extend far beyond the arbitration community alone. Furthermore, ultimately Nigeria succeeded in setting aside the award due to the inherent protections in the arbitral system, namely the supervisory role of the English courts and their ability to support the arbitral process.

Following the decision, the Ministry of Justice has sought views on whether any steps should be taken in relation to the risk of corruption in arbitration. This seems a helpful development and an appropriate reaction to the comments in the judgment, presenting the opportunity for a useful discussion. While further guidance may be helpful, this would need to be carefully balanced against considerations of party autonomy and arguably the discretion arbitrators are afforded should allow for appropriate procedures to be adopted. Going forward, we may see tribunals considering whether a more quasi-inquisitorial approach is appropriate for certain cases, particularly those involving states and state-owned entities and, where appropriate, adopting such procedures.