Early Detection of Fraud and/or Corruption in Arbitrations: Lessons from the Recent English Court Decisions?

Two recent English Commercial Court decisions serve as a warning to dishonest parties hoping to exploit the arbitral process to obtain or enforce fraudulent or corrupt arbitration awards. The English courts generally follow a non-interventionist approach when it comes to the challenge of enforcement of arbitral awards. However, these recent decisions signify that the Commercial Court can and will use its statutory powers to intervene, investigate and order disclosure to uphold the legitimacy of the arbitral process and parties’ rights.  

2 Apr 2024 7 min read Dispute Resolution Alert Article

At a glance

  • Two recent English Commercial Court decisions serve as a warning to dishonest parties hoping to exploit the arbitral process to obtain or enforce fraudulent or corrupt arbitration awards.
  • These cases signify that the Commercial Court can and will use its statutory powers to intervene, investigate and order disclosure to uphold the legitimacy of the arbitral process and parties' rights.
  • There are a number of considerations that parties to an agreement can take to mitigate against the risk of fraud and corruption in the context of arbitration awards.

Wayward parties or other participants in the arbitral process considering following a similar path and committing what the Commercial Court characterised as “the most severe abuses of the arbitral process” because they are “driven by greed and prepared to use corruption; giving no thought to what their enrichment would mean in terms of harm for others”, should take note.

A challenge on the basis of serious irregularity

The first decision concerned a challenge to a London seated arbitration award of USD 11 billion obtained against the Republic of Nigeria. Given the very high quantum involved (which equated to almost half of Nigeria’s 2023 national budget) the case was the subject of intense attention in Nigeria and beyond.

Nigeria challenged the award under section 68 of the English Arbitration Act (which deals with challenges to an award on the basis of a serious irregularity), alleging that the award had been procured by fraud and/or conduct that was contrary to public policy. The Commercial Court ordered extensive disclosure of documents and upheld Nigeria’s challenge and later set aside the USD 11 billion award. It found that the award had been obtained by fraud and procured in a way that was contrary to public policy, including corrupt payments made at the time the original contract was concluded and throughout the arbitration.

An application to enforce an arbitral award

The second decision concerned an application by a British Virgin Islands company to the English courts for permission to enforce an arbitration award. The arbitration had purportedly been seated in Kuwait under the rules of the Kuwait Chamber of Commerce and Industry Commercial Arbitration Centre.

In February 2024 the Commercial Court set aside an earlier decision granting leave to enforce the arbitral award with the extraordinary finding that the arbitration agreement, arbitration proceedings and alleged award were all entirely fabricated and had never happened, and therefore there was no triable issue of enforcement for the court to determine. Some of the compelling evidence included the fact that sections of the purported ‘award’ were copied from an unrelated English judgment, and the Kuwaiti arbitral centre confirmed that it had not administered the case. The judgment described the audacious and brazen attempted fraud as “very disquieting and of the utmost seriousness

Effective application of the legislative framework

These cases demonstrate that the English Arbitration Act and accompanying enforcement legislation can provide an effective statutory framework for the Commercial Court to act as a ‘check and balance’ on challenges and enforcement of arbitral awards. As the judgment in Nigeria’s favour declared: “What happened in this case is very serious indeed, and it is important that [the English Arbitration Act] has been available to maintain the rule of law”.

It is noteworthy that, in order to preserve the final and binding intent of arbitration, the English Arbitration Act only allows for appeals and challenges in very limited “extreme cases” and they are very rarely successful. In the 2020–2021 court year only 4% of section 68 challenges succeeded. The Commercial Court recognised that the facts of Nigeria’s appeal satisfied that high threshold. This confirms that the possibility of challenge is open in these extreme cases, but that the threshold remains high. This has the secondary advantage of stopping defaulting entities from alleging corruption or fraud against innocent parties in the hope that it will win an award in their favour or delay or deny enforcement of an award against them.

Additionally, the statutory framework worked effectively as the Commercial Court was empowered by legislation to order the disclosure of documents relevant to Nigeria’s challenge, even though such documents had not been before the original arbitral tribunal. Ultimately that “remarkable and crucial” disclosure “enabled the truth to be reached” and without the Commercial Court exercising its powers the truth may not have prevailed.

Future strategy and mitigations

Although thankfully such egregious examples of fraud and corruption are rare, there are inevitably concerns to ensure sufficient protections and checks are in place to prevent unscrupulous entities from abusing the arbitral process. Questions are rightly being asked about whether the fraud and corruption that tainted these cases could or should have been uncovered sooner by the appropriate tribunal or court. Some practitioners have also expressed a concern that the confidential nature of arbitration renders it susceptible to this type of behaviour as there is less public scrutiny of the conduct of the parties and the allegations forming the subject matter of the arbitration.

The judgment in Nigeria’s appeal encouraged reflection among the arbitration community, state users of arbitration and the courts with responsibility to oversee and supervise arbitration, to consider whether the arbitration process needs attention or amendment. This is particularly important where such significant sums of money are in dispute and a state is involved.

Any new procedures or innovations arising from this reflection will necessarily take time to develop. However, it is hoped that the high-profile nature of these cases will put courts and tribunals around the world on alert to potential abuses of the process. Additionally there are considerations for participants in the process that could further mitigate against similar risks both at the stage of contractual negotiation and once an arbitration is underway –

  • If a dispute arises, parties should select and appoint lawyers that are experienced in international arbitration and the subject matter of the dispute. Parties and their legal representatives should then work together to fully and proactively engage with the arbitration. By appointing experts in the process and being alert and equipped to identify issues of fraud and corruption, parties can ensure that all relevant information is put before the tribunal and the correct procedural steps followed. In this respect lessons should be learnt from Nigeria’s failure to appoint adequate legal representation and the disastrous lack of engagement with the arbitration, where: “legal representatives did not do their work to the standard needed, where experts failed to do their work, and where politicians and civil servants failed to ensure that Nigeria as a state participated properly in the Arbitration. The result was that the Tribunal did not have the assistance that it was entitled to expect, and which makes the arbitration process work”.
  • Parties should also choose a legal seat for the arbitration that has a legislative framework and robust court system to protect the integrity of the arbitral process. Choosing to arbitrate in a jurisdiction like South Africa or England where the courts are supportive of the arbitration process and empowered to intervene where appropriate as a check and balance on the arbitral process is valuable, especially to compel the disclosure of evidence (for example pursuant to the powers enshrined in Article 27 of Schedule 1 of South Africa’s International Arbitration Act) to ensure that procedural irregularities, dishonesty and corruption are exposed. Jurisdictions where the courts have less investigatory powers for disclosure may face more obstacles in uncovering fraud or corruption.
  • Arbitration users should consider what the appropriate level of confidentiality is. Although primarily a confidential process, there is a case for greater public scrutiny of disputes and their outcomes to combat corruption and bribery. This is particularly relevant when one of the parties is a state entity and there would be significant adverse consequences for the nation’s finances, contractual performance or reputation. Different legal seats and institutional rules prescribe different levels of confidentiality and due consideration should be given to the appropriate forum. For example Article 11 of South African International Arbitration Act requires that any arbitration proceedings with a state-owned entity must be held in public.
  • Parties should carefully select appropriate institutional rules to ensure that tribunals are empowered to conduct proceedings effectively. Choosing arbitral rules from an institution like the London Court of International Arbitration (LCIA) or the Arbitration Foundation of Southern Africa (AFSA) empowers the tribunal to gather evidence, call witnesses, request documents or appoint expert witnesses. This can help ensure that fraud, dishonesty and corruption are uncovered at an early stage.
  • Tribunals should be alert to the risk of corruption and fraud throughout the arbitral process, and proactively deal with signs or allegations of fraud or corruption. This is to both uncover corruption when it occurs, and to protect innocent parties when corruption is alleged to thwart enforcement of an award. Judges and courts with responsibility or oversight of arbitrations should remain similarly alert and not accept facts or documents at face value, especially given technological and AI advancements which can result in the creation of false or misleading evidence.
  • Commercial entities should ensure they have adequate document and data retention systems in place both at the time of contracting and after any dispute arises. They should also ensure they have experienced and adequate legal advisers when negotiating and drafting contracts, as well as robust procedures in place to prevent and identify instances of corruption tainting the negotiations. This can be essential for refuting any allegations of fraud or corruption made in the future, especially where there is a significant imbalance in the resources or expertise of the parties. For example, in higher-risk transactions such as with a state-owned entity there is a risk that if there is a change of political regime, a subsequent regime may seek to undo previous commercial contracts. In doing so the new regime could make unsubstantiated allegations of fraud or corruption to set aside a contract or to resist enforcement of an award against them, and in such instances a detailed evidential record will be invaluable. 

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