Does international arbitration have a fraud problem?

June 2024  |  SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

June 2024 Issue


The recent judgments in Nigeria v Process Industrial Developments Limited (2023) and Contax Partners Inc BVI v Kuwait Finance House and Ors (2024) are stark and extreme examples of the use of fraud and bribery in attempts to obtain and enforce arbitration awards. The lessons from those judgments need to be heeded by everyone in the arbitration community. But what are those lessons?

In October 2023, Justice Knowles found in Nigeria that Process & Industrial Developments Ltd (P&ID) had knowingly relied on false evidence, had committed bribery and had improperly retained documents. At the end of his judgment, Justice Knowles said: “I hope the facts and circumstances of this case provoke debate and reflection among the arbitration community, and also state users of arbitration, and among other courts with responsibility to supervise or oversee arbitration.”

The judgment did indeed provoke debate and reflection, but this was further compounded by Justice Butcher’s extraordinary judgment in Contax, which followed only four months after Nigeria. In Contax, Justice Butcher found (among other things) that the alleged arbitration had never even taken place and that the award was a complete fabrication.

The effectiveness and popularity of international arbitration relies on the integrity and the effectiveness of the process. Therefore, the Nigeria and Contax cases should be of real concern to arbitration practitioners, arbitrators and indeed users of international arbitration. But are they isolated examples? Or does international arbitration have a fraud problem?

In this article we consider the judgments and these questions in more detail.

Nigeria v Process & Industrial Developments Ltd

Nigeria and P&ID entered into a ‘Gas Supply and Processing Agreement for Accelerated Gas Development’ (GSPA), which related to the construction of a gas-processing plant. P&ID commenced an arbitration in 2012. A very experienced tribunal was appointed and comprised Lord Hoffman, Sir Anthony Evans and Chief Bayo Ojo SAN. The final award was issued in 2017. The tribunal found that Nigeria had committed a repudiatory breach of the GSPA on account of it not having provided P&ID with the required infrastructure and wet gas. Accordingly, Nigeria was ordered to pay the startling sum of $6.6bn in damages plus interest (which, at 7 percent, meant that the value of the award ended up exceeding $11bn).

Nigeria challenged the award in the English courts pursuant to section 68 of the Arbitration Act 1996. Section 68 allows the court to set aside an award on account of a serious irregularity (of the kinds listed in the section) which the court considers has caused or will cause substantial injustice to the applicant. In particular, section 68(2)(g) refers to “the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy”.

Nigeria made allegations of bribery, corruption and perjury, which it said extended to the GPSA, but also to the arbitral process from arbitration agreement to final award. Justice Knowles granted Nigeria’s application and set aside the award. He found that the award was obtained by fraud and the award and the way they were procured was contrary to public policy.

Justice Knowles reached this conclusion on account of the three main issues outlined below.

First, he found that P&ID had paid bribes to Grace Taiga (a former legal director at the Ministry of Petroleum Resources) in order to procure the GSPA and then during the arbitration in order to help suppress from the tribunal the truth that Ms Taiga had been originally bribed.

Second, he found that P&ID had provided evidence to the tribunal that it knew to be false. In particular, he found that the evidence of Michael Quinn (a co-founder of P&ID), which addressed how the GSPA came about, made no reference to the bribes that had been paid to Ms Taiga.

Thirdly, he found the P&ID had improperly retained Nigeria’s internal privileged and confidential legal documents, which it used to “monitor Nigeria’s position and awareness as the Arbitration continued”, which included “monitoring whether Nigeria had become aware of the deception being practised by P&ID”.

Contax Partners Inc BVI v Kuwait Finance House and Ors

The judgment in Contax found a different type of fraud, which is perhaps even more extreme than that that in Nigeria.

In June 2023, Contax applied to the English Court under section 66 of the Arbitration Act 1996 to seek leave to enforce an arbitration award said to have been obtained in November 2022 under the auspices of the Kuwait Chamber of Commerce and Industry Commercial Arbitration Centre.

The award was said to have been appealed by the defendants, Kuwait, to the Commercial Court of Appeal in Kuwait and then endorsed by the Upper Court. The application for leave to enforce was made without notice to the defendants and the court entered judgment granting leave in August 2023.

However, as is usual, the court allowed the defendants 28 days to set aside the order from the date of service on the defendants. Contax alleged it had served the award on Kuwait and, following the 28-day period, then sought third-party debt orders in relation to sums held by Kuwait in various bank accounts. Interim third-party debt orders were granted on 1 October 2023 and it was the freezing of accounts, pursuant to these orders, that Kuwait says first gave them notice of the proceedings.

Kuwait immediately applied to set aside the August order granting leave to enforce. In summary, the basis for Kuwait’s application was that the August order had not been served on them, but more seriously that there had been no arbitration at all and that the award was a complete fabrication.

Following a hearing in January 2024, Justice Butcher set aside the original order and ruled that there was “no real doubt, and no triable issue, that the Award is not genuine and a fabrication”. Justice Butcher identified five strong grounds for concluding the arbitration had not taken place and that the award was a fabrication. First, large parts of the text of the award had been copied from an unrelated English court judgment. Second, the award did not comply with Kuwaiti law, which enhanced the probability that the award was not issued under the auspices of the Kuwait Commercial Arbitration Center (KCAC). Third, the alleged Kuwaiti court judgment was in English (as opposed to Arabic, as required) and named judges that were not actually in the Court of Appeal. Fourth, there was evidence that individuals named in the award as having been involved were not involved at all (this included witnesses and also counsel for the defendants). Finally, the award and Kuwaiti Court judgment referred to a number of documents that had not been produced; if the arbitration was genuine it is expected that they could have been produced.

Justice Butcher did not hesitate to find that the arbitration and award were complete fabrications.

Assessing the fraud problem

The Nigeria and Contax cases are egregious and shocking examples of fraud, and the international arbitration community should take them very seriously. That said, in the context of the many thousands of arbitrations that take place each year, the Nigeria and Contax cases do appear to be reasonably isolated examples of fraud and the impact of the cases has been compounded by their coincidence of timing. We do not believe fraud in international arbitration to be endemic and, therefore, in our view, international arbitration does not have a pervasive fraud ‘problem’.

However, the cases do serve as a sharp reminder that international arbitration is not immune from fraud and that fraudsters will continue to think of ways in which the process may be exploited. This risk must be taken seriously.

As Justice Knowles noted in Nigeria: “This case has also, sadly brought together a combination of examples of what some individuals will do for money. Driven by greed and prepared to use corruption: giving no thought.” Any complacency in this regard is extremely dangerous both for parties being represented in individual cases, but also in risking the slow erosion of the reputation of arbitration as a reliable and trustworthy means of resolving disputes.

Therefore, even if not endemic, parties, tribunals and courts must take responsibility in seeking to prevent and identify fraud in international arbitration. But how might the arbitration community seek to do this?

There are certainly no automatic safeguards that would have detected the bribery in the Nigeria case. As to the fabrication of awards, the use of blockchain technology could potentially help prevent forgery. For instance, arbitral awards could be registered on the blockchain, which would allow the courts to know that the award has been legitimately issued by arbitrators and institutions.

However, for such technology to be truly effective, it would have to be widely adopted. For instance, in the Contax case, its success would have relied on the KCAC having adopted the technology. Though some of the largest arbitral institutions and courts might adopt the technology, many would not, which would still leave the opportunity for fraud. In both Nigeria and Contax, the necessary enforcement steps meant that courts acted as a failsafe, which allowed for additional scrutiny by the courts and the parties. However, in both cases, the awards got through several stages before detection.

Ultimately, protection comes from human vigilance. Parties, tribunals and courts must have a closer focus on the risk of fraud, and be alive to indicators of possible fraud in all cases in which they are involved.

 

Adam Short is a senior counsel and Huw Jenkin is a partner at Travers Smith LLP. Mr Short can be contacted on +44 (0)20 7295 3376 or by email: adam.short@traverssmith.com. Mr Jenkin can be contacted on +44 (0)20 7295 3213 or by email: huw.jenkin@traverssmith.com.

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