Allegations of fraud in civil claims under English law are not often actively pursued and rarely succeed.

However, in the case of Celtic Bioenergy Limited v Knowles Limited [2017], the judge decided that an arbitrator's award had been obtained by fraud, in the civil not the criminal sense, on the part of Knowles.

The case also illustrates that even where the parties have selected arbitration as the forum for the resolution of their disputes, there is no guarantee that the privacy considered to be one of the advantages of arbitration over litigation will be maintained, as an arbitrator's award can be challenged in the English Courts.

The factual background

This decision arose from Celtic's application to set aside, vary or remit an arbitrator's award on the grounds of serious irregularity in that it was obtained by fraud or in a manner contrary to public policy.

As the judge, Mrs Justice Jefford, highlighted in her judgment, the background to this application was "complex and convoluted".

  1. Devon County Council engaged Celtic to design and construct a composting facility;
  2. Disputes arose between Devon and Celtic about payment, some of which were dealt with in eight adjudications followed by an arbitration;
  3. Celtic engaged Knowles to provide advice and to represent it both in the adjudications and in the arbitration;
  4. By what the judge described as a "rather curious set of documents", Celtic later assigned to Knowles its rights against Devon, but at the same time reserved the right to enforce payment or to claim damages. Celtic also entered into a side letter which provided that any sums obtained by Knowles would be held for Celtic's benefit, less any sums due to Knowles as fees;
  5. Knowles subsequently issued to Devon invoices in respect of the sums awarded to Celtic in adjudication number eight, but Devon refused to pay;
  6. In the meantime, disputes arose between Celtic and Knowles about Knowles' entitlement to payment for the services it had provided in adjudications six, seven and eight and the quality of the services provided;
  7. Celtic and Knowles entered into an ad hoc arbitration agreement subject to English law which provided that all disputes between them would be resolved by arbitration; and, importantly, that Knowles would withdraw and extinguish the invoices it had served on Devon;
  8. Thereafter, separate arbitrations were commenced between Devon and Celtic, and also between Celtic and Knowles;
  9. The arbitrator in the arbitration between Celtic and Knowles decided in a partial award on initial issues, that fees would be payable to Knowles, but he did not decide (because he was not asked to), whether any sums were actually payable to Knowles at that time;
  10. The arbitrator later made a further award in which he decided that Knowles was liable for the costs of determining the initial issues and later ordered that Knowles pay Celtic £200,000 on account of these costs;
  11. Without Celtic's knowledge, in March 2016, Knowles wrote to Devon to demand payment of the sum of £377,985.50 plus VAT, which included the sums that had been the subject of the invoices Knowles had withdrawn. Again, Devon did not pay;
  12. In April 2016, Knowles attempted to commence a further arbitration against Celtic in which it claimed £2 million, as damages for breach of contract, for its fees relating to the services it had provided to Celtic in the arbitration between Celtic and Devon;
  13. Knowles then made applications for declarations in its arbitration with Celtic that it had complied with its agreement with Celtic to withdraw the invoices it had submitted to Devon. This led to a further arbitration award made in September 2016, which in turn led to Celtic's application now before the Technology and Construction Court;
  14. In the September 2016 award, the arbitrator declared that Knowles had complied with the ad hoc arbitration agreement between it and Celtic by withdrawing the invoices it had served on Devon, but in making that declaration, he was crucially not aware of the March 2016 demand for payment Knowles had submitted to Devon. It was only after the making of the September 2016 award that the March 2016 demand and subsequent related correspondence came to the attention of Celtic.

The legal principles and the court's decision

The question for the judge to decide was whether the evidence Knowles had presented to the arbitrator in the 2016 arbitration was, as Celtic claimed, incomplete, misleading and fraudulent.

The starting point is section 68 of the Arbitration Act 1996, which provides that:

"(1) A party to arbitral proceedings may…apply to the court challenging an award…on the ground of serious irregularity affecting the tribunal, the proceedings or the award.

(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant-…

(g) the award being obtained by fraud or the way in which it was procured being contrary to public policy…"

In the course of her judgment the judge emphasised that:

  1. The threshold for any challenge under section 68 is high; and "…it is not sufficient to show that one party inadvertently misled the other, however carelessly…There must be some form of dishonest, reprehensible or unconscionable conduct that has contributed in a substantial way to obtaining the award…";
  2. It is not enough for the court to surmise that there had been fraud, but that "…does not mean that anything short of an admission of fraud will do. The court is entitled, in the normal way, to reach a conclusion on all of the evidence available to it…" Therefore a finding of fraud, in the civil context, can be made on the basis of inferences from the evidence if the evidence is strong enough;
  3. The court will also bear in mind "...what is sometimes referred to as the higher standard of proof on an allegation of fraud. By this what is meant is not that the standard is something different from the balance of probabilities but rather that the explanation is more likely to be human error than dishonesty";
  4. It is also not enough to show that the award was obtained by fraud or in a way contrary to public policy; it must also have caused substantial injustice. "Amongst other things, the applicant must show that the true position or the absence of the fraud would probably have affected the outcome of the arbitration in a significant respect".

Applying the legal principles to the facts, the judge concluded that:

  1. Knowles' failure to draw its March 2016 correspondence with Devon (which was plainly relevant to the issues under consideration) to the attention of the arbitrator was deliberate, and in failing to do so, Knowles had created a "…wholly misleading impression". Knowles had failed to provide a credible explanation for this failure;
  2. In the circumstances, it was not necessary for her to decide whether or not Knowles had been reckless in failing to draw the March 2016 correspondence to the attention of the arbitrator (in the sense that it did not care about the veracity of the statements made to the arbitrator concerning compliance with certain provisions in the ad hoc arbitration agreement between Knowles and Celtic); but she said (without deciding the point) that "…there may be cases in which recklessness as to whether a statement was true or false might amount to fraud within the meaning of s.68(2)(g) if there is some other element of unconscionable conduct";
  3. Knowles had obtained the arbitrator's September 2016 award by fraud "…in that matters that were completely inconsistent with key issues in Knowles' case were deliberately withheld from the arbitrator".

Mrs Justice Jefford remitted the parts of the award that Celtic had challenged back to the arbitrator so that he could reconsider his award in possession of the full facts.

Key points to remember

This decision illustrates and emphasises the importance of not withholding key information from an arbitrator as it might result in (a) awards being set aside, varied or remitted to an arbitrator by an English Court that has jurisdiction; and (b) "private" arbitration awards coming into the public domain if they are challenged by a dissatisfied party on the grounds of serious irregularity.

The decision also illustrates and re-affirms the well-established principle that the English Courts will not interfere with an arbitration award on the grounds of serious irregularity unless there is a very clear basis for doing so.