The Court of Appeal recently handed down its judgment in a case that is significant for the global arbitration community. Minister of Finance (Incorporated), 1 Malaysia Development Berhad (Claimants/Appellants) v International Petroleum Investment Company, Aabar Investments PJS (Defendants/Respondents) provides clear guidance on the restricted circumstances in which the English courts will intervene in the increasingly common skirmishes between those seeking to enforce awards and those seeking to nullify them.
The claimant Malaysian government entities pleaded that during his tenure as Prime Minister of Malaysia, Mr Najib Razak had conspired with officials in the defendant Abu Dhabi entities to misappropriate over US$3.5 billion. As part of the alleged conspiracy, the parties entered into a binding term sheet to compromise payment rights and liabilities between the parties. The claimants contended that the defendants had known that Mr Razak was acting unlawfully for his own benefit and to the detriment of the claimants in entering into the binding term sheet, and that he had used the arbitration process and its confidentiality to mask the reality behind the payments.
The defendants commenced a first arbitration in June 2016, claiming performance of the claimants’ payment obligations under the binding term sheet. After 10 months, the parties agreed to resolve their differences under the terms of a settlement deed and a consent award made by the tribunal. The claimants later contended that Mr Razak had also procured the deed and consent award in his own interests, to the detriment of the claimants and again with the defendants’ knowledge.
The settlement deed also contained an arbitration clause with its seat in London, to be governed by English law under London Court of International Arbitration (LCIA) rules. It included payment obligations from the claimants to the defendants and a number of events of default, which would trigger a payment of US$1.2 billion to the defendants. In particular, the commencement of a claim by the claimants was such an event of default. The settlement deed’s arbitration clause also expressed the parties’ agreement to waive any right to challenge the consent award:
“on grounds of jurisdiction or for any other reason.”
The claimants made their payment obligations for one year under the settlement deed, but stopped them as soon as Mr Razak left office. At that point, each party took steps to attempt to shore up its position on the deed of settlement/consent award.
The Post-Award Skirmishes
- The claimants invoked the court’s supervisory jurisdiction. They issued a claim for the settlement deed and consent award to be set aside under sections 67 and 68 of the Arbitration Act 1996 (the Act). They also pleaded the repayment of the sums already paid under the settlement deed and consent award.Section 67 permits a party to an arbitration to challenge any award for a declaration that the tribunal did not have substantial jurisdiction to make it. The claimants relied on that section to argue that the prime minister had lacked authority to enter into the binding term sheet and the settlement deed. Section 68 provides for a challenge to an arbitral award if a party can show serious irregularity affecting the award, including the award being obtained by fraud or its having been obtained in a manner contrary to public policy.
- In response to the claimants’ court claim, the defendants commenced the second arbitration to demand an immediate default payment and a declaration of the validity of the settlement deed. The defendants also applied to strike out the claim form alternatively under section 9 of the the Act for an order to stay the claimants’ applications under sections 67 and 68 of the Act. If successful, that would leave the defendants free to continue with the second arbitration.
- For their part, the claimants applied under section 37(1) of the Senior Courts Act 1981 for an injunction to restrain the defendants from proceeding with the second arbitration.
At first instance, on skirmish (iii), English High Court Judge Robin Knowles refused to restrain the defendants from proceeding with the second arbitration. On skirmish (ii) he ordered that their applications should be stayed under his case management jurisdiction. He held that the second arbitration would decide the validity of the settlement deed and the payment obligations, and he would receive regular reports on the arbitration so that he could manage the risk of the same issue being tried simultaneously before the court and the arbitral tribunal.
The Court of Appeal’s Ruling: The Role of the UK Courts in the Arbitral Process
The chancellor, Sir Geoffrey Vos, gave the Court of Appeal’s judgment. He confirmed that parties agreeing to arbitrations in the UK also agree automatically to the supervisory jurisdiction of the Act, over their arbitral tribunal. The Act contains mandatory provisions, which the parties agreeing to arbitrate in this jurisdiction cannot attempt to contract out of in their arbitration clauses. Those mandatory provisions include sections 67 and 68 of the Act, setting out two of the courts’ intervention rights as part of their mandate to support the arbitral process.
He then cited case law to confirm that if it was correct that the prime minister lacked authority to enter into the binding terms sheet and the settlement deed, then equally he lacked authority to enter into its arbitration agreement provision so that the parties could not have agreed to bestow the tribunal with jurisdiction to hear any disputes. The chancellor then made a significant declaration confirming the role of the UK courts in supporting the arbitral process:
“…the courts exercising their supervisory role under the 1996 Act are acting as a branch of the state, not as a mere extension of the consensual arbitral process. These are, in our view, crucial features of the court’s approach to resolution of arbitration claims.”
He explained that for global enforcement of arbitral awards, it is of the utmost importance that the powers of the state not be used to enforce awards which are tainted by serious irregularity or where arbitral tribunals never had any jurisdiction to make them. He stressed the stringent tests that a party must meet before the court will agree to intervene under sections 67 and/or 68. Those tests are needed to prevent unmeritorious challenges designed only to put off the day of judgment. The courts facing such applications also had to decide these applications as soon as possible. That is because the parties need finality to enable or to prevent the state-backed enforcement of awards and uphold the integrity of the enforcement system.
The Court of Appeal’s Ruling on the Skirmishes
For skirmish (i) the chancellor ruled that the parties’ arbitration clause could not deprive the claimants of their statutory right to bring their section 67 and 68 challenges against the consent award.
It followed that for skirmish (ii), the first instance judge came to his decision on the wrong legal basis. That ruling enabled the chancellor to consider whether the Court of Appeal should grant the stay, or should permit the applications to proceed. He decided to permit the claimants’ applications to proceed. He relied on his earlier public policy points, and ruled that it be unfair for the claimants to face potentially large financial claims in the second arbitration before the court could rule on the validity of their section 67 and 68 challenges.
For skirmish (iii), Sir Geoffrey Vos reiterated that only in exceptional circumstances would a court restrain arbitration proceedings by injunction under section 37(1) of the Senior Courts Act 1981. Again, he ruled that the judge had come to his decision refusing such an injunction on the wrong legal basis; applying the same reasoning as for skirmish (ii). The section 37(1) test for a court to restrain arbitral proceedings is whether a party’s rights are threatened by those proceedings, or whether it would be vexatious, oppressive or unconscionable for the proceedings to continue. Here, both tests were satisfied.
Parties to arbitrations cannot contract out of their right to challenge an award on the grounds of jurisdictional defect or procedural irregularity. Whilst successful challenges to awards on those grounds are likely to remain few and far between, the courts will consider those challenges quickly and will not hesitate to uphold a party’s rights where an award is tainted by irregularities or jurisdictional problems. Otherwise, the global enforcement system of awards under the 1958 New York Convention would be compromised.