On 6 June 2017, the High Court held that there was sufficient evidence that an award of over US$500 million in damages against the Republic of Kazakhstan may be tainted by fraud and that this should be examined at trial (Stati v Kazakhstan [2017] EWHC 1348 (Comm)).

This bold, first instance decision indicates that, despite a reluctance to prevent the enforcement of awards under the New York Convention, the English courts are willing thoroughly to investigate claims under section 103 of the Arbitration Act 1996 and not enforce awards deemed contrary to public policy.

Background

Anatolie Stati, Gabriel Stati, the Ascom Group S.A., and Terra Raf Trans Traiding Ltd (the Claimants) commenced the initial arbitration, instituted pursuant to the Energy Charter Treaty, against Kazakhstan (the State) in Sweden. In December 2013, the arbitral tribunal found in favour of the Claimants, and in February 2014, the tribunal granted initial permission for the Claimants to enforce their award in England. Parallel enforcement proceedings were also commenced by the Claimants in the US courts.

The State responded in 2015 by applying both to the Svea Court of Appeal in Sweden to dismiss the award and to the English courts to set aside the permission that had been initially granted to enforce the award in England (the English Application). However, after lodging these applications, the State was granted access to a range of new documents in discovery in the US. The State alleged that these new documents revealed fraudulent activity on the part of the Claimants.

In August 2015, the State applied to amend the English Application, emphasising that any enforcement of the initial award would be contrary to public policy and that the allegations of fraud should be examined in a full trial. In 2016, the US courts dismissed similar State requests to amend its pleadings, while the Swedish courts dismissed an amended application on the same basis outright.

The High Court Proceedings

The High Court held that two conditions would need to be fulfilled for a full trial to commence. The first is that the evidence of fraud had to be unavailable at the time of the initial arbitration (Westacre Investments Inc v Jugoimport-SPDR Holding Co Ltd [2000] QB 288). The second is that there must be a prima facie case of fraud sufficient to overcome the inherent reluctance of the court to refuse the enforcement of an award recognised under the New York Convention (IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2015] EWCA Civ 1144).

The key contention in the Stati case concerned the valuation of a liquefied petroleum gas plant (the Plant). The owner of the equity interest in the Plant was Tolkynneftegaz LLP (TNG), a company that the Claimants subsequently acquired. In the initial arbitration, the Claimants requested that the tribunal base its award on the valuation of a US$199 million bid made by KazMunaiGas (KMG) to acquire the Plant.

KMG’s proposed bid was primarily calculated by reference to costs that the Claimants had supposedly spent on the Plant. The court held that there was sufficient evidence that these costs had been fraudulently exaggerated, which had subsequently inflated the bid put forward by KMG. Mr. Justice Knowles stated in his judgment that “in asking the Tribunal to rely on the KMG Indicative Bid in circumstances (concealed from the Tribunal, as from the bidder) of the alleged fraud, there was a fraud on the Tribunal” (paragraph 48).

The particulars of the alleged fraud were connected to the Claimants’ relationship with Perkwood Investment Limited (Perkwood). The new evidence indicated that Perkwood had charged TNG for equipment at inflated prices; management services of US$44 million that failed to materialise, and new equipment costing US$72 million that could not be incorporated into the Plant.

The new evidence considered by the court revealed that Perkwood was related to the Claimants and that this was purposefully concealed during the initial arbitration. The information was not available to the State at the time of the initial award and could not have been discovered by reasonable due diligence. The judge held that the Claimants should have produced the contracts with Perkwood for the initial arbitration and that the Claimants had not offered a convincing reason to explain why they had not (paragraph 75).

Conclusion

Though only a preliminary decision subject to further appeal, this judgment offers a nuanced approach to the setting aside of arbitral awards on public policy grounds under section 103 of the Arbitration Act 1996. The High Court did not see itself as being prevented from considering the allegations of fraud. Mr. Justice Knowles distanced his decision from the narrower reasoning of the US courts and reflected that the Swedish courts had not decided, from a factual perspective, the possible impact that the alleged fraud may have had on the original arbitral tribunal. Furthermore, even if the case put before the Swedish courts was deemed acceptable as a matter of Swedish public policy, “as a matter of law … English public policy is not the same”. Ultimately, parties wishing to enforce awards in multiple jurisdictions through the New York Convention cannot assume that they will be able to do so in a wholesale fashion, particularly in cases raising concerns of public policy.

This post was prepared with the assistance of Jagveen Tyndall in the London office of Latham & Watkins.