The Court of Appeal has allowed an appeal and made rare and significant orders, granting an injunction restraining arbitration proceedings and lifting a case management stay of applications to challenge an earlier arbitration award under ss.67 and 68 of the Arbitration Act 1996. This significant judgment emphasises the importance of the choice of seat of arbitration and highlights the English court’s consideration of its public interest function when determining challenges to arbitration awards. The judgment also provides useful guidance on the legal principles underpinning these applications.

Background

The background to the case of Minister of Finance (Incorporated) & Anr v International Petroleum Investment Company & Anr [2019] EWCA Civ 2080 concerns the claimants’ allegations that the former Prime Minister of Malaysia, Mr Najib Razak, conspired with others to misappropriate in excess of US$3.5 billion and also to conceal and prevent investigation of the conspiracy. The claimants are entities owned by the Malaysian Government; the defendants are entities owned by the Government of Abu Dhabi.

The parties entered into a binding term sheet containing a London arbitration clause and the defendants then commenced arbitration proceedings in London under that arbitration clause. The parties entered into settlement deeds compromising those proceedings which provided for a consent award to be made by the arbitral tribunal, which was then so made.

The claimants contended that both the binding term sheet and the settlement deeds were grossly disadvantageous to them and were, to the defendants’ knowledge, procured by Mr Najib to further his interests. The settlement deeds set out events of default which, once certified by the defendants, would result in substantial payments becoming immediately due. The events of default included the claimants making any “demand, action, claim or proceeding”. The settlement deeds included a waiver of any rights to challenge the consent award an arbitration agreement providing for London-seated arbitration under the LCIA Rules.

Following the departure of Mr Najib as Prime Minister of Malaysia, the claimants issued an application seeking to set aside the consent award, on the basis that the arbitral tribunal did not have substantive jurisdiction because, to the defendants’ knowledge, Mr Najib lacked the requisite authority (under s.67 of the Arbitration Act 1996), and on the basis that the consent award was procured by fraud or in a way that was contrary to public policy (under s.68 of the Act).

The defendants immediately commenced two arbitrations under the settlement deeds, in reliance upon certain events of default, seeking payment of sums due. The defendants also issued an application before the court seeking a stay of the claimants’ application. The claimants then later issued a further application seeking to restrain the defendants from pursuing the two second arbitrations, pending determination of the application to set aside the consent award.

First Instance Judgment

The defendants’ application seeking a stay and the claimants’ application seeking an anti-arbitration injunction were heard together on 11 and 12 March 2019. The first instance judge refused the defendants’ application for an automatic stay of the claimants’ challenge application as of right under s.9 of the Act but did grant a stay on case management grounds. The judge refused the claimants’ application to restrain the second arbitrations. We explained the first instance judgment in more detail in a previous Law-Now, available here.

The claimants appealed both the grant of the stay on case management grounds as well as the refusal of the injunction restraining the arbitration. Before the hearing, the Court of Appeal rejected an application by the defendants for the appeal to be heard in private.

Court of Appeal Judgment

The Court of Appeal allowed the appeal. It removed the case management stay on the claimants’ application and granted an injunction to restrain the defendants from pursuing the second arbitrations until the final determination of the claimants’ application.

The court recognised the importance of the parties’ choice of a London-seated arbitration as the foundation for the court’s jurisdiction under ss.67 and 68 of the Act. Significantly however, the court expressly noted that its jurisdiction was also founded upon wider considerations of public interest.

S.67 of the Act provides for parties to challenge any interim or final arbitral award on the basis that the tribunal did not have substantive jurisdiction to make that award. S.68 of the Act allows parties to challenge awards on the basis of “serious irregularity” causing substantial injustice to the applicant, within certain prescribed categories, including that the award was obtained by fraud or the way in which it was procured was contrary to public policy. The Act provides that certain provisions, including ss.67 and 68, are “mandatory” which have effect notwithstanding any agreement to the contrary, as safeguards “necessary in the public interest”.

The Court of Appeal noted that, when an application to challenge an arbitral award is made under ss.67 or 68, the court is under a duty to determine that challenge as promptly as possible. In doing so, a court is not merely giving effect to the parties’ agreement but is performing an important public function. The court is acting as a branch of the state, rather than as an extension of the consensual arbitration process. The court referred to the public interest in the recognition and enforcement of valid arbitral awards. It stated that when a court is exercising its supervisory jurisdiction under ss.67 or 68, it is deciding whether the award is one which should benefit from the coercive power of the state both in this country and worldwide, for its recognition and enforcement.

Case management stay of applications under ss.67 and 68 of the Act

The court considered, based on a review of previous authorities, that a stay of court applications under ss.67 and 68 on case management grounds should only rarely be granted, and that there should be compelling grounds for the grant of such a stay.

The Court of Appeal held that the judge had viewed the application from the wrong starting point and had exercised his case management power to stay the applications under ss67 and 68 on the wrong legal basis. The first instance judge had failed to recognise that:

  1. The claimants had a mandatory right to challenge the consent award.
  2. The grounds of challenge affected Mr Najib’s authority to enter into the settlement deeds and would therefore undermine the arbitration agreements contained in them.
  3. It was the responsibility of the court to determine challenges under ss.67 and 68 of the Act and to do so as promptly as possible.
  4. The choice of arbitration could not dictate the position in relation to ss67 and 68 applications, which are no longer consensual.
  5. Courts exercising their supervisory role under the Act do so as a branch of the state, not as a mere extension of the consensual arbitration process.
  6. The court must exercise its supervisory jurisdiction quickly to avoid uncertainty and injustice in the enforcement process.

The Court of Appeal held that there were no compelling reasons to grant a case management stay. It held:

  1. Properly brought court applications under ss.67 and 68 of the Act are safeguards necessary in the public interest and the court is performing an important public function in resolving such disputes.
  2. In circumstances where the second arbitrations were, in substance rather than mere timing, a reaction to the claimants’ court application brought under a statutory right, it would be illogical to give precedence to the second arbitrations unless there were other strong reasons to do so.
  3. A stay would not necessarily avoid unnecessary duplication as this would depend upon decisions in the second arbitrations give rise to issue estoppels determinative of the court applications.
  4. A case management stay would only enable the arbitrators to reach what could be no more than a provisional decision as to their own jurisdiction, in contrast to a final binding determination if the court applications were to continue.
  5. It would otherwise be inappropriately burdensome for the claimants to have to first defend themselves against the large financial claims in the second arbitrations.

The Court of Appeal also rejected the first instance judge’s suggestion that the court would exercise a form of continuous supervision over the second arbitrations by means of regular reports on their progress and held that the court had no such jurisdiction under the Act.

Injunction to restrain the second arbitrations

The Court of Appeal noted that an injunction to restrain arbitration proceedings would only be granted in exceptional circumstances. The relevant test applicable to the grant of such an injunction would require the claimants to establish: (i) whether their rights have been infringed or threatened by a continuation of the second arbitrations; (ii) whether continuation of the second arbitrations would be vexatious, oppressive or unconscionable; and (iii) whether it would be just and convenient to grant an injunction.

The Court of Appeal held that the first instance judge exercised his discretion to refuse an injunction on the wrong legal basis, as he did not directly answer the first two of these questions. The court went on to re-consider those questions itself.

The Court of Appeal found that the first two conditions were satisfied because the second arbitrations were premised on the fact that the pursuit of the court applications were themselves events of default under the settlement deeds, which triggered the claimants’ substantial and immediate financial liability. Those claims infringed and threatened the claimants’ legal right to pursue court applications under ss.67 and 68 of the Act and were vexatious and oppressive. The Court of Appeal held that the court applications should proceed to determine the validity of the consent award, and it was just and convenient that the second arbitrations should not proceed until that has been determined.

Comment

The judgment provides useful guidance of the legal principles relevant to an application for a case management stay of a challenge to an arbitration award and also an application for an anti-arbitration injunction. The Court of Appeal made clear that both applications would only be rarely granted, if the exceptional circumstances were made out.

The judgment makes clear that the English courts will not allow parties to contract out of ss.67 and 68 of the Act and any attempt to seek to enforce such a clause will be unsuccessful. The Court of Appeal therefore affirmed that the English court, when invoked under ss.67 and 68 of the Act, will exercise its supervisory jurisdiction to review arbitral awards to decide whether they should be recognised and enforced both in this country and worldwide. In doing so, the English court is performing an important public function, as a branch of the state.