In Stati and others v Kazakhstan, having obtained a favourable award in a Swedish-seated arbitration against Kazakhstan (K), the claimants (S) sought to enforce in a number of jurisdictions, including England. S successfully applied for an order to enforce the award in England and K then sought to set the order aside, alleging that the award had been obtained by fraud. Knowles J, sitting at first instance, directed that the fraud issue should be tried as an issue in the enforcement proceedings.

S then served notice of discontinuance of the enforcement proceedings and offered an undertaking not to enforce the award in England. K opposed the discontinuance and, ultimately, Knowles J set aside the notice of discontinuance on the basis that K had a legitimate interest in the continuation of the proceedings. On appeal by S, the Court of Appeal framed the issues as follows:

  • Did K’s fraud claim stand independent of the enforcement proceedings, so that the notice of discontinuance does not apply to the fraud claim?
  • If not, what was the proper scope of the power under CPR 38.4 to set aside a notice of discontinuance?
  • Was Knowles J right to hold that K had a legitimate interest in pursuing its fraud allegations in the English court, even though the award could not be enforced here, on account of undertakings offered by the claimants, and, if he was wrong, did that provide grounds for setting aside his order?
  • Was there a public interest in determining at trial whether S had “committed a fraud on the English courts” in seeking permission to enforce an award that, K said, was obtained by fraud?
  • The Court of Appeal had little difficulty in agreeing with Knowles J that the fraud claim was a defence to the enforcement action and not an independent claim. It also clarified that the discretion to set aside a notice of discontinuance was not confined to cases of abuse of process or collateral tactical advantage. The Court of Appeal also dismissed K’s argument that, by applying for and obtaining the order for enforcement supposedly tainted by fraud, S had committed a fraud on the English courts.

As to whether K had a legitimate interest in continuing the proceedings, the Court of Appeal concluded that the only purpose of the fraud argument raised by the state was to defend the enforcement proceedings and that there was otherwise no connection with the jurisdiction. The Court of Appeal found that Knowles J was wrong to hold that K’s interest in the continuation of the proceedings was a proper basis on which to set aside the notice of discontinuance, holding instead that an eight-day trial, which would effectively result only in an advisory ruling for the benefit of foreign courts in any future enforcement action by S, was not justifiable.

Accordingly, the appeal was allowed on terms that the enforcement order be set aside and S refresh its undertaking, offered before Knowles J, that it would not seek to enforce the award in England at any time in the future.

Comment

The Court of Appeal’s judgment in this case clarifies that the role of the English court in proceedings with no other English nexus is limited to the enforcement of the relevant award in this jurisdiction. Once the question of enforcement in England became moot, the Court of Appeal held that it would not make findings of fact for the benefit of courts in other jurisdictions where enforcement was being, or might be, sought.

However, the Court of Appeal left the door ajar for the trial of such issues in exceptional circumstances. For example, if K had been able to demonstrate that a finding of fraud would be sufficient to create an issue estoppel in other countries where enforcement proceedings were pending, a continuation of the fraud trial might have been justified; “but all would depend on the particular circumstances”. The case therefore offers some practical insight for parties seeking to enforce, or resist the enforcement of, foreign-seated arbitral awards in cases involving allegations of fraud or corruption.

First, since the English court will be more willing to hear a fraud issue if there is some substantive nexus with, or outcome in, this jurisdiction, it is in the interests of the party resisting enforcement to do what it can to establish that connection. Even where there is no such nexus, if that party can demonstrate that a finding on the fraud allegation would give rise to an issue estoppel in other jurisdictions, there is a possibility that proceedings might be allowed to continue.

Secondly, if there is an English nexus, the party resisting enforcement should, where possible, frame any fraud issue as a freestanding claim or counterclaim, rather than simply as a defence to the enforcement action. Provided that there is a material connection with this jurisdiction, this could be achieved by making a positive claim for appropriate declarations.

Finally, from the perspective of the party seeking to enforce an award, this case might give pause for thought where, as here, evidence of fraud or corruption comes to light. Rather than obtaining summarily an order for enforcement, the enforcing party could find itself embroiled in a trial of the fraud question. An adverse finding on that question could, to the extent it has evidential value in foreign courts, severely hamper that party’s enforcement efforts in other jurisdi​ctions.

This article first appeared on the Practical Law Arbitration Blog on September 6, 2018.