In a landmark decision, the UK Supreme Court has determined that the New York Convention does not permit domestic courts to require the provision of security as a condition for challenging the recognition and enforcement of an arbitral award on public policy grounds.
The judgment handed down on 1 March 2017 is the latest round in a long-running saga between the Nigerian National Petroleum Corporation (NNPC) and IPCO Nigeria Ltd (IPCO), related to the design and construction of a petroleum export terminal in Nigeria. IPCO obtained an award from a Nigeria-seated tribunal in October 2004, requiring NNPC to pay approximately US$ 150m plus interest at 14% per annum (the Award). IPCO sought recognition and enforcement of the Award in the UK, relying on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention), but these proceeding were adjourned in April 2005 following NNPC’s application to the Nigerian High Court challenging the quantum of the award (the Nigerian Proceedings). The English High Court ordered partial payment of the Award (for the sum not being disputed in the Nigerian Proceedings) and made the adjournment conditional on NNPC’s payment of US$50m by way of security against the Award.
Following delays in the progress of the Nigerian Proceedings, IPCO obtained an order in April 2008 for further partial payment of the Award, inclusive of accrued interest, but this order was stayed pending an appeal to the Court of Appeal, conditional on NNPC providing further security of US$ 30m. Later that year, NNPC allegedly uncovered evidence that the original Award had been obtained using fraudulent documentation to inflate the value of IPCO’s claim. NNPC applied to amend its pleadings in the Nigerian Proceedings to raise allegations of fraud and thereby have the entire Award set aside. In parallel, NNPC agreed a consent order with IPCO under which NNPC was no longer required to make the further partial payment ordered in April 2008 and the English enforcement proceedings were again adjourned pending the outcome of the Nigerian proceedings, conditional on the preservation of the security previously provided by NNPC, amounting to US$ 80m in total.
The renewed application
The Supreme Court appeal arose as a result of further delays in the Nigerian Proceedings, following which IPCO renewed its application for recognition of the Award, on the ground that the inordinate delay amounted to a change of circumstances that justified a cessation of the adjournment. The English High Court did not consider the delays to amount to a change of circumstances and dismissed the application noting that, in any event, NNPC had “a good prima facie case of fraud” that should be determined by the Nigerian court.
IPCO successfully appealed to the Court of Appeal, which found that there had been a material change of circumstances. Given the “extraordinary delay” experienced in the Nigerian Proceedings, it ordered that the proceedings be remitted to the High Court for determination as to whether the allegations of fraud should result in the refusal of recognition, on grounds of public policy. Further enforcement of the Award was adjourned pending this determination, subject to the payment by NNPC of additional security of US$ 100m. Failing payment of this additional security, the Court of Appeal held that the adjournment would lapse and IPCO would be entitled to enforce the Award in full and to draw down on the existing US$ 80m security. NNPC appealed to the Supreme Court on the basis that (a) the Court of Appeal did not have jurisdiction to award additional security; and/or (b) the Court of Appeal’s order was illegitimate in circumstances where NNPC had a good prima facie case of fraud, entitling it to resist enforcement of the whole Award.
Judgment of the Supreme Court
The Supreme Court undertook an analysis of the powers granted under sections 100 to 104 of the UK Arbitration Act 1996 (the Act), which give effect to the UK’s obligations under the New York Convention. It focused in particular on the following key provisions:
- section 103(2)(f) (implementing Article V.1(e) of the New York Convention), which provides for recognition to be refused where the relevant award “has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made“;
- section 103(3) (implementing Article V.2(b) of the New York Convention), which provides for recognition to be refused “if it would be contrary to public policy to recognise or enforce the award“; and
- section 103(5) (implementing Article VI of the New York Convention), which permits the court to adjourn a decision on the recognition or enforcement of an award and to order suitable security to be paid, in circumstances where “an application for the setting aside or suspension of the award” has been made to the “competent authority of the country in which, or under the law of which, it was made“.
The Supreme Court held that there was nothing in section 103 of the Act or Article V of the New York Convention that provided for the enforcing court to make the right to challenge enforcement of an award based on public policy grounds conditional upon the provision of security. This was in clear contrast to section 103(5), which was specific to circumstances where an application for setting aside had been made in the seat of arbitration. As a matter of principle, the Supreme Court considered security pending the outcome of foreign proceedings to be the price of an adjournment sought by an award debtor, not something to be imposed on an award debtor who is resisting enforcement on properly arguable grounds.
Accordingly, the Supreme Court found that the Court of Appeal had erred in granting additional security because the relevant adjournment that had been granted was pending the outcome of the High Court’s decision on the section 103(3) challenge (i.e. public policy grounds) rather than the outcome of the Nigerian Proceedings. Section 103(5) was not relevant in the circumstances and could not be relied upon by the Court of Appeal as a basis of jurisdiction to grant the additional security.
The Supreme Court also rejected arguments raised by IPCO that the Court of Appeal had jurisdiction to grant additional security by virtue of its general power under the English Civil Procedural Rules to attach conditions to an order (CPR 31(3)(a) and 3.3). The Supreme Court held that the conditions for recognition and enforcement under Articles V and VI of the New York Convention constituted a “code” and that this code excludes the possibility of requiring security to be provided as a condition for resisting enforcement under Article V. This reflected a balancing of interests between a party with a prima facie right to enforce and a party with a prima facie right to challenge enforcement. The Court also noted that there were other means by which an award creditor might properly protect its position without impinging on an award debtor’s rights of challenge, for example by seeking disclosure of assets and freezing orders.
While the Supreme Court’s decision primarily relates to the powers of the English courts under the UK Arbitration Act 1996, it appears to be the first appellate authority in any of the key arbitral jurisdictions to deal with the power of enforcing courts to order security under Article VI of the New York Convention. It is therefore likely to have a broader impact on international arbitral jurisprudence. The Court’s willingness to consider the underlying provisions of the New York Convention by way of contextual background increases the precedential value of the judgment, especially for jurisdictions (unlike the UK) where the UNCITRAL Model Law has been adopted. However, it remains to be seen whether other courts will interpret Article VI of the New York Convention in the same way.