The Commercial Court has recently considered the principles relating to the refusal to enforce a foreign arbitral award on grounds of fraud: Stati and others v The Republic of Kazakhstan  EWHC 1348 (Comm), a decision of Knowles J, writes Nicholas Goodfellow.
The Kazakhstan case is interesting because of:
The Republic of Kazakhstan (“the State”) was ordered to pay damages to the Claimants (“Cs”) in excess of US$500 million in arbitral proceedings in Sweden. The arbitral award was within the New York Convention. There followed a series of challenges by the State to the award and its enforcement:
The State sought to rely on the Relevant Documents in each of its three challenges to the award. In the US, permission to amend to add the alleged fraud as a ground of challenge was refused. In Sweden, an amendment was allowed, but the Court refused to set aside the award on grounds of fraud.
The State’s last chance saloon was the Commercial Court, where it applied to amend its set aside application to rely on the alleged fraud.
Knowles J summarises the relevant principles that apply when a party is seeking to argue that it would be contrary to public policy to enforce a foreign arbitral award, which include the following (relevant authority relied upon by Knowles J not included for the sake of brevity) :
The business that was the subject of the arbitration was the exploration and extraction of hydrocarbons. Damages ordered in the award included the value of a liquefied petroleum gas plant (“the LBG Plant”). Tolkynneftegaz LLP (“TNG”) was the owner of the equity interest in the LPG Plant.
Cs argued in the arbitration that the LPG Plant should be valued as a going concern, and claimed to have invested more than US$245 million in the development and construction of the LPG plant (“the Investment Sum”). Ultimately, the Tribunal decided to base its assessment of the valuation of the LPG Plant on an indicative bid made by KMG which estimated a value of US$199 million (“the KMG Bid”).
A third party known as “Perkwood” features in the award. Whilst it was not Cs position in the arbitration, it subsequently conceded before the Swedish Court that Perkwood and TNG were related entities.
Amongst the Relevant Documents (disclosed in the US) was a contract between Perkwood whereby TNG agreed to buy equipment from Perkwood for US$115 million (“the Perkwood Contract”). (This document fell within the scope of documents Cs had been ordered to disclose in the arbitration , but had not been disclosed.) The State’s cases is that such equipment had already been provided at a significantly lower cost (and that the equipment had been ascribed an excessive value in the Investment Sum). Further, the Relevant Documents also indicated that $72million of the US$245 million figure relied upon by Cs was ascribed to equipment delivered but not yet incorporated into the LPG Plant.
The information memorandum on which the KMG Bid was based, relied on financial statements for TNG which showed the construction costs for the LPG plant based on the Investment Sum.
The State’s argument was that if the US$245 million figure was fraudulently inflated by Cs, it led to the KMPG bid being materially higher than it ought to have been (on true information).
Knowles J held that there was a prima facie case that if the amount of the KMG Bid was, in fact, as a result of Cs dishonest representation, the Arbitral Tribunal would no longer have relied on that bid as providing the best source of information from which to value the LPG Plant .
In analysing the impact of the State’s unsuccessful challenges in other jurisdictions, Knowles J considered that:
Knowles J rejected an argument that if the State had acted with reasonable diligence it would have discovered the information on which it now relied in the course of the arbitration, citing the following dicta from Burton J in HJ Heinz Co Ltd v EFL Inc  EWHC 1203 (Comm):
“in a case of concealed fraud (concealed forgery) it may be, particularly where the source of the evidence is contained in the opposite camp, that, upon analysis of the facts an approach more favourable to the party defrauded in respect of what is due, or reasonable diligence, may be adopted”
Knowles J considered that the Perkwood Contract ought to have been disclosed in the arbitration and he was not satisfied that Cs had properly explained why it had not been .
In view of his interpretation of the US and Swedish Court’s decisions, Knowles J rejected an argument that the State was issue estopped, but went on to observe (obiter) that even if issue estoppel had been made out, the English Court would still have to decide whether enforcement should be permitted on public policy grounds .
Permission to amend was granted and the fraud issue will now proceed to trial.
The English Court is often a willing international policeman when it comes to potential fraudulent conduct. This case illustrates the broad approach the Court takes when issues of public policy arise. That is reflected in the narrow interpretation that was afforded to the foreign decisions, in rejecting the arguments on issue estoppel, although even if Knowles J had interpreted those decisions differently, that would not have been dispositive, given his finding that issue estoppel would not trump public policy issues.
It is reassuring to note the observations at , which emphasise that enforcement is a power of the state exercised on behalf of the public, and that this reinforces the seriousness of what is involved. One can rest assured that if there is any valid suspicion that one party to the litigation has acted dishonestly, that is something which shall be treated with the utmost scrutiny and care by the Court, before the rights of the parties are finally decided.
Nick Goodfellow specialises in commercial litigation and Civil Fraud is one of his key areas of practice. Nick appeared (led by Jonathan Cohen QC) before Knowles J in late 2016 in Greenbrier Companies Inc v Ebreez Railway Services and others (Commercial Court) 2016, which concerned various interim applications (including for anti-suit and freezing injunctions) relating to a deceit claim concerning a US$15 million commission. Nick is a member of Chambers’ Arbitration Group.