March 28, 2017

March 28, 2017

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March 27, 2017

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UK Supreme Court Clarifies English Curial Powers to Impose Security Payments in Enforcement of New York Convention Arbitral Awards

A recent UK Supreme Court judgment will likely impact on the interplay between the New York Convention and national law

In IPCO (Nigeria) Ltd v Nigerian National Petroleum Corp [2017] UKSC 16,  the UK Supreme Court overturned a Court of Appeal decision that imposed upon a New York Convention arbitral award debtor an obligation to pay US$100 million in security, as a condition to challenging enforcement or recognition of the award before the Commercial Court.

Background

In 2004, following Nigerian-seated proceedings, an arbitral tribunal awarded IPCO Nigeria Ltd US$152 million plus interest (the award) connected with a dispute arising out of a contract, under Nigerian law, for the design and construction of a petroleum export terminal for Nigerian National Petroleum Corp (NNPC). As respondent in the arbitration, NNPC commenced set aside proceedings before the Nigerian Federal High Court, originally on jurisdictional grounds (the non-fraud challenge) and, from 2009 onwards, on allegations of fraud concerning the quantum of IPCO's underlying claim.

IPCO sought to enforce the award in the English courts. On 29 November 2004 an ex parte order of the Commercial Court, made pursuant to Sections 101(2) and 101(3) of the Arbitration Act 1996 (the Act), recognised the award in England and required NNPC to effect full payment of the award to IPCO. Upon NNPC’s subsequent application, however, the enforcement proceedings were adjourned under Section 103(5) of the Act, pending resolution of the non-fraud challenges in Nigeria.

As the Commercial Court agreed that the challenge before the Nigerian courts was bona fide and had a realistic prospect of success, it maintained the adjournment conditional upon payment by NNPC of the undisputed amounts under the award, plus US$80 million in security.

NNPC subsequently argued that the award had been procured by fraud, and sought to resist and adjourn the enforcement proceedings on that basis. Given that NNPC’s challenge before the Nigerian courts was amended to capture the fraud allegations, and upon an undertaking by NNPC to maintain the US$80 million security, the parties consented to set aside the Commercial Court’s order for payment of the undisputed amounts under the award and to adjourn the award enforcement action pursuant to Section 103(5) of the Act.

Against this backdrop of protracted delays in the Nigerian courts, in 2012 IPCO issued a fresh application to enforce the award in England. The Commercial Court dismissed the application on the basis that it was inappropriate to enforce in England while NNPC had a good prima facie fraud case before the Nigerian courts.

Nonetheless, on appeal, the Court of Appeal decided that the continued lengthy delays in the Nigerian proceedings warranted the English court itself determining whether or not the award should be enforced. Specifically, the Court of Appeal ordered that conditional upon NNPC paying a further US$100 million in security, the proceedings

Shall be remitted to the Commercial Court for determination, pursuant to Section 103(3) of the Act, as to whether the arbitral award…should not be enforced in whole or in part because it would be against English public policy so to do (the Section 103(3) Proceedings)… Any further enforcement of the Award shall be adjourned, pursuant to Section 103(5) of the Arbitration Act 1996, pending determination of the Section 103(3) Proceedings.

NNPC appealed against this decision to the Supreme Court. The principal issue for the Supreme Court’s adjudication was whether the Court of Appeal’s order was validated by virtue of Section 103(5) of the Act, or by the English court’s procedural powers more generally.

Decision

There were several components central to the Supreme Court’s unanimous decision to allow NNPC’s appeal.

First, the Supreme Court held that English courts possess no powers, neither under Section 103(2) nor 103(3) of the Act, to impose upon an award debtor any obligation to provide security when resisting enforcement of an arbitral award in England on properly arguable grounds.

Second, the Court of Appeal erroneously characterised its Section 103(3) order as involving an “adjournment” within the scope of Section 103(5), which only contemplates any imposition of security being allowable where English proceedings had been adjourned pending challenge at the relevant arbitral seat. On the facts, that had ceased to be the case. Consequently, having remitted the question of the enforceability of the award to the Commercial Court under Section 103(3) of the Act, the Supreme Court opined that the Court of Appeal was wrong to adjourn the enforcement proceedings under Section 103(5) of the Act.

Citing Dardana Ltd v Yukos Oil Co (No.1) [2002] EWCA Civ 543, the Supreme Court ruled that an order for security under Section 103(5) of the Act, pending the set aside proceedings at the arbitral seat, is “the price of an adjournment which an award debtor is seeking” which should “not be imposed on an award debtor who is resisting enforcement on properly arguable grounds”. Accordingly, the Supreme Court ordered for NNPC’s challenge to be remitted to the Commercial Court without payment of further security, albeit without releasing the existing security as the price of earlier adjournments under Section 103(5).

Third, the Supreme Court held that the Court of Appeal’s order for further security was not validated by virtue of its general civil procedural powers. Citing Gater Assets Ltd v Nak Naftogaz Ukrainiy [2007] EWCA Civ 988, in the Supreme Court’s opinion the conditions for enforcement embodied at Articles V and VI of the New York Convention (the Convention), effect to which is given by Sections 103(2) and 103(3) of the Act, constitute a complete code “intended to establish a common international approach”. This code “excludes requiring security for an award” where there is an “arguable challenge under Article V”. Had the Convention envisaged security orders possibly attaching to rulings under Sections 103(2) or 103(3) of the Act, it would have expressly provided for them.

Absent any such Convention power, and approving Huscroft v P&O Ferries Ltd (Practice Note) [2010] EWCA Civ 1483, the Supreme Court determined that the general power to impose conditions on orders contained at Civil Procedural Rule 3.1(3) bore “no relevance on this appeal” and should not be exercised so as to fetter party entitlements to raise properly arguable challenges to recognition or enforcement of arbitral awards.

Observations

A number of significant points arise from this Supreme Court judgment.

It provides a shot in the arm for arbitral award debtors seeking to challenge flawed awards in England. That the English courts possess no powers to order security where properly arguable challenges are posited before the enforcing courts removes a potential deterrent for arbitral award debtors, particularly where the amounts granted under a challenged award are substantial.

For award creditors litigating under Sections 103(2) or (3) of the Act, alternative paths must be trodden to secure an award indirectly. For instance, as noted by the Supreme Court in obiter, it remains permissible to exercise other court powers for the making of disclosure and freezing orders without impinging upon award debtors’ rights of challenge.

The decision adds to an already considerable corpus of consistent English curial authority giving effect to enshrined Convention principles.

The last, and perhaps most striking aspect is that, by its interpretation of the Act and the Convention, the Supreme Court upholds the latter as providing for a “complete code”. In England, that effectively eradicates any lingering notion that English courts retain a jurisdiction to order security as a condition to advancing properly arguable challenges to award enforcement. Any such discretion may only be invoked in the specific circumstances prescribed by Section 103(5) of the Act, in full chime with Article VI of the Convention. Internationally, the Supreme Court’s judgment may provoke disputants to test any potential fault lines at the interface between the Convention and other state national laws. On the question of security, it is less clear whether other state courts will uphold Convention principles so robustly.    

© 2017 McDermott Will & Emery

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Damian is an international dispute resolution barrister with a particular focus on international arbitration. His disputes practice focuses primarily on infrastructure, construction, oil & gas, utilities, power, natural resources, maritime, transport, investment treaties, international trade and commodities. Damian acts as adviser in numerous complex international commercial arbitration disputes under the ICC, UNCITRAL, ICSID, SIAC, HKIAC, SCMA, GAFTA, CIETAC, DIFC, and LCIA rules. He has advised in numerous international commercial arbitration disputes and has...

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Marta Wrobel, London, McDermott Will, corporate energy matters counselor, oil and gas sector lawyer
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Marta Wrobel advises clients on corporate energy matters, with a particular focus on the oil and gas sector. She is experienced in dealing with various aspects of merger transactions, negotiating share purchase agreements, joint ventures, due diligence, legal compliance and complex commercial contracts. She has experience in oil and gas projects across Europe and North Africa.

Prior to joining the Firm, Marta was a part of an AIM-listed independent oil and gas exploration and production company, where she advised on governance and compliance issues and assisted on various corporate transactions, such as placings, mergers and reverse takeovers, giving her a breadth of hands-on experience and commercial exposure.

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