Supreme Court Clarifies the Law on Security and Enforcement of Foreign Arbitration Awards

21 08 2017

IPCO (Nigeria) Ltd v Nigerian National Petroleum Corporation [2017] UKSC 16 (1 March 2017)

These proceedings involved the question whether the appellant Nigerian National Petroleum Corporation (NNPC) should have put up a further $100m security in English enforcement proceedings connected to a Nigerian arbitration award for $152,195,971 plus 5m Nigerian Naira plus interest at 14% per annum arising out of an agreement under which IPCO (Nigeria) Limited (IPCO) contracted to design and construct a petroleum export terminal for NPCC. The Supreme Court unanimously allowed the appeal. Giving the sole judgment, Lord Mance reversed the Court of Appeal’s decision and imparted much needed guidance on the provisions of the Arbitration Act 1996. He also said that rule 3.1(3) of the Civil Procedure Rules 1998 was not relevant to the appeal. The recognition and enforcement of foreign awards is addressed by sections 100-104 of Part III of the 1996 Act and these provisions implement the UK’s obligations under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. Lord Mance explained that section 103, which sets out conditions for refusal of recognition of enforcement of awards under the Convention, was key to resolving this case. His Lordship construed the provision to hold that the court has no power to impose security when making orders under section 103(2) and section 103(3). Instead, only an order made under section 103(5) can be made conditional upon the provision of security by the award debtor.

IPCO is a turnkey contractor specialising in the construction of on-shore and offshore oil and gas facilities. The arbitration was conducted pursuant to a contract made in 1994 which was subject to Nigerian law and provided that disputes would be settled in accordance with the Nigerian Arbitration and Conciliation Act 1988. IPCO has been seeking to enforce the award in this jurisdiction since November 2004. In 2009, evidence tendered by a former IPCO employee enabled NPCC to challenge the entire award on the basis that IPCO inflated quantum by using fraudulent documentation. The English courts accept that NNPC has a good prima facie case regarding IPCO’s fraudulent behaviour and realistic prospects exist for the whole award to be set aside. NPCC’s challenges to the award are still pending in Nigeria for non-fraud and fraud reasons. Notably, however, NNPC’s application to amend its pleadings in the Nigerian proceedings to raise the fraud challenge was adjourned by consent and never determined.

Background to the Appeal

Steel J made an ex parte order for enforcement in November 2004 and NNPC applied to set it aside under section 103(2)(f) and 103(3) of the 1996 Act or alternatively sought under section 103(5) to adjourn enforcement. In April 2005, conditional on NNPC paying IPCO $13.1m and putting up security of $50m under section 103(5), Gross J ordered that enforcement should be adjourned pending resolution of the non-fraud challenges in Nigeria. Delay in Nigerian proceedings led to another application for enforcement, and new orders one of which required NNPC to provide $30m as security, in English proceedings. As the fraud case was pursued in Nigeria, in June 2009 English proceedings were adjourned by way of consent order upon NNPC undertaking to maintain the security of $80m thus far provided until further order.

Citing delay in Nigerian proceedings, IPCO renewed its enforcement application in July 2012 which was first dismissed but subsequently allowed on appeal by the Court of Appeal, which decided to cut the Gordian knot caused by the “sclerotic” process of the Nigerian proceedings. In doing so, it remitted proceedings to the Commercial Court for determination pursuant to section 103(3) whether the award should be enforced in light of the alleged fraud.

Conditional on NNPC providing a further $100m security in addition to the $80m already provided, the court also ordered that any further enforcement of the award should be “adjourned” in the meanwhile under section 103(5). NNPC appealed against the order for security on the ground that it was made without jurisdiction or that it was wrong in principle and/or was illegitimate in circumstances where the English courts had concluded that NNPC had a good prima facie case of fraud entitling it to resist enforcement of the whole award.

The Supreme Court

Lord Mance allowed NNPC’s appeal and Lords Clarke, Sumption, Hodge and Toulson concurred in the result because the order for security was not within the scope of any jurisdiction or power conferred by section 103 of the 1996 Act. The issue on appeal fell under two heads. First of all, whether the Court of Appeal’s order was justified by reference to section 103(5) of the 1996 Act. And secondly, whether it was justified by reference to general English procedural rules.

(i) Analysis of the Arbitration Act 1996

It was held that the order for security was not justified under section 103(5) of the 1996 Act. Lord Mance judged that neither section 103(2) or (3) nor the underlying provisions of article V of the New York Convention provide a power to make an enforcing court’s decision on an issue raised under these provisions conditional on an award debtor providing security in connection to the award. As he said:

24. … In this respect, there is a marked contrast with section 103(5), which specifically provides that security may be ordered where there is an adjournment within its terms.

Moreover, the Court of Appeal also erred in characterising its order under section 103(3) as involving an “adjournment” within the meaning of section 103(5) which concerned circumstances where the court adjourned a decision under section 103(2) or section 103(3) while an application for setting aside or suspension of the award was pending in a foreign jurisdiction where the award was made or whose law applied. Noting that the Court of Appeal had misused the word “adjourned”, Lord Mance held at para 26 that the scope of section 103(5) does not cover delays in the decision-making process that occur while a decision of an issue under section 103(2) or (3) is made.

An order for security being made is within the contemplation of section 103(5) “on the application of the party claiming recognition or enforcement of the award”. Lord Mance invoked his own decision in Dardana Ltd v Yukos Oil Co [2002] EWCA Civ 543 where it was held that the English courts had no power under section 103(5) to order Yukos to provide security on the tacit basis that, unless Yukos did so, immediate enforcement would be ordered against it. His Lordship’s historic approach confirmed that:

28. … Security pending the outcome of foreign proceedings is, in effect, the price of an adjournment which an award debtor is seeking, not to be imposed on an award debtor who is resisting enforcement on properly arguable grounds.

In the instant case, the type of adjournment in contemplation was not ordered by the Court of Appeal which instead decided that the fraud issue should be resolved in the English proceedings and:

31. … There was therefore no adjournment under section 103(5) onto which to hang, as the price, a requirement of further security.

Lord Mance went on to hold that the Court of Appeal’s further reasons for imposing the security, inclusive of the rationale that security would provide impetus and accelerate achieving finality in the context of lengthy delays, do not go to the jurisdiction or power to order security under section 103.

(ii) Analysis of General English Procedural Rules

The Convention’s drafters inserted the second paragraph of article VI, transposed by the second paragraph of section 103(5), to regulate “abuse” at the international level because all the individual contracting states (156 in total) might not possess their own procedural mechanisms to do so. IPCO submitted that sections 100-104 related to procedural matters, but only partially. It argued that states were able to attach procedural conditions to challenges made under article V or under section 103(2) and (3) domestically. IPCO argued that an English court’s general power to make conditional orders – including orders on its own motion under CPR 3.1(3)(a) and 3.3 – were rightly exercised by the Court of Appeal.

Reliance was placed on CPR 3.1(3) and, indirectly, on section 70(7) of the 1996 Act but Lord Mance held that the requirement to provide security could not be justified by reference to general English procedural rules. Notably, section 70(7) appears among a group of provisions in Part I of the 1996 Act which expound the court’s powers in relation to awards linked to arbitrations that are seated in England, Wales or Northern Ireland. Accordingly, it was clear to the court that the conditions for recognition and enforcement specified in articles V and VI of the Convention, routed into domestic law by virtue of section 103(2), (3) and (5), constitute a “complete code” intended to establish a common international approach.

Relying on the majority view in Gater Assets Ltd v NAK Naftogaz Ukrainiy [2007] EWCA Civ 988, IPCO argued that, contrary to article III, the English courts would be engaging in procedural discrimination between foreign awards and those seated in England if they were precluded from ordering security against a party who was merely mounting a challenge under section 103(2) or (3). It is in this context that IPCO invoked section 70(7). Nevertheless, it was unsuccessful because the point failed on numerous levels and Lord Mance refused to get drawn into the issue that divided the court in Gater.

Except the second paragraph of article VI, the Convention’s provisions do not intend to improve award creditors’ prospects of taking on assets to satisfy awards. Rather, as demonstrated by Yukos, the courts are able to assist award creditors by using other measures such as disclosure and freezing orders. Since such means do not infringe award debtors’ rights of challenge, Lord Mance opined that:

41. … The Convention reflects a balancing of interests, with a prima facie right to enforce being countered by rights of challenge.

His Lordship said that under section 70(7) the court may order that any money payable under the award shall be brought into court or otherwise secured pending the determination of the application or appeal. But the scope of the provision does not provide coverage to foreign arbitrations and only applies to arbitrations that have their seat in England, Wales or Northern Ireland. Plainly, section 70(7) does not apply to Convention awards. In light of the first instance authorities of A v B (Arbitration: Security) [2010] EWHC 3302 (Comm) and Y v S [2015] EWHC 612 (Comm), the court further elucidated that the power conferred by section 70(7) is only exercisable if the challenge appears “flimsy or otherwise lacks substance” which cannot be said of NNPC’s fraud challenge in light of the evidence.

Lord Mance found it “entirely clear” that CPR 3.1(3) was irrelevant to the appeal and the submission took “IPCO nowhere”. He explained that it is a power, expressed in general terms, to impose conditions on orders which focuses on the imposition of a condition as the price of relief sought as a matter of discretion or concession. Endorsing the analysis in Huscroft v P & O Ferries Ltd (Practice Note) [2010] EWCA Civ 1483, the court held that the subject matter of the power is not the imposition of a fetter on a person exercising his right to raise a properly arguable challenge to recognition or enforcement.

As held in Deutsche Bank AG v Unitech Global Ltd [2016] EWCA Civ 119, CPR 3.1(3) is potentially relevant where the court only permits the pursuit on terms of a claim or defence which is problematic in some respect. Yet Lord Mance’s analysis did not equate with creating an inflexible rule precluding the exercise of the power in CPR 3.1(3), or indeed the court’s other general procedural powers, in the context of an issue being decided under section 103(2) or (3).

IPCO’s argument that the ordinary procedural powers of the English courts were left untouched by both the Convention and sections 100-104 of the 1996 Act was generally correct in the context of the conduct of a challenge to recognition or enforcement being decided under section 103(2) or (3). However, the point did not provide a foothold “for making the raising for decision of a properly arguable challenge under these sections conditional upon the provision of security for the award.”

Comment

The New York Convention aims to provide a uniform approach to enforcement and it does not serve as a means of improving an award creditor’s prospects. The Supreme Court’s important decision clarifies that award creditors who bring proceedings under section 103(2) or (3) of the 1996 Act will need to find other methods of indirectly securing their award because financial security can only be requested in one specific circumstance under section 103(5). The approach essentially forecloses the enforcing party’s capability to get security for an arbitral award unless an application to set the award aside is also pending before the competent authority.

Overall, unless the strict circumstances contemplated by section 103(5) are met, the guidance imparted on the interplay between the 1996 Act and the Convention removes the English courts’ jurisdiction to order security as a condition for challenging enforcement. The ruling not only provides clarity to previously unchartered provisions of the 1996 Act, but it also smoothens out the interlocking enforcement regime by concluding that only a challenge incurs a price and an adjournment does not.


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