In overturning USD 11 billion award for fraud, High Court invites discussion on arbitration’s ability to resolve large disputes involving states

On 23 October, in The Federal Republic of Nigeria v Process & Industrial Developments Ltd. [2023] EWHC 2638 (Comm), Mr Justice Robin Knowles found that an arbitration award for USD 11 billion had been “obtained by fraud” and thus was “contrary to public policy.” While the Court has yet to decide whether the award should be entirely set aside or remitted to the arbitral tribunal, Mr Justice Knowles invited discussion upon how his factual findings touched upon several key issues central to the rule of law and the conduct of arbitration including the ability of the arbitral process to root out corruption, professional conduct standards, and the role of transparency in arbitrations involving states.

Factual Background

In 2010, Process & Industrial Developments Ltd. (“P&ID”) entered into a 20-year contract with the Nigerian Government under which Nigeria was to supply a certain amount of “wet” gas that P&ID would then strip into “lean” gas and deliver back to Nigeria for power generation. P&ID would retain the remaining materials for onward sale.

Neither party performed all of its obligations under the contract. A few years after the contract was signed, P&ID launched an arbitration where an eminent tribunal ultimately found Nigeria liable for repudiatory breach of contract, and then in a separate decision awarded P&ID USD 6.6 billion, with 7% interest per annum.

Nigeria challenged both the award on liability and the award on quantum in the High Court under section 68 of the Arbitration Act 1996 on the grounds that they were procured by fraud and/or conduct contrary to public policy, and further that due to corruption and fraud the arbitral tribunal lacked jurisdiction. In support of its legal arguments, Nigeria alleged widespread corruption, fraud, and misconduct by P&ID and its lawyers before, during, and after the conclusion of the contract at issue. This included allegations of misconduct during the arbitration and during Nigeria’s initial challenges before the English court.

P&ID denied all such allegations.

While the High Court did not agree with all of Nigeria’s allegations, it did agree with Nigeria on several instances of corruption and misconduct, including several actions by PI&D and its legal team that raised serious questions about the validity of the arbitral awards.

Fraud and Misconduct Hidden from the Tribunal 

The Court agreed with Nigeria that a series of payments from people and companies affiliated with P&ID to a then-Nigerian government employee were bribes “in connection with the entry into” the original contract. These payments also continued throughout the arbitration and after the final award, in the Court’s view because P&ID wanted to ensure its corruption remained hidden.

The Court also found that throughout the arbitration P&ID and its lawyers misused material that was protected by Nigeria’s legal professional privilege. After noting that the contingency arrangements with P&ID’s legal team would result in “life-changing sums of money”, the Court found that P&ID’s legal team had been provided with documents that they knew were privileged and were not entitled to see, but made the “indefensible” choice “not to put a stop to it” and instead opted to retain the documents, read them, and “take the benefit of the information they conveyed.” This “improper retention” of privileged material allowed P&ID to track Nigeria’s strategy throughout the arbitration and adjust its strategy accordingly, including during settlement discussions that occurred in the midst of the arbitration.

Finally, the Court found that P&ID provided false witness evidence. Nigeria challenged several assertions in a witness statement about the creation of the contract, P&ID’s performance of its obligations, and P&ID’s ability to continue to perform. While the Court was not satisfied that all of the statements were “knowingly false” at the time they were made, the Court agreed that some of the statements were false. The most troubling issue for the Court was the omission of any mention of payments made to the government official at the contract’s inception. While P&ID claimed that it had no duty to disclose pre-contractual payments, the Court found that omission “dishonest by the standards of ordinary decent people.”

Despite this finding, the Court was careful to note that given the status of the action, as a set aside proceeding, the Court’s inquiry was limited to corruption in the creation of the (separable) arbitration agreement, rather than its other operative provisions. However, the Court concluded that if the arbitral tribunal had known about the bribes, the misuse of privileged information, or the witness’s incorrect testimony “the entire picture would have had a different complexion.”

Nigeria’s Lawyers’ Conduct

Nigeria also raised allegations relating to the conduct of its own lawyers and experts during the proceedings. The Court agreed that some of them were concerning, particularly in relation to what the Court appeared to view as an inadequate defence of Nigeria’s position on quantum. While the Court did not find any evidence of bribery, it acknowledged that this was a case where lawyers, experts, and the politicians and civil servants overseeing the arbitration “failed to do their work” in order to “ensure that Nigeria as a state participated properly” with the result that “the Tribunal did not have the assistance that it was entitled to expect, and which makes the arbitration process work.”

The Court’s Invitation for Further Discussion

Mr Justice Knowles also addressed the broader legal community in hopes that his findings would spark a wider discussion in the arbitration community about “whether the arbitration process . . . needs further attention where the value involved is so large and where a state is involved.” In particular, he invited discussion on four key issues:

First, the importance of professional standards of ethics when drafting contracts involving developing states, including the potential assistance pro bono of leading law firms.

Second, the importance of the disclosure process and a court’s ability to enforce disclosure, including third-party disclosure orders. It was only through court-ordered disclosure from banks and other third parties in England and other jurisdictions that much of P&ID’s misconduct came to light - “in all the recent debates about where disclosure or discovery matters, this case stands a strong example for the answer that it does.”

Third, the ability of arbitration to address issues of fraud as, in the Court’s view, the fact that even with an eminent tribunal “of the greatest experience and expertise”, these issues went undetected meant that the arbitral process was “vulnerable to fraud.”

And finally, whether “greater visibility in arbitrations involving a state or state owned entities is part of the answer.” As Mr Justice Knowles noted, despite the serious issues at stake for the Nigerian public given the amount of damages awarded, the public and press had no “opportunity to call out what is not right.”

Mr Justice Knowles concluded by opining that this case is a sad example of “what some individuals will do for money” when “driven by greed and prepared to use corruption; giving no thought to what their enrichment would mean in terms of harm for others.”

Next Steps in this Dispute and for the Arbitration Community

The case is not yet over. While the Court found that Nigeria was successful on some of its claims of fraud and allowed to challenge the Award under Section 68(2)(g) of the Arbitration Act, it asked the parties for further submissions in light of the judgment before it will decide whether the awards should be remitted to the Tribunal, set aside or declared to be of no effect.

For all of those whose legal practices involve arbitration, this case also serves as a wake-up call to ensure that we adhere to the highest professional standards. It further invites all members of the arbitration community—businesses, legal professionals, and states—to seriously reflect on the court’s critique of the arbitration process’s ability to address issues of fraud, and the degree of transparency that should be afforded in large value disputes involving states and state-owned entities.

This article was prepared with the assistance of Virginia Sanchez-Eguibar and Sofia Sotgia, trainees in CMS London.