By: Emmanuel Abasiubong Bassey (S.P.A. Ajibade & Co.)
Introduction
For quite a long time, the law had seemed settled that a dispute arising out of an agreement tainted with fraud was not capable of being resolved by Arbitration, because it is contrary to public policy. The rationale for this is that an allegation of fraud has criminal consequences and resolution of such dispute is therefore reserved for the Courts. An arbitral tribunal, being a creature of contract, is not endowed with general and wide jurisdiction (bestowed upon regular Courts), to adjudicate on complex issues nor to offer a wide range of reliefs to the parties in dispute.
The position of the law has now changed in many jurisdictions, including Nigeria. The aim of this article is to examine those situations under which disputes seemingly tainted with fraud would be subject to Arbitration and how the arbitral tribunal is expected to deal with such disputes.
How Arbitral Tribunals Deal with Fraud Claims
The question of how an arbitral tribunal should handle the issue of fraud when raised by a party or where it is obvious from the pleadings will ordinarily be determined by national laws. The practice in most countries is for arbitrators to receive submissions and evidence from the parties, counsel and witnesses and then decide what award to make. Courts in these countries have however, set different parameters to determine when it would be proper for arbitral tribunals to determine issues of fraud.
In England, where a party claims that the main contract itself was induced by fraud, English Courts have employed the doctrine of separability to hold that in such circumstances the Arbitration clause will not be affected, so a tribunal will have jurisdiction to determine the dispute. The principle of separability provides that the invalidity or non-existence of the main agreement does not render the Arbitration agreement invalid or non-existent. The Arbitration agreement has to be treated as a distinct agreement and could be void or voidable only on the ground which is directly related to the Arbitration agreement and not merely a consequence of the main agreement.
The doctrine of separability was affirmed and explained by the House of Lords in Fiona Trust v. Privalov [2007] UKHL 40, where the House of Lords was called upon to decide whether the arbitral tribunal could rule on its own jurisdiction, including the existence of a valid Arbitration agreement, in a case where the ship-owners alleged that the charter-party containing the Arbitration agreement was procured by bribery/fraud. The House of Lords held that an Arbitration clause should be construed on the presumption that the parties intended any dispute arising out of the relationship into which they had entered or purported to enter to be decided by the same tribunal, unless the language made it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction. The Court found that the language of the Arbitration clause contained nothing to exclude disputes about the validity of the contract, whether on the grounds that it was procured by fraud, bribery, misrepresentation, or anything else. Hence, it was held that the tribunal would have power to rule on its own jurisdiction since the allegation of fraud was on the main agreement and not on the Arbitration agreement.
However, where the allegation of fraud strikes at the root of the Arbitration agreement, English courts have held that the tribunal would be deprived of jurisdiction to determine the underlying dispute and the allegation of fraud would be referred to a national court for determination. Where the allegation of fraud strikes at the root of the Arbitration agreement, it raises a very strong possibility that the agreement to arbitrate was itself obtained by fraud. Thus, it would be inappropriate to refer such a dispute to Arbitration. The determining factor is always to ascertain to what extent the allegation of fraud vitiates the Arbitration agreement. For example, in Nigel Peter Albon v. Naza Motor Trading SDNBHD & Ors [2007] EWCA Civ 1124, it was held that since there was a good arguable case not only that the Respondent’s signature on the joint venture agreement, together with its Arbitration clause, was not genuine but a forgery, the English court was to be the judge of the authenticity of the joint venture agreement rather than the arbitrators.
In Nigeria, the first case in which the apex court in Nigeria made a statement on the arbitrability of fraud was in Kano State Urban Development Board v. Fanz Construction Co. Ltd., (1990) LPELR-1659(SC, (pp 58 – 60, paras C – B) where the Supreme Court, although not called upon to determine the question whether an agreement tainted with fraud was arbitrable, made a blanket statement to the effect that:
“…an indictment for an offence of a public nature cannot be the subject of an Arbitration agreement, nor can disputes arising out of an illegal contract nor disputes arising under agreements void as being by way of gaming or wagering”.
In another case, although the Fanz Construction Co. Ltd case was cited to it, the Court of Appeal in Bendex Eng. Corp. & Anor. v. Efficient Pet. (Nig.) Limited (2001) 8 NWLR (Pt.715) 333 rejected the Appellant’s contention that the trial court erred in appointing an arbitrator to resolve the dispute between it and the Respondent because the Respondent’s allegations of fraud and misrepresentation were not amenable to Arbitration. The court held that it could not decide on the allegation of fraud because the jurisdiction of the court was limited to determining whether there was a genuine dispute between the parties that would warrant the appointment of an arbitrator to resolve the dispute.
The Court pointed out that, being at the preparatory stage of ‘forum identification’, the Court is not cloaked with any jurisdiction or duty to inquire into the sustainability or otherwise of the alleged dispute. Its function, the court said, was restricted to the construction of the Arbitration clause in an agreement with a view to ascertaining whether the alleged dispute is within the contemplation of the agreement. The Court found that there was a genuine dispute between the parties and that the trial court was concerned strictly with the appointment of arbitrators to resolve the dispute between the parties and that it was the arbitral tribunal that had the responsibility to look into the dispute between the parties and determine the questions surrounding the Respondent’s allegations of fraud and misrepresentation.
However, in a subsequent case, the Court of Appeal relied on the pronouncement by the apex court in the Fanz Construction Co. Ltd case and held in B. J. Export & Chemical Company Limited v. Kaduna Refining & Petro-Chemical Company Limited (2002) LPELR-12175(CA) that a criminal matter, like the allegation of fraud is not amenable to settlement by Arbitration. The Court of Appeal in that case granted leave to the Appellant to revoke the authority of the arbitrator appointed by the parties on the ground that the Appellant’s claim against the Respondent upon which reference had been made to the Arbitrator was prima facie fraudulent and therefore not a proper subject of Arbitration as contemplated by the parties in their agreement. The Court stated that based on the facts of the case, where a contract for the hire of 180 tanks for the rental charges in the sum of N80,000.00 which accrued to the respondent in the transaction gave rise to a claim of U8$400,000.00 damages to the appellant, it was prima facie fraudulent and therefore not suitable for Arbitration. The ratio in the B. J. Export & Chemical Company Ltd was followed in the case of Kano State Govt. & Anor v. A.S.J. Global Links (Nig.) Ltd (2017) LPELR-46215(CA), (pp 43 – 45, paras C – A) where the Court of Appeal stated that:
“where the contract agreement is tainted with prima facie illegality or fraud, the Arbitration clause shall cease to have effect and the proper cause of action for the parties is to institute a suit at the High Court for the determination of the dispute where the issues of illegality and fraud involved would be resolved by evidence at trial”.
In the cases analysed so far, it appears the courts did not attempt to draw any distinction between general allegations of fraud relating to a dispute and fraud which strikes at the root of the Arbitration agreement. The Court of Appeal, however, seems to have redefined the parameters for the arbitrability of fraud in the case of Dr. Charles D. Mekwunye v. Lotus Capital Limited & Ors (2018) LPELR-45546(CA), where the Respondent had brought an application before the Federal High Court seeking a stay of the proceedings in the suit which was filed by the Appellant against the Respondents pending a reference to and determination of the dispute between the Appellant and the Respondents by Arbitration in line with the agreement between the parties. The Federal High Court granted the application of the Respondents and the Appellant appealed to the Court of Appeal on the grounds, inter alia, that the dispute between the parties was not arbitrable because his Statement of Claim raised allegations of fraud with particulars duly pleaded to the effect that the 1st Respondent’s Telecoms Private Equity Fund Investment Agreement was a Ponzi Scheme and an instrument of fraud, used by the Respondents to defraud unsuspecting Nigerians including the Appellant. The Court of Appeal rejected the contention of the Appellant and held:
“…to accept the Appellant’s contention to the effect that Arbitration should be shut out, merely on the basis of allegation of fraud, which has not been subject to proof, would undoubtedly destroy the very purpose for which the parties had agreed by contract to submit to Arbitration”.
The Court went on to hold that unless the allegation of fraud affects the validity of the Arbitration agreement and or the substantive contract, the arbitral tribunal would have jurisdiction to determine the allegation of fraud. The court, therefore, held that “since the allegation of fraud by the Appellant in the case is not directed at the Arbitration agreement, thereby impeaching same and the resultant Arbitration, nor is it directed at the main contract; I am therefore unable to accept the submissions of learned Counsel for the Appellant that mere allegation of fraud renders the dispute herein un-arbitrable”.
The Court of Appeal in reaching its decision distinguished the case from its decision in B. J. Export & Chemical Company Limited, where the Respondent’s allegation of fraud went to the root of the Arbitration Agreement; whereas, in the instant case, the allegation of fraud is in relation to the performance of obligations under the contract, thus the arbitral tribunal could competently adjudicate same. The Court stated that the position of the law stated by the Court in B. J. Export & Chemical Company Ltd remains potent but qualified to the effect that only the Court can adjudicate on allegation of fraud which affects the validity of an Arbitration agreement.
Conclusion
Based on a review of the foregoing cases, it is safe to conclude that the decision of the Court of Appeal in the Lotus Capital case expresses the current position of the law on the arbitrability of fraud in Nigeria, which is that unless the allegation of fraud affects the validity of the Arbitration agreement, such allegation is arbitrable. This is in line with the current trend in other jurisdictions which have become more Arbitration friendly and would not strike down an Arbitration agreement on the ground of fraud, except the allegation of fraud strikes at the root of the Arbitration agreement, so as to make it invalid.
It is hoped, however, that the Nigerian Supreme Court would have the opportunity to pronounce on this issue and give the Nigerian jurisprudence on the point some level of finality and certainty.
