Federal Republic of Nigeria v Process & Industrial Developments Ltd [2023]

EWHC 2638 (Comm) and [2023] EWHC 3320 (Comm).

The case that attracted the most headlines in the international arbitration community in England last year was almost certainly Nigeria v P&ID: an $11bn arbitral award issued by an esteemed Tribunal seated in London was set aside because the arbitration itself was contaminated by fraud.

The 140-page judgment is a genuine page-turner involving bribery, corruption and knowing procurement and retention of privileged documents by legal counsel. And yet, it is the judge’s ruling that is of even greater interest than the scandalous facts – in a rare move, the English High Court has set aside an arbitral award on account of serious irregularity and in an even rarer move, the judge, Mr Justice Knowles, has concluded with some far-reaching and provocative observations about international arbitration at large.

Background

The Award

The background to the case will be known to many. In January 2010, Nigeria and P&ID entered into a Gas Supply and Processing Agreement for Accelerated Gas Development (the GSPA). Nigeria was to supply certain quantities of wet gas to processing facilities which would be constructed by P&ID. P&ID would then convert the wet gas into lean gas, which it would then deliver to Nigeria, and retain any remaining gas liquids for its own onward processing.  

Within three years of the GSPA’s signature, P&ID had not constructed the processing facilities, and Nigeria had not supplied any gas. P&ID commenced arbitral proceedings on account of Nigeria’s failure to supply any gas for processing, alleging that Nigeria committed “repudiatory breach”. The Tribunal appointed was, as the Court described it, “of the greatest experience and standing”. 

A key piece of evidence before the Tribunal was a witness statement by one of P&ID’s managing directors, in which he described how the GSPA had come to be. In that statement, he also described P&ID’s efforts to perform its part of the bargain, indicating that P&ID had obtained funding for the project, and that the engineering designs for the facilities were 90% complete. Neither was, in fact, true.

In the event, the Tribunal concluded that P&ID was poised to perform its part of the bargain, but Nigeria was not. It found that Nigeria had committed a repudiatory breach of the GSPA, and awarded P&ID damages in the sum of US$6.6bn, with an interest rate of 7% (the Award).

Discovering Bribery

During the final months of the arbitration, Nigeria’s financial crime law enforcement agency commenced an interim investigation into P&ID. It recommended that further investigation into the circumstances in which the GSPA was awarded be carried out. This was not pursued further until, more than a year after the Award, and while P&ID was seeking enforcement of the Award, the new Nigerian President directed that the investigation proceed.

The enforcement agency interviewed, among others, Nigerian officers who were involved in the procurement stage leading to the GSPA. It identified that, at the time the Nigerian ministry was considering potential candidates for the project which became the subject of the GSPA, P&ID was making payments to senior Nigerian officials, including the legal officer at the Ministry of Petroleum Resources who eventually recommended entry into the GSPA and who shared the final draft with the minister for signature. These events were omitted from the evidence that P&ID had put before the Tribunal. That same evidence also failed to mention that payments continued to be made to the same legal officer, both shortly before the commencement and during the course of the arbitration, and which the Court concluded were intended to prevent the bribes from being revealed. 

“Serious irregularity”

In December 2019, Nigeria challenged the Award in England, relying on section 68 of the Arbitration Act 1996. That section provides that:

“(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award. (…)

(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant (…):

(g) the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy (…).” 

Bribery as a “serious irregularity”

As the Court noted, the purpose of challenges under section 68(2)(g) for awards procured by fraud is aligned with the objective of arbitration, being to obtain a fair resolution of disputes (section 1 Arbitration Act 1996). 

The Court acknowledged that fraud on a contract underlying an arbitral award was not tantamount to the Award itself being “obtained by fraud” – the latter being an example of the “serious irregularity” which the Arbitration Act introduced as grounds for challenging the award. 

However, the Court found that P&ID’s fraud was not restricted to the time of entry into the GSPA: it extended to the arbitration. Not only had P&ID continued to bribe the Nigerian legal officer throughout the arbitration, it had knowingly provided to the Tribunal material evidence which it knew to be false.  Specifically, in a witness statement describing how the GSPA “had come about”, P&ID had omitted that bribes had been paid to the person with carriage of the draft GSPA. The judge considered that this omission, taken in context, was so misleading as to amount to a positive misrepresentation.  

The Court then considered whether P&ID’s conduct had caused Nigeria a “substantial injustice”. Noting in particular that, as a finding of bribery would have rendered the GSPA voidable, it found that the arbitration would have been “completely different, and in ways strongly favourable to Nigeria” if the evidence of the bribes had been before the Tribunal. The Court considered RAV Bahamas v Therapy Beach Club [2021] UKPC 8, where it was held that substantial injustice would be inferred if the irregularity influenced the outcome of the arbitration, and distinguished the present case from cases of apparent bias which might not have influenced the outcome of the arbitration (as per the dictum of Sir Ross Cranston in Africa Sourving Camerous v LMBS [2023] EWHC 150). 

On the evidence before it, the Court concluded that had the evidence of the bribes been before the Tribunal, “the entire picture would have had a different complexion”, and taking into account the concealment of that evidence from the Tribunal, Nigeria had suffered “substantial injustice” within the meaning of section 68(2)(g).  

Access to privileged documents as a “serious irregularity”

In the course of the proceedings before the English court, another significant discovery was made: P&ID had, throughout the arbitration, obtained more than 40 confidential and, in some cases, privileged legal documents setting out Nigeria’s strategy, both on its defence and on settlement.  The documents were shared with P&ID’s solicitors and legal counsel, who did not either challenge how those documents had come into P&ID’s possession, inform Nigeria, or return the documents. 

The Court considered the documents and concluded that they were material to P&ID’s ongoing “deception … on the Tribunal and on Nigeria before the Tribunal”, including because they were used to monitor whether Nigeria had become aware of the bribery. P&ID’s improper retention of those documents was found to fall within the definition of “serious irregularity” which, having resulted in Nigeria’s right to confidential legal advice being “utterly compromised”, had caused Nigeria a “substantial injustice”.  

The Court distinguished the present case from Hamilton v Al Fayed [2001] EMLR 15 (where it was held that stolen privileged documents had not given any tactical advantage to the other party in the course of a trial) on the basis that challenges under section 68(2)(g) are focussed on the process by which an award is achieved. The fact that Nigeria was comprehensively deprived of its right to legal professional privilege throughout the arbitration was contrary to public policy and within the ambit of section 68(2)(g). Even if the Award may have been influenced by Nigeria’s “neglect” of the arbitration process, as Mr Justice Knowles simply put it:

“If this was a fight, it was not a fair one, and could not lead to a just result”. 

Losing the right to object and “discovery” of the fraud

Section 73 of the Arbitration Act 1996 provides that a party who “takes part, or continues to take part, in the proceedings” must make an objection of irregularity “either forthwith or within such time as is allowed by the arbitration agreement or the tribunal (…)”, or it loses the right to “raise that objection later before the tribunal or the court”. An exception arises if the party can show that it “did not know and could not with reasonable diligence have discovered the grounds for the objection” at the time it took part in the arbitration.

The Court accepted that Nigeria was required to prove that it did not, and could not with reasonable diligence, have discovered the grounds for the objection which it raised. It considered whether any of the three irregularities which had been found on the facts and which gave rise to the right to object – namely, (1) the initial bribery and its concealment from the Tribunal, (2) the continued bribery throughout the arbitration, and (3) the retention of privileged legal documents – could have been discovered by Nigeria using “reasonable diligence” throughout the arbitration process. 

P&ID suggested that Nigeria was already alert to the possibility of bribery, and cited some “red flags” which Nigeria had in mind in the course of the arbitration – including a Nigerian official’s contention the GSPA was “deeply suspicious”, the fact of known widespread corruption in the oil and gas sector, and the recommendation to investigate the circumstances leading to the GSPA given by Nigeria’s advisors. The Court found that those “red flags” (either individually or cumulatively) would not have prompted Nigeria, with reasonable diligence, to look for bribery, in circumstances where dishonest evidence and additional bribes / monitoring of privileged documents further concealed it. 

The Court applied The Law Society v Sephton & Co [2004] EWCA Civ 1627 in finding that, for Nigeria to lose the right to object, it needed to not only be apprised of a suspicion of fraud, but to have sufficient material to enable fraud to be alleged.  The initial investigation by its law enforcement agency did not uncover any evidence of bribery. Sufficient evidence to pursue a bribery allegation only became available when Nigeria subsequently interviewed the bribed official, following which it could obtain copies of bank statements showing the bribes. Similarly, Nigeria could not have uncovered P&ID’s unauthorised access to its privileged legal documents – this only became available upon disclosure of the fact by P&ID’s new solicitors, in the course of the English proceedings. Despite the fact that Nigeria had not called any witnesses as to its knowledge, the Court concluded that it had satisfied the burden of proving that it did not know, and could not with reasonable diligence, have discovered either the bribery or the unauthorised retention of its privileged documents by P&ID.

Setting aside the Award

Nigeria’s challenge of the Award on the basis of “serious irregularity” was successful, with the Court highlighting the importance of section 68 as a means of maintaining the rule of law. The decision marks an addition to a very short list of successful challenges under section 68 before the English courts since the Arbitration Act 1996 came into force. 

Having subsequently heard submissions from the parties, the Court exercised its power under section 68(3) to set aside the Award, and not to remit it to the Tribunal for reconsideration. The Court cited, in support of its decision, the seriousness of the irregularities committed by P&ID, which went “to the root of the award” and would result in no real prospect of justice being done if the Tribunal were to reconsider the matter. 

In its application for permission to appeal before Mr Justice Knowles, P&ID sought to challenge the judgment, including on the proposed grounds that the witness statement did not contain any express representation that bribery had not occurred and that, at worst, it comprised a “deliberate exclusion” which, in the absence of any duty of disclosure was not capable of constituting fraud. The Court dismissed P&ID’s application for permission to appeal, finding that the witness statement had “deliberately and dishonestly” excluded the fact of the bribery, and stressing that:

“when a person represents that 5 things happened knowing that in fact 6 things happened, there is a positive misrepresentation”. 

Encouraging reflection in the arbitration community

In reaching his judgment, Mr Justice Knowles took the opportunity to make the following general comments, intending to “encourage reflection” in the arbitration community.

1. Is arbitration the best forum for state disputes?

While acknowledging the eminence of the Tribunal, and the fact that it did what it could to manage the case despite the lack of engagement by one party, Mr Justice Knowles was sceptical of the Tribunal’s traditional approach in the face of what was “not a fair fight”. He invited the arbitration community to consider whether tribunals should be expected to take a more interventionist approach in proceedings whose subject matter are long-term, high-value contracts. He also questioned whether the lack of public scrutiny which accompanies arbitration as a dispute resolution method is appropriate when the parties involved are state entities, and the sums in dispute will be paid out of public funds. 

2. The importance of disclosure

Mr Justice Knowles stressed the significance of disclosure, both in the English court, and from courts in other jurisdictions, in enabling the truth about the fraudulent conduct to be revealed.

3. Contracts with state entities

The imbalance in the contributions of the parties to the drafting of the GSPA was the cause of what subsequently occurred.  Even though on these facts, bribery and corruption were the reason for that imbalance, it could plausibly have happened because of a gross inequality in the “experience, expertise or resources” between the two parties.

4. Legal professionals

Mr Justice Knowles expressed concerns with the manner in which P&ID’s legal team in the arbitration had conducted itself, including in failing to stop the continued violations of Nigeria’s legal professional privilege. Noting the magnitude of their remuneration in the event that P&ID was successful – £3bn in the case of P&ID’s solicitor, and £850 million in the case of the barrister – he concluded that they had chosen not to act “because of the money they hoped to make”. He has referred the practitioners to the Solicitors Regulation Authority and Bar Standards Board respectively, inviting them to consider, as well as their conduct, the acceptability of the contingent fee arrangements in place.

Our comments

The majority of commentary focuses on the last four pages of the judgment and the four general observations listed above. These are respectful but provocative (the first in particular) and question the efficacy of traditional approaches of arbitral tribunals, particularly in the context of investor-state arbitration and in the absence of public scrutiny.

There are many in the community who will view the words as potentially damaging to the future success of investor-state arbitration but in reality, the provocations are nothing new and Mr Justice Knowles is merely using his prominent platform to ensure adequate attention and debate is afforded to the issues. The huge amount of time and (in part taxpayer) money that has been spent and wasted on the underlying arbitration (even allowing for recovery) must surely be enough to persuade everyone that these issues should be on the mind of all with conduct of arbitrations if they are to be avoided in the future.

It should also not go unnoticed that the seat of this arbitration in England allowed for disclosure that helped to unravel the fraud, as Mr Justice Knowles observed (item two above) – our broad disclosure regime is a huge attraction for London as a seat.

As to the English court’s approach to setting aside awards for serious irregularity where there is, or is a risk of, substantial injustice, we have an interesting judgment on what a party is expected to do when a serious irregularity has arisen and in particular what is expected of them when the serious irregularity is not known to them due to fraud. The judge in this case appears to have been so appalled by the fraud that he was willing to give Nigeria the benefit of the doubt – but each case will turn on its facts, and other parties may be expected to do more to uncover a fraud.

Macferlanes LLP

United Kingdom/February 20 2024