UK: Arbitration And Fraud

Last Updated: 24 August 2017
Article by Edmonds Marshall McMahon

In the United Kingdom, an allegation of fraud in civil proceedings is not made lightly and the Courts will not find dishonest conduct without a high burden of proof being satisfied.

In the case of Celtic Bioenergy Limited v Knowles Limited EWHC 472 (TCC), the Court held that a firm of solicitors, Knowles, had acted fraudulently in failing to disclose important information to an arbitrator. The Court set aside the relevant parts of the arbitration award.

The case is a timely reminder that although arbitration is often a preferred method of dispute resolution due in part to its privacy and confidentiality, the English Courts can still challenge or appeal an arbitrator's award in open court, in certain circumstances, one of them being a serious irregularity, which was the claim in this case.

Background to the arbitration

In the words of the judgment, the background to the arbitration "is a complex and convoluted story". Celtic Bioenergy Limited ("CBL") had been engaged by the Devon County Council ("the DCC") to design and construct a composting facility.

Payment disputes arose between CBL and the DCC, which were subject to arbitration. CBL instructed Knowles for advice and representation with respect to the arbitration. In a set of documents described by the Judge as "rather curious"1, CBL assigned their rights against the DCC to Knowles but reserved their right to enforce payment or claim damages. A side letter also provided that any sums obtained by Knowles would be held in a client account for the benefit of CBL.

The arbitration between the DCC and CBL ("the First Arbitration") resulted in an award against the DCC for sums due to CBL. Knowles then issued invoices to the DCC for the sums awarded.

In the meantime, a dispute arose between Knowles and CBL regarding payment of Knowles' fees. The parties entered into an ad hoc arbitration agreement in which they agreed that Knowles would withdraw and extinguish all invoices issued to the DCC and provide an indemnity in respect of the assignment.

The Defendant then obtained an ex parte arbitration award ("the Second Arbitration") declaring that it had complied with the terms of the ad hoc arbitration agreement, on the basis that it had issued credit notes with respect to the invoices relating to the First Arbitration. This was an attempt to put itself in a better position to recover its fees from CBL.

The fraud

In light of the Second Arbitration award declaring (among other things) that Knowles had withdrawn its invoices to DCC, CBL approached the DCC asking for payment of the sums awarded in the First Arbitration, as anticipated by the parties' ad hoc arbitration agreement.

The DCC responded by providing copies of letters from Knowles sent in March 2016 ("the March Correspondence"), prior to the Second Arbitration award, in which Knowles demanded payment of the sums set out in its previous invoices relating to the First Arbitration.

CBL subsequently filed an application with the High Court challenging the Second Arbitration award on the basis that the March Correspondence showed that Knowles had not complied with the ad hoc agreement, and that the failure to put the correspondence before the arbitrator was misleading, amounting to fraud and a serious irregularity under s 68(2)(g).

The judgment

Section 68 of the Arbitration Act 1996 lies at the heart of the judgment. Section 68(1) of the Arbitration Act 1996 provides that an arbitrator's award may be challenged in the English Courts where a serious irregularity has occurred affecting the tribunal, the proceedings, or the award. S 68(2)(g) states that one of the grounds constituting a serious irregularity is where the award is obtained by fraud or the award, or the way in which it was procured is contrary to public policy.

The Judge held that the requirements in s 68(2) of a "serious irregularity" amounted to a high threshold, which must have caused substantial injustice.2 She went on to emphasise that the level of the threshold was "designed as a long stop, available only in extreme cases where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected"3.

As to what amounts to fraudulent conduct, the Judge clarified that "it is not sufficient to show that one party inadvertently misled the other, however carelessly"4. What is required is some form of "dishonest, reprehensible or unconscionable conduct that has contributed in a substantial way to obtaining the award."5

On the facts, the Judge held that Knowles' failure to disclose the March Correspondence to the applicant, was deliberate and "created a wholly misleading impression". The Judge did not accept Knowles arguments that withholding the information from the arbitrator was not relevant and that the managing director had no knowledge of the relevant issues. It was clear to the Judge that the arbitrators' Second Award had clearly been directly influenced as a result the fraud:

"It is self-evident from this passage of his decision that he equated the withdrawing of the invoices and issue of credit notes with extinguishing the claim. That was not because withdrawing of an invoice has some particular legal effect but simply because he assumed that the withdrawn invoices would not be re-presented or new invoices for the same amounts presented."

The fraud had therefore "caused a substantial injustice" and the Second Arbitration award was set aside.

Key points

  1. The judgment re-affirms the robust approach that the Courts take to allegations of fraud by requiring a high burden of proof. It is an example of where that threshold is met and in particular, why it is important for all relevant material to be disclosed to an arbitrator.
  1. The judgment also provides some interesting but non-binding comments on whether statements which are simply reckless regarding the truth, as opposed to dishonest, can amount to fraud under s 68(2)(g):

"there may be cases in which recklessness as to whether a statement was true or false might amount to fraud within the meaning of s.68(2)(g) if there is some other element of unconscionable conduct."6

If later cases find this to be the case then in theory it will be easier for claimants in CBL's position to prove allegations of fraud, at least in the context of setting aside arbitration awards.

  1. The decision serves as an example of the importance of disclosing all material information to the arbitrator, and that the English Courts will set an award aside and break the privacy of an arbitration if there is a serious basis to do so.


1 Celtic Bioenergy Ltd v Knowles Ltd [2017] EWHC 472 (TCC) at [8]

2 Lesotho Highlands Development Authority v Impreglio SpA [2005] UKHL 43 at [28]

3 1996 Departmental Advisory Committee Report, para. 280

4 Celtic Bioenergy Ltd v Knowles Ltd [2017] EWHC 472 (TCC) at [66]

5 Ibid at [67]

6 ibid at [104]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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