UK: Cutting Up The Cake: Dividing Awards And Second-Guessing Foreign Courts

Last Updated: 10 September 2008
Article by Robert Blackett

Cutting Up The Cake: Dividing Awards And Second-Guessing Foreign Courts

Winning a big court case or arbitration will be the culmination of many years work, but a new battle may soon thereafter ensue as the winning party chases defendants and their assets across the world in an attempt to convert a paper award handed down by the tribunal into hard cash.

A judgment or award which holds a party liable is of no value if that party's assets are located, and that party's affairs are conducted, in a State which will not enforce it. Whether a court in one country will enforce a judgment handed down in another is a complex question. In some cases countries will be party to reciprocal agreements about when one another's judgments will be recognised and enforced. In other cases there will be no such agreements and so the grounds on which enforcement may be declined vary both according to where a judgment is given and where it is sought to be enforced. This can be contrasted with the relative uniformity in the treatment of arbitration awards. That uniformity exists because so many countries are party to the New York Convention1, which requires members to recognise and enforce arbitral awards made in the territory of other member states2 and provides only very limited grounds on which enforcement may be resisted and refused.

Pending challenges as a ground for refusing enforcement

The Arbitration Act 1996 gives effect to the New York Convention in England. Section 103 sets out the small number of grounds on which recognition or enforcement of a New York Convention award may be refused. The Convention very much favours enforcement and, even where one of the grounds on which enforcement may be refused is established, the court will still have a discretion to enforce the award3. One ground on which enforcement may be refused is as follows:

" (2) Recognition or enforcement of the award may be refused if the person against whom it is invoked proves –

...

(f) that the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made.

...

(5) Where an application for the setting aside or suspension of the award has been made to such a competent authority as is mentioned in subsection (2)(f), the court before which the award is sought to be relied upon may, if it considers it proper, adjourn the decision on the recognition or enforcement of the award.

It may also on the application of the party claiming recognition or enforcement of the award order the other party to give suitable security."

Where a foreign award is subject to a challenge or appeal the English court which is asked to enforce it therefore has a discretion whether to do so, and whether to order the party resisting enforcement to provide security. The Act gives no indication as to what sort of test the English court should apply in its exercise of this discretion.

The English High Court has recently considered these provisions in IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation4.

Background to the first decision

The claimant, IPCO, was the Nigerian subsidiary of a Hong Kong company. In 1994 IPCO had agreed to design and build a petroleum export terminal, called the "Bonny Export Terminal", for NNPC, the Nigerian state oil company. The project overran by 22 months due in large part, IPCO claimed, to variations which had been ordered by NNPC. The parties proceeded to arbitration in accordance with their contract, the case being heard by three Nigerian arbitrators and an award rendered in Lagos. In October 2004 the arbitrators awarded IPCO over US$152 million, with interest to run at 14% a year.

NNPC is a very substantial company — Africa's biggest oil producer with a turnover equivalent to over £5 billion in 2005. Having received the arbitration considerable assets in England. Nigeria is party to the New York Convention, and so enforcement fell to be determined according to the terms of the Convention, as set out in the 1996 Act.

In November 2004, IPCO applied to the English High Court for an order that NNPC pay it the sterling equivalent of the award, converted at the prevailing rates of exchange, along with interest amounting to more than £800,000 for the 26 days since the award, and accruing at a rate of more than £30,000 a day until payment. Mr Justice David Steel considered the ex-parte application on paper and granted IPCO an order in the terms sought.

In parallel with this enforcement action, NNPC had begun proceedings in the Federal High Court of Nigeria, seeking to have the award set aside under the Nigerian Arbitration and Conciliation Act. IPCO had responded by filing a 'notice of preliminary objection' seeking, in effect, to strike out NNPC's challenge on the grounds that it was frivolous, vexatious, calculated to delay enforcement of the award and interfere with or delay the due administration of justice and so an abuse of process.

NNPC then applied to the English court, seeking that the enforcement of the award pursuant to the order of Mr Justice David Steel be adjourned under section 103(5) of the Arbitration Act 1996, NNPC having applied to a competent authority to set aside the award. IPCO resisted this application, but argued in the alternative that, if the court was to allow that application, it should be conditional upon the provision of security by NNPC. The application was heard by Mr Justice Gross and judgment5 given on 27 April 2005.

The test to be applied

Gross J considered what test should apply to the exercise of the section 103(5) discretion. He first referred to the general pre-disposition to favour enforcement of New York Convention Awards and identified that Section 103(5) represents a compromise between competing concerns: that it should not be possible to frustrate enforcement merely by making an application in the country of origin; and that the respect due to the court before which proceedings are pending in the country of origin should not necessarily be pre-empted by rapid enforcement in another jurisdiction.

Having identified that no threshold test for the exercise of the discretion is given in the Act he stated:

" Ordinarily, a number of considerations are likely to be relevant: (i) whether the application before the court in the country of origin is brought bona fide and not simply by way of delaying tactics; (ii) whether the application before the court in the country of origin has at least a real (i.e. realistic) prospect of success (the test in this jurisdiction for resisting summary judgment); (iii) the extent of the delay occasioned by an adjournment and any resulting prejudice."

In support of this conclusion he went on to cite the decision of the Court of Appeal in Soleh Boneh v. Uganda Government [1993] 2 Lloyd's Rep 208, where Staughton LJ had identified two important factors as: the strength of the argument that the award is invalid; and how difficult the award would be to enforce if enforcement were delayed.

Finally he considered that:

" it is pertinent to underline that the New York Convention contains no nationality condition ... and is thus applicable, as here, when an award is made abroad in an arbitration between parties of the same nationality ... While primarily the New York Convention was undoubtedly intended to facilitate international arbitration rather than the enforcement in a foreign country of a domestic arbitration award, the benefits of the New York Convention are available to a party seeking enforcement in the latter case also. Such cases are necessarily rare but it would be wrong to introduce a nationality condition into the New York Convention by the backdoor. ... all that said, in the exercise of the discretion under s.103(5) of the Act, the fact that the arbitration was domestic in the country of origin, must generally be likely to enhance the deference due to the court exercising supervisory jurisdiction in that country. Comity and common sense are likely to require no less; pre-empting the decision on a challenge to an award before the court exercising supervisory jurisdiction in the country of origin would be a strong thing in a case where all award IPCO sought to enforce the arbitral award before the English courts, NNPC presumably having some parties were domiciled or incorporated in that country."

Decision of Gross J

Gross J ordered that enforcement be adjourned pursuant to section 103(5) of the 1996 Act, but imposed two conditions. NNPC had accepted that approximately US$13.1 million would remain indisputably due to IPCO even if its challenge to the award succeeded. Gross J therefore imposed as a first condition of the adjournment a requirement that NNPC pay this to IPCO within 28 days.

As to the rest of the award, Gross J considered some grounds of challenge had a real prospect of success. He listed a number of factors relevant to the exercise of his discretion. These included that, based on evidence of IPCO's finances, if immediate enforcement was ordered without the provision of cross security and NNPC were to succeed in setting aside the award before the Nigerian court, there would be a very substantial risk that monies paid out would not be recovered.

As a second condition of the adjournment Gross J required that NNPC provide security in London in the sum of US$50 million.

The 2008 decision

In 2008, three years after Gross J's decision, IPCO went back to English High Court, asking Mr Justice Tomlinson to revisit the decision to adjourn enforcement of David Steel J's original judgment, and allow IPCO to enforce against NNPC6.

Tomlinson J found that, before Gross J, counsel for NNPC had drawn the court's attention to the speed with which NNPC were pursuing the Nigerian challenge, such that a first instance decision on the challenge was to be expected in the second half of 2005.

" What ... is plain is that Gross J took the view that resolution at first instance of IPCO's Preliminary Objection might well prove to be something of a watershed. A decision at first instance of the Nigerian High Court that NNPC's grounds of challenge to the award should be struck out would or might change the landscape against the backdrop of which the English court was called upon to decide whether to permit enforcement of the award. As Gross J himself put it in the course of argument before him, "if IPCO succeeds in its Notice of Preliminary Objection one can anticipate a return to court" i.e. a return to this court by IPCO seeking immediate enforcement of the award."

After the hearing before Gross J, the first instance judge in the Nigerian proceedings had proceeded to hear IPCO's preliminary objection and reached a decision but, before she could hand it down, NNPC had asked that the case be re-assigned to another judge, and the Nigerian Chief Judge had either done so or had referred to another judge the question whether the case should be re-assigned (the precise decision is not clear). IPCO had sought to appeal his decision, and the proceedings had been subject to a number of delays. Having reviewed these delays, Tomlinson J found that:

" Whatever the outcome of IPCO's appeal to the Nigerian Court of Appeal, any disinterested observer can only reflect with some dismay upon the time being taken to achieve finality in the resolution of the underlying contractual dispute between IPCO and NNPC. ... far from the envisaged watershed being reached in a matter of months, the date of resolution of the Preliminary Objection is now a matter simply of conjecture where the only confident conclusion can be that it is unlikely to be resolved at first instance before the elapse of at least another five years or so and that the delay could now be very significantly longer than that."

NNPC's argument was that, though Gross J's order did not give rise to any issue estoppel, it was an abuse of process for a party to seek to re-argue points before a court of co-ordinate jurisdiction. The prospects of the Nigerian appeal succeeding had been assessed by Gross J and remained unchanged.

The Court's power to revisit an interlocutory decision

The Court was not being asked to exercise its powers under the CPR, rather the power to make the order in this case was derived from the Arbitration Act 1996. Nonetheless decisions on the application of the domestic power represented useful guidance. Accordingly the court looked at cases decided under CPR rule 3.7(1), which provides that the court's power to make an order includes a power to vary or revoke that order. Tomlinson J derived the following guidance from those cases:

" Plainly a judge of parallel jurisdiction cannot entertain what is in effect an appeal. Similarly a change of circumstances cannot ordinarily justify a variation of an earlier order unless at the least the change in circumstances impinges on or relates to the reason for seeking the variation. There must be some causative link between the change in circumstances and the variation sought."

Tomlinson J reasoned that an adjournment under s103(5) Arbitration Act 1996 is, by its very nature, a temporary order which is destined to be revised according (usually) to the outcome of the appeal or challenge. Gross J's decision had been premised on a first instance determination of IPCO's Preliminary Objection taking place within a matter of a few months. The court's jurisdiction to adjourn was premised on the pendency of the Nigerian proceedings, and so a significant relevant development in those proceedings would allow the court to revisit the decision to adjourn.

What is to be revisited is the exercise of the discretion — whether to adjourn a decision on enforcement or not. It would not, usually, be appropriate to re-run and reconsider the arguments about the strength of the challenge before the foreign court — whether it had a reasonable prospect of success. The exception, however, is where the judge who ordered the adjournment had been misled. Tomlinson J held that here he could reconsider the strength of the challenge because Gross J had (unintentionally) been misled as to the structure of the contract and the nature of the claim. He found that Gross J had been misled when he found that there was a substantial duplication in award, such that IPCO had received multiple compensation in respect of the same work. Tomlinson J concluded that, as a result, NNPC had no real prospect of reducing the award to less than US$58.5 million.

Partial enforcement

That left the question whether the court could order partial enforcement of the US$152 million+ award. Section 101(3) of the 1996 Act refers only to judgment being entered "in terms of the award". The Convention makes one reference to the partial enforcement of an award, in Article V(1)(c) which provides (broadly) that where a tribunal makes an award both as to matters which fall outside and within its jurisdiction, that part of the award which covers matters within the tribunal's jurisdiction may be enforced. An express power of partial enforcement being given in limited circumstances might be taken as showing that such a power was not intended to be available in any other circumstances. Tomlinson J held, however, that he could order that the award be enforced in part. Three points are made in support of this conclusion:

Firstly the Court referred to a decision of an Austrian court in which an award was upheld as to the principal sum awarded by an arbitral tribunal, but the court declined to enforce the award as to the interest awarded. The Austrian court considered the high rate of interest awarded was contrary to public policy (one of the other grounds on which enforcement may be refused under the convention). Tomlinson J referred to the opinion of Lord Wilberforce in Fothergill v Monarch Airlines, to the effect that English courts should construe international conventions on the same basis as is generally accepted by other member states, and the Austrian decision was relevant to show the accepted basis.

Secondly the Court referred to the Obiter of Christopher Clark J in TTMI Limited v ASMI Shipping. That case concerned enforcement of a domestic award under s.66 of the 1996 Act, which (like s.101(3)) provides for judgment "in terms of the award". Nonetheless both Christopher Clarke J and, in an earlier judgment in the same case Aiken J, appeared to have assumed that awards could be enforced in part.

The Nigerian Court had the power to set aside parts of the award and preserve others. Based on previous decisions of the Nigerian courts there was little chance that an error in one part of the award would be taken to invalidate it in its entirety.

Comment

The risks of entering a substantial contract with a state or quasi-state entity differ from those which appear when entering a contract with a private party. States will tend to have the advantage in terms of bargaining position, and can offer contracts on 'takeit- or-leave-it' terms. In the developing world a contract which provides for disputes to be resolved before the local courts will raise questions as to those courts' independence, how long it will take to obtain a final decision and also as to the relative power the courts enjoy as against the executive — will their decisions be enforced and followed?

English conflict of laws recognises a doctrine of comity, whereby foreign courts must be assumed as capable as the English court. The fact is that this is often a fiction as Tomlinson J's comments on progress in the Nigerian challenge illustrate. The English court's approach in the NPCC case seeks to strike a balance. On the one hand, there is the need to make sure that one party cannot keep another out of its money by bringing an ill-founded challenge and then relying on the failings of its national court system to see that final resolution is long delayed. On the other hand, there is the need to ensure that legitimate complaints about an award can be considered and that, if they are upheld, the complaining party's is not a hollow victory, the money having long disappeared.

A different problem arises, however, where the local court subsequently sets aside the award. The New York Convention provides that this is a ground on which enforcement 'may' be refused. The courts of the signatory states may, therefore, decide to enforce an award even if it has been set aside by the local court. The Convention, therefore, leaves open the possibility that the court where enforcement is sought may ignore the fiction of comity, and simply conclude that the local court was wrong. Such rulings, though permissible under the Convention, are far from common.

Arbitration is frequently chosen because it helps in avoiding some of the difficulties attendant upon litigating in local courts. There will be independent decision makers and their award will enjoy an international currency. It is not enough, though, just to choose arbitration and one should not forget that if the arbitration is to be seated in the country where the work is to be performed it will still be subject to the supervisory jurisdiction of its courts, with the issues that that entails. Even worse than specifying a local seat is to leave the question of seat open, since that automatically means there will be an extra issue to argue about if a dispute goes to arbitration.

The ideal position, therefore, is to agree that disputes be resolved by way of arbitration with such arbitration to be seated in a country where local courts can be relied upon to be independent, quick and supportive of the process.

Footnotes

1 Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by the United Nations Conference on International Commercial Arbitration on 10 June 1958.

2 Article 1(1) provides for signatories to recognise and enforce arbitral awards "made in the territory of a State other than the State where the recognition and enforcement are sought" but Article 1(3) provides that "... any State may on the basis of reciprocity declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another Contracting State." The UK has made such a declaration, and this is reflected in Section 100(1) of the Arbitration Act 1996.

3 See e.g. Mustill & Boyd, Commercial Arbitration, 2nd edition, 2001 Companion, at p.87.

4 [2008] EWHC 797 (Comm) 17 April 2008.

5 [2005] 2 Lloyd's Rep 326.

6 The parties had, by that time, agreed that David Steel J's original judgment was inappropriate in one respect – that it ordered NNPC to pay the equivalent of the award in sterling when the court's power (under s101(3) of the 1996 Act) is only to enter judgment 'in terms of the award'. Tomlinson J was, therefore, asked to substitute the earlier decision for one in terms of the award and lift the adjournment on enforcement.

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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