Key takeaways
Court clarifies fraud claims in arbitration context
Not all allegations justify bypassing agreed arbitration clauses.
Contractual fraud and arbitration fraud treated differently
Understanding this distinction is key for dispute strategy.
Parties should review drafting of arbitration agreements
Clear wording can reduce risk of jurisdictional challenges.
K1 & others -v- B [2025] EWHC 2539 (Comm)
This is the latest in a series of recent cases in which the English High Court has made it clear that s.68 of the Arbitration Act 1996 (1996 Act), which allows an arbitrating party to challenge an arbitration award on the ground of serious irregularity leading to substantial injustice, is designed as a long stop, only available 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.
This was not one of those cases.
The background facts
The decision is anonymised for confidentiality purposes, but it indicates that there are three claimant companies, two incorporated in Kuwait and one in Egypt. There is no information as regards the defendant’s identity or nationality/place of incorporation.
The underlying dispute arose out of a letter of engagement (LOE), which provided for English law and for any disputes to be resolved by arbitration under the LCIA Rules seated in London.
A dispute arose and was referred to LCIA arbitration. In its award (Award), the Tribunal made an award against the claimants in favour of the defendant and awarded the sum of US$3.2 million as a success fee for services rendered under the LOE.
The claimants sought to challenge the Tribunal’s jurisdiction by making an application under s.67 of the 1996 Act. They argued that they were not bound by the LOE either because the US law firm that signed it had no authority to bind the claimants or because the first two claimants lacked capacity, as a matter of Kuwaiti law, to enter into an arbitration agreement.
S.68 challenge
The claimants then sought leave to amend their arbitration claim form to include a further challenge under s.68(2)(g) of the 1996 Act on the ground of alleged serious irregularity. As they sought to make this amendment after the 28-day time-limit specified in s.70(3) of the 1996 Act for bringing such a challenge had expired (by almost one year), the claimants also required an extension of time and relief from sanction.
The basis for the further challenge was that the claimants alleged the LOE was a 'contract for fraud', being a contract to 'obtain information from targets by deception' and was performed in that way. The targets were said to be foreign state officials or authorities possessing confidential information about a foreign Ministry and Authority.
However, the contention that the LOE was 'a contract for fraud' was not raised in the arbitration. The claimants submitted that they never considered the point during the arbitration because they were not themselves signatories to the LOE. Rather, the LOE was entered into by legal counsel 'who had not raised any concern in relation to legality'. Further, the Defendant had given an undertaking in the LOE that its activities were lawful.
As to the delay in making their application, the claimants argued that it was the product of an honest oversight or mistake in not considering the point earlier.
The Commercial Court decision
The Court referred to the decision in Federal Republic of Nigeria -v- Process & Industrial Developments Ltd [2023] EWHC 2638 (Comm), a key recent case dealing with fraud in arbitration, in which the Court stated:
'476. The objection under consideration in section 68(2)(g), that of 'the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy', is of fundamental character to the arbitration process because it goes to the integrity of that process. No policy of arbitration law calls for section 68(2)(g) to be given other than its plain meaning. An award obtained by fraud or contrary to public policy (or procured in a way that was contrary to public policy) and which has caused or will cause substantial injustice is not what the parties agreed to when they agreed on arbitration. To support it in the name of supporting arbitration as a process achieves the opposite. Unless the right to object is lost for reasons of finality (the business of section 73, below), and subject to the procedural restrictions in section 70(2) and (3), there is no sanctuary. This architecture meets the requirements of justice.'
The claimants sought to argue that there was serious irregularity affecting the Award because if the LOE was a 'contract for fraud' then the Award was contrary to public policy.
The Court disagreed. The claimants were making a case on the merits of the claim that was for the Tribunal to decide, assuming the Tribunal had jurisdiction. However, the claimants did not raise it before the Tribunal. To accept that the claimants’ case was nonetheless within s.68 would, in the Court’s opinion, have substantial consequences for the relationship between the Courts and arbitration.
The decision in Nigeria -v- PID made it clear that the focus of s.68 was not on the claim on which an award was based or the cause of action on which the claim was based but was on the parties’ conduct in the arbitration and the process by which the award was obtained.
In this case, there was no suggestion that the arbitration process was interfered with. According to the claimants, the Tribunal should have declined to award the sum it did to the defendant because the LOE was a contract for fraud and illegal. However, the Tribunal did not find that the LOE was a contract for fraud and illegal. The claimants were seeking to argue that the Tribunal did not arrive at the correct decision in its Award, but that was not a valid ground for challenge under s.68.
The Court acknowledged that there may be exceptional cases where the alleged illegality of the contract and of the manner of its performance were matters capable of grounding a challenge to the Award under section 68(2)(g) because these matters could well lead to the conclusion that the Award was procured by fraud, as part of an overall fraudulent enterprise. This was not, however, one of those cases.
The Court emphasised that this was not a situation where the Tribunal found that the LOE was a contract for fraud or illegal and yet still went on to make the Award. Nor was it a case where it was said that, even though the allegation was not raised by the claimants, the Tribunal nonetheless should on its own initiative have inquired into or investigated whether the LOE was a contract for fraud or illegal, but without doing so went on to make the Award.
The Court was not obliged to consider the issue of whether or not the English (or any other court) would enforce the Award. Nor did it have to consider whether it would be appropriate to grant an extension of time notwithstanding the almost one-year delay. It proceeded to dismiss the application to amend the arbitration claim form.
Comment
The case serves as a useful reminder of the limits on the scope of s.68 of the 1996 Act. It also highlights that a failure to raise issues and make arguments before a tribunal may result in an inability to bring them up in a subsequent challenge to the Court.
The claimants still have a pending jurisdictional challenge under s.67 and it will be interesting to see what the outcome of that challenge is.
