U.K. Supreme Court Clarifies Rules to Order Security As Condition to Challenge Arbitral Awards Enforcement Proceedings
On 1 March 2017, the U.K. Supreme Court (the Supreme Court) found that an arbitral award debtor should not be required to pay USD 100 million in security as a pre-condition to adjourn the enforcement of the arbitral award until a decision is taken on the annulment of the award.
The Supreme Court’s decision was issued in proceedings between Nigerian National Petroleum Corporation (NNPC) and IPCO (Nigeria) Ltd (IPCO). The latter was awarded USD 152 million following arbitration proceedings seated in Nigeria. NNPC sought to set aside the award before the Nigerian courts initially on jurisdictional grounds and, from 2009 onwards, on allegations of fraud.
Meanwhile IPCO sought the enforcement of the arbitration award before the U.K. Commercial Court. This was granted on an ex parte basis, but was soon challenged by NNPC which sought to have the enforcement order set aside or adjourned, in light of NNPC’s ongoing challenge against the award in Nigeria. In response, the U.K. Commercial Court agreed to adjourn the enforcement order under section 103(5) of the U.K. Arbitration Act 1996 (the Act). This provision allows a court before which an enforcement action is pending to adjourn its decision pending the decision on the setting aside or suspension of the award at the seat of arbitration. In this case, however, the Commercial Court subjected the adjournment of the order to the payment of security worth USD 50 million, later increased to USD 80 million in 2008.
Following severe delays in the Nigerian courts, in 2012, IPCO sought once again to lift the adjournment on the enforcement of the award in England and the Commercial Court once again refused to grant the request. IPCO appealed this decision to the U.K. Court of Appeal which concluded that the English courts should now actually rule on whether the award should be enforced. Its decision was based on the fact that that the proceedings before the Nigerian courts had been ongoing for over a decade and there had been a sufficient change in circumstances.
The Court of Appeal therefore remitted the case to the Commercial Court to rule on whether the enforcement should be refused under section 103(3) of the Act (which provides that the recognition or enforcement of an arbitral award may be refused if the award raises issues which are not capable of settlement by arbitration, or if it would be contrary to public policy to recognise or enforce the award) on the basis of allegations of fraud. The Court of Appeal also ruled, however, that until the Commercial Court reaches such a decision, the adjournment of the enforcement of the award should be maintained and raised the amount of security by an additional USD 100 million.
NNPC then challenged the Court of Appeal’s decision before the Supreme Court. The Supreme Court set aside the order to provide the additional security on two major grounds.
First, the circumstances in which the order for security was granted did not fall within the scope of section 103(5) of the Act. According to section 103(5) of the Act, an “adjournment” only encompasses cases where the English proceedings were adjourned on account of the fact that a challenge to the award was pending before a competent court, usually at the seat of arbitration.
The Supreme Court found, however, that in the present case the enforcement of the award was no longer adjourned on the basis that proceedings were still ongoing in Nigeria. Rather it was done on the basis that the U.K. courts would now have to resolve the public policy challenge under section 103(3) of the Act. The Supreme Court therefore found that the Court of Appeal wrongly characterised the circumstances as constituting an adjournment within the meaning of section 103(5).
Second, the Supreme Court found that the U.K. Court’s general civil procedural powers, which are contained in the Civil Procedural Rules, did not convey on the Court of Appeal the power to order security in these circumstances. The reason being that the conditions for the recognition and enforcement of arbitral awards set out in Article V (on which section 103(2) and (3) of the Act are based) and Article VI (on which section 103(5) of the Act is based) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) constituted a complete code intended “to establish a common international approach“. It could therefore not be superseded by powers only existing in national procedural law.
The Supreme Court emphasised that the New York Convention aimed to find a balancing of interests between the parties’ rights to enforce or challenge an award. In light of this, it must have been deliberately intended that the right of one of the parties to receive the decision “of a properly arguable challenge” under Article V of the New York Convention (section 103 of the Act) could not be made dependant on the provision of security. Otherwise, the New York Convention would have expressly provided for this possibility.
The Supreme Court therefore ordered NNPC’s public policy challenge to be remitted to the Commercial Court without the requirement to provide the additional security. It did not release the pre-existing security ordered under section 103(5).
At the end of the day, two major takeaways should be highlighted.
First, the Supreme Court highlighted the fact that U.K. courts have an express power to make an order for security when adjourning an action for enforcement only in the precise circumstances in which a decision on the setting aside of the arbitral award is pending in the courts of the seat of arbitration.
Second, the Supreme Court emphasised that Articles V and VI of the New York Convention constitute a code intended “to establish a common international approach“.