Section 68 challenge rejected as no causal link between fraud and award (Commercial Court)

Practical Law UK Legal Update Case Report 0-517-6683 (Approx. 6 pages)

Section 68 challenge rejected as no causal link between fraud and award (Commercial Court)

by PLC Arbitration

Background

Challenging an award under section 68

A party to an arbitration may challenge an award under section 68 of the Arbitration Act 1996 (AA 1996) on the basis of any of the types of "serious irregularity" specified in section 68(2). One ground is "the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy" (section 68(2)(g)).

In Double K Oil Products 1996 Ltd v Neste Oil Oyj [2009] EWHC 3380 (Comm), Blair J summarised the applicable legal principles on a section 68 application as follows:

It is not enough to show that one party inadvertently misled the other, however carelessly (Cuflet Chartering v Carousel Shipping Co Ltd [2000] EWHC 200 (Comm)).
It will normally be necessary to satisfy the court that some form of reprehensible or unconscionable conduct has contributed in a substantial way to the obtaining of the award. Therefore, a challenge to an award cannot be made on grounds of:
- an innocent failure to give proper disclosure (Profilati Italia SRL v PaineWebber Inc and another [2001] EWHC 24 (Comm)); or
- the innocent production of false evidence (Elektrim SA v Vivendi Universal SA and others Rev 1 [2007] EWHC 11 (Comm), discussed in Legal update, Failure to disclose document not a serious irregularity).
The applicant must show that the new evidence relied on to demonstrate the fraud was unavailable at the time of the arbitration and would have had an important influence on the result (Westacre Investments Inc v Jugoimport-SDPR Holding Co Ltd [1999] 2 Lloyd's Rep 65).

For further discussion of section 68, see Practice note, Challenging the award under section 68 of the English Arbitration Act 1996: serious irregularity.

Applying for an extension of time to challenge an award

Any application under section 68 of the AA 1996 must be made within 28 days of the award (section 70(3)). The leading case on extensions of time in the context of arbitration claims is Kalmneft v Glencore International AG and another [2001] EWHC QB 461, in which Colman J identified seven relevant criteria:

The length of delay.
Whether in permitting the time limit to expire and the subsequent delay to occur, the party was acting reasonably in all the circumstances.
Whether the respondent to the application caused or contributed to the delay.
Whether that respondent would suffer irremediable prejudice by reason of the delay, in addition to mere loss of time if the application proceeded.
Whether the arbitration had continued during the period of delay and, if so, what impact a determination of the application may have on the progress of the arbitration or the costs incurred.
The strength of the application.
Whether, in the broadest sense, it would be unfair to the applicant to deny him the opportunity to have the application determined.

Facts

The underlying dispute between the parties arose out of a licence agreement for the design by the defendant (GTT) of a containment system for a liquified natural gas carrier for the claimant (CAT). The agreement was governed by French law and provided for International Chamber of Commerce (ICC) arbitration in London. Disputes arose and CAT commenced ICC arbitration proceedings, alleging that there were design faults in the containment system. During the arbitration, CAT sought disclosure by GTT of the results of various laboratory tests that it had carried out. GTT supplied certain test results, but not all.

The arbitrators dismissed all of CAT's claims, finding that CAT could not establish "gross fault" as a matter of French law. Further, even if CAT had been able to establish gross fault, it could not satisfy the test imposed by French law concerning the circumstances in which a licensor will be liable to a licensee for a design fault or an economic fault.

A few weeks after the award was published, CAT received a "tip-off" from a former GTT employee, suggesting that CAT had been the victim of a fraud in relation to the tests carried by GTT. CAT applied to set aside the award under section 68(2)(g) of the AA 1996. Further investigation revealed that, although there were discrepancies in the test results previously provided to CAT, there had been no fraud. However, towards the end of 2010, an anonymous "whistleblower" provided CAT with an internal GTT e-mail that had an attachment referring to the results of unfavourable tests (B0 tests), which had not been disclosed to CAT in the arbitration.

CAT amended its section 68 application so that the central allegation was that GTT had deliberately concealed the B0 test results from the tribunal and CAT. Specifically, CAT alleged that:

GTT provided deliberately misleading responses to disclosure requests, which did not disclose the B0 tests.
GTT's head of research and development gave deliberately misleading evidence to the tribunal.

CAT argued that, if the tribunal had been aware of the true position, this would have seriously undermined GTT's witnesses' credibility and led to the question why GTT had engaged in a cover-up, if there was no design flaw. On that basis, the court should set aside the award and remit it to the arbitrators.

Decision

Flaux J dismissed the application to set aside the award under section 68(2)(g) of the AA 1996.

Extension of time

Since CAT's application to set aside the award was made almost six months after the award was published, it required an extension of time under section 80(5) of the AA 1996 and CPR 62.9. Considering the factors set out in Kalmneft v Glencore, Flaux J granted the extension of time. Although there was delay, CAT acted reasonably, as it was responsible to investigate the fraud before issuing its application. Furthermore, the importance and significance of the allegations raised meant that he would be reluctant to shut out CAT on grounds of delay.

Challenge to the award

Turning to the substantive section 68 application, Flaux J highlighted five aspects of the applicable legal principles summarised in Double K Oil as meriting expansion and emphasis for the purposes of this case. These were:

As recognised by the Departmental Advisory Committee on Arbitration Law, section 68 is "designed as a longstop only available in extreme cases" (Departmental advisory committee on arbitration law: report on the Arbitration Bill (28 February 1996), paragraph 280).
Fraud (that is, dishonest, reprehensible or unconscionable conduct) must be distinctly pleaded and proved, to a heightened burden of proof.
The applicant for relief under section 68(2)(g) must establish that the award itself was obtained by fraud. For example, there must be a causative link between the deliberate concealment of a document and the decision in the award in favour of the other, successful party (Elektrim). This means that there must have been fraud in the arbitration itself that led to the obtaining of the award. In this case, CAT had to establish that GTT deliberately and dishonestly failed to disclose the B0 results in the arbitration and made submissions or called evidence that deliberately and dishonestly continued that concealment and misled the tribunal.
The applicant must show that it could not, with reasonable diligence, have obtained or produced evidence of the fraud at the arbitration hearing. It must then show that the evidence is "so material that its production [at trial] would probably have affected the result and (when the fraud consists of perjury) is so strong that it would reasonably be expected to be decisive at the re-hearing and if unanswered must have that result." (Westacre Investments, concerning setting aside judgments obtained by fraud and applicable by analogy to applications to set aside awards obtained by fraud.
The test cannot be so high as that the evidence would have affected the result (not least because the court would then be usurping the function of the arbitrators in the event that the matter was remitted to them). However, the statutory requirement that the applicant show that the serious irregularity has caused substantial injustice means that the applicant must show that the evidence in question would have had an important influence on the result.

Therefore, to succeed on its section 68(2)(g) application in this case, CAT had to show:

Evidence of fraud in the arbitration itself.
The evidence could not, with due diligence, have been obtained during the course of the hearing.
The evidence would probably have affected the result of the arbitration.

Flaux J noted that the arbitration was conducted by French parties, represented by French lawyers, in accordance with civil law arbitration procedure. In particular, the rules for disclosure of documents were based on the International Bar Association Rules on the Taking of Evidence in International Arbitration. As such, there was no duty to disclose relevant documents as there may be in a London arbitration conducted in accordance with English procedure. Therefore, the court must be careful not to import English law concepts of the duty of disclosure into its assessment of GTT's conduct and the serious allegations of concealment made by CAT.

Flaux J rejected CAT's allegation that there was fraud by GTT in the disclosure exercise. However, he found that the head of GTT's research and development department had deliberately and dishonestly concealed the B0 tests and results from the tribunal. This went beyond a witness for one of the parties to an arbitration lying to the tribunal and committing perjury (the scenario that Aikens J in Elektrim considered would be insufficient to establish that the award was obtained by fraud). Rather, this was serious deception of the tribunal by a person who had been deputed to present GTT's technical case to the tribunal. As such, it was a fraud by GTT as a party to the arbitration for the purposes of section 68(2)(g) of the AA 1996.

However, the judge concluded that CAT could not show that disclosure of the true position to the tribunal would have had an important influence on or would probably have affected the result of the arbitration. This was because the tribunal had decided that, even if it had accepted CAT's argument that there was a design fault, GTT was not liable under French law. Consequently, CAT could not show that the award was obtained by fraud or that it had suffered a substantial injustice.

Comment

The decision is striking because the judge made an unequivocal finding of fraud by a principal witness in the arbitration, that amounted to a fraud by a party to the arbitration, but nevertheless rejected the challenge to the award. As such, it highlights the strict statutory test for challenges under section 68 of the AA 1996, and the need for a causative link between the fraud and the obtaining of the award.

Flaux J's judgment provides a useful summary of the principles that apply to challenges based on fraud in obtaining the award, in particular. Given the tribunal's finding that, as a matter of French law, CAT's claim would have failed even if it had established a design flaw, it is difficult to see how Flaux J could have found that the fraud would probably have affected the result of the arbitration.

It is also worth noting, in the context of international arbitration, the care that Flaux J took not to bring English rules of procedure (and disclosure, in particular) into his assessment of GTT's conduct. He recognised that, although the seat of arbitration was London, the parties and their lawyers were French and the arbitration was conducted under "civil law arbitration procedure".

Case

Chantiers De l'Atlantique SA v Gaztransport et Technigaz SAS [2011] EWHC 3383 (Comm) (20 December 2011).

Section 68 challenge rejected as no causal link between fraud and award (Commercial Court) | Practical Law