Timothy Reflects (2023): Are arbitral tribunals soft targets for bad actors? – #809

This case note reflects on emerging procedural and systemic vulnerabilities of arbitration, a timely and important topic in light of the recent decision of the High Court of England and Wales in  Process & Industrial Development v Federal Republic of Nigeria, [2023] EWHC 2638 (Comm) (“P&ID v Nigeria”). In that case, Justice Robin Knowles remarked: 

“In the Arbitration the Tribunal did what it did with what it had. The English Court too saw nothing of what truly lay underneath when it first, briefly, came across the Arbitration in 2016. But the fact is that the Arbitration was a shell that got nowhere near the truth.” (Emphasis added.) 

P&ID v Nigeria, at para. 580.

The facts developed in Nigeria’s challenge would be at home in a Hollywood script, telling a tale of official corruption, fraud, incompetence, and unethical lawyering. On the evidence adduced in the challenge to two arbitral awards, the Court concluded, at para. 574, that “the Awards were obtained by fraud and the Awards were and the way in which they were procured was contrary to public policy.” This case and its powerful cautionary message are well worth a closer look. To give away the punch line, in the manner of the Court’s judgment, this article will leave the reader with more questions than answers. Yet these questions merit careful consideration now, and into the future.

Background – The contract, signed in January 2010, provided for Nigeria to supply to P&ID a quantity of wet gas for a term of 20 years; P&ID was to process the wet gas and to return about 85% of it by volume to Nigeria as lean gas for power generation. There was nothing in the contract to stipulate that Nigeria’s obligations to perform were contingent on any milestones to be performed by P&ID. Nigeria never supplied any wet gas. Nor did P&ID build any gas processing facilities.

In 2012, P&ID asserted that the state had repudiated the contract and commenced arbitration. The tribunal, comprised of three experienced arbitrators, issued an award on 17 July 2015 (the “Award on Liability”) finding that Nigeria had repudiated the contract, that the contract was terminated when P&ID accepted the repudiatory breach, and that Nigeria was liable to pay damages. 

On 31 January 2017, the tribunal, by a majority, issued its Final Award requiring Nigeria to pay P&ID US$ 6.6 billion, with interest at 7%. One tribunal member dissented. 

Nigeria challenged both awards based on a “serious irregularity” under Section 68 of the English Arbitration Act 1996. The Court concluded, at paras. 493-496 that there were “three things that bring the case within section 68(2)(g) [of the Arbitration Act 1996) […] as an ‘irregularity’”:

  1. P&ID presented to the tribunal and relied upon false evidence in the form of a witness statement – drafted by P&ID’s lead lawyer in the arbitration – of one of P&ID’s founders, explaining how the contract “came about” without mentioning that bribes had been paid to a Nigerian official in connection with it;
  2. P&ID continued to bribe that official in 2015 and 2016 to suppress from the tribunal and from Nigeria the fact that the official had been bribed when the contract came about; and
  3. P&ID received and improperly retained several highly sensitive and privileged internal legal documents produced by Nigeria between 2012 and 2017, which it retained and used to monitor Nigeria’s knowledge of the deception and the state’s strategy in the arbitration.

A call for reflection – In a classically English understatement, the Court expressed hope, at para. 582, that the extraordinary circumstances of the case may “provoke debate and reflection among the arbitration community.”

Arbitration practitioners and users should enthusiastically accept the Court’s invitation to critically consider whether the arbitration process needs, in his words, “further attention where the value involved is so large and where a state is involved.” Arbitration – like any human institution – has weaknesses that go along with its strengths. In turn, institutional legitimacy depends upon the capacity of stakeholders to evaluate good-faith criticism and to respond in kind. The lessons to be learned from the extraordinary facts of P&ID v Nigeria, as this note explores, may extend beyond disputes involving sovereign entities or high stakes.

This note is organized around the four points the Court posited for reflection: (1) inequality of arms in contracting; (2) disclosure; (3) effective party participation; and (4) transparency. In the judgment these points relate to the specific facts of the case, but they have broader resonance for dispute resolution.

Issue one – inequality of arms in contracting:

“It was a complete imbalance in the contributions of the parties that enabled the [contract] to be in the form it was. Many reading this judgment will recognise that, although in the present case bribery and corruption were behind that imbalance, it happens in other cases without bribery and corruption but simply where experience, expertise or resources are grossly unequal.” 

P&ID v Nigeria, at para. 585.

The Court found that inequality of arms in the negotiation of the contract resulted in terms that favored P&ID, as P&ID intended.

Another example of potentially problematic inequality of arms arises in the context of consumer contracts of adhesion. Last year, I wrote in a blog (Timothy’s 2022 Hot Topic – At the crossroads of class actions and arbitration – #702) about the competing policies at the intersection of commercial arbitration and consumer claims, including the practice of including arbitration agreements and class-action waivers in consumer-oriented adhesion contracts. Jurisprudence in Canada and elsewhere has developed to broadly support that practice, in line with the pro-arbitration policies expressed in international conventions and national legislation. This results in legal hurdles – if not outright barriers – to a host of claims that are not economic to assert on an individual basis.

It bears emphasis that commercial arbitration, in the traditional sense, typically involves participants of relatively equal bargaining power. Much more study is needed to understand the pressure points that are emerging as the number and complexity of disputes resolved by arbitration grows, and the sophistication of arbitration practice develops. 

Issue two – disclosure:

“It has been disclosure or discovery of documents that has enabled the truth to be reached in this case. I highlight the disclosure orders made by courts in this and other jurisdictions. The disclosure secured from P&ID and third parties through court processes has been remarkable and crucial. […] In all the recent debates about where disclosure or discovery matters, this case stands a strong example for the answer that it does.” 

P&ID v Nigeria, at para. 586.

The Chairman of the P&ID tribunal, Lord Hoffman, has commented on the “great miasma of dishonesty” that can cloud cases, positioning a tribunal to decide while in the dark as to the truth. The scope of disclosure has long been a bugaboo in international arbitration, where lawyers and parties from different legal traditions and cultures interact and often conflict. The general thrust in the arbitration community often seems to be that disclosure in common law systems – most notoriously as practiced in US courts – is expensive, burdensome, overly broad, and not often worth it.

In that light, the robust defence of disclosure by the Court in P&ID v Nigeria should encourage a fresh look at how it is managed in arbitration, especially in high-stakes cases. The role of obligatory disclosure in getting to the truth sometimes gets second billing in the debate about costs, burden, and proportionality.

Of course, those factors are and will continue to be important. But, how might the arbitration community reconsider disclosure? For one, technology has the potential to bring down the cost and burden associated with retaining, reviewing, and producing documents. Another possibility lies in the often available, but infrequently utilized, power of an arbitral tribunal to order disclosure on its own initiative. It is true that arbitral tribunals may shy away from that step in order to avoid the appearance of partiality. But in the right case, it might assist arbitrators to protect the integrity of the process, reach closer to the truth in an award, or even to avoid becoming complicit in a criminal scheme.

There is also the issue of whether courts may assist a tribunal, but court orders in a post-award challenge may come too late for anything to be done. The Court in P&ID v Nigeria was clear that a miscarriage of justice was narrowly avoided, but only after years of litigation and enormous cost. And the authority of courts to annul or refuse enforcement of an award due to an error of fact is likely to be limited if it is available at all. These considerations cut against the notion that disclosure or discovery does not matter.

Issue three – participation and representation:

Nigeria experienced many difficulties in presenting its case in the arbitration. The Court rejected Nigeria’s assertion of corruption on the part of one of its own lawyers in the arbitration, but noted, at para. 587, “the case has shown examples where legal representatives did not do their work to the standard needed, where experts failed to do their work, and where politicians and civil servants failed to ensure that Nigeria as a state participated properly in the Arbitration.”

A central theme emerging from the case is that adversarial procedures do not work well when one party’s participation, as the Court put it, is “compromised”. These challenges meant that “the Tribunal did not have the assistance that it was entitled to expect, and which makes the arbitration process work.” 

While this case involved a sovereign entity, these practical challenges to participation are not unique to states. With sympathy to the position of the arbitrators in the case, the Court asked, without suggesting a solution, whether the tribunal ought to have adopted a more directive, interventionist approach:

“588. But what is an arbitral tribunal to do? The Tribunal in the present case allowed time where it felt it could and applied pressure where it felt it should. Perhaps some encouragement to better engagement can be seen as well. Yet there was not a fair fight. And the Tribunal took a very traditional approach. But was the Tribunal stuck with what parties did or did not appear to bring forward? Could and should the Tribunal have been more direct and interventionist when it was so clear throughout the Arbitration that Nigeria’s lawyers were not getting instructions, or when at the quantum hearing Nigeria’s then Leading Counsel […] was failing to put necessary points to experts to test their opinion and Nigeria’s own experts (for whatever reason) had not done the work required? Should the Tribunal have taken the initiative to encourage exploration of new bounds of contract law and the law of damages that may today be required where major long term contracts are involved?”

It is difficult not to be sympathetic to the tribunal’s predicament, particularly with the benefit of hindsight. There are no obvious answers to the Court’s questions, and the tribunal in P&ID was exceptionally experienced. But simply raising the question provides an important insight for arbitration professionals and participants. As the geographic range and sophistication of participants widens, other arbitral tribunals – including ones faced with far lower stakes – will certainly find themselves in a similar situation.

Ineffective participation by a party is even thornier for tribunals than non-participation. In the latter case, the tribunal’s duty to render an enforceable award provides a basis for taking a more assertive role in testing the participating parties’ claims. But in the former, taking steps beyond what the P&ID tribunal did may well precipitate a challenge to the tribunal or to any award it renders. And the Court in P&ID v Nigeria acknowledged, at para. 591, the blunt correctness of the submission by counsel for P&ID that s. 68 of the Arbitration Act 1996 does not provide a remedy “if you instruct an honest lawyer who makes a mess of it or doesn’t take an available point.

Context matters, too – P&ID v Nigeria involved a state and vast sums of public money. It may well be that in commercial arbitration, a party is stuck with the quality of representation it chooses or can afford. But as an ever broader range of participants and circumstances find their way into arbitration, this is an important point for reflection, even if there are no easy answers.

Issue four – transparency:

The Court in P&ID criticized the confidentiality of the arbitration, observing at para. 589 that “open process allows the chance for the public and press to call out what is not right.” He pointed to the role of transparency in allowing scrutiny of the process, as well as the performance of the lawyers, consultants, and – where a state is involved – public officials entrusted with carriage of a dispute. For example, in the challenge proceeding, Nigeria alleged that one of its lead advocates had deliberately underperformed in the arbitration, and that P&ID had concluded the underlying contract not with the intention to perform, but “as a device to get an award or settlement.” Impliedly, public scrutiny of the arbitration process might have led to the ventilation of these concerns earlier, possibly altering the tribunal’s conclusions. The Court ultimately rejected both allegations, but gravely observed, at para. 590, that “the case shows the danger of the latter happening.”

The possibility that a bad actor could attempt to subvert the private arbitration process for an improper purpose is very real. Corruption, money laundering, sanctions evasion, and terrorism finance, among other illegal acts, are serious international problems. And that goes beyond disputes involving sovereign states. There is a risk that confidentiality of the arbitration process may contribute to the concealment of illegality. In recent years this has become a focal point of the arbitration literature. And, in 2019, reacting to a perceived increase in allegations – or suspicions – of corruption and other illegal acts in both investor-state and commercial arbitration, the Basel Institute on Governance published a toolkit for arbitrators facing these issues.

There is no way to know how the P&ID v Nigeria arbitration would have been different, or if the underlying corruption would have been detected earlier, if it had proceeded in public. Confidentiality can be a legitimate and important means of serving the interests of parties proceeding in good faith. But stakeholders in the international arbitration community would be wise to take up the Court’s invitation to think critically about the role, scope, and risks of confidentiality.

Conclusion – In the end, there are important questions, but few clear answers. The Court’s judgment in P&ID v Nigeria highlights the institutional weaknesses of a private adversarial system. That system relies on both the skill and resourcefulness of parties and their counsel, but also their ethics. Any system will have vulnerabilities, and it is helpful to re-examine what backstops exist to prevent the miscarriage of justice. Perhaps one of the most difficult lessons of this case is that the challenges the Court observed happened even with an extraordinarily experienced and robust tribunal. The Court acknowledged the risks in a sobering passage at para. 581:
“Policy, worldwide, properly limits challenges to arbitration awards. In the present case a challenge has been available and, in my judgment, has prevailed. But I end the case acutely conscious of how readily the outcome could have been different, and of the enormous resources ultimately required from Nigeria as the successful party to make good its challenge. I highlight the possible consequences if [P&ID’s lead counsel in the arbitration] haddrafted [a key witness’s] witness statement a little more cautiously and if P&ID had not retained Nigeria’s Internal Legal Documents during the Arbitration.”