Fraudulent Arbitral Awards – Anatolie Stati and others v Republic of Kazakhstan [2017] EWHC 1348 (Comm)

Fraudulent Arbitral Awards - Anatolie Stati and others v Republic of Kazakhstan [2017] EWHC 1348 (Comm)

1. Summary

Could permission to set aside the English court’s permission to enforce a Swedish arbitral award allegedly obtained by fraud be granted in circumstances where the Swedish courts had dismissed an application to set aside the award? In Anatolie Stati and others v Republic of Kazakhstan [2017] EWHC 1348 (Comm), the English court held that the Respondent had established a sufficient case that an arbitral award had been obtained by the fraud of the Claimants and neither the Swedish judgment nor a US judgment refusing the Respondent permission to amend its defence to enforcement in the US amounted to an issue estoppel binding the English court. As a result, permission was granted for the fraud issue to proceed to trial in England.

2. Background to the arbitration

The arbitration arose from a dispute over a damages relating to the value of a liquefied petroleum gas plant (the “LPG Plant“). The arbitration was commenced in 2013 pursuant to the Energy Charter Treaty and seated in Sweden. The Claimants were ultimately awarded over $500m in damages, an amount which included damages assessed by reference to the value of the LPG Plant. During the arbitration both parties disputed the basis of the valuation of the LPG Plant. The Claimants premised their valuation on a number of indicative bids for the LPG Plant’s acquisition in 2008; one of which was an indicative bid made by KMG (the Kazakh state owned oil/gas company) for $199m (the “KMG Bid“). On the other hand, the Respondent believed the project behind the LPG Plant had failed and therefore it should have been valued as scrap. The arbitral tribunal ultimately decided to value the LPG Plant on the basis of the KMG Bid and awarded damages of $199m in respect of the LPG Plant.

Permission was sought and granted to enforce the award in England and the United States in 2014. In US enforcement proceedings in mid-2015, the Respondent was successful in subpoenaing a third party for the disclosure of a number of key documents, amongst which were contracts for the sale of equipment which the Respondent claimed revealed that the KMG Bid was inflated and not representative of the LPG Plant’s true value.

The Respondent sought to amend its applications to the Swedish and English courts in order to refer to the alleged fraud. The Respondent also applied to amend its defence to enforcement in the US to refer to the fraud. In the US, permission for the amendment to the Respondent’s defence was refused, whilst in Sweden the court allowed the amendment, but refused to set aside the application on the grounds of fraud on the basis that Swedish public policy did not require the award to be set aside.

The Respondent applied the English court to amend its defence and to set aside the permission that had been granted to enforce the award in England on the grounds of public policy, in reliance on the alleged fraud.

3. Decision

In analysing the impact of the Respondent’s unsuccessful applications in the US and Sweden, the English court rejected an argument that the Respondent was issue estopped regarding the fraud. Neither the US nor the Swedish courts had determined the issue as to whether the alleged fraud had in fact occurred. The US court’s decision to refuse permission for the Respondent to amend its defence did not involve any decision as to whether the tribunal had been misled and the Swedish court had considered Swedish public policy, which is materially different to English public policy. The Respondent was therefore entitled to rely on the evidence obtained from the documents.

Under English law, allegations that an arbitral award was obtained by fraud are generally permitted to trial when both (a) the evidence establishing the fraud was not available to the party alleging the fraud at the time of the initial arbitration; and (b) there is a prima facie case of fraud sufficient to overcome the extreme caution of the court. The court held that there was a sufficiently strong prima facie case that the documents had been fraudulently withheld from the arbitration, which materially affected its outcome, and therefore the issue should be allowed to proceed to trial.

4. Comment

The decision shows the difficulty in establishing issue estoppel in the context of enforcing an arbitral award in multiple jurisdictions, particularly where that issue estoppel arises on public policy grounds, which are likely to vary from jurisdiction to jurisdiction.

by Baker McKenzie – Richard Molesworth and Tony Hewitt
Lexology

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