Romy Welch

Romy Welch

Trainee Solicitor

More from Romy

10 April 2017

Supreme Court rules that challenge to enforcement of foreign arbitral award cannot be conditional on payment of security

In IPCO (Nigeria) Ltd v Nigeria National Petroleum Corp [2017] UKSC 16, the Supreme Court held that the Court of Appeal had been incorrect to require the appellant to provide security of $100 million under section 103 of the Arbitration Act 1996 in respect of its challenge to enforcement in the English courts of a Nigerian arbitral award which had been obtained against it.  

The Supreme Court found that security can only be ordered where an application for recognition and enforcement of a foreign arbitral award is being adjourned due to challenges to the award in the courts of the country in, or under the law of which, it was made.  The English courts do not have power to order security where the challenge is to the enforcement proceedings themselves.  

The journey from Nigerian arbitration to the UK Supreme Court

In 1994, IPCO (Nigeria) Limited ("IPCO") and Nigerian National Petroleum Corporation ("NNPC") entered into a contract for the creation of a new petroleum plant.  In 2004, a Nigerian arbitral tribunal made an award of "$152,195,971 plus Naira 5m plus interest at 14% per annum" in IPCO's favour.  NNPC appealed to the Nigerian courts claiming there were non-fraudulent reasons why the award should not have been made. 

IPCO then commenced an action in the English courts to enforce the arbitration award under the New York Convention 1938.  The enforcement action was adjourned under section 103(5) of the Arbitration Act 1996, pending the outcome of NNPC's appeal in the Nigerian proceedings.  Section 103(5) gives the court power to adjourn recognition and enforcement of an arbitral award where an application has been made to set aside or suspend the award in the jurisdiction where it was originally made.  Where the court has power to adjourn enforcement proceedings under section 103(5), it also has power to order the respondent to those proceedings to provide security for all or any part of the sums awarded by the arbitrators.  Here, the court made the adjournment conditional on payment of $50 million in security by NNPC.  However, substantial delays in the Nigerian courts meant that another adjournment was ordered in 2008 and further security was to be provided by NNPC.  

The situation changed in 2009 when NNPC raised allegations of fraud against IPCO in the Nigerian proceedings.  In consequence of this, the next enforcement application made by IPCO was rejected under section 103(3) of the 1996 Act (which permits the court to refuse recognition or enforcement of an award if to do so would be contrary to public policy), on the basis that it would be contrary to public policy to allow IPCO to benefit from a potential fraud. 

IPCO appealed against the rejection and the Court of Appeal partially allowed the appeal.  It determined that lengthy delays in the Nigerian proceedings justified the English courts proceeding with the enforcement action, and remitted to the English Commercial Court the question of whether the allegations of fraud amounted to a public policy ground for refusing enforcement under section 103(3).  The Court of Appeal also ordered that the enforcement be adjourned until that issue was decided and required NNPC to provide an additional $100 million in security.  NNPC appealed against the order for security.

The Supreme Court

The Supreme Court allowed the appeal and concluded that there were a number of areas where the Court of Appeal had incorrectly applied section 103.

The court noted that only section 103(5) grants the courts power to order security.  For the purposes of section 103(5), an "adjournment" means a pause on the English court's decision on enforcement while an application for setting aside or suspension of the award is pending before the court of the country in, or under the law of which, the award was made.  The previous adjournments had been as a result of NNPC's appeal against the award in Nigeria and so fell within section 103(5), and the requirement for NNPC to give security was valid. 

However, in this instance the Court of Appeal had not adjourned the proceedings within the meaning of section 103(5).  It had decided that the public policy issue should be heard by the English Commercial Court and should no longer await the outcome of the Nigerian proceedings.  It had adjourned the enforcement action pending the decision by the Commercial Court, not the appeal in the Nigerian proceedings.  The situation fell within section 103(3) rather than section 103(5), and the order of security as a condition was outside the court's remit because there was no power to order security under section 103(3).  Lord Mance summarised this as "no adjournment under section 103(5) onto which to hang, as the price, a requirement of further security".

The Supreme Court also referred to the case of Dardana Ltd v Yukos Oil Co (No 1) [2002] EWCA Civ 543, where the Court of Appeal had made the same error.  As Lord Mance observed: "Security pending the outcome of foreign proceedings is, in effect, the price of an adjournment which an award debtor is seeking, not to be imposed on an award debtor who is resisting enforcement on properly arguable grounds".

The alternative argument suggested by IPCO was that Rule 3.1(3) of the Civil Procedure Rules gave the courts general powers to order conditions, and such powers were unaffected by the Arbitration Act 1996 and the New York Convention.  The Supreme Court rejected this argument.  It held that Articles V and VI of the Convention (which are the basis, respectively, for sections 103(3) and (5) of the 1996 Act) constituted a code "intended to establish a common international approach".  The absence of a provision permitting the ordering of security in relation to Article V was revealing.  As Lord Mance stated: "Had it been contemplated that the right to have a decision of a properly arguable challenge, on a ground mentioned in article V (domestically, section[s] 103(2) and (3)), might be made conditional upon provision of security in the amount of the award, that could and would have been said".

Comment

The Supreme Court's decision has clarified the position on when the court can require payment of security in the context of applications under section 103 of the Arbitration Act 1996.  

This ruling also provides some interesting insights on the relationship between the Arbitration Act 1996 and the New York Convention, notably how the provisions of the Convention circumscribe the English courts' power to order security.  As Lord Mance observed: "The Convention reflects a balancing of interests, with a prima facie right to enforce being countered by rights of challenge.  …its provisions were not aimed at improving award creditors’ prospects of laying hands on assets to satisfy awards".  As he acknowledged, however, the courts have other means of assisting award creditors which do not impinge on award debtors’ rights of challenge, such as disclosure and freezing orders, and in future award creditors will need to look to such alternatives as a more indirect way of the securing the award sum.