Foreign arbitral award enforcement and fraud

While the circumstances of the recent High Court decision in Contax Partners Inc BVI v Kuwait Finance House (KFH-Kuwait) & Ors are unique, this case has important wider implications. It raises the question of whether the English civil court procedure for enforcement of foreign arbitral awards is sufficiently robust to protect an innocent party against fraud.

What happened

Mr Justice Butcher made an order on 9 August 2023 entering judgment against the defendants in the terms of the purported Kuwaiti arbitration award dated 28 November 2022 (the award), which was purportedly issued by the Kuwait Chamber of Commerce and Industry Commercial Arbitration Centre (KCAC). Due to the lack of challenge from the defendants, the judgment creditor obtained interim third-party debt orders (TPDOs) in October 2023 freezing the defendants’ bank accounts. On 30 January 2024, Mr Justice Butcher heard the defendant’s application to set aside the August order challenging service and, most uniquely, claiming there was never an arbitration at all. In his judgment dated 29 February 2024, Mr Justice Butcher set aside the award having found that the alleged arbitration agreement, the arbitration, the award and the Kuwaiti judgment allegedly endorsing the award were all fabrications.

Evidence for fabrication

The evidence for fabrication was overwhelming. First, substantial parts of the award were a copy-and-paste job taken directly from Picken J’s judgment in Manoukian v Société Générale de Banque au Liban SAL [2022] EWHC 669 (QB).

Second, there appeared to be no record of the relevant arbitration or court proceedings, as confirmed by KCAC and the Kuwait Ministry of Justice.

Third, the award and the Kuwaiti judgment did not comply with the procedural requirements of the Kuwaiti law.

Fourth, the individuals named in the award as having been involved in the arbitration were not so involved.

Fifth, the Kuwaiti judgment referred to a considerable number of documents but none of them were produced in the English court.

How could a fabricated award have been recognised by the English court?

The application for leave to enforce an arbitral award was made in the usual way – on a without-notice basis and on paper. This is a straightforward process which is consistent with the spirit of arbitration and one of its main features – global enforcement. However, this simple and speedy format of applying for recognition of an arbitral award creates a possibility for an abuse of process by dishonest parties. This is because judges, understandably, are unable to scrutinise such applications extensively.

The main procedural safeguard for the defendant against the risk of such abuse is that an order rendering judgment on an arbitral award may not be enforced until: a) it has been served on the defendant; and b) the defendant has had an opportunity to apply to set it aside within the prescribed time. However, this safeguard only works if the service has been carried out properly by the judgment creditor’s legal representatives – that is, honestly and competently. If not, the defendant may not find out about the order until much later.

In this case, the claimant’s legal representative – a company called H&C Associates and registered as an alternative business structure – purportedly served the order on a London-based company within the defendants’ group. The defendants’ case was that the order was not validly served on them but no further information was provided in the judgment on this issue.

The same procedural safeguard is built into the next step of the enforcement process – getting the award money. In this case, this step involved obtaining TPDOs against large banks (Citibank UK, HSBC plc, Barclays Bank plc and JP Morgan Chase NA) where the defendants held accounts.

It is unclear from the judgment how the judgment creditor had found out about these accounts and what evidence they provided to the court. However, it may not be that difficult when defendants are large corporates with much information about them available online.

Again, the effectiveness of the safeguard hinges on the service of interim TPDOs being carried out honestly and competently. If a defendant does not receive the TPDO, they are likely to find out about it when they try to access their funds in the bank account but are unable to do so due to the funds having been frozen.

However, if, for example, an account is a deposit account or it is otherwise not in regular use, or the amount frozen only represents a part of the sum held in the account, the defendant may find out about the TPDO only after the money has already gone. By then it may be too late or, at a minimum, very expensive to get it back. In this case, it is unclear from the judgment when exactly and how the defendants found out about the TPDOs, but the judgment provides that they became aware of it as a result of the freezing of their bank accounts.

The next procedural safeguard is that if the defendant does not show up on the return date for the TPDO, the court is likely to require evidence from the judgment creditor that the debtor has been served/knows about the order. This evidence is likely to be more than just the certificate of service and can include emails sent to the lawyers for the defendants, proof of delivery of any letters, or even proof that the judgment creditor’s lawyers have checked if the bank has let its client know that the account has been frozen. Therefore, one would hope that if at this point a judge is not sure whether the debtor knows about the TPDO, they would be reluctant to allow money to be taken.

However, there is no specific procedural rule on requiring such further evidence, so it does very much depend on how robust the judge is in ensuring the debtor knows about the TPDO. There is also a risk that once someone starts fabricating documents in pursuit of a lucrative return, they are likely to go the extra mile and fabricate more evidence if needed.

Further, there is no procedural requirement for a third party to notify the debtor of the receipt of the TPDO. Obligations of a third party served with an interim TPDO are set out in Civil Procedure Rule 72.6. That rule does not state that a third party (in this case a bank) must mention the order to its customer (the judgment debtor). This means the debtor cannot rely on the absence of such a notification as another safeguard, and the absence of a procedural requirement on a third party to notify the debtor of the receipt of the TPDO is another indication that not every judge would request proof of such a notification before granting the final order.

There may be contractual safeguards where the bank’s terms of business provide that they are under an obligation to notify their customers if their accounts have been frozen. However, terms of business may vary from bank to bank, and compliance is always subject to human error and delay, especially where large banks and large corporate clients are involved with a multi-layered and multi-jurisdictional chain of communications.

If all the above safeguards fail, then it appears that the defendant’s only hope is that their bank will promptly notify them of the TPDO, once the bank has frozen the account, as a matter of good banking practice and a strong client relationship. The safety of a multi-million-dollar bank account may depend on one timely phone call from the bank manager!

It might therefore be prudent for both corporates and banks to ensure that there are appropriate mechanisms in place on both sides to provide this much-needed safety net, and promptly, as a last resort.

Conclusions

The judgment is short on factual detail, probably intentionally so, and other court documents relating to this case are not publicly available. This, therefore, leaves many questions unanswered.

There is little doubt that there should be an investigation into the circumstances of this case and who is responsible for the fabrication and the attempts to enforce the fabricated award.

The enforcement system is focused on speed and simplicity, and this case is an example of an attempt to exploit these qualities. It’s unlikely that the architects of the international arbitration system contemplated such a development.

This case also suggests that there was identity fraud involved in the fabrication of the arbitral award and possibly the entire enforcement scam. The director of the claimant company denied any knowledge of the arbitration while his identification documents, signature and some confidential company documents were relied upon in obtaining the August judgment. Findings on the issue of identity fraud were outside the scope of the February judgment setting aside the award.

If arbitral enforcement, and large-scale court proceedings generally, are now the new arena for identity fraud, this may be another new development which should be kept under close observation.

 

Neil Newing is a partner specialising in international arbitration at Signature Litigation, London