Unmasking fraud in arbitration: the Nigerian $11bn case study

A recent international arbitration, in which Nigerian taxpayers were almost defrauded of $11bn, is a graphic illustration of why English courts should retain powers to police arbitration processes in case necessary.

While light touch court supervision has long been a hallmark of arbitration, with English courts traditionally reluctant to interfere, this was a case in which correctly exercised supervisory powers, and disclosure powers in particular, were vital in uncovering the truth.

The ruling in this case, which followed several court hearings earlier in 2023, proved courts must in some instances be able to intervene to protect parties involved in arbitration processes to avoid gross injustices slipping through the net.

At the centre of the long-running dispute, which dates to 2010, was a contract involving Nigeria (through its petroleum ministry) and an offshore shell energy company called Process and Industrial Developments (P&ID), backed ultimately by two Irish businessmen.

P&ID won a contract in 2010 to run a natural gas processing plant, but the Nigerian government failed to build the pipeline that would have supplied it. The company began arbitration proceedings in 2012 alleging a breach of contract. Five years later, following arbitration hearings on liability and quantum, a panel of three arbitrators ordered Nigeria to pay $6.6bn. 

The award was among the largest publicly known sums granted against a country, and with interest over the intervening period, the award value increased to $11bn. Paying this sum would have depleted most of Nigeria’s foreign reserves and negatively affected its budget and credit rating.

In late October 2023, however, a judge overseeing a set aside application at the High Court in London ruled in favour of the West African state, noting that the awards “were obtained by fraud” and “the way in which they were procured was contrary to public policy.” Mr Justice Robin Knowles said he wanted to hear more arguments from both parties before deciding whether to dismiss the award entirely or remit the dispute to an arbitral tribunal. 

In his ruling, he found among other abuses that there was a “strong prima facie case” that one of P&ID’s ultimate beneficial owners, Michael Quinn, had given “perjured evidence to the tribunal” and that P&ID had paid bribes to a state official during the arbitration to cover up bribes it had paid to obtain the contract in the first place. 

This judgment has highlighted some concerns around the use of international arbitration in certain circumstances. As Knowles acknowledged: “the facts and circumstances of this case, which are remarkable but very real, provide an opportunity to consider whether the arbitration process, which is of outstanding importance and value in the world, needs further attention where the value involved is so large and where a state is involved.”

In his 140-page judgment, Knowles raised difficult questions about the role of arbitration in settling high-value disputes involving states, suggesting the process can be vulnerable to fraud. Simultaneously, he acknowledged that this was an extreme case. One of the key takeaways from the judge is that P&ID won its award “only by practising the most severe abuses of the arbitral process.”

According to Knowles, the case demonstrated the importance of section 68 of the Arbitration Act 1996, which stipulates that a party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings, or the award. 

He said that he hoped the case will provoke debate and reflection among the arbitration community. In an endnote, Knowles lambasted individuals who were “driven by greed and prepared to use corruption; giving no thought to what their enrichment would mean in terms of harm for others.” Those individuals included two lawyers involved in the arbitration for P&ID - a solicitor and a barrister - referring a copy of his judgment to the Solicitors Regulation Authority and the Bar Standards Board.

This raises crucial conduct and practice issues for arbitration practitioners. A spokesperson for the Federal Republic of Nigeria was far less cautious than the judge, describing the actions of P&ID as a “brazen fraud,” and the ruling as “a lesson to any party that would seek to defraud the Nigerian people for their own benefit.” Lawyers for P&ID said they are considering the steps available in the light of the judgment.

What this case demonstrates most clearly is that when all else fails in arbitrations, the national courts, in this case the English court, are the most effective backstop. Here, the English court correctly granted extensions of time to apply to set aside the award because Nigeria could not with reasonable diligence have uncovered the grounds for its set aside applications.

Furthermore, the court correctly exercised disclosure powers to help to uncover the truth. 

While disclosure is often subject to criticism for being too time-consuming and expensive, its value was shown in this case, demonstrating its continuing appeal to parties that turn to England as a forum for resolving international disputes.

By correctly circumscribing Nigeria’s applications and denying certain of its grounds advanced for setting aside the award, where appropriate, the court’s decision was not too interventionist, despite the extreme nature of this case.

Here, effective judicial intervention – including the use of disclosure powers – enabled the proper application of a successful (and now successfully evolving) statutory regime. It continues to ensure the rule of law in international arbitration and justify the continuing pre-eminence of London as an international arbitration seat. 

Longer term, this case has accentuated the need for effective compliance by both investors and states regarding state contracts. Investors should create systems and controls to prevent wrongs that can metastasise into serious irregularities that deprive them of the benefit of their investments. States, equally, should ensure effective oversight and resource allocation to prevent potential financial and reputational issues arising. 

Helen Taylor, senior legal researcher at anti-corruption group Spotlight on Corruption, said it is “difficult to overstate the importance” of the ruling “for the Nigerian people.” She went on to add that “the economic prospects of an entire country have been held hostage by a tainted arbitral award for a gas project that was built on bribes and lies.” 

Of course, commercial parties should, where preferable, always be able to contract out of national courts - with confidence and the safeguard of confidentiality - to facilitate the international commerce and FDI that helps to generate much societal prosperity and stability.
 
When, however, substantial injustice occurs as it has here, those national courts must protect the arbitration process and society by transparently rebalancing the scales. Occasionally, even pro-arbitration courts must interfere to this end. The English Court is to be lauded for doing so robustly and unhesitatingly.

Paul Kinninmont is an international arbitration partner at Freeths