Security in Enforcement Proceedings: Developments from the United Kingdom in IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation (IPCO)

Introduction

The Supreme Court of the United Kingdom (the Court) recently handed down a decision concerning the lack of availability of the enforcing party (i.e. the award creditor) to seek security in circumstances where the award debtor challenges enforcement of award on public policy grounds (or other definitive grounds such as lack of jurisdiction) as distinct from grounds to delay the enforcement proceedings pending proceedings at the seat. In a unanimous decision delivered by Lord Mance, the Court has allowed an appeal against the requirement for additional security as a condition to challenging the enforcement of this foreign arbitral award. In what is the culmination of an extensive history of enforcement proceedings running alongside local proceedings in the Nigerian court system, the issue before the Court was whether the Nigerian National Petroleum Corporation (NNPC) should have to put up additional security in the United Kingdom (UK) enforcement proceedings for the Nigerian arbitration award. That is, should NNPC’s challenge to the enforcement of the award itself be made conditional on its payment of additional security?

On this basis it provides useful guidance for interpreting the New York Convention in national courts, particularly on the issue of whether security can be required as collateral for a substantive determination on the enforcement of an award.

Background

By way of background, IPCO entered into a contract in 1994 to design and construct a petroleum export terminal for NNPC. This agreement was subject to Nigerian law and contained provision for disputes to be arbitrated in accordance with the Nigerian Arbitration and Conciliation Act 1988.[1]

Following a dispute arising and subsequent arbitration, an award was made on 28 October 2004 for US$152,195,971 plus 5,000,000 Nigerian Naira (plus 14% interest per annum).[2] NNPC challenged the award in the Nigerian Federal High Court firstly for non-fraud reasons, and then from 2009 on the basis of fraud. There are still challenges to the award within the Nigerian court system on these bases.  

Enforcement Proceeding History

The enforcement proceedings are protracted and complex, the key aspects being as follows.

Proceedings for enforcement were commenced in the United Kingdom shortly after the award was made. Following an ex parte order for enforcement made on 29 November 2004, NNPC made an application for the award to be set aside pursuant to s 103(2)(f), and 103(3) of the Arbitration Act 1996 (UK) (the Act). In the alternative, for the enforcement of the award to be adjourned pursuant to s 103(5). Section 103(5) states that:

Where an application for the setting aside or suspension of the award has been made to such a competent authority as is mentioned in subsection (2)(f), the court before which the award is sought to be relied upon may, if it considers it proper, adjourn the decision on the recognition or enforcement of the award.

It may also on the application of the party claiming recognition or enforcement of the award order the other party to give suitable security.

The crux of this provision for the purpose of this decision is when such security is appropriate in enforcement proceedings.

Under s 103(2) of the Act, enforcement of an award may be refused if the party against whom it is invoked proves that the award is not yet binding, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made.[3] Section 103(3) provides that enforcement can be refused where the matter is not capable of settlement by arbitration, or where it would be contrary to public policy to enforce the award.[4]  These provisions give effect to Articles V and VI respectively of the New York Convention.

On 27 April 2005, the High Court adjourned the enforcement proceedings while the non-fraud challenges were heard in Nigeria, with this being conditional on the payment of US$13M to IPCO and security of US$50M pursuant to clause 103(5) of the Arbitration Act 1996.[5]  

Following unanticipated delays to the Nigerian proceedings, IPCO challenged that decision with a further enforcement application on 17 July 2007. On 17 April 2008, IPCO was successful in obtaining orders for proceedings to be stayed pending appeal, with an additional US$30M security to be provided. The Court utilised s 103(5) to adjourn any decision regarding enforcement of the balance of the award. This was further stayed on appeal pending a petition to appeal to the House of Lords.[6]

NNPC successfully sought to adjourn the 17 April 2008 order on the ground it had new evidence of fraud to be presented in the Nigerian proceedings. This enabled NNPC to apply for a further adjournment of enforcement on the basis of fraud, with NNPC maintaining the security of US$80M as previously ordered.[7]

NNPC sought to amend its pleadings in the Nigerian proceedings on 27 March 2009 to introduce the fraud challenge. This led to a consent order being obtained in the UK enforcement proceedings on 17 June 2009, maintaining the US$80M in security already ordered and adjourning the enforcement proceedings under s 103(5) of the Arbitration Act 1996.[8]

The Nigerian proceedings incurred additional delay, and on 24 July 2012 IPCO again applied to enforce the arbitral award in the United Kingdom on the basis that there were sufficient changed circumstances to justify this. IPCO was unsuccessful, and the security was continued.[9]

Decision of the Court of Appeal

On appeal, the Court of Appeal held that there had been a material change in circumstances, and to avoid incurring additional delay it cut ties with the Nigerian proceedings.[10] The proceeding was remitted to the Commercial Court for determination upon the provision of security to the sum of an additional US$100M (in addition to US$80M it had already provided).[11] It is also worth noting that the parties subsequently agreed that both fraud and non-fraud issues should be determined in the United Kingdom enforcement proceedings.

The Court of Appeal had set out its initial conclusions in a draft circulated on 4 September 2015, and the order made on 10 November 2015 did not appear to reflect this. NNPC made an exceptional request to the Court to reconsider its position based on the position that the order for security was made without jurisdiction or was wrong in principle or manifestly wrong pursuant to s 103(3) which allows for the refusal of enforcement definitively on grounds of public policy. For example if the contract is tainted with illegality or corruption then it may deal with a dispute that is not capable of settlement by arbitration. The Court rejected the jurisdictional argument, but did reconsider the quantum of security and reduced this to US$100M.[12] Ultimately the order made by the Court was for the fraud issue and its impact on the enforcement of the award to be determined in the UK, not the Nigerian, proceedings. Further, it decided that the decision on the fraud issue was conditional on the payment of additional security, failing which the Court gave leave for the award to be enforced without any decision made on the fraud issue. If such security was provided, the order provided that ‘any further enforcement of the award should be “adjourned” under section 103(5) pending decision of the fraud issue.’[13]

Decision of the Supreme Court

NNPC appealed to the Supreme Court contending that the Court of Appeal had made the order for security without jurisdiction, or that it was wrong in principle, or was illegitimate as NNPC had a good prima facie case of fraud entitling it to resist enforcement of the whole award.[14] The interpretation and application of s 103 was the fulcrum for the Court in making this decision.

The Court’s decision was in two parts, and required it to determine if the Court of Appeal order for security was justified pursuant to s 103(5) of the Act, and also whether it was justified according to the UK procedural rules (namely s 3.1(3) and ss 66 through 70 of the Civil Procedure Rules).[15]  

The Court allowed the appeal, and held that the Court of Appeal made the order for security without the jurisdiction to do so:

Nothing in section 103(2) or (3) (or in the underlying provisions of article V of the New York Convention) provides that an enforcing court may make the decision of an issue raised under either subsection conditional upon the provision of security in respect of the award. In this respect, there is a marked contrast with section 103(5), which specifically provides that security may be ordered where there is an adjournment within its terms.[16]

The Court found error in the Court of Appeal’s order that the enforcing court’s decision on the issued raised by an award debtor could be made conditional on the provision of security for the award, and that this was not supported in ss 103(2) or (3) of the Act or the New York Convention.[17]   

The Court also found error in the view that the enforcing court should decide the fraud issue as involving an ‘adjournment’ of the decision: [18]

Section 103(5) concerns the situation where an enforcing court adjourns its decision on enforcement under section 103(2) or (3), 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. This was the situation when orders were made by Gross J on 12 April 2005, by Flaux J on 16 December 2008 and by consent on 17 June 2009. But it ceased to be the situation for the future, once the Court of Appeal held that the issue whether fraud was an answer to enforcement should no longer await the outcome of the Nigerian proceedings, but should be decided by the English courts. Although the literal trigger to the application of section 103(5) is that “an application … has been made to” the courts of the country where, or under the law of which, the award was made, the adjournment which it contemplates is pending the outcome of that application. Once it is held that there should be no such further adjournment, there is no basis for ordering further security under section 103(5).[19]

As the Court of Appeal had made a decision as to whether the fraud was an answer to enforcement, and there would be no further adjournment pending a decision in the Nigerian courts, there was no basis for ordering the security under s 103(5).[20] Further, that:  

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.[21]

The Court drew heavily on the decision in Dardana Limited v Yukos Oil Co (Dardana v Yukos),[22] noting that the power to order security under s 103(5) was limited to circumstances in connection with an adjournment[23] and that s 103(3) provided an alternative arguable ground for enforcement, namely where the award is not capable of settlement by arbitration or if it would be contrary to public policy to recognise or enforce the award. As established by the Court, this test could be applied and established by the UK Courts despite the Nigerian proceedings.

Lessons for Australia

This case will inform Australia’s interpretation of s 8(8) of the International Arbitration Act 1974 (Cth) (the IAA). This section mirrors that in s 103(3) of the Act and Article VI of the New York Convention, so the precedent in IPCO v NNPC will provide helpful guidance for similar enforcement proceedings that arise in Australian courts.

While the specific issue raised in IPCO v NNPC has not yet been raised in an Australian enforcement decision, there have been decisions looking at the tangential issue of what constitutes suitable security for the purpose of this provision. In ESCO Corporation v Bradken Resources Pty Ltd [2011] FCA 905 (ESCO). The Federal Court of Australia (FCA) held that s 8(8) of the IAA provided the Court with wide discretion to adjourn an enforcement proceeding and the power to order suitable security if the party seeking enforcement of the award requested it. Often, as was the case in both ESCO and in IPCO , the parties are unable to agree upon the terms of such security and the crucial question therefore become what is suitable security? The Australian court in ESCO states that the answer to this question will depend on the circumstances under consideration in that case, including the quantum of the security, the type of security and the terms and conditions upon which the security is to be provided, including the circumstances in which it might be called upon the enforcing party.[24]

The FCA held that relevant factors when ordering security include the subject matter of the award, the history of the parties’ dealings with each other since the making of the award, the enforcing party’s prospects of enforcing the award and the potential for the party against whom enforcement is sought to resist enforcement by applying to suspend or set aside the award in the jurisdiction where it was made, as the case may be.[25] Further, the term suitable attracts a wide range of discretionary factors. Such discretion, as with the discretion to adjourn the enforcement proceedings, must be exercised by having regard to the object of the IAA and the rationale underlying the Convention.[26]

On this basis, s 8(8) of the IAA should be looked at within the context and alongside the IAA as a whole, Section 8(7), which is the equivalent of the UK section 103(3) of the Act discussed above, would need to be another factor analysed within this context. Given that direction in this area has previously been taken from the UK jurisprudence, it may be inferred as highly probable that an Australian court would apply the most recent IPCO v NNPC decision in this context. This would ensure, in an Australian enforcement proceeding, that where there are competing arguments for adjournment of the enforcement under s 8(8) of the IAA, and refusal of the enforcement under s 7(b) (which provides for a refusal of enforcement on public policy grounds), that security could not be given under s 8(8) or made conditional on the ability to apply to refuse enforcement under s 7(b). This is because when a court is faced with both questions simultaneously (under s 8(8) and s 7(b)), instead of adjourning the decision and providing security it would have to determine the question of whether to enforce the award would contravene public policy. Further, the court answering this question should not be made conditional on security (or more security) being provided by the award debtor. In IPCO, as soon as the UK Court decided that the fraud issue should be decided in that jurisdiction in accordance with s 103(3) of their Act, no such adjournment or basis for security existed. 

Although ESCO did not deal with public policy issues, it did cite UK precedent as the leading authority on the approach to be taken by the courts when dealing with an adjournment application, specifically citing Soleh Boneh International Ltd v Government of the Republic of Uganda (Soleh Boneh).[27] In Soleh Boneh, Staughton LJ held that the enforcing court should examine for itself the strength of the arguments in the foreign jurisdiction for setting aside or suspending the award.  If those arguments are strong, an adjournment will be granted, most likely without security. If those arguments are weak, then an adjournment may be refused or granted upon terms that substantial security be provided.

Further, the FCA also referred to Dardana Ltd v Yukos Oil Co[28] and the earlier decision in IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation[29] which held that there is wide discretion in applying the question of security (echoing article VI of the New York Convention) and that the considerations relevant include whether the setting aside application was brought bona fide and whether that application has a real prospect of success as well as the extent of the delay occasioned by an adjournment and any resulting prejudice. Beyond this, it depends on the circumstances of the case. It is now important to recall that at the time of the 2005 IPCO judgment, the fraud evidence had not been discovered and only non-fraud objections were evident in the Nigerian courts.

It is important that when questions arise regarding security and public policy issues that the court called to enforce or refuse enforcement look at the relevant domestic arbitration legislation (in Australia it is the IAA and in the UK it is the 1996 Act) as a whole. If there are question arising which enliven policy issues, then no adjournment or security should be allowed as enforcement should and could be refused on the basis of public policy alone.

Conclusion

This decision provides significant commentary for national courts in Convention jurisdictions on the interplay between the Convention, domestic enforcement legislation and procedural rules.

It emphases the importance of the court considering the merits of a challenge to enforcement of an award, and not allowing security to be used as a means of avoiding this occurring or as a condition before which a competent enforcement court may decide a challenge to enforcement. Perhaps this was particularly prominent in IPCO, where the decision on the fraud challenge to the enforcement of the award effectively became conditional on security being paid. Had the Court of Appeal order remained unchallenged, NNPC and its fraud challenge would have been held to ransom by the requirement for additional security to be paid.

From a public policy perspective, the rectification of this order ensures that legitimate challenges to the enforceability of arbitral awards are considered on their merits and not made arbitrarily subject to orders for security.

The decision also emphasises the importance of reading the relevant arbitration act as a whole and for the court to refrain from exercising discretion to require a party which is challenging enforcement to provide suitable security until and unless all other issues have been dealt with. This is particularly so where such issues provide in and of themselves a basis to refuse enforcement, thereby rendering the sought out adjournment (and therefore security) inapplicable.

[1] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [2] (Lord Mance).

[2] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [2] (Lord Mance).

[3] Arbitration Act 1996 (UK), s 103(2)(f) < http://www.legislation.gov.uk/ukpga/1996/23/contents> (accessed 6 March 2017)

[4] Arbitration Act 1996 (UK), s 103(3)  < http://www.legislation.gov.uk/ukpga/1996/23/contents> (accessed 6 March 2017)

 

[5] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [4] (Lord Mance).

[6] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [5] (Lord Mance).

[7] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [6] (Lord Mance).

[8] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [7] (Lord Mance).

[9] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [8] (Lord Mance).

[10] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [9] (Lord Mance).

[11] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [9] (Lord Mance).

[12] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [10] (Lord Mance).

[13] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [22] (Lord Mance).

[14] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [13] (Lord Mance).

[15] https://www.justice.gov.uk/courts/procedure-rules/civil

[16] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [24] (Lord Mance).

[17] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [23] – [24] (Lord Mance).

[18] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [25] (Lord Mance).

[19] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [25] (Lord Mance).

[20] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [25] (Lord Mance).

[21] IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16, [28] (Lord Mance).

[22] Dardana Limited v Yukos Oil Co [2002] EWCA Civ 543

[23]

[24] ESCO, 71.

[25] Id, 72.

[26] Id, 73.

[27] [1993] 2 Lloyd’s Rep 208

[28] [2002] 2 Lloyd’s Rep 326

[29] [2005] EWHC 726