Court of Appeal takes rare step of intervening in an arbitration

In the recent case of Minister of Finance v. IPIC [2019] EWCA Civ 2080 the Court of Appeal has halted the progress of arbitration proceedings whilst the High Court has the opportunity to consider related arbitration appeal proceedings, reversing the decision of the High Court to do the opposite.

The usual expectation is that the Court will favour ongoing arbitration proceedings, regardless of any other litigation processes, in which the same parties are involved, particularly where the Arbitrator has determined that they have jurisdiction and the parties have contractually agreed to have their disputes determined at arbitration.

In this decision the Court of Appeal has explained when it is appropriate to halt arbitration proceedings, so that the Court can consider related issues.

Background

The underlying dispute concerns the well-publicised problems between 1Malaysia Development Berhad, an investment fund set up by the Malaysian government, its parent company Minister of Finance (Incorporated) (both referred to here together as 1Malaysia), and two of its investors, International Petroleum Investment Company (IPIC) and Aabar Investment PJS (Aabar, and together with IPIC, the Investors).

The Investors claim that the former Prime Minister of Malaysia, Mr Najib Razak conspired with others to misappropriate in excess of US$3.5 billion from the fund, and that he has sought to conceal and prevent investigation of the conspiracy.

The original arrangement between 1Malaysia and the Investors contained a binding arbitration clause. The Investors commenced an arbitration on 13 June 2016 over failures to pay sums owed. That arbitration was compromised by a settlement deed and consent Award, the former included another binding arbitration clause.

After Mr Najib ceased to be Prime Minister 1Malaysia issued a claim seeking:

  • to set aside the consent award on the basis that the arbitral tribunal in the first arbitration did not have substantive jurisdiction to make it because, to Investors knowledge, Mr Najib lacked authority (under section 67 of the Arbitration Act 1996 (the Act)); and
  • determinations that the consent award was procured by fraud, or in a way that was contrary to public policy and should be set aside or declared non-binding (under section 68 of the Act).

Apparently in response, the investors then sought to commence an arbitration under the settlement deed arbitration clause. They alleged that there had been events of default under the settlement deed entitling them to demand immediate payments. These events included an alleged public statement by the Attorney General of Malaysia about the Government of Malaysia’s intention to apply to the English court for an order to set aside the consent award and to recover some US$1.46 billion already paid under the consent award, as well as 1Malaysia's sections 67 and 68 applications themselves.

The Investors then applied to the Court to strike out the claim, or for a stay of the claim (pending completion of the arbitration proceedings). 1Malaysia applied for an injunction to prevent the further arbitration from proceeding, whilst the claim was dealt with.

The High Court decision

In the High Court the Honourable Mr Justice Knowles CBE stayed the court proceedings and declined an injunction to prevent the further arbitration from proceeding.

The Judgment is reasoned and principled, but in the circumstances, where it was ultimately overruled there is little point summarising it in detail. The salient points are that the Judge considered both sets of proceedings to stem from the parties autonomy to consent to an arbitration process, as opposed to the Court processes. The Judge was also of the view that the issues in the claim and the arbitration were substantially the same (save for some limited exceptions) and as such there was an overlap. Effectively the Judge preferred that the Arbitration determined the issues in front of it, and then if there were any further matters, the Court would decide those afterwards in the claim.

The Court of Appeal

The Court of Appeal reversed the decision completely. Its judgment was that the public interest in the Courts supervising arbitration proceedings was to be given more prominence, and that in the circumstances where the very existence of a second arbitration extended from the Award in the first, the opportunities to attack that Award needed to be heard first.

The Court of Appeal overruled the stay on the basis that:

           (a)          1Malaysia had a right to challenge the consent award under sections 67 and 68;

(b)          the claim related to the validity of the Award and as such would undermine the arbitration agreement contained within them;

(c)          it is the responsibility of the court to determine challenges under sections 67 and 68, and to do so as promptly as possible;

(d)          the election to arbitrate the second time could not dictate the position in respect of challenges under sections 67 and 68, which were no longer consensual;

(e)          courts exercising their supervisory role under the  Act do so as a branch of the state, not as a mere extension of the consensual arbitration process; and

(f)           the court, exercising its supervisory jurisdiction under sections 67 and 68 must do so quickly to avoid uncertainty and injustice in the enforcement process.  

It follows that the Court also imposed the injunction to prevent the further arbitration from proceeding.

Impact of this decision

The decision is of particular interest to those involved in proceedings where:

  • an arbitration is necessary to determine certain matters of fact  (such as the validity of a notice to quit), but the award of damages is outside of the jurisdiction of the arbitrator;
  • there are overlapping issues of fact, but the jurisdictions cover different areas of law (such as the Court determining forfeiture, whilst an arbitration determines breach);
  • there is some ambiguity as to the powers wielded by an arbitration and the Court, with the potential for overlap (such as in partnership disputes over the dissolution of the partnership); or
  • where the issues for determination in an arbitration might be affected by determinations in the Court, in related proceedings (such as in an insolvency context).

The point to bear in mind is that the parties agreement to arbitrate, and the Court's inclination to protect that above all else, is not sacrosanct. It is necessary to consider carefully the order of remedies sought, and how events, such as an appeal, might reverse matters.

When arbitration deadlines (such as to appeal and award), and rules (such as not participating in an arbitration where jurisdiction is contested) are so very strict, this is a real procedural minefield, requiring specialist lawyers, who can act quickly in the interests of their clients.