Court of Appeal publishes judgment in MoF (Inc) 1Malaysia Development Berhad -v- IPIC

05 Dec 2019

1Malaysia Development Berhad (1MDB) and Minister of Finance Incorporated (MOFI) have succeeded in their appeal against a decision limiting their ability ask the English court to set aside a consent award which they believe stands in the way of settling the well-known 1MDB debacle. The wider scandal has seen one of the world's biggest financial frauds come to the fore, it has embroiled many a famous face and involves eye watering sums of money. This particular case also highlights London as one of the most popular and widely used seats for arbitration.

For practitioners, the case provides clarification that, where the Court is being asked to exercise its power under sections 67 and 68 of the Arbitration Act 1996 (which are mandatory and cannot be contracted out of) to challenge an award, seated in England, the court will normally protect the ability to challenge quite aggressively, if there is an attempt to prevent it. A stay of an application under section 67 or 68 will be difficult to secure. Therefore, agreements which seek to penalise a party for bringing a challenge to an award might not be effective, or at least should be used with caution.

 

Background

This appeal came about in response to the London Commercial Court’s decision to delay a claim brought by 1MDB and MOFI (both owned by the Malaysian Government) against two Abu Dhabi based firms International Petroleum Investment Company (IPIC) and Aabar Investments PJS (Aabar) (both indirectly owned by the Government of Abu Dhabi) regarding the alleged conspiracy surrounding Malaysia's former Prime Minister, Mr Najib Razak (Mr Najib).

In 2015 the parties entered into a "binding term sheet" with a London arbitration clause, which was relied on to bring an arbitration in 2016 but in 2017 the parties had entered into a settlement deed which provided for a consent arbitration award to be made. The settlement deeds also provided for a number of "default events", including, it seems, challenging the consent award under sections 67 and 68 of the Arbitration Act 1996 (the Act), which would trigger substantial payments to be made by the claimants to the defendants.

In 2018, after Mr Najib resigned, the claimants issued court applications in London seeking (1) to set aside the consent award on the basis of a lack of jurisdiction by the arbitral tribunal, because Mr Najib lacked  authority to sign the agreement at all, and (2) a determination that the consent award was procured by fraud or contrary to public policy. A statement issued with the claim stated "The Award formed part of an attempt by Mr Najib to cover up his and his fellow conspirators' fraud (including former senior officers of IPIC and Aabar PJS), contrary to the interests of MOFI, 1MBD and the Malaysian people, in whose interests he was constitutionally bound to act". It also stated that IPIC and Aabar were complicit in the fraud.

The Defendants sought the stay because they preferred for any issues regarding the  regarding the validity of the consent award made in the first arbitration to be resolved in further arbitration proceedings under the settlement agreement. The  Commercial Court at first instance agreed that allowing the court and the arbitration proceedings to proceed would involve duplication of issues. The claimants appealed that decision resulting in this appeal.


Judgment

This Court of Appeal considered two key points, namely:

(1) the primacy of the court's supervisory powers over arbitration awards under sections 67 and 68 of the Act; and

(2) an application for an injunction to restrain the second arbitrations in the case.


The issues for determination

  1. Whether the judge exercised his case management power to stay the court applications on the correct legal basis?

No – "the judge proceeded on a false premise that the claimants' court applications elevated the supervisory jurisdiction above the concurrent jurisdiction of the second arbitrations" failing to recognise the following points:

  1. the Claimants had a right, which the defendants agreed they should have, to challenge the consent award under sections 67 and 68 of the Act;
  2. the Claimant's ground of challenge affected Mr Najib's authority to enter into the settlement deeds (undermining the arbitration agreement within them);
  3. it is the responsibility of the court to determine challenges under the Act and to do so promptly;
  4. the election to arbitrate in the settlement agreement could not dictate the position in respect of challenges under the Act which were no longer consensual;
  5. the courts exercise supervisory role under the Act as a branch of the state, not an extension of the arbitration process;
  6. courts exercising the supervisory jurisdiction under the Act must do so quickly to avoid uncertainty and injustice.


  1. If not, ought this court to exercise a case management power to stay the court applications?

The correct test had been applied, namely, whether this was a rare and compelling case to justify a stay, however, the defendants had submitted to the supervisory jurisdiction of the English court in relation to the first arbitration when entering into the binding term sheet, before entering into the settlement deeds. The judgment states that "there are, therefore, no circumstances in which the court will not need to determine the court applications under sections 67 and 68… allowing the court proceedings to take their normal court would… allow the parties' original expectations under the undisputed first arbitration agreement to be completely fulfilled". The appeal judges felt there were no compelling reasons to grant a stay on this basis.


  1. Whether the judge exercised his discretion to refuse an injunction under section 37(1) on the correct legal basis?

The questions the judge should have considered come from Claxton, (i) were claimants' rights infringed or threatened by a continuation of the second arbitrations (ii) would the continuation be vexatious, oppressive or unconscionable (c) would it be just and convenient to grant the injunction. The appeal judges concluded that the judge did not directly answer the first two and therefore did not exercise his discretion properly.


  1. If not, ought this court to exercise its discretion to grant an injunction to restrain the second arbitrations under section 37(1)?

The appeal judges considered that the conditions in (i) and (ii) of the Claxton test were satisfied due to the fact that the defendants will argue in the second arbitrations that the court applications are events of default under the settlement deed, triggering a payment from the claimants to the defendants. The appeal judges stated that "the pursuit of the second arbitrations seeks in terrorem to impose a large financial penalty on the claimants for having sought to exercise their agreed legal rights". The only appropriate route to take was therefore to grant an injunction to restrain the pursuit of the second arbitrations, allowing the court applications to proceed to decide on the validity of the consent award.


Conclusion

Whilst a non-interventionist approach is often relied on as a hallmark of the pro-arbitration attitude of a court, here the court was keen to see that the court was free to exercise its important supervisory powers over an arbitration which the parties had agreed to seat in England. Even if that meant that the court decisions should take priority over arbitration proceedings, which would raise similar issues, and which should be stopped by an injunction if necessary.

The decision of principle seems like in this case to have been supported by a desire to see the allegations on lack of jurisdiction and fraud properly examined.

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