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Can one be so reckless as to be fraudulent? An analysis of the obiter comments in Celtic Bioenergy Ltd v Knowles Ltd

The Arbitration Act 1996 (AA 1996) provides a limited role for English courts to supervise the arbitral process. Amongst the few provisions relating to court intervention under the AA 1996, an award rendered in an English-seated arbitration can be challenged on the basis of serious irregularity under section 68. In Celtic Bioenergy Ltd v Knowles Ltd, a recent decision by the Technology and Construction Court (TCC), Jefford J set aside an arbitration award on the grounds of fraud under section 68(2)(g) of the AA 1996. She decided that the arbitrator had been deliberately misled by the defendant (Knowles Limited) and that the award had, therefore, been obtained by fraud. This case is being cited as one of the few examples where an application to set aside an award on the grounds of fraud has actually succeeded.

As an alternative to its primary case, Celtic Bioenergy argued that Knowles had recklessly misled the arbitrator and that this would be sufficient to satisfy section 68(2)(g). Although Jefford J did not have to decide this point (concluding that Knowles had deliberately misled the arbitrator), she made certain obiter observations as to whether recklessness could amount to fraud (which she prefaced by stating that they were comments “and they are no more than that”). These observations are interesting in the context of the earlier jurisprudence on section 68(2)(g).

Inadvertence – however careless – is not sufficient

In Elektrim v Vivendi, the court considered that fraud required deliberate concealment of the relevant evidence and that failure to disclose a document as a result of negligence was not “fraud”. (“Reckless fraud” was initially raised but later abandoned as irrelevant on the facts of the case.) Similarly, in Cuflet Chartering v Carousel Shipping, Moore-Bick J (as he then was) stated that, if a party bases its complaint on the conduct of the other party in relation to the proceedings, “I doubt whether anything short of unconscionable conduct would justify the court in setting aside the award”.

The relevant legal principles applicable to section 68(2)(g) were summarised in the case of Double K Oil Products 1996 Ltd v Neste Oil OYJ, in which the court stated, amongst other things, that:

  • The threshold to prove fraud is high.
  • It is not enough to show that one party inadvertently misled the other.
  • Some form of reprehensible conduct must have contributed in a substantial way to the obtaining of the award.

The court has, therefore, consistently considered it insufficient for the purposes of section 68(2)(g) that one party inadvertently misled the other, irrespective of how careless it had been.

Synonymous or disjunctive?

In Celtic Bioenergy v Knowles, Jefford J examined the earlier jurisprudence on section 68(2)(g) and acknowledged this. She noted that the required high threshold made it insufficient to show that one party inadvertently and carelessly misled the other. In order for an application under section 68(2)(g), there must be some form of “dishonest, reprehensible or unconscionable conduct” that had led to obtaining the award. However, she noted that it was unclear from the authorities whether these adjectives were disjunctive or whether “reprehensible” or “unconscionable” conduct were just different ways of describing dishonest conduct.

Obiter comments on recklessness

In the context of examining whether recklessness was sufficient to establish fraud, Jefford J stated that, if the distinct types of conduct were synonymous, it suggests that “dishonest” would involve something more than recklessness. However, she then went on to say that it appeared to her that there may be cases in which recklessness as to the truth of a statement might amount to fraud for the purposes of section 68(2)(g) if there was an additional element of unconscionable conduct. This conclusion was based on her examination of the elements of the tort of deceit, under which a false statement made recklessly amounted to a “dishonest” statement in the civil context.

This obiter comment is by no means clear or unqualified. It is limited only to circumstances in which a party’s recklessness concerns the truth or falsity of a statement. It is also unclear what is meant by “some other element of unconscionable conduct”, and whether this additional conduct must relate to the act of making the false statement. However, it seems to be an acknowledgment that there are situations in which recklessness could amount to fraud for the purpose of section 68(2)(g). This departs from the earlier jurisprudence, which required some sort of deliberate behaviour to establish fraud under section 68(2)(g). For instance, in Double K Oil, the court recognised the difference between dishonest behaviour and behaviour which is negligent, “even grossly negligent”.

Furthermore, Jefford J observed that neither party had been able to identify a case where a court had decided whether recklessness as to the truth of a statement could amount to fraud within section 68(2)(g). If such a case was now to come before the court, it might well be that these obiter statements would be considered relevant to the outcome.

For the sake of completeness, it is worth noting that there is also a second level of enquiry before an award can be set aside under section 68(2)(g), namely whether the award was obtained by the act constituting the fraud, and whether substantial injustice has been caused to the applicant.

Conclusion

It remains to be seen whether the obiter comments in Celtic Bioenergy v Knowles might represent a deviation from the prior jurisprudence pointing towards a lowering of the extremely high threshold, ordinarily associated with section 68(2)(g), or whether such comments will be re-evaluated as and when a “recklessness case” proper reaches the court. Lowering the threshold will inevitably increase the potential for challenges against arbitral awards and for tactical litigation, contrary to the non-interventionist stance of the English courts.

As Jefford J noted, there is a lack of clarity as to what exactly is required for the purposes of section 68(2)(g). So far as the author is aware, there is no Court of Appeal decision on the point. The field is ripe for further development.

The author thanks Harshit Neotia (Trainee Solicitor, Allen & Overy LLP) for his contribution to this blog post.

 

Allen & Overy Shreya Aren

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