Klausegger Austrian Yearbook 2012 U1 - HSF Noteshsfnotes.com/arbitration/wp-content/uploads/sites/... · In England, the Arbitration Act 1996 (the “1996 Act”) provides that the

Kremslehner Klausegger

Klein

Kremslehner

Petsche

Pitkowitz

Power

Welser

Zeiler

Editors:

Yearbook on

International

Austrian Yearbook on

International Arbitration

2012

C.H.BECK STÄMPFLI

Austrian Yearbookon

International Arbitration

2012

The Editors

Christian Klausegger, Peter Klein, Florian Kremslehner,Alexander Petsche, Nikolaus Pitkowitz, Jenny Power,

Irene Welser, Gerold Zeiler

The AuthorsStephanie Balsys, Arish Bharucha, Simon Bushell, Yuliya Chernykh,

Ivan Chuprunov, Andreas Heuser, Alexandra Klausner, Florian Kremslehner,Niccolò Landi, Alex Lo, Julia Mair, Stephan T. Meyer, Susanne Molitoris,

Sebastian Lysholm Nielsen, Colin Ong, Alexander Petsche, Stefan Riegler,Markus Schifferl, Iegor Sierov, Alfred Siwy, Barbara Helene Steindl,

Dan Terkildsen, Robert Wachter, Yuan Wang, Thomas Weimann, Irene Welser,Michael Wietzorek, Stephan Wilske

Wien 2012

Manzsche Verlags- und UniversitätsbuchhandlungVerlag C.H. Beck, München

Stämpfli Verlag, Bern

To be cited as:Author [first and last name], Title of Work, in AUSTRIAN YEARBOOK ON INTER-

NATIONAL ARBITRATION 2012 [first page on which work appears, pincite](Klausegger, Klein, Kremslehner, Petsche, Pitkowitz, Power, Welser & Zeiler

eds., 2012)

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Bringing Fraud Claims under

an Arbitration Agreement – Does

the Arbitral Process Pack Enough Punch?

Simon Bushell/Arish Bharucha/Stephanie Balsys1)

I. Introduction

This article considers the particular challenges faced by a party seeking to ar-bitrate a fraud claim. In the context of an increasing prevalence of fraud and cor-ruption issues arising in international disputes, the article considers how wellsuited the arbitral process is to resolving such claims.

As a starting point, the authors note the increase in the number of disputesoriginating in resource-rich, emerging and frontier market jurisdictions in recentyears. This has been concurrent with a rise in the number of fraud and corruptionrelated issues that practitioners see being arbitrated, and which are an inevitableand significant risk in many of the regions increasingly exploited for natural re-sources. As this trend continues, it will become more important than ever for par-ties to consider whether arbitration is the most appropriate forum in which toconduct their dispute, and if it is (perhaps owing to enforcement considerations),to adapt and anticipate some of the fraud issues which can be difficult to tackle inan arbitral context.

To this end the authors consider, with a particular focus on English proce-dural law, the effectiveness of apparatus available to parties wishing to arbitrate afraud claim. They look at a tribunal’s procedural powers, such as its ability to awardinterim relief, and how these powers might affect the conduct of a fraud claim.

By way of example and from experience, comparisons are made, primarilywith the English litigation framework. The authors acknowledge, of course, thateach jurisdiction (civil and common law) poses somewhat different obstacles andpresents unique considerations for arbitrating and litigating parties.

The article goes on to address the topical and contentious issue of confiden-tiality in arbitration and the impact that it has on successfully arbitrating a fraudclaim.

1) Simon Bushell is a partner and Arish Bharucha and Stephanie Balsys are associatesin the Dispute Resolution division of Herbert Smith LLP. The views expressed in this articleare their own.

Finally, the article sets out selected practical guidance which may be usefulfor clients and practitioners to consider if anticipating fraud claims.

II. Setting the Scene: The Rise of Fraud andCorruption Issues in International Arbitration

It is undeniable that matters of fraud and corruption are becoming moreprevalent in international arbitration. There is a strong pattern to the geograph-ical provenance of cases dealing with fraud and corruption. Looking at thesetrends in prevalence and provenance, it seems ever more likely that internationaldisputes lawyers should expect to encounter fraud issues in the context of interna-tional arbitration.

Recent years have seen a boom in developing, emerging market and frontiereconomies. They have also seen the keener use of international arbitration as thepreferred mechanism of dispute resolution in those areas. More cross-bordertrade occurs today, increasingly involving parties from developing, emerging andfrontier markets. More cross-border contracts are concluded governing transac-tions in those jurisdictions and more of those contracts contain arbitration agree-ments. Complex cross-border disputes are more common than ever, as is the like-lihood that parties may face fraud issues as part of complex claims.

The commodities boom in particular has spawned intensely concentratedexploration and extraction from jurisdictions facing pervasive corruption. Thelegal systems in these jurisdictions are often unpredictable, difficult to navigateand prone to state interference and corruption. Consequently, the preference fordisputes in those jurisdictions to be settled through international arbitrationcomes as no surprise. The reader will be familiar with the features that interna-tional arbitration boasts as a progressive and positive alternative to domestic liti-gation, namely, enforcement benefits, flexibility, impartiality, independence andconfidentiality.

Foremost among reasons for the emergent trend of arbitrating fraud claimsmust be this: international investors and corporates, as well as local entities, placehigh value on the perceived integrity, neutrality and efficiency that internationalarbitration offers. Fears that local judicial systems will be infected with “homebias”, institutional corruption and frustrating procedural inefficiencies andabuses leads many to conclude that international arbitration is a more reliablemeans of resolving disputes.

These positive features of arbitration are embodied and exemplified in thecomparative ease with which arbitral awards can be enforced in difficult jurisdic-tions, relative to court judgments. The benefits of the 1958 Convention on theRecognition and Enforcement of Foreign Arbitral Awards (the “New York Con-vention”) will be familiar to readers, but they are of particular significance in thecontext of fraud claims arising from emerging and frontier market jurisdictions.The fact that foreign arbitration awards can be considerably more straightforward

326 Simon Bushell/Arish Bharucha/Stephanie Balsys

to enforce than foreign court judgments must go a long way towards a party’s de-cision to arbitrate rather than litigate.

For an illustration of the trends discussed above, it is useful to view statisticscollated by Transparency International (an organization which monitors andseeks to combat corruption across the globe), in conjunction with certain LCIAstatistics. Transparency International describes corruption as “the abuse of en-trusted power for private gain … it finds safe havens in countries with lax rules”2).

Every year, Transparency International publishes a list of perceived levels ofcorruption in relation to virtually every country in the world. The list scores coun-tries based on an aggregate of various sources of information and then ranks themfrom 1 to 182 (1 being the least corrupt and 182 being the most corrupt). The Cor-ruption Perceptions Index 20113) demonstrates patterns in levels of corruptionand geography: emerging and frontier, resource-rich countries are ranked higheron the Corruption Perceptions Index.

By way of example, consider the following rankings:

• Sudan – 177

• Iraq – 175

• Venezuela – 172

• Democratic Republic of the Congo – 168

• Russia – 143

• Nigeria – 143Recent LCIA statistics4) reveal that disputes from emerging and frontier

market jurisdictions are increasingly being resolved through international arbi-tration. In 2011, Russia, Eastern Europe and the CIS accounted for 14% of allLCIA cases, with Africa accounting for 4.5% and Latin America accounting for3% of all cases.

In addition, the most recently available ICC statistics5) show that in 2009 thenumber of North African parties arbitrating claims rose 65% from the previousyear and the number of Latin American and Caribbean parties rose by 30%.

In this light, it is suggested that the increasing commercialisation of certaindeveloping geographical regions entails an inevitable rise in fraud and corruptionissues being arbitrated. Accordingly it seems prudent for disputes practitioners tobear in mind that, more than ever, there is a need to:

• educate ourselves about the legal cultures and practices of emerging andfrontier jurisdictions in order to understand the extent to which they valueand support international arbitration.

• better prepare and advise clients who operate in these geographies and mar-kets, how to deal effectively with fraud claims, which can be more prevalentin these areas.

Bringing Fraud Claims under an Arbitration Agreement 327

2) See www.transparency.org/topic.3) Available at http://cpi.transparency.org/cpi2011/results/.4) Contained in the Director General’s Report 2011.5) Contained in the ICC International Court of Arbitration Bulletin – Vol. 21/1 – 2010.

• re-evaluate the retention of some of the commonly valued features of the ar-bitral process, such as confidentiality, which present obstacles to the prose-cution of fraud cases and which would otherwise be considered desirable.

III. Can Arbitration Manage Fraud Claims Effectively?

In England, the House of Lords decision in Fiona Trust 6) has left no doubtthat fraud claims can be dealt with by arbitral tribunals. Generally, arbitrators areable to rule on their own ability to deal with fraud claims under the well-established doctrine of kompetenz-kompetenz7). However, fraud claims are partic-ularly onerous to prove and difficult to manage efficiently, especially, if the allegedfraudster is a reluctant participant in the process. A victim of fraud looking toprosecute a claim will benefit from a strict and well enforced procedural timetable,a range of effective interim remedies, comprehensive disclosure and the ability toobtain evidence pre-action and from third parties. In short a thorough and robustlegal structure is required. This section of the article considers how far the arbitralprocess meets that challenge.

A. Procedural and Coercive Powers

It is a hallmark of the flexible, party-driven nature of arbitration that, both inad hoc arbitration and under many institutional rules, parties are free to agreeprocedural directions. Failing such agreement, an arbitral tribunal may step inand make orders, stipulating the time for compliance.

In England, the Arbitration Act 1996 (the “1996 Act”) provides that the tri-bunal, subject to the right of the parties to agree any matter, shall “decide all proce-dural and evidential matters” 8). Under the 2012 ICC Rules of Arbitration (“ICCRules”)9), the UNCITRAL Arbitration Rules 2010 (“UNCITRAL Rules”)10) andthe 2012 Swiss Arbitration Rules (“Swiss Rules”)11), a tribunal takes the initiativein preparing a procedural timetable, albeit with the input of the parties.

But if a party fails to comply with a procedural direction, a tribunal’s powerof compulsion or coercion is limited. A tribunal has no legally effective powers toenforce orders, directions, decisions or awards.

Under English law, where a party fails to comply with a procedural order ofthe tribunal (without showing sufficient cause) the 1996 Act12) empowers the


6) Fiona Trust & Holding Corporation v. Privalov [2007] UKHL 40.7) This doctrine is enshrined in section 30 of the Arbitration Act 1996.8) Section 34 (1).9) Article 18 (4).

10) Article 17 (2).11) Article 15 (3).12) Section 41 (5): “If without showing sufficient cause a party fails to comply with any

arbitral tribunal to make a peremptory order13) fixing a final time for compli-ance.

If the defaulting party breaches a peremptory order, the following remediesare available to the tribunal under section 41 (7) of the 1996 Act14). The tribunalmay:

• direct that the party in default will not be entitled to rely on any allegation ormaterial which was the subject matter of the order. This type of order is onlyapplicable when a party has failed to produce documents or evidence onwhich it relies – it will not help a claimant who seeks production of a docu-ment which it hopes may help to establish fraud against a party in default;

• draw such inferences from the act of non-compliance as the circumstancesjustify;

• proceed to an award on the basis of such materials as have been provided toit; and/or

• make such order as it thinks fit for the payment of costs of the arbitration in-curred because of non-compliance.It is immediately apparent that the sanctions available to the tribunal are

limited in scope and effect and may lack sufficient “bite” to compel a fraudster in-tent on stalling and stymying the proceedings, into complying.

By way of illustration, consider the situation where a defendant to a fraudclaim has repeatedly breached an order of the tribunal to disclose documents, sub-mit witness evidence or provide other information. Although strictly, under Eng-lish law, the relevant standard of proof in a commercial fraud claim is the civil“balance of probabilities”, in reality claimants pleading fraud will have to satisfy amore onerous standard. In cases where an allegation of fraud has to be made out,the ability to obtain evidence which is of probative value is, therefore, particularlyimportant. Moreover, such evidence is valuable because it might direct the victimto a new and fruitful train of enquiry, leading, for example, to the ability to tracemisappropriated monies.

Seeking to argue and support a fraud claim can be difficult (though not im-possible) when the principal remedy available for non-compliance with a tribu-nal’s order is its power to draw adverse inferences from such non-compliance.Moreover, if evidence sought cannot be obtained, other wrong-doers who mighthave been exposed by such disclosure could evade claims that should properly bebrought against them.

Interestingly, in an attempt to tackle this issue in the context of disclosure(dealt with more generally in section C. below), the tribunal in ICC case No. 6497provided that in the context of bribery allegations there could be a certain flexibil-


order or directions of the tribunal, the tribunal may make a peremptory order to the same effect,prescribing such time for compliance with it as the tribunal considers appropriate.”

13) Effectively, a final order.14) If a party breaches a peremptory order in relation to security of costs, the court may

dismiss the entire claim (Section 41 [6] of the 1996 Act).

ity in the burden of proof. The tribunal suggested that if an alleging party pre-sented relevant but inconclusive evidence and the defendant failed to adducecounter evidence when required by the tribunal to do so, the tribunal could con-clude that the alleged facts were true15). While this appears to be a constructive ap-proach, a claimant seeking to arbitrate a fraud claim still lacks the certainty andrigor in the enforcement of procedural requirements that a litigant can rely on inthe same situation.

Indeed when compared to the power of the English court to hold a party incontempt of court for failing to obey an order, the relative ineffectiveness of a tri-bunal in this regard16) is notable. A party in contempt of the English court mayface committal to prison, fines, or a writ of sequestration over property. A partyrefusing to cooperate with a tribunal’s order faces no such weighty penalty.

In order to shore up a tribunal’s powers in this context, the 1996 Act17) doesmake provision for the English courts to provide support to tribunals by assistingwith the enforcement of peremptory orders. Essentially, this is done by empower-ing the court (upon the application of the tribunal or one of the parties) to makean order requiring compliance with a peremptory order of the tribunal. If theorder is made, any further breach by the defaulting party will result in that partybeing in contempt of court, facing all the attendant consequences.

While ultimately, with the intervention of the court, a claimant in fraud maybe able to compel compliance by another party, domestic courts remain the ulti-mate procedural force.

B. Availability of Interim Remedies

The ability to obtain interim relief is likely to be of paramount importance toa claimant in fraud. Unless local law reserves matters of interim relief for the court,arbitrating parties generally enjoy freedom to seek interim measures from thecourt or the tribunal, as suits their needs and desires.

In England, both courts and tribunals possess powers to order interim mea-sures. The courts tend to be seen as the forum of last resort, reflecting the generalpolicy of the 1996 Act18) that the courts should intervene as little as possible in ar-


15) “The alleging Party may bring some relevant evidence for its allegations, without theseelements being really conclusive. In such case, the arbitral tribunal may exceptionally request theother party to bring some counter-evidence, if such task is possible and not too burdensome. If theother party does not bring such counter-evidence, the arbitral tribunal may conclude that thefacts alleged are proven … However, such change in the burden of the proof is only to be made inspecial circumstances and for very good reasons.”

16) “… there must be some limitation to the arbitrator’s power. He could not, for instance,imprison for contempt …”, per Viscount Reading CJ in Re Unione Stearinerie Lanza andWeiner Arbitration [1917] 2 K.B. 558.

17) Section 42.18) As recorded in section 1: “1 – General Principles: E+W+N.I. The provisions of this

bitral proceedings. However as this article suggests, they remain a vital buttress toa tribunal’s powers.

Some institutional rules, including the ICC Rules19), SCC Rules20),UNCITRAL Rules21), Swiss Rules22) and LCIA Rules23) provide for the tribunal togrant interim measures. Tribunals under those rules can also order a party to pro-vide security in connection with constituted interim measures.

Generally, a tribunal can order flexible and tailored measures in response tothe parties’ particular needs. As a first observation, however, it will not normallybe able to do so prior to its constitution, which can take many weeks and months.

In response to this difficulty, it is becoming more common for institutionalrules to include provisions permitting parties to make an application for urgentinterim measures to an emergency arbitrator. The new ICC Rules24), SwissRules25) and the SCC Rules26) all permit the appointment of an emergency arbi-trator prior to the commencement of the arbitration. Emergency arbitrators areappointed; in the case of the ICC, by the president of the ICC; in the case of theSwiss Rules, by the Arbitration Court of the Swiss Chambers’ Arbitration Institu-tion; and in the case of the SCC, by the SCC board of directors. Ostensibly theseprovisions offer a welcome expediting tool, purporting to preclude the need forrecourse to the courts. But parties may be reluctant to entrust matters of such im-portance to an arbitrator whom the parties have not appointed.

The 1996 Act makes no similar provision for emergency measures. In termsof remedies more generally, section 48 provides that “the parties are free to agree onthe powers exercisable by the arbitral tribunal as regards remedies” 27). Unless other-wise agreed by the parties, the tribunal has “the same powers as the court to order aparty to do or refrain from doing anything” 28).

Of particular concern to a claimant in fraud will be the preservation and orfreezing of assets. While the 1996 Act does not explicitly bestow power on an arbi-tral tribunal to grant interim injunctions to this effect, it might be thought that atribunal is free to grant such relief under section 48.

This is not the case. In Kastner v. Jason29), the English High Court held thatsection 48 did not permit a tribunal to grant a freezing injunction. The decisionwas based on the fact that the 1996 Act defines “court” to mean “the High Court or


Part are founded on the following principles, and shall be construed accordingly – … (c) in mat-ters governed by this Part the court should not intervene except as provided by this Part.”

19) Article 23.20) Article 26.21) Article 26.22) Article 32.23) Article 25 (1) (c).24) Article 29 and Appendix V.25) Article 43.26) Appendix II.27) Section 48 (1).28) Section 48 (5) (a).29) (2004) EWHC 592 (Ch).

a county court” 30). Since only some designated county court judges have jurisdic-tion to award freezing injunctions, Lightman J. came to the conclusion that theprovision could not have been intended to permit an arbitral tribunal to grant afreezing injunction.31) He also took the view that section 48 of the 1996 Act wasonly intended to confer powers on the tribunal for the purposes of final awards.32)

It may however be possible for parties to confer upon a tribunal the power toaward interim freezing injunctions by express agreement. Similar to some of theinstitutional rules cited above, in England, section 39 of the 1996 Act provides that“the parties are free to agree that the tribunal shall have power to order on a provi-sional basis any relief which it would have the power to grant in a final award”.

In Kastner v. Jason Lightman J. held that parties could agree, pursuant to thissection, to confer power on a tribunal to grant an interim freezing injunction.33)

Lightman J.’s conclusions discussed here were not in issue when the case wasappealed to the Court of Appeal.34) However, Rix LJ noted (without adopting anyparticular view) that most commentators agreed that “section 48 should be con-fined to final awards and to substantive remedies on the merits”.35) He pointed outthat there was no unanimity of opinion as to the implication of section 39: certaincommentators had taken the view that:

“… section 39 (1) confers no power on arbitrators to make a freezing ordereven with the parties’ agreement, because (a) there is no power to do so undersection 48 and (b) section 39 (1) only relates to power to order on a provisionalbasis “any relief which it would have power to grant in a final award.”36)

Others took the view that section 39 did enable the parties to grant the tribu-nal power to make interim freezing injunctions.37) As a result of these authoritiesit is unclear whether an agreement reached between parties to empower a tribunalto grant a freezing injunction will actually be enforceable and effective.38)

Even in the event that a tribunal has the power to do so, it would lack the co-ercive ability to enforce such an injunction against third parties, such as bankswhere funds material to a fraud claim are held. A tribunal’s power to compel par-ties is limited, but its power to compel non-parties is even more limited, given thatthey will not be contractually bound by the arbitration agreement.

In an effort to address this enforcement issue, tribunals can employ theirprocedural freedom to draft interim orders or awards in a form that renders them


30) Section 105 (1).31) Paragraph 27 of the judgment.32) Paragraph 26 of the judgment.33) Paragraph 28 of the judgment.34) (2004) EWCA Civ 1599.35) Ibid at paragraph 16.36) Ibid.37) Ibid.38) For further discussion of these issues see the UK PLC practice note, The English

court’s supportive powers: interim injunctions and receivers.

as enforceable as possible. For example, the authors have encountered tribunalsnaming an order for interim relief “Order and Award”, perhaps in an effort to ne-gate debate about its enforceability under the New York Convention39), and in-cluding a provision specifying that the applicant shall be permitted to apply to anycourt of competent jurisdiction for a court order giving effect to the terms of that“Order and Award”.

Against this background, court-granted interim relief may offer a more ef-fective legal safeguard, and section 44 of the 1996 Act stands out as a fundamentalprovision in this regard. Under section 44 of the 1996 Act, the English courts pos-sess wide supportive powers:

“44 Court powers exercisable in support of arbitral proceedings.(1) Unless otherwise agreed by the parties, the court has for the pur-

poses of and in relation to arbitral proceedings the same power of making ordersabout the matters listed below as it has for the purposes of and in relation tolegal proceedings.

(2) Those matters are(a) the taking of the evidence of witnesses;(b) the preservation of evidence;(c) making orders relating to property which is the subject of the pro-

ceedings or as to which any question arises in the proceedingsi(i) for the inspection, photographing, preservation, custody or de-

tention of the property, or(ii) ordering that samples be taken from, or any observation be

made of or experiment conducted upon, the property;and for that purpose authorising any person to enter any premises in the

possession or control of a party to the arbitration;(d) the sale of any goods the subject of the proceedings;(e) the granting of an interim injunction or the appointment of a re-

ceiver.”

The DAC Report on the Arbitration Bill used by courts to interpret the 1996Act (the “DAC Report”), explains in relation to section 44 that “it is under thisClause that the Court has power to order Mareva/freezing injunction or Anton Pillerrelief (ie urgent protective measures to preserve assets or evidence) so as to help the ar-bitral process to operate effectively” 40). Section 44 provides key support to arbitrat-ing parties and is of particular interest in the context of fraud claims, where theability to obtain urgent interim or conservatory measures is crucial.


39) The New York Convention is silent as to whether the definition of “arbitral award”includes procedural orders as well as final and partial or interim awards on the merits. Conse-quently, the enforcement of foreign arbitral orders will often be a matter of interpretation bythe enforcing court.

40) The Departmental Advisory Committee on Arbitration Report on the Arbitration Bill,February 1996.

If the relief sought is not urgent, an application must be made on notice tothe tribunal and other parties, and with the permission of the tribunal or otherparties.41) As an exception to these requirements, if the case is one of urgency,under section 44 (3), “the court may, on the application of a party or proposed partyto the arbitral proceedings, make such orders as it thinks necessary for the purpose ofpreserving evidence or assets”. The definition of “assets” for these purposes has beenwidely drawn, to include a legal right.42) The DAC Report explains, “we have ex-cepted cases of urgency, since these often arise before the tribunal has been properlyconstituted or when in the nature of things it cannot act quickly or effectivelyenough” 43). For a claimant in fraud seeking urgently to secure funds or freeze as-sets central to their claim, section 44 (3) provides critical support.

It should be noted that section 44 (5) states:

“In any case [under section 44] the court shall act only if or to the extentthat the arbitral tribunal, and any arbitral or other institution or person vestedby the parties with power in that regard, has no power or is unable for the timebeing to act effectively.”

It will be interesting to see whether seeking urgent relief from the courtunder section 44 is impacted by the existence of provisions permitting emergencymeasures, incorporated into the arbitration agreement by, for example, the SwissRules, SCC Rules or ICC Rules (as to which see above).

On the basis of the discussion above, it is clear that the supportive powerswhich a court provides, particularly to a claimant in fraud, are vital. As the natureof cross-border disputes evolves, and as ever more complex disputes throw up evermore issues of fraud, arbitrating parties will increasingly look to the courts forsupport. As a result, disputes practitioners, whether litigators or arbitrators (orboth), will increasingly need to bridge the gap between the services offered by thearbitral and court procedures, and have familiarity with both.

C. Evidential Concerns: Disclosure and the Availabilityof Documents

It has long been recognized that key weapons in the arbitral procedure’s arse-nal to attract parties away from litigation are its flexibility, efficiency and its partydriven nature. So far as disclosure and documentation provision in English arbi-tral proceedings is concerned, the 1996 Act makes no exception to this principle ofparty autonomy, stating that: “it shall be for the tribunal to decide all … evidentialmatters, subject to the right of the parties to agree any matter” 44).


41) Section 44 (4).42) Cetelem SA v. Roust Holdings Ltd (2005) EWCA Civ 618).43) Paragraph 215.44) Section 34 (1).

Such evidential matters include “whether any and if so which documents orclasses of documents should be disclosed between and produced by the parties and atwhat stage … whether and to what extent there should be oral or written evidence orsubmissions” 45). For all its attractiveness, how well does such flexibility and partyautonomy benefit parties seeking to conduct a fraud claim?

Failing agreement by the parties, under the 1996 Act a tribunal may step in todecide not just the scope of disclosure but whether there should even be any dis-closure at all.46) Given that evidential matters are so critical in fraud claims, claim-ant parties who do not establish sufficient support for themselves in agreed termsof disclosure could face difficulties.

In English court proceedings, a party is required to disclose all directly rele-vant (and admissible) documents regardless of whether they are helpful or harm-ful to that party’s case. The result is that Party A may, through standard disclosure,obtain from Party B a document which is helpful to Party A and harmful to PartyB even though Party A had no prior knowledge that such a document (or class ofdocuments) existed. This sort of extensive disclosure is of particular assistance to aclaimant in fraud, who may find it difficult to uncover documentary evidence ofthe alleged wrongdoing and may benefit when such evidence is unearthed in themost unexpected or unlikely places.

Strictly speaking, the arbitral process does not provide for a format disclo-sure exercise. Parties rely on documents merely to support their case. They willoften use a “Redfern Schedule” to list categories of documents or specific docu-ments requested, state the relevance of the request and then ask the adversary toprovide comments. However, depending on the constitution of the tribunal and,for example, whether the parties have chosen to apply the IBA Rules on the Takingof Evidence in International Arbitration (the “IBA Rules”)47), there can some-times be disclosure more similar to that in English or US litigation.

The IBA Rules are widely adopted by parties in international arbitrationsand offer interesting and comparatively detailed provisions on documentproduction. Their provisions concerning document production “represent a bal-anced compromise between the broader view generally taken in common law coun-tries and the more narrow view generally held in civil law countries” 48). For example,rather than simply providing for the production of those documents on which theparties rely, the IBA Rules allow parties to request documents from adversariesthat they believe are “relevant or material”49) to the outcome of the case.

The IBA Rules also go into such detail as specifying grounds on which a partymay legitimately object to a request for document production by the other party.


45) Article 34 (2) (d).46) Section 34 (2) (d).47) Revised and adopted May 29, 2010.48) 1999 IBA Working Party Commentary on the revised text of the 2010 IBA Rules on the

Taking of Evidence in International Arbitration, page 8.49) Article 3 (3) (b).

As a result they provide useful guidelines to parties wishing to reinforce their posi-tion in relation to disclosure.

Typical of institutional rules, the LCIA Rules make no general provision fordocument disclosure. Parties are simply required to produce “all essential docu-

ments” on which they rely.50) An LCIA tribunal has the power (by its own motionor on application from a party) to order any party to produce documents for in-spection by the tribunal, the other party or experts. An ICC tribunal possesses abroad power to summon a party to provide additional evidence at any point dur-ing the proceedings,51) while a tribunal convened under SCC Rules may onlyorder production of documents or other evidence at the request of a party.52)

In England under the 1996 Act, theoretically an arbitral tribunal has the abil-ity to order equally wide-ranging disclosure as that in English court proceedings.In practice, however, the scope of arbitral disclosure is invariably more limited.Importantly, as outlined in section As above, non-compliance with orders for dis-closure is less effectively penalized in arbitral proceedings than in the courts.

While the less onerous and demanding nature of disclosure under the arbi-tral procedure may be attractive to claimants seeking efficiency and expediency,for those pursuing a fraud claim it may not offer the most effective and compre-hensive way of ensuring that, to borrow a popular phrase, “the truth will out”.

For example, a party may not be aware that a document or category of docu-ments which might help to establish the relevant fraud exists. Accordingly, the re-quest for that document will not be made and the document will remain hiddenfrom scrutiny. Even if a party has suspicions and seeks to make a “catch-all” re-quest for a category of documents, a tribunal may not order disclosure if the re-quest is seen to be too broad ranging. Only in rare cases will a tribunal exercise itsdiscretion to order extensive disclosure, so there is a chance that relevant docu-ments will remain hidden if their custodians want them to. Worse still, documentsmight be destroyed or rendered unobtainable (although of course the conceal-ment or destruction of documentation is not a problem exclusive to arbitration).

It might be said that a claimant pursuing a fraud claim will take greater bene-fit from the more demanding, extensive and well-enforced disclosure require-ments in English court procedure, than from those that typify arbitral proceed-ings. However, it should be noted that this may not be the case everywhere,particularly in those civil systems where disclosure does not feature in litigation.In Russia, for example, where the domestic rules of court procedure do not recog-nize the concept of disclosure, litigating parties need only submit the documentson which they base their position. Russian arbitration provisions are similar tomost other institutional rules: the Rules of the International Commercial Arbitra-tion Court at the Russian Federation Chamber of Commerce and Industry do notrequire disclosure.


50) Article 15 (6).51) Article 20 (5).52) Article 26 (3).

A further challenge posed to the claimant in fraud by the arbitral procedureconcerns third party disclosure. Arbitration, consensual as it is, does not tend tofacilitate obtaining disclosure against third parties – another key step in success-fully fighting fraud claims. Characteristic of many institutional rules, neither theICC, LCIA, UNCITRAL Rules, Swiss or SCC Rules make explicit reference to ob-taining evidence from third parties.

The IBA Rules,53) on the other hand, record the possibility of the parties ob-taining evidence from third parties, but this is strictly limited to circumstanceswhere local law permits it:

“If a Party wishes to obtain the production of Documents from a person ororganization who is not a Party to the arbitration and from whom the Partycannot obtain the Documents on its own, the Party may, within the time or-dered by the Arbitral Tribunal, ask it to take whatever steps are legally availableto obtain the requested Documents, or seek leave from the Arbitral Tribunal totake such steps itself.”

The real weight behind such a power may not equal that behind the equiva-lent power of a court, but this is a provision that should be noted and valued, espe-cially by potential claimants in fraud.

While it is in the English court’s discretion to grant third party disclosureunder the Civil Procedural Rules (“CPR”), and equitable third party disclosure or-ders under Bankers Trust 54) and Norwich Pharmacal 55) principles requiring non-parties to make evidence available to litigating parties, arbitral tribunals possessno such powers under English law. This weakness vis-à-vis third parties is a nota-ble hurdle for a claimant seeking to arbitrate a fraud claim.

The DAC Report commentary on the 1996 Act notes that one of the previousdrafts “… would arguably (inadvertently) have allowed arbitrators to order ex parteMareva or even Anton Piller relief. These draconian powers are best left to be appliedby the Courts” 56).

Indeed it is arguable that the real power in this regard still lies with thecourts. In which case, the question to be posed again is, what support can a tribu-nal obtain from the local courts?

It has been noted above that section 44 of the 1996 Act provides Englishcourts with the power to order interim relief in order to assist the arbitral process.The same section57) provides the courts with supportive powers in relation to thetaking and preservation of evidence. Further, section 43 of the 1996 Act providesthe court with powers to compel witnesses to appear and give evidence in arbitral


53) Article 3 (9).54) Bankers Trust Co v. Shapira (1980) 1 W.L.R. 1274.55) Norwich Pharmacal Co. and Others Appellants v. Customs and Excise Commissioners

Respondents (1973) 3 W.L.R. 164.56) Paragraph 201, DAC Report 1996.57) Specifically, section 44 (2) (a) to (c).

proceedings. However, agreement of the parties or the permission of the tribunalis required, and the witness and proceedings must be in the United Kingdom.58)

By way of brief comparison, Swedish domestic legislation allows an arbitrat-ing party to apply to court (with the permission of the tribunal) to compel an ad-versary to produce evidence59). Under Swiss law arbitrators can seek the supportof state authorities for the purpose of collating evidence and in New Zealand, aparty with tribunal approval or the tribunal itself can seek assistance in gatheringevidence from the High Court or District Court.60)

In England, both sections 43 and 44 have been invoked in an attempt to gaindisclosure from third parties in arbitrations.61) On each occasion the court em-phasized the limits of its powers in this regard:

• In BNP Paribas v. Deloitte & Touche LLP 62), the court held that section 43,while giving the court powers to compel a witness to bring evidence (akin toa subpoena duces tecum), did not give the court power to order general dis-closure against a third party, as is available under the CPR63). Giving judg-ment, Mr Justice Morison observed:

“This is an application for the production of classes of documents as op-posed to an application for the production in evidence of specific identified doc-uments. Accordingly this is not an application which falls within section 43 be-cause it has been too widely framed. It is an application which in courtproceedings would have been apt under CPR 31.17. But that procedure is notavailable in an arbitration, as section 43 is dealing with production of docu-ments in evidence, and not disclosure, as previously governed by section 12 (4)of the 1950 Act. The decided cases make clear that under that procedure it is notpermissible to go ‘document hunting’ with a view to trawling though documentsto see what turns up. However, I should make it clear that if there were a prop-erly targeted application relating to specific documents which could be said to be


58) “43 Securing the attendance of witnesses.(1) A party to arbitral proceedings may use the same court procedures as are avail-

able in relation to legal proceedings to secure the attendance before the tribunal of a witness inorder to give oral testimony or to produce documents or other material evidence.

(2) This may only be done with the permission of the tribunal or the agreement ofthe other parties.

(3) The court procedures may only be used if –(a) the witness is in the United Kingdom, and(b) the arbitral proceedings are being conducted in England and Wales or, as the

case may be, Northern Ireland.(4) A person shall not be compelled by virtue of this section to produce any docu-

ment or other material evidence which he could not be compelled to produce in legal proceedings”.59) Section 26 of the Swedish Arbitration Act 1999.60) First Schedule, Article 27 (1).61) Tajik Aluminium Plant v. Hydro Aluminium AS and others [2005] EWCA Civ 1218;

Assimina Maritime Ltd v. Pakistan Shipping Corporation [2004] EWHC 3005 (Comm); BNPParibas v. Deloitte & Touche LLP [2004] EWHC 3005 (Comm).

62) [Lloyds] 1 Lloyd’s Rep 233.63) CPR 31.17.

required to be adduced in evidence, then any such specific application wouldhave to be considered on its merits.”

The scope of any documentation requested to be produced by a witnessunder section 43 must therefore be specifically defined.

• In Tajik Aluminium Plant v. Hydro Aluminium AS, the Court of Appeal reit-erated the decision in BNP Paribas: section 43 of the 1996 Act is not to beused as a means of obtaining general disclosure of documents from a thirdparty. In response to the appellant’s submission that, through the mecha-nism of section 43 of the 1996 Act, parties should effectively be able to obtainorders for disclosure by third parties in aid of arbitral proceedings, Lord Jus-tice Moore-Bick noted that “whether it would be desirable for the court to havea power of that kind or not, the fact remains that the 1996 Act curtailed thecourt’s role in relation to arbitral proceedings in certain respects, one of whichconcerns disclosure. The court’s power to order disclosure which was formerlycontained in section 12 (6)(b) of the Arbitration Act 1950 has disappeared andas a result disclosure is entirely a matter for the arbitral tribunal.” 64) He wenton to indicate that any documents required to be produced pursuant to awitness summons under section 43 would have to be specifically identified,“or at least described in some compendious manner that enabled the individualdocuments falling within the scope of the subpoena to be clearly identified” 65).

• In Assimina Maritime Ltd v. Pakistan Shipping Corporation 66) the courtnoted that neither could section 44 of the 1996 Act be used to obtain a gen-eral order for disclosure against a third party. Colman J. said that “it is onlywhere it can be shown that a question arises in relation to a particular docu-ment or documents of a non-party which need to be inspected or photocopied orpreserved that an order under this section can be made. However, such docu-ments must be capable of specific description.” 67) Any order made pursuant tosection 44 must therefore identify the specific documents sought, ratherthan seeking wide disclosure of classes of documents.A final point to note in relation to disclosure is that an arbitral tribunal can-

not generally make an order for pre-action disclosure, not least because it will nothave been constituted pre-action. It might be thought that where necessary, thecourts could step in to assist a potential claimant by ordering pre-action disclo-sure. However, in England at least this is not the case. In EDO Corporation v. UltraElectronics Ltd 68) it was held that the court’s power to order pre-action disclosure,of such value in litigation, would not be available where the underlying disputearises out of a contract which requires any dispute to be determined by arbitra-tion. Accordingly, it is the position in England that the courts do not have jurisdic-tion to order pre-action disclosure in support of the arbitral process.


64) Paragraph 26 of the judgment.65) Paragraph 25 of the judgment.66) [2004] EWHC 3005 (Comm).67) Paragraph 14 of the judgment.68) [2009] EWHC 682 (Ch).

In addition to the limited force of disclosure powers in arbitration, there isalso a more general concern that sufficient time must be allowed for evidence to begathered. While parties to arbitrations often prefer an accelerated proceduraltimetable, in the authors’ experience the quality and quantity of evidence in fraudcases tends to be better when the parties have had longer to gather and test evi-dence. The longer a fraudster is subjected to the scrutiny of the dispute resolutionprocess, the more likely it is that decisive evidence will come to light.

For similar reasons, it is also important to ensure that a substantial amountof time is set aside for the cross examination of witnesses. In international arbitra-tion this will often be difficult because a greater emphasis is placed on expeditedproceedings. It may not be easy to find arbitrators who are able to commit severalweeks at a stretch to the hearing of a particular matter.69)

In summary, evidence, documentary or otherwise, is particularly critical infraud cases where there is a high burden of proof to discharge. Comprehensivedisclosure, sufficient time for evidence gathering and the cross examination ofwitnesses, third party disclosure and pre-action disclosure are some of the funda-mental tools available in English litigation to ensure that key evidence, otherwisedifficult to obtain, is brought to light. By contrast, arbitral tribunals possess lim-ited apparatus with which to gather and compel the production of evidence. Ac-cordingly, they face a difficult task of responding to and satisfying the high stan-dard of proof required in fraud claims. They also face challenges in meetingparties’ requests for readily enforceable pre-action and interim relief. Neverthe-less, while the arbitral process may not be equipped with the procedural powersnecessary to manage every facet of a fraud claim efficiently, where there are gaps ina tribunal’s powers, they are readily filled by the courts.

IV. The Relevance of Confidentiality

Parties might wish to review the impact that confidentiality will have ontheir proceedings where fraud ist an issue. The confidentiality of proceedings hastraditionally been considered an important benefit of arbitration. It is valuable toparties in dispute for a number of reasons. Crucially, it protects them from nega-tive accusations and decisions or awards entering the public domain. It also safe-guards confidential and commercially sensitive information which a party mayneed to adduce in pursuing their case.

In England the concept of arbitral confidentiality is particularly well re-spected and enforced. It has long been recognized under English law that confi-dentiality should be an implied term in an arbitration agreement. Although the


69) However, the length of a hearing will not be determined without the observationsor submissions of counsel. A tribunal will be wary of curtailing proceedings if a party arguesthat it will not be able to put its case in the time proposed, for fear that the same party maysuccessfully defend enforcement of the award.

1996 Act is silent on the matter there is considerable authority from case law insupport of the point.70) In general, parties to an arbitration and the tribunal areunder a duty to maintain the confidentiality of the award, the hearing and thedocuments and materials produced for the purpose of the arbitration.

That said, guarding matters from public scrutiny is not always beneficial noran attractive proposition. Indeed, transparency in the commercial world is morehighly valued today than ever. Businesses face constant public scrutiny and in-creased accountability through the global reach of the media. The internet and so-cial networking spread information faster than has ever been possible, creating theexpectation that information should and can be available instantly, with few re-strictions. The reputations of corporations, governments and individuals may bemade or destroyed by public scrutiny. At the same time, the turbulent economicclimate has placed greater focus on corporate governance and regulatory compli-ance requirements, which are becoming more stringent and complex, demandingmore information and more accountability from businesses. In this ever moretransparent world, it might be questioned whether the concept of confidentialityin arbitrating commercial disputes has passed its sell by date.

It has been pointed out71) that beyond England, the current trend in interna-tional arbitration is to diminish or question the overarching concept of arbitralconfidentiality. In the Australian case of Esso Australia Resources Ltd v. The Hon-ourable Sidney James Plowman 72) the court concluded that while the privacy ofthe hearing should be respected, confidentiality was not an essential attribute ofarbitration. Courts in Sweden and the United States have moved away from a gen-eral duty of confidentiality in arbitration. The new French arbitration law73) re-verses the traditional presumption of confidentiality in international arbitrationand requires the parties to specify if they wish proceedings to be confidential(when it comes to domestic arbitration though, paragraph 4 of Article 1464 of theCode of Civil Procedure still provides for an implied duty of confidentiality).

This gradual shift away from confidentiality may enhance the arbitral pro-cess in a fraud context. However, under English law, unless parties agree to limit orexclude confidentiality obligations, arbitral proceedings will remain largely pri-vate and confidential: a claimant will not benefit from the coercive effects of pub-lic scrutiny that can provide such strategic power to a claimant litigating a fraudclaim.


70) See, e.g., Dolling-Baker v. Merrett [1990] 1 WLR 1205, Ali Shipping Corporation v.Shipyard Trogir [1997] EWCA Civ 3054, Emmott v. Michael Wilson & Partners Ltd [2008]EWCA Civ 184.

71) Redfern and Hunter, International Arbitration (5th ed.) at 2.152.72) (1995) 193 CLR 10.73) Decree No. 2011-48 of January 13, 2011 reforming the law governing arbitration.

V. The Constitution of the Tribunal

Given the challenges outlined above, an integral step in successfully arbitrat-ing a fraud claim will be choosing the tribunal itself. Parties have significant powerto shape the conduct and outcome of their dispute by the ability to nominate anarbitrator. This power should not be underestimated, particularly in the contextof fraud claims.

The quality and skill of the arbitrators appointed will affect the quality of theproceedings.While issues such as interim remedies, and (in particular) breadth ofdisclosure, will be of great concern to the claimant, they will also be of importanceto the tribunal, which will need to get these procedural decisions right in order toproperly discharge its duty. For the most part, parties do not tend to anticipatefraud claims against their counterparty at the outset of the contractual relation-ship, so there is every chance that an arbitration clause will be in place long beforesuspicion or a claim develops. Nonetheless, parties can usually influence who willbe the decisionmaker in their dispute and this will be key in the event that any is-sues of fraud arise.

Parties to a fraud claim will require a robust and experienced tribunal, onewhich will not shy away from the fraud issue and which will have confidence in itsabilities to adapt its procedure to suit the nature of the claim being brought beforeit (e.g. to depart from the Redfernschedule or other similar approach and orderbroader disclosure). Ultimately, the tribunal will need to ensure that it is in a posi-tion to confidently determine the claim.

Parties will therefore need to consider the constitution of the tribunal, thequalifications and expected approach of their party appointee and how these willaffect the line taken by the tribunal in terms of procedure.

As well as requiring a reputation for being robust and having a high level ofrelevant experience, a party may want to think about the professional backgroundof its appointee. For example, practising lawyers with extensive experience ofclaims involving English principles of equity, accessory liability or breach of fidu-ciary duty may be more prepared or willing to draw the inferences necessary tomake out a fraud claim than others lacking that experience. Equally, a party mightconsider that the approach of a civil lawyer, familiar with the concepts of goodfaith and fair dealing, is valuable in the context of determining a fraud claim (not-withstanding their limited exposure to the broader principles of common law dis-closure). In a similar vein, a claimant might consider that he is more likely to besuccessful arbitrating a fraud claim in front of a three person arbitral panel, thanin front of a sole arbitrator who may not feel sufficiently confident to reach a find-ing of fraud.


VI. Conclusion – Anticipating Fraud Claims

This article has sought to evaluate the ability of the arbitral process to man-age fraud claims, highlighting the important concurrent supportive power of thecourts. It has been argued that, generally, the arbitral tribunal lacks a number ofimportant procedural and enforcement powers which are essential in exposingand resolving fraud claims. Consequently, domestic courts necessarily providemuch needed support to arbitral tribunals, filling gaps in procedural and enforce-ment power, albeit from an essentially non-interventionist standpoint.

The less onerous and comprehensive disclosure requirements of arbitration,the commonly expedited proceedings and the role of confidentiality in the arbitralprocess which traditionally attract parties to arbitration, can also present chal-lenges. Practitioners and contracting parties should be mindful of these issues andplan for them:

• A party considering bringing a fraud claim should educate itself as to thepowers of the local courts of the relevant jurisdiction to support arbitral pro-ceedings.

• Local courts’ supportive powers should be carefully considered when decid-ing the seat and procedural law of arbitral proceedings to be recorded in thearbitration agreement.

• Parties should consider providing for widened powers of disclosure in thearbitration agreement, and as a minimum, perhaps, for the inclusion of theIBA Rules of evidence.

• Careful thought should be given to the constitution of the tribunal.

• Where possible, parties should seek to empower a tribunal to order interiminjunctions (bearing in mind the uncertainty with which such an agreementmight be treated by, specifically, the English courts).

• Parties should agree a suitable and well thought-out procedural timetablewith considerable time in particular set aside for the gathering of evidenceand cross-examination of witnesses.

• The level of confidentiality afforded to the proceedings should be reviewedin light of the potential benefits of more transparent proceedings.

• Finally, parties could consider narrowing their jurisdiction clause to excludeclaims in fraud from being referred to arbitration, or opting for a “hybrid”jurisdiction clause. Such a hybrid clause could provide that one or both par-ties have the right to choose between arbitration and litigation once a dis-pute has actually arisen. Such clauses are already common in loan agree-ments, but they could also prove beneficial where parties wish to makeprovision for potential fraud claims being litigated. However, while suchclauses may provide flexibility, they are not without risk. Certain jurisdic-tions may consider them unenforceable, which in a worst case scenario couldresult in the rendering of an unenforceable arbitration award. Specialist ad-vice should be sought before agreeing to such a clause.It is hoped that these steps will fortify an arbitral tribunal’s ability to deal ef-


fectively with fraud claims. However, what is most evident from the above, is thatgoing forward it will be all the more important for practitioners to offer their cli-ents multi-disciplinary services, offering both arbitration and litigation supportwhere issues of fraud arise.
