Impact of fraud on validity of international commercial arbitration awards

In international commercial activities, fraud not only violates the principle of good faith but also affects the legal validity of related actions. This article explores the impact of fraud on the validity of international commercial arbitration awards.

Fraud typically involves one party deliberately making false statements or concealing important facts to mislead the other party into making decisions based on incorrect information.

According to article 148 of China’s Civil Code, fraud is described as a means to “induce the other party to engage in a legal act against their true intention”. Hong Kong case law defines fraud as “inducing a person to believe a falsehood to be true, with the perpetrator knowing or believing it to be false”.

Article 5(2) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards states: “Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement are sought finds that: … (b) the recognition or enforcement of the award would be contrary to the public policy of that country.”

Reflecting this provision, article 68(2)(g) of the UK’s Arbitration Act 1996 allows parties to challenge an award obtained through fraud or in violation of public policy.

This highlights the close relationship between fraud and public policy. In international commercial practice, fraud affecting the validity of arbitration awards includes contract fraud and obtaining awards through fraudulent means.

If a party enters into a foundational contract through fraud and subsequently obtains a favourable arbitration award based on the arbitration clause in that contract, the validity of the award may be compromised. Although arbitration clauses or agreements are relatively independent and generally not invalidated by the nullity of the main contract, the ruling in Guangdong Shunde Zhanwei v Sun Fung Timber is notable.

Here, the respondent, primarily engaged in timber retail, signed an excessively high-value marble sales contract with the petitioner, with the contract amounting to 62 times the petitioner’s annual sales revenue. The contract also included unusually high penalties for late performance.

The Hong Kong court found that the contract amount in question was inconsistent with the parties’ main business and trading practices, deeming the contract to be fraudulent. Additionally, the arbitration process was found to be flawed. Therefore, enforcing the arbitration award would violate Hong Kong’s public policy, leading the court to refuse recognition and enforcement of the award.

Similarly, obtaining arbitration awards through fraudulent means can affect their validity. In The Federal Republic of Nigeria v Process & Industrial Developments Limited, Nigeria alleged bribery by the respondent in both the contract signing and arbitration process.

The UK court found that the respondent bribed Nigerian lawyers to influence the signing of the involved contract, concealed these acts during the arbitration process, and continued to bribe the lawyers to maintain their silence.

The respondent also submitted false evidence during the arbitration and improperly retained internal legal documents from Nigeria to monitor their strategies and considerations in the arbitration. The court ruled that obtaining the arbitration award through fraud violated public policy and thus annulled the award.

However, not all fraud-based annulment requests are supported by courts. In the Singapore case of BVU v BVX, the applicant sought to annul the arbitration award on the grounds of fraud and violation of public policy, accusing the respondent of failing to disclose certain documents and evidence, concealing facts and making false statements.

The Singapore High Court held that three conditions must be met to annul an award for nondisclosure or concealment: (1) the concealment was intentional; (2) the concealment was causally linked to the award in favour of the concealing party; and (3) there was no sufficient reason for nondisclosure.

Ultimately, the Singapore High Court did not support the applicant’s request to annul the arbitration award but established the relevant standards for parties to seek annulment of an arbitration award on the grounds of nondisclosure or concealment of evidence.

The above-mentioned cases illustrate that courts, when handling arbitration awards involving fraud, will consider the nature of the fraud, its impact on the award’s validity, and public policy protection.

Although courts in different countries have different standards for determining the validity of fraudulently obtained arbitral awards, fraudulently obtained favourable arbitral awards may face validity challenges.

For parties in international commercial practice, adhering to the principle of good faith during contract formation and arbitration can prevent the risk of awards being annulled or refused recognition and enforcement due to fraud. Conversely, if a party discovers contract fraud or an award obtained through fraudulent means, they can challenge the award’s legal validity.

Shen Qian is a senior partner and Zhu Huihui is a paralegal at Hylands Law Firm. Jiang Wanshan, an intern at the firm, also contributed to the article