The 1MDB arbitration: more time for a exceptional case

On 28 July 2020, Dato' Sri Haji Mohammad Najib bin Tun Haji Abdul Razak, the former Prime Minister and Minister of Finance of Malaysia, was sentenced to 12 years in jail by the High Court in Kuala Lumpur. This was the high point, but not the end, of the investigation into the activities of 1 Malaysia Development Berhad (“1MDB”), a sovereign wealth fund that had been set up when Mr Najib was Prime Minister.

The 1MDB scandal involved the diversion of billions of dollars, which had originally been raised for public development projects in Malaysia, into the hands of various individuals. It has led to criminal prosecutions and investigations around the world, including in Malaysia, the USA, Hong Kong, Singapore and Abu Dhabi. Huge fines and compensation orders have been paid by Goldman Sachs among others.

The latest development has been a decision by the High Court in London to allow a challenge to a US$ 1.6 billion arbitration award to proceed, even though the challenge has been filed long outside the 28-day period specified in the Arbitration Act 1996 (Minister of Finance (Incorporated) & Another v International Petroleum Investment Company & Another [2021] EWHC 2949 (Comm)).

The time-limit for challenging awards ?

The Arbitration Act 1996 allows parties to challenge an award made in an English-seated arbitration under various grounds. However, such an application must be made to the courts within 28 days of the date of the award. This is a relatively tight timetable, which is intended to promote certainty, the emphasis being on enforcement (which can be done in England within 6 years of the date of the award) rather than challenges to awards.

The courts have the power to extend this deadline. In Aoot Kalmneft v Glencore International AG [2002] 1 Lloyd’s Rep 128 identified the following factors that should be taken into account when deciding whether to exercise this power:

• The length of the delay
• Did the party seeking the extension of time act reasonably in all the circumstances?
• Did the respondent to the application, or the tribunal, cause or contribute to the delay?
• Will the respondent to the application suffer irremediable prejudice, if the extension of time is granted?
• If the arbitration is ongoing (in the case of a partial award), what will be the impact of any extension of time on the arbitration?
• The apparent strength of the challenge to the award, assessed provisionally as best the court may be able to do so.
• Overall, would it be unfair to the applicant to be denied the chance to have its challenge to the award determined on its merits?

In general, the courts have taken the view that delays of weeks beyond the 28-day deadline have been excessive. But there have been cases where extensions have been granted for long periods of time. For example, last year in Nigeria v Process & Industrial Developments [2020] EWHC 2379 (Comm) the High Court granted an extension of time of over 4 years.

The 1MDB arbitration

The arbitration in this case was between 1MDB (and its parent company, controlled by Mr Najib as the Malaysian Minister of Finance) and two investment companies owned by the Government of Abu Dhabi, IPIC and Aabar Investments. At the time, the two Abu Dhabi companies were controlled by individuals who have subsequently been convicted of criminal offences in Abu Dhabi for their role in the 1MDB scandal.

The Malaysian parties and the Abu Dhabi parties entered into contracts worth billions of dollars. One of these contracts, called the Binding Term Sheet, led to an arbitration, which was started in June 2016. The Abu Dhabi parties claimed over US$ 12 billion; the Malaysian parties counterclaimed for US$ 3.5 billion. A Statement of Claim and a Defence were filed. But at that point the parties settled the dispute. The parties asked the arbitral tribunal to issue a consent award, which it did in May 2017. Under the consent award, the Malaysian parties had to pay US$ 1.2 billion to IPIC, among other matters.

Challenge to the award

Mr Najib lost the general election in May 2018. By that time, the 1MDB affair had come to light (as the result, in particular, of a Wall Street Journal investigation). When the new government took power it started an investigation into 1MDB. This led to criminal charges being filed against Mr Najib. It also led to a challenge to the arbitration award, which was filed in the English High Court in October 2018. The challenge was brought on the basis that, it was alleged, the parties had settled the arbitration and obtained the consent award in order to cover up Mr Najib’s prior fraud and dishonesty; and therefore the consent award should be set aside under section 68(2)(g) of the Arbitration Act 1996 as being obtained by fraud or against public policy.

At the same time, the Abu Dhabi parties started a second arbitration against the Malaysian parties for enforcement of the settlement agreement. That led to further litigation in England, which went to the Court of Appeal, and resulted in the suspension of the second arbitration. The consequence of that process was that the challenge to the consent award was postponed and it did not come before the High Court until 2021.

The challenge, of course, had been brought long after the 28-day period had expired: it was filed 511 days after the date of the award. The first point that the High Court had to consider therefore was whether the time-limit should be extended. After reviewing the factors identified in the Kalmneft case and applying them to the facts here, the High Court decided that the time should be extended. This was principally because the Malaysian parties could not have been expected to pursue a challenge while Mr Najib was still Prime Minister; and once he had left office, the Malaysian parties had, on the whole, prepared its challenge reasonably diligently (and the Abu Dhabi parties had not suffered any prejudice as a result of delay to that preparation). Further, the judge thought that the allegations were properly arguable on their merits.

Comment

An extension of time of almost a year and a half is, like the extension in the Nigeria case, far outside the boundaries laid down in the Arbitration Act. This raises the question of how can an arbitration award be treated as final if a party can challenge it years later?

On the other hand, most applications for an extension of time are refused, and only a small number are granted. Also, both this case and the Nigeria case might be seen as highly unusual, involving allegations of massive frauds and awards worth billions of dollars.

After it was suggested to the judge in the 1MDB case that a long extension of time might undermine London’s reputation as a global disputes centre, he replied that this was “an exceptional decision to meet the justice of an exceptional case”. He also said that it was far more likely to bring London into disrepute for it to be perceived that an award has been brought about via dishonest efforts, but a challenge is then barred as a result of the statutory time-limit.

This case, like the Nigeria case, should perhaps be seen as an outlier, and as an exception that proves the rule. Most applications for a long extension of time to bring a challenge will be dismissed. It is only in extraordinary situations that such an extension will be granted.