The dispute emerged in 2013, when SCM (a Cypriot company which is a wholly-owned subsidiary of Joint Stock Company System Capital Management, a Ukrainian corporation) consented to buy 100% shares in Ukrtelecom ( which is one of the largest fixed line telephone operators in Ukraine and was owned by the State Property Fund of Ukraine until its privatisation in 2011) from Raga (a Cypriot company which is a subsidiary of an international financial investment company incorporated in Austria) for US $860 million. As per the terms of the share purchase agreement (SPA), the purchase price was to be paid in three portions. SCM paid the first portion of $100 million on the due date, however it neglected to pay the second and third portions, totaling US $760,566,951.86 after a mutual agreement between the parties to somewhat bring down the purchase price.
Accordingly, in 2016, Raga started LCIA arbitration against SCM, looking for recovery of the unpaid installments. Over the span of the proceedings, notwithstanding, Raga found that since its buy of Ukrtelecom, SCM had been redirecting its assets to different entities in the SCM Group. The aggregate impact of several intra-group transfers was to basically strip SCM of its benefits and along these lines keep Raga from having the capacity to gather the outstanding installments as an end-result of its sale of Ukrtelecom. Accordingly, Raga obtained a freezing order against SCM Financial from the English High Court in 2016 and against SCM Holdings of the District Court of Nicosia in Cyprus.
In October 2017, long after the LCIA issued its last order against SCO, the Kyiv Commercial Court decided that Ukrtelecom should be returned to the State since its purchaser, the SCM-claimed ESU, had had failed to meet privatization obligations agreed at the time of purchase in 2011. ESU, which is 93% controlled by Raga’s holding organization, was directed to return proprietorship rights to the state.
SCM described the Kyiv Commercial Court’s action as a very important and highly relevant piece of evidence, going directly to some of the issues before the arbitrators and therefore asked the tribunal to defer the issue of their award. This was challenged by Raga stating that Kyiv Commercial Court’s action was “utterly irrelevant”
The tribunal held
- the Investment Obligation in the Privatisation agreement was not a legally binding obligation; and
- even if it had been legally binding, SCM had failed to prove any breach of that obligation by ESU.
The result, therefore, was that the arbitrators and the Kyiv Commercial Court reached diametrically opposite conclusions on the same issues, with the consequence that SCM is now obliged to pay a total purchase price of some US $860 million to Raga, plus a penalty of US $81.9 million to the Ukrainian State, for shares in Ukrtelecom which will be confiscated.
Proceedings in English High Court
An application under Section 68 of the English Arbitration Act, 1996 (the Act) was filed in the English High Court to set aside the award.
Applicable Legal Principles
Section 68 of the Act
68. Challenging the award: serious irregularity
(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award. …
(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant—
(a) failure by the tribunal to comply with section 33 (general duty of tribunal); …
Section 33 of the Act
33. General duty of the tribunal
(1) The tribunal shall—
(a) act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent, and
(b) adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined.
(2) The tribunal shall comply with that general duty in conducting the arbitral proceedings, in its decisions on matters of procedure and evidence and in the exercise of all other powers conferred on it.
Section 34 of the Act
It shall be for the tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree any matter.
Analysis of the Court
- In order to determine whether there has been a breach of the section 33 duty it is necessary to establish that the arbitrators have acted unfairly (para (a)) or have adopted procedures which have resulted in unfairness (para (b)).
- What must be shown is unfairness by the arbitrators and not merely a mistake or misunderstanding by the losing party or its lawyers.
- The arbitrators’ duties under section 33 are to give each party a reasonable opportunity of putting its case and to adopt procedures providing a fair means for resolving the dispute. Whether the opportunity given is reasonable and whether the procedures are fair are objective questions to be determined by the court, but these are not unduly demanding standards. A party may have been given a reasonable opportunity of putting its case even if there is more evidence that could have been adduced. A procedure may be fair even if it is not perfect.
- The arbitrators are charged with avoiding unnecessary delay in accordance with the object of arbitration identified in section 1 of the Act (“to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense”). Thus unnecessary delay is to be avoided even in the absence of prejudice. In some cases to defer an award could itself be unfair and therefore in breach of the arbitrators’ section 33 duties. In other cases, however, delay may be necessary in order to avoid unfairness. Indeed, it is debatable whether necessary delay is properly to be regarded as delay at all. It may seem, therefore, that arbitrators are faced with walking something of a tightrope, vulnerable to attack by both parties. However, the critical issue is fairness. Provided the arbitrators act fairly, the court will support their decision.
- Where the fairness of a procedural decision by arbitrators is challenged, the court will wish to examine any reasons given by the arbitrators for their decision. Ultimately, however, the question is not whether the reasons given by the arbitrators are sound but whether the procedure has been fair.
- In contrast with the question whether there has been an irregularity, substantial injustice may be either present or future. It is necessary to show that the irregularity “has caused or will cause” substantial injustice. However, it is not enough merely that it may do. If the injustice has not yet occurred, the court must form a view about whether it will do so.
- However, it is not necessary to show that but for the irregularity the result of the arbitration would have been different. There will be a substantial injustice if the result might well have been different.
- It is a risk inherent in the choice of arbitration that a party choosing to arbitrate is at risk of inconsistent decisions. the fact that the risk materialises cannot by itself amount to substantial injustice. On the contrary, the choice of arbitration means that, as between themselves, the parties elect to be bound by the decision of their chosen tribunal, not the decision of some other court or tribunal. In general arbitrators are not bound to defer to the decisions of other tribunals.
The Court held as under:
- There could be no question of the Kyiv Commercial Court decision creating any issue estoppel against Raga and that Raga will not be bound by the judgment in the Kyiv Commercial Court.
- To the extent that there was an issue in the arbitration (as clearly there was) whether the Ukrtelecom shares were liable to be and would be confiscated and on what grounds, the Kyiv Commercial Court judgment was likely to put that issue beyond doubt.
- The Court rejected the contention that the Kyiv Commercial Court was better placed than the arbitrators to determine the issues. As between the parties, it had been agreed that the arbitrators were the appropriate tribunal to do so. However, the Court noted that the Kyiv Commercial Court decision cannot be dismissed as necessarily irrelevant to their decision. It was potentially important evidence.
- A decision not to defer issue of an award until further evidence is available is capable of amounting to a breach of arbitrators’ section 33 duties.
- Whether such a decision does amount to a breach of the section 33 duties in any particular case must depend on all the circumstances. However, the actual outcome of the Kyiv Commercial Court action is not relevant to the issue of breach of the section 33 duties. Nor is the fact that, in the event, there was no significant additional evidence adduced in that action.
- There was no irregularity within the meaning of section 68 and accordingly that the issue of substantial injustice does not arise.
The criteria adopted by English High Court is similar to the approach of Singaporean Court of Appeal on this issue in Soh Beng Tee & Co Ltd v. Fairmount Development Pte Ltd, wherein the Court held that a party challenging an arbitration award as having contravened the rules of natural justice must establish:
- which rule of natural justice was breached;
- how it was breached;
- in what way the breach was connected to the making of the award; and
- how the breach prejudiced its rights.