In SCM Financial Overseas Ltd v Raga Establishment Ltd [2018] EWHC 1008 the English High Court held that a Tribunal’s decision not to defer its Award pending judgment from a foreign court on the same issues did not render the Award susceptible to challenge for “serious irregularity” pursuant to Section 68 of the Arbitration Act 1996.
Although the Tribunal could have deferred its Award, the decision on whether to do so fell within the Tribunal’s legitimate discretion. In this case, the Tribunal properly exercised its discretion and the challenge was therefore dismissed.
Factual summary
In June 2013, SCM Financial Overseas Ltd (“SCM”) entered into an SPA with Raga Establishment Ltd (“Raga”), pursuant to which SCM purchased a 92% indirect shareholding in one of Ukraine’s largest telephone operators, Ukrtelecom, for US$860 million.
Under the terms of Ukrtelecom’s privatisation in 2011, Ukrtelecom and its direct majority shareholder (“ESU”) were under certain obligations, including to invest US$450 million into Ukrtelecom and to create a special network for Ukrainian governmental agencies (the “Obligations”). The SPA obliged Raga to procure the performance of the Obligations and contained a term recording good and valid title to the Ukrtelecom shares. The SPA was governed by English law and provided for disputes to be resolved by arbitration seated in London under the LCIA Rules.
Payment under the SPA was due in instalments. Having paid the first instalment of US$100 million, SCM refused to pay the remainder. Raga therefore commenced the arbitration, seeking the unpaid sums. SCM, in its defence, argued that Raga had been responsible for a failure by ESU to fulfil the Obligations, that the shares were consequently liable to confiscation by the Ukrainian state, and that it was therefore entitled to rescind the SPA.
Meanwhile, in Ukraine, investigations into ESU’s failure to fulfil the Obligations had been ongoing. This led to court proceedings being commenced in Kyiv by the State Property Fund of Ukraine against ESU. Those proceedings sought return of ESU’s shares in Ukrtelecom to the Ukrainian State and were filed only five days before the arbitration hearing. The alleged breaches of the Obligations and their consequences therefore fell to be addressed both by the Tribunal and by the Kyiv Court.
SCM requested the Tribunal to defer its Award pending judgment of the Kyiv Court. Although the Tribunal recognised the importance of the anticipated judgment of the Kyiv Court, it proceeded to issue its Award. Having found that the Obligations were not breached, it dismissed SCM’s case that the shares were liable to confiscation. Three months later, the Kyiv Court reached the opposite conclusion. SCM was therefore required to pay substantial sums to Raga for shares which are subject to confiscation.
The challenge
SCM challenged the Award on the basis that the Tribunal breached the duties imposed on it by Section 33 of the Arbitration Act 1996 to: (i) act fairly and impartially between the parties, giving each party a “reasonable opportunity of putting his case”; and (ii) adopt procedures suitable to the circumstances of a particular case (the “Section 33 Duties”).
In an arbitration seated in England, failing to comply with Section 33 Duties can constitute a “serious irregularity” which renders an Award liable to challenge before the court under Section 68 of the Arbitration Act 1996.
SCM argued that the Tribunal breached the Section 33 Duties because it should have considered the outcome of the Kyiv claim. Had that outcome been considered, the Tribunal may have reached a different decision. In support of its challenge, SCM argued that the risk of irreconcilable decisions which existed at the date of the Award (and which subsequently materialised) could (and subsequently did) cause substantial prejudice to SCM.
Award upheld
In setting the groundwork for dismissing the challenge, the Court made a number of pertinent comments regarding challenging an Award on the basis of breaches of the Section 33 Duties, including:
- the determination of whether the decision not to defer the Award constituted a serious irregularity must be determined at the date of the Award (on which the Kyiv claim was still in progress) and not on a subsequent date [56];
- the Section 33 Duties are not “unduly demanding standards” [58]; and
- where the fairness of a procedural decision is challenged, the question is not whether the reasons for the decision are sound, but whether the procedure has been fair [61].
In a stark reminder of the strict inter-partes nature of arbitration, the Court observed that “it is a risk inherent in the choice of arbitration that a party choosing to arbitrate is at risk of inconsistent decisions” if there are court or other proceedings which concern non-parties to the arbitration and that, therefore, the materialisation of this risk cannot constitute “substantial injustice” [66] and is not a serious irregularity.
The Court held that although the refusal not to defer an Award is capable of constituting a breach of Section 33 Duties, whether such a breach occurs depends on all the circumstances of the case. Those circumstances may include “the nature and significance of the evidence in question, the likelihood of it becoming available, the length of the delay which will result, and the prejudice to the party resisting deferral from that delay” [83], all of which must be assessed as at the date of the Award.
In this case, the Tribunal had recognised that the Kyiv judgment may be relevant to the outcome of the arbitration, yet decided to render the Award without the benefit of that judgment as “an adjournment may result in uncertainty over a lengthy period, which could be prejudicial to either party” and that it was “likely” that the Ukrainian court would come to the same conclusion as the Tribunal [67]. In fact, the judgment was issued only three months later and reached the opposite conclusion. The Court also disagreed that “either party” would have been prejudiced by the delay (as SCM would not have been).
Nevertheless, the Court still rejected the challenge emphasising that at the time of the Award, the Tribunal was not provided with any information as to the likely duration of the Kyiv action (which could have lasted significantly longer) and was not required to enquire as to its timing. Absent such information, the Tribunal would have risked an “uncertainty over a lengthy period” [85]. Against that, the Court recognised that the prejudice to SCM was potentially very significant, but held that prejudice to be a mere possibility which was also a risk inherent in the choice of arbitration as discussed above.
The Court therefore held that the Tribunal did not breach its Section 33 Duties. Although it was open to the Tribunal to defer, and some Tribunals may have done so, ultimately this decision was at the discretion of the Tribunal which in this case was properly exercised.
Comment
The average duration for an LCIA arbitration with an amount in dispute of greater than US$100 million for the period 2013 to 2016 was 29 months (according to the LCIA’s “Fact and Figures” report of October 2017). In this arbitration, only 12 months passed between its commencement and the Award. Not being an expedited arbitration, the available statistics and experience suggest that it concluded comparatively swiftly and well below the traditionally expected timings.
Although expeditious dispute resolution is generally welcome, that will be of little comfort to SCM who, in effect, is left to pay substantial sums for ostensibly no assets. The fact that some Tribunals, as the court noted, may have deferred their Award indicates the potential helpfulness of institutional guidelines for Tribunals to follow in these type of circumstances. Whilst appreciating that circumstances are always different, such guidance could at least help promote overall consistency of approach.