In its recent decision in SCM Financial Overseas Ltd v Raga Establishment Ltd  EWHC 1008 (Comm) (available here), the English High Court (“Court“) refused to set aside an award on the ground of serious irregularity in circumstances where the London-seated tribunal applying the LCIA rules (“Tribunal“) proceeded to issue an award rather than await the outcome of domestic court proceedings which could have had a significant impact on the issues before the Tribunal.
The Court’s decision is significant because it highlights the wide discretion afforded to tribunals to manage the proceedings as they see fit, and demonstrates that there is an high bar to a successful challenge under section 68 of the Arbitration Act 1996 (“Act“). The decision also provides interesting observations on the relationship between arbitral and domestic court proceedings, and the inherent risk of inconsistent decisions should a party choose to arbitrate.
Pursuant to a sale and purchase agreement (“SPA“), Raga Establishment Ltd (“Raga“) agreed to sell to SCM Financial Overseas Ltd (“SCM”) shares in UA Telecominvest Limited (“UAT Shares“), which owned 100% of the shares in ESU. ESU, in turn, owned approximately 93% of the shares in Ukrtelecom (“Ukrtelecom Shares“), one of the largest fixed line telephone operators in the Ukraine. The Ukrtelecom Shares had been acquired by ESU from the State Property Fund of Ukraine (“SPFU“) pursuant to a privatisation agreement which obliged ESU to make investments to Ukrtelecom’s business and to transfer to the Ukrainian state a protected telecommunications network (“Investment and Network Obligations“).
The purchase price of US$860 million for the UAT Shares was payable by SCM in three instalments. The principal value of the UAT Shares was the indirect shareholding in the Ukrtelecom Shares. There were terms in the SPA to the effect that ESU had good title to the Ukrtelecom Shares and that Raga would procure ESU’s compliance with its obligations in respect of the privatisation agreement.
After the sale (but before all the instalments were paid), the SPFU issued a report claiming that ESU had breached the Investment and Network Obligations and proposed that the Ukrtelecom Shares be returned to the State.
Proceedings before the Tribunal
Raga commenced arbitral proceedings under the LCIA rules in London against SCM seeking the unpaid instalments due under the SPA. SCM argued that ESU had breached the Investment and Network Obligations, and that these breaches gave rise to a risk of the Ukrtelecom Shares being confiscated. SCM alleged that Raga had made misrepresentations as to ESU’s compliance with its obligations which entitled SCM to rescind the SPA, and that there was a total failure of consideration by reason of the prospect of confiscation.
Shortly before the arbitral hearing commenced, SPFU filed proceedings against ESU in the Ukrainian court alleging breaches of the Investment and Network Obligations and seeking the return of the Ukrtelecom Shares. In oral closings at the arbitral hearing, SCM urged the Tribunal to defer its award on the basis that the findings of the Ukrainian court would be highly relevant to the issues in the arbitration. Raga argued that the award should not be deferred and that the SPFU’s action in the Ukraine was irrelevant.
Inconsistent Award and Ukrainian judgment
The Tribunal declined to await the Ukrainian court’s decision and issued a partial final award (“Award“) which rejected SCM’s case and found in favour of Raga. The Tribunal’s reason for proceeding with the Award was that while the findings of the Ukrainian court would be relevant, the Tribunal should nevertheless make its decision on the basis of the evidence before it. Waiting for the Ukrainian judgment could result in uncertainty over a lengthy period which could be prejudicial to the parties.
Accordingly, and based on the expert evidence on Ukrainian law before it, the Tribunal found that there was no breach of the Investment and Network Obligations as alleged by SCM. In reaching this conclusion, the Tribunal considered the absence of any Ukrainian court decision on the issue to have been significant.
Less than three months after the Award was rendered, the Ukrainian court issued a judgment which found that there had been breaches of the Investment and Network Obligations and ordered that the Ukrtelecom Shares be confiscated.
Application to set aside Award for serious irregularity
SCM brought an application before the Court to set aside the Award on the basis of serious irregularity under section 68 of the Act. SCM’s case was that in refusing to defer the Award, the Tribunal had breached its general duty under section 33 of the Act.
Observations on application to set aside due to failure to comply with tribunal’s general duty
The Court made eight observations in respect of challenges to awards based on an alleged breach of a tribunal’s general duty under section 33 of the Act:
- In determining whether there has been a breach of the general duty, the tribunal’s conduct must be assessed as at the time of the award. What ultimately transpired after the award is not relevant to the question of irregularity (although it may be relevant to the question of substantial injustice).
- The party challenging the award must show unfairness by the tribunal, and not merely a mistake by the party or its lawyers.
- The tribunal’s general duty is to give each party a reasonable opportunity to present its case and adopt procedures which provide a fair means of resolving the dispute. These are not unduly demanding standards. A procedure may be “fair” without being “perfect”.
- The tribunal must avoid unnecessary delay (in accordance with the objectives of the Act), even if an unnecessary delay would not cause prejudice.
- Where the fairness of a procedural decision is challenged, the court may examine the tribunal’s reasons for the decision but ultimately the question turns on whether the decision was objectively fair or not.
- In contrast to the question of whether there was irregularity, substantial injustice may be either present or future.
- It is not necessary to show that but for the irregularity the result would have been different. There will be substantial injustice if the result might have been different.
- A party choosing to arbitrate faces the inherent risk of inconsistent decisions as between the arbitral tribunal and a court or different arbitral tribunals. The fact that the risk materialises cannot by itself amount to substantial injustice.
Refusal to defer Award did not amount to breach of Tribunal’s general duty
The Court considered that the Ukrainian judgment, although not binding on the Tribunal, had the potential to be extremely important evidence in the arbitration. The Court also considered that a decision not to defer an award until further evidence is available is capable of amounting to a breach of the general duty. Whether a decision not to defer would amount to a breach would depend on all of the circumstances of the case (assessed at the time of the award), including the nature and significance of the evidence, the likelihood of it becoming available, the length of the delay which would result, and the prejudice of the delay on the party resisting deferral.
The Court concluded that in the present case the Tribunal had not breached its general duty in proceeding to issue the Award without waiting for the Ukrainian judgment. While there were factors in favour of deferring the Award, including the evidential value of the Ukrainian judgment, there were factors weighing against deferral: in particular, the prejudice that Raga would suffer by reason of a potentially lengthy delay. It was significant that, at the time of the Award, the Tribunal had not been provided with information about the likely duration of the Ukrainian court proceedings.
While it would have been open to the Tribunal to delay the Award for a short while in order to find out more about the timescale of the Ukrainian proceedings, it was also open to the Tribunal to proceed without doing so. The Tribunal’s decision to proceed was therefore not unfair so as to constitute a breach of its general duty.
The Court’s decision to dismiss SCM’s application is noteworthy for several reasons:
- It confirms that a procedural decision about whether to defer an award is capable of amounting to a breach of the general duty, and may render the award amenable to challenge under section 68 of the Act.
- The Court observed that the risk of inconsistent decisions – between an arbitral tribunal and a court or two arbitral tribunals – is an inherent risk of arbitration. The fairness or unfairness of a tribunal’s procedural decisions will thus be assessed in the light of that inherent risk.
- The Court afforded the Tribunal a wide discretion in deciding whether or not to defer the Award, notwithstanding that the Ukrainian judgment would have been potentially significant and the Tribunal “could not have been criticised” had it decided to defer the Award, at least for a short while.
The Court’s decision thus demonstrates that there is a high threshold to succeed in a challenge under section 68 of the Act. This is borne out by the statistics: since 2015, only three of the more than 100 section 68 applications brought before the Court have succeeded (see further here).
For more information, please contact Craig Tevendale, Partner, Aaron McDonald, Senior Associate, or your usual Herbert Smith Freehills contact.