INDIAN SUPREME COURT ALLOWS INDIAN PARTIES TO CHOOSE A FOREIGN SEAT OF ARBITRATION

Settling a much-litigated issue, the Supreme Court of India (“Court”) recently decided that two Indian parties can choose a foreign (non-Indian) seat of arbitration. Some courts had previously held that at least one party had to be a non-Indian person or company for such a clause to be effective. The Court clarified the position and held that an award issued by an arbitral tribunal in such circumstances would be enforceable in India and that the parties could also seek interim relief in India. The decision brings welcome certainty particularly for Indian subsidiaries of international companies that have negotiated contracts providing for offshore arbitration in jurisdictions like Singapore, London, Hong Kong and others.

Background

The judgment, in PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited, followed from an appeal from a decision of the Gujarat High Court (which we covered here). It involved two Indian companies, one a subsidiary of a French company, that had entered into an agreement for the sale of converters. The agreement provided for arbitration in Zurich under the ICC Rules and was governed by Indian substantive law. The Tribunal issued an award and GE Power applied to enforce it in Gujarat. The Gujarat High Court held that the award was enforceable notwithstanding that the two Indian parties had chosen a foreign seat, but also held that parties to such an arbitration would not be entitled to interim relief in the Indian courts. PASL Wind Solutions appealed to the Court.

The Judgment

Meaning of ‘Foreign’ Award

Part II of the Indian Arbitration and Conciliation Act 1996 (the “Arbitration Act”) applies to the enforcement of foreign awards in India. One question before the Court was how the term ‘foreign award’ should be interpreted.

The appellant argued that the definition turns on the nationality of the parties, and that an award could not be considered ‘foreign’ because it involved two Indian parties. The Court rejected this argument and held that there were four criteria for an award to be considered a foreign award: (i) the dispute must be considered to be a commercial dispute under the law in force in India, (ii) it must be made pursuant to a written arbitration agreement, (iii) the dispute must arise between “persons” (without regard to their nationality, residence, or domicile), and (iv) the arbitration must be conducted in a New York Convention country.

The Court held that these criteria were met by the award in question. Section 44 of the Arbitration Act (which defines foreign awards) was “party-neutral” and the key factor is the place of arbitration.

The appellant also argued that the term ‘foreign award’ in Part II must be understood by reference to terms used in Part I (which deals with domestic or India-seated arbitrations). The Court rejected this argument and held that it was not possible to interpret the provisions of one part of the Arbitration Act using provisions of another part, following its earlier decision in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services.

Public policy

Another issue before the Court was whether an agreement between two Indian parties to arbitrate in a foreign seat was against the provisions of the Indian Contract Act 1872. In particular it was argued that this was against Section 23, which makes agreements against public policy void, and Section 28, which provides that agreements in restraint of legal proceedings are void.

On public policy, the Court found that on balance there was no harm to the public in allowing two Indian parties to resolve their disputes offshore: “The balancing act between freedom of contract and clear and undeniable harm to the public must be resolved in favour of freedom of contract as there is no clear and undeniable harm caused to the public…”. Where issues of fundamental Indian public policy where involved, the Court found that there were adequate safeguards in the Arbitration Act and under conflict of laws rules.

The Court also echoed its previous judgments which held that party autonomy was “the brooding and guiding spirit of arbitration” and that there were no grounds on which to restrict this autonomy by preventing Indian parties from arbitrating abroad.

Interim Relief

Finally, the Court overruled the Gujarat High Court’s finding that interim relief would not be available for arbitrations between Indian parties seated abroad. The Court found that this was based on an erroneous reading of the provisions of Parts I and II of the Arbitration Act.

Comment

The Court’s judgment will be a welcome clarification on an issue that has divided many High Courts in India including those in Delhi, Bombay and Gujarat. For contracts entered into before this question was widely litigated, parties will welcome the clarity. Looking ahead, for parties now negotiating contracts, the Court’s decision offers a wider menu of available forums in which to resolve their disputes, which is consistent with the global reach of Indian businesses.

For more information please contact Paula Hodges QC, Head of Global Arbitration Practice, Andrew Cannon, Partner, Nihal Joseph, Associate, or your usual Herbert Smith Freehills contact.

Paula Hodges QC
Paula Hodges QC
Head of Global Arbitration Practice
+44 20 7466 2027

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852
Nihal Joseph
Nihal Joseph
Associate
+44 20 7466 2212

Of joy and woe: Australian decision confirms the limits of the ‘reasonable opportunity’ entitlement

In Full Joy Foods Pty Ltd v Australian Dairy Park Pty Ltd [2020] VSC 672, the Victorian Supreme Court confirmed the well-established position in Australia that a party’s entitlement to a ‘fair opportunity to present its case’ does not require an arbitrator to ensure the party takes best advantage of those opportunities presented to it in the course of arbitration.

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ANNULMENT OF AL KHARAFI V. LIBYA ARBITRAL AWARD BY CAIRO COURT OF APPEAL

On 3 June 2020, the Cairo Court of Appeal set aside a US$ 1 billion investment treaty award arising out of a dispute between a Kuwaiti construction company and the State of Libya, in relation to a license for a tourist development project in Tripoli, Libya.

The award was issued under the Unified Agreement for the Investment of Arab Capital in Arab States dated 26 November 1981 (the “Unified Agreement” or the “Treaty”). The arbitration was seated in Cairo, Egypt and administered by the Cairo Regional Centre for International Commercial Arbitration (“CRCICA”).

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RUSSIAN SUPREME COURT DECIDES PARTY CANNOT CHALLENGE AWARD DUE TO ARBITRATOR’S REMOVAL FROM LIST OF RECOMMENDED ARBITRATORS

The Russian Supreme Court (the “SC”) has seemingly put an end to the enforcement battle in Atlantic Hermes Shipping Limited v OOO Strakhovaya Kompaniya Soglasie (Limited Liability Company Insurance Company Soglasie) (Case No. A40-153265/2019). In its decision dated 27 February 2020, the SC confirmed that the removal of a party-appointed arbitrator from the list of recommended arbitrators published by an arbitral institution administering the arbitration (the “List”) did not, in itself, enable the other party to challenge the arbitral award. The SC also confirmed that parties are not prohibited from instructing, as their legal representative in the arbitration, a person who was also a recommended arbitrator on the List.

Background

Arbitration proceedings

In June 2019, an arbitral tribunal administered by the Maritime Arbitration Commission at the Russian Chamber of Commerce and Industry (the “MAC”) issued an award (the “Award”) in favour of the claimant, Atlantic Hermes Shipping Limited (“Atlantic”). The defendant in the arbitration, Limited Liability Company Insurance Company Soglasie (“Soglasie”) refused to honour the Award voluntarily.

Russian court proceedings: first instance court decision

Atlantic sought to enforce the Award in the Russian courts. Soglasie resisted enforcement and applied to set aside the Award, arguing that it violated Russia’s public policy for two reasons:

  • During the arbitration proceedings, the arbitrator appointed by Atlantic was removed from the List recommended by the MAC. However this removal was not communicated to Soglasie. As a result, Soglasie was allegedly precluded from challenging the arbitrator on this basis.
  • Atlantic’s legal representative in the arbitration was listed as a recommended arbitrator on the MAC List. Soglasie argued that this was contrary to the MAC Arbitration Rules, which provided, in the relevant section, that arbitrators had to be impartial and independent, and could not act as counsel in the same arbitration in which they sat as an arbitrator.

In September 2019, having joined the parties’ applications in the same proceedings, the first instance court sided with Soglasie, dismissing Atlantic’s enforcement application and setting aside the Award (the “Set Aside Decision”). The court held that the Award was issued in breach of Russia’s public policy, as the arbitrators blatantly violated the well-established principles of administration of justice and principles of Russian law.

Set Aside Decision overturned

Russian court proceedings: Cassation Court Decision

In November 2019, the Moscow District Court (the “MDC”) overturned the Set Aside Decision and sent the case back to the court of first instance for re-consideration (the “Cassation Court Decision”).

The MDC noted that the parties were not under an obligation to appoint arbitrators from the MAC List (there was no such requirement either under Russian law, or in accordance with the MAC Arbitration Rules, or indeed in the parties’ agreement). It was therefore open to Atlantic to appoint an arbitrator who was not listed on the MAC List. Although the removal of the arbitrator appointed by Atlantic was a matter of public knowledge, Soglasie failed to raise its objections during the arbitration, and had therefore waived its right to do so.

Further, according to the evidence provided by the parties, while the arbitration was still on-going, five months after the Atlantic-appointed arbitrator was removed from the MAC List, the parties entered into a written agreement confirming that they agreed to the composition of the tribunal and there were no grounds for challenge of the arbitrators; it was therefore not open to Soglasie to renege on its agreement in this respect. The MDC determined that Soglasie’s failure to raise the objections during the arbitration constituted a clear waiver of its right to raise the same objections during Russian court proceedings.

On Soglasie’s second argument, the MDC held that Atlantic’s legal representative acted solely in his capacity as counsel and he was not appointed to act as an arbitrator in this case. Therefore, he was not under a duty to act impartially, or to act as an independent and neutral party, in this arbitration.

Finally, the MDC reiterated that the notion of “public policy” (which we discussed in more detail in one of our previous blog posts) was to be construed as comprising only highly imperative and universal fundamental principles, which had particular social and public importance, and formed the basis of the Russian economic, political and legal system. It concluded that the factual circumstances referred to by Soglasie were not related to public policy.

Russian court proceedings: re-consideration by the first instance court

In December 2019, the first instance court followed the directions given by the MDC in the Cassation Court Decision, issuing an execution writ long-sought by Atlantic (the “Re-consideration Decision”). Soglasie attempted to challenge the Cassation Court Decision in the SC and the Re-consideration Decision in the MDC. Both appeal attempts were unsuccessful. We discuss the SC decision in more detail below.

Russian court proceedings: Supreme Court decision

The SC carried out a limited review of the case, deciding that there were no circumstances that would merit a full review. The SC agreed with the conclusions in the Cassation Court Decision. It has therefore confirmed that, as a matter of Russian law, a removal of a party-appointed arbitrator from a list of recommended arbitrators published by the administering arbitral institution does not, in itself, enable the other party to challenge the arbitral award. It has also determined that parties are not prohibited to instruct, as their legal representative, a person who is also a recommended arbitrator on such a list.

Comment

The SC decision in this case follows its previous guidelines, which attempted to narrow down the scope of “public policy” and suggested that Russian courts should refuse recognition or enforcement of an arbitral award on public policy grounds only in exceptional circumstances. Although, strictly speaking, the SC decision is not binding on the lower courts, it may also prove to be a helpful point of reference for parties seeking to enforce arbitral awards in Russia.

For more information, please contact Nicholas Peacock, Partner, Alexei Panich, Partner, Alexander Gridasov, Associate, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
Nicholas Peacock
Partner
+44 20 7466 2803

Alexander Gridasov
Alexander Gridasov
Associate
+7 495 36 36536

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

HONG KONG: COURT MAKES WINDING UP ORDER WHERE DEBTOR UNABLE TO PROVE BONA FIDE DISPUTE ON SUBSTANTIAL GROUNDS

The Hong Kong Court of First Instance has declined to prioritise an arbitration agreement where a debtor intended to dispute the existence of a debt without proving there was a bona fide dispute on substantial grounds.

Dayang (HK) Marine Shipping Co., Ltd v. Asia Master Logistics Ltd [2020] HKCFI 311; HCCW 14/2019

Background

The parties entered into a charterparty on 25 October 2018 by which Asia Master chartered a vessel M.V. “Aoli 5” from Dayang.

The Fixture Note obliged the owner to guarantee that the vessel be watertight and that all fitted gear be workable and in good condition throughout the charter period. It provided for the cost and duration of the hire, with disputes to be resolved by arbitration in Hong Kong under English law. Finally, it applied the New York Produce Exchange 93.

This was the substantive hearing of Dayang’s winding up petition based on the unpaid debt of US$360,919.76, which was originally dated 11 January 2019 then amended on 11 April 2019. Asia Master did not deny the existence of the debt but raised a counterclaim in relation to an alleged breach of Dayang’s obligations as per the Fixture Note and submitted that the dispute should be resolved by arbitration. On 22 February 2019, Asia Master’s counsel sent a letter to Dayang to state its preparedness to settle the dispute by arbitration.

In making its decision, the Court examined the nature of the dispute and any public policy implications.

Whether the debt was disputed in good faith and on substantial grounds

Deputy High Court Judge William Wong SC first observed that the breaches of obligations, for which Asia Master claimed Dayang should take responsibility, remained under investigation. Asia Master was unable to give particulars as to the duration of the alleged delay, the extent of the loss, and whether the counterclaim would exceed (and therefore extinguish) the debt. The Court held it was insufficient for Asia Master merely to state that Dayang ought to bear some responsibility when resisting its petition for winding up based on undisputed debts. The crux of the dispute was held to be whether Asia Master had a bona fide counterclaim on substantial grounds.

The Court accepted Dayang’s argument that, where the entire debt is not disputed (exceeding HK$10,000), it becomes irrelevant whether or not arbitral proceedings commence and the Court must exercise its discretion to wind up the respondent. Where a debtor challenges a petition on the grounds of a genuine and serious counterclaim, which is greater than or equal to the debt, the burden of proof shifts and the debtor must prove the claim is genuine, serious, and of substance. The Court noted similarities with the test for deciding whether a debt is disputed in good faith and on substantial grounds, citing Re Sinom (Hong Kong) Ltd I [2009] 5 HKLRD 487 and Re Alpha Building Construction Ltd, unreported, HCCW 283/2014.

The Court found that the lack of precise factual evidence to substantiate Asia Master’s counterclaim was problematic and indicated a prima facie lack of dispute to the debt. Where the underlying contract contains an arbitration clause that covers any dispute relating to the debt, the Court asked: i) is the Court obliged to stay or dismiss the winding up proceedings in favour of arbitration; and if not, ii) should the Court exercise its discretion to do so?

As to the first question, it is established in Hong Kong law that section 20 of the Arbitration Ordinance, which requires the Court to stay its proceedings if there is a valid arbitration agreement, applies only to actions and not to petitions for winding up.

The Court also held that question of its discretion to stay or dismiss a winding up petition was similarly uncontroversial. The Court pointed to section 180(1) of the Companies (Winding Up and Miscellaneous Provisions Ordinance) (Cap. 32). The Court studied two distinct approaches to show how this discretion should be exercised in a principled manner.

The “Salford-Lasmos Approach”

Asia Master relied on the principles in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 and Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449. It contended that a winding up petition should generally be dismissed where:

  • the contract underlying a debt contains an arbitration clause that covers any dispute relating to the debt;
  • the company takes the steps required by the clause to commence the mandatory dispute resolution process; and
  • the company files an affirmation in accordance with r.32 of the Commission (Winding Up) Rules (Cap. 32H. Sub. Leg.).

However, the judge held that this principle was not engaged as no notice of arbitration had been sent. Consequently, the arbitration proceedings had not been ‘commenced’.

The “Traditional Approach”

The judge noted that the differences between the “Traditional” and “Salford-Lasmos” approaches  were:

  • under the “Traditional Approach”, there cannot be a dispute if it is shown that A is obviously right and B is obviously wrong. B must show a bona fide dispute on substantial grounds; mere assertions will not suffice;
  • under the “Salford-Lasmos Approach”, all B has to do is simply deny A is right. There is no requirement for B to show a bona fide dispute on substantial grounds.

The “Contractual Justification”

Both the Salford and Lasmos judgments acknowledge the importance of protecting the parties’ freedom of contract. Specifically, the courts must protect the parties’ freedom to refer disputes to arbitration. However, the extent to which one’s contractual rights or obligations are (or ought to be) protected by the Court must depend upon the scope of those rights and obligations. This is a matter for contractual interpretation. The analytical starting point should therefore be to construe the agreement to arbitrate.

In the Court’s view, an arbitration clause imposes an obligation to have disputes that fall within its scope determined, or resolved, by arbitration. It also prevents any party from seeking to have such disputes determined or resolved in any other forum.

The Court went on to ask whether presenting a winding up petition to the Companies Courts amounts, per se, to a breach of an agreement to resolve disputes by arbitration. In the Court’s view, “the short answer…is unequivocally ‘no’… [T]he presentation of a winding up petition does not come within the scope of an agreement to arbitrate”.

Ultimately, the Court adopted the “Traditional Approach”.

Winding up as a discretionary remedy

The judgment asserts that there are no strong reasons to put an unprecedented fetter on the Court’s otherwise flexible discretion to make a winding-up order. The judge held:

  • the conditions presented in the “Salford-Lasmos Approach” are antithetical to the nature of discretion and represent an unprecedented fetter on the Court’s discretion; and
  • the inflexibility of this approach may prejudice the interests of creditors because it can compel the creditor to establish the existence of a debt by an action. This would then deprive it of all tangible remedies where the assets of the debtor have been dissipated by the time the action for debt has been completed by arbitration.

The Court referred to several authorities to demonstrate its discretion to allow winding up petitions, even where the debtor is able to prove a bona fide dispute on substantial grounds.

Public policy concerns: ousting the creditor’s right to wind up

While the judge observed that are no public policy objections to the “Salford-Lasmos Approach”, he maintained that its real issue is the impact on the Court’s discretion to make winding up orders rather than its effect on the petitioner’s “right” to petition to wind up.

Decision

The Court made a winding up order against Asia Master, finding:

  1. to dispute the existence of a debt a debtor must show there is a bona fide dispute on substantial grounds; it cannot merely deny the debt. This test applies regardless of whether or not the debt has arisen from a contract incorporating an arbitration clause;
  2. the Court must exercise discretion irrespective of whether there is an arbitration agreement;
  3. commencing arbitration proceedings is not sufficient proof of the existence of a bona fide dispute on substantial grounds, but may constitute relevant evidence of such dispute; and
  4. where a creditor petitions a winding up order on a debt where there is a bona fide dispute based on substantial grounds, it risks being liable to pay the debtor’s costs on an indemnity basis (and the tort of malicious prosecution).

Comment

Recent developments in relation to the issue of winding up petitions with respect to the existence of arbitration clauses / arbitration proceedings between the petitioner and the debtor have seen the Courts shift from the “Traditional Approach” (which is referred to by the Court in paragraph 57 of the judgment as being the need for the debtor to show “a bona fide dispute on substantial grounds” in order to persuade the court to stay or dismiss a winding up petition) to the “Salford-Lasmos Approach” (“Lasmos Approach” previously discussed here) and then back to a more moderate approach in the case But Ka Chon v Interactive Brokers LLC [2019] HKCA 873 (previously discussed here).  In light of such developments, it is notable that the Court in Dayang relied primarily on the “Traditional Approach” in deciding in favour of the creditor.

The Court also considered the “Salford-Lasmos Approach”.  The Court commented that even if the “Salford-Lasmos Approach” was applicable, it would still have held in favour of the creditor because the debtor did not, in failing to timely commence arbitration proceedings, hold a genuine intention to dispute the debt.

It is also notable that the Court spent more than three-quarters of this judgment in an analytical discourse over the recent developments in this area.  As noted by the Court at paragraph 135, “the Singaporean authorities have not been altogether successful in navigating a middle-ground between the Traditional Approach and the Salford-Lasmos Approach.  I suspect that similar problems would more or less arise if the same is attempted in Hong Kong”.  The Court was, therefore unable to come to a clear conclusion.  Nevertheless, the Court, in spending much time on dissecting the matter, has shown a clear intention to resolve this common issue.  Therefore, it is reasonable to expect that further developments in this area will be forthcoming.

 

Kathryn Sanger
Kathryn Sanger
Partner, Hong Kong
+852 2101 4029
Simon Chapman
Simon Chapman
Partner, Hong Kong
+852 2101 4217
May Tai
May Tai
Managing Partner, Greater China
+852 2101 4031
Briana Young
Briana Young
Foreign Legal Consultant (England & Wales) / Professional Support Lawyer, Hong Kong
+852 2101 4214
Philip Lis
Philip Lis
Senior Associate, Hong Kong
+852 2101 4212
Jacob Sin
Jacob Sin
Associate, Hong Kong
+852 2101 4230

PRIVY COUNCIL DISMISSES CHALLENGE TO MAURITIAN ARBITRAL AWARD BASED ON ALLEGED BREACHES OF NATURAL JUSTICE AND PUBLIC POLICY

In the recent case of Peepul Capital Fund II LLC v VSoft Holdings LLC [2019] UKPC 47, handed down on 19 December 2019 and available here, the Privy Council (on appeal from Mauritius) upheld the decision of the Supreme Court of Mauritius which refused to set aside an arbitral award on the basis of alleged breaches of natural justice and public policy.

The essence of the appellant’s case was that the sole arbitrator had improperly concluded, based on a submission by the appellant’s counsel at the hearing, that the appellant had abandoned its defence to the claim. Alternatively, it was alleged that the relevant submission by counsel had been preceded by an inappropriate intervention by the sole arbitrator, and this had prevented the appellant from presenting its case. However, the Privy Council rejected these arguments and held that the appellant’s counsel had indeed made such a concession, and that the sole arbitrator’s intervention preceding the concession had been appropriate.

The decision serves as a useful remainder of the high hurdle that an applicant will generally face when attempting to challenge an award on the basis of natural justice or procedural irregularity. The case also highlights an unusual feature of Mauritian arbitration law: decisions of the Mauritius court in respect of challenges to an award may be appealed as of right to the Privy Council.

Background facts

The dispute arose from an equity investment by the respondents (“Investors“) into the appellant (“VSoft“), a company incorporated in Mauritius.

The relationship was governed by an investment agreement, which provided one of the Investors with an option to exit its shareholding in VSoft in exchange for a minimum return on its original purchase price (“Investment Agreement“).

The parties subsequently terminated the Investment Agreement and entered a new agreement under which the Investors agreed to surrender their shares in VSoft for an aggregate sum of US$17 million, which was payable in three tranches and with interest (“Shareholders Agreement“).

The Investors surrendered their shares in VSoft but VSoft failed to pay the tranches due under the Shareholders Agreement.

Arbitration and award

The parties referred their dispute, through an ad hoc agreement, to arbitration in Mauritius before a sole arbitrator.

The parties’ positions were developed through two rounds of pleadings. By the time the arbitration came to hearing, the Investors were only pursuing a claim under the Shareholders Agreement and both parties were asserting in their pleadings that the Investment Agreement had been terminated.

However, during closing submissions at the hearing, counsel for VSoft argued that the Investors had not properly followed the steps under the Shareholders Agreement and the sole arbitrator was therefore required to decide which legal document and which legal regime governed the Investors’ claim for payment.

The sole arbitrator intervened to explain his view “for the time being” that counsel’s attempt, for the first time, to argue that VSoft’s liability might arise otherwise than under the Shareholder’s Agreement was contrary to the contemporaneous correspondence. He advised counsel that he should seek instructions from his client on the approach and adjourned the hearing to allow this to occur.

Following the adjournment, counsel for VSoft stated that VSoft did not dispute the Investors’ claim, but did request that the sole arbitrator determine the quantification of the claim. Counsel for the Investors responded by noting VSoft’s abandonment of its defence to the claim and arguing that there could be no dispute as to quantum, save for interest. The main part of the arbitration concluded at this point on the basis that there was no dispute as to VSoft’s liability under the Shareholders Agreement, and the sole arbitrator directed the parties to present written submissions on the narrow point of quantum which remained between them.

In the subsequent written submissions, the Investors submitted their interest calculation but VSoft submitted a quantum calculation based on the repayment of the original investment without reference to the Shareholders Agreement.

The sole arbitrator rendered his award in the Investors’ favour, holding that there was no dispute as to liability (in light of the concession by VSoft’s counsel) and accepting the Investors’ quantification of the claim.

Challenge in Mauritius Supreme Court

VSoft applied to the Supreme Court of Mauritius to set aside the award under section 39(2) of the Mauritius International Arbitration Act 2008 (“MIAA“). The challenge was based on the following grounds:

  • VSoft was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present its case (section 39(2)(a)(ii));
  • the award was in conflict with the public policy of Mauritius (section 39(2)(b)(ii)); and
  • a breach of the rules of natural justice occurred during the arbitral proceedings or in connection with the making of the award by which the rights of VSoft have been or will be substantially prejudiced (section 39(2)(b)(iv)).

The Supreme Court rejected each of these challenges and upheld the award.

Appeal to Privy Council

VSoft appealed against the Supreme Court’s decision to the Privy Council, which is available as of right in Mauritius. Its key arguments were:

  • Considered in its context, the submissions made by VSoft’s counsel following the adjournment was a continued assertion of VSoft’s case (albeit in the briefest summary) rather than an abandonment of it. This was reinforced by its written submissions on quantification, which were based on the repayment of the original investment rather than the amount due under the Shareholders Agreement. The sole arbitrator’s failure to rule upon liability was contrary to the rules of natural justice and caused VSoft substantial prejudice.
  • Even if counsel’s submissions had the effect of abandoning VSoft’s defence to liability, this was a result of being unable properly to present its case as a result of the sole arbitrator’s intervention.
  • The award ordered that the Investors receive the payment in full (plus interest), but did not contain any provision to ensure that the Investors ceased to enjoy the benefits of being equity shareholders. This amounted to double recovery and was contrary to public policy.

The Privy Council dismissed each of these arguments for the following reasons:

  • The submissions made by VSoft’s counsel were, objectively construed in context, an abandonment of VSoft’s defence to liability. To the extent that aspects of the submissions may have appeared equivocal, that was part of counsel’s attempt to “dress up a surrender“.
  • The meaning of the submissions at the hearing cannot be affected by the subsequent written submissions on quantum. The part of the arbitration dealing with quantum had been concluded at the end of the hearing, and it was not open to VSoft to attempt to re-open the issue at a later stage.
  • Even if it was arguable that counsel’s submission was not an abandonment of VSoft’s case on liability, the sole arbitrator committed no breach of the rules of natural justice by interpreting it otherwise. The sole arbitrator’s interpretation of the submission was reasonable, and nothing in section 39 of the MIAA is designed to enable a party to challenge a decision of a tribunal on the merits, or to enable the court to overrule such a decision merely because it disagrees with it.
  • Had the sole arbitrator’s understanding of the submission been plainly wrong so as to give rise to a breach of the rules of natural justice, the requirement to demonstrate substantial prejudice had not been met. In particular, none of the evidence or arguments offered the slightest basis for the conclusion that VSoft was not liable under the Shareholders Agreement.
  • The sole arbitrator’s intervention did not prevent VSoft from presenting its case. The sole arbitrator did not stop counsel from making submissions; he expressed a clearly provisional view about the course being taken by counsel and invited counsel to take instructions.
  • The public policy argument was hopeless in circumstances where the Investors had surrendered their shares for cancellation and it was for VSoft to cancel them.

The appeal against the Supreme Court’s rejection of the application to set aside the award was therefore dismissed.

Comment

Although the case concerned the application of section 39 of the MIAA, the guidance provided by the Privy Council is likely to be useful in other common law jurisdictions with an arbitration law based on the UNCITRAL Model Law.

The case serves as a reminder of the high threshold that must generally be met to establish a breach of natural justice or serious procedural irregularity, and confirms that:

  • the court will not intervene where the tribunal’s conclusion that a concession was made was reasonable;
  • a party will be held to a concession made at the hearing, even if it later attempts to re-open the point in subsequent submissions; and
  • a party will not be prevented from presenting its case merely because the tribunal expresses a provisional view on the party’s position.

The case also highlights an unusual feature of the MIAA: decisions of the Mauritius Supreme Court on applications to set aside an award may be appealed, as of right, to the Privy Council. This can be contrasted with most other comparable jurisdictions with an arbitration law based on the UNCITRAL Model Law, where such appeals are not available or are available only with permission. As the Privy Council observed, a consequence of the wide right of appeal in this case was that while the arbitration itself only took approximately six months, the set aside application and subsequent appeal took approximately five years. Parties considering Mauritius as an arbitral seat should therefore take into account the additional time and costs that may arise under the MIAA if the award becomes the subject of a challenge and subsequent appeal.

For more information, please contact Craig Tevendale, Partner, Aaron McDonald, Senior Associate, or your usual Herbert Smith Freehills contact.

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445
Aaron McDonald
Aaron McDonald
Senior Associate
+44 20 7466 2980

RUSSIAN SUPREME COURT REQUIRES UNIFORM APPROACH IN ARBITRATION CASES AND CLARIFIES MEANING OF PUBLIC POLICY

On 10 December 2019, almost four years after the Russian arbitration reform of 2016 and one year since the Russian Supreme Court (the “SC“) published its guidance in relation to various issues concerning international commercial arbitration, the SC issued an important resolution relating to arbitration. Resolution No 53 On the fulfilment by the Russian state courts of the assistance and control functions in relation to domestic and international commercial arbitration (the “Resolution“, available in Russian here), is a detailed and long-awaited document requiring Russian state courts to adopt a uniform approach when dealing with arbitration-related cases. In particular, the Resolution attempts to define the meaning of “public policy”, helpfully reminding the Russian courts that they should refuse recognition or enforcement of an arbitral award on public policy grounds only in exceptional circumstances.

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English High Court refuses to set aside order for enforcement under s103 in long-running dispute regarding ICC award

The English High Court has refused an application under s.103 of the Arbitration Act 1996 (“AA 1996“) to set-aside an order allowing for the enforcement of an ICC award in England. The decision is the culmination of a long-running dispute in which the award debtor has sought to set-aside the award and prevent enforcement in France, the Seychelles and England. The judgement is the latest illustration of the pro-enforcement approach of the English courts with respect to international arbitral awards, particularly where an award debtor has made efforts in multiple jurisdictions to prevent enforcement against it. While the outcome is not surprising, the level of attention given to the grounds raised by the award debtor, even in the face of issue estoppel, demonstrates the importance placed by the English Court on its New York Convention obligations.

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