Herbert Smith Freehills has secured a landmark judgment from the Hong Kong Court of Final Appeal, with significant practical implications for thousands of commercial contracts.
In C v D [2023] HKCFA 16, the CFA confirmed that arbitrators, not the courts, should have the final say on whether a party has complied with an escalation clause – a common contractual mechanism pursuant to which parties agree (for example) to negotiate, or mediate, before commencing arbitration.
INTRODUCTION AND TAKEAWAY
In a recent decision, the Supreme Court of New South Wales set aside an arbitral award on the basis that the arbitrator had failed to give one party a proper opportunity to present its case. While there is a high bar for judicial intervention in arbitration proceedings, Australian courts will act to protect the integrity of the arbitration process when arbitrators fail to uphold its fundamental safeguards.
The Delhi High Court (the “Court“) in a recent decision, has set aside a 2015 arbitral award of the International Chamber of Commerce (“ICC“) which had directed Antrix Corporation Limited (“Antrix“) to pay damages of over US$ 560 million plus interest to Devas Multimedia Private Limited (“Devas“) (the “ICC Award“). This is the latest development in a series of disputes that first arose more than a decade ago, as a result of Antrix’s premature termination of a leasing agreement with Devas. In its decision, the Court has held that the ICC Award, now worth in excess of US$ 1 billion with interest, suffered from “patent illegalities and fraud” and was accordingly in conflict with the “public policy of India“, such that it was liable to be set aside under India’s Arbitration and Conciliation Act, 1996 (the “Act“).
Background
In 2005, Antrix, the commercial arm of the Indian Space Research Organisation, a State-owned body, and Devas, signed an agreement for the lease of S-band electromagnetic spectrum capacity provided by two orbiting Indian satellites (the “Contract“). However, in 2011, Antrix annulled the Contract on grounds of force majeure, alleging that India’s Cabinet Committee on Security (the “CCS“) had decided to deny Andrix orbital slots in S-band spectrum as there had “been an increased demand for allocation of spectrum for national needs“, including for “defence, para-military forces, railways and other public utility services”. Antrix claimed that this decision amounted to a force majeure event, which allowed Antrix to terminate the Contract.
Devas did not accept the termination and instead, initiated ICC proceedings against Antrix for repudiatory breach. On 14 September 2015, an Indian-seated ICC tribunal (“Tribunal“) rendered the ICC Award, which upheld Devas’ claims, finding that: (i) the CCS decision did not qualify as a force majeure event as the termination was a result of Antrix’s own actions, (ii) Antrix could not rely on a contractual limitation of liability clause and was liable for liquidated damages, and (iii) Antrix had wrongfully repudiated the Contract, and was liable to pay Devas approximately US$ 562.5 million plus interest as damages. In response, Antrix filed to set aside the ICC Award at the seat in Delhi under s34 of the Act.
Decision
Patent illegality
The Court noted that in finding that Antrix could not rely on the limitation of liability clause under the Contract, the Tribunal did not consider the pre-contractual negotiations between the parties. By disregarding pre-contractual negotiations on the basis of the IBA Rules on Taking of Evidence (“IBA Rules“), the Tribunal committed a “patent illegality” as the IBA Rules were only applicable with the consent of both parties, which was absent in this case.
The Court then considered the substance of the pre-contractual negotiations and held that these made clear that the only consequence of the termination of the Contract would be the refund of the upfront capacity reservation fees paid by Devas, and Devas would not be entitled to the larger liquidated damages claim. The Court held that the findings of the Tribunal, which ignored such evidence were a “complete perversity”.
Further, the Court noted that the Tribunal committed a “patent illegality” by being “self-contradictory” and finding Antrix liable for wrongful termination of the Contract, despite recognising elsewhere in the ICC Award that the CCS decision to annul the Contract was “an act of governmental authority acting in sovereign capacity” within the scope of the force majeure clause. The Court emphasised that Antrix could not be held liable for any breach of the Contract as it was “prevented from performing its obligations on account of factors beyond its control“.
Winding-up of Devas and evidence of fraud in the set aside proceedings
Since the ICC Award was rendered in 2015, Devas has attempted to enforce the ICC Award against Antrix. In parallel, Antrix sought the winding up of Devas before India’s National Company Law Tribunal (the “NCLT“), alleging that Devas “was formed for a fraudulent and unlawful purpose and its affairs had been conducted in a fraudulent manner“. In May 2021, the NCLT allowed the winding up of Devas, which was also subsequently upheld on appeal by the National Company Law Appellant Tribunal and the Supreme Court of India (the “Winding-up Proceedings“).
In the set aside proceedings, Antrix moved to amend its application and incorporate subsequent evidence against Devas from the Winding-up Proceedings. Devas objected, on the ground that the amendment application was inadmissible as it was filed after the expiry of the statutory period for filing objections under s34 of the Act. The Court rejected Devas’ objections and held that the Winding-up Proceedings operated as res judicata and “the court [was] bound to take notice of the same“, without the need to amend the applications under s34 of the Act.
The Court further affirmed the Supreme Court’s view, and held that “if the seeds of the commercial relationship between Antrix and Devas were a product of fraud perpetrated by Devas”, then “every part of the plant that grew out of those seeds, such as the Agreement, the disputes, arbitral awards etc., are all infected with the poison of fraud”, and “a product of fraud is in conflict with the public policy of any country including India“.
Legal threshold for judicial interference with arbitral awards under the Act
In its decision, the Court highlighted the legal standard for setting aside arbitral awards under the Act and noted that there were “limited” grounds for a successful set aside. While awards may be set aside if there is a patent illegality, this should be “illegality which goes to the root of the matter”, and an “erroneous application of law” could not give rise to a set aside decision. Likewise, a “contravention of law not linked to public policy or public interest is beyond the scope of the expression “patent illegality””.
The Court affirmed, as other recent decisions from Indian courts have, that it is impermissible for Courts to “reappreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award“. This is because Courts do not sit in appeal against the arbitral award. However, if an arbitrator (i) takes a view which is not even a possible one, (ii) interprets a contractual clause in such a manner which no fair-minded or reasonable person would, (iii) commits an error of jurisdiction by going beyond the scope of the contract and dealing with matters not allotted to them, or (iv) bases their conclusions on no evidence or by ignoring vital evidence, the award so rendered would be “perverse” and liable to be set aside on the ground of patent illegality.
The Court held that the Tribunal in this case had committed a patent illegality as it (i) incorrectly excluded the pre-contractual negotiations between the parties, (ii) rendered contradictory findings on the applicability of the force majeure clause, and (iii) the finding of fraud in the Winding-up Proceedings established that the ICC Award “conflict[s] with the most basic notions of justice“, and “thus antithetical to the fundamental policy of Indian law“. For all these reasons, the Court allowed the s34 application and set aside the ICC Award.
Comment
This decision provides insight on the interpretation of “patent illegality” as a ground for setting aside an arbitral award under s34 of the Act. It is a reminder that although Indian courts will not sit in appeal against an arbitral award, an award may be set aside if the award itself or the underlying transaction is tainted by fraud or is contrary to the public policy of India.
While the Court’s decision is a significant win for Antrix, the Indian State-owned body, this is far from the end of the road in this matter for the Indian State. The cancellation of the Contract gave rise to two bilateral investment treaty (“BIT“) arbitrations initiated by Devas’ shareholders – CC/Devas v India under the India-Mauritius BIT, and Deutsche Telekom v India under the India-Germany BIT. These disputes were both decided in favour of the investors, with India being directed to pay the claimants substantial damages as compensation (for discussion of these arbitrations and India’s failed attempts to set aside these awards at their respective seats, see our blogs here and here).
More recently in February 2022, following the Winding up Proceedings, Devas’ shareholders have initiated a third BIT claim against India under the India-Mauritius BIT, alleging that the country has made an “audacious scheme” to prevent payment and enforcement of the ICC Award, including through alleged “manufactured fraud allegations“. It remains to be seen how India will respond to this BIT arbitration, and what the ultimate outcome may be.
For more information, please contact Andrew Cannon, Partner, Arushie Marwah, Associate, or your usual Herbert Smith Freehills contact.
Shenzhen Intermediate People’s Court has ordered that an arbitral award made by Shenzhen Arbitration Commission (also known as Shenzhen Court of International Arbitration) be set aside on the ground that awarding damages in US dollars in lieu of crypto is against the public interest.
(2018) Yue 03 Min Te No. 719 or (2018) 粤03民特719号
Background
The 2nd Respondent (Li) commissioned the Applicant (Gao) to conduct cryptocurrency wealth management. Gao failed to return the relevant assets and profits to Li. Gao, Li and the 1st Respondent (Yunsilu Fund) then entered into a share transfer agreement (Agreement), whereby the parties agreed that: (1) Yunsilu Fund should transfer a 5% share in a company to Gao at a consideration of RMB 550,000 (Consideration); (2) Li should pay RMB 300,000 to Yunsilu Fund on behalf of Gao as part of the Consideration and Gao should pay the remaining RMB 250,000 to Yunsilu Fund directly; and (3) Gao should return the relevant crypto assets (20.13 Bitcoin, 50 Bitcoin Cash, and 12.66 Bitcoin Diamond) to Li.
Gao failed to perform his obligation under the Agreement. Yunsilu Fund and Li commenced arbitration proceedings against Gao at the Shenzhen Arbitration Commission. They asked the tribunal to order that (1) the shares be transferred to Gao; (2) Gao pay RMB 250,000 to Yunsilu Fund; (3) Gao pay the US dollar equivalent of the crypto assets to Li, plus interest; and (4) Gao pay damages of RMB 100,000.
The arbitral tribunal found that Gao had failed to deliver crypto as agreed by the parties (who considered that such crypto had property value). This constituted a breach of contract and merited an award of damages. The tribunal referred to public information about the closing price of Bitcoin and Bitcoin Cash at the agreed date of contractual performance, and estimated the loss at US$401,780. The tribunal ordered that (1) the shares be transferred to Gao, (2) Gao pay RMB 250,000 to Yunsilu Fund, (3) Gao pay US$401,780 to Li (to be converted to RMB at the exchange rate as of the date of the award); and (4) Gao pay damages of RMB 100,000 to Li.
Gao applied to the Shenzhen Intermediate People’s Court to set aside the award.
Decision
Since this is a Chinese domestic arbitral award, the Court reviewed it in accordance with Article 58 of the PRC Arbitration Law. The main issue for determination was whether the award was against the public interest. The Court held that, according to the Circular of the People’s Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission on Preventing Risks from Bitcoin (Yin Fa [2013] No.289), Bitcoin does not have the same legal status as a fiat currency, and cannot and should not be circulated in the market as a currency. In 2017 seven authorities, including the People’s Bank of China, jointly issued the Announcement on Preventing Risks relating to Fundraising through Token Offerings to reiterate the above provision. Meanwhile, from the perspective of preventing financial risks, the Announcement further provides that any so-called “token” financing and trading platform shall not:
The above documents essentially prohibit the redemption, trading and circulation of Bitcoin in Mainland China, as well as speculation in Bitcoin and other activities that may amount to engaging in illegal financial activities, disturbing the financial order or affecting financial stability.
The arbitral tribunal ruled that Gao Zheyu should compensate Li Bin for the US dollar equivalent of the Bitcoin, then convert the US dollars into RMB. The Shenzhen Court ruled that this amounted to redemption and trading between Bitcoin and fiat currency in a disguised form, which contravenes the spirit of the above documents and violates the public interest. It therefore set aside the arbitral award. The Court declined to review the other grounds raised by the Applicant Gao Zheyu.
Comment
This ruling sends a clear warning that enforcing a crypto-related arbitral award may be difficult in jurisdictions, such as Mainland China, which show little tolerance for the cryptocurrency business.
Despite the fact that some Mainland Chinese courts have recognised Bitcoin as a “virtual commodity” or “virtual asset” (see (2019) Hu 01 Min Zhong No. 13689), it is important to remember that trade and exchange of cryptocurrencies (especially trading with fiat currencies) is strictly prohibited in Mainland China.
Claimants in crypto-related arbitrations with any Mainland element must take great care when framing their requests for relief. For example, if a claimant is owed crypto currency, instead of asking the tribunal to convert the debt into a fiat currency for damage calculation, the claimant may consider asking for damages to be paid in the same crypto currency to avoid any uncertainty on enforcement.
For more information, feel free to get in touch with any of the contacts below, or your usual Herbert Smith Freehills contact.
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.
After the Arbitration and Conciliation Bill, 2019 (the “Bill“) was passed by both houses of the Indian Parliament, the President of India on 9 August 2019 gave his assent. The new Arbitration and Conciliation (Amendment) Act, 2019 (the “2019 Act“) will amend the Indian Arbitration and Conciliation Act, 1996 (the “1996 Act“), implementing the recommendations of the High Level Committee Report issued in 2017 under the chairmanship of Justice BN Srikrishna. The changes proposed in the Bill were previously discussed here.
The respondents in an international commercial arbitration were successful in the Federal Court in Australia in setting aside parts of two partial awards and removing the sole arbitrator pursuant to Articles 12, 18 and 34 of the UNCITRAL Model Law. These articles are incorporated into Australian law by the International Arbitration Act 1974 (Cth).
The Court found that the arbitrator had conducted himself in such a manner that the applicants could no longer have confidence in him. This was mainly because the arbitrator had decided various substantive questions in a final manner without giving some of the parties an opportunity to be heard on those questions.
The Court observed that procedural difficulties were encountered due to the hiving off and determination of incomplete separate questions where issues between the parties had not been properly crystallised.
Hui v Esposito Holdings Pty Ltd [2017] FCA 648 and Hui v Esposito Holdings Pty Ltd (No 2) [2017] FCA 728 demonstrate the circumstances in which the Court may review the actions of an arbitrator and may be prepared to terminate an arbitrator’s mandate and set aside awards.
On 9 March 2017, the Arbitration Amendment Bill (Bill) was introduced to the New Zealand Parliament. The Bill proposes to amend the Arbitration Act 1996 (Act), and follows recommendations by the Arbitrators’ and Mediators’ Institute of New Zealand (AMINZ).
The proposed changes include:
Other amendments to the Act came into effect on 1 March 2017, which we earlier reported on here.
In a decision handed down recently, the Supreme Court of India found that the Delhi High Court had overstepped its powers and wrongly set aside a domestic arbitration award. In the process, the Supreme Court has clarified the scope of the “public policy ground” to set aside awards under Section 34(b)(ii) of the Arbitration and Conciliation Act (Act).
The Supreme Court was critical of the Delhi High Court re-opening an arbitrator’s award on merits by reviewing evidence considered by the arbitrator and even considering evidence above and beyond that which the arbitrator had the opportunity to consider. The Supreme Court advocated giving due weight and recognition to a determination by an arbitration – especially on issues of fact. The court recognized that an award could only be set aside on grounds of public policy in very limited circumstances, such as where an award was arbitrary, capricious or such that it would shock the conscience of the court.
