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

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