BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| SCM FINANCIAL OVERSEAS LTD
|- and -
|RAGA ESTABLISHMENT LTD
Neil Calver QC and Tom Pascoe (instructed by Quinn Emanuel Urquhart & Sullivan UK LLP) for the Defendant
Hearing dates: 23 and 24 April 2018
Crown Copyright ©
Mr Justice Males :
The Share Purchase Agreement
(1) ESU had a good and valid title to the shares in Ukrtelecom;
(2) Raga was not aware of any fact that might have a material impact on SCM's decision to buy the UAT shares; and
(3) Raga was obliged to procure performance of the obligations of ESU and Ukrtelecom under the Privatisation SPA.
The Arbitration Dispute
"The reality of SCM's situation is that it has been misled into buying an asset which, through no fault of its own, is likely to be taken back into State ownership. If Raga were to succeed on its claim in these proceedings, SCM would be forced to pay for an asset which it is likely to lose as a result of wrongdoing perpetrated by entities under Raga's control. There would be no justice in that outcome."
(1) ESU was said to be in breach of an obligation under the Privatisation SPA to invest US $450 million before 11 May 2016 in support of Ukrtelecom's business activities ("the Investment Obligation").
(2) ESU was also said to be in breach of an obligation under the Privatisation SPA to create and transfer to the Ukrainian State a protected telecommunications network for the use of Ukrainian governmental agencies ("the Special Network Obligation").
The Security and Stay Applications
The Ukrainian Proceedings
The Ukrainian proceedings in the arbitration
"To what extent should we take account of what may happen after the hearing in relation to the various proceedings and investigations in the Ukraine?"
"… I would say to you that if you -- obviously we say first and foremost you should reject Raga's case for all the good reasons that I have already given you, but if you genuinely come to the view that this really does depend on whether or not realistically we will lose the shares, then we would suggest to you that you should defer your award, because there are likely to be material events in Ukraine, certainly if there are material events in the proceedings we will be asking for permission to put those in, but if you do come to that view we would invite you to defer because this is a very, very important matter, we are now being sued by the state to get the shares back, and we would have thought you would want more information about what was going to happen in those proceedings."
The Investment Obligation
(1) the Investment Obligation in the Privatisation SPA was not a legally binding obligation; and
(2) even if it had been legally binding, SCM had failed to prove any breach of that obligation by ESU.
"101. In ordinary circumstances the Tribunal would give considerable respect and weight to the findings of governmental authorities. In this case the Tribunal is persuaded that it should be more cautious. The Tribunal considers that it must look especially critically at the quality of the evidence before it and be rigorous in requiring the Respondent's [i.e. SCM's] allegations to be fully established. There are two reasons.
102. First, on the material before it, the Tribunal is not in a position to decide on the merits of the Claimant's [i.e. Raga's] submission that the authorities are motivated by political considerations, but it cannot exclude the possibility that such considerations are in play to some extent at least. Certainly the challenge to the lawfulness of the Privatisation seems to have been initiated only three years after the events in question following President Yanukovych's fall from grace; and there is material which suggests a lack of balance and the influence of political considerations.
103. Second, the Tribunal considers it important to recognise the status of the findings and actions of the governmental authorities in question. The Tribunal accepts that they are relevant and that they have certain legal consequences, but it is common ground that they are not determinative of any issues between the Parties as a matter of Ukrainian law. As will be discussed further below, they represent no more than the start of a process and that any determination of the issues will depend on the outcome of proceedings before the Ukrainian courts. …
105. The findings and actions of these authorities will be considered in greater detail below. The Tribunal considers it significant that there has so far been no decision of the Ukraine courts on the merits of the Respondent's allegations."
The Special Network Obligation
"189. … it is common ground that none of the findings made by these bodies is binding on the Parties. The court proceedings have not yet resulted in any findings on the merits. …"
Total failure of consideration
"278. The Tribunal has arrived at the following conclusions:
(1) SCM has failed to prove that ESU did not have good and valid title to the [Ukrtelecom] Shares.
(2) SCM has failed to prove that the Privatisation SPA was null and void ab initio, by reason of the matters relied upon.
(3) SCM has failed to prove that the Privatisation SPA was voidable and/or liable to be terminated by reason of the matters relied upon.
(4) SCM has failed to prove on the balance of probabilities on the evidence placed before us that the Shares will otherwise be taken back into State ownership.
279. SCM's case on initial failure of consideration and subsequent failure of consideration therefore fails."
The arbitrators' view of the potential relevance of a Ukrainian court decision
The decision not to defer the award
The section 68 application
The outcome of the SPFU action
The applicable legal principles
"68. Challenging the award: serious irregularity
(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award. …
(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant—
(a) failure by the tribunal to comply with section 33 (general duty of tribunal); …"
"33 General duty of the tribunal
(1) The tribunal shall—
(a) act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent, and
(b) adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined.
(2) The tribunal shall comply with that general duty in conducting the arbitral proceedings, in its decisions on matters of procedure and evidence and in the exercise of all other powers conferred on it."
"It shall be for the tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree any matter."
"… section 33 has to be approached by reference to the conduct of the arbitrators. For an irregularity to be established in a case of this kind it must be established that the tribunal have acted unfairly (partiality is not in issue) by failing to give a party a reasonable opportunity of putting his case or dealing with that of his opponent."
"It is unnecessary and in the circumstances undesirable for me to express a view as to whether the arbitrator came to the right conclusion, even if by the wrong route, or whether, had he ignored the 2003 amendments, he should have reached the same or a different conclusion. The element of serious [sc. substantial] injustice in the context of section 68 does not in such a case depend on the arbitrator having come to the wrong conclusion as a matter of law or fact but whether he was caused by adopting inappropriate means to reach one conclusion whereas had he adopted appropriate means he might well have reached another conclusion favourable to the applicant. Thus, where there has been an irregularity of procedure, it is enough if it is shown that it caused the arbitrator to reach a conclusion unfavourable to the applicant which, but for the irregularity, he might well never have reached, provided always that the opposite conclusion is at least reasonably arguable. Above all it is not normally appropriate for the court to try the material issue in order to ascertain whether substantial injustice has been caused. To do so would be an entirely inappropriate inroad into the autonomy of the arbitral process."
The arbitrators' reasons for not deferring the award
"283. At the Evidential Hearing SCM submitted that, if it became relevant to the Tribunal's decision in this case whether the Ukrainian Proceedings were in fact going to result in SCM losing the Shares, the Tribunal should defer making its Award. The Tribunal rejects this submission. It accepts that a decision of a court in Ukraine which is binding on the Parties would be relevant and might affect the conclusion the Tribunal has otherwise come to. It nevertheless considers that it should make its Award now on the basis of the evidence before it. An adjournment may result in uncertainty over a lengthy period, which could be prejudicial to either Party [footnote]. That is inconsistent with the duty of the Tribunal to adopt procedures which avoid unnecessary delay and expense. Furthermore on the evidence placed before it the Tribunal considers it likely that any future court decision will arrive at the same conclusion which the Tribunal has arrived at."
The parties' submissions
(1) In principle a case management decision (i.e. not to defer issue of an award until further evidence is available) is capable of amounting to a breach of arbitrators' section 33 duties.
(2) The arbitrators' refusal to defer their award did amount to such a breach in this case because (a) they did not give SCM a reasonable opportunity to put its case and (b) they adopted a procedure which was unsuitable to the circumstances of the case.
(3) The commencement of the SPFU action changed fundamentally the landscape of the case because, as the arbitrators were aware, (a) the risk of the Ukrtelecom shares being confiscated was no longer a hypothetical question but a real issue which would be decided by the Ukrainian court and (b) in order to determine that issue, the Ukrainian court would need to decide a number of the same issues as those in the arbitration including (i) whether the Investment Obligation was legally binding, (ii) the scope of the Special Network Obligation, and (iii) whether ESU had breached one or both of those obligations.
(4) The Ukrainian court was better placed than the arbitrators to decide these issues, which were issues as to the construction of a Ukrainian agreement (the Privatisation SPA) and would be decided in proceedings between the parties to that agreement, the SPFU and ESU.
(5) SCM faced a very real threat of irreconcilable decisions with enormous financial consequences if Raga were to succeed in the arbitration and the shares were then confiscated as a result of the SPFU action.
(6) Accordingly the outcome of the SPFU action was highly relevant evidence which the arbitrators ought to have considered before issuing their award.
(7) There was no prejudice to Raga from deferring the award but, in any event, any such prejudice was substantially outweighed by the prejudice to SCM if the threat of irreconcilable decisions were to materialise.
(8) Applying the Vee Networks approach, this is a case where the arbitrators' decision has caused substantial injustice because, if the arbitrators had known about the result of the SPFU action, they might well have reached a different conclusion on all three issues described above, that is to say the Investment Obligation, the Special Network Obligation and total failure of consideration.
(1) The parties chose to have their dispute determined by arbitration. Accordingly the decision of the Ukrainian court in the SPFU action was irrelevant. It would have been irrelevant even if the SPFU action had been concluded as it was before issue of the award.
(2) The SPFU action was between different parties, the SPFU and ESU, neither of whom was a party to the arbitration or the SPA. Accordingly Raga could not possibly have been bound by the decision in the SPFU action. For that reason also it was irrelevant.
(3) SCM had continued to dissipate assets despite the freezing order and undertakings which it had given, so that Raga would have been seriously prejudiced by deferral of the award. Indeed, for the arbitrators to have deferred their award would itself have been in breach of their section 33 duties.
(4) In any event the arbitrators' decision was well within their procedural discretion and consistent with their duty to avoid delay.
(5) A failure to adjourn to allow a party more time to adduce evidence cannot amount to an irregularity for the purpose of section 68: Shuttari v Solicitors' Indemnity Fund  EWHC 1537 (Ch) at  to .
(6) The Ukrainian court did not have any significant new evidence before it which was not before the arbitrators.
(7) Examination of the Ukrainian court decisions both at first instance and on appeal shows that those decisions, even if known to the arbitrators, could not have made any difference to their award. There was, therefore, no substantial or indeed any injustice to SCM as a result of the arbitrators' decision to issue the award when they did.