The rejection of SCM Financial Overseas Ltd’s (“SCM“) challenge to an US$ 860 million award in favour of Raga Establishment Ltd (“Raga“) on the grounds of serious irregularity under section 68 of the Arbitration Act 1996 (“AA 1996“) reinforces the difficulty of challenging the outcome of arbitral proceedings.
In the Commercial Court, Mr Justice Males has dismissed SCM’s challenge, in which SCM alleged that the arbitrators neglected their duty of fairness under section 33 AA 1996, by failing to grant its application to stay the arbitration pending the outcome of parallel Ukrainian court proceedings. By the arbitrators’ own admission, the Ukrainian proceedings would have provided useful guidance on the points of Ukrainian law under consideration in the arbitration.
This case is a restatement of the principle that an agreement to arbitrate is an agreement to be bound by the decision of the tribunal. Provided it is reached in a manner that is procedurally fair, the Court will support the decision of the tribunal regardless of whether the Court would have reached a different decision.
On 3 June 2013, under a share purchase agreement between SCM and Raga, (the “SPA“), SCM agreed to purchase the entire issued share capital of UA Telecominvest Limited (“UAT“), a wholly-owned subsidiary of Raga. The value of UAT was principally derived from its indirect holding, via Limited Liability Company ESU (“ESU“), in Public Joint Stock Company Ukrtelecom (“Ukrtelecom“). Formerly state-owned by the Ukrainian Government, Ukrtelecom is one of the largest fixed line telephone operators in the country.
Pursuant to a privatisation agreement governed by Ukrainian law, the State Property Fund of Ukraine (the “SPFU“) had agreed to sell Ukrtelecom to ESU, subject to certain privatisation conditions (the “Privatisation SPA“). For the purposes of the arbitration, the two relevant obligations were: (i) that ESU invest US$ 450 million in Ukrtelecom’s business activities before 11 May 2016 (the “Investment Obligation“); and (ii) that ESU establish a protected telecommunications network for use by Ukrainian governmental agencies (the “Special Network Obligation“) (together the “Privatisation Obligations“).
Alleged breaches by ESU of the Privatisation Obligations became the subject of investigation by the Ukrainian State and the SPFU threatened ESU with confiscation of Ukrtelecom’s shares, which would have deprived SCM of substantially all of the value of UAT. Having already paid US$ 100 million of the US$ 860 million purchase price, SCM withheld payment of the two remaining tranches payable to Raga on the grounds Raga had misrepresented ESU’s title to the shares in Ukrtelecom and ESU’s compliance with its Privatisation Obligations. Raga subsequently commenced arbitral proceedings in London on 20 June 2016 for non-payment of the debt. Following the conclusion of its investigation, the SPFU published a report which found ESU in breach of its Privatisation Obligations. On 10 May 2017, just five days prior to the hearing in the arbitral proceedings, the SPFU commenced parallel proceedings against ESU in the Commercial Court of Kyiv applying for an order terminating the Privatisation SPA and returning the Ukrtelecom shares to State ownership.
The tribunal’s decision
At the hearing in the arbitral proceedings, SCM adduced the SPFU’s statement of claim in the Ukrainian proceedings into evidence and the tribunal asked both parties to address the issue of the extent to which the tribunal should take into account what might happen after the hearing in relation to the various proceedings and investigations in Ukraine. SCM submitted that the tribunal should defer its award pending the outcome of the Ukrainian proceedings, whereas Raga submitted that the Ukrainian proceedings were irrelevant.
The tribunal later published an award in favour of Raga on 26 June 2017, without waiting to hear the outcome of the Ukrainian proceedings. In doing so, the tribunal determined certain issues of Ukrainian law in light of expert evidence adduced by both parties. In particular, the tribunal found that the Investment Obligation was not legally binding and, even if it had been, SCM had failed to prove any breach of that obligation by ESU. The tribunal further found that SCM had failed to prove that ESU had failed to comply with the Special Network Obligation. The tribunal treated the findings of breach by the SPFU “with some caution” due to the risk of political manipulation. Particular weight was placed on the lack of a Ukrainian court decision on the issues the tribunal had to determine, which would have assisted in choosing between the views of the parties’ Ukrainian law experts and the weight that could be accorded to the findings of the SPFU. However, the tribunal did not defer the award because an adjournment may have led to uncertainty over a lengthy period, which could be prejudicial to either party and would be inconsistent with the tribunal’s duty to adopt procedures that avoid unnecessary delay. The tribunal also considered that it was likely that a Ukrainian court would reach the same conclusion in any event.
On 19 October 2017, SCM’s concerns materialised. The Kyiv Commercial Court found ESU in breach of the Privatisation Obligations and ordered rescission of the Privatisation Agreement, returning the shares in Ukrtelecom to SPFU. ESU was further ordered to pay a fine of US$ 81.9 million.
Section 68: A high bar to clear?
SCM challenged the award under section 68 AA 1996 on the grounds that the tribunal’s failure to defer their award amounted to a serious irregularity in breach of their duty under section 33 AA 1996 by acting unfairly and / or adopting procedures resulting in unfairness.
Males J held that the question as to whether the tribunal breached their section 33 duty was to be assessed as at the date of the publication of the award. The success of the SPFU in the Ukrainian case success was therefore irrelevant even though the Ukrainian judgment “was likely to be the best evidence of Ukrainian law” governing breaches of the Privatisation Obligations and the resulting confiscation of the Ukrtelecom shares (although the outcome of the Ukrainian proceedings would be relevant for the purposes of establishing substantial injustice). Further, the requirement under section 33 is that the tribunal gives the parties a reasonable opportunity to put their case and adopts a procedure that is a fair means of resolving the dispute; there may be no single right answer such that some tribunals would be prepared to defer, whilst others would not. The question to be answered is whether the tribunal’s decision is one it was entitled to reach.
In respect of substantial injustice, the Court held that the issue to be determined is whether ‘but for’ the irregularity the outcome of the arbitration ‘might well’ have been different. It is not necessary to show that the result of the arbitration would have been different.
The Court accepted that the decision not to defer the arbitral proceedings was capable of breaching the arbitrators’ section 33 AA 1996 duties given the relevance and evidential force of the impending Ukrainian judgment. However, whether section 33 was in fact breached depends on consideration of all the circumstances. Section 34 AA 1996 confers on arbitrators a wide discretion to decide matters of procedure and evidence. This undoubtedly covers considering the likely future availability of evidence, its potential relevance and any delay caused by a stay of proceedings. In this regard, the arbitrators were not presented with any information by SCM’s legal representatives on the duration of the SPFU investigation or the Ukrainian case. SCM sought to argue that had the arbitrators enquired as to the possible length of any delay, they would learned the outcome of the Ukrainian decision was due in a matter of a few months. However, the Court held that the duration of those proceedings was an obvious factor of relevance to the arbitration and the arbitrators were entitled to proceed on the basis that had any information on duration been available to SCM it would have been presented by SCM’s legal representatives.
On the matter of the arbitrators’ general duty under section 33 AA 1996, Males J found there was no breach by the arbitrators. While a different tribunal may have allowed a stay, the arbitrators had reached a conclusion they were entitled to reach. There was therefore no irregularity within the meaning of section 68 AA 1996.
However, Males J noted that had a procedural irregularity been found, he would have concluded that SCM did suffer a substantial injustice because the conclusion of the arbitration might well have been different if the arbitrators had the benefit of the Ukrainian court’s decision.
SCM Financial Overseas Ltd v Raga Establishment Ltd is a reiteration of the Court’s reluctance to intervene in arbitral proceedings. Males J followed the approach in Vee Networks, in which Colman J stated “serious injustice in the context of section 68 does not in such as 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“. When parties agree to arbitrate a commercial dispute, they agree to abide by the outcome even if this risks contradictory judgments where there are parallel related court proceedings. The fact that this risk materialises is not itself sufficient grounds for a finding of serious irregularity within the meaning of section 68 AA 1996.