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You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> SCM Financial Overseas Ltd v Raga Establishment Ltd (Rev 1) [2018] EWHC 1008 (Comm) (03 May 2018) URL: https://www.bailii.org/ew/cases/EWHC/Comm/2018/1008.html Cite as: [2018] 2 All ER (Comm) 1038, [2018] EWHC 1008 (Comm), [2018] Bus LR 1391, [2018] WLR(D) 279, [2018] 2 Lloyd's Rep 99 |
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BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
 SCM FINANCIAL OVERSEAS LTD |
Claimant |
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| - and - |
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| RAGA ESTABLISHMENT LTD |
Defendant |
____________________
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 :
Introduction
SCM") because the Ukrainian courts have now reached conclusions which are irreconcilable with those of the arbitrators: in short, and at the risk of over simplification, whereas the arbitrators have found that SCM is liable to pay the outstanding purchase price of over US $760 million for shares in a Ukrainian company, the decision of the Ukrainian courts means that those shares will be confiscated without compensation for reasons which are the responsibility of the defendant ("Raga").
SCM has to show, in summary, that (1) the arbitrators' decision to issue the award without waiting for the outcome of the Ukrainian court action was a breach of their duty under section 33 of the 1996 Act to conduct the arbitration fairly and (2) that this breach has caused or will cause it substantial injustice.
The parties
SCM is a Cypriot company which is a wholly-owned subsidiary of Joint Stock Company System Capital Management, a Ukrainian corporation. It is part of the SCM group of companies, said to be one of the largest corporate groups in Ukraine. The ultimate beneficial owner of the group is Rinat Akhmetov, who is said to be an associate of former President Yanukovych who was driven from power and fled to Moscow in February 2014.
The Share Purchase Agreement
SCM for a total purchase price of approximately US $860 million. The price was payable in three instalments. The first instalment of US $100 million was paid by SCM on 3 July 2013. The second and third instalments totalling US $760,566,951.86, were due in March 2014 and October 2015 respectively but have not been paid.
(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
SCM's defence to Raga's claim for the unpaid instalments and its counterclaim to recover the initial instalment revolved around the risk that the shares in Ukrtelecom would be confiscated by the Ukrainian State because of failures for which Raga was responsible. SCM's summary of its case, quoted by the arbitrators from its written submissions in the arbitration, was that:
"The reality of
(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").
SCM in the arbitration in a number of ways. It said that, because of them, Raga had made misrepresentations which entitled it to rescind the SPA. It said that, as a result, it was entitled to damages for breach of the SPA. And it said that confiscation (or liability to confiscation) meant that there was a total failure of consideration such that it was entitled to restitution of the first instalment of the purchase price and not liable to pay the remaining instalments.
SCM's defence and counterclaim in the arbitration required the arbitrators to consider (among other things) whether ESU was in breach of the Investment Obligation and/or the Special Network Obligation under the Privatisation SPA, such as to render the Ukrtelecom shares liable to confiscation. Those were also matters which would or might fall for determination by the Ukrainian courts in the event of proceedings by the SPFU to confiscate the shares.
The Security and Stay Applications
SCM provide security for its claim, relying on evidence which had been provided in support of an application for a freezing order made to this court, to the effect that SCM was dissipating its assets. SCM sought a stay of the arbitral proceedings until the completion of investigations being undertaken by the Ukrainian authorities into the privatisation of Ukrtelecom. The arbitrators rejected these applications by a procedural order dated 31 July 2016 and gave directions for the service of submissions, documents and evidence which in due course led to an evidentiary hearing before the arbitrators for five days between 15 and 19 May 2017.
The Ukrainian Proceedings
The Ukrainian proceedings in the arbitration
SCM's London lawyers had obtained a copy of the SPFU's statement of claim and advised the arbitrators that they proposed to adduce it in evidence. After the conclusion of that day's hearing, the arbitrators sent to the parties a list of points which they invited the parties to address in their closing speeches. The list included:
"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?"
SCM described the SPFU action as a very important and highly relevant piece of evidence, going directly to some of the issues before the arbitrators. He said:
"… 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 award
SCM's case and found in favour of Raga.
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.
SCM's expert, Dr Kisil.
SCM had failed to prove a breach of the Investment Obligation by ESU, was a conclusion of fact. SCM relied on the findings of the Ukrainian government entities referred to above, including in particular the SPFU Act of February 2017. The arbitrators accepted at para 149 of the award that these had "some evidential value", but considered that they should be treated "with some caution". That was because, according to Raga, these investigations were politically motivated and subject to corrupt manipulation, with political capital to be had in attacking the legitimacy of actions taken by the government of former President Yanukovych. The arbitrators said that they were not in a position to decide whether that was so, but they could not exclude the possibility:
"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.
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."
SCM to demonstrate a failure by ESU to perform the Investment Obligation. They regarded it as important that SCM had chosen not to adduce other evidence on this issue, including evidence under its control which it had been ordered to produce.
The Special Network Obligation
SCM contended, relying on Dr Kisil, that the two-year time limit applied to both creation and transfer. The arbitrators accepted Raga's construction, acknowledging that the Special Network created within the two-year period had to be capable of being transferred to the Ukrainian State.
SCM relied on the later findings of the Central Commission for Transfer and Acceptance of the Special Network and the SPFU that the Special Network was not compliant.
SCM failed to discharge the burden of proving that the Special Network created by Ukrtelecom did not comply with the requirements of the Privatisation SPA. They reached that conclusion in part because SCM had chosen not to adduce relevant evidence which must have been within its control as indirect owner of Ukrtelecom and in part because they discounted the conclusions of the Central Commission and the SPFU because they might be influenced by political motives.
"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. …"
SCM's expert Dr Kisil regarded them as having particular significance in Ukrainian law, Raga's expert Dr Martinenko described them as "nothing but allegations" which were "not supported by any due evidence or decisions of a competent court". Thus Raga's own expert relied on the absence of any Ukrainian court decision on this issue.
Total failure of consideration
SCM's case on total failure of consideration. They did so at paras 278 and 279 of the award, stating:
"278. The Tribunal has arrived at the following conclusions:
(1)
(2)
(3)
(4)
279.
SCM put its case, but in this paragraph it can be ignored.
The arbitrators' view of the potential relevance of a Ukrainian court decision
SCM's case on failure of consideration, it is apparent that here too such a decision would have been of interest. In particular such a decision would have demonstrated conclusively one way or the other whether the Ukrtelecom shares would be taken back into State ownership.
The decision not to defer the award
SCM's submission that the award should be deferred, which they rejected. I shall consider later in this judgment the reasons which they gave.
The section 68 application
SCM challenged the award, contending that the arbitrators' decision not to defer their award constituted a serious irregularity, that there was a real risk that the Ukrainian proceedings would result in the confiscation of the Ukrtelecom shares without compensation, and that its decision had caused substantial injustice to SCM. It sought the remission of the award for reconsideration in the light of the outcome of the SPFU action.
The outcome of the SPFU action
SCM is now obliged to pay a total purchase price of some US $860 million to Raga, plus a penalty of US $81.9 million to the Ukrainian State, for shares in Ukrtelecom which will be confiscated.
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."
SCM relies. At that stage the SPFU action was in being but had not yet reached any conclusion. The fact that this action eventually succeeded, and did so within a reasonably short period, is therefore irrelevant to the question of irregularity, although it is relevant to the question of substantial injustice. The arbitrators' task was to assess the position as it stood at the date of their award.
"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's stay application at the outset of the arbitration which the arbitrators had rejected in their procedural order dated 31 July 2016.
SCM put its case (e.g. those which depended on Raga's state of mind) which could not be affected by the outcome of the SPFU action, there were others which could.
SCM could be prejudiced. SCM could only gain from waiting to see what the Ukrainian court decided, not least as the arbitrators were on the point of publishing an award requiring SCM to pay US $760 million for shares which might be confiscated as a result of the SPFU action. Raga would of course be prejudiced if it was kept out of a substantial sum to which it was entitled, but Mr Calver submitted that the arbitrators' footnote reference to the July 2016 stay application amounted to a finding that there was a risk of dissipation of assets by SCM which would render enforcement of an eventual award more difficult.
SCM in the past but concluded that it was not a current risk in the light of freezing orders granted by this court and the court in Cyprus and undertakings which SCM had given. If the arbitrators had intended to refer to a continuing risk of dissipation of assets based on positive evidence to that effect, they should and no doubt would have said so more clearly. The fact that they did not so intend is confirmed by their final award dated 20 September 2017 dealing with costs in which they indicated that they were not in a position to make findings on that issue. Nevertheless, even in the absence of positive evidence of dissipation of assets, it would have been a natural conclusion that the passage of time and thus exposure to ordinary economic uncertainty over an extended period might well render enforcement of an award more difficult.
The parties' submissions
SCM, submitted in outline that:
(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
(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)
(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
(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)
(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 [2004] EWHC 1537 (Ch) at [42] to [57].
(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
Analysis
SCM's appeal were to succeed, its case on substantial injustice would fall away. Accordingly I approach this section 68 challenge on the basis that the position in Ukraine is and will remain as determined by the Kyiv Commercial Court and confirmed by the Kyiv Commercial Court of Appeals and that the Ukrtelecom shares will be confiscated and returned to State ownership.
SCM does not contend otherwise.
SCM's case is not that the Ukrainian judgment would be binding on Raga, but that (viewing the position at the date of the award) it was potentially relevant evidence for the arbitrators to consider. Indeed it was potentially extremely important evidence. To the extent that the Ukrainian court would determine the same issues of Ukrainian law as arose in the arbitration, its judgment was likely to be the best evidence of Ukrainian law on these issues, obviating the need for the arbitrators to choose between the parties' experts. To the extent that there was uncertainty as to the weight to be given to the decisions of Ukrainian government entities due to the risk of political manipulation, the view of an independent court about this issue would be relevant. To the extent that there was an issue in the arbitration (as clearly there was) whether the Ukrtelecom shares were liable to be and would be confiscated and on what grounds, the Ukrainian judgment was likely to put that issue beyond doubt.
SCM (represented as it was by very experienced counsel and solicitors and with the assistance also of Ukrainian lawyers) had any information about the likely duration of the action which would assist its case for a deferral of the award, it would have said so. As it did not, the obvious inference was that it had no such information. To impose upon the arbitrators a burden of asking for information in such circumstances would be unreasonable and contrary to the approach of the Court of Appeal in The Magdalena Oldendorff. Accordingly the arbitrators were entitled in my judgment to proceed on the basis that to defer the award "may result in uncertainty over a lengthy period". This was itself a factor against deferral.
SCM if they proceeded to an award against the prejudice which would be suffered by Raga if they deferred a decision for an indeterminate period. The prejudice to SCM was potentially very significant, but it would only occur if the SPFU action did result in confiscation of the Ukrtelecom shares and even then only if the decision of the Ukrainian court would cause the arbitrators to reach a different conclusion. These were possibilities, but by no means certainties. Moreover, it was the kind of prejudice, that is to say resulting from arbitrators reaching one decision and court proceedings reaching a different decision, which is to some extent a risk inherent in the choice of arbitration as discussed above. On the other hand, if Raga was entitled to succeed, deferring the award would ensure that it was kept out of its money for what might be a lengthy period and might render enforcement of an eventual award more difficult.
Conclusion
SCM's section 68 challenge to the award is dismissed.