Double K Oil Products 1996 Ltd v Neste Oil Oyj

Approved Judgment

Hearing dates: 3 and 4 December 2009

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Mr Justice Blair :

This is an application by the Claimant, Double K Oil Products 1996 Ltd (“Double K”) to challenge an arbitration award made on 1 July 2009 in favour of the Defendant, Neste Oil Oyj (“Neste”) on grounds of serious irregularity under s.68 Arbitration Act 1996. The arbitration was an LCIA arbitration, the tribunal consisting of Mr Richard Southwell QC (who was chairman), Mr Michael Collins QC and Mr Neil Kaplan QC. The Claim Form seeks an order setting aside the Award on the following grounds: (a) the failure by the Tribunal to comply with its duty under s.33 Arbitration Act 1996 (the duty to act fairly), (b) the failure by the Tribunal to deal with all the issues that were put to it, and (c) the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy. Ground (a) has been argued under two heads, namely an assertion that the Tribunal acted unfairly in not ordering Neste to make certain witnesses available at the hearing, and an assertion that the Tribunal unfairly relied on materials covered by legal professional privilege. In the result, there are four grounds at issue, which Double K submits are interrelated.

There is a long history that preceded the dispute between the parties that led to this arbitration, whose relationship goes back to 1996. Double K is a company incorporated in Israel which carries on an oil trading business out of Vienna. In practice, its business has concerned the supply of stable gas condensate (which is a by-product of the extraction of natural gas) produced at the Gazprom Sosnogorsk refinery in North West Russia, Gazprom being the Russian energy group. The refinery is near to Vetlosjan railway station, and the product is called “Vetlosjan Gas Condensate” (VGC). By a contract dated 19 October 2000, Double K entered into a Purchase Agreement with a company in the Gazprom group called Severgazprom for the purchase of an amount of VGC which (according to its evidence filed in support of the application) Double K was advised at the time represented the entire amount of VGC available for export between 2003 and 2010. The total amount equates (and this is not disputed) to annual amounts of 150,000 mt +/—10%.

Neste Oil Oyj is a state-owned Finnish oil company. Following a number of agreements, on 14 December 2004 it entered into a Sales Agreement by which it bought the VGC acquired by Double K from Gazprom. This agreement was subject to English Law and arbitration under the LCIA rules. The agreement was extended up to the end of 2007, and provided for the delivery of “150,000 mt +/—10%” of VGC during that year. Negotiations took place which Double K says were completed in September 2007 to further extend supply for the year 2008. The arbitrators found however, Double K says incorrectly, that no binding contract for 2008 was in fact concluded between the parties (Award paragraph 120).

About this time, Gazprom was restructuring its export activities. There were negotiations between Double K and Gazprom for the transfer of the contract between them, and a Transfer Agreement was signed on 21 September 2007. However to quote from the Award, Double K still had not reached the stage of negotiating an agreement with the export arm of Gazprom, though the then deadline was the end of September 2007. Following a meeting on 25 September 2007, Neste entered into a contract direct with Gazprom on 28 September 2007 for the supply of VGC from October to December 2007. A further contract for supply during 2008 was entered into on 11 December 2007.

Meanwhile on 1 October 2007, Gazprom ceased all supplies of VGC to Double K, which says that in response it withheld €5m for supplies received in August and September 2007. In October 2007, Double K brought proceedings in the Courts of Finland for an injunction to halt deliveries of VGC to Neste, but these were unsuccessful, it seems because of the arbitration clause in the agreement between the parties. Gazprom brought proceedings in the Moscow Commercial Court for the withheld payments. According to a witness statement from Double K's Russian lawyers dated 1 December 2009, the Court decided in favour of Gazprom, and that decision was upheld on appeal (Double K says wrongly) on 22 October 2009. For present purposes, it is significant to note that Double K and Gazprom entered into negotiations from November 2007 to try to settle their differences, and the documents relevant thereto form part of this application.

Neste's case is that it did not seek the contracts it entered into with Gazprom for VGC, but accepted them at Gazprom's request as part of a “contract package” with liquefied petroleum gas (LPG), which was (it says) much more important to Neste. The best price offered to Neste by Gazprom for the VGC was only 0.3% better than the price Neste was paying Double K under the Sales Agreement. However, Neste says that it felt that it had no real choice but to enter into the package deal, because the LPG contract was very valuable to Neste and it was presented with an “all or nothing” deal for VGC and LPG.

Double K's case is that this caused a deviation of supply to Neste. Because no other amounts of VGC were available, let alone for export, the contracts between Neste and Gazprom diverted Double K's supply of VGC directly to Neste with the result that from September 2007, Double K was (a) unable to perform its obligations under the Sales Agreement with Neste, and (b) deprived of its supply of VGC from Gazprom from September of 2007 through to 2010. The diversion of the supply of VGC that should, it is submitted, have come to Double K directly to Neste has formed the basis of its claim against Neste.

The arbitration began on 14 February 2008. Double K put its case against Neste in contract and in tort. In contract, it alleged that Neste was in breach of implied terms of the Sales Agreement with Double K. The implied terms contended for are set out in paragraph 100 of the Award. In paragraph 108 it is stated that, “the furthest that the Tribunal considers it acceptable to go in the implication of an additional term is that there could be implied a term that nether party would deliberately make performance of the Sales Agreement impossible for the other party (or “frustrate” the other party's performance) in the knowledge that by so acting performance would be made impossible. Putting such a term in the context of the Claimant's case, it would apply if the Respondent agreed with [Gazprom] to buy all of the VGC which [Gazprom] would export, so that [Gazprom] could not supply to the Claimant VGC agreed to be supplied under the Purchase Agreement so that in turn the Claimant could not perform the Sales Agreement, and the Respondent knew that by so contracting with [Gazprom] this would make it impossible for the Claimant to perform the Sales Agreement”. As regards knowledge for these purposes, the Tribunal considered that this might consist of either actual knowledge, or a reckless shutting of the eyes to means of knowledge.

In tort, Double K alleged that Neste had induced a breach of the Purchase Agreement between Double K and Gazprom. It further alleged a conspiracy by Neste with one or more Gazprom companies to cause damage by unlawful means. The Tribunal found that the law applicable to the tort claims was English law.

Various procedural matters were determined by the tribunal. An award ordering Double K to provide security for Neste's costs was made on 4 August 2008. An application by Double K to set that award aside on grounds including serious procedural irregularity was refused, a decision which is criticised in Double K's evidence in support of this application. Oral hearings began on 18 February 200There were, in all, eleven days of hearings. Some further material was submitted to the Tribunal after the oral hearings had closed (which is the subject of one of Double K's grounds in the present application). The parties filed extensive closing submissions, and the Award was made on 1 July 2009.

As regards the claim in contract, because of its finding that no binding agreement was reached between Double K and Neste for 2008, the Tribunal found that the question of breach of the Sales Agreement arose only in respect of the last quarter of 2007. As regards breach of the implied term, the Tribunal found (Award paragraph 149) that: (1) Double K had not established that the making of the direct contracts between Gazprom and Neste made performance of the Sales Agreement by Double K impossible. It “remained possible for [Double K] to novate the Purchase Agreement with [Gazprom] and secure the necessary supplies of VGC, and this appears plainly from the communications between [Double K] and [Gazprom] which were disclosed after the close of the oral hearings”. (These communications are said by Double K to have been privileged, a point that forms the basis of a different ground.) “(2) Double K “has not established that [Neste] “knew” whether actually or by recklessly ignoring means of knowledge that any such impossibility would be a result of [Neste] contracting directly with [Gazprom]”. It...