Orascom Tmt Investments S.À R.L. (formerly Weather Investments II S.à r.l.) v VEON Ltd (formerly VimpelCom Ltd)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Andrew Baker |
| Judgment Date | 22 March 2018 |
| Neutral Citation | [2018] EWHC 985 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: CL-2017-000653 |
| Date | 22 March 2018 |
Neutral Citation Number: [2018] EWHC 985 (Comm)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Rolls Building, Fetter Lane, London EC4A 1NL
Mr Justice Andrew Baker
Case No: CL-2017-000653
David Foxton QC and Emily Wood (instructed by Cleary Gottlieb Steen & Hamilton LLP) for the Claimant
Charles Kimmins QC (instructed by Simmons & Simmons LLP) for the Defendant
Hearing dates: 22 March 2018
APPROVED JUDGMENT
Introduction
This is a claim brought by Claim Form dated 23 October 2017 challenging under section 68(2)(d) of the Arbitration Act 1996 a final award of arbitration under the Rules of the LCIA dated 30 September 2017. Section 68(2)(d) provides that, where a tribunal has failed “to deal with all the issues that were put to it”, if that amounts in the particular case to a serious irregularity, the court may intervene. Serious irregularity, as defined by section 68(2), is an irregularity of one or more of the kinds set out in the section which the court considers has caused or will cause substantial injustice to the applicant.
The claim having been brought, squarely and solely under paragraph (d) of section 68(2), one could be forgiven for looking first to the Claim Form for a clear and succinct definition of the issue said to have been put to the arbitrators and said not to have been dealt with by them in the award. In fact, in this case the claim form is not so clear or helpful. It is said that the tribunal:
“… failed to address a fundamental issue as to the impact of Italian law on the defendants' obligations under the contractual indemnity that was the subject of the parties' dispute.”
As the court sees on many occasions, beyond that unhelpfully imprecise definition of the issue in respect of which the section 68 challenge was brought, the Claim Form in substance did no more than recite, by reference to the particular award in this case, the other statutory requirements.
It seems to me, although ultimately this claim will not turn on it, that that is not a satisfactory approach to challenges under section 68. Particularly under sub-paragraph (d), but also, for that matter, under the other sub-paragraphs, the function of the Claim Form in identifying the remedy claimed and the grounds on which the claim is made is not merely to identify that it is a claim under section 68(2), or which particular sub-paragraph is invoked, but is to stand as a sufficiently detailed and particularised statement of case to enable, in the first place, the defendant to the challenge, and then, ultimately, the judge dealing with the matter, to see precisely the nature of the challenge, the grounds upon which it is said to arise and, as a result, the particular questions that will need, or may need, to be dealt with at any hearing.
It is, with respect, insufficient in my judgment, although a common practice, merely to say in the Claim Form, beyond identifying the bare statutory essentials, that reference should be made to the supporting witness evidence. Witness statements served in support of a section 68 claim should contain evidence, not comment or argument. They are not the proper vehicle for setting out the analytical case to be advanced before the court; that should properly be done by way of statement of case. In circumstances where the procedure for section 68 challenges, as for that matter section 67 challenges, does not involve, unless specifically ordered in a particular case, an exchange of statements of case separate to the Claim Form, the Claim Form has to serve that purpose.
Background
The award in this case, and thus the challenge, arose ultimately out of a share sale agreement entered into in April 2011, by which the claimant, Orascom, which was the respondent in the arbitration, sold to the defendant, the claimant in the arbitration, VEON, the Wind Telecom Group. That was achieved by way of the sale and transfer of Orascom's shareholding in Wind Telecom SpA, an Italian entity, and, as a result, indirectly its ownership of Wind Telecom's various operating subsidiaries.
The share sale agreement was governed by New York law but contained an arbitration agreement providing for arbitration in the event of dispute seated in London under the LCIA Rules.
In due course, disputes arose as a result of VEON's claim that Orascom was obliged to indemnify it in respect of financial loss it had suffered in settling claims arising in Italy as a result of three separate tax audits carried out by the Italian tax authorities in 2013 relating to Wind Group transactions pre-dating the transfer of ownership.
The arbitration award upheld VEON's claim in relation to each of the three tax audits and awarded in aggregate just under €140 million plus arbitration and legal costs, and made provision for interest. The section 68 challenge concerns, and concerns only, one of the three underlying tax audits. In relation to that tax audit, the loss suffered by VEON was, in round figures, €31 million, the claim against Orascom was, in round figures, for €25 million, the difference because under the indemnification provisions of the share sale agreement Orascom did not owe a full indemnity obligation but, rather, a stated percentage of losses of this kind fell to be borne by VEON come what may.
The award runs to some 378 paragraphs across 173 pages, and is an award of three very well known and experienced New York arbitrators. Size is of course no guarantee of quality; however, it often indicates — and my review of the award in this case bears this out — a degree of care and thoroughness as to the detail in the case undertaken by arbitrators that in truth goes well beyond the English law requirements of the 1996 Act adequately to set out the reasons for their ultimate decision and award.
The arbitrators' consideration included a detailed review of the requirements of the contractual indemnification provisions interpreted in the light of underlying principles of New York law. That led them to conclude that the following was their appropriate ‘sequence of inquiry’, as they described it, for each of the indemnification claims:
“First, the Tribunal determines whether the claims fall within the scope of the indemnification obligation in the first place. If so, the Tribunal next examines whether in reaching the decision to settle each of the Italian tax claims, VimpelCom in good faith believed that it otherwise faced a cognizable risk of exposure with respect to such claims. This is a threshold requirement under New York law, and is not varied by any contractual provisions under the SSEA. Assuming subjective good faith, the Tribunal next examines whether VimpelCom complied with the applicable notice and participation provisions of the SSEA, and to the extent there is any doubt, whether any shortfalls in this regard demonstrably prejudiced OTMTI, in the sense that it exposed OTMTI to loss that otherwise it would not have faced. In the absence of any such demonstrable prejudice, the inquiry remains as it would be under New York law where there is no dispute about notice, namely whether the decision to settle at all, or the terms of the resulting settlement, were objectively unreasonable. If not, then OTMTI's obligation to indemnify attaches, except to the extent that the “Losses” could reasonably have been obviated or significantly reduced by concrete steps that VimpelCom failed to take in mitigation. The obligation otherwise extends to all Losses effectively sustained by VimpelCom, and includes OTMTI's 72.65% share of such Losses, plus applicable interest.”
The ‘Issue’
As regards the tax audit in respect of which the section 68 challenge arises, the underlying tax claim giving rise to the audit was the booking and carrying forward by Wind Telecom of a €207 million write down of the value of a put option granted to a Wind Group subsidiary, Wind Telecommunicazione. The result of booking and carrying forward that write down as a tax deductible loss in the books of Wind Telecom was a tax saving of €57 million.
The essential premise of the tax audit conclusion that the €57 million tax saving had been improperly claimed was that the complex set of underlying transactions, including the put option, were a construct designed solely to translate a loss which would not have been tax deductible, arising on the collapse of the Wind Group's Greek operations, into a tax deductible loss. Thus, the audit conclusion was essentially that this was, in English law terminology, tax evasion not merely tax efficiency.
The potential liability under a challenge thus grounded to the Wind Telecom tax returns was €57 million in underpaid tax, plus penalties potentially at least doubling that sum. The loss ultimately incurred of only €31 million — I use “only” in its context as a comparative measure against the potential liability — arose when the potential tax liabilities arising out of the audit were the subject of a formal settlement concluded between VEON and/or Wind Telecom and the Italian tax authorities.
That settlement agreement articulated a rationale for the figure at which the tax authorities agreed to settle the potential audit liabilities, namely that there had been a failure to comply with transfer pricing rules under which the put option ought only to have been granted for an arms' length price. The arms' length price would then have represented a profit on which tax would have been payable. Had the transaction been structured in that way and had this been a sound, applicable theory of Italian tax law, the fault would then be in the failure to...
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