SCM Financial Overseas Ltd v Raga Establishment Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Males |
| Judgment Date | 03 May 2018 |
| Neutral Citation | [2018] EWHC 1008 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: CL-2017-000474 |
| Date | 03 May 2018 |
[2018] EWHC 1008 (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
Strand, London, WC2A 2LL
Mr Justice Males
Case No: CL-2017-000474
Ewan McQuater QC, Kate HoldernessandMiriam Schmelzer (instructed by White & Case LLP) for the Claimant
Neil Calver QC and Tom Pascoe (instructed by Quinn Emanuel Urquhart & Sullivan UK LLP) for the Defendant
Hearing dates: 23 and 24 April 2018
Judgment Approved
Introduction
This is a challenge to an arbitration award on the ground of serious irregularity pursuant to section 68 of the Arbitration Act 1996. The irregularity alleged is that the arbitrators proceeded to an award instead of awaiting the outcome of court proceedings in Ukraine which would or might have had a significant impact on the decisions they had to make. It is said that this has resulted in substantial injustice to the claimant (“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”).
In order to succeed with its challenge to the award, 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.
Examination of this challenge requires some understanding of the issues which arose in the arbitration. I shall describe these as briefly as possible. Most section 68 applications require an examination of the issues in the arbitration, but such applications do not provide an occasion for those issues to be fought all over again.
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.
Raga is also a Cypriot company. It is a subsidiary of an international financial investment company incorporated in Austria. It was formerly known as Epic Telecom Invest Limited and was the owner of 100% of the issued share capital of a company called UA Telecominvest Limited (“UAT”). UAT in turn owned 100% of the shares of Limited Liability Company ESU (“ESU”) and, through ESU, 92.7906% of the shares in Public Joint Stock Company Ukrtelecom (“Ukrtelecom”).
Ukrtelecom is one of the largest fixed line telephone operators in Ukraine. It was owned by the State Property Fund of Ukraine (“the SPFU”) until its privatisation in 2011. The privatisation was effected pursuant to an agreement between the SPFU and ESU dated 11 March 2011 (“the Privatisation SPA”). As would be expected, the Privatisation SPA was governed by Ukrainian law.
The Share Purchase Agreement
By a Share Purchase Agreement dated 3 June 2013 (“the SPA”) Raga sold its shares in UAT to 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.
As the SPA recorded, the principal value of the UAT shares was UAT's indirect shareholding in Ukrtelecom.
The SPA was governed by English law with provision for arbitration in London in accordance with the LCIA Rules.
There were terms of the SPA to the effect (in summary) that:
(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
Raga commenced arbitration on 20 June 2016 claiming the unpaid instalments of the purchase price. The LCIA Court appointed Jonathan Crow QC, Vasanti Selvaratnam QC and Christopher Style QC to be the tribunal, with Mr Style as the presiding arbitrator.
It has always been Raga's case that this is a straightforward claim for an unpaid debt.
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 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.”
Of the failures for which Raga was alleged to be responsible which were said to give rise to the likelihood of confiscation of the Ukrtelecom shares, two remain relevant:
(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”).
These breaches of the Privatisation Agreement by ESU were relied on by 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.
It is apparent, therefore, that 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.
By the time the arbitration was commenced, investigations into these matters by the Ukrainian authorities were under way, but there were as yet no court proceedings in Ukraine.
The Security and Stay Applications
Once the arbitral tribunal was formed it had to deal with preliminary applications by both parties. Raga sought an order for an expedited timetable and that 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
Several investigations by Ukrainian government entities were in evidence in the arbitration. It is sufficient to mention the following.
In September 2015 and March 2016 (i.e. before the commencement of the arbitration) a Special Commission of the Verkhovna Rada (the Ukrainian Parliament) passed resolutions recommending that the Ukrainian Prosecutor General should ensure a comprehensive investigation of the privatisation of Ukrtelecom and should confiscate the shares. The grounds for doing so included a breach by ESU of the Special Network Obligation.
A Central Commission for Transfer and Acceptance of the Special Network was established. On 31 May 2016 it refused to accept transfer of ownership of the Special Network created by UKrtelecom claiming the network was flawed in ways which prevented transfer of ownership to the Ukrainian State.
On 17 February 2017 the SPFU issued a report (“the SPFU Act”) which concluded that ESU had failed to implement both the Investment Obligation and the Special Network Obligation. On 3 April 2017 the SPFU warned ESU that the Privatisation SPA should be rescinded and proposed the return of the Ukrtelecom shares to the State.
On 11 April 2017 the Pecherskyi District Court issued an order freezing ESU's shares in Ukrtelecom.
Finally, on 10 May 2017, only five days before the first day of the evidentiary hearing in the arbitration, the SPFU filed proceedings...
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