UK: The High Hurdle Of Challenging An Arbitration Award In England

Last Updated: 15 May 2018
Article by Ben Giaretta
Most Read Contributor in UK, July 2018

This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

A party can challenge an arbitration award made in England on the grounds of serious irregularity affecting the proceedings that has caused or will cause substantial injustice. Successful challenges, however, are extremely rare. In the past three years there have been 112 challenges for serious irregularity but only one has succeeded: a success rate of less than 1%. That record continued in SCM Financial Overseas Ltd v Raga Establishment Ltd [2018] EWHC 1008. The English High Court ruled that a tribunal's decision not to defer an award until a Ukrainian court had given judgment in a related case was not a serious irregularity, even though such a delay might well have meant that the award would have been different.

The facts

In 2013, Raga sold UA Telecomvinest Limited ("UAT") to SCM for US$ 860 million. UAT owned a company called ESU, which in turn owned the majority of shares in Ukrtelecom, one of the largest telephone companies in Ukraine. Ukrtelecom was formerly a state-owned company and had been privatised by the State Property Fund of Ukraine ("SPFU") in 2011. SCM paid the first instalment of the purchase price (US$ 100 million) to Raga in July 2013. However, SCM did not pay the second and third instalments, due in 2014 and 2015. SCM said that Raga had breached warranties in the sale agreement because it was likely that Ukrtelecom was going to be taken back into public ownership. That risk arose because ESU had failed, SCM alleged, to comply with its obligations under the privatisation agreement. Specifically, ESU had failed to invest US$ 450 million in Ukrtelecom before May 2016, and ESU had failed to create and transfer to the Ukrainian State a protected telecoms network for the use of Ukrainian governmental agencies.

Raga commenced arbitration in June 2016, under the LCIA Rules in London, claiming the remainder of the purchase price (US$ 760 million). SCM counterclaimed the amount it had already paid (US$ 100 million). In the meantime, the Ukrainian Parliament ordered an investigation into the privatisation of Ukrtelecom, and in February 2017 the SPFU warned ESU that the privatisation could be rescinded and Ukrtelecom returned to the State. In April 2017, the Pecherskyi District Court issued an order freezing ESU's shares in Ukrtelecom. On 10 May 2017, 5 days before the arbitration hearing started, the SPFU commenced court proceedings in Kyiv, applying for the return of Ukrtelecom and a penalty from ESU in the sum of US$ 81.9 million.

The arbitration award

The arbitral tribunal issued an award in Raga's favour on 26 June 2017. The tribunal ruled that SCM had failed to prove that there had been a breach of ESU's privatisation obligations (a conclusion which involved issues of Ukrainian law). Consequently, SCM's defence and counterclaim failed, and it had to pay the remaining part of the purchase price (US$ 760 million). In reaching this decision, the tribunal placed weight on the fact that there was no Ukrainian court decision at that time relating to the privatisation issues. SCM had informed the tribunal about the ongoing court proceedings in Kyiv, and had applied to the tribunal to defer its award until the Ukrainian court had given judgment. But the tribunal rejected that application because the length of such an adjournment would be uncertain and that would be inconsistent with the tribunal's duty to avoid unnecessary delay and expense. The tribunal also thought it was likely that a Ukrainian court would arrive at the same conclusion on the privatisation issues.          

The Ukrainian court proceedings

On 19 October 2017, the Kyiv Commercial Court handed down its judgment. It ruled that ESU had breached its privatisation obligations, and ordered ESU to return Ukrtelecom to the SPFU and pay a penalty of US$ 81.9 million. That judgment was upheld by the Kyiv Commercial Court of Appeals in December 2017 (a further appeal is pending before the Ukrainian Supreme Court).

This meant SCM had to pay a US$ 81.9 million penalty in Ukraine and had to pay US$ 760 million to Raga, in addition to the US$ 100 million it had already paid, but had nothing to show for this because it had to return Ukrtelecom to the SPFU.

The English court judgment

SCM challenged the arbitration award in the English High Court under section 68 of the Arbitration Act 1996. It said that the tribunal's decision not to defer the award until the Ukrainian court had handed down its judgment constituted a serious irregularity which had caused substantial injustice to SCM. It asked the High Court to remit the award back to the tribunal for reconsideration, hoping that the tribunal would issue a new award in SCM's favour in light of the Ukrainian court ruling.

The High Court handed down its judgment on 3 May 2018. The judge made the following observations on the application of section 68:

  • The question of whether there was a serious irregularity must be determined as at the date of publication of the arbitration award.
  • What must be shown is unfairness by the arbitrators, not merely a mistake by the losing party such as a failure to present an argument or evidence in the arbitration.
  • A party may have been given a reasonable opportunity of putting its case even if there was more evidence that could have been adduced: a procedure may be fair even if it is not perfect.
  • Although arbitrators have to avoid unnecessary delay, what is critical is that the arbitrators act fairly. In some cases a delay to an award could be unfair; in other cases, a delay may be necessary to avoid unfairness.
  • While the court has to examine the reasons given by arbitrators, the question is not whether the arbitrators' reasons are sound, but whether the procedure followed by the arbitrators has been fair.
  • The substantial injustice may be either in the present or the future. If the injustice has not yet occurred the court must form a view about whether it will do so.
  • It is not necessary to show that, but for the irregularity, the result would have been different, it is enough if the result might well have been different.
  • There is a risk inherent in the parties' choice of arbitration that there may be inconsistency between an arbitration award and a related court judgment. Such an inconsistency cannot by itself amount to substantial injustice.

Applying these principles, the judge concluded that the arbitrators were entitled here to decide not to defer the award until the Ukrainian court action had been completed, and it was not unfair for them to do so at the time when they made that decision because there was no evidence before them about the likely duration of the court proceedings. This meant there was no serious irregularity, and SCM's challenge failed – even though the judge accepted that if the tribunal had waited for the Ukrainian court judgment, the award might well have been different.

Comment

The English High Court repeated in this case that section 68 sets a "high threshold", or a "high hurdle". The judge observed that, in appropriate cases, high thresholds are there to be crossed and high hurdles to be jumped. This was not such a case. And given that the Commercial Court has recently reported that there were 112 applications under section 68 in the period from 2015 to 2017, but only one successful application, it must be recognised that the hurdle is very high indeed – even if the result would have been different if a different procedure had been followed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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