Ronly Holdings Ltd. v JSC Zestafoni G Nikoladze Ferroalloy Plant

This is an application by the Claimant (“Ronly”) for relief under ss. 67 and/or 68 and/or 69 of the Arbitration Act 1996 (“the Act”), following an award by Mr. Ian Kinnell QC dated 19^th December, 2003 (“the award” and “the arbitrator” respectively), whereby he ordered the Defendant (“Zestafoni”) to pay to Ronly, forthwith, US$10,088,834.57 plus interest thereon.

The gravamen of Ronly’s complaint is that the arbitrator, having held that a sum of US$16,083,772.40 was “outstanding” under the underlying agreement forming the subject-matter of the arbitration, directed that a “capital” sum of only US$10,088,834.57 should be “immediately payable” by Zestafoni to Ronly. The effect of the relief sought by Ronly would be to increase the sum immediately payable by the shortfall between the sum outstanding and the sum immediately payable, namely, US$5,994,937.83 (“the shortfall amount”).

There is also before the Court a very subsidiary application by Ronly, in effect to correct the award. No more need be said of that application until the end of the judgment.

Returning to the principal application, the nature of Ronly’s claims for relief appears from its Claim Form dated 20^th February, 2004, which included the following:

Insofar as relevant, ss. 67-68 of the Act provide as follows:

It is unnecessary to set out the well-known provisions of s.69 of the Act providing for leave to appeal to the Court on a question of law arising out of the proceedings; leave is of course not to be granted unless (inter alia) the decision of the tribunal is obviously wrong or, where the question is one of general public importance, the decision of the tribunal is at least open to serious doubt.

For completeness, I record but need not recount that there has been a dispute as to whether the arbitrator had jurisdiction at all, a matter determined adversely to Zestafoni by Colman J. on the 16^th February, 2004 (in, I am told, [2004] EWHC 245 (Comm.)). I further record that Zestafoni wishes to reserve the question as to whether the award was within the jurisdiction which was held to exist by Colman J.; nothing about this suggested reservation impacts upon the matters which must now be decided.

The history of this matter has a distinct “Alice in Wonderland” air.

The arbitrator was appointed to determine disputes arising under a Ferro-Alloy Production Agreement (“the agreement”). As the arbitrator observed, the agreement’s essential purpose was for the supply to the Zestafoni alloy plant of electricity and raw materials and for the supply by the plant of ferro-alloys; in somewhat simplified terms, Ronly was to supply the electricity and raw materials and Zestafoni agreed to produce and supply ferro-alloys to Ronly.

In the original (unamended) Points of Claim in the arbitration, Ronly claimed a balance of US$15,081,242.13 as due and payable under the agreement and in respect of cash advances made. The Points of Claim then gave credit for balances due from Ronly (1) under the “Seymour Contracts” (see below) and (2) under other contracts with Zestafoni. The relevant paragraphs in the Points of Claim read as follows:

It is not unfair to observe that the various Responses which Zestafoni provided to the Points of Claim are somewhat opaque; on any view, however, it does not appear that Zestafoni agreed or admitted the facts contained in the paragraphs of the Points of Claim set out above. Further and on any view, it is plain that Zestafoni denied that the arbitrator had jurisdiction to deal with any matters other than disputes arising under the (Ferro-Alloy Production) agreement.

By this stage, at least for the time being (if now no longer), well-known English solicitors, Norton Rose, had come to represent Zestafoni, itself a Georgian company. On the 13^th February, 2003, Ince & Co., solicitors for Ronly, wrote to Norton Rose in what might be thought very fair and plain terms. The Ince & Co letter said this:

Nothing daunted, as I have been told without objection, Zestafoni, represented by Norton Rose, maintained its stance at a hearing before the arbitrator on the 6^th March, 2003; the reference was to deal with and only with the agreement; all other contracts were excluded from the arbitration. Subsequently, Norton Rose produced Points of Defence, dated 31^st March, 2003, which emphasised Zestafoni’s position that the arbitrator had no jurisdiction (whatsoever) to determine the disputes which had been referred to him. Following an order by the arbitrator, Norton Rose then produced “Further Points of Defence”, dated 23^rd April, 2003. So far as here relevant, these Further Points of Defence, said this:

Against this background, Ronly now abandoned its attempt to resolve the entire position between itself, Zestafoni, Fapet and Seymour, encapsulated in the original Points of Claim. Extensive amendments were made to the Ronly pleadings in the arbitration. So far as the Points of Claim were concerned, these were amended to delete all reference to the Seymour and (other) Zestafoni contracts. As a result, the proposed credits were deleted and the amount claimed was accordingly increased by the shortfall amount of US$5,994,937.83.

At the substantive hearing before the arbitrator in July 2003, Ronly obtained permission for these amendments; no terms were imposed. On the pleaded cases before the arbitrator, there was, therefore, neither any agreement nor any issue as to credits to be given by Ronly – or, if it be said that the Norton Rose Further Points of Defence raised some such issue - at least no issue which could be explored, still less determined, without reference to contracts other than the agreement.

I come next to the key passages in the award. It is ultimately simplest to set them out at some length:

What might be termed the formal parts of the award included the following:

For my part, I have much sympathy with the arbitrator in the position in which he found himself, as recounted in the award. Moreover, if I may say so, his good intentions in seeking to promote an overall commercial settlement, are at once apparent. The question remains, however, as to whether his approach is sustainable. To that I must return, having first summarised the rival cases.

For Ronly, Mr. Gruder QC submitted that the arbitrator’s approach was unsustainable. There had been no study of any contracts other than the agreement; they had been treated as outwith the arbitrator’s jurisdiction. There had been no agreement as to the credits due to Zestafoni. Insofar as Ronly had represented in the (original) Points of Claim that it was willing to give credit, that representation had not been relied upon by Zestafoni and had gone with the amendment. More generally, at least unless the credits constituted a “transaction” set-off, the arbitrator had no jurisdiction to take them into account, arising, as they did under other contracts outside his jurisdiction; see: Aectra Refining v Exmar [1994] 1 WLR 1634; Glencore v Agros [1999] 2 Lloyd’s Rep. 410. There was, however, no need to decide if the credits did constitute a transaction set-off, as the arbitrator had made no binding determination in that regard. While the arbitrator’s approach might have been a good idea if all concerned were reasonable, in practice he had left Ronly exposed; as Mr. Gruder put it, what would happen if Seymour (for example) commenced proceedings against Ronly to recover monies due under other contracts? Ronly could find itself facing a shortfall under the agreement and exposed to Seymour’s claims under the other contracts. Finally, in leaving Ronly to collect “by other means” sums due to it under the agreement, the arbitrator had failed to deal with the issues before him. In the circumstances, Ronly was entitled to succeed in its application, whether under s.67 or s. 68 of the Act, or, but only if need be, under s.69.

For Zestafoni, Mr. McClure submitted that the hearing before the arbitrator had proceeded on the basis that there was no dispute as to the fact that the credits put forward in the unamended Points of Claim were due to Zestafoni. There had been no suggestion that the concession was untrue. The balance in favour of Zestafoni was to be treated as akin to a payment already made by Zestafoni to Ronly. There was no need to decide whether the credits gave rise to a transaction set off, because the parties had gone beyond that; they had agreed that there was a balance due to Zestafoni. Essentially, Zestafoni relied on the reasoning set out in the arbitrator’s award. The arbitrator had not been in error but, if there was an error, it did not go to his jurisdiction. At most, a question of law arose but not one on which it could be said that the arbitrator’s decision had been open to serious doubt, let alone obviously wrong. Ronly was not entitled to the relief sought or any relief.

In my judgment, with respect, the arbitrator’s approach was unsustainable and Ronly is entitled to the relief sought.

(1) Leaving the matter in limbo: In paragraphs 49-51 of the award, the arbitrator drew a distinction between (i) the position as he found it by reference to the agreement and hence the sums owing by Zestafoni to Ronly thereunder; and (ii) the amount directed to be immediately payable by Zestafoni to Ronly. The upshot was, as already observed, a shortfall amount of some US$5.995 million. In that regard, as it seems to me, the parties and the matter were left in limbo. The arbitrator was the only tribunal to which Ronly could turn to obtain payment of the shortfall amount. But the arbitrator has neither ordered payment thereof nor determined that the shortfall amount is not due to Ronly. Instead, notwithstanding the arbitrator’s determination that that sum is outstanding under the agreement, the arbitrator has done no more than express the hope that the parties would “resolve by other means any outstanding differences that may remain concerning the contracts and arrangements from which they were derived”. That cannot be right.

As a matter of principle:

An award must be final as to all issues decided (save exceptionally and irrelevant here, when the arbitrator is empowered by the parties to grant relief on a provisional basis pursuant to s.39 of the Act).

Subject to iv) below, an award must be complete as to all issues before the tribunal; an award which leaves any such issues undecided, cannot be maintained.

An arbitrator has no power to reserve a decision on issues before him to others to resolve.

An arbitrator only has power to reserve issues to himself for later decision if he proceeds by way of an “interim” award (see now s.47 of the Act).

On the face of it, the arbitrator’s approach in paragraphs 49-51 of the award contravened principles ii) and iii) above; the issue of the shortfall amount was before him; but the fate of the shortfall amount was to be left to the parties or to others to resolve.

If it be said – I am not sure that Mr. McClure actually said it – that the award can survive as a valid interim award, then, with respect, I would be unable to accept a submission to this effect. As it seems to me, the parties and the arbitrator might have gone down that path, depending on their approach to the arbitrator’s jurisdiction, but it is now too late for it to be viable. My reasons are these:

For the award to stand as an interim award, it must be contemplated that, if need be, the parties would return to the arbitrator for a determination as to whether the shortfall amount is to be paid by Zestafoni to Ronly or is to be credited by Ronly in favour of Zestafoni. It is here that the difficulties, arising from the course already taken by the arbitration, become insuperable.

As paragraphs 49-51 of the award disclose, the arbitrator has already foresworn investigating the contracts and arrangements other than the agreement – accepting in this regard the submissions of Zestafoni that he had no jurisdiction to do so and should not do so. But unless the arbitrator explored those other contracts and arrangements, he could make no determination as to the destination of the shortfall amount going beyond that which he was already in a position to have made in the award. Further, if the parties were to return before the arbitrator, nothing said by Mr. McClure suggested to me that Zestafoni’s position as to the arbitrator’s jurisdiction would be any different from that which it had been until now.

On this footing, a further hearing before the arbitrator would be futile. I cannot read the award as intending to commit the arbitrator and the parties to a pointless exercise. Whatever the theoretical position as embodied in paragraph 9 of the formal parts of the award, in my judgment, the award was not in this respect intended to stand as an interim award; as foreshadowed, the intention instead was that the parties or third parties would, somehow, resolve the destination of the shortfall amount.

Pulling the threads together, the arbitrator was appointed to determine the issues arising on the reference. On one view, he has failed to deal with an issue put to him, namely, the fate of the shortfall amount. Alternatively, having determined the sums outstanding under the agreement, he has taken upon himself a power to withhold payment of the shortfall amount pending a resolution of its fate by the parties or third parties. On either analysis the award cannot stand; the right answer, in the light of what had gone before in the arbitration, is that the arbitrator ought to have gone on to order payment of the shortfall amount to Ronly.

Accordingly, I am satisfied that Ronly is entitled to succeed under s.68 of the Act. For my part, I would have been minded to think that s.68(2)(d) is the sub-section most obviously applicable; the fact that it is not mentioned in the Claim Form is neither here nor there as it was addressed both in Mr. Gruder’s skeleton and oral arguments. But it matters not because Ronly is any event entitled to succeed under s.68(2)(b) of the Act, a sub-section which was dealt with in terms in the Claim Form.

(2) Credits no longer part of the arbitration: Mr. McClure argued that the arbitrator was right not to order payment of the shortfall amount because the arbitration had proceeded on the basis that the credits were agreed. He adduced no evidence in support of this proposition and said, instead, that he relied primarily on the award. In particular, Mr. McClure relied on the concluding two sentences of paragraph 48 of the award and the sentence in paragraph 50 of the award which stated that there had not “even been a suggestion that the Claimants have themselves had second thoughts as to what, looking at the broader picture, it was appropriate to allow as a credit to the Respondents”.

To my mind – quite apart from the fact that the arbitrator made no determination that the shortfall amount was not due to Ronly - there are a number of conclusive objections to this approach which would otherwise have had the effect, as Mr. Gruder aptly put it, of allowing Zestafoni to eat it and have its cake. First, Ronly’s stance had been, as is apparent, premised on the “broader picture”; but that broader picture was not before the arbitrator, by reason of Zestafoni’s insistence that the arbitrator’s jurisdiction be confined to the agreement, even to the extent of not investigating other contracts or arrangements. Secondly, Ronly’s “offer” as to the credits had not been “accepted” by Zestafoni. It follows that there was no agreement as to the credits offered by Ronly. Nor does an analysis in terms of estoppel assist Zestafoni; given that Zestafoni disputed the correctness and basis of Ronly’s assertion as to credits, even if Ronly’s assertion could be viewed as a representation, there was manifestly no reliance. Thirdly, once the amendment was permitted without the imposition of terms, there was no longer any live assertion before the arbitrator as to Ronly’s position with regard to the “broader picture”. It is as if an offer is withdrawn before any acceptance; that the offer was or may have been genuine is neither here nor there; no consequences flow from it. The analogy drawn by the arbitrator with admissions (in paragraph 50 of the award) is, with respect, either unhelpful or assists Ronly; here, Ronly had been allowed to withdraw its “admission”.

In summary, I cannot accept and the award does not support the conclusion that the arbitration proceeded on the basis that the credits had been agreed. Instead the arbitrator did no more than seek to hold Ronly to a position which had been adopted on the basis of a different premise and from which it had, by its amendment, now been permitted to withdraw. That amendment, so far as the credits are concerned, was the end of the matter; as the credits were no longer on offer, they were no longer available to be taken into account; nor was there any live issue relating to them. For completeness, I add this; in paragraph 47 of the award the arbitrator speculated as to whether Zestafoni realised what would be the consequences of its decision not to agree an extension of his jurisdiction. All I would say is that if Zestafoni did not appreciate the likely consequences, that was not the fault of Ronly; the Ince & Co letter of 13^th February, 2003 (set out above) could not have been more plain.

In the circumstances, on this basis as well, Ronly is entitled to the relief which it seeks. Though the matter could be put under s.67 of the Act, my preference is for s.68(2)(b); the arbitrator was exceeding his powers by dealing with a matter not or no longer before him. To have done so, a fortiori given Zestafoni’s unyielding stance on jurisdiction, was simply unfair to Ronly.

(3) The position as to set off: For completeness, I must refer to the question of set-off. In the event, both counsel were agreed that there was no purpose in exploring this question, albeit for very different reasons. Mr. Gruder said that this was so because the arbitrator had no jurisdiction to consider any of the other contracts under which a set-off might have arisen and in any event made no binding determination in this regard. Mr. McClure submitted that as the parties were agreed on the credits to be allowed any further study was unnecessary.

For my part, by virtue of the conclusions to which I have already come, I cannot accept Mr. McClure’s submission. Moreover, at least in one respect, I am not inclined to favour Mr. Gruder’s argument as to jurisdiction. I agree, however, that no detailed consideration of set-off is called for. My reasons are these:

Questions of some intricacy arise as to the classification of set-offs and the correct approach to be followed when a claim before an arbitrator is met by an argument that there is a set-off available arising under some separate transaction over which the tribunal does not have jurisdiction. Provisionally, I would be minded to think that an arbitrator does or should have jurisdiction to allow a “transaction” set-off, in effect amounting or akin to a defence, to be raised to reduce or extinguish a claim, even though that set-off arises under another contract, outside the tribunal’s jurisdiction: see: Aectra Refining, at pp.1648 and following and Glencore v Agros, at pp. 416-417, both supra. As it seems to me, the investigation and determination of the availability and amount of such a set-off do not involve the arbitrator arrogating to himself a jurisdiction over separate contracts which he does not have (albeit that considerations of issue estoppel may well arise); instead, these steps form part of the process of arriving at a conclusion of whether a defence is properly available in respect of the contract as to which the arbitrator alone has jurisdiction. However, all these observations are provisional only, given that for reasons which follow, such questions do not arise for decision in this matter.

Where a decision is called for in respect of a set-off said to arise under a separate contract, then, absent agreement: (1) the point must be properly in issue before the arbitrator; (2) the arbitrator must necessarily investigate the position prevailing in respect of that separate contract; (3) if need be (and unless the arbitrator is proceeding by way of interim award, for example pending a decision on the separate contract by another court or tribunal and with an appropriate reservation of jurisdiction) the arbitrator must make a determination as to the position prevailing in respect of that separate contract; (4) in the light of any such determination, the arbitrator must come to a conclusion as to whether the alleged set-off is indeed available or whether, if not a transaction set-off, it faces a procedural bar, of the nature discussed in the two authorities referred to above.

In the present case, no issue of set-off was before the arbitrator. As already discussed, Ronly had withdrawn all reference to the credits it had been willing to allow. For its part, Zestafoni, far from raising a defence of set-off, vigorously objected to the arbitrator considering any contract other than the agreement. But unless he did so, plainly he could reach no conclusion on the availability or amount of any set-off. For his part, the arbitrator accepted this Zestafoni submission.

It was accordingly inevitable and is plain from the award that the arbitrator did not make any determination that the shortfall amount was not to be payable because it constituted a set-off. As already canvassed, he made no determination in this regard at all.

In the circumstances, it is not for the Court to consider whether the credits amounting to the shortfall amount might have constituted a transaction set-off potentially available to Zestafoni by way of a defence, serving to reduce Ronly’s claim.

(4) Overall conclusion on the principal application: For the reasons given, I allow Ronly’s application, under s.68, alternatively under s.67 of the Act, as set out above. There is accordingly no need to say any more of the application under s.69 of the Act.

In a nutshell, the award was incomplete in respect of the fate of the shortfall amount; in the circumstances of this arbitration, the arbitrator was instead bound to order payment of that amount to Ronly, given the conclusions to which he had already come as to the sums outstanding under the agreement. The award cannot be defended on the basis of the credits originally offered by Ronly; those credits had disappeared from the arbitration following the permitted amendments to Ronly’s Points of Claim. Nor can the arbitrator’s approach be justified by reference to the doctrine of set-off; the issue of set-off was not before him and he made no determination in that regard. That the arbitration might have followed a different course is now, on the particular facts of this matter, water under the bridge. In my judgment, the parties must address their overall accounting position against the reality of an order for immediate payment of the shortfall amount.

I can deal with this subsidiary application summarily. It would appear that Ronly raised with the arbitrator the question of correcting the award under s.57 of the Act (essentially, the slip rule), to reduce (by some very small sum) the amount payable to it. Curiously, Zestafoni opposed any such correction. The arbitrator thereafter declined to make any correction.

Before me, Mr. Gruder very fairly conceded that any application under s.57 faced insuperable jurisdictional difficulties. I agree. The power under that section is one for the arbitrator not the court to exercise. What remained, was an application, contained in the Claim Form, under s.68 of the Act, to the effect already summarised. I inquired of Mr. McClure as to Zestafoni’s position and he told me that it continued to oppose any correction to the award. In these somewhat unusual circumstances, it seems idle to spend any more time on this application. It is unnecessary to say more than that I am not persuaded that there is in the present respect any serious irregularity in the award; I therefore dismiss Ronly’s subsidiary application.

I shall be grateful for the assistance of counsel in drawing up an appropriate order reflecting my conclusions and on all questions of costs.