Protech Projects Construction (Pty) Ltd. v Mohammed Abdulmohsin Al-Kharafi & Sons for General Trading, General Contracting and Industrial Structures WLL

These two claims concern the same parties. I shall refer, as the parties have done, to “Protech” (a South African company now in liquidation after changing its name to “Big Dig”) and “Kharafi” (a Kuwaiti company).

In 2004 Folio 828 Cooke J made an Order on 8 October 2004 under section 66 of the Arbitration Act 1996 giving Protech permission to enforce as a judgment three arbitral awards, dated 10 February, 9 July and 30 August 2004, given by Mr Brian Eggleston in an ICC arbitration between the parties held in London. On 13 October 2004, Cooke J also made charging orders over certain shares in Costain Group Plc held by Kharafi through nominees. Kharafi now applies by a notice dated 15 February 2005 to set aside the charging orders and for an order that the awards not be enforced until further order.

In 2005 Folio 438 Kharafi applies under section 68 of the 1996 Act to set aside or have remitted five awards made in the same arbitration, being a partial award dated 20 January 2005 and a final award dated 4 May 2005 in addition to the three awards the subject of 2004 Folio 828. The application notice was dated 26 May 2005 and Kharafi also therefore needs and seeks an extension of time for the application insofar as it relates to the first four of the awards.

Kharafi also issued a further Arbitration Claim Form (2005 Folio 117) relating to the third (9 July 2004) award which concerned questions of interest. Following the decision of the House of Lords in Lesotho Highlands Development Authority v Impregilo SpA [2005] 3 WLR 129, Kharafi withdrew this claim. Liability for the costs of the claim were also to be determined at the present hearing. As there were no reasons why costs should not follow the event, I ordered that they be paid by Kharafi to Protech to be assessed if not agreed.

Kharafi was the main contractor for airport construction works in Ethiopia. Kharafi engaged Protech as earthworks sub-contractor. The sub-contract was dated 4 December 1998. It provided for ICC arbitration. Kharafi terminated the sub-contract before the earthworks were completed. Protech made claims which were referred to arbitration. The ICC (not the parties) chose London as the seat of the arbitration. Mr Eggleston was appointed sole arbitrator. His first “Partial Award” dated 20 January 2003 addressed “jurisdictional and locus standi issues”. In brief, Kharafi contended that Protech had assigned (ceded) its claims under the sub-contract to others and so had no standing to advance them. The arbitrator rejected this contention. Kharafi now seeks to challenge the award on the grounds that material documents were not disclosed by Protech and, had they been, the outcome would have been different. If the challenge is successful it is said that all the awards must be set aside.

There followed a hearing of the main claims by Protech and counterclaims by Kharafi. A second “Partial Award” was issued dated 10 February 2004. Protech was awarded a capital sum of US$ 1,868,140 payable within 28 days. There is, and has been, no challenge to this award on the merits.

The third (9 July 2004) and fourth (30 August 2004) awards dealt with interest. The third award addressed the principles on which interest should be awarded to Protech as at 10 February 2004. Interest was quantified by the fourth award in the sums of US$ 452,626.43 and Ethiopian Birr 173, 896.97, again payable within 28 days. It was the third award which Kharafi sought to challenge in 2005 Folio 117 but has now withdrawn the challenge.

The fifth and final award (4 May 2005) dealt with costs. Protech was awarded quantified costs of US$ 120,000 and £1,413,605.33 and SA Rand 661,222.76. This award is the subject of a discrete challenge by Kharafi made in 2005 Folio 438. Kharafi contends that the arbitrator failed to deal with submissions concerning the validity of certain conditional fee agreements (CFAs) relating to Protech’s costs and that the award is invalid for that reason.

Protech also had an earthmoving sub-contract with a South-African company, MAK (Pty) Limited (“MAK”). This contract involved works in Botswana. By a Deed of Cession dated 4 April 2004 MAK ceded to Kharafi certain claims it asserts against Protech under the contract. For the purposes of the present proceedings only, Protech is prepared to assume that under South African/Botswana law set-off operates in favour of Kharafi on the asserted claims under the Botswana sub-contract. Whether it does or not is or will be the subject of dispute in other jurisdictions. This assumption, however, does not apply to the fifth (costs) award because it is common ground that under the applicable law the asserted claims cannot be set-off against an award made after the date of Protech’s winding-up. On 30 March 2005 Protech entered into a creditors voluntary liquidation in South Africa. The resolution was registered on 5 April 2005. The costs award was issued on 4 May 2005.

In addition to the matters to which I have already referred the evidence establishes, or it is to be assumed, that:

In his award on standing the arbitrator set out the material terms of the Claims Cessions and the Releases. He recorded (paragraph 8.2) that Corbett & Co had written to him on 18 July 2002 that, whilst they disputed the proposition that the Claims Cessions had deprived Protech of the right to arbitrate, they proposed:

“unless [Kharafi] now agree to waive the matter to ask the ICC to re-start the arbitration, assigning a new number but otherwise leaving matters as they are. As your appointment was by consent, there should be no break in your appointment.”

In paragraph 8.3 the arbitrator also recorded that:

“On 8 August 2002 Protech submitted to ICC a further Request for Arbitration as indicated in its letter of 18 July 2000. That arbitration which was assigned the reference … is currently ‘on hold’. I am appointed the Sole Arbitrator”

In paragraph 10 of the award, the arbitrator (referring to Kharafi as MAK) summarised his reasoning (so far as relevant) as follows:

“10.1

Protech’s locus standi in the arbitration founds on the arbitration agreement between the parties and in general terms that remained intact and effective at commencement of the arbitration notwithstanding the cessions. Any capacity to arbitrate lost by the cessions was restricted to the particular rights assigned ….

10.2

MAK’s challenge on locus standi should be considered having regard to South African law ….

10.3

South African law allows discretion to be exercised in certain circumstances where a claimant having commenced proceedings with a locus standi defect subsequently rectifies that defect ….

10.4

….

10.5

….

10.6

I am left with the question, is this a right case for the exercise of discretion on locus standi, and if it is should I exercise that discretion.

10.7

Having regard to my findings that:

1.

the challenge to Protech’s locus standi relates not to a fundamental lack of capacity but to a temporary loss of some rights of claim.

2.

the lost rights did not include all rights to arbitrate.

3.

the lost rights were restored within 2 months of the challenge being mounted.

I hold that this is a case where the exercise of discretion is appropriate and that in the circumstances I should exercise my discretion in Protech’s favour.

10.8

For all of the above reasons my answer to the issue at D33.1 – “Does Protech have locus standi in this Arbitration” is YES.”

The arbitrator noted (paragraphs 2.4 and 2.5) that the Terms of Reference provided for the proceedings to be governed by the ICC Rules of Arbitration in force as from 1 January 1998 and that in Section D of the Terms of Reference Issue 32(x) of “The Issues to be Decided” was:

“Who should pay the costs of the arbitration (including the Arbitrator’s fees and expenses, the administrative charges of the ICC and the reasonable legal costs of the parties)?”

The arbitrator (paragraph 8.1.4) recorded one of Kharafi’s (again referred to as MAK) “principal submissions” to be that:

“The CFA’s entered into by Protech in respect of its solicitor’s fees and its senior counsel’s fees are subject to English law but to be lawful they must comply with the Conditional Fee Agreement Regulations 2000 (CFAR). MAK contends that the CFA’s fail to comply with mandatory requirements for the proportion of the success fee relating to the costs of postponement of fee recovery to be stated and accordingly the CFA’s are unenforceable.”

The award (paragraph 11.1) sets out the CFAs concerned, which were expressly subject to English law, and in paragraphs 11.2 and 11.3 sets out the submissions on behalf of Kharafi made for the hearing in September 2004 which was to address “principles on costs” together with the arbitrator’s provisional conclusions following that hearing, in these terms:

“11.2

In its Cost Submissions served on 16 August 2004 MAK disputed liability under the CFA’s arguing that there was no established practice of ICC arbitrators allowing recovery of success fees which were, in effect, the doubling of standard fees. MAK also argued that to the extent that a CFA included compensation for deferred payment (albeit within the 100% success fee) such compensation was not recoverable as cost in the arbitration. Protech, in its Reply to MAK’s Submissions, disputed that there was any bar to the recognition of CFA’s in ICC arbitrations.

11.3

In my letter to the parties, dated 5 September 2004, issued after the Hearing on Principles of Costs on 1 and 2 September 2004, I stated:

The provisional conclusions I have reached on contingency [conditional] fee agreement issues are:

(a)

costs arising from such agreements should not be disallowed as a matter of principle.

(b)

Whether uplifts above normal rates should be allowable is subject to the ‘reasonable’ cost test.”

Although the question had not been raised at the hearing to address principles on costs, at the final hearing to address the amount of costs it was submitted on behalf of Kharafi that, irrespective of reasonableness, the CFAs were not “enforceable” by virtue of section 58(3)(c) of the Courts and Legal Services Act, 1990, because of a failure to comply with requirements prescribed by the Secretary of State in the Conditional Fee Agreement Regulations 2000 (2000 No 692). The particular requirement of the Regulations relied upon was Regulation 3(1)(b) that a CFA which provides (as these CFAs did) for a success fee must “specify how much of the percentage increase … relates to the cost to the legal representative of the postponement of the payment of his legal fees and expenses”.

The CFAs did not specify this cost. The reason for the Regulation is that the cost of postponement of payment is not recoverable from the other party: CPR Rule 44.3B(a). The CPR do not, of course, apply to arbitrations. But the 1990 Act and the Regulations do extend to arbitrations: Section 58A(4).

There was also an issue as to whether the source of the arbitrator’s power to award costs derived from section 61 of the 1996 Act or Article 31 of the ICC Rules. Kharafi contended (paragraph 3.7) that Article 31 applied and that it gave the arbitrator complete discretion to award costs as he saw fit. Article 31 provided that:

“1.

The costs of the arbitration shall include … the reasonable legal and other costs incurred by the parties for the arbitration.

2….

3.

The final Award shall fix the costs of the arbitration and decide which of the parties shall bear them ….”

The arbitrator addressed these questions in paragraphs 11.7 to 11.9 of the award:

“11.7.

In the circumstances of the present case, where I have decided that my powers to award costs derive from Article 31 of ICC Rules, it seems to me that issues as to the legal enforceability of CFA’s are secondary to issues as to whether the CFAs meet the reasonableness test of Article 31.

11.8.

The first question I propose to consider, therefore, in respect of the CFA’s (and the bonus agreement) is do they meet the test of ‘reasonable’ costs as set out in Article 31.1 of ICC Rules. In my view they do not. These are not CFA’s where work is undertaken below normal rates but uplifted on success. These are CFA’s which effectively double normal fee rates. The justification given in Corbett & Co’s letter of 13 March 2002, (quoted in paragraph 11.1.1 above) is:

- risks involved in international arbitration

- risks in enforcement of awards overseas

- postponement of fee recovery.

I am not persuaded that the risks in international arbitration justify, and/or make reasonable, fee uplifts of the amounts claimed in this arbitration. Nor am I persuaded that enforcement risks justify, and/or make reasonable, such uplifts. As to postponement of fee recovery I am not persuaded that the costs of such an arrangement are costs within the ambit of Article 31 of ICC Rules whether they be included within a CFA or otherwise.

In the light of the above, issues as to the legal enforceability of the CFA’s are moot.

11.9.

My decision is that the CFA’s and bonus agreement which Protech relies on in this arbitration to recover success fees as costs in the arbitration do not meet the ‘reasonable’ cost test in Article 31.1 of ICC Rules.”

The arbitrator then proceeded to award what he found to be reasonable costs without reference to any uplifts.

Protech’s English solicitors (Corbett & Co), who had acted prior to the liquidation, lost their authority to act upon the liquidation. As a result, a hearing fixed for May 2005 was vacated and the dates of the present hearing were fixed to allow the liquidators to consider their position and to instruct English lawyers.

Although at the outset of the hearing it was proposed that oral evidence should be given by 5 witnesses, in the event evidence was given by video link with South Africa only by Nicholas Maritz SC, an advocate of the High Court of South Africa, who had made a Witness Statement served on behalf of Kharafi.

As is well established and known, Sections 67, 68 and 69 of the 1996 Act provide for the limited bases on which arbitration awards can be challenged in the courts. Section 67 relates to the substantive jurisdiction of the tribunal and is not in issue. Section 68 permits, subject to its terms, awards to be challenged only for serious irregularity which has caused or will cause substantial injustice to the applicant. Section 69 permits, subject to its terms, appeals to the court on a question of law arising out of an award. Section 69 was not available to Kharafi because agreement to ICC arbitration precludes its application.

So far as material, Section 68 provides:

“Challenging the award: serious irregularity

68.

(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award. A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3).

(2)

Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant-

(a)

…

(b)

…

(c)

…

(d)

failure by the tribunal to deal with all the issues that were put to it;

(e)

…

(f)

…

(g)

the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy;

(h)

…

(i)

…

(3)

If there is shown to be serious irregularity affecting the tribunal, the proceedings or the award, the court may-

(a)

remit the award to the tribunal, in whole or in part, for reconsideration,

(b)

set the award aside in whole or in part, or

(c)

declare the award to be of no effect, in whole or in part.

The court shall not exercise its power to set aside or declare an award to be of no effect, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration.

(4)

The leave of the court is required for any appeal from a decision of the court under this section.”

The principles on which the court must act in relation to Section 68 are also well established: see, for example, Lesotho Highlands cited above. They include:

Sections 70(2) and 73 of the 1996 Act are not in issue. Section 70(3) provides that any application under section 68 must be brought within 28 days of (in this case) the date of the award. Plainly the challenges to the first four awards are substantially out of time. Section 80(5) of the Act confers a discretion on the court to extend the 28 day period. Mr Kuschke, who appeared for Protech, sensibly accepted that if the court found in favour of Kharafi on the merits then an extension of time should be granted. The fact is that Kharafi only discovered the existence of the Proceeds Recession on which it relies for the challenge a month before bringing its application.

Despite the fact that the South African High Court, on 16 August 2005, requested this court to recognise the status of the liquidators and to assist them in bringing the present proceedings to determination, and made an order giving the liquidators authority and leave to proceed in the name and on behalf of Protech with all civil proceedings to which it was a party in this court, Kharafi submitted, supported by the opinion of a South African attorney (Mr Winer), that the liquidator had no authority to pursue these proceedings. That opinion was contradicted on behalf of Protech (Mr Reitz). I am sure wisely, Mr Reese QC, who appeared for Kharafi, informed the court on the second day of the hearing, that Kharafi was no longer advancing a case of want of authority.

It is Kharafi’s submission that the failure to disclose the Proceeds Recession amounts to a serious irregularity within Section 68(2)(g) which has caused Kharafi substantial injustice. Mr Reese, rightly in view of the evidence as to the circumstances in which the Proceeds Recession was not disclosed, did not suggest that it was a case of “fraud” but he did submit that it was a case in which the way the award had been procured was “contrary to public policy”.

To be contrary to public policy, in my judgment the impugned conduct must at least involve more than inadvertence and must, save perhaps very exceptionally, involve something which can readily be described as unconscionable or reprehensible: see the judgments of Moore-Bick J in Cuflet Chartering v Carousel Shipping Co Ltd [2001] 1 All ER (Comm) 398 and Profilati Italia SRL v Paine Webber Inc [2001] 1 All ER (Comm) 1065. Whilst the conduct of the parties directed only towards each other may less easily meet the test than conduct which can be said also to have been directed towards the tribunal itself I do not think the nature of the test differs.

In my judgment the matters on which Kharafi relies do not begin to satisfy the public policy test nor the requirement of substantial injustice. My reasons can be summarised as follows:

I see no need to resolve the dispute in the opinions on South African law as to whether or not the arbitrator applied the right test to the exercise of his discretion and exercised it correctly in his first award. On the evidence I read and heard, the weight of authority favours a general discretion to permit claims to continue despite a want of standing or completed cause of action at the time of issue provided that no or no significant prejudice can be shown by the respondent/defendant. Mr Kuschke referred me in particular to the decisions of Wunsh J in Marigold Ice Cream v National Co-Operative Dairies 1997(2) SA 671 and an unreported decision of Howie J in Simonsig Landgoed v Theron Van Der Poel Brink Ross (CPD, 26 August 1991) which lend compelling support to such an approach. In modern times, I can see no reason why a court should, absent any uncurable prejudice, put the claimant through the hoop of having to start again and bearing the costs of the false start. Mr Maritz SC did suggest a court should censure a party who “queue jumped” by commencing proceedings when there was no standing to do so. If that could be shown to be the motive perhaps so, albeit a more proportionate sanction would be to put the case back in the queue, but it is not this case and has little if any relevance in the context of an arbitration let alone one which has the history of this one.

The locus standi application by Kharafi fails.

It is the submission of Mr Reese that the arbitrator failed to address the enforceability of the CFAs and that, if he had held them to be unenforceable, the consequence would have been that Protech had no liability for any of the costs (as distinct from disbursements) of those with whom CFAs were made and Kharafi equally would have had no liability to Protech for such costs. That, Mr Reese submitted, fell within Section 68(2)(d) of the 1996 Act, and the “substantial injustice” lay in the fact that Kharafi would have to pay substantial sums by way of costs to Protech which Protech had not paid and could decline to pay to those concerned. I asked, and was told, that Protech would accept claims in the liquidation for the amounts awarded by the arbitrator by way of these costs. Indeed I think the arbitrator’s award may carry with it an obligation to do so.

Again, in my judgment, this challenge fails:

I also, therefore, reject Kharafi’s challenge to the fifth (costs) award.

The challenges to the awards fail. I will hear the parties when this judgment is handed down on the orders which they submit should then be made unless they can be agreed.