Arduina Holdings BV v Celtic Resources Holdings Plc

MR JUSTICE TOULSON: Arduina mounts challenges under sections 67 and 68 of the Arbitration Act 1996 to an arbitration award (“the award”) of Mr Christopher Style, dated 12 December 2005, in which he dismissed claims by Arduina against Celtic and gave declaratory relief to Celtic under a counterclaim.

The arbitrator went on to make a costs award in favour of Celtic, dated 22 February 2006. Arduina also applies to set aside an order of Colman J dated 8 March 2006 permitting registration and enforcement of the costs award, but that application depends on Arduina succeeding in challenging the primary award.

On 22 November 2002 Arduina and Celtic entered into an agreement entitled Framework Agreement. As was recited in its opening paragraphs, the Framework Agreement related to ten assignment agreements entered into by the same parties at the same time, under which Celtic assigned to Arduina the right to payment under ten loan agreements by which Celtic had advanced money to a company called South Verkhoyansk Mining Company (SVMC). SVMC was an entity incorporated under the laws of the Republic of Sakha (Yakutia), part of the Russian Federation.

Clause 1 of the Framework Agreement provided that it was a condition precedent to the payment of any amount, and the obligations of the parties under the assignment agreement, that a Yakutian state enterprise (which has been referred to in the award and in these proceedings as either SUE Komdragmetal, or SUEK) should have agreed to transfer all its shareholding in SVMC to Arduina on terms satisfactory to Arduina and that such transfer should have taken place and be duly registered in SVMC’s books.

It also provided that Celtic would take all steps and do all acts to encourage SUEK to agree to transfer its shareholding in SVMC to Arduina and cause the transfer to be duly registered, but that Arduina should have complete discretion whether or not to accept such transfer. Clause 2 provided that on Arduina notifying Celtic that the condition precedent had been wholly or partially satisfied, as Arduina in its discretion should decide, the rights and obligations under the assignment agreements should become valid and enforceable and Arduina should pay Celtic US$ 5 million.

Pausing there, this meant that Arduina incurred no obligations under the Framework Agreement unless and until it declared the condition precedent satisfied, and Celtic’s only obligation was to do what it could to encourage SVMC to dispose of its shares to Arduina.

Clause 3 provided that the agreement would terminate and the assignments would become null and void after one year unless Arduina, in the meantime, had declared the condition precedent wholly or partly satisfied. Clause 4(a) stipulated that the Framework Agreement was governed by English law; clause 4(b) was the arbitration clause. This provided:

Then a little further on:

Mr Style was appointed arbitrator under that clause.

Clause 4(d) provided that:

The assignment agreements were all in similar form to each other. Each appeared, on its face, to be an unconditional and complete assignment of the relevant loan. Clause 2.3 of the assignment agreements recited that the parties had, by a separate agreement, determined the consideration for the assignment which the parties acknowledged was good and valuable.

Clause 4.1 of the each assignment agreement stipulated that it was governed by the laws of the Russian Federation. Clause 4.2 provided for arbitration in London in accordance UNCITRAL Arbitration Rules.

The commercial background to these agreements was gone into in some detail in the award. Put shortly, SVMC had certain rights to extract precious metals from the Nezhdaninskoye mine in Yakutia. Arduina’s aim was to invest in the mine. Nobody with experience in this court of agreements for exploitation of Russian mineral resources would be surprised to be told that the full story was neither straightforward nor transparent. Not infrequently, such enterprises involve tales of entrepreneurs trying to stitch each other up, and this case is no exception.

The hope underlying the Framework Agreement was that Arduina would use what would appear to be outright assignments as a lever to persuade SUEK to part with its 50 per cent shareholding to Arduina who would then provide payment to Celtic. Arduina and Celtic would thereafter be joint owners of SVMC. Meanwhile, a rival entity Alrosa was also trying to arrange to obtain a transfer of SUEKs shares to a company jointly owned by SUEK and Alrosa. Alrosa had the support of the president of Yakutia, President Shtyrov.

On the day of the agreements, but before they were signed, Alrosa took control of SVMC’s premises, assisted by local police, and Celtic’s personnel were pushed out. The full story is more tangled by far, but that is sufficient, by way of very brief introduction, to the claims raised in the arbitration and the issues which I have to consider. A more detailed but still abbreviated account can be found set out in the award.

Arduina’s claims fell into two categories. First, it made various allegations of breach of contract. Essentially, it alleged that Celtic breached its obligations under the Framework Agreement to encourage SUEK to offer to transfer its shares to Arduina. The allegations of breach of duty were rejected.

Secondly, it alleged various misrepresentations. These included representations relating to Celtic’s shareholding in SVMC and Celtic’s ability to control SVMC. It was Arduina’s case that, on the strength of Celtic’s representations, it invested a large amount of time and money in what turned out to be a wild goose chase.

This part of the case necessitated the arbitrator examining what disclosures were made by Celtic to Arduina, or their respective legal representatives, in the run up to the Framework Agreement and assignment agreements being executed. Having done so, the arbitrator rejected the claims that there had been a material misrepresentation, except in two linked respects. These concerned the fourth and fifth pleaded representations. The fourth had to do with Celtic telling Arduina that it had a right of pre-emption over SVMC’s shares; the fifth concerned a representation by Celtic that it had either management and control or management control of SVMC.

On a point of terminology, the arbitrator noted that in its pleadings the word “and” sometimes did, and sometimes did not, appear between the words “management” and “control”, but it was accepted that Celtic, through its managing director Mr Foo, told Arduina, through one of its backers Mr Steinmetz, that Celtic had management control of SVMC and that Arbitrator treated the terms as synonymous.

The arbitrator accepted Arduina’s argument that, as a matter of fact, Celtic lost management control at the extraordinary general meeting of SVMC, whether regularly called or not, which resulted in the physical ousting of Celtic’s personnel on the day that the Framework Agreement and assignment agreements were signed, but before they were signed, regardless of the legality or illegality of the EGM, and that fair disclosure required Mr Foo, who signed the agreements on behalf of Celtic, to disclose his knowledge of what had happened to Dr Sittard, who signed them as sole director of Arduina. Also, the events at the EGM could have affected Celtic’s rights of pre-emption in respect of SVMC’s shares and, on that score also, ought to have been disclosed to Dr Sittard. In that respect, or those respects, there was a misrepresentation or misrepresentations, but the arbitrator found that disclosure of what had happened on the morning of the agreements would have made no difference to Dr Sittard and those allegations of misrepresentation therefore also failed.

I will need to come back to this matter where considering Arduina’s section 68 challenge.

After the conclusion of the evidence in the arbitration, Celtic applied to amend its pleadings to counterclaim declarations that the Framework Agreement contained a condition precedent (as I have previously set out), that had not been fulfilled wholly or partially by 22 November 2003 and that the Framework Agreement therefore terminated on 22 November 2003. The application was opposed but was allowed.

Arduina served a defence to counterclaim which consisted of a bare denial. Arduina’s closing written submissions in relation to the counterclaim read as follows:

In his award, the arbitrator stated, at paragraphs 152 and 153:

In his skeleton argument and oral submissions, Mr Oliver QC, on behalf of Arduina, presented his challenge to the award on the counterclaim, before his challenge to the award, and I will follow the same order.

The challenge is made under section 67 on the ground that the arbitrator exceeded his substantive jurisdiction in entertaining the counterclaim. By way of belt and braces, Arduina relies in the alternative on section 68.

In the claim form, Arduina’s complaint was put as follows:

It is simply wrong to say that the arbitrator purported to dispose of matters of Russian law. The Framework Agreement contained a condition precedent. It was governed by English law. The arbitrator had jurisdiction to determine any claim arising out of the agreement.

The claim that, as a matter of English law, there had been non-fulfilment of the condition precedent, and accordingly the Framework Agreement had been terminated, was a claim arising out of the agreement. The arbitrator did not purport to decide, as a matter of Russian law, what was the effect of his ruling on the assignment agreements, which were governed by Russian law.

The arbitrator had been swift to point out the distinction during the discussion on the application to introduce the counterclaim. Mr Hoyle complained (transcript, day 10, pages 194 to 195) that the counterclaim was essentially asking the arbitrator to find that the assignments were not valid, but their validity was a matter for a Russian tribunal and a Russian court had already ruled that they were valid.

The arbitrator observed that the counterclaim was carefully drafted as a claim under, and only under, the Framework Agreement, that the Framework Agreement was an English law contract in respect of which he had jurisdiction and that it would then be up to another tribunal, meaning a Russian tribunal, in a claim under the assignment agreements to decide what the effect of his award would be.

The arbitrator’s reasoning was, in my view impeccable. In these proceedings, the complaint about the counterclaim has been put in a number of ways. The central points made by Mr Oliver can be summarised as these:

There is a short answer to this argument, which is that it starts from the wrong place and ends in a faulty conclusion. The starting point must be the starting point taken by the arbitrator, which is the Framework Agreement under which he was appointed. The parties chose, for their own reasons (which are, in fact, fairly obvious) to introduce the condition precedent in the Framework Agreement rather than in the assignment agreement. That choice, together with the choice of different governing laws and separate arbitration clauses, provided a potential source of conflict of laws problems.

Having chosen, for better or for worse, to make the condition precedent part of the Framework Agreement governed by English law, it was for the arbitrator under that agreement to decide whether, as a matter of English law, there had been non-fulfilment of the condition precedent and, consequently, termination of the Framework Agreement. It was not rendered beyond the arbitrator’s jurisdiction to decide that point merely because the sole reason for Celtic seeking to have the point determined was in order to provide a platform for an argument as to the consequential effect in Russian law of the validity of the assignments.

The alternative challenge under section 68 to the arbitrator’s decision to permit the counterclaim to be advanced is, in my view, hopeless. Circumstances would have to be extreme for it to be a serious irregularity for an arbitrator to permit a party to raise an issue within his jurisdiction. The application was made late, but Mr Hoyle, who appeared in the arbitration on behalf of Arduina, fairly conceded that this caused Arduina no evidential prejudice. Indeed, as a matter of substance, there was no shadow of doubt that the condition precedent had not been fulfilled. Arduina’s primary complaint was that it had not obtained SVMC’s shares because of contractual breaches by Celtic. Once that compliant was disposed of, there was nothing of substance which Arduina could have said in relation to the counterclaim. That accounts for the bare denial in the defence to counterclaim and the submissions made in the closing submissions, which were directed to the question whether as a matter of discretion it was appropriate for the Arbitrator to make the declaration.

There is a further ground on which the challenge to the award on the counterclaim would fail in any event. At the conclusion of day ten, the arbitrator asked both parties if they had any objection about the way in which he had conducted the arbitration up to that point. He doubtless had in mind section 73 of the Act. This provides:

that the tribunal lacks substantive jurisdiction;

that the proceedings have been improperly conducted …

In opposing the application for leave to plead the counterclaim, Mr Hoyle had made arguments why the matter was best left to the Russian tribunals to determine, but he had not gone so far as positively to submit that the arbitrator had no jurisdiction to determine the point under his appointment. That, at any rate, is how I interpret his submissions on re-reading them.

When the arbitrator subsequently asked both parties whether they had any objection to the way in which the proceedings had been conducted, Mr Hoyle said that he did not. Neither in the defence to counterclaim, nor in the closing submissions, was the point taken that there was no jurisdiction to entertain the counterclaim. Rather, the argument went to whether the declaration should be made. In those circumstances, I accept the submission of Ms Newman QC that it would be too late in any event for Arduina to have complained about the decision to permit the counterclaim.

I conclude that the challenge to the award on the counterclaim is ill-founded in substance and also out of time.

In the claim form it was asserted simply that:

The claim form was issued on 31 March 2006, over three months after the publication of the award. Prior to that, Arduina had applied for an extension of time in which to issue its claim form. In a letter to this court dated 28 February 2006, Arduina’s solicitor wrote saying, among other things:

Then he added:

I have two comments to make about that. First, the statement about what would be involved in the arbitration application is, frankly, misleading in a rather extraordinary way in relation to the issues sought to be raised on the application. The questions whether there was an excess of jurisdiction or whether there was an irregularity within section 68 do not involve the litany of matters which the letter suggested needed to be examined. But more striking is this: that if Arduina had been working on this matter from the moment they received the award, up until the issue of the claim form on 31 March, the statement in the claim form setting out the basis of the section 68 claim is quite remarkably defective. Had the judge before whom that application came been aware that the claim form, when issued, was likely to be in the form that it was issued, I have no doubt that he would not have granted a further month’s extension.

Before coming to how the claim has been more fully developed, it is right to make a preliminary comment about the scope of section 68, although that ought not, by now, to be necessary. This court and higher courts have repeatedly stressed that section 68 is available only in extreme cases where the arbitral process has gone wrong in such an exceptional way that justice demands its correction. There is no need to cite authority for that proposition. The relevant authorities are, or ought to be, very well known.

The assertion in the claim form that the decision was contrary to the weight of the evidence does not begin to meet the requirements of section 68. If it were otherwise, then any appeal on grounds of fact could be brought under section 68. This would be contrary to the whole scheme of the Act. There may be an appeal on points of law under section 69, with the leave of the court or agreement of the parties, but there is no appeal on questions of fact. Section 68, which does not require leave, is not intended to provide a backdoor route to appeals on fact.

The assertion that the arbitrator failed to take any or proper consider of the evidence could, in an exceptional case, give rise to a challenge under section 68, based on the general duty of an arbitrator under section 33 if, for example, an arbitrator genuinely overlooked evidence that really mattered, or got the wrong end of the stick in misunderstanding it. But there is all the difference in the world between such cases and an arbitrator evaluating evidence but reaching factual conclusions on it (as will happen in most arbitrations) which one party does not like. That cannot be the basis of a complaint under section 68.

The first attempt by Arduina to spell out its complaints under section 68 was in a statement of Michael Wilson, Arduina’s solicitor, dated 8 July 2008. In this statement, he asserted as follows:

Exhibited were 50 pages of comments and criticisms. In that schedule, Mr Wilson went through the award in paragraph order, making large numbers of comments. I regret to say that it is not a structured and coherent document which seeks to identify topics and to demonstrate how the points affected the crucial findings of the arbitrator. It is assault by grapeshot. It fires a lot of points, but is unfocussed and all too often the target is unclear. Time and again, the reader is left asking the question, “So what?” Much of it has to do with the commercial background and what various actors were up to, rather than the essential allegations of breach of contract and misrepresentation. When the schedule finally reached section 5(b) of the award, where the arbitrator analysed and gave his conclusions on the breach of contract claims, which involved an analysis of Celtic’s obligations under clause 1 of the Framework Agreement, the schedule stated:

There are various other references to Mr Layton’s opinion in the course of the schedule.

Mr Layton’s opinion was not in evidence and, so far as I am aware, it was not before the arbitrator. All this is far removed from the proper way in which to present an application under section 68. I will not go through its deficiencies in further detail. Ms Newman, in her skeleton argument, describes the schedule as an “intemperate rant”, and I very much regret to say that I think that this is a fair characterisation of it. I said at an earlier stage of this hearing that I have never previously seen a section 68 challenge presented in such a fashion, and hope not to do so again. It falls far below the standard which this court is entitled to expect.

Mr Oliver, naturally, presented his submissions in a way which was temperate and concise, and I wish to make it plain that the strictures which I have advanced do not in any way apply to the presentation of the skeleton argument or his oral submissions. Mr Oliver did not abandon what I have described as the grapeshot approach in Mr Wilson’s schedule, but he confined the complaints which he developed in his written and oral submissions to specific complaints about the arbitrator’s finding in relation to representations by Celtic about the management and control of SVMC, and the arbitrator’s rejection of Arduina’s claimed reliance on them.

For this purpose, a short bundle was prepared containing witness statements and transcripts of evidence of Dr Sittard and Mr Pieter du Plessis, which I have read.

On the question of what representations were made, it is said that there was serious irregularity in the arbitrator failing to find that Celtic lost management and control (or management control) long before 22 November 2002. Indeed, it is said that, as a non-majority shareholder, Celtic could never have had control of SVMC. As to that, Arduina had its own Russian lawyer who knew the position regarding Celtic’s shareholding in SVMC, according to the arbitrator’s findings.

In any event, the arbitrator said in his award, when dealing with the representations about Celtic’s management control of SVMC, that it was Arduina’s primary case that Celtic lost that control on 22 November 2002 and he accepted their case on that point. What he rejected was their case that the non-disclosure of events on 22 November 2002 prior to the signature of the agreements induced Dr Sittard to enter into agreements which he would not otherwise have done.

As to that point, on which Mr Oliver concentrated his arguments, Arduina’s case was put in the skeleton argument in summary as follows:

Mr du Plessis was a mining consultant brought in by Mr Steinmetz on behalf of Arduina to see if the mine was worth making an investment. He visited Nezhdaninskoye and provided a report to Mr Steinmetz. The arbitrator said in paragraph 133 of the award:

So the arbitrator considered Mr du Plessis’s evidence and evaluated it. Arduina does not like the result, but that does not entitle it to make a complaint under section 68. The arbitrator also considered and evaluated the written and oral evidence of Dr Sittard, but he did so in the context of considering what was the attraction of the Framework Agreement to Arduina.

Dr Sittard’s written statement was one of a number prepared by Mr Wilson. In paragraph 71 of his award, the arbitrator considered a number of complaints made by Celtic of misconduct by Mr Wilson in the conduct of the claim. He said:

He went on to set out his reasons. Having identified a number of matters of concern, he concluded in paragraph 72:

He went on to consider how Dr Sittard viewed the Framework Agreement and the opportunity which it presented. In paragraph 77 he expressed his conclusions as follows:

The reference to Celtic’s prospectus and its AIM disclosure obligations is explained by the fact that in September 2002 Celtic had issued a prospectus seeking capital by way of shares which it was intended should be traded on the London Stock Exchange Alternative Investment Market.

The Arbitrator stated, in paragraph 78:

He continued in paragraph 79:

I should add, in passing, that Dr Sittard in cross-examination had agreed that he did not regard it as important to conclude the due diligence stage before entering into the Framework Agreement. That could be done later. The arbitrator clearly took the view that that was perfectly understandable if Arduina had nothing to lose by entering into the Framework Agreement, because the Framework Agreement was merely giving it the opportunity to use the assignments as a lever with which to try to cut a deal, but it would always be able to walk away if it did not like the best that it could negotiate.

These passages in the award provide the background to passages where the arbitrator then considered directly the effect of the misrepresentations which he found on the mind of Dr Sittard. In paragraph 144, dealing with the pre-emption representation, the arbitrator said:

In paragraph 147, he considered the effect of the non-disclosure that Celtic had lost effective control of SVMC earlier that day. The arbitrator said:

The gentlemen whose names were referred to in the last sentence were associates of Dr Sittard in relation to the attempt by Arduina to acquire an interest in SVMC.

What follows from all of this? It is quite apparent that the arbitrator did not overlook or ignore the evidence of Dr Sittard, or fail to evaluate it. His reasoning was a result of his evaluation of that evidence set in the context of many other things about which there had been evidence in the course of the arbitration. He had Dr Sittard’s evidence very much in mind. Arduina disagreed vehemently with his analysis and conclusions, but that is nothing to the point when one is considering an application under section 68. Objective analysis of this head of complaint shows that it has no substance.

Even if, for the sake of argument, the arbitrator should have found that disclosure of the events on 22 November would have caused Dr Sittard not to go through with the agreements, Arduina would then have to show that this failure to do so resulted in a substantial injustice. I have read the paragraph of Mr Wilson’s witness statement in which he addressed the matter of substantial injustice.

The arbitration was not on liability alone; it was for Arduina to show any loss. It is apparent from the evidence that by 11 December 2002, less than three weeks after the signing of the agreements, Arduina knew of the latest developments affecting SVMC. It opted to keep the Framework Agreement alive. I am unaware of any evidence put forward by Arduina of loss suffered by it during that three-week window as a result of entering into the agreements. Arduina put forward a claim for loss, but not on that basis. I have today been shown the schedule of loss. I do not claim fully to understand it, but it does include a passage which lists time spent by various people and the cost of their time. For example, Dr Sittard is shown as having spent 30 days at $10,000 a day, giving rise to a total claim for $300,000. There are similarly round figures for Mr Steinmetz and others; the dates are not shown.

In his award at paragraph 87, the arbitrator quoted the following paragraph from Dr Sittard’s witness statement:

The arbitrator continued:

There is no evidence before me that a finding of misrepresentation would have produced an award of damages other than, I suppose conceivably, an award of nominal damages, but even that would be questionable. Mr Oliver submitted that such a finding would at least have had a bearing on the costs award. In the costs award, the arbitrator said, at paragraph 11:

I suppose it is conceivable that if he had found that there had been a misrepresentation, but which did not sound in loss, he might have made some allowance for that in assessing costs, but that is at best speculative and it seems to me probably rather unlikely.

Arduina has the burden of establishing that it suffered substantial injustice, and in this regard it has not done so.

I have also considered the other allegations of irregularity. I do not propose to go line by line through the complaints made by Mr Wilson in his schedule. To do so would take far too long. I have made my general comments on it. I have tried to do justice to it by following the thread of the complaints there made, and I have also followed the responses to those complaints made by Celtic. All I can say is that, having done my best to follow the thread of those matters to see how they relate to the arbitrator’s findings, I can find nothing in it which comes close to irregularity, let alone serious irregularity.

In the light of the tone of the attack made on the arbitrator by Mr Wilson, I should say that I think that the award is a model of clarity. It is plainly the product of very careful thought and preparation. In my judgment, the attack on the award under section 68 is misconceived.

It follows from my rejection of the claims by Arduina in relation to the award, that their application to set aside the order of Colman J also must fail.