Double K Oil Products 1996 Ltd v Neste Oil Oyj

This is an application by the Claimant, Double K Oil Products 1996 Ltd (“Double K”) to challenge an arbitration award made on 1 July 2009 in favour of the Defendant, Neste Oil Oyj (“Neste”) on grounds of serious irregularity under s.68 Arbitration Act 1996. The arbitration was an LCIA arbitration, the tribunal consisting of Mr Richard Southwell QC (who was chairman), Mr Michael Collins QC and Mr Neil Kaplan QC. The Claim Form seeks an order setting aside the Award on the following grounds: (a) the failure by the Tribunal to comply with its duty under s.33 Arbitration Act 1996 (the duty to act fairly), (b) the failure by the Tribunal to deal with all the issues that were put to it, and (c) the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy. Ground (a) has been argued under two heads, namely an assertion that the Tribunal acted unfairly in not ordering Neste to make certain witnesses available at the hearing, and an assertion that the Tribunal unfairly relied on materials covered by legal professional privilege. In the result, there are four grounds at issue, which Double K submits are interrelated.

There is a long history that preceded the dispute between the parties that led to this arbitration, whose relationship goes back to 1996. Double K is a company incorporated in Israel which carries on an oil trading business out of Vienna. In practice, its business has concerned the supply of stable gas condensate (which is a by-product of the extraction of natural gas) produced at the Gazprom Sosnogorsk refinery in North West Russia, Gazprom being the Russian energy group. The refinery is near to Vetlosjan railway station, and the product is called “Vetlosjan Gas Condensate” (VGC). By a contract dated 19 October 2000, Double K entered into a Purchase Agreement with a company in the Gazprom group called Severgazprom for the purchase of an amount of VGC which (according to its evidence filed in support of the application) Double K was advised at the time represented the entire amount of VGC available for export between 2003 and 2010. The total amount equates (and this is not disputed) to annual amounts of 150,000 mt +/- 10%.

Neste Oil Oyj is a state-owned Finnish oil company. Following a number of agreements, on 14 December 2004 it entered into a Sales Agreement by which it bought the VGC acquired by Double K from Gazprom. This agreement was subject to English Law and arbitration under the LCIA rules. The agreement was extended up to the end of 2007, and provided for the delivery of “150,000 mt +/- 10%” of VGC during that year. Negotiations took place which Double K says were completed in September 2007 to further extend supply for the year 2008. The arbitrators found however, Double K says incorrectly, that no binding contract for 2008 was in fact concluded between the parties (Award paragraph 120).

About this time, Gazprom was restructuring its export activities. There were negotiations between Double K and Gazprom for the transfer of the contract between them, and a Transfer Agreement was signed on 21 September 2007. However to quote from the Award, Double K still had not reached the stage of negotiating an agreement with the export arm of Gazprom, though the then deadline was the end of September 2007. Following a meeting on 25 September 2007, Neste entered into a contract direct with Gazprom on 28 September 2007 for the supply of VGC from October to December 2007. A further contract for supply during 2008 was entered into on 11 December 2007.

Meanwhile on 1 October 2007, Gazprom ceased all supplies of VGC to Double K, which says that in response it withheld €5m for supplies received in August and September 2007. In October 2007, Double K brought proceedings in the Courts of Finland for an injunction to halt deliveries of VGC to Neste, but these were unsuccessful, it seems because of the arbitration clause in the agreement between the parties. Gazprom brought proceedings in the Moscow Commercial Court for the withheld payments. According to a witness statement from Double K’s Russian lawyers dated 1 December 2009, the Court decided in favour of Gazprom, and that decision was upheld on appeal (Double K says wrongly) on 22 October 2009. For present purposes, it is significant to note that Double K and Gazprom entered into negotiations from November 2007 to try to settle their differences, and the documents relevant thereto form part of this application.

Neste’s case is that it did not seek the contracts it entered into with Gazprom for VGC, but accepted them at Gazprom’s request as part of a “contract package” with liquefied petroleum gas (LPG), which was (it says) much more important to Neste. The best price offered to Neste by Gazprom for the VGC was only 0.3% better than the price Neste was paying Double K under the Sales Agreement. However, Neste says that it felt that it had no real choice but to enter into the package deal, because the LPG contract was very valuable to Neste and it was presented with an “all or nothing” deal for VGC and LPG.

Double K’s case is that this caused a deviation of supply to Neste. Because no other amounts of VGC were available, let alone for export, the contracts between Neste and Gazprom diverted Double K’s supply of VGC directly to Neste with the result that from September 2007, Double K was (a) unable to perform its obligations under the Sales Agreement with Neste, and (b) deprived of its supply of VGC from Gazprom from September of 2007 through to 2010. The diversion of the supply of VGC that should, it is submitted, have come to Double K directly to Neste has formed the basis of its claim against Neste.

The arbitration began on 14 February 2008. Double K put its case against Neste in contract and in tort. In contract, it alleged that Neste was in breach of implied terms of the Sales Agreement with Double K. The implied terms contended for are set out in paragraph 100 of the Award. In paragraph 108 it is stated that, “the furthest that the Tribunal considers it acceptable to go in the implication of an additional term is that there could be implied a term that nether party would deliberately make performance of the Sales Agreement impossible for the other party (or “frustrate” the other party’s performance) in the knowledge that by so acting performance would be made impossible. Putting such a term in the context of the Claimant’s case, it would apply if the Respondent agreed with [Gazprom] to buy all of the VGC which [Gazprom] would export, so that [Gazprom] could not supply to the Claimant VGC agreed to be supplied under the Purchase Agreement so that in turn the Claimant could not perform the Sales Agreement, and the Respondent knew that by so contracting with [Gazprom] this would make it impossible for the Claimant to perform the Sales Agreement”. As regards knowledge for these purposes, the Tribunal considered that this might consist of either actual knowledge, or a reckless shutting of the eyes to means of knowledge.

In tort, Double K alleged that Neste had induced a breach of the Purchase Agreement between Double K and Gazprom. It further alleged a conspiracy by Neste with one or more Gazprom companies to cause damage by unlawful means. The Tribunal found that the law applicable to the tort claims was English law.

Various procedural matters were determined by the tribunal. An award ordering Double K to provide security for Neste’s costs was made on 4 August 2008. An application by Double K to set that award aside on grounds including serious procedural irregularity was refused, a decision which is criticised in Double K’s evidence in support of this application. Oral hearings began on 18 February 2009. There were, in all, eleven days of hearings. Some further material was submitted to the Tribunal after the oral hearings had closed (which is the subject of one of Double K’s grounds in the present application). The parties filed extensive closing submissions, and the Award was made on 1 July 2009.

As regards the claim in contract, because of its finding that no binding agreement was reached between Double K and Neste for 2008, the Tribunal found that the question of breach of the Sales Agreement arose only in respect of the last quarter of 2007. As regards breach of the implied term, the Tribunal found (Award paragraph 149) that: (1) Double K had not established that the making of the direct contracts between Gazprom and Neste made performance of the Sales Agreement by Double K impossible. It “remained possible for [Double K] to novate the Purchase Agreement with [Gazprom] and secure the necessary supplies of VGC, and this appears plainly from the communications between [Double K] and [Gazprom] which were disclosed after the close of the oral hearings”. (These communications are said by Double K to have been privileged, a point that forms the basis of a different ground.) “(2) Double K “has not established that [Neste] “knew” whether actually or by recklessly ignoring means of knowledge that any such impossibility would be a result of [Neste] contracting directly with [Gazprom]”. It followed that the claim based on the alleged breach of the Sale Agreement failed.

It is necessary to set out the Tribunal’s findings as regards the claim in tort for inducement of breach of contract in order fairly to understand Double K’s submissions on this application:

“171.

Clearly the Respondent knew of the Purchase Agreement and of its term which extended to 2010. Its representatives knew that the Purchase Agreement was the means by which the Claimant obtained supplies of VCG to be able to sell VGC on to the Respondent under the Sales Agreement. The Respondent in fact did not know what was the “production” or “export” capacity of the Sosnogorsk plant. The Tribunal has in any event already held that the Claimant has failed to establish that there was the limited export capacity which is alleged, and has held that the production capacity was sufficient to enable SVP/GP to perform the Purchase Agreement by supplying VGC to the Respondent as well. In so far as SVP or GP [Gazprom companies] failed to perform the Purchase Agreement from 1 October 2007 that was a breach of SVP or GP, though the position may have become different from November 2007, as indicated in Paragraph 174 below. The Claimant has not succeeded in establishing that the Respondent had the requisite knowledge. The Respondent did not know that a breach of the Purchase Agreement would ensue, and was not recklessly indifferent to whether a breach, might ensue.

172.

The Claimant has not established that the Respondent had the intention to induce a breach by SVP/GP of the Purchase Agreement. No doubt such a breach might have been a possibly foreseeable consequence. But the Tribunal’s conclusion is that the Respondent did not enter into the direct contract with GE with any intention of causing a breach of the Purchase Agreement. In so far as GE decided not to supply to the Claimant (and whether there was any such decision is now open to question by reason of the communications between the Claimant and GP which have belatedly been disclosed) that was GE’s and GP’s decision which was not induced or intended by the Respondent. Further, the Tribunal rejects the notion that the Respondent was under any duty to refuse the offer from GE or GP in order to protect the Claimant’s interests while at the same time jeopardising its position vis-à-vis the Gazprom Group.

173.

Further, the Claimant needs to establish acts of inducement or incitement or persuasion on the part of the Respondent, brought to bear on GE/GP to induce, incite or persuade them to act in breach of the Purchase Agreement. The Tribunal’s conclusion is that the Claimant has failed to establish that the Respondent engaged in such acts. On the contrary, the inducement to enter into the direct contract of 28 September 2007 came from GE, which made clear its intention to enter into a contract package with the Respondent for the supply both of LPG and of VGC. The minutes of the meeting of 25 September 2007, and the evidence of those who attended the meeting, are consistent with the view of GE’s conduct.

This paragraph goes on to deal with adverse inferences which the Tribunal had been invited to draw on the basis of Neste’s failure to call certain witnesses. This is the basis of another ground of complaint, to which I shall come back.

In the light of the Tribunal’s findings, the conspiracy claim also failed, the Tribunal additionally concluding that there was no evidence of any combination or conspiracy between Neste and any of the Gazprom companies. In the result, all Double K’s claims against Neste failed. The Tribunal expressed its conclusion as follows: “The Tribunal has considerable sympathy with Mr Kluger (and his company, the Claimant) in the difficult position in which he found himself at the time of the Gazprom reorganisation. With respect to all of the Claimant’s causes of action, the Tribunal notes that it was in no instance convinced that it was but for the Respondent’s actions that the Claimant lost its contracts. The Tribunal find that it appears from the evidence that this was the Gazprom Group’s unilateral decision. This finding of the lack of causation infects all of the claims in this arbitration. The Tribunal considers that, in those circumstances, if the Claimant has any claim it is a claim against SVP or GP or GE [each a Gazprom company] and not against the Respondent.”

These proceedings under s.68 Arbitration Act 1996 were begun on 29 July 2009. I have set out the grounds of the application in paragraph 1 of this judgment. A considerable body of material was filed in support, namely the witness statements of Mr Stewart Shackleton, who represented Double K at the hearing, a witness statement of the company’s principal, Mr Zenon Kluger, and a joint witness statement made by Double K’s Russian lawyers. Neste’s evidence consisted of a witness statement from Mr David Waldron, its solicitor. Reference was also made at the hearing to some of the documents in the arbitration bundles. Double K made two applications shortly before the hearing to adduce further evidence. Neither was opposed. The first is the one which is significant for the purposes of the application, and consists of extracts from the Gazprom website. Finally I should note that in the light of Moscow City Council v Bankers Trust Co [2005] QB 207, and C v D [2007] EWCA Civ 1282, the parties were agreed that the appropriate course was for this judgment to be public.

Section 68 Arbitration Act 1996 does not permit a challenge to an award on the ground that the tribunal arrived at a wrong conclusion as a matter of law or fact (Lesotho Highlands Development Authority v Impregilo SpA [2006] 1 AC 221 at [31]). In other words, it is not like an appeal in that regard. It is concerned, as subsection (1) states, with cases where there has been serious irregularity affecting the tribunal, the proceedings or the award, which has caused, as subsection (2) states, substantial injustice. So far as is relevant to this application, it provides as follows:

Section 33 (referred to in subsection (a)) deals with the “General duty of the tribunal” in the following terms:

In a passage in the Lesotho case at [28] dealing with the effect of s. 68 that has been applied in the authorities since, Lord Steyn said:

“This is a mandatory provision. The policy in favour of party autonomy does not permit derogation from the provisions of section 68. A number of preliminary observations about section 68 are pertinent. First, unlike the position under the old law, intervention under section 68 is only permissible after an award has been made. Secondly, the requirement is a serious irregularity. It is a new concept in English arbitration law. Plainly a high threshold must be satisfied. Thirdly, it must be established that the irregularity caused or will cause substantial injustice to the applicant. This is designed to eliminate technical and unmeritorious challenges. It is also a new requirement in English arbitration law. Fourthly, the irregularity must fall within the closed list of categories set out in paragraphs (a) to (i).”

With that in mind, I shall consider the four grounds of challenge raised in the present application.

The s. 68(2)(g) ground

The first ground is under s. 68(2)(g) Arbitration Act 1996, by which an award may be set aside if it was obtained by fraud or the award or the way in which it was procured is contrary to public policy. Double K’s case in this respect is most conveniently summarised in its skeleton argument as follows. The “public policy on which Double K relies is the prohibition against false evidence to procure a favourable decision. This ground qualifies under any or all of the three grounds set out in s 68(2)(g). During the arbitration, Neste submitted a statement [dated 27 January 2009] it obtained from Gazprom Pererabotka confirming production levels of VGC by Gazprom’s refinery in Sosnogorsk of 315,000 and 290,000 mt in 2007 and 2008. The Tribunal relied on this statement. Gazprom’s statement is contradicted by new information obtained by Double K from Severgazprom. Both Neste and Gazprom Pererabotka knew the information in the Gazprom Pererabotka statement was false. In any event, an award affected by fraud must be set aside whether the fraud itself was committed by Neste or by Gazprom. In either case, the award and the way it was procured are contrary to public policy”. In a further passage it is said that, “The Gazprom Pererabotka statement of 27 January 2009 was unconscionable and reprehensible. It was provided with the dishonest intention deliberately to mislead the Tribunal and may “comfortably” be described as fraud. Neste knew this information to be false.” These assertions were reflected in oral submissions. The basis of the application under this ground, therefore, is that evidence was adduced in the arbitration by the respondent which has now been shown to be false, not merely in the sense that it was incorrect, but in the sense that it was known by the respondent to be false, and therefore submitted fraudulently.

Given the seriousness of this assertion, it is necessary to explain the facts in relation to this ground in some detail. An issue in the arbitration was whether Gazprom could, if it wanted to, make deliveries of VGC to both Double K and Neste. The question was whether the Sosnogorsk plant could satisfy two contracts at a rate of supply of 150,000 mt per annum, +/- 10%, i.e. a minimum of 135,000 mt per contract, requiring a total rate of supply of 270,000 MT per annum. If it could, then I understand it to be common ground that this would in practical terms have precluded Double K’s claim. It is plain that there was a considerable body of evidence before the Tribunal which related to this issue.

Mr Shackleton has put his client’s case as follows. During the first few months of 2008, Double K sought information on production volumes and export restrictions from Severgazprom, without success. I note that Neste’s submissions are to the effect that both parties had difficulty in obtaining evidence as to the capacity of the Sosnogorsk plant. Double K had already instructed a consultancy firm called Kortes, which specialises in oil and gas in Russia, and which in two reports of 6 August and 16 December 2008 produced an analysis to the effect that:

Double K also submitted a report by a Russian agency called Ros Business Consulting, and instructed an oil and gas expert with extensive experience in Russia, Mr Peter Jones, who gave evidence concerning production volumes and export restrictions. It says, and I do not understand it to be disputed, that Neste’s oil and gas expert, Mr O’Brien, did not produce his own figures for the total production of VGC, but principally relied on those proposed by Kortes. He based his view as to actual production on a statement by Gazprom Export dated 18 October 2007 (signed by Mr Vyacheslav Valuev, Managing Director of oil, oil products and petrochemicals) which says that, “Under an information available to us, total gas condensate production capacity of Sosnogorsky plant is approximately 20 kt/month,”. This is the equivalent of 240,000 mt annually. Mr O’Brien estimated Sosnogorsk’s annual production at 240,000 to 275,000 mt (which included the 2005 production figure, which was 277,800 mt). In terms of information obtainable by Double K from Gazprom itself, according to Double K’s skeleton argument (summarising its evidence in this respect), its contacts within Severgazprom refused to provide information or evidence of production volumes or amounts available for export (or conversely, amounts reserved for the domestic market) because this information was confidential, and sensitive in light of the disputes that had arisen.

Against that background, some two weeks or so prior to the hearing, further evidence was adduced by Neste. By letter of 27 January 2009, Neste’s General Counsel wrote to the member of the Gazprom Group, a company called Gazprom Pererabotka, which from 1 October 2007 took over responsibility for the operation of the Sosnogorsk Plant and the production of VGC. The letter refers to the arbitration, stating, “…we hereby ask you to specify the volume of stable gas condensate refined in 2007 and 2008 at the gas processing unit at the Sosnogorsk Gas Processing Plant [GPP] as well as the potential designed capacity at the Plant”.

Later that day, that is 27 January 2009, Gazprom Pererabotka replied saying:

“In reply to your enquiry, we hereby inform you that the following volumes of stable condensate were refined at the Sosnogorsk GPP in 2007: in 2007 approx. 315 thousand tonnes refined and in 2008 approx 290 thousand tonnes.

Gas condensate is refined according the established contracts.

The designed capacity of the Plant allows for the refining of up to 950 thousand tonnes of stable condensate annually.”

The letter is signed by Mr V.N. Tochilin, Deputy General Manager for General Affairs. The reference to “designed capacity” can be left on one side. As Double K puts it, “the Arbitrators rejected, correctly, the notion of the “design capacity” of the Sosnogorsk Plant as being of any relevance”. But the figure given here of 315,000 mt as refined in 2007 compares with figures in the Kortes Report dated 16 December 2008 of 241,900 mt for that year. By letter of 6 February 2009, Eversheds requested that the Tribunal order Neste to make Mr V.N. Tochilin available for examination at the oral hearing or, failing that, to exclude his testimony pursuant to Art 20.4 of the LCIA Rules. The Tribunal was also invited to draw all appropriate negative inferences in relation to Mr Tochilin’s letter, and more generally in respect of Neste’s claim not to be able to obtain and/or produce evidence from Gazprom. Neste responded to the effect that since Mr Tochilin worked for Gazprom, it had no ability to make him available at the oral hearing. By email dated 9 February 2009 dealing with that and a considerable number of other matters that arose in the run up to the hearing, the Tribunal declined to order that Neste be required to produce Mr Tochilin as a witness for cross-examination, and permitted the letter of 27 January 2009 to be received as evidence, to be given appropriate weight in the light of each party’s submissions. The hearing went ahead on that basis.

The Award, as I have said, was made on 1 July 2009. In paragraph 122 of the Award, the Tribunal makes reference to the evidence as to the production capacity of the Sosnogorsk Plant, including the letter of 27 January 2009. In paragraph 123, appears the following:

“Under the Purchase Agreement with [Double K] and the September 2007 contract with [Neste] together, [Gazprom] was contractually bound to supply at a total rate of around 27,666 metric tons per month for the three months October to December 2007, plus or minus 10%. In 2008, the total monthly rates under both contracts would have been around 25,000 metric tons per month, and the total to be delivered during the year, 300,000 metric tons, subject to a possible deviation under each agreements of plus or minus 10%. Thus the total to be supplied in 2008, if [Gazprom] took advantage of a deviation of minus 10%, would have been around 270,000 metric tons. It appears that both in the last quarter of 2007, and during 2008, [Gazprom] could have met this required supply on the basis of the figures set out above.”

Mr Rhodri Davies QC for Neste submits that the evidence amply justified this conclusion. It is certainly the case that the evidence (even on the present application) is voluminous, and there was ample room for different interpretations of the production figures available, but Mr Shackleton submits, it appears to me correctly, that the Tribunal’s conclusion must have been based on the figures given in the letter of 27 January 2009. Leaving that document aside, the only year in which the evidence showed that both contracts could have been supplied was 2005.

I now come to the new evidence that Double K has produced in this regard since the Award and upon which this part of the application is based. By a witness statement dated 16 November 2009, Mr Kluger says as follows:

“35.

When I advised my own contact within Severgazprom of the results of the arbitration, they were shocked that the statement by Gazprom Pererabotka had been accepted and relied on.

36.

In the beginning of July 2009, I travelled to Russia to meet my contacts at Severgazprom to explain what had happened. My contacts did not believe that the false numbers provided by Gazprom Pererabotka were taken at face value by the Arbitral Tribunal.

37.

I again requested evidence of production volumes and quantities allocated for export. This time, they agreed to provide documents from Severgazprom archives for 2006 and 2007 when Severgazprom was still in charge of sales and exports showing that the statement by Gazprom Pererabotka which the Arbitral Tribunal had relied on was false.

38.

These documents confirmed the figures previously supplied by Kortes relying on the official Russian customs declaration.

39.

They also showed that the statement of Gazprom Pererabotka relied on by the Arbitral Tribunal was intended to deceive the Arbitral Tribunal.

40.

My sources within Severgazprom requested that I not mention their names as this is a highly sensitive matter within Gazprom and I must respect their wishes given the situation in Russia.”

Mr Davies QC submits, in my view with considerable force, that this explanation is not entirely satisfactory. Leaving aside the failure to identify sources, which is perhaps understandable, the grounds for obtaining this material after, rather than before, the publication of the Award do not seem to me to be particularly cogent bearing in mind that Double K’s case on the present application is that the statement of 27 January 2009 was decisive. The only other evidence in this respect is Mr Shackleton’s first witness statement of 29 July 2009 which states at paragraph 73 that, “Following the Award … Double K’s contacts within SGP were so indignant at the Tribunal’s apparent failure to understand or take into consideration obvious realities of State-owned companies in Russia, not least Gazprom, that they forwarded to Double K documents showing actual and planned VGC production figures for 2006 and 2007”. This does not take matters much further.

Leaving aside for the moment the question whether the evidence was not available at the time of the hearing, or indeed any time up to the date of the Award, I now describe what the evidence consists of. It comes, as indicated in Double K’s witness statements, from Severgazprom, and deals with the years 2006 and 2007. Although, as Neste says; the documents purport to show planned production, in the case of 2006 it is correct to say, as Double K points out, that matters go further in that the plans are available on a monthly as well as a yearly basis. Totalled up, I am told that these amounted in 2006 to a figure of 232,600mt. A breakdown by month is not available for 2007, but the plan (which I understand is undated) gives a figure of 240,300mt for that year. The latter figure compares with 315,000mt stated as having been refined at Sosnogorsk in 2007 in the letter of 27 January 2009.

Paragraphs 80 to 96 of Double K’s skeleton argument contain its submissions to the effect that “the only conclusion that can be drawn is that the Gazprom Pererabotka statement is false”. It is submitted that the new evidence shows that for the years 2006 and 2007, Gazprom planned to refine “for sale” 206,000 and 213,000mt respectively of VGC, far below the required amount of 270,000mt required to supply both Double K and Neste, and still without taking domestic supply obligations into account or amounts used by Gazprom itself. The Gazprom Pererabotka statement which indicates production in the order of 315,00mt in 2007 and 290,000mt in 2008 is, it is submitted, obviously false. The new evidence is said to corroborate the Ros and Kortes reports, and Gazprom’s own statement of 18 October 2007, all of which appear to come to virtually the same figures. There is no credible explanation for the discrepancy, for example no evidence that more feedstock was suddenly available in 2007 and 2008.

In its skeleton argument for this hearing, Double K appended further material in the form of a document called the “Gazprom Databook 2008” which is available on the Gazprom website. In Mr Shackleton’s fourth witness statement of 1 December 2009, he explains that this came to light when Double K’s expert, Mr Peter Jones, decided of his own accord to review the Gazprom website. The document concerned appears to be dated 7 July 2009, but in any case there is no dispute that it was not available prior to the Award. As I have said, its production at the hearing was not opposed by Neste. It gives figures for the production of condensates from the Northwestern Federal District for the years 2003 to 2008, and it is not in dispute that the Sosnogorsk Plant is the only Gazprom gas processing plant located in this district. The production figures shown on the website are 209,800mt for 2007, and 192,600mt for 2008. These compare with figures given in the 27 January 2009 statement of 315,000 tons and 290,000tons respectively.

Accordingly, it is submitted, the statement was provided with the dishonest intention deliberately to mislead the Tribunal, and may comfortably be described as fraud. Neste knew, it is submitted, this information to be false at the time. The false evidence, it is submitted by Double K, caused substantial injustice because the Tribunal’s reliance on the statement of 27 January 2009 led directly to the dismissal of Double K’s claims and “drove the Tribunal’s analysis of numerous other issues arising in the proceedings”. It affected, it is submitted, the Tribunal’s decision not to draw negative inferences from the absence of two witnesses (Ms Hietala and Mr Loktyukhov to whom I shall come in due course). In addition, it is submitted, the Tribunal’s reliance on the evidence influenced its interpretation of privileged settlement material which was produced by Double K after the hearing. Finally, “it cannot be excluded that the Tribunal’s reliance on the false evidence also affected the Tribunal’s decision not to consider whether, in the absence of any legal bar on export, the compelling indirect evidence submitted by Double K was sufficient to establish the existence in practice of some form of restriction applied by the Government and/or Gazprom”.

In response, Neste has pointed to the fact (which is not disputed) that the documents obtained from Severgazprom deal with planned production. No submissions were made as regards the evidence from the website—this as I have indicated was produced by way of annex to Double K’s skeleton argument of 30 November 2009. The principal points Neste relies on are as follows. First, it is contended that the Severgazprom documents do not demonstrate that the statement of 27 January 2009 was false. Second, it is said that the evidence does not show that Neste acted fraudulently in relying on it. Third, it is said that the finding as to the production rate of the plant was only one of three independent findings which caused Double K’s claims to fail in totality. Double K would have lost even if the Tribunal had found in its favour on the production of the plant.

The authorities show that the applicable principles are as follows. In accordance with the high threshold applicable to s. 68 Arbitration Act 1996 (Lesotho Highlands Development Authority v. Impregilo SpA [2006] 1 AC 221 at 235H, Lord Steyn), it is not enough in an application under s. 68(2)(g) to show that one party inadvertently misled the other, however carelessly (Cuflet Chartering v. Carousel Shipping Co Ltd [2001] 1 Lloyd’s Rep 707, Moore-Bick J, at [12]). It will normally be necessary to satisfy the court that some form of reprehensible or unconscionable conduct has contributed in a substantial way to the obtaining of the award. A challenge to an award cannot, therefore, be made on the grounds of an innocent failure to give proper disclosure (Profilati Italia SRL v. PaineWebber Inc [2001] 1 ArbLR 51, [2001] All ER (Comm) 1065, Moore-Bick J at [17] and [22]), or the innocent production of false evidence (Elektrim SA v. Vivendi Universal SA [2007] All ER (Comm) 365, Aikens J at [80]-[81]). Where, as in the present case, the allegation is fraud in the production of evidence, the onus is on the applicant to make good the allegation by cogent evidence (Cuflet at [12], Elektrim at [81]). The applicant must show that the new evidence relied upon to demonstrate the fraud was not available at the time of the arbitration and would have had an important influence on the result (Westacre Investments Inc v Jugoimport-SDPR Holding Co Ltd [1999] 2 Lloyd’s Rep 65 at 76-77, Waller LJ, applied by Cooke J in Thyssen Canada Ltd v Mariana Maritime SA [2005] ArbLR 62 at [60]-[66] and in DDT Trucks of North America Ltd v DDT Holdings Ltd [2007] 2 Lloyd’s Rep 213 at [22]-[23]). The latter point (important influence on the result) takes effect within the statutory requirement that the irregularity has caused or will cause substantial injustice to the applicant (Thyssen at [65]).

As I indicated above, though its case is that Neste was fraudulent, Double K has argued that it is sufficient for these purposes to show that fraud was committed by Neste or by Gazprom. This question arose for decision in the Elektrim case that I have referred to above. The allegation in that case was that Vivendi, which was the other party to the arbitration in question, had deliberately concealed a vital memorandum. In dismissing the application under s. 68(2)(g), Aikens J observed ([88] and following) that there was no direct evidence that could establish, and no basis upon which it could be inferred, that someone connected to Vivendi and the arbitration knew of the memorandum at the material time, but deliberately withheld it from production to Elektrim and the Tribunal, with the intention that both Elektrim and Tribunal should conclude that no such memorandum existed.

Section 68(2)(g), Aikens J pointed out at [79], “does not refer to the fraud of a party to the arbitration. On the face of the wording it would seem that the ‘fraud’ referred to in the paragraph can be committed by anyone who is connected with the arbitration process. If this were right, then (for example) if it were proved that a witness for one side or another has committed perjury when giving evidence before the Tribunal, that would be a ‘fraud’ within para (g). If so then, if it were also proved that the perjured evidence resulted in the award being in favour of that party, then, logically, the award would have been ‘obtained by fraud’”. But, he concluded, this is not the correct construction of these words. It “is a party to an arbitration that obtains an award in its favour or has one made against it. The words ‘obtained by fraud’ must refer to an award being obtained by the fraud of a party to the arbitration or by the fraud of another to which a party to the arbitration was privy”. He continued at [80]:

“If this wording referred to the fraud of anyone that was involved in the arbitral process, whether or not the fraud was committed with the knowledge of the relevant party to the arbitration, then that would give unsuccessful parties carte blanche to apply to the court to set aside or remit an award. The unsuccessful party need only assert (for example) that a witness of the successful party had committed perjury (even without the knowledge of the successful party) and the award had as a result been in the favour of that party. It could then be asserted that the award had been ‘obtained by fraud’, resulting in ‘substantial injustice’; therefore the award must be set aside or remitted.”

In the present case, the letter of January 27, 2009 was sent by Gazprom, but produced as evidence in the arbitration by Neste, being the Respondent. On the authority of Elektrim, fraud must be demonstrated on the part of Neste. Double K has argued that this case was wrongly decided, and does not reflect international public policy that a party is not entitled to keep the benefit of an award that has been obtained on the basis of false evidence. I reject that submission for the reason given by Aikens J. I should add that where the requirements of the subsection are established, the Court will intervene, however inconvenient the results—I was told that this arbitration had cost US$7 million—because not to do so would undermine the integrity of the arbitration process. The question for the Court is whether such requirements are satisfied or not.

I express my conclusions on this question as follows:

The s. 68(2)(a) grounds

Failure to order witnesses to be made available

There are two grounds raised under s. 68(2)(a) (general duty of fairness), of which the first (to take the heading from Double K’s skeleton argument) is a failure on the part of the Tribunal to order witnesses to be made available. The background to this complaint is as follows. On 23 December 2008, Double K’s solicitors wrote to the Tribunal stating that throughout the documentary record and witness statements, reference had been made to Ms Kaisa Hietala and Mr Seva Loktyukhov. Ms Hietala, it was said, was directly responsible for Neste’s relationship with Double K. Mr Loktyukhov joined Neste from Gazprom in 2007, and would “undoubtedly have had knowledge of the Claimant’s contractual relationship with Gazprom … as well as of production and export volumes at the Sosnogorsk plant. Further, Mr Loktyukhov appears to have been heavily involved in Respondent’s negotiations with Gazprom in 2007 for a direct contract…”. On that basis, Double K requested the Tribunal to direct Neste to make both these people available for cross examination at the oral hearing, failing which Double K “reserves all rights to request that the Tribunal draw the appropriate negative inference”.

By letter of 7 January 2009, Neste’s solicitors resisted this request, saying that neither person played a key role in the relationship with Double K. As regards Mr Loktyukhov, it was said that he was a Gazprom trader (I was told in Moscow) and did not have any knowledge of the Sosnogorsk plant production or export volumes. On 12 January 2009, the Chairman emailed to the effect that the Tribunal had decided not to make the Order sought “which in the judgment of the Tribunal would not be an appropriate order, not least because the Respondent does not seek to rely on evidence from either of these persons. Whether any inferences are to be drawn from the fact that the Respondent does not produce evidence from either of these persons will be a matter on which submissions can if so wished be made at the substantive hearing”.

On 20 January 2009, Double K’s solicitors wrote to the Tribunal asking it to reconsider its decision. The letter sets out over 7 pages why (contrary to Neste’s submissions) Ms Hietala and Mr Loktyukhov were important witnesses. On 23 January 2009, Neste’s solicitors wrote to the effect that they continued to resist “Claimant’s repeated application”. On 26 January 2009, the Chairman emailed to the effect that the Tribunal declined to make such a direction, and that it would be for Double K to make clear whatever inferences it might ask the Tribunal to draw from the fact that Neste had not relied on the evidence of these witnesses or agreed to produce them for cross examination.

Mr Shackleton took me to extracts from the transcript of the hearing to passages in the evidence which he submitted made it clear that Double K’s case as to the importance of Ms Hietala and Mr Loktyukhov were well justified. I take as an example the cross examination of Mr Siltanen (a Neste employee) to the effect that Mr Loktyukhov “knows different capacities, production capacities of the plant … of the plants their taking or getting product”.

In the course of the Award, the Tribunal refer to both Ms Hietala and Mr Loktyukhov at various points. As regards Mr Loktyukhov in particular, in paragraphs 135 and 136 the Tribunal refer to his role at the time Neste and Gazprom were discussing the possibility of an agreement between them in September 2007. Referring to a draft contract, the Tribunal states, “It is improbable that this draft contract could have been prepared by [Gazprom] and sent less than an hour and a half after the faxed letter to [Neste] unless there had been some previous contact with Mr Loktyukhov that laid the ground work”.

In its written submissions, Double K has made numerous criticisms of the Tribunal’s handling of, and conclusions drawn from, Neste’s evidence, and particularly the failure, as Double K sees it, to require Ms Hietala and Mr Loktyukhov to be called. It is submitted (skeleton argument paragraph 137) that the Tribunal should have ordered Neste to make them available, and that its failure to do so was unfair and prevented Double K from having access to relevant evidence essential to its case. There appears, as Mr Davies QC pointed out, to be some inconsistency in that regard with Mr Shackleton’s third witness statement, in which at paragraphs 210, 211 and 243, he suggests that the Tribunal’s decisions not to order the witnesses to be made available were “standard procedure in any international commercial arbitration”. The case that appears to be advanced in the witness statement is that the Tribunal’s irregularity lay in how it dealt with the question of negative inferences, rather than in declining to make the orders in the first place.

Notwithstanding, as advanced to the court, Double K’s argument is a broader one. In his oral submissions, Mr Shackleton summarised the case as follows. Double K was prevented from accessing relevant information. Procedural irregularity arose from the Tribunal’s handling of Neste’s failure to call these two witnesses, consisting in not ordering them to be made available, but offering the opportunity to draw negative inferences, and then changing the basis upon which such inferences would be drawn. This followed, he said, because the Tribunal drew inferences on the basis not only of Neste’s, but also of Double K’s, failure to make the witnesses available. To make this good he draws attention to passages in the Award in which the Tribunal said that neither party called the witnesses, and (it is submitted) further relied upon a non-existent agreement to limit the number of witnesses.

The latter point is put in paragraph 138(e) of Double K’s skeleton argument as follows: “none of the alleged reasons why the negative inferences should not be drawn are true: Double K repeatedly asked for the witnesses to be made available (the Tribunal reports Double K’s strong complaints in this regard), there was no agreement that they should not appear (for costs or any other reasons), and Double K had made it clear throughout that the witnesses would be able to give relevant evidence on key issues (and not only the Moscow meeting)”.

Two passages in the Award in particular found Double K’s complaint. In paragraph 46, the Tribunal state, “Mr Loktyukhov was not called as a witness by the Respondent (or by the Claimant)”. In paragraph 77, dealing with Double K’s complaints as to the absence of evidence from six witnesses including Ms Hietala and Mr Loktyukhov, the Tribunal states, “In the absence of evidence from, and availability for questioning of, these witnesses, the Claimant contended that inferences adverse to the Respondent should be drawn by the Tribunal in a number of instances. The Tribunal will endeavour to deal with the more significant instances below; but it notes here that the parties to this arbitration rightly sought to limit the extent of their written and oral evidence so as to avoid duplication, lengthening of the oral hearings, and the additional costs which that would have involved”.

In that latter respect, Double K submits in paragraph 140 of its skeleton argument that aware that it had acted unfairly, the Tribunal sought in its Award thereby retrospectively to justify its decision: “… it is clear that the Tribunal, in realising that it was unjustified in refusing Double K’s request to order Neste to make the witnesses available, has sought in its Award to claim that it was unable to make such an order because of party agreement to the contrary. Given that there was, however, no such agreement (or any possible basis on which the Tribunal could genuinely believed there to have been any agreement) the Tribunal’s attempts to justify its decision ex post facto only further expose the clear and serious irregularity committed by the Tribunal.”

Neste maintained that the Tribunal had no power to order it to call Ms Hietala and Mr Loktyukhov for cross-examination. The IBA Rules which appear to give such power did not apply to this arbitration. In any case, it is submitted that such an order would have been “quite exceptional” and it is impossible to say that the decision not to make it constituted an irregularity of any sort, let alone a serious one. As regards the drawing of adverse inferences, Neste submits that this was a decision about evaluation of the evidence, which was a decision on the merits for the Tribunal, and does not provide a basis for a s.68 challenge. The criticisms Double K has made of the Award are said to be wholly unfounded.

I express my conclusions on this question as follows.

Tribunal’s reliance on privileged materials was unfair

The background to this aspect of the complaint is as follows. On 28 January 2009, Neste’s solicitors sought among other things copies of documents evidencing discussions concerning the willingness of Gazprom to supply VGC to Double K from September 2007 to date. Double K took the position that these comprised documents concerning settlement negotiations about litigation in Russia, and that they were privileged. On day one of the hearings, Double K asked the Tribunal to determine the question before it took a position. On day two, the Chairman dealt with the matter by indicating that if the documents were said by Double K to be privileged, it would make not an order for production, but it would be for Neste to make submissions as to what inferences might be drawn. On day eight, Double K indicated that it was considering producing the documents in the light of the Tribunal’s indication that it would be willing to draw negative inferences. Oral hearings concluded on 13 March 2009.

On 25 March 2009, Double K’s solicitors wrote to the Tribunal and to Neste as follows:

“Claimant’s position remains that there is no basis on which negative inferences may be drawn from any failure to produce this material which would be considered “privileged” if the correspondence had taken place in England, and is equally “privileged” under functionally equivalent legal norms and practice in civil law jurisdiction, including Russia (as set out in earlier correspondence).

In light however, of the Tribunal’s indication that negative inferences may nonetheless be drawn from the non-production by Claimant of privileged settlement correspondence with Gazprom, Claimant has reviewed its position …

Accordingly please find attached the correspondence between Double K and Gazprom concerning settlement of disputes between them including as to amounts withheld by Double K and resumption of deliveries by Gazprom under the Purchase Agreement following the conclusion of the direct contracts for the supply of VGC between Gazprom Export and Neste.

In producing this documentation, Claimant does not concede that the documents are not subject to privilege nor does it waive privilege in any way in relation to any of the documents. It remains the Claimant’s position that these documents may not be relied on by the Arbitral Tribunal and they are produced solely to dispel the allegations made by the Respondent concerning attempts to settle and to avoid negative inferences”.

A substantial body of correspondence was enclosed with the letter.

Extensive submissions are then made as regards the contents of the correspondence. The letter states that:

“At a meeting held on 9 September 2008, Gazprom Pererabotka claimed that it had sufficient capacity to make deliveries to Double K under the Purchase Agreement notwithstanding its direct contracts with Neste on 28 September and 11 December 2007 for the same monthly quantities of VGC. This was a mere bluff, as it had been confirmed to Double K by Russian Federation Custom reports (via Kortes) that there was not enough VGC available for export to supply both Double K and Neste. Indeed this is clear from the fact that even as at today Gazprom has only ever exported enough VGC to be able to supply one export contract (around 150,000mt of VGC per year) now supplied to Austrofin. Provided that the parent company Gazprom JSC was willing to guarantee future supply to Double K under the Purchase Agreement, this was not a concern.

In any event, as it now turns out, it is clear that Gazprom’s claims were made as part of a careful plan to engineer a position to terminate the Purchase Agreement in Russian Courts (and avoid claims by Double K) by suggesting that it was prepared to resume deliveries. In addition, Gazprom Pererabotka asserted that, contrary to its earlier letter of 2 August 2007, future supply contracts for VGC were to be completed between Double K and Gazprom Pererabotka (not Gazprom Export).”

Neste also dealt with these documents extensively in its written closing submissions of 9 April 2009. Double K wrote to the Tribunal on 16 April 2009 to the effect that the correspondence was submitted without prejudice to its submission that it was “privileged” in relation to the proceedings. It refers to Double K’s submissions in its letter of 25 March 2009, saying that, “The Arbitral Tribunal will weigh [Neste’s] claims against the background of disputes in Russia between Gazprom and Double K in the context of which Gazprom could not possibly admit that it had sold Double K’s quality of VGC to Neste without being in breach of its own Purchase Agreement with Double K. In the event, the correspondence clearly establishes that Gazprom had no real basis for the claim made in the correspondence or any genuine interests in resuming supplies even on the basis of repayment of moneys held by Double K, as set out in the final letter of that correspondence sent on behalf of Double K)…”.

In paragraph 69 of its Award, the Tribunal deals with certain matters as regards this correspondence in respect of which “the Claimant had previously claimed legal professional immunity from disclosure”. In paragraph 129(3) of the Award, it refers to the description of Gazprom’s position that it had sufficient capacity to make deliveries to Double K under the Purchase Agreement notwithstanding its direct contracts with Neste on 28 September and 11 December 2007 as “mere bluff”, stating that it “does not consider that the evidence before it supports that description”.

In support of its present application, Double K submits that it was under the compulsion of the threat of negative inferences that Double K produced the materials, but expressly without waiving privilege and only in order to dispel negative inferences that may be drawn from any refusal to produce the materials. In deciding to rely on this correspondence without prior communication to the parties that it would do so, and in circumstances where Double K had expressly stated that the materials remained privileged and were not to be relied on, the Tribunal acted unfairly as it did not allow Double K the opportunity to present its case in relation to the content of the correspondence. Its letter of 25 March 2009 did not contain any submissions as to the content of the correspondence. All it did was set the context of the correspondence, particularly where the negotiations had been in progress for some time. As Double K intended and expected that the materials would not be relied upon by the Tribunal, it did not make extensive submissions as to the interpretation of the correspondence, nor did it adduce any evidence, including evidence of Russian law, in order to explain the significance (or not) of any particular discussion recorded in the correspondence. The Tribunal’s failure to request submissions from either party on the question of whether the documents were privileged or advise that it intended to determine this question after all (having previously decided that it would not do so) and its failure having decided to rely on them, to invite additional submissions as to the significance of the documents was unfair to Double K who was not given an opportunity to put its case and respond to Neste’s case on these issues.

In oral argument, Mr Shackleton summarised his submissions as follows. The Tribunal should not have relied on privileged material, particularly after refusing to rule on the question of privilege. But whether it was right or wrong to rely on it, there was a procedural irregularity in failing to give notice of its decision to do so, with the attendant risk of misinterpreting the correspondence.

Neste submits that Double K disclosed the documents voluntarily in order to avoid negative inferences being drawn. Having done so, it could not limit the use which could be made of the documents by either Neste or the Tribunal. The documents were either in or out, and once in, they were in “warts and all”. Double K had the opportunity to respond to Neste’s closing submission, and there was no unfairness, far less irregularity or serious irregularity in what happened.

I express my conclusions on this question as follows.

Further, for the reasons that are set out in relation to s.68(2)(g) at paragraphs 37(7) to (8) of this judgment, I do not consider that substantial injustice has been caused to Double K by the matters complained of. This applies to both grounds argued under s. 68(2)(a).

The s. 68(2)(d) grounds

Double K’s fourth ground is based on s.68(2)(d), by which failure by a tribunal to deal with all the issues that were put to it may amount to serious irregularity. Its submissions are as follows. One of the issues in the arbitration concerned whether there were any restrictions on the amount of VGC that could be exported from the Sosnorgosk plant. The parties agreed that there was no statute or law in that respect. However, Double K’s case was that since Gazprom was a state owned entity that would not be necessary. It presented indirect evidence that Gazprom and/or the Russian state did indeed restrict export of VGC. The indirect evidence produced by Double K, it is submitted, established not only that Gazprom exported less than the total amount of VGC produced, but that on several occasions it was barely able to meet even its minimum contractual requirements. In its Award however, it is submitted, the Tribunal found only that there was no legal bar or restriction on the amount of VCG that could be exported, and that therefore there was nothing to prevent Gazprom from diverting domestic sales to export. In coming to this decision, it is said that the Tribunal failed to address whether the indirect evidence produced by Double K would have been sufficient to establish the presence of some other form of restriction (albeit not a law).

Neste submits that it is absolutely plain that the Tribunal both understood the point that Double K was arguing, and dealt with it in the Award.

I express my conclusions on this question by reference to the relevant sections of the Award as follows.

Further, for the reasons that are set out in relation to s.68(2)(g) at paragraphs 37(7) to (8) of this judgment, I do not consider that substantial injustice has been caused to Double K by the matters complained of.

For the reasons set out above, this application must be dismissed.