SCM Financial Overseas Ltd v Raga Establishment Ltd (Rev 1)

This is a challenge to an arbitration award on the ground of serious irregularity pursuant to section 68 of the Arbitration Act 1996. The irregularity alleged is that the arbitrators proceeded to an award instead of awaiting the outcome of court proceedings in Ukraine which would or might have had a significant impact on the decisions they had to make. It is said that this has resulted in substantial injustice to the claimant (“SCM”) because the Ukrainian courts have now reached conclusions which are irreconcilable with those of the arbitrators: in short, and at the risk of over simplification, whereas the arbitrators have found that SCM is liable to pay the outstanding purchase price of over US $760 million for shares in a Ukrainian company, the decision of the Ukrainian courts means that those shares will be confiscated without compensation for reasons which are the responsibility of the defendant (“Raga”).

In order to succeed with its challenge to the award, SCM has to show, in summary, that (1) the arbitrators’ decision to issue the award without waiting for the outcome of the Ukrainian court action was a breach of their duty under section 33 of the 1996 Act to conduct the arbitration fairly and (2) that this breach has caused or will cause it substantial injustice.

Examination of this challenge requires some understanding of the issues which arose in the arbitration. I shall describe these as briefly as possible. Most section 68 applications require an examination of the issues in the arbitration, but such applications do not provide an occasion for those issues to be fought all over again.

SCM is a Cypriot company which is a wholly-owned subsidiary of Joint Stock Company System Capital Management, a Ukrainian corporation. It is part of the SCM group of companies, said to be one of the largest corporate groups in Ukraine. The ultimate beneficial owner of the group is Rinat Akhmetov, who is said to be an associate of former President Yanukovych who was driven from power and fled to Moscow in February 2014.

Raga is also a Cypriot company. It is a subsidiary of an international financial investment company incorporated in Austria. It was formerly known as Epic Telecom Invest Limited and was the owner of 100% of the issued share capital of a company called UA Telecominvest Limited (“UAT”). UAT in turn owned 100% of the shares of Limited Liability Company ESU (“ESU”) and, through ESU, 92.7906% of the shares in Public Joint Stock Company Ukrtelecom (“Ukrtelecom”).

Ukrtelecom is one of the largest fixed line telephone operators in Ukraine. It was owned by the State Property Fund of Ukraine (“the SPFU”) until its privatisation in 2011. The privatisation was effected pursuant to an agreement between the SPFU and ESU dated 11 March 2011 (“the Privatisation SPA”). As would be expected, the Privatisation SPA was governed by Ukrainian law.

By a Share Purchase Agreement dated 3 June 2013 (“the SPA”) Raga sold its shares in UAT to SCM for a total purchase price of approximately US $860 million. The price was payable in three instalments. The first instalment of US $100 million was paid by SCM on 3 July 2013. The second and third instalments totalling US $760,566,951.86, were due in March 2014 and October 2015 respectively but have not been paid.

As the SPA recorded, the principal value of the UAT shares was UAT’s indirect shareholding in Ukrtelecom.

The SPA was governed by English law with provision for arbitration in London in accordance with the LCIA Rules.

There were terms of the SPA to the effect (in summary) that:

Raga commenced arbitration on 20 June 2016 claiming the unpaid instalments of the purchase price. The LCIA Court appointed Jonathan Crow QC, Vasanti Selvaratnam QC and Christopher Style QC to be the tribunal, with Mr Style as the presiding arbitrator.

It has always been Raga’s case that this is a straightforward claim for an unpaid debt.

SCM’s defence to Raga’s claim for the unpaid instalments and its counterclaim to recover the initial instalment revolved around the risk that the shares in Ukrtelecom would be confiscated by the Ukrainian State because of failures for which Raga was responsible. SCM’s summary of its case, quoted by the arbitrators from its written submissions in the arbitration, was that:

“The reality of SCM’s situation is that it has been misled into buying an asset which, through no fault of its own, is likely to be taken back into State ownership. If Raga were to succeed on its claim in these proceedings, SCM would be forced to pay for an asset which it is likely to lose as a result of wrongdoing perpetrated by entities under Raga’s control. There would be no justice in that outcome.”

Of the failures for which Raga was alleged to be responsible which were said to give rise to the likelihood of confiscation of the Ukrtelecom shares, two remain relevant:

These breaches of the Privatisation Agreement by ESU were relied on by SCM in the arbitration in a number of ways. It said that, because of them, Raga had made misrepresentations which entitled it to rescind the SPA. It said that, as a result, it was entitled to damages for breach of the SPA. And it said that confiscation (or liability to confiscation) meant that there was a total failure of consideration such that it was entitled to restitution of the first instalment of the purchase price and not liable to pay the remaining instalments.

It is apparent, therefore, that SCM’s defence and counterclaim in the arbitration required the arbitrators to consider (among other things) whether ESU was in breach of the Investment Obligation and/or the Special Network Obligation under the Privatisation SPA, such as to render the Ukrtelecom shares liable to confiscation. Those were also matters which would or might fall for determination by the Ukrainian courts in the event of proceedings by the SPFU to confiscate the shares.

By the time the arbitration was commenced, investigations into these matters by the Ukrainian authorities were under way, but there were as yet no court proceedings in Ukraine.

Once the arbitral tribunal was formed it had to deal with preliminary applications by both parties. Raga sought an order for an expedited timetable and that SCM provide security for its claim, relying on evidence which had been provided in support of an application for a freezing order made to this court, to the effect that SCM was dissipating its assets. SCM sought a stay of the arbitral proceedings until the completion of investigations being undertaken by the Ukrainian authorities into the privatisation of Ukrtelecom. The arbitrators rejected these applications by a procedural order dated 31 July 2016 and gave directions for the service of submissions, documents and evidence which in due course led to an evidentiary hearing before the arbitrators for five days between 15 and 19 May 2017.

Several investigations by Ukrainian government entities were in evidence in the arbitration. It is sufficient to mention the following.

In September 2015 and March 2016 (i.e. before the commencement of the arbitration) a Special Commission of the Verkhovna Rada (the Ukrainian Parliament) passed resolutions recommending that the Ukrainian Prosecutor General should ensure a comprehensive investigation of the privatisation of Ukrtelecom and should confiscate the shares. The grounds for doing so included a breach by ESU of the Special Network Obligation.

A Central Commission for Transfer and Acceptance of the Special Network was established. On 31 May 2016 it refused to accept transfer of ownership of the Special Network created by UKrtelecom claiming the network was flawed in ways which prevented transfer of ownership to the Ukrainian State.

On 17 February 2017 the SPFU issued a report (“the SPFU Act”) which concluded that ESU had failed to implement both the Investment Obligation and the Special Network Obligation. On 3 April 2017 the SPFU warned ESU that the Privatisation SPA should be rescinded and proposed the return of the Ukrtelecom shares to the State.

On 11 April 2017 the Pecherskyi District Court issued an order freezing ESU’s shares in Ukrtelecom.

Finally, on 10 May 2017, only five days before the first day of the evidentiary hearing in the arbitration, the SPFU filed proceedings against ESU before the Commercial Court of the City of Kyiv alleging breaches of the Investment Obligation and the Special Network Obligation, and applying for an order terminating the Privatisation SPA and returning the Ukrtelecom shares to State ownership. It claimed also a penalty from ESU in the sum of US $81.9 million. I refer to these proceedings as “the SPFU action”.

By 18 May 2017, the fourth day of the hearing, SCM’s London lawyers had obtained a copy of the SPFU’s statement of claim and advised the arbitrators that they proposed to adduce it in evidence. After the conclusion of that day’s hearing, the arbitrators sent to the parties a list of points which they invited the parties to address in their closing speeches. The list included:

“To what extent should we take account of what may happen after the hearing in relation to the various proceedings and investigations in the Ukraine?”

The parties did address that question in their oral closings. Mr Ewan McQuater QC for SCM described the SPFU action as a very important and highly relevant piece of evidence, going directly to some of the issues before the arbitrators. He said:

“… I would say to you that if you -- obviously we say first and foremost you should reject Raga's case for all the good reasons that I have already given you, but if you genuinely come to the view that this really does depend on whether or not realistically we will lose the shares, then we would suggest to you that you should defer your award, because there are likely to be material events in Ukraine, certainly if there are material events in the proceedings we will be asking for permission to put those in, but if you do come to that view we would invite you to defer because this is a very, very important matter, we are now being sued by the state to get the shares back, and we would have thought you would want more information about what was going to happen in those proceedings.”

Mr Neil Calver QC for Raga challenged the suggestion that the arbitrators should defer the issue of their award, saying that the SPFU action was “utterly irrelevant”.

There the matter rested.

On 26 June 2017 the arbitrators published a Partial Final Award in which they comprehensively rejected SCM’s case and found in favour of Raga.

In relation to the Investment Obligation the arbitrators concluded:

The first of these conclusions was a conclusion of Ukrainian law. The issue was as to the true construction of the Privatisation SPA, a contract which was governed by Ukrainian law and written in the Ukrainian language. It is apparent from the arbitrators’ reasoning that they regarded the English translation of the opening words of the relevant clause (clause 11 of the Privatisation SPA) as unclear in their effect (para 138 of the award). They determined, however, that, having regard to the whole content of the transaction, the relevant provision constituted an aspirational target and not a binding legal obligation (paras 139 and 140). They considered that when the clause was read in its full context, its meaning as a whole was clear (para 143).

The arbitrators reached this decision in the light of expert evidence of Ukrainian law adduced by both parties and tested by cross examination. As they said at para 136 of the award, they had to choose between the experts’ competing opinions. They chose to accept the evidence of Raga’s expert on Ukrainian law, Dr Martinenko, in preference to that of SCM’s expert, Dr Kisil.

The second conclusion, that SCM had failed to prove a breach of the Investment Obligation by ESU, was a conclusion of fact. SCM relied on the findings of the Ukrainian government entities referred to above, including in particular the SPFU Act of February 2017. The arbitrators accepted at para 149 of the award that these had “some evidential value”, but considered that they should be treated “with some caution”. That was because, according to Raga, these investigations were politically motivated and subject to corrupt manipulation, with political capital to be had in attacking the legitimacy of actions taken by the government of former President Yanukovych. The arbitrators said that they were not in a position to decide whether that was so, but they could not exclude the possibility:

“101.

In ordinary circumstances the Tribunal would give considerable respect and weight to the findings of governmental authorities. In this case the Tribunal is persuaded that it should be more cautious. The Tribunal considers that it must look especially critically at the quality of the evidence before it and be rigorous in requiring the Respondent’s [i.e. SCM’s] allegations to be fully established. There are two reasons.

102.

First, on the material before it, the Tribunal is not in a position to decide on the merits of the Claimant’s [i.e. Raga’s] submission that the authorities are motivated by political considerations, but it cannot exclude the possibility that such considerations are in play to some extent at least. Certainly the challenge to the lawfulness of the Privatisation seems to have been initiated only three years after the events in question following President Yanukovych’s fall from grace; and there is material which suggests a lack of balance and the influence of political considerations.

103.

Second, the Tribunal considers it important to recognise the status of the findings and actions of the governmental authorities in question. The Tribunal accepts that they are relevant and that they have certain legal consequences, but it is common ground that they are not determinative of any issues between the Parties as a matter of Ukrainian law. As will be discussed further below, they represent no more than the start of a process and that any determination of the issues will depend on the outcome of proceedings before the Ukrainian courts. …

105.

The findings and actions of these authorities will be considered in greater detail below. The Tribunal considers it significant that there has so far been no decision of the Ukraine courts on the merits of the Respondent’s allegations.”

The arbitrators were not persuaded that the findings of the Ukrainian government entities were sufficient to discharge the burden on SCM to demonstrate a failure by ESU to perform the Investment Obligation. They regarded it as important that SCM had chosen not to adduce other evidence on this issue, including evidence under its control which it had been ordered to produce.

It was common ground that the Special Network Obligation in the Privatisation SPA was a legally binding obligation, but there was an issue as to the content of that obligation. This was an issue of construction of the Privatisation SPA and thus of Ukrainian law. Raga’s case, supported by Dr Martinenko, was that the Special Network had to be created within two years of the date of the Privatisation SPA, but only needed to be transferred to the Ukrainian State within five years. SCM contended, relying on Dr Kisil, that the two-year time limit applied to both creation and transfer. The arbitrators accepted Raga’s construction, acknowledging that the Special Network created within the two-year period had to be capable of being transferred to the Ukrainian State.

The next question was whether the Special Network created within the two-year period was capable of such transfer. This was a question of fact, on which it appears that evidence before the arbitrators was limited. Moreover, there was some apparently relevant material which was not in evidence before them. Essentially Raga relied on a 2013 certificate prepared by a Commission appointed by the Ukrainian Administration of the National Special Purpose Communications which certified that Ukrtelecom had created the Special Network “in accordance with the main technical requirements”, while SCM relied on the later findings of the Central Commission for Transfer and Acceptance of the Special Network and the SPFU that the Special Network was not compliant.

The arbitrators concluded that SCM failed to discharge the burden of proving that the Special Network created by Ukrtelecom did not comply with the requirements of the Privatisation SPA. They reached that conclusion in part because SCM had chosen not to adduce relevant evidence which must have been within its control as indirect owner of Ukrtelecom and in part because they discounted the conclusions of the Central Commission and the SPFU because they might be influenced by political motives.

In this latter regard, the arbitrators distinguished (as they had done when considering the Investment Obligation) between Ukrainian government bodies which might be open to political influence and the decision of a Ukrainian court which, as they pointed out, did not yet exist:

“189.

… it is common ground that none of the findings made by these bodies is binding on the Parties. The court proceedings have not yet resulted in any findings on the merits. …”

The arbitrators referred also at para 192 to the rival views of the Ukrainian law experts about such official findings. Whereas SCM’s expert Dr Kisil regarded them as having particular significance in Ukrainian law, Raga’s expert Dr Martinenko described them as “nothing but allegations” which were “not supported by any due evidence or decisions of a competent court”. Thus Raga’s own expert relied on the absence of any Ukrainian court decision on this issue.

In the light of their conclusion that there was no breach of the Investment Obligation or the Special Network Obligation the arbitrators were able to deal briefly with SCM’s case on total failure of consideration. They did so at paras 278 and 279 of the award, stating:

“278.

The Tribunal has arrived at the following conclusions:

(1)

SCM has failed to prove that ESU did not have good and valid title to the [Ukrtelecom] Shares.

(2)

SCM has failed to prove that the Privatisation SPA was null and void ab initio, by reason of the matters relied upon.

(3)

SCM has failed to prove that the Privatisation SPA was voidable and/or liable to be terminated by reason of the matters relied upon.

(4)

SCM has failed to prove on the balance of probabilities on the evidence placed before us that the Shares will otherwise be taken back into State ownership.

279.

SCM’s case on initial failure of consideration and subsequent failure of consideration therefore fails.”

The word “otherwise” in para 278(4) appears to be an echo of the way SCM put its case, but in this paragraph it can be ignored.

As already indicated, the arbitrators placed weight on the absence of a Ukrainian court decision on the issues which they had to determine, describing this as “significant”. It was significant in relation to both the Investment Obligation and the Special Network Obligation in two respects: first because a decision on the very issues of Ukrainian law which the arbitrators had to decide would (at least) have been relevant in assisting them to choose between the views of the two Ukrainian law experts; and second because the decision of a Ukrainian court may have assisted the arbitrators in determining what weight to give to the views of Ukrainian government entities such as the SPFU to which, as they put it, they would ordinarily have given considerable respect and weight, but about which they thought it preferable to be cautious because of the possibility that those views might be affected by political considerations. This latter respect is plainly what Raga’s expert Dr Martinenko had in mind when he relied upon the absence of any Ukrainian court decision dealing with the SPFU allegations.

Although the arbitrators did not refer expressly to the absence of a Ukrainian court decision when considering SCM’s case on failure of consideration, it is apparent that here too such a decision would have been of interest. In particular such a decision would have demonstrated conclusively one way or the other whether the Ukrtelecom shares would be taken back into State ownership.

After setting out their conclusions on the various issues for determination, the arbitrators turned to SCM’s submission that the award should be deferred, which they rejected. I shall consider later in this judgment the reasons which they gave.

By an application dated 24 July 2017 SCM challenged the award, contending that the arbitrators’ decision not to defer their award constituted a serious irregularity, that there was a real risk that the Ukrainian proceedings would result in the confiscation of the Ukrtelecom shares without compensation, and that its decision had caused substantial injustice to SCM. It sought the remission of the award for reconsideration in the light of the outcome of the SPFU action.

At the date of the section 68 application there had as yet been no decision by the Kyiv Commercial Court, but that court delivered its judgment on 19 October 2017, less than three months after publication of the award. It held that the Investment Obligation was a binding legal obligation of which ESU was in breach; that ESU was also in breach of the Special Network Obligation; that as a result of these breaches the Privatisation SPA should be rescinded and the Ukrtelecom shares should be returned to the State without compensation; and that in addition ESU should pay a penalty of US $81.9 million. In reaching its conclusions the court relied heavily on the findings of the government entities about which the arbitrators had expressed caution.

The result, therefore, was that the arbitrators and the Kyiv Commercial Court reached diametrically opposite conclusions on the same issues, with the consequence that SCM is now obliged to pay a total purchase price of some US $860 million to Raga, plus a penalty of US $81.9 million to the Ukrainian State, for shares in Ukrtelecom which will be confiscated.

ESU appealed to the Kyiv Commercial Court of Appeals which dismissed the appeal on 12 December 2017, upholding the decision and reasoning of the first instance court.

On 22 December 2017 ESU filed a further appeal to the Ukrainian Supreme Court, together with a motion to suspend the enforcement of the judgment. On 24 January 2018 the Supreme Court rejected the motion to suspend. The appeal is due to be heard on 15 May 2018.

Section 68 of the Arbitration Act 1996 provides, so far as relevant:

“68.

Challenging the award: serious irregularity

(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. …

(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)

failure by the tribunal to comply with section 33 (general duty of tribunal); …”

Section 33 provides:

“33  General duty of the tribunal

(1)

The tribunal shall—

(a)

act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent, and

(b)

adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined.

(2)

The tribunal shall comply with that general duty in conducting the arbitral proceedings, in its decisions on matters of procedure and evidence and in the exercise of all other powers conferred on it.”

Section 34 is also relevant. This provides:

“It shall be for the tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree any matter.”

Sections 33 and 68 are mandatory provisions from which the parties are not free to derogate. They are concerned with ensuring due process and not with whether the arbitrators have reached the right conclusion, whether as a matter of law or fact. As has been said many times, a section 68 challenge faces a “high threshold” (Lesotho Highlands Development Authority v Impregilo SpA [2005] UKHL 43, [2006] 1 AC 221 at [28]) or a “high hurdle” (The Magdalena Oldendorff [2007] EWCA Civ 998, [2008] 1 Lloyd’s Rep 7 at [35]). In short, it must be shown that something has gone badly wrong with the fairness of the procedure. This is in accordance with the policy of the 1996 Act which respects the parties’ choice of arbitration as the means to settle their disputes and gives the arbitrators extensive powers to decide all matters of procedure and evidence. This policy means that decisions by arbitrators will be upheld regardless of whether they are (in the court’s opinion) right or wrong. The court has a strictly limited power to intervene. Nevertheless, in appropriate cases, high thresholds are there to be crossed and high hurdles to be jumped. The question is whether this is such a case.

I draw attention to some features of this regime which are relevant in the present case.

First, in order to determine whether there has been a breach of the section 33 duty it is necessary to establish that the arbitrators have acted unfairly (para (a)) or have adopted procedures which have resulted in unfairness (para (b)). As explained in The Magdalena Oldendorff at [35], the section is concerned with unfair conduct by the arbitrators:

“… section 33 has to be approached by reference to the conduct of the arbitrators. For an irregularity to be established in a case of this kind it must be established that the tribunal have acted unfairly (partiality is not in issue) by failing to give a party a reasonable opportunity of putting his case or dealing with that of his opponent.”

It follows that the question whether the arbitrators’ decision not to defer the award constituted an irregularity must be determined as at the date of publication of the award. That is the conduct by the arbitrators on which SCM relies. At that stage the SPFU action was in being but had not yet reached any conclusion. The fact that this action eventually succeeded, and did so within a reasonably short period, is therefore irrelevant to the question of irregularity, although it is relevant to the question of substantial injustice. The arbitrators’ task was to assess the position as it stood at the date of their award.

Second, it follows also that what must be shown is unfairness by the arbitrators and not merely a mistake or misunderstanding by the losing party or its lawyers. That is the ratio of The Magdalena Oldendorff, where counsel for the shipowners had not appreciated that a point on which the arbitrators decided the case (“the 17 hour point”) was being run by the charterers as an alternative to their primary case. The Court of Appeal rejected the owners’ submission at [37] that the arbitrators “must have been aware that he had not dealt with the 17 hour point, and that they owed an obligation to ask him whether he had anything further to say on the point in addition to the points already taken as to why the charterers could not succeed”. Waller LJ held at [40] that this “would be placing an unfair burden on any tribunal where (I stress) they do not appreciate that a point is being missed”. The position would be different however, if the arbitrators do appreciate that a party has missed the point (see [42]). In that situation there would be unfairness by the arbitrators.

Third, the arbitrators’ duties under section 33 are to give each party a reasonable opportunity of putting its case and to adopt procedures providing a fair means for resolving the dispute. Whether the opportunity given is reasonable and whether the procedures are fair are objective questions to be determined by the court, but these are not unduly demanding standards. A party may have been given a reasonable opportunity of putting its case even if there is more evidence that could have been adduced. A procedure may be fair even if it is not perfect.

In some cases, including a challenge to a decision not to defer an award, the fairness of the arbitrators’ decision will depend upon evaluation of a range of factors. In some such cases there will be no single right answer, that is to say that while some tribunals may have been prepared to defer their decision, others would not. The question then will be whether the arbitrators’ decision not to do so was one which they were entitled to reach.

Fourth, the arbitrators are charged with avoiding unnecessary delay in accordance with the object of arbitration identified in section 1 of the Act (“to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense”). Thus unnecessary delay is to be avoided even in the absence of prejudice. In some cases to defer an award could itself be unfair and therefore in breach of the arbitrators’ section 33 duties. In other cases, however, delay may be necessary in order to avoid unfairness. Indeed, it is debatable whether necessary delay is properly to be regarded as delay at all. It may seem, therefore, that arbitrators are faced with walking something of a tightrope, vulnerable to attack by both parties. However, the critical issue is fairness. Provided the arbitrators act fairly, the court will support their decision.

Fifth, where the fairness of a procedural decision by arbitrators is challenged, the court will wish to examine any reasons given by the arbitrators for their decision. Ultimately, however, the question is not whether the reasons given by the arbitrators are sound but whether the procedure has been fair.

Sixth, in contrast with the question whether there has been an irregularity, substantial injustice may be either present or future. It is necessary to show that the irregularity “has caused or will cause” substantial injustice. However, it is not enough merely that it may do. If the injustice has not yet occurred, the court must form a view about whether it will do so.

Seventh, however, it is not necessary to show that but for the irregularity the result of the arbitration would have been different. There will be a substantial injustice if the result might well have been different. This was explained by Colman J in Vee Networks Ltd v Econet Wireless International Ltd [2004] EWHC 2909 (Comm), [2005] 1 Lloyd’s Rep 192 at [90] and has been followed in other cases:

“It is unnecessary and in the circumstances undesirable for me to express a view as to whether the arbitrator came to the right conclusion, even if by the wrong route, or whether, had he ignored the 2003 amendments, he should have reached the same or a different conclusion. The element of serious [sc. substantial] injustice in the context of section 68 does not in such a case depend on the arbitrator having come to the wrong conclusion as a matter of law or fact but whether he was caused by adopting inappropriate means to reach one conclusion whereas had he adopted appropriate means he might well have reached another conclusion favourable to the applicant. Thus, where there has been an irregularity of procedure, it is enough if it is shown that it caused the arbitrator to reach a conclusion unfavourable to the applicant which, but for the irregularity, he might well never have reached, provided always that the opposite conclusion is at least reasonably arguable. Above all it is not normally appropriate for the court to try the material issue in order to ascertain whether substantial injustice has been caused. To do so would be an entirely inappropriate inroad into the autonomy of the arbitral process.”

It is apparent from his earlier judgment in The Capricorn [1998] 2 Lloyd’s Rep 379 that what Colman J meant by saying that the result “might well” have been different was something less than a balance of probabilities but not a case where this was highly improbable or merely an outside chance. There is a danger in seeking to gloss the words of a statute, particularly when it is not in practice difficult to recognise when there has been a “substantial injustice”, but in my judgment the test that the arbitrators might well have reached another conclusion expresses the concept well and needs no further exposition.

For Raga, Mr Calver submitted that this test is of limited scope, applicable only where the irregularity is a failure to give the losing party an opportunity to address a point at all. He pointed to an earlier passage in Colman J’s judgment in The Capricorn where he said that there would be no justification for remission or setting aside “if it appears to the court that, even if the rules of natural justice had been adhered to, the arbitrators would be likely to have arrived at the same conclusion as they in fact did”. To my mind, however, this just illustrates the danger of scouring the law reports for isolated phrases out of context. I would regard the Vee Networks approach to the question of substantial injustice under section 68 as principled, settled and of general application. Certainly it would be a cause of confusion if there were a different test for different categories of irregularity.

Eighth, it is a risk inherent in the choice of arbitration that a party choosing to arbitrate is at risk of inconsistent decisions. It is common for a dispute to involve multiple parties, some but not all of whom may have contracts containing arbitration clauses. Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40, [2008] 1 Lloyd’s Rep 254, the leading case explaining the merits of one-stop adjudication, was itself such a case. In such a situation the risk that arbitrators may decide one thing and the court another is a risk that parties take. Equally, there may be a chain of contracts each subject to a separate arbitration clause. Many arbitration lawyers will have the unhappy experience of finding themselves in the middle of such a chain and losing in both directions. That too is a risk that parties take when they choose arbitration. As these are common situations, the fact that the risk materialises cannot by itself amount to substantial injustice. On the contrary, the choice of arbitration means that, as between themselves, the parties elect to be bound by the decision of their chosen tribunal, not the decision of some other court or tribunal. In general arbitrators are not bound to defer to the decisions of other tribunals.

The arbitrators’ reasons for not deferring the award in this case were as follows:

“283.

At the Evidential Hearing SCM submitted that, if it became relevant to the Tribunal’s decision in this case whether the Ukrainian Proceedings were in fact going to result in SCM losing the Shares, the Tribunal should defer making its Award. The Tribunal rejects this submission. It accepts that a decision of a court in Ukraine which is binding on the Parties would be relevant and might affect the conclusion the Tribunal has otherwise come to. It nevertheless considers that it should make its Award now on the basis of the evidence before it. An adjournment may result in uncertainty over a lengthy period, which could be prejudicial to either Party [footnote]. That is inconsistent with the duty of the Tribunal to adopt procedures which avoid unnecessary delay and expense. Furthermore on the evidence placed before it the Tribunal considers it likely that any future court decision will arrive at the same conclusion which the Tribunal has arrived at.”

A footnote added that the issues raised were similar to those raised by SCM’s stay application at the outset of the arbitration which the arbitrators had rejected in their procedural order dated 31 July 2016.

The parties disagreed about the meaning of the third sentence of this paragraph, in particular about what the arbitrators meant by “a decision of a court in Ukraine which is binding on the Parties”. Mr Calver submitted that this must mean a decision which would give rise to an issue estoppel by which the parties would be bound. In my judgment, however, this cannot be what the arbitrators meant. There was never any possibility of the SPFU action creating such an issue estoppel as it was an action between the SPFU and ESU to which Raga was not a party. The arbitrators would obviously have understood this. Accordingly, to speak about such a hypothetical possibility would be meaningless. In my judgment it is clear that what the arbitrators had in mind was a decision by the court in Ukraine which would in fact determine what would happen to the Ukrtelecom shares in a way which the parties could not challenge. That was a possible outcome of the SPFU action and is the outcome which (subject only to the further appeal to the Supreme Court) has in fact occurred.

Accordingly I take this third sentence to be a recognition by the arbitrators that the outcome of the SPFU action would (or at least could) be relevant and might affect their conclusion. In other words, there was a possibility that if the SPFU action were to result in the confiscation of the Ukrtelecom shares, that might cause the arbitrators to reach a different conclusion. Although there were some ways in which SCM put its case (e.g. those which depended on Raga’s state of mind) which could not be affected by the outcome of the SPFU action, there were others which could.

Despite this, the arbitrators decided not to await the outcome of the SPFU action. Their first reason for this decision was that to do so “may result in uncertainty over a lengthy period”. In fact the period before the Kyiv Commercial Court decision was relatively short, and by any standard the appeals have proceeded with reasonable expedition. However, there was no evidence before the arbitrators as to the likely duration of the SPFU action, either at first instance or on appeal.

The arbitrators’ reference to delay being “prejudicial to either Party” is puzzling. It is difficult to see how SCM could be prejudiced. SCM could only gain from waiting to see what the Ukrainian court decided, not least as the arbitrators were on the point of publishing an award requiring SCM to pay US $760 million for shares which might be confiscated as a result of the SPFU action. Raga would of course be prejudiced if it was kept out of a substantial sum to which it was entitled, but Mr Calver submitted that the arbitrators’ footnote reference to the July 2016 stay application amounted to a finding that there was a risk of dissipation of assets by SCM which would render enforcement of an eventual award more difficult.

The arbitrators’ second reason for refusing to defer their award was that “on the evidence placed before it the Tribunal considers it likely that any future court decision will arrive at the same conclusion which the Tribunal has arrived at”. What the arbitrators were saying here depends to some extent on what they meant by the word “likely”. This can cover a range of possibilities. However, in a case where the issues of Ukrainian law were open to argument, there was uncertainty as to the appropriate weight to be afforded to the determinations by Ukrainian government entities, and the arbitrators themselves had relied on the absence of a Ukrainian decision in reaching their conclusions, it would be surprising if the arbitrators felt able to express a high degree of confidence about the result of the SPFU action. Moreover, any such view would be hard to reconcile with the sentence earlier in the same paragraph acknowledging that the decision of a Ukrainian court might affect their conclusion.

In these circumstances, Mr McQuater, for SCM, submitted in outline that:

For Raga Mr Calver submitted, again in outline, that:

I should begin by noting that neither party submitted that I should defer delivery of this judgment until after the decision of the Ukrainian Supreme Court even though, if SCM’s appeal were to succeed, its case on substantial injustice would fall away. Accordingly I approach this section 68 challenge on the basis that the position in Ukraine is and will remain as determined by the Kyiv Commercial Court and confirmed by the Kyiv Commercial Court of Appeals and that the Ukrtelecom shares will be confiscated and returned to State ownership.

As is apparent from the summary of the parties’ submissions above, there is a significant disagreement between the parties as to the status and potential relevance in the arbitration of the Ukrainian courts’ decision in the SPFU action. Raga’s case is that this decision is necessarily irrelevant because the parties chose to have their dispute determined by arbitration and not by the decision of a Ukrainian court and because it could not be bound by the decision of such a court in proceedings where it is not a party. I accept that there could be no question of the SPFU action creating any issue estoppel against Raga and that Raga will not be bound by the judgment in the SPFU action. SCM does not contend otherwise.

However, that is not the point. SCM’s case is not that the Ukrainian judgment would be binding on Raga, but that (viewing the position at the date of the award) it was potentially relevant evidence for the arbitrators to consider. Indeed it was potentially extremely important evidence. To the extent that the Ukrainian court would determine the same issues of Ukrainian law as arose in the arbitration, its judgment was likely to be the best evidence of Ukrainian law on these issues, obviating the need for the arbitrators to choose between the parties’ experts. To the extent that there was uncertainty as to the weight to be given to the decisions of Ukrainian government entities due to the risk of political manipulation, the view of an independent court about this issue would be relevant. To the extent that there was an issue in the arbitration (as clearly there was) whether the Ukrtelecom shares were liable to be and would be confiscated and on what grounds, the Ukrainian judgment was likely to put that issue beyond doubt.

I accept that submission. Viewing the position at the date of the award, a judgment in the SPFU action was potentially important evidence. It would not be determinative, and it may be that having considered it, the arbitrators would have reached a different conclusion from the Ukrainian court. They would have been entitled to do so on issues of foreign law and fact. Accordingly I would not accept that the Ukrainian court was better placed than the arbitrators to determine these issues. As between the parties, it had been agreed that the arbitrators were the appropriate tribunal to do so. However, a Ukrainian judgment cannot be dismissed as necessarily irrelevant to their decision. It was potentially important evidence.

This was not, therefore, a case of pre-empting or undermining the parties’ choice of arbitration to determine their dispute, but rather ensuring that relevant and important evidence was available to the parties’ chosen tribunal in making its decision. Indeed, it appears that this was the arbitrators’ own view in the passages of the award set out above where they referred to the significance of the absence of a Ukrainian court decision and, even more clearly, in para 283 itself where they stated in terms that such a decision “would be relevant and might affect the conclusion the Tribunal has otherwise come to”.

I accept also that a decision not to defer issue of an award until further evidence is available is capable of amounting to a breach of arbitrators’ section 33 duties. To describe such a decision as a case management decision does not advance the matter. Shuttari v Solicitors’ Indemnity Fund [2004] EWHC 1537 (Ch), on which Raga relied, does not decide otherwise. It was simply a decision on the merits of that particular case that refusal of an adjournment was not unfair. In any event the case is, with respect, an unreported extempore judgment which decides no issue of principle.

Whether such a decision does amount to a breach of the section 33 duties in any particular case must depend on all the circumstances. Consideration of that question must also take account of the wide discretion given to the arbitrators in matters of procedure and evidence by section 34 of the 1996 Act (and, in an LCIA case, by Article 14.5 of the LCIA Rules). Without seeking to provide an exhaustive list, the relevant circumstances will be likely to include the nature and significance of the evidence in question, the likelihood of it becoming available, the length of the delay which will result, and the prejudice to the party resisting deferral from that delay. However, these matters must be assessed as at the date of the award. Accordingly, as already discussed, the actual outcome of the SPFU action is not relevant to the issue of breach of the section 33 duties. Nor is the fact that, in the event, there was no significant additional evidence adduced in the SPFU action.

In the present case a judgment in the SPFU action was potentially important evidence for the reasons already given. It might, but not necessarily would, have resulted in the arbitrators reaching a different conclusion. It was evidence which was likely to become available at the conclusion of the SPFU action.

On the other hand, the arbitrators were provided with no information about the likely duration of the SPFU action. Mr McQuater submitted that if this was an important factor in their decision, they ought to have asked for such information and that, if they had done, they would have been provided with an accurate prediction indicating that there would be a decision at first instance within a matter of a few months. However, I reject that submission. The likely duration of the action was a factor of obvious potential significance in deciding whether to defer the award. The arbitrators were entitled to proceed on the basis that they had been provided with whatever relevant information was available to the parties. More specifically, they were entitled to proceed on the basis that if SCM (represented as it was by very experienced counsel and solicitors and with the assistance also of Ukrainian lawyers) had any information about the likely duration of the action which would assist its case for a deferral of the award, it would have said so. As it did not, the obvious inference was that it had no such information. To impose upon the arbitrators a burden of asking for information in such circumstances would be unreasonable and contrary to the approach of the Court of Appeal in The Magdalena Oldendorff. Accordingly the arbitrators were entitled in my judgment to proceed on the basis that to defer the award “may result in uncertainty over a lengthy period”. This was itself a factor against deferral.

The arbitrators would then need to balance the prejudice which would be suffered by SCM if they proceeded to an award against the prejudice which would be suffered by Raga if they deferred a decision for an indeterminate period. The prejudice to SCM was potentially very significant, but it would only occur if the SPFU action did result in confiscation of the Ukrtelecom shares and even then only if the decision of the Ukrainian court would cause the arbitrators to reach a different conclusion. These were possibilities, but by no means certainties. Moreover, it was the kind of prejudice, that is to say resulting from arbitrators reaching one decision and court proceedings reaching a different decision, which is to some extent a risk inherent in the choice of arbitration as discussed above. On the other hand, if Raga was entitled to succeed, deferring the award would ensure that it was kept out of its money for what might be a lengthy period and might render enforcement of an eventual award more difficult.

Weighing all these factors, this was not a case in my judgment where compliance with the arbitrators’ section 33 duties required a deferral of the award. Viewing the position as it stood at the date of the award, with the SPFU action having only just been commenced, the arbitrators could not have been criticised if they had decided to defer the issue of their award, at least for a short while, in order to find out more information about the issues likely to be decided in the SPFU action and the likely timescale for a decision. Some tribunals might have proceeded in this way. However, the arbitrators had a wide discretion as to how to proceed and their decision was one which they were entitled to reach. I conclude that it was not unfair so as to constitute a breach of either limb of section 33.

This conclusion means that there was no irregularity within the meaning of section 68 and accordingly that the issue of substantial injustice does not arise. Had it done so, however, I would have concluded that there was a substantial injustice because the conclusion of the arbitrators might well have been different if they had had the benefit of the decision of the Ukrainian courts at first instance and on appeal. For this purpose it is sufficient to refer to the arbitrators’ own acknowledgement that a decision of the Ukrainian court might affect their conclusion. It may be that close examination of the Ukrainian decision either at first instance or on appeal would suggest that this was unlikely, but I would not accept Raga’s submission that it could not have done so. Following the Vee Networks approach, that would be to make an inappropriate inroad into the function of the arbitrators. As it is, however, the point does not arise.

For these reasons SCM’s section 68 challenge to the award is dismissed.