English Court of Appeal upholds arbitration award in a complex Moscow mall dispute

In its recent judgment, the English Court of Appeal (the “Court“) decided to uphold the arbitration award in a dispute between a former Russian MP Ashot Yegiazaryan and his business partner Vitaly Smagin.

The case was rather complex as the arbitration proceedings involved two arbitration agreements based on two separate contracts, one of which was not directly signed by the Claimant while the other was ambiguous and poorly written, lacking several essential elements of a valid arbitration clause.

How did the dispute arise?

The dispute arose around a large real estate development project in Moscow – the shopping mall Europark. The parties intended to use Europark as collateral for a loan. Through a company called Tufts Investment Trade Inc (“Tufts“) Mr Smagin owned a 20% interest in Europark, while Mr Yegiazaryan and his wholly owned company Kalken Holdings Ltd (“Kalken“) had a 73% interest in the project.

In 2006 Kalken entered into the Shareholders’ and Escrow Agreement (the “2006 Agreement“), in which it agreed to deliver its shares in Tufts to an escrow account as a collateral. It was governed by English law and had an LCIA arbitration clause.

In 2008, after Kalken failed to deliver the shares into escrow, the parties resolved this issue by concluding a further agreement (the “2008 Agreement“) in which they again agreed to complete the transfer. The new agreement was signed by Mr Yegiazaryan and Mr Smagin and provided that if Mr Yegiazaryan failed to perform his obligations, Mr Smagin would be able to file a claim in the LCIA and require enforcement of the 2006 Agreement.

Europark’s organisational structure was organised through Tufts’ wholly owned Cypriot subsidiary. In 2009, Tufts transferred its shares in that subsidiary to other companies, which rendered Mr Smagin’s shareholding in Tufts valueless as Tufts no longer owned the Europark retail complex. Kalken and Mr Yegiazaryan also failed to put Tufts shares into escrow.

Arbitration proceedings and the first instance

Mr Smagin’s request for arbitration was referring to both 2006 and 2008 Agreements, arguing that although Mr Yegiazaryan was not a party to the 2006 Agreement, he had complete ownership and control of Kalken and that Kalken was his agent under both of the agreements.

Mr Yegiazaryan, in turn, argued that he was neither a party to the 2006 Agreement nor a beneficial owner of shares in Kalken. Additionally, he also alleged that his signature in the 2008 Agreement was forged, that it was an unenforceable letter of intent, and its arbitration clause was not valid and did not cover the claims of Mr Smagin.

The tribunal decided that the 2008 Agreement’s terms expressly and impliedly provided for LCIA Arbitration in the case of breach of both Agreements and decided that it had jurisdiction.  In 2014 the arbitrators found that Mr Yegiazaryan had breached his obligations under the 2008 Agreement and that Kalken had breached its obligations under the 2006 Agreement and issued a US$84 million award against Mr Yegiazaryan.

In 2015 Mr Yegiazaryan challenged the arbitration award in the English High Court on two grounds: that his signature was forged and that the 2008 Agreement did not contain a valid arbitration clause. However, the judge stated that the forgery argument lacked cogency and that presented evidence “was not worthy of belief.” On the second ground the judge, though acknowledging the ambiguity of the 2008 Agreement still decided that it was a valid LCIA arbitration clause and refused to set aside the award.

The Court of Appeal

The first instance judge gave Mr Yegiazaryan (the Claimant) permission to appeal on the question of the validity of the 2008 Agreement’s arbitration clause, which the Claimant did in 2016.

In the appeal, he claimed that the 2008 Agreement’s arbitration clause was not a valid arbitration agreement and could not be construed as one because it only articulated a failure to comply with the 2008 Agreement. The other reasons included ambiguity and invalidity of the arbitration agreement and too broad an interpretation attributed to it by the High Court judge.

The Claimant later tried to add another ground – that the judge of the first instance should have checked whether the claims fell under the arbitration clause. The Court, however, quoted Republic of Kazakhstan v Istil and rejected it as it was not part of the original proceedings and the Claimant never applied for permission to appeal based on this ground in the first instance.

The Court acknowledged that the 2008 Agreement’s arbitration clause was unclear, particularly on the possibility of enforcement of the 2006 Agreement against Mr Yegiazaryan, who was not a party to it.  However, the Court decided that a reasonable person would believe that the 2008 agreement allowed to make claims against Mr Yegiazaryan and consider it a valid agreement and not a mere statement of intent.

The Court decided to review it in conjunction with the 2006 Agreement and its arbitration clause. The clause had a consolidation provision, which was broad enough to include disputes under the 2008 Agreement – allowing making claims based on the 2006 Agreement “or any instruments or documents delivered in connection therewith”.

In relation to the validity of the 2008 arbitration clause the judges acknowledged that it was poorly drafted – undated, had manuscript annotations, several gaps and no governing law clause. But, quoting Trust Risk Group v AmTrust the court said that in such cases there may be more scope for resort to the apparent commercial purpose of the contract. This includes looking into the intentions of the parties, relevant background and commercial reality of the situation rather than on formalistic, technical differences.

Finally, the court pointed out that under Fiona Trust & Holding Corporation v Primalov there is a strong presumption that businesspeople who are parties to a contract containing a dispute resolution clause intend to resolve all their disputes in the forum designated by that clause. Under such cases as Monde Petroleum SA v Westernzagros such presumption is specifically strong when the dispute-resolution clause in a contract is entered into to resolve disputes under an earlier contract (as 2008 Agreement in this case).

Based on these reasons the Court decided to uphold the award.

Conclusion

Despite all the complications of the case – vague and incomplete language of the 2008 Agreement and differences between the signing parties of the 2006 and 2008 Agreements – the English Court of Appeal still decided to uphold the arbitration award.

The Court’s decision to look into the intentions of the parties and the context of the cases rather than on formalities and technical differences and support of the strong presumption of validity of the arbitration clause are in line with the general pro-arbitration approach for which English courts are famous.