SCM Financial Overseas v. Raga Establishment: the Arbitration Fairness Test

On 3 May 2018, the English High Court of Justice heard a challenge to the arbitral award rendered by an LCIA tribunal on 26 June 2017. The challenge was based on a serious irregularity in the principle of fair conduct of arbitral proceedings embodied in sections 68 and 33 of the English Arbitration Act 1996.

More specifically, the issue revolved around the extent to which the tribunal must fairly conduct an arbitration. The Claimant alleged that the tribunal breached its duty by denying his application for deference of the arbitral proceedings until a national court ruled on the matter.

The Court dismissed the challenge and found, firstly, that fairness of the arbitral process must be gauged at the time an arbitral tribunal hands down its award, and secondly, it reiterated that along with the principle of fairness, an arbitral tribunal must avoid unnecessary delay and expense in the arbitral process.

The Underlying Dispute and the Parties’ Positions in the LCIA Arbitration

The subject matter of the LCIA proceedings concerned the share purchase agreement concluded in 2013 between Raga, a Cypriot company, and SCM Financial Overseas LTD (SCM), a wholly-owned subsidiary of System Capital Management, a Ukrainian corporation. Under the purchase agreement, Raga sold its shares in UA Telecominvest Limited (UAT) to SCM; UAT in turn owned through its subsidiaries 92% of stock capital in Joint Stock Company Ukrtelecom, one of the largest telephone operators in Ukraine.

Put simply, UAT’s indirect shareholding in Ukrtelecom made up the subject matter of the purchase agreement. The price was to be paid in three installments, but Raga received only the first one ($100 million) and hence initiated arbitral proceedings with a view to recovering the outstanding sum ($760 million).

The Respondent (SCM) submitted that in 2011, one of the UAT subsidiaries, Limited Liability Company ESU entered into a privatization agreement with Ukraine’s State Property Fund regarding Ukrtelecom. Raga, in turn, guaranteed in the share purchase agreement performance procurement of ESU’s obligations under the privatization agreement. More specifically, it undertook to invest $450 million into Urktelecom’s business activities (Investment Obligation), to create a telecommunication network and to transfer it to the Ukrainian state (Special Network Obligation).

SCM alleged that Raga didn’t comply with these obligations and the Ukrainian Government would, therefore, seize the Respondent’s shares in Ukrtelecom. SCM also applied for deference of the arbitral proceedings until Ukrainian investigation authorities and national courts ruled on the matter. The Respondent believed it to be pivotal to the arbitration.

Yet, the LCIA tribunal rejected SCM’s case altogether, ruling that the Investment Obligation didn’t constitute a legally binding one and the Respondent didn’t provide sufficient evidence that the Special Network, which Raga had delivered, didn’t meet the privatization agreement’s requirements. The tribunal denied the application for deference of the arbitral proceedings as well because it would create “uncertainty over a lengthy period”. It handed down the final award on 26 June 2017, finding in favour of Raga.

Thus, SCM brought a claim before the English High Court of Justice claiming that the arbitral tribunal didn’t give it a reasonable opportunity to present its case and didn’t adopt suitable procedures, thus acting in breach of its duty to fairly conduct arbitral proceedings under sections 68 and 33 of the English Arbitration Act 1996.

Indeed, the decision of a Ukrainian court turned out to be critical, as it found Raga to be in breach of the respective obligations and awarded confiscation of SCM’s shares in Ukrtelecom. Hence, SCM, being held liable to pay the outstanding purchase price, would have its shares in Ukrtelecom confiscated due to the Respondent’s failure.

The Fairness Test to be conducted at the Time of the Arbitral Award

The Court drew attention to the fact that Sec.33 (together with Sec.68) distinguishes between unfairness in arbitral proceedings vis-à-vis one of the parties (para. I, A) and unfairness resulted from the procedures adopted by the tribunal (para. I, B). Firstly, the Court observed that if the arbitral tribunal acted unfairly towards SCM one must gauge at the time of the issuance of the award, that is on 26 June 2017. At that time, the proceedings in Ukrainian courts were still pending with no decision on the merits struck. For this reason, the Court concluded that the outcome of the Ukrainian court proceedings is irrelevant for the finding of this type of injustice.

Timely Dispute Resolution over Fairness in the Arbitral Process

Secondly, the Court reiterated that an arbitrator, adopting procedures suitable to the circumstances of a particular case, should concurrently avoid unnecessary delay and expense so as to obtain a fair resolution of disputes.

The Court found that the LCIA tribunal pursued this goal paying, however, much attention to the upcoming decision of Ukrainian courts. The following wording is illustrative in this respect: “a decision of a court in Ukraine which is binding on the Parties might affect the conclusion of the Tribunal”. The Court noticed that a Ukrainian court’s decision would, in fact, settle the dispute over the Ukrtelecom shares and the arbitral tribunal would have to respect it.

Therefore, the outcome of the court proceedings would be relevant and may have had an impact on the LCIA award. The arbitral tribunal would have reached a different conclusion had a Ukrainian court’s decision been delivered at the time of the proceedings. However, the Court upholds the reasoning of the tribunal that deferring the arbitral proceedings would result in “uncertainty over a lengthy period”.

In fact, the period between the final award and the decision of a Ukrainian court amounted to less than 3 months; that couldn’t, however, be anticipated at that stage and the parties submitted no evidence in this regard to the tribunal either. The tribunal, being unaware of the duration of average proceedings in a Ukrainian court, just ruled on the evidence at hand. The tribunal could, however, have asked the parties to provide such evidence but it didn’t have to; otherwise, that would be an unnecessary burden and would contradict the nature of arbitration.

Mr. Justice Males judged on the case. The judgment is available here.

Ildar Sakaev,

LL.M. candidate at Queen Mary University of London

Intern at CIS Arbitration Forum