Section 67 and 68 challenges to LCIA award dismissed

In the highly complex and contentious case of Filatona Trading Ltd and another v Navigator Equities Ltd and others [2019] EWHC 173 (Comm), the English High Court dismissed an attempted challenge to an LCIA award brought on the grounds of jurisdiction (s.67 Arbitration Act 1996) and serious irregularity (s.68 Arbitration Act 1996).

In particular, the Court held that an LCIA arbitral tribunal did not exceed the scope of its powers in ordering relief that was not available to an English court.

Background

The dispute arose under a shareholder agreement (SHA) concerning land in central Moscow.  Ms Danilina and Mr Deripaska were named as parties to the SHA. Ms Danilina's former partner, Mr Chernukhin, was not.  Mr Chernukhin's position was that Ms Danilina was acting as his nominee or agent and that, consequently, he was the true party to the SHA by virtue of being Ms Danilina's disclosed principal and the beneficial owner of Ms Danilina's shares. Ms Danilina and Mr Deripaska disputed this.

In arbitration proceedings between Mr Chernukhin and Mr Deripaska, an arbitral tribunal held that Mr Chernukhin was a party to the SHA and ordered Mr Deripaska to pay $95 million to "buy out" Mr Chernukhin's shareholding in the relevant Cypriot company.

Mr Deripaska sought to challenge the award. Mr Deripaska contended (as he had done before the tribunal) that Mr Cherunkhin was not a party to the SHA and the arbitration agreement in it, and thus challenged the Award under s.67 on the basis that the tribunal did not have jurisdiction to make it (Section 67 Challenge).  Mr Deripaska also argued that the award should be set aside on the grounds of serious irregularity under s.68, alleging that the tribunal had acted ultra-vires by ordering buy-out (Section 68 Challenge).

Ms Danilina was not party to the arbitration and so was not bound by the award.  Shortly after the award had been rendered, she entered into an agreement to transfer the beneficial interest in her shares to Mr Deripaska. She then began litigation in England seeking a declaration from the court that she was the true party to the SHA and the owner of the shares, and not Mr Chernukhin.

Given the related nature of Ms Danilina's claim in litigation and Mr Deripaska's challenge in arbitration, the Court heard both cases together.

Section 67 Challenge

The Court acknowledged that the key factual issue of whether Mr Chernukhin was a party to the SHA, and the related legal issue of whether Mr Chernukhin was precluded from suing under the SHA, was common to both Ms Danilina's request for a declaration and the Section 67 Challenge.  It followed that this required consideration of the same issue that was at the heart of the arbitration.  The Court emphasised, however, that the challenge was "not an appeal from the decision of the arbitration tribunal" but a "re-hearing".

The Court concluded that it agreed with the tribunal's finding, holding that Mr Chernukhin was indeed the true party to the SHA and not Ms Danilina, and that the SHA did not exclude Mr Chernukhin's ability to sue under it as the disclosed principal of Ms Danilina.  The Court accordingly dismissed the Section 67 Challenge.

Section 68 Challenge

The award ordered Mr Deripaska to buy out Mr Chernukhin's shareholding in the Cypriot entity, by reference to Cypriot company law concerning relief in circumstances of shareholder oppression.  By contrast, under English law, the English court does not have the power to order the buy-out of shares in a foreign company. Mr Deripaska consequently argued that the Tribunal did not have the power to make such a buy-out order, whether under s.48 of the Arbitration Act 1996 (as the procedural law of the LCIA arbitration) or under the SHA.  Therefore, he argued that the award should be set aside on the ground of serious irregularity.

Under s.48(5) an arbitral tribunal seated in England has the same powers as the English court to order a party to do or refrain from doing anything, and to order specific performance of a contract. It was common ground between the parties that the tribunal did not have power to make the buy-out award pursuant to s.48(5), because an English court would not have that power in relation to a foreign company.  However, the Court also noted s.48(1), which provides that the parties are free to agree on the powers exercisable by the tribunal as regards remedies.  The correct question for the Court to determine, therefore, was whether the SHA, properly construed, provided the tribunal with the relevant power.

The SHA provided the Tribunal with the power to settle "all disputes and disagreements arising from this Agreement or in connection herewith". The Court noted that a Cypriot court would have the power to make a buy-out order in respect of a Cypriot company. However, given that the parties had chosen to refer all disputes and agreements to arbitration, a dispute concerning shareholder oppression in the Cypriot company to which the SHA relates and requiring a buy-out order would not come before the Cypriot court but an arbitral tribunal.  The Court concluded that a reasonable person would not understand the parties to have intended that all disputes would be resolved by an arbitral tribunal, except those concerning shareholder oppression requiring a buy-out order which would need to be brought before a Cypriot court.  Rather, a reasonable person would understand the parties to have intended the SHA to provide a 'one-stop shop' for dispute resolution.  On that basis, the Court found that the SHA did grant the tribunal the necessary power to make the buy-out order.  Consequently, the Section 68 Challenge was dismissed, as there was no serious irregularity.

Comment

This is a prominent example of the English court hearing a challenge to an arbitral award at the same time as a related, yet separate, claim in litigation in order to ensure consistent decisions on the same points.  The reasoning and dismissal of the challenges highlights the Court's continued non-interventionist approach to arbitration and its considered yet robust approach towards applications to set aside awards.

In this case, the Court's conclusion that the tribunal had not exceeded its powers was based on the facts of the case and contractual interpretation of the SHA. It is unclear from the judgment which version of the LCIA Rules (1998 or 2014) was applicable here. However, it is possible that the English court could, in future cases with similar facts, base a similar decision on Article 22.1(vii) of the LCIA Rules (2014), which bestows upon an arbitral tribunal the power to "order compliance with any legal obligation, payment of compensation for breach of any legal obligation and specific performance of any agreement".

For further information, please contact Nicholas Peacock, Partner, Natalie Yarrow, Associate, or your usual Herbert Smith Freehills contact.