Stockman Interhold SA v Arricano Real Estate Plc

Factual and Procedural Background

This opinion concerns a series of arbitration applications involving multiple awards made in a commercial dispute between two companies, Stockman Interhold S.A. ("Stockman") as Claimant and Arricano Real Estate PLC ("Arricano") as Defendant, relating to a joint venture involving shares in a company holding Ukrainian property assets, notably the Sky Mall shopping centre in Kiev.

The dispute originated from arrangements made in 2009 and 2010, including a Letter of Intent, a Memorandum of Understanding, a Shareholders Agreement ("SHA"), and a Call Option Agreement ("COA") under which Arricano had the right to require Stockman to sell its shares in Assofit, a Cypriot company holding the property assets.

Following Arricano's exercise of the Call Option in November 2010, Stockman terminated the SHA alleging fundamental breaches by Arricano. This led to parallel UNCITRAL and LCIA arbitrations, with the UNCITRAL tribunal upholding Stockman's termination of the SHA and the LCIA tribunal initially finding the Call Option not validly exercised.

Subsequently, the LCIA Award was challenged and remitted for reconsideration on the issue of compliance with the Escrow Agreement. The arbitrator later issued a Second Award confirming valid exercise of the Call Option and ordering Stockman to transfer shares subject to escrow arrangements. Disputes arose regarding the escrow, deposit of the Option Price, and subsequent share transfers to third parties, leading to further LCIA Awards (Third, Fourth, Fifth, and Seventh) addressing jurisdictional and substantive issues including claims for damages and allegations of fraud related to the deposit of the Option Price.

Stockman challenged several awards on grounds including lack of jurisdiction and fraud, with the present judgment addressing these challenges and the arbitrator's jurisdiction and conduct in the arbitration proceedings.

Legal Issues Presented

1. What was the scope of the remission order by Field J and the consequent jurisdiction of the arbitrator?
2. Whether the arbitrator's jurisdiction was expanded to include claims for damages in lieu of or in addition to specific performance.
3. Whether the arbitrator became functus officio after the Second Award, precluding further awards of damages.
4. Whether the arbitrator had jurisdiction to allow amendments to claims under the LCIA Rules.
5. Whether the Fifth LCIA Award was procured by fraud, specifically regarding representations about the deposit of the Option Price.
6. Whether the alleged fraud caused substantial injustice warranting setting aside the Fifth Award.
7. Whether Stockman waived objections to jurisdiction by delay in raising them.

Arguments of the Parties

Claimant's Arguments (Stockman)

• Contended that the arbitrator lacked jurisdiction to award damages arising after the First Award and to deal with claims beyond the scope of the remission.
• Argued the Fifth Award was procured by fraud due to false representations made by Arricano about the Option Price deposit.
• Asserted that the arbitrator was functus officio after the Second Award and could not award damages in addition to specific performance.
• Maintained that knowledge of withdrawals from escrow accounts by Arricano's agent should be imputed to Arricano, supporting the fraud allegation.
• Raised jurisdictional objections late and argued these should not have been waived.

Defendant's Arguments (Arricano)

• Submitted that the remission revived the arbitrator's jurisdiction broadly, including claims for damages in lieu of or in addition to specific performance.
• Argued that Stockman consented or waived objections to the arbitrator's jurisdiction through conduct and correspondence.
• Contended that the arbitrator was not functus officio and retained jurisdiction to vary awards and allow amendments.
• Denied fraudulent misrepresentation, asserting that the monies were deposited as required and that any withdrawals were permitted and/or unknown to Arricano.
• Argued that knowledge of withdrawals by Mr Tymochko, an agent, should not be attributed to Arricano due to his role and alleged breach of duty.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a detailed chronological and thematic analysis of the arbitrator's jurisdiction and the challenges to the awards.

Regarding jurisdiction, the court emphasized that the arbitrator's jurisdiction was initially limited after the First Award but was revived by Field J's remission order strictly to reconsider the issue of whether the Call Option was validly exercised and consequential issues arising from that determination. The court applied authoritative case law to hold that the arbitrator could not entertain wholly new claims outside the scope of the remission without express court authority.

The court found that the remission included claims for damages in lieu of or in addition to specific performance to the extent these were pleaded or particularized before the First Award, including legal costs damages and claims consequential on the breach of the Call Option Agreement. The court rejected Stockman's narrow view that only claims existing at the time of the First Award could be considered, recognizing that subsequent events relevant to damages could be taken into account.

The court analyzed correspondence immediately prior to the Second Award and found that Stockman had effectively consented or waived objections to the arbitrator's jurisdiction to hear damages claims, including amendments to claims after the Second Award. The court further held that Stockman waived its right to object to jurisdiction by failing to raise timely objections under the Arbitration Act 1996.

On the question of whether the arbitrator was functus officio, the court agreed with the arbitrator that he retained jurisdiction to award damages after the Second Award, particularly as he had expressly reserved jurisdiction to do so and to vary the award to ensure its effectiveness.

The court also considered the arbitrator's jurisdiction to allow amendments under the LCIA Rules and concluded that such amendments were within the arbitrator's revived jurisdiction and discretion.

Turning to the fraud challenge to the Fifth Award, the court applied the statutory test under s.68(2)(g) of the Arbitration Act 1996, requiring a high standard of proof of fraud causing substantial injustice.

The court examined the representations made by Arricano to the arbitrator in letters dated 31 December 2014, 5 February 2015, and 25 February 2015 regarding the deposit of the Option Price with independent third parties. It found that while the 31 December letter was not proven false, the subsequent letters contained false representations as monies had been withdrawn without disclosure.

On the knowledge element, the court relied heavily on the arbitrator's findings that certain Arricano directors deliberately turned a blind eye to the withdrawals, which was sufficient to impute knowledge to Arricano under the doctrine of "blind eye knowledge." The court rejected Arricano's argument that knowledge of Mr Tymochko, a non-executive director and agent, should not be attributed to Arricano, applying the Supreme Court's decision in Bilta (UK) Limited v Nazir which rejects a general fraud exception to attribution in claims by innocent third parties.

Despite concluding that the Fifth Award was procured by fraud, the court found no substantial injustice had been caused because the condition precedent for the deposit was satisfied at the relevant time, and any subsequent withdrawals did not vitiate that satisfaction. Accordingly, the court declined to set aside the Fifth Award.

The court also addressed the binding nature of the arbitrator's findings, distinguishing between findings on jurisdiction (not binding if jurisdiction challenge succeeds) and findings on merits within jurisdiction (binding).

Holding and Implications

The court's final decision was as follows:

1. The arbitrator had jurisdiction, as revived and expanded by the remission and conduct of the parties, to determine claims for damages in lieu of or in addition to specific performance, and to allow amendments under the LCIA Rules.

2. Stockman waived its right to object to the arbitrator's jurisdiction by failing to raise objections in a timely manner.

3. The arbitrator was not functus officio after the Second Award and retained jurisdiction to vary the award and award damages.

4. The Fifth Award was procured by fraud due to false representations about the deposit of the Option Price and failure to disclose withdrawals.

5. However, there was no substantial injustice caused by the fraud because the condition precedent was satisfied at the relevant time and the arbitrator would likely have reached the same conclusion.

6. Accordingly, the application to set aside the Fifth Award was refused.

Implications: The decision confirms the importance of the scope of remission orders in arbitration, the ability of arbitrators to award damages alongside specific performance, and the high threshold for setting aside awards on grounds of fraud, requiring proof of substantial injustice. It also clarifies the attribution of knowledge to companies through agents, applying recent Supreme Court authority. No new precedent was established beyond the application of existing principles to the complex facts of this case. The direct effect is that the challenged awards stand, and the arbitration proceedings continue under the arbitrator's jurisdiction.