A mistake in the award is disappointing. Whether it is an error of law or an error in computation. If such errors are ignored then they can lead to a change in the meaning of the ruling and can stir trouble during enforcement. An error in the calculation is all the more disappointing when $90 million is involved. Plus or minus 90 million does affect the calculation, doesn’t it?
Background of the case
In 2015, the claimant, Caledor Consulting Ltd., which is majority-owned by Mikhail Khabarov, a Russian businessman, currently the CEO of Trust Bank, secured an option to purchase 30% of shares in the holding company “Delovye Linii GK” for $60 million.
Later on following a corporate conflict, however, the deal fell through. The parties did not publicly disclose the cause of the corporate conflict. The claimant applied for damages to the LCIA (the agreement drawn up under English law had a corresponding clause). On January 21, 2020, the arbitration court awarded him compensation in the amount of $ 58 million (LCIA Award № 183883).
At this time the respondent started a tactical asset shifting manoeuvre, transferring shares to third parties. According to the claimant, the purpose of these disposals was to hinder or even make impossible the enforcement of the LCIA award in Russia.
The subject matter of the dispute when considering the amount of the Claimants’ loss from the termination of their option to acquire 30% of the shares in the holding company of the respondent was the valuation of the holding company’s enterprise value. The claimant’s (purchaser’s) losses were to be determined as the difference between the actual value of the company’s 30% enterprise and the option price (USD 60 million).
According to this valuation model, the “tax risks” of the Russian economic entities controlled by the holding company should be deducted from the total value.
The respondent’s position was based on the fact that the shares were worth nothing because of the tax debt. The LCIA tribunal estimated the company’s “historic tax liability” at $ 90 million, but due to a “typo or miscalculation,” the tax debt resulted in an increase in the company’s value, not a decrease. As a result, the LCIA tribunal estimated the value of the company’s capital at $ 392 million, the value of option shares at $ 118 million and the damage to the claimant at $ 58 million, respectively. That was contrary to the common ground between the parties and contrary to what the Tribunal had intended to do. If the amount had been subtracted, on the Tribunal’s other findings the figure would have been $US 4 million.
Following the discovery of this error, the respondent submitted a request for its correction, to which the claimants objected.
The tribunal sent a reply to the respondents dated 14.02.2020, in which the tribunal acknowledged the error, calling it a “calculation error”, which the tribunal “regrettably” made by putting a positive number (USD 90 million) in the calculation line instead of a negative number (USD -90 million), for which the tribunal offered its “sincere apologies”. The tribunal, however, refused to amend the award, on the grounds that to do so in this way would depart from what it regards as a reasonable and fair assessment of the loss.
The Claimant sought enforcement of the award in Russia. On 4 June 2020, the Arbitrazh Court of St. Petersburg and the Leningrad Region granted provisional relief pursuant to art. 90(1) of the Commercial Procedure Code in order to prevent dissipation of assets and to prevent the frustration of enforcement of the LCIA award in Russia. The court found that the claimant had presented sufficient evidence, demonstrating the possibility of further alienation of shares.
Refusal of enforcement
However, later on, the award was denied enforcement. The Arbitrazh Court in St. Petersburg held that as an obvious and fundamental calculation error has not been corrected by the tribunal, its enfocement would violate the basic notions of justice and Russian public policy (Arbitrazh Court of St Petersburg and the Leningrad Region, Resolution of 25 Nov. 2020, A56-20377/2020).
The Arbitrazh Court in St. Petersburg held that the award contained a simple but very serious error that the tribunal refused to correct.
It referred to the definition of public policy in the information letter of the Presidium of the Supreme Arbitration Court of the Russian Federation of 26.02.2013 No. 56 “Review of Practice…”. It pointed out that legality, finality, validity of a judicial act and legal certainty are fundamental principles of Russian law (Supreme Court judgment of 24.02.2015, 305-ES14-2110) and part of public policy. At the same time, the Court held that a refusal to enforce the judgment would not mean a review of its merits.
High Court of England and Wales: Significant injustice?
The respondent further applied to the High Court of England and Wales which held that the Award shall be remitted to the Tribunal for a corrected Final Award to be produced. In the court’s view the serious irregularity in this case was one which has caused or will cause substantial injustice to the claimant: There is an award containing a computation mistake which leads to a significant difference in the damages payable. The Tribunal, however, does not have to reconsider the Award’s quantum analysis as a whole, as it was in the matter fully reasoned and self-contained.
Proving that an irregularity in the award is serious enough to warrant being regarded as out of the ordinary, such that it may be said to have caused or to be likely to cause substantial injustice, is very hard. In this case, the decision on the merits was not challenged and probably correct, that is, the question whether the respondent has to pay damages. However, concerning quantum, the tribunal messed it up completely – anyboday will agree that it makes a huge difference whether one has to pay US$ 4 million or US$ 58 million.
So, this is a rare case where the outcome of Russian court proceedings are congruent with the outcome of parallel proceedings in the UK. This is, however, becoming a rare event: In 2019 and 2020, 11 arbitral awards rendered in the UK (mainly LCIA and LMAA awards) were tried to be enforced in Russia. Out of these 11 cases, only 4 awards were declared enforceable by Russian courts, in 7 cases enforcement was denied. And in most of the other cases, the reasons to deny enforcement were not as compelling as in this one.