Carpatsky Petroleum Corporation v PKSC Ukrnafta 2020 EWHC 769 Comm - 31 March 2020
The Defendant ('Ukrnafta') has applied to set aside orders made by Robin Knowles J granting the Claimant permission to enforce a Stockholm Chamber of Commerce ('SCC') award made on 24 September 2010 ('the Final Award') whereby the tribunal consisting of Sigvard Jarvin, Per Runeland and Wolfgang Peter ('the tribunal') awarded US$145.7 million in favour of the Claimant against Ukrnafta.
The Final Award is a New York Convention award, within the meaning of s. 100 Arbitration Act 1996 ('the 1996 Act'). Enforcement is resisted on the basis, as I will set out in more detail, that one or more of the exceptions specified in s. 103 of the 1996 Act is applicable.
Although other points have been taken at an earlier stage, Ukrnafta's case was confined at the hearing to three points. First, Ukrnafta contends that there was never an arbitration agreement, and no arbitration agreement in writing, between itself and the Claimant. I will call this the 'No Arbitration Agreement point'. Secondly, it contends that there was a serious procedural irregularity in that, it says, the tribunal dealt with an issue concerning a limitation of liability clause (Article 20.1) on a basis which had not been pleaded, was not properly evidenced, and which Ukrnafta had no proper opportunity to deal with. I will call this the 'Article 20.1 point.' Thirdly, it contends that the tribunal took a procedurally irregular approach to the agreed methodology for assessing damages, with the result that a serious mathematical error has occurred in the calculation exercise. I will call this the 'Damages Model point'. I will return to consider these points in turn. First, however, it is necessary to introduce the parties, to say something about what is now a long and involved history of this case, and as to the nature of the present hearing.
The Claimant is an oil and gas company which was incorporated and registered in Delaware on 18 July 1996. Before 1996 there was another company called 'Carpatsky Petroleum Corporation', which had been incorporated under the laws of Texas on 17 November 1992. (Where it is necessary to distinguish between them, I will call the Claimant 'Carpatsky Delaware' and the Texas company 'Carpatsky Texas'. Where in context it is not essential to distinguish, I will refer to whichever of the two was extant at the relevant time as 'Carpatsky'). On 18 June 1996, one minute after the incorporation of Carpatsky Delaware, there was filed a Certificate of Merger of Carpatsky Texas into Carpatsky Delaware, which named Carpatsky Delaware as the 'surviving corporation' of the merger. Articles of merger were filed in Texas four days later, on 22 June 1996. The result of this process was that Carpatsky Texas ceased to exist. Carpatsky Delaware, as the 'surviving corporation' assumed all the rights and liabilities of Carpatsky Texas, and succeeded as a universal successor to Carpatsky Texas as a matter of Delaware law.
Ukrnafta is a large Ukrainian oil and gas company. At least by the time of the arbitration it was owned 50% plus one share by PJSC National Joint-Stock Company Naftogaz of Ukraine, which is owned by the Ukrainian state.
The JAA and subsequent agreements
On 14 September 1995, Carpatsky Texas and SE Poltavanaftogaz ('PNG'), a subsidiary of Ukrnafta entered into a joint activity agreement ('the JAA') to develop and exploit the Rudivsko-Chervonozavodskiy gas field (the 'RC field') in Ukraine. The initial investment of Carpatsky Texas was to consist of cash and technology, whilst PNG was to make a contribution in kind by way of certain wells to be explored. At the outset it was intended that the parties should invest on a 50:50 basis.
The JAA provided that 'Carpatsky Petroleum Corporation' had contracted with PNG and was 'a Party'. Article 1.10 of the JAA provided that 'the Parties in their joint activity shall be governed by Ukrainian law and this Agreement.'
An additional and amended JAA was entered into on 15 October 1996 ('the Restated JAA'). The Restated JAA provided at the outset that PNG and 'Carpatsky Petroleum Corporation, USA' had made the agreement. It further defined 'the Company' as 'Carpatsky Petroleum Corporation, registered in Texas, USA, a participant to this Agreement'. By Article 17.3 it was provided that 'If any of the Participants terminates as a result of liquidation or reorganization, its rights and obligations hereunder shall pass to the official legal successor subject to legal backing of the rights of the latter'. By Article 20.1 it was provided that 'Each of the Participants shall bear material liability for failure to perform, or improper performance of, the terms and conditions of this Agreement and annexes hereto, and in the event of breach of such terms and conditions shall indemnify the other Participants for the direct losses suffered through its fault.' By Article 20.4 the parties agreed, in the event of disputes which could not be resolved by negotiations, that there should be reference to the International Commercial Arbitration Court of the Chamber of Commerce and Industry of Ukraine.
Nearly two years after that, on 26 August 1998, an addendum to the JAA was executed ('the 1998 Addendum'), which, amongst other things, replaced PNG with Ukrnafta, and also made a change in relation to the provision for arbitration in the JAA, such that it now provided for disputes to be referred to the Arbitration Institute of the SCC for arbitration to be conducted under UNCITRAL rules.
The 1998 Addendum also amended the definition of 'Parties' for the purposes of the JAA and the Restated JAA, so that it now read that the term meant 'participants who initially concluded this Agreement, or their legal successors and any other legal entities or individuals who will join this Agreement in the future.'
A number of other agreements supplemental to the JAA were entered into subsequently.
It is of significance to note that each of the original JAA, the Restated JAA and the 1998 Addendum was signed by Mr Leslie Texas as 'President' of 'Carpatsky Petroleum Corporation'. Each of the documents was stamped with the seal of Carpatsky Texas, which bore a Texas lone star, and Carpatsky Texas's corporate number. Apparently until 2000, other supplemental agreements were also stamped with the seal of Carpatsky Texas. From 2000 a Carpatsky Delaware seal was in use for official documents, including some which were transmitted to Ukrnafta.
It appears that, during the early years of the project, Carpatsky had difficulties raising the funding necessary to sustain a 50% interest in the project. As a result, during the years 1997-2003, Carpatsky's actual share was reduced to 14.9%. From 2004, however, Carpatsky was seeking to restore its stake in the project to 50% by providing further investment. Ukrnafta refused to allow Carpatsky to participate in the project on an equal basis, but instead undertook the development of the RC field on its own. This effectively led to the arbitration.
The Commencement of Arbitration
Carpatsky filed a request for arbitration with the SCC on 28 September 2007. The front page of the Request stated that the claimant was 'CARPATSKY PETROLEUM CORPORATION (Delaware, United States)'. Paragraph 10 of the Request set out that the arbitration had been commenced pursuant to the arbitration agreement contained in the 1998 Addendum. Ukrnafta submitted its Answer on 28 November 2007. It was served without a reservation as to jurisdiction, and explained that the parties, 'through negotiations between counsels' had 'agreed to proceed with the arbitration' on various terms, including the application of SCC Rules rather than UNCITRAL rules.
A tribunal was constituted comprising Messrs Peter, as Chairman, Jarvin and Runeland, and a procedural timetable was agreed. Carpatsky submitted its Statement of Claim dated 13 May 2008, followed by Ukrnafta's Statement of Defence and Counterclaim dated 23 June 2008. On 25 November 2008, Carpatsky submitted its Reply to the Statement of Defence and Answer to the Counterclaim.
On 19 December 2008, Ukrnafta served Objections to the Jurisdiction. These Objections raised a new issue, namely that it was said that there was no valid arbitration agreement because the relevant contracts had been made between Ukrnafta and Carpatsky Texas, which had ceased to exist. It was contended by Ukrnafta that it had not been informed about the merger between Carpatsky Texas and Carpatsky Delaware. In this context, Ukrnafta contended that the validity of the arbitration agreement was governed by Swedish law, while the issue of authorisation to enter into an arbitration agreement was to be determined by the law of the place where the company was domiciled, which was said to be Texas.
On 12 January 2009 Carpatsky submitted its response to the jurisdictional challenge. It contended that Carpatsky Delaware had assumed all Carpatsky Texas's rights and liabilities pursuant to the merger, and had therefore become party to the JAA and to the arbitration agreement contained in the 1998 Addendum. It contended further that both parties had treated Carpatsky Delaware as a party to the JAA, that Ukrnafta had been aware of the merger, and also that the complaint was not timely as Ukrnafta had participated in the arbitration without making this complaint.
Ukrnafta submitted a rejoinder on this issue on 19 January 2009 reiterating that the 1998 Addendum, and therefore the agreement for SCC Arbitration, was 'null and void ab initio'. Ukrnafta withdrew its counterclaims. Carpatsky responded to this on 23 January 2009.
Ukrnafta submitted a further document on 18 February 2009, and this time attached witness statements from Ms Svitlana Vasylets, who was Head of the Protocol Division - Deputy Head of the External Affairs and Corporate Relations Department of Ukrnafta from 2001 to 2008, and from Mr Texas. Ms Vasylets stated that it was only in the course of the arbitration, 'somewhere in November 2008', that she had learned that Carpatsky Texas had 'ceased to exist upon its merger into the company with the same name, having its place of incorporation in the State of Delaware'. Mr Texas stated that the merger 'was done for tax reasons and generally because Delaware law was more favourable than Texas law'.
On 24 February 2009 Ukrnafta urged the tribunal to postpone the jurisdiction hearing. The tribunal did not accede to that request. Ukrnafta then declined to attend the hearing, which went ahead and resulted in a decision of the tribunal on jurisdiction of 22 April 2009. The tribunal rejected Ukrnafta's case that it was only when the arbitration was underway that it first discovered that the claimant was Carpatsky Delaware. The tribunal determined that it had jurisdiction because Ukrnafta had entered into an arbitration agreement with Carpatsky Delaware by engaging in the arbitration without reservation, and that that agreement was concluded at the latest by the time of the service of Ukrnafta's Statement of Defence; and also that Ukrnafta's jurisdictional objection was out of time by reference to Article 24 of the SCC Rules. The arbitration then proceeded on the merits.