In March 2010, Travis Coal (as seller) and Essar Minerals (as buyer) entered into a stock purchase agreement providing for the sale and purchase of shares in Trinity Parent Corporation, a US coal mining operation. As part of the consideration for the purchase, Essar Minerals issued promissory notes worth a total of US$203 million in favour of Travis Coal. EGFL provided a guarantee of, inter alia, Essar Minerals’ obligation to pay the sums due under the promissory notes.
Following completion, the Essar group claimed to have discovered that the target’s financial position was much worse than had been represented by Travis Coal. In particular, the group alleged that Travis Coal had failed to disclose that Trinity would need a substantial capital injection to continue operating, and that Travis Coal had significantly understated certain liabilities and significantly overstated certain assets. In the arbitration and subsequent court proceedings, these allegations were described as EGFL’s “fraud defences”.
In April 2012, Essar Minerals defaulted on the promissory notes, causing Travis Coal to accelerate the debt, which remained unpaid. Travis Coal then called on EGFL to pay the sums due pursuant to its guarantee of Essar Minerals’ obligations under the promissory notes. EGFL also defaulted on its obligations. In May 2012, Travis Coal commenced ICC arbitration against EGFL in New York pursuant to the arbitration clause in the guarantee. A three-member tribunal was constituted to hear the claim in late 2012.
On 7 December 2012, Travis Coal applied for summary judgment on EGFL’s fraud defences. Travis Coal appears to have sought summary judgment according to the standard applied by the New York courts, which requires that the applicant be entitled to judgment as a matter of law and that there be no genuine issues of material fact. EGFL objected to Travis Coal’s summary judgment application, arguing that the tribunal did not have power to grant summary judgment and that the adoption of a summary procedure would contravene its right to be heard on the fraud defences.
The tribunal held hearings in April and November 2013, and in the latter heard oral testimony relevant to EGFL’s fraud defences from a witness for each party. On 25 November 2013, the tribunal issued a procedural order in which it ruled that EGFL’s fraud defences did not bar Travis Coal’s claim under the guarantee. In summary, the tribunal concluded that certain waivers and disclaimers set out in the guarantee were effective as a matter of New York law to exclude EGFL’s fraud defences. The tribunal further concluded hat, although New York law contains certain exceptions to the effectiveness of such waivers and disclaimers, EGFL had not discharged its evidentiary burden of demonstrating that such exceptions applied. In terms of procedure, the tribunal noted in its subsequent award that it “has moved beyond a simple summary judgment process, receiving witness testimony and conducting oral hearings with cross examination n all controverted questions that might support a fraud defense to Claimant’s claims in light of the waivers and disclaimers in the Guarantee and SPA”. While not comparable to “summary judgment” as understood by the New York (and English) courts, the procedure adopted by the tribunal does appear to have been somewhat summary in nature, falling short of a full hearing of EGFL’s fraud defences. In the tribunal’s view, this procedure complied with both:
• the parties’ arbitration agreement, which contained a clause granting the tribunal “the discretion to hear and determine at any stage of the arbitration any issue asserted by any party to be dispositive of any claim or counterclaim, in whole or part, in accordance with such procedure as the arbitrators may deem appropriate, and the arbitrators may render an award on such issue”; and
• the ICC Rules, article 22 of which requires the tribunal to “conduct the arbitration in an expeditious and cost-effective manner”, and empowers the tribunal (after consultation with the parties) “to adopt such procedural measures as it considers appropriate, provided that they are not contrary to any agreement of the parties”.
In March 2014, the tribunal issued its final award in which it resolved the remaining issues in dispute, upheld Travis Coal’s claim in part, and ordered EGFL to pay US$148 million in principal, plus interest and costs.
In April 2014, EGFL filed a challenge to the final award before the New York courts based on, inter alia, the tribunal’s decision to entertain Travis Coal’s application for summary judgment on EGFL’s fraud defences.
In the meantime, Travis Coal applied to the English High Court for recognition and enforcement of the final award, and obtained an ex parte order entering judgment in the terms of the final award. EGFL applied to have the ex parte enforcement order set aside, or alternatively for an adjournment of any decision on recognition and enforcement until the determination of EGFL’s challenge to the final
award before the New York courts. For its part, Travis Coal opposed EGFL’s application for an adjournment, but sought security for the amount of the award in the event that the adjournment was granted.
EGFL’s adjournment application came before Mr Justice Blair in June 2014. In resolving that application, he was required to consider the strength of EGFL’s challenge to the final award in the New York courts. Blair J concluded that EGFL does not have a realistic prospect of successfully challenging the final award based on the procedure adopted by the tribunal. In reaching this conclusion, Blair J observed that:
• the adoption of a summary judgment process by the tribunal does not necessarily amount to a denial of due process. This is a question that cannot be addressed in general terms; regard must be had to the facts of the particular case to determine whether the procedure adopted by the tribunal was within the scope of its powers, and was otherwise fair. This is a question of substance, rather than of how the procedure is labelled (as “summary judgment” or otherwise);
• accordingly, the court did not need to enter into the general debate about the availability of summary judgment in arbitration; and
• in the present case, the tribunal made every effort to conduct the arbitration in an expeditious and cost-effective manner, while giving each party a fair opportunity to present its case. So far as the procedure adopted by the tribunal was summary, it was permitted by the terms of the arbitration agreement .
Source:
A breakthrough for financial services arbitration?
Nicholas Peacock, Dominic Kennelly and Emily Blanshard of Herbert Smith Freehills
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