Arbitrators made “simple” $54m mistake

Cranston: Unfortunate consequences

A High Court judge has described how “a tribunal of leading arbitrators” made a “simple mistake” when assessing damages in a Russian commercial dispute, awarding one of the parties up to $54m more than they meant to.

Sir Ross Cranston explained that the London Court of International Arbitration (LCIA) panel had, when calculating the value of shares, added a sum relating to historic tax liabilities instead of subtracting it.

The tribunal had “sincerely apologised for the error but has refused to amend the award”, on the grounds that it was a “fair assessment” of loss.

Sir Ross said the three arbitrators involved had made “the sort of simple mistake any of us can make”, but “with the most unfortunate consequences”.

The claimants challenged the award under section 68 of the Arbitration Act 1996, on the grounds that the mistake was a “serious irregularity”, causing “substantial injustice”, and the damages should be reduced to $4m.

The defendants argued that the mistake was “an error of fact” and that it had not caused the claimants “substantial injustice” because it did not affect the outcome of the arbitration.

The High Court heard in Doglemor Trade v Caledor Consulting [2020] EWHC 3342 (Comm) that the second claimant, Alexander Bogatikov, was a Russian citizen who co-founded a haulage and logistics business, the Business Lines Group.

The third claimant, DL Management, was the holding company for Business Lines, and the holding company was wholly owned by Doglemor Trade, the first claimant.

Mikhail Khabarov, the second defendant, joined Business Lines in 2014 to perform “senior managerial functions” in return for “an option to acquire an ownership stake in the business”. He was the majority owner of Caledor Consulting, the first defendant.

The option was granted by a call option deed, which enabled Mr Khabarov to buy 30% of the shares of DL Management and included an LCIA arbitration clause.

Mr Khabarov was excluded from the Business Lines Group in 2017. He alleged the deed had been repudiated and began an arbitration. Doglemor admitted repudiation, so the “only substantive issue” for the arbitration was quantification of loss.

The LCIA panel made its award in January 2020. Sir Ross said Doglemor argued that the option shares in were “worthless” and Caledor, in a “strikingly different” valuation, that they were worth $174m.

The tribunal determined that the equity value of the whole group was $392m, which included assessing the EBITDA margin.

At 30% of that value, the option shares were worth $118m, less the option exercise price of $60m, leaving a total of $58m for the damages award.

The Doglemor parties requested that the tribunal correct a “mistake resulting from its failure to make a deduction through overlooking the instruction in the agreed valuation model to enter the tax liabilities figure as a one to be subtracted rather than added”. Making the necessary changes to the damages award would reducing it to $4m.

The tribunal admitted an “error of computation”, however it was “of the clear view that notwithstanding the error, the award should not be corrected”.

Sir Ross said that section 68 allowed an award to be challenged if there had been a “serious irregularity”, and this was a case of serious irregularity which would “cause substantial injustice to the claimants”.

He said that if the tribunal “had an opportunity to address the computational mistake, it might well have produced a significantly different award”.

However, the figure the tribunal calculated for the company’s EBITDA “was potentially affected by the computational mistake”.

The tribunal decided it did not need to take its analysis of EBITDA further because the “overall figure it had mistakenly calculated for damages” seemed a “reasonable assessment” of loss.

Sir Ross ruled that the damages award should “be remitted to the tribunal” for it to correct the computational error, reach a “concluded view in light of the evidence (such as it is) as regards the EBITDA margin”, and calculate a figure for the defendant’s loss “when that EBITDA margin is coupled with its other (unchanged) findings in the award”.

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