In Rochester Resources Limited & Ors v Leonid Lebedev & Anor1 the Commercial Court rejected an application for an injunction restraining New York court proceedings in favour of arbitration. The application was made under section 37 Senior Courts Act 1981 (1981 Act), and relief sought in the alternative under section 44(2)(e) of the Arbitration Act 1996 (1996 Act).
Mr Vekselberg, Mr Blavatnik, and a BVI company (Rochester) of which they were ultimate beneficiaries, were the claimants. The defendants were Mr Lebedev, and Coral Petroleum Limited (Coral), an Irish company, which the claimants contended was ultimately beneficially owned by Mr Lebedev. The individual parties were “well known and immensely wealthy businessmen”.
Mr Lebedev was the ultimate beneficiary of a minority interest in an oil company, TNK, and one of its subsidiaries. Mr Lebedev arranged to transfer these interests to entities owned by Messrs Vekselberg and Blavatnik.
By 2001, Mr Vekselberg and Mr Blavatnik’s interests had been consolidated in Oil and Gas Industrial Partners (OGIP), which owned 50% of TNK. In 2001, some kind of agreement was reached orally between Messrs Vekselberg, Blavatnik and Lebedev that Mr Lebedev was entitled to a 15% interest in OGIP to reflect his contributions, but there was a dispute as to whether this agreement was binding.
Also in 2001 an investment agreement which purported to be based on the above arrangements was drawn up, although not fully executed. Broadly, the investment agreement recognised a 15% share (and entitlement to 15% of the profits) in OGIP by “Party 3”. Mr Lebedev signed the investment agreement for “Party 3”, and Mr Vekselberg signed for “Party 1”. The parties dispute whether this agreement was intended to be binding, particularly given non-execution by Mr Blavatnik.
An OGIP promissory note of 1 December 2001 (Note) was issued to Coral for $200m, maturing in December 2010.
Coral was, the claimants alleged, controlled and beneficially-owned by Mr Lebedev. Mr Lebedev claimed that the Note represented security for his right to 15% of the income from TNK, and that Coral would receive income due to him but that Coral was nevertheless entirely independent from him.
In the early 2000s the TNK-BP joint venture was established. Discussions took place between Messrs Vekselberg and Lebedev regarding the former buying out the latter’s stake in TNK. The claimants said that a deal was done which saw those interests be purchased for $600m. Mr Lebedev said that he would not relinquish his 15% share altogether at that price, only his right to income and the Note.
On 20 June 2003 Coral, entered into an agreement (Acquisition Agreement) with Rochester. Under the Acquisition Agreement, Rochester would pay $600m to Agragorn Holdings Ltd (to be owned legally and beneficially by Coral), in return for the Note.
Various clauses of the Acquisition Agreement purported to bind the “Parties”, and their “Affiliates”.
The Acquisition Agreement provided that Rochester was the “Buyer” and Coral the “Seller”, each a “Party” and together the “Parties”.
Clause 1.4 of the Acquisition Agreement defined “Affiliate” or “Affiliates” as:
“… any of the beneficial owners of a party to this Agreement or any entity in which such beneficial owner or beneficial owners directly or indirectly own or control at least 10% of the outstanding share capital or participation rights.”
Clause 11.2 of the Acquisition Agreement provided:
“Arbitration: The Parties agree that any dispute, controversy or claim arising between the Parties out of or in connection with this Agreement or the interpretation, breach, enforcement or termination, thereof, shall be finally settled by arbitration …”
On 21 March 2013, Rosneft acquired TNK-BP for $55bn. Mr Vekselberg’s and Mr Blavatnik’s joint share of the purchase price was in the region of $13.8bn.
On 4 February 2014, Mr Lebedev, complaining that he had not received any payment for his equity stake in TNK-BP, commenced proceedings in the New York court under the investment agreement. He claimed 15% of the price Mr Vekselberg and Mr Blavatnik received on the sale to Rosneft. It was not clear to the court what credit, if any, had been given for the $600m paid under the Acquisition Agreement.
Issues and decision
Messrs Vekselberg and Blavatnik sought an anti-suit injunction to restrain the New York proceedings in favour of the arbitration clause in the Acquisition Agreement. They argued that they were entitled to enforce the arbitration agreement against Mr Lebedev on the footing that:
- Coral was controlled by Mr Lebedev and contracted as his agent; Rochester contracted as the claimants’ agent;
- alternatively, if Rochester contracted as principal, it could enforce the arbitration clause against Mr Lebedev for their benefit; and
- in the second alternative, as its ultimate beneficial owners, Messrs Vekselberg and Blavatnik were “Affiliates” of Rochester entitling them to enforce the rights conferred on them by the Contracts (Rights of Third Parties) Act 1999.
It was common ground that, following Transfield Shipping Inc2, for the court to grant an anti-suit injunction it was necessary for the claimants to establish that there was a high degree of probability that Mr Lebedev was obliged to arbitrate his claims against Messrs Vekselberg and Blavatnik under the arbitration clause in the Acquisition Agreement.
Although it was arguable that Mr Lebedev was also a party, the court was not persuaded of this, rather concluding that Mr Lebedev was an “Affiliate”, noting that the Recitals to the agreement would only make sense if he was so regarded. It was still possible for Coral to have contracted as Mr Lebedev’s agent, but this did not answer whether he was bound by the arbitration clause.
The court found that the limitation in clause 11.2 to disputes arising “between the Parties” made it much harder to conclude that the clause was also intended to apply to “Affiliates”, noting that “there are limits as to what a court can properly do to improve a carefully drafted and (at least in this respect) reasonably clear written agreement.”
Had the parties wished to do so, they could have added Messrs Lebedev, Vekselberg and Blavatnik to the arbitration clause. They had not done so.
In consequence, the court found that Mr Lebedev was probably not bound by the arbitration clause. It had certainly not been established to a high degree of probability that he was so bound. This same finding applied with equal force to Messrs Vekselberg and Blavatnik. They too were better regarded as “Affiliates”, than “Parties”. This meant that the application for an anti-suit injunction under section 37 of the 1981 Act failed.
The Court considered the application under section 44(2)(e) of the 1996 Act to fail for the same reason, as it also relied on Mr Lebedev being a “Party”.
Having decided that there was no agreement requiring Mr Lebedev to arbitrate, it was not necessary to consider the enforcement of such an agreement by Rochester for the benefit of Messrs Vekselberg and Blavatnik.
This case is a reminder of the importance of drafting agreements to arbitrate carefully and precisely. This extends not only to the nature of the disputes that will be caught by the agreement but also the parties who are intended to benefit from the clause.
It will remain open to Messrs Vekselberg and Blavatnik to invoke the Acquisition Agreement as a defence to court proceedings brought by Mr Lebedev.