Friday, June 17, 2016

Claiming RM26.6b in a 'court' that is not a court

 KiniGuide     Published     Updated

KINIGUIDE | Frustrated with 1MDB and the Ministry of Finance Incorporated (MoF Inc), Abu Dhabi sovereign wealth fund International Petroleum Investment Company (IPIC) and its subsidiary Aabar Investments PJS (Aabar) have taken the two to ‘court’.

IPIC and Aabar want their dispute with 1MDB and MoF Inc to be arbitrated by the London Court of International Arbitration (LCIA).

It is claiming about US$6.5 billion (RM26.6 billion) from the Malaysians.

In this instalment of KiniGuide, we explore the dispute between the four parties, and the LCIA which is arbitrating the dispute.

What is the LCIA?
Despite its name, it is not a proper court in the usual sense. Instead, it describes itself as a not-for-profit company offering administrative services.

LCIA was founded in London in 1986, although its roots date back nearly a century earlier. It is used as an alternative to conventional courts in settling commercial disputes, with either one or three arbitrators presiding over each dispute depending on what the disputing parties can agree on.

Does that mean that the dispute will be heard in London?
Perhaps. London is the default option, but it is not the only one.
Article 16 of the LCIA arbitration rules allows parties to a dispute to decide the venue of the hearings before an arbitral tribunal is formed.

Once it is formed, the tribunal may decide to hear the case at any place that it deems convenient.

Cool. Can I attend the hearings?
No, the proceedings are confidential. In addition to barring members of the public (including the media) from attending the proceedings, the LCIA also doesn’t publish details of the proceedings even after its conclusion.

“Confidentiality is still generally regarded as one of the primary underpinnings of arbitration. Nobody who is not a proper party to an arbitration, or a legal representative of a party, may obtain information about pending or completed arbitrations from the LCIA.

“Our response to any such request will be that we cannot comment, irrespective of whether we have any knowledge of the matter about which we are being asked,” the LCIA says on its website.

Who can use LCIA’s services?
Just about anyone with a contractual dispute – provided that they can afford it.

A contract may specify that LCIA rules are to be used as the method for settling disputes. In this case, the LCIA would have jurisdiction once any party submits a request for arbitration to the LCIA.

In the absence of such a clause, disputing parties may still mutually consent to having their dispute settled by LCIA’s arbitrators. If there is no consensus, however, the LCIA won’t step in.

The former appears to be the case in IPIC and Aabar’s dispute against 1MDB and MoF Inc.

IPIC’s announcement of its request for arbitration makes reference to a binding term sheet (a type of contract) between the disputing parties, and alluded that it contains provisions on settling disputes that involve the LCIA.

“The claim (for US$6.5 billion) will be determined by an arbitral tribunal that will comprise of three arbitrators in accordance with the binding term sheet and the LCIA rules,” said IPIC.

How much does it cost?
Quite a lot. IPIC and Aabar would have paid £1,750 (RM10,167) just to file the case to the LCIA. Once the tribunal starts, each member of the tribunal’s secretariat charges a set hourly rate that is listed on LCIA’s schedule of fees.

There is no set fee for the tribunal members, and this may vary on a case-by-case basis. However, it may not exceed £450 (RM2,614) per hour. The members may charge for their time spent travelling, however. All charges are subject to UK’s 20 percent value added tax (VAT).

According to LCIA, the average arbitrators’ fees and institutional costs incurred over the course of an arbitration is US$192,000 (RM787,209). The median is at a more modest figure of US$99,000 (RM405,904). This suggests that the average figure is skewed higher by a relatively small number of very expensive cases.

However, LCIA said the cost of these two items only make up about 20 percent of all costs incurred in an arbitration.

How long do proceedings last?
The average time for a three-member panel to decide a case is 21 months, starting from the submission of the request for arbitration. The median time is 19 months. The time is shorter for arbitrations that are presided by only one arbitrator.

However, there is no independent verification of LCIA’s cost and length of time analysis, which is crucial given that it has a vested interest in downplaying these figures and present itself as a cost and time-efficient way to settle disputes.

Who presides over LCIA arbitrations?
The arbitrators are selected from a database of persons who have expressed interest in being arbitrators, all of whom presumably have legal training. The database is maintained by the LCIA, and is not open to public.

The exact selection process varies depending on how the disputing parties want to resolve their dispute, including whether they want to be involved in the selection process such as by nominating potential arbitrators. However, the final decision rests with the LCIA.

The LCIA arbitration rules stipulate that arbitrators should not have a vested interest in the case, and should not be of the same nationality as the disputing parties (including nationalities of their controlling shareholders), unless the parties agree otherwise.

What can the LCIA do?
The LCIA’s arbitration tribunal may make decisions on awards, including interim awards before a final decision is made.

Its decisions are final and legally binding, and parties have to agree to waive their right to appeal the decision in any court of law.

Since LCIA is not a court, why bother abiding with its orders?
According to the LCIA, while the panel’s decisions are not enforceable, the mediation process is likely to be part of a contract, and its breach is a matter that can be pursued in a court of law.

What’s the IPIC-1MDB dispute about?
In May last year, an international consortium of six banks led by Deutsche Bank began demanding 1MDB to repay its debts early. The loan amounting to US$975 million (RM3.57 billion) was originally due in September that year, but the banks reportedly had concerns about 1MDB's ability to repay it.
On May 29, Second Finance Minister Ahmad Husni Hanadzlah announced that IPIC and Aabar had stepped in to resolve the matter. The details of the deal are subsequently laid out in IPIC’s announcement on the London Stock Exchange dated June 10, 2015.

It says that IPIC and Aabar had entered a binding term sheet on May 28, which was a day before Ahmad Husni’s announcement. As part of the deal, IPIC would provide 1MDB US$1 billion in cash to settle the debt on June 4, and would also assume the obligation to pay interests for two 1MDB loans, amounting to US$3.5 billion.

In turn, IPIC is to receive transfers in assets by June 30 this year, after which it would assume liability for all payment obligations under the two loans, and forgive certain 1MDB financial obligations to IPIC.

The value of assets to be transferred was undisclosed, but it represents the sum of the cash payment, payment obligations under the two loans, and 1MDB’s debts to IPIC.

IPIC is a co-guarantor of the two loans even prior to the binding term sheet being signed. Aabar has investments in some of 1MDB’s properties and assets.

How did the dispute arise?
A year later, on April 18, 2016 IPIC claimed that 1MDB and MoF Inc had not met some of its payment and other obligations under the binding term sheet.

It did not elaborate on what obligations were not met, except that it included a payment of US$1.1 billion plus interest.

In view of this, IPIC started refusing to pay interests on 1MDB loans, with the first one due on April 28, leading to default.

1MDB said it has sufficient money to service the debts, but insisted that IPIC should pay because 1MDB had held up its end of the bargain.

Eventually, IPIC relented and paid the interest, but said it would demand compensation from 1MDB and MoF Inc, with interest.

All told, as of May 11, it said 1MDB and the government owed US$1.21 billion – plus interest – pursuant to the binding term sheet.

A report by The Straits Times also quoted unnamed Malaysian officials as saying that the dispute also has to do with a 2012 transaction of US$3.54 billion.
The money was supposed to go from 1MDB to IPIC, but it instead went to Aabar Investments PJS Ltd in the British Virgin Islands. Despite similar names, IPIC said this is not one of its subsidiaries and it did not receive the money.
How did the US$6.5 billion figure come about?
Without a copy of IPIC’s request for arbitration – and since none of the disputing parties has disclosed the exact nature of the dispute – one can only guess.

Assuming that The Straits Times’ report is correct, and that IPIC is attempting to recover both the arears under the binding term sheet and the 2012 transaction, the total comes to about US$4.75 billion.

Perhaps the US$6.5 billion includes interest of the 2012 transaction?
If that is the case, it would imply an interest rate of more than 10 percent per annum, which is rather high considering that the interest rate for the two loans are no more than 5.99 percent per annum.

This KiniGuide is compiled by Koh Jun Lin.

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