Swedish Court of Appeals Overturns $173 Million Arbitration Award On Grounds That Arbitral Panel Exceeded Its Authority

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One of the advantages of arbitration is the certainty that comes with it. While arbitration awards can be challenged in court, it is extremely difficult to overturn an award. In fact, courts will vacate, or refuse to confirm an arbitration award only if there was a serious conflict of interest or corruption on the part of a neutral arbitrator, or the arbitrators exceeded their powers. This latter ground, the arbitrators exceeding their authority, is most frequently used as a basis for setting aside an arbitral award. A recent decision by the Swedish Court of Appeals setting aside a US $173 million arbitration award provides some guidance on how this standard may be applied.

The underlying dispute resulted from a failed 1992 joint venture between a Russian company, Tyumenneftegaz ("TNGZ"), and the American company First National Petroleum ("FNP"). Rather than obtain a license to develop certain oil and gas deposits in the name and for the benefit of the joint venture company, TNGZ obtained a license in 1993 in the name and for the benefit of itself. In December 2011, FNP filed a claim with the Arbitration Institute of the Stockholm Chamber of Commerce (the "SCC") for damages caused by the partnership breach. The arbitration hearing was conducted in the summer of 2013 and the award in favor of FNP was based on estimates of TNGZ's revenues from oil sales in the local market.

TNGZ challenged the arbitration and the Swedish Court of Appeals set the award aside on the grounds that arbitration tribunal exceeded its authority. The award was based on an oral statement that the Russian company had distorted the size of its estimated oil reserves. Although FNP had never officially claimed this breach, the arbitral panel nevertheless based its decision upon it. Each party was required to provide a legal foundation to support its position in the arbitration. Because FNP never specifically referred to the oral distortion to support its legal position, the Swedish Court of Appeals held that the tribunal should not have based its conclusions on it (it is not clear from available sources how the tribunal learned about the alleged distortion if FNP had not claimed it).

The decision is significant because of the size of the award involved and also because it is one of the few examples of an arbitration award being set aside by a court and therefore provides guidance on what constitutes exceeding an arbitrator's authority.

To learn more about Fitch Law Partners LLP's international arbitration practice, please visit our website.

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