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Quantum matters – steelmakers award in Minnesota

Louisa Plumb Louisa Plumb

Essar Steel was found liable to pay US$1.4 billion in damages to ArcelorMittal by the ICC Arbital Tribunal on 19 December 2017, for failing to supply iron ore pellets from a site in Minnesota. The Tribunal considered that, in the absence of challenge to the quantum claim by the Respondent, it could base its decision on the evidence and arguments put forward by the Claimant.

Background

On 12 December 2012, a subsidiary of the Mauritian-owned Essar Steel agreed to supply ArcelorMittal with 3.5 million dry metric tons (DMT) per year of iron ore pellets from a site in Minnesota over a 10-year period, starting from 1 July 2014.  The start date was subsequently delayed to 1 July 2016 and the end date extended to 31 March 2027. 

Essar stopped developing the site in Minnesota in late 2015. In May 2016, ArcelorMittal sent notice of termination of the agreement as Essar Steel would be unable to start delivering iron ore pellets in July 2016 as agreed.

In August 2016, ArcelorMittal (the Claimant) sent a notice for arbitration to Essar Steel (the Respondent).

Claimant’s position

ArcelorMittal claimed US$1.22 billion (before interest), being the difference between what would be paid to an alternative supplier and what would have been due to Essar Steel under the terms of the contract.

For the period 1 July 2016 to 30 April 2017, the claim was based on the actual additional costs incurred by ArcelorMittal in purchasing an alternative supply of pellets, totalling US$149 million. 

For the period from 1 May 2017 to 31 March 2027, the claim was based on forecasts prepared by the Claimant’s experts and on the pricing formula in the contract with Essar, which referred to price indices including the IODEX and the China Freight Rate.  Amounts that would have been paid to Essar were compared to the sums that were projected to be paid to the alternative supplier on the basis of their contract and the projected values of various indices provided in expert evidence.  The additional costs for this period (before discounting) totalled US$1.94 billion.

The claim was discounted back to 1 July 2016, the date of the breach, using a discount rate of 11.5%, being the effective rate at which Essar successfully issued high yield bonds or alternative debt financing in 2014.

Respondent’s position

Despite asserting that ArcelorMittal’s claim was “vastly overstated”, Essar Steel did not put forward any evidence or alternative calculations.

Essar Steel counterclaimed for its loss of equity investment in the mine development in Minnesota, which it claimed was due to ArcelorMittal terminating the agreement in bad faith. Essar claimed that its equity investment was worth over US$800 million, although the basis for this valuation was not specified.

Tribunal’s approach

Where no competing evidence was provided by Essar Steel, the Tribunal considered the calculations put forward by ArcelorMittal. Those calculations, particularly in relation to projections of future movements in various price indices and cost values prepared by the Claimant’s experts, were accepted by the Tribunal as “appropriate and reliable”. The Tribunal used the periods for which historical data was available as a cross check to the forecast damages, noting that the projected damages were lower per DMT than actual damages for periods where data was actually available.

The Tribunal awarded damages as claimed by ArcelorMittal, plus pre- and post-award interest based on the Claimant’s WACC of 8.6%, to represent the costs of procuring finance to cover amounts claimed. Interest to the date of the award in December 2017 (compounded annually) stood at US$157 million.

The Tribunal considered Essar Steel’s US$800 million counter-claim to be withdrawn, as they did not participate in the hearing.

Conclusion

In this case, no alternative calculations were put forward by the Respondent in defence of ArcelorMittal’s quantum claims. The Tribunal considered the evidence put forward by only one party and the lack of an alternative position did not preclude it from reaching a decision.

Case information

Claimant: ArcelorMittal USA LLC

Respondent: Essar Steel Ltd.

Case ref: ICC Case No. 22187/RD/MK

Tribunal: James H Carter (United States), President

Jean E Kalicki (United States), Arbitrator

Edward G Kehoe (United States), Arbitrator

 

For further information, please contact Louisa Plumb

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