Mauritius: What the Privy Council is looking into in the Betamax affair

This week saw hearings for Betamax's appeal against the Supreme Court decision to set aside its arbitration decision at the SIAC. So how did a budding politically-connected monopoly to transport petroleum to Mauritius end up being derailed and what is it that is being decided at the Privy Council?

How Betamax got the contract

The Betamax story, like so many others, began with a sense of misplaced nationalism. In March 2006 the then-government headed by Navin Ramgoolam of the Labour Party established a steering committee to look into ways to further develop the Mauritius Shipping Corporation Ltd (MSCL). On the ways it came up with was for the MCSL to get its own ship to transport petroleum imports for Mauritius. The following year, another company, Maritime Logistics and Trade Consulting (MLTC) conducted a study submitted on 25 May 2007 arguing that Mauritius getting its own oil tanker would boost Mauritius' shipping activities, reduce dependence on foreign shipping firms for crucial oil imports and would end up saving the government between $12.6 million and $13.5 million.

On 23 October 2007, the private sector lobby, the Mauritius Chamber of Commerce and Industry (MCCI) sent an email to its members to elicit interest in the government's proposal to get a 47,000 DWT Mauritian tanker to transport oil from its supplier in Mangalore in India. One of the firms to respond to the MCCI's email was the Bhunjun Group, a 20-company conglomerate specializing in construction and real estate and whose CEO Veekram Bhunjun, is the brother-in-law of then-cabinet minister Rajesh Jeetah. On 4 March 2008 the public infrastructure ministry sent the Bhunjun Group a request to officially lodge an expression of interest in the project, which it did on 28 March 2008.

What the Bhunjun Group proposed was this: one of its subsidiary companies Betonix Ltd - a ready-mix concrete company - would establish a joint venture with a Singaporean firm Executive Ship Management Pte Ltd (ESM) to launch a new company called Betamax, in which Bhunjun's Betonix would own 85 percent of the stake and ESM the remaining 15%, to own and operate a tanker, the Red Eagle, which would be built by a shipyard in South Korea. In January 2009, the government's State Trading Corporation (STC), which imports Mauritius' oil, agreed "in principle" to sign the contract with Betamax, which was formally established on 6 May 2009.

That same day, another set of manoeuvers was underway: On 28 April 2009 the Attorney-General's Office warned the STC that since the STC had not got the approval of the Central Procurement Board (that allocates major public contracts) before agreeing to sign the Betamax deal, it its view, "unless the approval of the Central procurement Board is obtained, the STC will be precluded from signing the contract". On the same day that Betamax was established, the STC's board ignored the legal warning and simply approved the deal. To lend more credence to the deal, the accounting firm BDO in July 2009 came up with its own report stating that the rates being proposed by Betamax were "more competitive" than those the government was being charged by freight companies, Pratibha and ST Shipping, at the time. On 27 November 2009, the STC signed a 15-year contract with Betamax.

The terms and how Betamax lost the contract

What the STC is now arguing is that the deal that the Labour Party government signed with Betamax was too favorable to Bhunjun's company. According to the terms of the deal, the STC was bound to pay Betamax for the full 100 percent of its freight capacity, regardless of whether the vessel was full or not. This was something that Betamax insisted on since 7 April 2009. What the STC argued was that instead of buying a 53,000 DWT tanker, the Red Eagle that Betamax bought was a 75,000 DWT tanker. Larger capacity means larger payments each trip. Before signing the contract in November 2009, the STC guaranteed to make these payments to Betamax. Another condition was that over the course of the 15-year contract, the amount paid to Betamax would escalate: by 1% for the first five years, 1.5% for the second five years and 2% for the remaining five years. What that meant was that although Betamax was paid $17.6 million for its first year that amount only grow over time.

Other conditions were that the STC would also pay for other costs such as port and delay charges, demurrage fees and footing the bill for excess cargo if other ships were needed. These conditions did not slip the notice of the Singapore International Arbitration Centre (SIAC) which although it backed the legality of the Betamax deal, noted nonetheless that "the tribunal accepts that the CoA was unusual, and more akin to a time charter than a contract of affreightment". Taken together, over the course of the 15-year contract, Betamax looked to get $290 million from the STC regardless of market freight rates during that time. By the time the Betamax deal came to an end, between May 2011 and January 2015, Betamax had already been paid $125.2 million.

The new MSM-led government in 2015 wanted to get rid of the Betamax contract. In a series of meetings with Bhunjun and his lawyers on 9, 14 and 22 January both sides refused to back down, leading the government on 30 January 2015 that it had dumped the Betamax deal. The government had also tapped a Dubai-based law firm, Stephenson Harwood to go over the contract and find a way to give the government an out. According to then-Attorney General Ravi Yerrigadoo speaking in parliament on 19 June 2017, what the Harwood report found was that, "STC had overpaid an amount in the range of $45 million to $53 million" for oil shipped by Betamax as compared to it had gone through the market. This is the opposite of the good deal that the BDO and the MLTC had previously touted the Betamax deal to be. But although it criticized the terms of the Betamax deal, the findings of the Harwood report did not extend to scrapping the deal entirely.

The final break was to come on 4 February 2015. The lawyers for Betamax, Legis Consult, sent a letter to the STC on 2 February saying that Betamax was due to sail back to Mangalore to pick up another shipment of oil two days later. If it did not hear back from the STC, the Red Eagle would continue as planned assuming that the deal still stood. On 4 February 2015, the STC sent a missive to Betamax announcing that it was "unable to avail itself of your services for the transport of petroleum products from New Mangalore any longer". The next day, Betamax pressed for the STC to hold up its end of the contract which STC refused to do, reiterating its decision in another letter on 23 February. On 7 April 2015, Betamax formally issued a legal notice saying that it was terminating the contract because the STC was not fulfilling its end and on 15 May 2015 lodged a case at the SIAC.

What the SIAC decided

In effect, what Betamax wants the Privy Council to now do is put into effect the deci- sion of Michael Pryles, the arbitrator at SIAC who on 5 June 2017 decided to award Betamax Rs4.5 billion for the STC and government terminating Betamax's contract. This was after the charges for conspiracy that the government had charged Bhunjun, Anil Bachoo in connection with the Betamax deal were dropped in 2016 for lack of evidence.

What both STC and Betamax agreed to at the SIAC was that the Betamax deal was not approved by the Central Procurement Board (CPB). The difference was what that meant in the context of the Betamax deal: what the STC argued was that since the deal was not approved by the CPB as required under the Public procurement Act 2006, it was an illegal contract that could not be enforced, that it was a conspiracy for the state to pay Betamax and that since the government decided to terminate the Betamax contract on 30 January 2015, the STC had no choice but to comply as a matter of public policy under article 1148 of the Code Civil of Mauritius. What Betamax argued was that the deal fell under a regulation (GN No.68 of 2009) passed in June 2009 (the same year that the contract was signed) that exempted the STC from having to pass through the CPB for certain types of major contracts and that therefore the contract was valid even though it did not pass through the procedures in the Public Procurement Act. The SIAC backed Betamax's version of the case and awarded Betamax the damages.

What the Supreme Court Decided

Shorn of all its legal verbiage, the basis of the Supreme Court's decision to set aside the SIAC's decision on 31 May 2019 is actually relatively simple. And this is what is at the crux of Betamax's appeal at the Privy Council to overrule the Supreme Court decision as well.

Unlike what the SIAC had found, the Supreme Court reached the opposite conclusion: that the 2009 regulations did not exempt the STC from having to get the Betamax contract approved by the CPB. The 2009 regulations also contained a section 2A which stated that, "Nothing in these regulations shall be construed as excluding the application of the Act to a public body referred to in the First Schedule to these regulations and the Schedule to the Act in respect of a procurement contract to which the public body intends to be a party and which is specified in column 2 of the Schedule to the Act." What the schedule of the Public Procurement Act states is that the STC as a public body has to pass through the CPB as laid down in the Public Procurement Act for contracts above Rs100 million for 'goods'.

And how are 'goods' defined in the Public Procurement Act? "Every kind and description including commodities, raw materials, manufactured products and equipment, industrial plant, objects in solid, liquid or gaseous form, electricity, as well as services incidental to the supply of the goods such as freight and insurance". Since the contract with Betamax was essentially a contract for freight, transporting oil from suppliers in India to Mauritius, it qualified as a contract for "goods" above Rs100 million and therefore had to pass through the CPB. That the STC was not excluded from this requirement is what section 2 A of the 2009 regulations themselves said. Therefore, since the contract did not pass through the CPB, as the Public Procurement Act requires, the Betamax contract itself, the court ruled, was fundamentally illegal. And therefore, section 39 the Mauritius International Arbitration Act 2008 allowed the court to set aside the SIAC's decision.

Ultimately, whether or not the regulations really exempted the STC from having to pass through the CPB before giving the contract to Betamax back in 2009 is what is the meat of the matter at the case currently underway at the Privy Council. This is the fundamental question that London will have decide in one of the largest claims for damages against the Mauritian state in its history.

Key Dates in Betamax Affair

MARCH 2006: Government sets up steering committee to promote Mauritian shipping.

MARCH 2007: Maritime Logistics and Trade Consulting recommends Mauritius getting its own oil tanker to save money on oil shipping costs.

OCTOBER 2007: MCCI sends out email to its members to elicit interest of Mauritian companies to buy their own oil tanker.

4 MARCH 2008: Ministry of Public Infrastructure sends request to Bhunjun Group, headed by Veekram Bhunjun brother-in-law of then-minister Rajesh Jeetah to submit an expression of interest.

28 MARCH 2008: Bhunjun Group lodges expression of interest in the project.

JANUARY 2009: State Trading Corporation agrees "in principle" to sign contract with Bhunjun Group.

28 APRIL 2009: Attorney-General's Office warns STC not to sign contract without approval of Central Procurement Board.

6 MAY 2009: Bhunjun Group officially establishes Betamax as a joint venture with Singaporean firm. On the same day, board of STC approves Betamax's proposal.

JUNE 2009: Government passes regulation GN.68 that exempts STC from Public Procurement laws for certain types of contracts.

27 NOVEMBER 2009: STC signs 15-year contract with Betamax.

JANUARY 2015: New government starts talks with Betamax and Veekram Bhunjun to review Betamax contract.

30 JANUARY 2015: Cabinet announces its scrapping Betamax deal.

23 FEBRUARY 2015: STC informs Betamax its scrapping the deal.

7 APRIL 2015: Betamax issues legal notice saying it's terminating the contract due to non-performance by STC.

15 MAY 2015: Betamax lodges case at the Singapore International Arbitration Centre.

NOVEMBER 2016: State prosecutor drops charges of conspiracy in Betamax deal against Veekram Bhunjun and Anil Bachoo for lack of evidence.

5 JUNE 2017: SIAC awards Betamax Rs4.5 billion in damages.

31 MAY 2019: Supreme Court rules Betamax contract 'illegal' and sets aside SIAC award.

JANUARY 2021: Hearings at Privy Council after Betamax appeals Supreme Court decision.

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