The Court of Appeal of Victoria refuses an application for leave to appeal against the enforcement of an arbitral award

On 9 February 2016, the Court of Appeal of Victoria has refused an application for leave to appeal against the enforcement of an arbitral award, rejecting the applicants’ argument that enforcement would be contrary to public policy as it would give effect to “double recovery” by the respondents (Joseph Isaac Gutnick & Anor v. Indian Farmers Fertiliser Cooperative Ltd & Anor [2016] VSCA 5).

Factual Background

On 14 July 2008, Indian Farmers Fertiliser Cooperative Ltd (“IFFCO”) and Legend International Holdings Inc (“Legend”) entered into a Share Options Agreement whereby IFFCO acquired the option to purchase shares in Legend. On the same day, IFFCO and Joseph Isaac Gutnick (“Gutnick”) entered into a Shareholders’ Agreement in order to regulate their relationship as shareholders in Legend. By an Affiliate Deed of Adherence, Kisan International Trading Fze (“KIT”) agreed to be bound by the terms of the Shareholders’ Agreement. Pursuant to the terms of these agreements, IFFCO and KIT purchased 20 million shares in Legend for a total price of USD 40.4 million.

The parties later fell into dispute, and subsequently referred their disputes to arbitration. The seat of the arbitration was Singapore, and the governing law of the agreements was English law.

On 7 May 2015, the Tribunal rendered its final award, finding that Gutnick and Legend (the applicants before the Court of Appeal of Victoria) were found to have induced, by fraudulent misrepresentation, the purchase by IFFCO and KIT (the respondents before the Court of Appeal of Victoria) of the relevant shares in Legend by their entry into the Share Options Agreement and Shareholders’ Agreement. The Tribunal declared that the Shareholders’ Agreement and the Share Options Agreement be rescinded and ordered Gutnick and Legend to return the purchase price with interest and costs to IFFCO and KIT.

On 21 December 2015, the judge in charge of the Arbitration List in the Commercial Court acceded to an application by IFFCO and KIT, under Section 8(2) of the International Arbitration Act 1974 (Cth) (“the Act”) to enforce the award.

Subsequently, Gutnick and Legend sought leave to appeal from the orders made by the judge before the Court of Appeal of Victoria. Before the judge and the Court of Appeal, the applicants contended that the award should not be enforced because enforcement would be contrary to public policy. In making that submission, the applicants relied upon Section 8(7)(b) of the Act, which provides: “In any proceedings in which the enforcement of a foreign award by virtue of this Part is sought, the court may refuse to enforce the award if it finds that: … (b) to enforce the award would be contrary to public policy.”

In support of their application for leave to appeal, the applicants contended that the judge departed from the established understanding of the equitable doctrine of rescission in respect of executed transactions by not recognizing that rescission is not achieved until specific orders are made unwinding the transaction. Accordingly, the judge ought to have held that the award provided for double recovery by the respondents (i.e., that the respondents were entitled to repayment of the purchase price without being obliged to retransfer the relevant shares), and that to enforce the award would be contrary to the public policy of Australia, for the purposes of Section 8(7)(b) of the Act.

The Court of Appeal’s Order

The questions before the Court of Appeal were whether double recovery would be a ground for refusal of an application to enforce an award on the basis that it was contrary to public policy under the Act, and the effect of the Tribunal’s declaration of rescission under English law, i.e., the law governing the agreements.

The Court of Appeal stated that “public policy” was to be construed narrowly as referring to the most basic, fundamental principles of morality and justice in the jurisdiction. The Court of Appeal noted that the respondents did not dispute the judge’s finding that an award that permitted double recovery would be contrary to “public policy”.

Further, the Court of Appeal stated that both parties accepted that the judge had correctly described the role of a court when exercising its jurisdiction under the Act to enforce a foreign arbitral award, as “not extend[ing] to determining substantive disputes between the parties as to fact or law, or otherwise reviewing the determination of an arbitral tribunal”.

With respect to the effect of the declaration of rescission under English law, the Court of Appeal accepted the contention of the respondents that it is simply not possible either for a court order or an arbitral award to perfect a party’s legal ownership of shares. Rescission was the act of the parties. A court order was not a condition precedent to the effectiveness of rescission. As much as a court does is to “confirm” the act of the rescinding party: to declare that the anterior act of rescission was justified and is valid. A court order may also make ancillary or consequential orders that may be needed to restore the parties to the status quo ante.

Accordingly, in so far as the act of rescission, confirmed in the award, had the effect of vesting equitable rights to the shares in the applicants, there was no basis for saying that the declaration was a nullity until the applicants had been restored in their legal title.

Further, in determining whether the effect of the award was contrary to the public policy of Australia, the Court of Appeal found it necessary consider the effect of an order by a court under the Act. The Court of Appeal referred to Section 8(2) of the Act which provides that “a foreign award may be enforced in a court of a State or Territory as if the award were a judgment or order of that court”. In compliance with Section 8(2), the Court of Appeal stated that the order of the judge was that the award “be enforced as if it were a judgment or order of the Supreme Court of Victoria”. Thereafter, the order incorporated the exact provisions of the award. Given that the award has become in effect a court order, all the powers of the court in aid of its proper execution became available. Those powers included powers to prevent double recovery.

The Court of Appeal also referred to Section 29 of the Supreme Court Act 1986, which provided it with equitable jurisdiction to restrain a plaintiff from recovering more than the sum claimed, as well as its inherent powers to prevent any abuse of its process and to enable it to make some order which would prevent a plaintiff from proceeding twice to execution.

The Court of Appeal accepted the contention of the respondents that the effect of the award was that both the Shareholders’ Agreement and the Share Options Agreement were set aside ab initio and that the parties were restored to the positions that they were in before the agreements were entered into. The Court of Appeal also accepted the contention of the respondents that for the applicants to have made good the proposition that enforcement of the award would be contrary to public policy, they would have had to have established that the primary declaration of rescission would or should not have been made under the domestic law of Australia or England without express consequential orders providing for the revesting of the shares.

The Court of Appeal stated that when the tribunal made its award declaring that the agreements had been rescinded, it did not declare that the respondents were entitled to retain ownership of the shares; nor did it say anything that implied such an entitlement. The Court of Appeal, therefore, considered that the award conformed with the public policy of Australia.

Accordingly, the Court of Appeal refused the applicants’ application for leave to appeal.

Amore detailed summary and an excerpt of this decision, indexed and searchable according to the list of topics published in http://www.newyorkconvention.org/court+decisions/description will be published in the 2016 volume of the Yearbook Commercial Arbitration, published by the International Council of Commercial Arbitration (ICCA).

Source: Original Order of the Court of Appeal of Victoria available at http://www.transnational-dispute-management.com