Double recovery as a challenge to the enforcement of an arbitral award

In brief

The Victorian Court of Appeal has refused an application for leave to appeal against the enforcement of an arbitral award. The applicants applied for leave to appeal on the basis that enforcement of the award would be contrary to public policy as it would give effect to 'double recovery' by the respondents. Partner Peter O'Donahoo, Managing Associate Hilary Birks and Lawyer Luke Callaghan report.

Background

The applicants (Mr Gutnick and Legend International Holdings) applied for leave to appeal from orders made in favour of the respondents (Indian Farmers Fertiliser Cooperative Ltd and Kisan International Trading FZE) for the enforcement of a foreign arbitral award in the Victorian Supreme Court.²

The arbitration related to a transaction between the parties in which:

• Indian Farmers Fertiliser Cooperative Ltd and Legend International Holdings entered into a Share Options Agreement, pursuant to which the former acquired the option to purchase shares in Legend International Holdings; and
• Indian Farmers Fertiliser Cooperative Ltd and Mr Gutnick entered into a Shareholders' Agreement, with an affiliate Deed of Adherence with Kisan International Trading FZE, designed to regulate the parties' relationship as shareholders in Legend International Holdings.

Pursuant to the arrangements agreed between the parties, the respondents purchased 20 million shares in Legend International Holdings for a total price of US$40.4 million.

The arbitral panel found that the applicants had induced the respondents to purchase the shares in Legend International Holdings by fraudulent misrepresentation. The arbitral award declared that the relevant agreements be rescinded ab initio and ordered that the applicants return the purchase price and pay interest and costs (the Award).

The respondents applied to the Victorian Supreme Court for the Award to be enforced under section 8(2) of the Act.³ His Honour Justice Croft rejected the applicants' argument that enforcement of the Award should be refused on the grounds of public policy and the applicants sought leave to appeal from that decision.

The unsuccessful application for leave to appeal

In seeking leave to appeal, the applicants submitted that the enforcement of the Award would be contrary to public policy as enforcement would lead to double recovery.⁴ The applicants argued that the respondents would benefit from double recovery because the arbitral tribunal failed to make consequential orders creating an obligation to retransfer the relevant shares in Legend International Holdings to the applicants. The applicants submitted that this meant that the respondents benefited from double recovery in that they were effectively entitled to repayment of the purchase price without being obliged to retransfer the relevant shares.

The Court of Appeal considered two main issues:

• whether double recovery would be a ground for refusal of an application to enforce an arbitral award on the basis that it was contrary to public policy under the Act; and
• the requirements for rescission of a contract (ie, whether the failure of the arbitral tribunal to make a specific order for the retransfer of the shares meant that the contracts were not in fact rescinded).

In relation to the first issue, the Court of Appeal referred to the judgment of the Full Federal Court in TCL Air Conditioner (Zhonghsan) Co Ltd v Castel Electronics Pty Ltd,⁵ noting that the 'public policy' defence was to be construed narrowly.

At first instance, Justice Croft held that an arbitral award that permitted double recovery would be contrary to public policy under Australian law.⁶ The respondents did not dispute this finding. However, Justice Croft found that the Award would not, in fact, result in double recovery.

On appeal, the Court of Appeal cited Justice Croft's reasoning in relation to an arbitral enforcement decision, noting that the court has a limited role under the Act, which, in this case, meant that the court was not permitted to determine whether the arbitral tribunal had correctly applied the doctrine of rescission under the applicable governing law.⁷ However, the Court of Appeal noted that it was necessary to identify the effect of the declaration of rescission under the governing law of the contracts, which, in this case, was English law.⁸

The Court of Appeal held that the Award did constitute an effective rescission of the relevant contracts, stating:⁹

Rescission is the act of the parties. A court order is 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.

 

The Court of Appeal recognised that rescission had the effect of vesting the equitable rights to the shares in the applicants and that in determining whether the Award is contrary to public policy, the court must consider the effect of an order for enforcement of that award. With reference to s8(2) of the Act, the court recognised that an award may be enforced as if the award was a judgment or order of the court. Accordingly, as the Award had become, in effect, an order of the court, 'all the powers of the Court in aid of its proper execution become available', including powers to prevent double recovery.¹⁰ The court also recognised its equitable jurisdiction to prevent double recovery under s29 of the Supreme Court Act 1986 (Vic) as well as the court's inherent powers to prevent abuse of process.

Ultimately, the court accepted the respondents' contention that the effect of the Award (as enforced) was that both the Share Options Agreement and the Shareholders' Agreement were set aside ab initio, restoring the parties to the positions they were in before they entered into the agreements. They also accepted the respondents' contention that the applicants would have had to prove that the primary declaration of rescission required a consequential order providing for the revesting of the shares and that the applicants failed to do so. The Court of Appeal found that, for these reasons, there was no risk of double recovery and the Award was not contrary to public policy.¹¹

On that basis, the applicants' application for leave to appeal was refused, having no real prospect of success.¹²

Conclusions

The decision is an interesting example of circumstances in which an Australian court may find that enforcement of an award would be in breach of public policy under the Act. The outcome is consistent with recent developments in Australian case law in which courts have refused challenges to the enforcement of arbitral awards, with reference to the objects of the Act, including Australia's obligations under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the UNCITRAL Model Law on International Commercial Arbitration.