Commercial Law Update - Court of Appeal rejects public policy defence to enforcement of international arbitration award

Commercial Arbitration
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In keeping with its recent strong support of international arbitration, the Victorian Court of Appeal swiftly heard and rejected an application for leave to appeal in which Joseph Gutnick sought to resist enforcement in Victoria of an arbitration award made in Singapore.

The claimant companies (incorporated in India and the UAE), invested in a phosphate mining company controlled by Mr Gutnick through a pair of agreements made in 2008.  They commenced an arbitration in the Singapore International Arbitration Centre claiming that they were induced to make the investments by misrepresentations made by Mr Gutnick.  In May 2015, the tribunal upheld those claims and made an award that:

 -   declared the share purchase agreements to have been rescinded; and

 -   ordered Mr Gutnick and his company to refund the amount invested, totalling US$40 million, plus interest.

In October 2015, the claimants applied to the Victorian Supreme Court to enforce the award under s 8 of the International Arbitration Act 1974 (Cth), which gives effect to the New York Convention on recognition and enforcement of arbitral awards.  The Gutnick parties resisted the application on the basis that enforcement of the award would be contrary to public policy.  They contended that, because the arbitral award required repayment of the purchase moneys, but did not include an order requiring the claimants to return their purchased shares, enforcement of the arbitral award would result in the claimants obtaining double recovery – that is, being refunded their investment while keeping the shares they had acquired.  At first instance, Croft J, the judge in charge of the Commercial Court’s arbitration list, rejected the public policy defence and granted enforcement of the award.  Justice Croft accepted that, if an arbitral award would result in the successful party obtaining double recovery, then enforcement of the award would be contrary to public policy.  But he held that the award did not result in double recovery.  The judgment was given on 21 December 2015, and the next day Croft J granted a stay of execution until the first week after the court vacation, on the Gutnick parties’ undertaking to apply expeditiously for leave to appeal.

During January 2016, the Gutnick parties applied to the Court of Appeal for leave to appeal, and to continue a stay of execution until the hearing and determination of the appeal.  Upon the reopening of the court on 1 February, the stay application was listed for hearing on Friday, 5 February.  Later that week, the court also listed the full hearing of the application for leave to appeal, and the appeal itself, for that Friday.

The appeal was then heard on Friday, 5 February and judgment was given the following Tuesday.  The Court of Appeal rejected the public policy defence, on two main grounds. 

First, although the arbitral tribunal had not ordered the claimants to transfer back their purchased shares, it was implicit in the tribunal’s declaration that the agreements had been validly rescinded that both parties must give back the benefits they had each received under the rescinded contracts.  The effect of that declaration of rescission, without more, was that the equitable title to the shares had passed back to the Gutnick parties.  The court rejected their argument that, unless the arbitral award included specific orders for the retransfer of legal title to the shares as well as for the repayment of the moneys invested, its declaration of rescission was invalid and ineffective.

Secondly, the Court of Appeal had regard to the effect of an order under s 8(2) of the IAA, which is to enforce the award “as if the award were a judgment or order of the court”.  The consequence is that, upon the court making an order that embodies the terms of the award, all of the court’s enforcement powers then become available.  Importantly, those powers include the court’s inherent jurisdiction to prevent a successful party from obtaining double recovery.  In granting execution of its judgment against the Gutnick parties’ assets, the court would ensure that no double recovery occurs.  Viewed in the context of the court’s inherent powers to prevent double recovery, it could not be said that enforcement of the award in the terms made by the tribunal would be contrary to public policy.

Both Croft J and the Court of Appeal applied the narrow formulation of the public policy defence that has become firmly established in Australia since the Full Federal Court’s decision in TCL v Castel Electronics in 2014.  Indeed, that formulation was not contested by the parties in these proceedings.  Most notably, the Court of Appeal maintained its strong recent stance of supporting commercial arbitration and the enforcement of arbitral awards, both by bringing the appeal on rapidly (thus reducing the delay in enforcement of the award), and by dismissing the application for leave to appeal on the basis that the proposed appeal had no real prospect of success.  In so doing, the court has sent a strong signal that it will not lightly entertain attempts by unsuccessful parties to invoke the public policy defence as a means to delay enforcement of international arbitration awards.

Chris Horan SC and Tom Clarke of List G Barristers appeared for the claimants on the appeal, and Chris also appeared before Croft J at first instance (led by Neil Young QC at both stages).

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Tom Clarke practises in commercial, regulatory and public law, particularly in energy, commercial arbitration, financial services and private international law.

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