Australia: Enforcement Of Foreign Arbitration Awards And The Public Policy Exception

In the recent matter of Gutnick v Indian Farmers Fertiliser Cooperative Ltd [2016] VSCA 5, the Victorian Court of Appeal enforced a Singapore arbitration award against Mr Gutnick and his company, rejecting the submissions made by the Gutnick parties that the award should not be enforced on grounds of public policy.

What this decision means for you

  • Arbitrating parties should carefully consider how the proposed wording of arbitration orders may effect enforcement in foreign jurisdictions. In the Gutnick case, the omission of consequential orders by the arbitrator caused the claimant companies to suffer significant extra expense and delay during the enforcement process
  • When drafting arbitration clauses in commercial contracts the parties should consider the appropriate venue for arbitration and where any arbitration decision is likely to be enforced
  • When proceeding to arbitration always consider the commercial realities. Namely, how and where will any arbitration order be enforced?

The arbitration

The arbitration concerned a share purchase dispute, in which the claimant companies invested approximately AUD 40 million in a phosphate mining company controlled by Mr Gutnick.

The investors alleged they were induced by Mr Gutnick's misrepresentations to make the investments by entering into a Shareholders Agreement and a Share Options Agreement (the Agreements). The Singapore Arbitration Centre (the tribunal) applied English law, as required by the Agreements, and upheld the investors' misrepresentation claims.The tribunal declared that the Agreements were rescinded and ordered the Gutnick parties to refund the share purchase price together with interest and costs.

The High Court of Singapore granted the investors leave to enforce the arbitral award as a judgment of that court. Judgment was entered in the Singapore court but enforcement was unsuccessful.

First instance decision

The investors applied to Justice Croft of the Victorian Supreme Court to enforce the tribunal's arbitration award under section 8 of the International Arbitration Act 1974 (Cth) (the Act). The Gutnick parties resisted the application for enforcement, seeking to rely on section 8(7)(b) of the Act, which allows a Court to refuse to enforce the award where enforcement would be contrary to public policy.

In the proceeding before Justice Croft the parties agreed that the tribunal had erred in law by omitting to make consequential orders for transfer of the legal title of the shares back to the Gutnick company concurrently with the refund of the purchase price. However, the parties also conceded that the error of law made by the tribunal was not a relevant consideration in an application under section 8 to enforce the award.

Rather, the Gutnick parties argued that because of the arbitrator's failure to make consequential orders for the return of the shares, the investors would obtain "double recovery" if the Court enforced the arbitral award. The Gutnick parties contended that court-sanctioned double recovery would be contrary to the public policy of Australia.

Justice Croft decided that double recovery could be avoided and enforced the arbitral award. The Gutnick parties applied unsuccessfully to the Victorian Court of Appeal for leave to appeal.

Construction of the section 8 "public policy" provision

The appeal court applied a recent Full Federal Court decision which states that the "public policy" defence to enforcement is to be applied narrowly and is only available in circumstances where "fundamental norms of justice and fairness are breached" and "real unfairness and real practical injustice" is caused by enforcement1. Consistent with previous decisions, the appeal court in Gutnick otherwise shied away from more precisely defining the parameters of the public policy defence to enforcement.

The appeal court decided it is necessary to consider, among other things, the effect that enforcing the arbitration award will have on the parties. The appeal court accepted as a general proposition that the enforcement of an arbitral award which unavoidably resulted in double recovery would offend Australian public policy.

Ultimately, the appeal court affirmed Justice Croft's view that the enforcement of the award against the Gutnick parties would not result in double recovery in this instance.

No double recovery

It is settled law that for rescission to be effective each party must be rehabilitated and restored to the position they occupied before the rescinded contract was made. The Gutnick parties argued that enforcement of the award would not achieve rehabilitation because ownership of the shares would not be returned to the vendors.

The trial and appeal courts both decided that the arbitrator's declaration of rescission achieved rehabilitation, even without the consequential order for return of the shares, because the declaration resulted in the investors holding the shares on trust for the Gutnick parties.

The appeal court considered that double recovery could be avoided through appropriate supervision of the execution process. The appeal court reasoned that once the section 8 order was made, the arbitral order effectively became an order of the Supreme Court of Victoria and the court then had at its disposal all of its powers to aid the proper execution of the order and avoid double recovery. These powers include:

  • its equitable jurisdiction to restrain a plaintiff from recovering more than the sum claimed; and
  • its inherent powers to prevent any abuse of its processes such as the plaintiff proceeding twice to execution.

The appeal court therefore decided that the appeal had no prospects of success and dismissed the application for leave to appeal.

Implication

The Victorian Court of Appeal has followed the recent trend by Australian courts of supporting commercial arbitration and the enforcement of international arbitral awards.

This decision confirms that:

  • Courts that will analyse the effect of the proposed section 8 order to determine whether the enforcement of the arbitral award will offend Australian public policy;
  • Courts will not decline to enforce an award because the award is improperly worded, unclear as to its precise effect or otherwise difficult to enforce. The courts will instead prefer to enforce the award under section 8 and then invoke their powers to supervise the just execution of the award; and
  • If a case ever arises where the enforcement of an arbitral award necessarily involves double recovery, the court will probably decline to enforce the arbitral award on public policy grounds.

Footnotes

1 TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361

Enforcement Of Foreign Arbitration Awards And The Public Policy Exception

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