The importance of identifying parties

On 16 July 2021 the Court of Appeal handed down Vale SA and others v Steinmetz and others [2021] EWCA Civ 1087. This case is an important reminder of the principle that, generally, only parties to an arbitration agreement will be bound by any resultant arbitral award. What follows here is a brief summary of the case, and a comment on the practical importance of identifying the parties to an arbitration agreement.

Background

Vale and BSGR entered into a joint venture agreement whereby BSGR sold 51% of its subsidiary, BSG Resources (Guinea) Ltd, to a wholly owned subsidiary of Vale. The price included ‘Initial Consideration’ of $500 million payable by Vale to BSGR. In fact, another company, Vale International, made the payment of the Initial Consideration. BSGR was owned by Nysco, and Nysco was owned by Balda. The beneficiaries of Balda were Mr Steinmetz and various others. It was common ground in this appeal that at least some of the Initial Consideration received by BSGR was transferred to Balda and Nysco. It was further assumed that any such part of the Initial Consideration that had passed on to Balda and Nysco could be successfully traced.

The reason for the joint venture agreement was that BSG Resources (Guinea) Ltd held valuable mining licenses from the Republic of Guinea. After the joint venture had been concluded the Government of Guinea revoked these licenses on the basis they had been procured by bribery. Revocation of the license gave rise to a claim by Vale against BSGR for rescission of the joint venture agreement for fraudulent misrepresentation. The matter was the subject of a significant arbitration, the result of which was that:

1) Vale was entitled to equitable rescission of the joint venture agreement; however,

2) the Initial Consideration could not be claimed as part of the rescission as it was paid to BSGR by a third party (Vale International); and, therefore,

3) Vale could not succeed in its claim in restitution.

It was held that Vale could claim the relevant sums by way of damages for fraudulent misrepresentation[1]. Notwithstanding the arbitral award, BSGR made no payment to Vale.

These proceedings

The claimant in these proceedings were Vale, Vale International, and another company. The defendants were Mr Steinmetz, Balda, Nysco, and other individuals. One of the claims brought by the claimants was a proprietary one for such parts of the Initial Consideration as was held by the defendants. The question on appeal was the effect of the arbitral award on any proprietary claim for such sums.

It was common ground that, if a contract is voidable for fraud, the innocent party’s right to rescind gives rise to an equity, such that the sums paid are impressed with a constructive trust (in these proceedings called a “rescission trust”). Such sums could, in principle, be recovered by the beneficiary of the rescission trust.

The defendants sought summary judgment against the proprietary claim. They did so on the basis that the arbitrators’ award dealt with the issue by holding that Vale had not paid the Initial Consideration, and therefore no rescission trust arose[2].

Issues on appeal

The narrow issue on appeal was whether Vale was bound by the arbitral decision in respect of the claims against the defendants such that no rescission trust has arisen.

Court of Appeal Judgment

The judgment of the Court was given by Males LJ (Bean and Lewis LJJ agreeing). As a preliminary point, it was noted that counsel for the defendants had accepted that the joint venture agreement had been validly rescinded by the decision of the arbitrators. Males LJ reserved his position on this point.

The Court of Appeal began from the elementary principle that an arbitrator cannot make an award which is binding on a third party which has not agreed to be bound by their decision. The question, then was what allowed the defendants (not being BSGR) to rely on the arbitral award between Vale and BSGR in defence of the claim? The defendants said this was because the claimants themselves had to rely on the award to make out the fact that the joint venture agreement had been rescinded, and that it was intrinsic to that rescission that Vale had no personal claim for restitution against BSGR of the Initial Consideration (and, thus, no proprietary claim).

The Court of Appeal held this was wrong. An award between A and B has no effect in proceedings between A and C because of the consensual nature of arbitration. Neither C has agreed to be bound by the award, nor has A agreed to be bound by the award in respect of a dispute with C. While A and B may agree to accept the decision of an arbitral tribunal as final between themselves, even if it is wrong, it is quite another thing to suggest that A agrees to be bound as such in respect of strangers.

Males LJ had regard to the recent decision of the Court of Appeal in Ward v Savill [2021] EWCA Civ 1378. In that case, the effect of rescission in proceedings between A and B was considered in the context of later proceedings between A and C. The Court of Appeal firmly held the rescission established in the earlier proceedings was not a legal fact binding on C in the later proceedings, but required to be proved. Males LJ went on to note that there is a distinct difference between, for example, a decree of divorce and rescission of a contract. A decree of divorce, made in the courts, affects the status of the divorcing parties against all the world. A rescission is purely a personal matter between the parties to that contract[3]. Applying these principles to the case on appeal, Males LJ held there was no basis to unseat the general rule that only those who consent to arbitration are bound. It made no difference that Vale was seeking to rely on the award; indeed it was only by virtue of a tactical concession of counsel for the defendants that it was assumed without argument that the rescission had validly occurred.

Alternatively, the defendants said they should succeed as the claim was brought in abuse of process: that is, it was an abuse for Vale to rely on the award for the rescission of the joint venture agreement but not also accept the burden of that decision in recognising it had no restitutionary claim against BSGR. The Court of Appeal rejected this argument. There was no suggestion of a collateral attack on the award. In any event, this is a case where it is being assumed that the defendants had received a portion of the Initial Consideration at least on notice of the fraud. As such, in the context of the defendants having that notice, a suggestion of abuse of process was far-fetched.

Comment

This case makes clear the importance of correctly identifying and binding parties to an arbitration. Matters which are thought to be final as a result of an award might well be the subject of subsequent litigation. Nowhere is this more so than claims involving tracing and restitution, where the tendrils of equity may reach far into a complex corporate structure. Parties to an arbitration agreement should be careful to ensure they understand who is, and who is not, bound by the arbitral agreement. They could be in for a shock if they omit to include everyone who could successfully bring (or be subject of) a claim.

[1] In this appeal the Court of Appeal found this to be inconsistent with the finding that there could not be a successful restitutionary claim.

[2] The case separately considered the issue of whether the beneficiary of the rescission trust was in fact Vale or Vale International. As a result of the outcome of this appeal, the Court of Appeal left the matter to be considered at the trial.

[3] It is interesting to consider how this line of reasoning would apply in a case raising issues concerning purely proprietary rights.