English Court of Appeal finds that third parties may not rely on an arbitration award to which they were not a party in defence of restitutionary claim
This decision from the English Court of Appeal confirms that an arbitral award will not be binding on, and cannot by relied upon by, a third party who was ‘a stranger’ to the arbitration.
Vale.S.A. & Ors v Benjamin Steinmetz & Ors [2020] EWHC 3501 (Comm)
Facts
In 2010, Vale S.A. ("Vale") entered into a joint venture agreement (the "JVA") with BSG Resources Ltd (BSGR) in order to participate in valuable mining licences from the Republic of Guinea that were held by BSG Resources (Guinea) Ltd, a wholly owned subsidiary of BSGR. Under the JVA, BSGR transferred 51% of BSG Resources (Guinea) Ltd to a wholly owned subsidiary of Vale in exchange for USD500m (the "Initial Consideration").
Vale instructed a subsidiary company, Vale International S.A., to pay the Initial Consideration to BSGR. Upon receipt, BSGR transferred at least part of the Initial Consideration to its parent companies (the "Parent Companies").
After payment of the Initial Consideration, the Government of Guinea revoked the mining licences on the basis that they had been procured by bribery. Vale then commenced arbitration proceedings against BSGR under the JVA claiming:
- Recission of the JVA; and
- Return of the Initial Consideration.
The LCIA award
In 2019, an LCIA Tribunal upheld Vale’s claim that the JVA was entered into as a result of BSGR’s fraudulent misrepresentations and found that the JVA was rescinded. However, the Tribunal rejected Vale’s claim in restitution for the return of the Initial Consideration on the basis that the Initial Consideration had not been paid by Vale, but by Vale International S.A..
Although Vale’s claim in restitution failed, the Tribunal nevertheless awarded Vale damages, which included USD500m in respect of the Initial Consideration, on the basis that Vale had suffered losses in reliance upon BSGR’s deceit. At the time of this judgment, BSGR had not paid any part of the sum awarded.
The Proprietary Claim
Vale commenced proceedings in the English High Court against the Parent Companies on the basis that:
- the Parent Companies had received at least some of the Initial Consideration;
- the JVA was entered into as a result of fraudulent misrepresentations made by BSGR;
- the Tribunal had found that the JVA was rescinded due to the fraudulent misrepresentation; and
- recission of the JVA created a ‘recission trust’, under which the Parent Companies held the Initial Consideration received by them for the benefit of Vale.
In defence, the Parent Companies sought to rely on the LCIA award. They argued that as the Tribunal had already found that Vale was not entitled to restitution from BSGR, no trust had been established, so the proprietary claim against them must fail.
At first instance, the High Court found that the Parent Companies could not rely on the LCIA award. Mr Justice Baker held that ‘Just as [the Parent Companies] as non-parties were not bound by the arbitrators’ findings (it has not been suggested that they should be regarded as privies of BSGR for the purpose of any res judicata argument), neither was Vale bound by the arbitrators view that the Initial Consideration payment was not in law the conferring of a benefit on BSGR by Vale’. Furthermore, the creation of a trust upon recission of the JVA did not depend on any determination by the arbitrators; rather, such a trust arose by operation of law.
The Court of Appeal’s decision
The Court of Appeal was asked to decide whether Vale was bound by, or whether the Parent Companies could take the benefit of, the Tribunal’s award in respect of the proprietary claim for the purpose of the claim against the Parent Companies by Vale.
The Court of Appeal agreed with the High Court that the LCIA award was not binding on parties that had not been party to the original arbitration. Giving judgment for the Court, Lord Justice Males explained that ‘It is elementary that an arbitrator cannot make an award which is binding on third parties who have not agreed to be bound by his decision.’ It would be different if a third party could be considered to be a ‘privy’ of one of the parties, but this did not apply in this case.
Males LJ went on to explain that: ‘Just as C has not agreed to be bound by the decision of arbitrators in an arbitration between A and B, neither has A agreed to be bound by any such decision in any dispute he may have with C’. Following this logic, the Court of Appeal held that if the Parent Companies were not bound by the LCIA award, then neither could they make the argument here that Vale should be bound by the Tribunal’s decision that Vale had no claim in restitution for the return of the Initial Consideration. It was up to Vale to demonstrate, if it could, that it had a valid proprietary claim against the Parent Companies based (if necessary) on a claim in restitution against BSGR.
Key Practice Points
This decision helpfully illustrates the ‘elementary’ principle of arbitration that arbitral awards are not binding on third parties who have not agreed to be bound by them. However, it is important to note that this works both ways: just as a third party may not be bound by the outcome of a process to which they were not a party, nor can they rely on the outcome of that process as binding a claimant who was a party in separate proceedings. That is not to say that the earlier award, if it is available, may not be relevant in later proceedings, but the basis on which it is deployed will need to be carefully considered.
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