Lloyd's Maritime and Commercial Law Quarterly
TRAVERSING SHROUDED VALES—RESCINDING CONTRACTS DESPITE THE PRESENCE OF AN ARBITRATION AWARD IN A THIRD-PARTY SITUATION
Edwin TEONG Ying Keat*
Vale v Steinmetz
It is trite law that an arbitral award between A and B binds both parties.1 Similarly, parties can rescind contracts procured by fraud where B fraudulently procured its contract with A.2 However, what happens in a multiple party situation? B fraudulently induces A into contracting with it, to the knowledge of C. But an arbitral award exists to bind A and B. Can A sue C on the basis of a proprietary claim? To make waters murkier, what if A had a subsidiary company, A1, which made payment pursuant to the contract between A and B? Then, who sues C—A or A1? The English Court of Appeal discussed these issues in Vale SA v Steinmetz.3
In Vale v Steinmetz, a joint venture agreement (“JVA”) was concluded between Vale SA (“A”) and another company, BSG Resources (“B”). Pursuant to this JVA, B sold 51 per cent of shares in its subsidiary company to Vale International SA (“A1”), a subsidiary company to A.4 A1 made payment of US$500 million as initial consideration for said shares on behalf of A.5 However, B was owned by Nysco Management Corporation, a BVI company, that was in turn owned by Balda Foundation. The beneficiaries of Balda Foundation then included the first defendant, Mr Benjamin Steinmetz and his family members (“C”6). The basis of concluding the JVA was that B held valuable mining licences from the Republic of Guinea, allowing them to exploit iron ore deposits. However, these licences were fraudulently procured.7 They were revoked by the Guinean Government.8 This revocation gave A a claim in arbitration against B on the ground of fraudulent misrepresentation. A London Court of International Arbitration award was issued, and the fraudulent misrepresentation claim was made out.9 But, A’s claim in restitution—for B to return said US$500 million—was not allowed. This was because B had not fulfilled its burden of establishing the bar of restitutio in integrum impossible and that A is accordingly entitled to equitable rescission of the JVA.10
A thus brought in C to court proceedings, arguing that C was involved in the fraud or had received the proceeds from the US$500 million. A further argued that they had a proprietary claim over assets held by C as the recipients of said US$500 million proceeds.11 In the High Court, Andrew Baker J held that the arbitration award did not function as a defence to said
* Practice Trainee, Allen & Gledhill LLP.
1. Stravros Brekoulakis, “The Effect of An Arbitral Award and Third Parties in International Arbitration: Res Judicata Revisited” (2005) 16 American Review of International Arbitration 1, 4.
2. Spence v Crawford  2 All ER 271, 288. See also Liberty Sky Investments v Goh Seng Heng  SGHC 39, .
3.  EWCA Civ 1087;  2 Lloyd’s Rep 601, [3–4].
4. Ibid, .
5.  EWCA Civ 1087, .
6. Mr Steinmetz, his companies and others.
7.  EWCA Civ 1087, .
9.  EWCA Civ 1087, .
10.  EWCA Civ 1087, .
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