Vale v. Steinmetz: The Court of Appeal re-emphasizes the consensual nature of arbitration and says “no” to third-party application of arbitral awards

On 16 July 2021 the Court of Appeal handed down its judgment in Vale SA & Ors v. Steinmetz & Ors¹, dismissing an appeal to have litigation proceedings against the appellants summarily struck out on the basis of a determination in an arbitral award to which they were not parties.

In doing so, the Court of Appeal underscored the private and consensual nature of arbitral proceedings, and provided certainty regarding which elements of an arbitral award may be relied upon by parties to an arbitral award in proceedings against third parties.

Background and Questions Posed to the Court

Vale SA (Vale) had entered into a joint venture agreement with BSG Resources Ltd (BSGR) to exploit mining licences granted by the Republic of Guinea. After the Government of Guinea revoked those licences due to bribery on the part of BSGR, Vale brought arbitral proceedings against BSGR for, amongst other things, rescission of the joint venture agreement and restitution of the USD500 million paid (by one of Vale’s subsidiaries) upon entering the agreement.

In its award, the LCIA tribunal made an order for rescission but rejected Vale’s claim in restitution for the USD500 million. As is usual under the LCIA Rules, the award was final and Vale had no right of appeal (and did not avail itself of the rights to challenge provided by the Arbitration Act 1996).

Subsequently, Vale brought Commercial Court proceedings against eight defendants, including the appellants, which Vale alleged had received part or all of the USD500 million. In turn, the appellants sought summary judgment to dismiss the proprietary claims made against them on the basis that:

• Vale was bound by the LCIA tribunal’s determination that there was no personal restitutionary claim against BSGR, and that since the proprietary claims against the appellants were reliant on Vale having a restitutionary claim against BSGR, no proper proprietary claim could be maintained against them by Vale; and
• it was an abuse of process for Vale to rely, on the one hand, on the tribunal’s award of rescission whilst, on the other, to submit to the Court that Vale was not bound by the fact that the tribunal had dismissed its restitutionary claim, on which the proprietary claims against the Appellants relied. As such, the appellants suggested that Vale’s claim amounted to a collateral attack on the award.

The Court’s Judgment and Reasoning

On the first point, the appellants accepted the general position that an arbitral award cannot bind other legal proceedings involving third parties. However, they argued for an exception to that rule in which the tribunal’s determination that there was no personal restitutionary claim constituted a ‘legal fact’ (or “a fact in the world”) that did bind subsequent proceedings.

However, the Court rejected this on the basis that a potentially erroneous arbitral award cannot be deemed to be an indisputable fact that should bind third parties in subsequent proceedings. In doing so, the Court referred to Sun Life Assurance Co of Canada v. Lincoln National Life Insurance Co². In that case, Longmore LJ referred to The Sargasso where a tribunal had awarded damages in favour of a sub-charterer and against a charterer (for cargo damage). In subsequent proceedings brought by the charterer against the shipowner (in respect of the former’s liability to the sub-charterer), the charterer was able to invoke the arbitral award as evidence of its loss since this was clearly a “fact in the world”; an uncontroversial point that should bind proceedings in any follow-on action against the shipowner.

By contrast, a tribunal’s determination that one party does not have a restitutionary claim against another does not meet this same standard of factual objectivity. Accordingly, the Court reverted to the general principle founded on the private and consensual nature of arbitration: that, save for limited purposes not applicable in the current case, an arbitral award between A and B has no binding effect in proceedings between A and C. As a result, it was open to Vale to re-submit and prove that it had a restitutionary claim against BSGR in court proceedings, notwithstanding that the tribunal had determined that it did not have one, in order to provide the basis for its proprietary claims against the appellants.

On the second point - alleged abuse of process - the Court was quick to reject this argument by referring to the principles laid down by Simon LJ in Michael Wilson & Partners Ltd v. Sinclair³. Collectively, these suggest that the circumstances in which proceedings that follow an arbitral award will constitute an abuse of process are relatively narrow, absent an element of vexation. Simon LJ confirmed this by saying that “courts should be cautious” before accepting that subsequent proceedings are an abuse of process via a collateral attack on an earlier arbitral award. Moreover, Simon LJ stated that a genuine abuse of process where proceedings are brought against a non-party “will probably be a rare case, and perhaps a very rare case”. The Court held that the present case could not viably be seen as one of those rare cases. There was no question of Vale making any collateral attack on the award; on the contrary, it largely sought to rely on the award in making a proprietary claim against the appellants.

Conclusion

The Court of Appeal’s judgment in Vale confirms the scope within which an arbitral award may bind third parties in subsequent proceedings and reasserts the private and consensual nature of arbitration. Parties should be aware that they cannot rely on findings made in an arbitral award where those findings do not constitute an objective “fact in the world” and that it will only be in rare cases that an arbitral award will be binding on non-parties in subsequent legal proceedings.

¹ [2021] EWCA Civ 1087.
² [2004] EWCA Civ 1660.
³ [2017] EWCA Civ 3.