What can ‘rescission’ of a contract really achieve?

The Court of Appeal recently considered the effect of rescission and, in particular, its quality as an equitable remedy. The case of Gutnick v Indian Farmers Fertiliser Cooperative Ltd,[1] involving an application for leave to appeal a decision enforcing a foreign arbitral award, illustrates the ability of a judicial declaration of rescission to help facilitate relief for a party seeking restitution.

The facts

In 2008, the parties entered into a number of agreements relating to the sale of shares by the applicants to the respondents. When the parties came to disagree on certain matters they referred their dispute to an arbitral tribunal in Singapore. The tribunal heard the dispute in May 2014 and handed down its award a year later. The tribunal found that the applicants had by fraudulent representation induced the respondents to purchase the shares, and ordered amongst other things the rescission of the agreements and the repayment of the purchase price of the shares together with interest and costs. The High Court of Singapore later granted leave to enforce the award as a judgment of that court. The Victorian Supreme Court ultimately made orders enforcing the award.

On appeal

The key issue before the Court of Appeal was whether the primary judge had erred in ordering, in support of the foreign arbitral award, rescission of the share sale agreements.

Applicable Commonwealth legislation permitted a court to refuse to enforce a foreign award where ‘to enforce the award would be contrary to public policy’.[2] The applicants contended that the Supreme Court’s enforcement of the arbitral award was contrary to public policy insofar as rescission of the contract permitted ‘double recovery’. According to the applicants, double recovery arose because the orders effectively permitted the respondents to keep the shares (as the orders did not require transfer of legal ownership of the shares) whilst entitling the respondents to the repayment of the purchase price. The applicants argued that the arbitral tribunal’s order for rescission did not go far enough as it was incapable of restoring the parties to their original state; it had not ‘effected restitutio in integrum as a matter of meaning and effect’.[3]

The respondents denied the existence of any double recovery and hence any contradiction to public policy. The respondents also submitted that even if enforcement of the arbitral award were contrary to public policy, it remained within the primary judge’s discretion to make orders enforcing the arbitral award nonetheless.

The Court’s findings

In a joint decision, Warren CJ, Santamaria and Beach JJA refused leave to appeal. In dismissing the leave application, their Honours considered the applicants’ argument that enforcement of the arbitral award was contrary to public policy because the arbitral tribunal did not make orders capable of restoring the parties to their pre-transaction state, and so gave rise to double recovery.

The Court identified the limits of an order for rescission in the circumstances, holding that ‘it is simply not possible either for a court order or an arbitral award to perfect a party’s legal ownership of shares. It is not until the order of the court or tribunal is executed by alteration of the [share] register that legal ownership is restored’.[4] Notwithstanding this, the Court observed, consistent with the notion that rescission is a form of self-help for litigants:

‘Rescission is the act of the parties. A court order is not a condition precedent to the effectiveness of rescission. As much as a court does is to “confirm” the act of the rescinding party: to declare that the anterior act of rescission was justified and is valid’.[5]

Their Honours noted that once an order is made, absent any consequential orders, it is for the parties to make restitution, though ‘[w]here full or precise restoration at law or approximate restoration in equity cannot be achieved, rescission is not possible’.[6]

Notwithstanding these qualities of rescission, and contrary to the applicants’ contention, the Court of Appeal was satisfied that a declaration of rescission, being an equitable remedy, was not a toothless creature incapable of leading to restitution. The Court held that ‘by reason of the (declaration of) rescission, [the applicants] had acquired rights, enforceable in equity, in respect of the shares’.[7] On that footing, their Honours held that:

‘[I]n so far as the act of rescission, confirmed in the award, had the effect of vesting equitable rights to the shares in the applicants, there is no basis for saying that the declaration was a nullity until the applicants had been restored their legal title’.[8]

The theory that rescission gives rise to equitable rights appears consistent with the authority in Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd.[9] That was a decision to which their Honours referred and in which the NSW Court of Appeal held that a constructive trust arises, in favour of the party to whom the property ought be returned, upon the making of an order for rescission.[10]

The Court went on to conclude that a declaration of rescission in the present case, in what was a ‘conventional claim for rescission involving the return of what was purchased with a refund of the purchase price’, was something that conformed with, rather than offended, Australian public policy.[11] It was primarily for this reason that the Court held the appeal had no real prospect of success.

Conclusion

The decision of the Court of Appeal in Gutnick, albeit brief, reaffirms some key tenets of the doctrine of rescission. The comments of the Court strongly suggest that court-ordered rescission is not something the effect of which should be viewed narrowly. The findings in the case suggest that rescission, when scrutinised in the light of public policy, passes muster as a remedy that can bring about real and effective relief for a party seeking restitution.


[1]: [2016] VSCA 5.

[2]: International Arbitration Act 1974 (Cth) s 8(7)(b). The applicants also relied upon the UNCITRAL Model Law on International Commercial Arbitration art 36(1)(b)(ii).

[3]: [2016] VSCA 5 [14].

[4]: Ibid [22].

[5]: Ibid [23].

[6]: Ibid [24].

[7]: Ibid [25] (emphasis added).

[8]: Ibid [26].

[9]: (1996) 39 NSWLR 143.

[10]: Ibid 153.

[11]: [2016] VSCA 5 [30].