UK: Arbitration – Two (Or Three?) Can Play That Game

Arbitration is consensual by nature. An arbitral tribunal only has jurisdiction over those parties that have entered into the underlying arbitration agreement. However, in certain circumstances, findings made by a tribunal can have an effect on subsequent legal proceedings, including litigation before the English Courts. This article considers recent decisions of the Commercial Court in which the parties sought to strike out their opponents' cases, as being inconsistent with prior findings in arbitrations. Some, but not all, succeeded in establishing that seeking to go behind the arbitral determination was an abuse of the process of the court.

Res Judicata, abuse of process and arbitration proceedings

There is obvious merit in protecting the finality of judicial rulings, ensuring that the same claims and issues are not relitigated save for the appellate process. Once a competent Court has made a ruling, the matter becomes res judicata. It cannot be opened up again between the same parties, or their 'privies' – meaning other (third) parties where there is a sufficient relationship, degree of identification or dependency with the claimant or defendant in the relevant proceedings. Privity in this context is a question of fact. Any such parties seeking to circumvent a judicial determination made against them in subsequent litigation may be found to have 'abused the process of the court'. A claim or defence that amounts to such an abuse of process can be struck out, but the English Court retains a discretion as to this.

A so-called collateral attack on a prior judicial determination by persons who were not themselves party to the relevant earlier litigation (and were not anyone's 'privy') can still be an abuse of process, but the test is more restrictive as regards such third parties. In Secretary of State for Trade and Industry v Bairstow [2003] EWCA Civ 321, the Court of Appeal held that as regards non-parties to the original proceedings:

"... it will only be an abuse of the process of the court to challenge the factual findings and conclusions of the judge or jury in the earlier action if (i) it would be manifestly unfair to a party to the later proceedings that the same issues should be relitigated or (ii) to permit such relitigation would bring the administration of justice into disrepute."

Bearing in mind that arbitration depends on privity created by agreement, where do the findings of a tribunal come in this in context? Can they be opened up in court, or before a different tribunal, at least if the same party against whom the finding was made is involved?

The general rule as regards findings by arbitral tribunals

The starting point is that a determination by an arbitral tribunal will not be binding in any subsequent arbitration between different parties. This applies both to the determination of contractual (or other) rights and claims and findings of fact. In Sun Life Assurance Company of Canada v The Lincoln National Life Assurance Company [2004] EWCA 1660, the Court of Appeal noted that:

"Different arbitrations on closely inter-linked issues may as a result lead to different results, even where, as in the present case, the evidence before one tribunal is very largely the same as that before the other."

In practice, parties to international arbitration proceedings can seek to mitigate the risk of inconsistent findings through joinder by consent, mechanisms set out in institutional rules for the consolidation or proceedings, or the use of multi-party and reciprocal arbitration clauses that might be included in contracts that all form part of the same transaction or project.

The exception to the rule: special circumstances

English law, however, does recognise that a finding made in arbitration proceedings can, in appropriate circumstances, support a finding of abuse of process if it is subsequently challenged.

In Michael Wilson & Partners Ltd v Sinclair [2012] EWHC 2560 (Comm), Teare J referred to the Court's duty to prevent attacks on prior determinations by a tribunal, and:

"... concluded that there can be no rule that the court can have no such duty merely because the tribunal whose decision is under attack is an arbitral tribunal. However, it will probably be a rare case where an action in this court against a non-party to an arbitration can be said to be an abuse of the process of this court. Where a claimant has a claim against two or more persons and is obliged to bring one such claim in arbitration the defeat of that claim in arbitration will not usually prevent the claimant from pursuing his claim against the other persons in litigation. Arbitrations are private and consensual and non-parties cannot, in the absence of consent, be joined or be affected by the decisions of the arbitral tribunal."

The case arose out of dealings in shares through a number of companies and intermediaries. A dispute arose as to who was ultimately meant to be the beneficial owner of the shares. In the Commercial Court, the claimants ("MWP") sought delivery up of the shares on the basis that they were being held by Mr Sinclair, ultimately, to MWP's order. MWP had previously arbitrated a similar claim (relating to the same shares) against a Mr Emmott, whom MWP had accused of having acted in breach of fiduciary duties as regards a transfer of the shares. MWP's contract of engagement with Mr Emmott had contained an arbitration clause. In the resulting arbitration, Mr Sinclair had been cross-examined by MWP as to his involvement in the alleged breach by Mr Emmott, but Mr Sinclair had not agreed to be joined as a defendant to the arbitration. Ultimately, the tribunal dismissed MWP's claims.

The factual allegations in the Commercial Court case mirrored those MWP had already made in the arbitration. Before Teare J, Mr Sinclair was now accused of having dishonestly assisted in Mr Emmott's breach of fiduciary duty (which had been MWP's primary cause of action before the tribunal). The Judge held that special circumstances existed which justified precluding MWP from making the same factual allegations, which the arbitrators had rejected, again in Court. Teare J noted the involvement of Mr Sinclair as a witness: it was not as if MWP had never had a chance to put the matter to Mr Sinclair. The Judge also referred to the fact that the arbitrators had envisaged that, following their award, the shares would be free to be disposed of by an investment company controlled by Mr Sinclair, at Mr Sinclair's instructions. MWP had been aware of this in the arbitration. Accordingly, as the Judge put it, "Whereas many arbitrations have, and are intended to have, effect only between the parties to them this arbitration was different." – because one purpose of the arbitral proceedings had been to determine what could be done with the shares.

An attempt to reinterpret a contract that had already been construed by a tribunal

Arts & Antiques Ltd v Richards and others [2013] EWHC 3361 (Comm) provides another example of a claim being struck out as an abuse of process because of an earlier determination by an arbitrator. The claimant's London jewellery business ("A&A") was the victim of a robbery. A&A sought to recover its losses from its insurers Zurich, and commenced arbitration proceedings under the policy. Zurich denied coverage on the basis that A&A had failed to comply with a condition precedent in the policy as regards keeping detailed records of purchases and store inventories ("CP2"). Zurich succeeded before the sole arbitrator, who found that A&A had failed to comply with CP2 so that coverage was avoided. A&A then sought to challenge the award by reason of an alleged error of law (under the very limited procedure in Section 69 of the Arbitration Act 1996). That challenge was dismissed.

Around the same time as challenging the award, A&A also commenced court proceedings against the insurance brokers who had procured A&A's policy with Zurich. That claim was based on allegations of fraud, misrepresentation and negligence, to the effect that the brokers had ex post facto sought to introduce CP2 into the policy documents, something that A&A never knew and had not accepted when A&A signed what it said was a different policy document. A&A asserted that the arbitration clause had similarly been smuggled into the policy, and included Zurich as a defendant in the litigation. In A&A's claim against Zurich in the arbitration, the arbitrator had, however, found that it had been open to Zurich unilaterally to issue new policy wording from time to time, which became binding on A&A once it was 'accepted' by A&A. On A&A's own case, it had been in the possession of a policy document that contained CP2 for around 4.5 years, and had accepted that wording by its conduct in the clearest terms. That conduct also included commencing the arbitration against Zurich by submitting a version of the policy document with CP2 as the contract on which A&A relied.

Hamblen J struck out A&A's claim both against Zurich and the brokers. He accepted that the brokers, though they had not been parties to the arbitration, could rely on a finding made by the arbitrator in support of their argument that A&A had abused the process of the court. Having referred to A&A's unsuccessful challenge of the award, the Judge went on to note that:

"Further, [the award] relates to the terms of the contract as between A&A and Zurich, which have been determined in accordance with the agreed contractual machinery, namely by arbitration. In all the circumstances, I conclude that it would bring the administration of justice into disrepute, and would be oppressive and unfair on [the brokers], for A&A to be allowed to fight the issue of whether or not the contract contained CP2 all over again. It would accordingly be an abuse of process."

A balancing exercise: who suffers the greater unfairness, claimant or defendant?

The most recent decision on this issue turns the situation that arose in the previous cases on its head: in OMV Petrom SA v Glencore International AG [2014] EWHC 242 (Comm), it was the claimant who sought to preclude the defendant from raising a point that, as the claimant argued, had already been determined against the defendant in an arbitration.

Glencore had contracted with Petex, an intermediary, for the supply by Glencore of crude oil to two Romanian companies for which Petex acted as agent. Glencore had supplied crude oil between 1993 and 1997. A dispute subsequently arose as the buyers felt that Glencore had failed to supply a product that met the contractual specifications. In 2003, Petex commenced arbitration proceedings against Glencore, purporting to bring the claim on behalf of its principals, the two Romanian companies which had ultimately taken delivery of the oil. Glencore's defence was that the limitation period for this claim had expired. Glencore also questioned whether Petex was entitled to bring a claim for substantial damages on behalf of the two principals, for losses that had been suffered by those companies rather than Petex. By that stage, it appears that the two Romanian entities had ceased to exist, but Petrom (the claimant in the 2014 Commercial Court proceedings) had succeeded them.

The tribunal dismissed the limitation point. The arbitrators found that Glencore had deliberately concealed material facts from Petex for some time. Since Petex was unaware that there was a claim until that had been discovered, the limitation period had not expired when the arbitration was commenced. However, Petex's victory was ultimately a pyrrhic one: the arbitrators did not award it any damages. They found that in principle, Petex might have had a right to claim on behalf of its principals, but it had not in fact informed Petrom as the successor in title, nor had Petex established that it would account for any damages to any appropriate party who might have suffered the loss.

This was a substantial claim for around US$ 64 million (with interest having accrued for a number of years), and it appears that the claimants left no stone unturned. Petex challenged the award in the Commercial Court, alleging a serious procedural irregularity. This failed. Petrom then appeared on the scene, and took an assignment of Petex's claim, presumably seeking to deal once and for all with any further arguments that Petrom had no right to bring the claim. Having done that, Petrom commenced arbitration proceedings against Glencore, to claim the damages in its own right. However, that second arbitration failed, on the basis that the award in the first arbitration had rendered the issues res judicata. The Commercial Court judgment does not give much detail as to this second arbitration, but one wonders whether a finding that the agent had a good claim on behalf of the principal, but had not suffered any loss, really ought to preclude a subsequent by claim the principal in its own right.

Undeterred, Petrom went to the Commercial Court for one last chance at recovering the money. There, it was met by Glencore's limitation defence. Petrom argued that Glencore's attempt to plead limitation was an abuse of process, because the first arbitrators had found that Petex's claim had not become barred by reason of Glencore's fraudulent concealment. In effect, Petrom asserted that the Commercial Court should accept that Glencore had been dishonest because an arbitration tribunal had already established this, even though Petrom had not been a party to those proceedings.

Blair J held, citing the two cases discussed above, that a finding made by an arbitral tribunal can provide a basis for striking out a claim even though the relevant party seeking that finding was not also a party to the arbitration proceedings – always provided that special circumstances existed. The Judge considered a number of factors that went both for and against striking out Glencore's defence:

  • The fact that Glencore was seeking to defend itself against a claim by relying on matters that had been the subject of an arbitral finding was not by itself a sufficient reason for refusing to strike out the defence. A defendant does not have an absolute entitlement to raise whatever matter it wishes in its defence, and it is necessary to consider the particular facts to see whether a defence would be an abuse of process. That said, a Court might need more persuading before striking out a defence rather than a claim as an abuse of process.
  • Glencore, perhaps ingeniously, argued that it should not be estopped from raising the limitation point in court because, while it had actually lost on that issue before the arbitrators, Glencore had been the successful party overall (as Petex did not recover any damages). The Judge dismissed this, holding that:

    "It can, in my view, be an abuse of process for a party which was successful overall in earlier proceedings to seek to relitigate an issue on which it was unsuccessful."
  • One of the witnesses on whose evidence Petrom would have wanted to rely in establishing Glencore's dishonest conduct had died. That was a factor which went in Petrom's favour. The same was true as regards Petrom's other witnesses having to be cross-examined again as regards matters on which they had already given evidence.
  • However, Glencore faced an allegation of fraud and dishonesty, made against it in public court proceedings, and Petrom was arbitral tribunal. The question was whether it was more unfair for a claimant to have to prove fraud, or for a defendant to be unable to defend itself against serious charges brought in court. Blair J found that Glencore, facing serious allegations of dishonesty, would suffer greater unfairness, and that this alone justified dismissing the application.
  • The final factor in Glencore's favour was that Petrom had waited too long before making the application to strike out the defence, having initially appeared willing to prove fraud on the part of Glencore.

Conclusion

These recent decisions by the Commercial Court shows that while arbitration is still very much a two-player game, there can be circumstances where findings made by a tribunal are in effect binding on third parties. Those third parties would, however, need to have a sufficient involvement or connection with the underlying dispute – a stranger to the dispute determined by the arbitrators would not be affected by any such determination. It is also clear that the Court retains a discretion, and will weigh up all relevant factors when determining whether the process of the court really has been abused by a party seeking to mount a 'collateral attack' on a ruling by an arbitral tribunal. Petrom v Glencore provides a good illustration of the considerations that the Court will take into account in this context.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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