In Michael Wilson & Partners v Sinclair ( EWHC 2560) Michael Wilson & Partners (MWP) was a company providing consultancy services in, among other places, Kazakhstan. John Emmott was one of the company's directors.
Sokol, a Delaware company, engaged MWP in relation to a number of natural resources transactions. Mr Sinclair was the managing director of Sokol.
A dispute arose between the parties in relation to certain shares in Max, an Alternative Investment Market-listed company. MWP commenced arbitration proceedings against Emmott for breach of contract and breach of fiduciary duty following Emmott's departure from MWP. The arbitral tribunal found in favour of Emmott, finding that there had been no breach of fiduciary duty and that the Max shares were beneficially held by Sinclair (who was not a party to the arbitration).
Subsequently, MWP brought a claim in the Commercial Court against Sinclair, Sokol and third defendant EPIL in respect of the Max shares, alleging that EPIL had received the shares on behalf of Emmott in breach of his fiduciary duty.
Sinclair and EPIL brought an application for the claim to be struck out. The question that the court was required to decide was:
"Where A has pursued a claim in arbitration against B alleging a breach of fiduciary duty and has failed to establish that claim, can A thereafter pursue a claim against C in court alleging that C has dishonestly assisted B in committing a breach of duty?"
The defendants relied on three arguments in support of their application:
- There was privity of estate between Sinclair and Emmott such that MWP was estopped from making allegations against Sinclair that contradicted the earlier findings of the arbitral tribunal;
- It would be an abuse of process of the court to permit MWP to challenge the findings of the arbitral tribunal by continuing with its claim; and
- MWP had obtained "satisfaction" from Emmott such that any claims against parties that were jointly and severally liable with him were extinguished.
The judge struck out the claim as an abuse of process. The court's findings in relation to each of the three arguments relied on by the defendants were as follows.
Privity of estate
The court referred to Powell v Wilshire ( QB 117), in which there was a dispute over the ownership of an aircraft. Powell claimed that he had good title to the aircraft, having bought it in good faith from Etherington, who claimed to have bought it in good faith from Ebbs. Wilshire claimed that the aircraft was his. The court had declared that Wilshire was the owner. Wilshire argued that Etherington was bound by this finding, such that he could not pass good title to Powell.
Lady Justice Arden of the Court of Appeal had set out the following statement of principle:
"Res judicata promotes the important public policy of finality in legal proceedings and thus legal certainty…If there was no estoppel per rem judicatam in this situation the result would always be that a defendant to an action about the ownership of property could always avoid the result of an adverse judgment by disposing of the property before the judgment was enforced. That would clearly be an intolerable state of affairs."
In the current case, the court had to balance two competing issues. On the one hand, it would have led to "commercial chaos" if Sinclair had not been bound by the arbitral decision; on the other, the essence of estoppel per rem judicatam (ie, by record) is that it works mutually – that is, a person can take the benefit of a decision only if he or she would have been prejudiced by it had it gone the other way. In this case, if the arbitral tribunal had found in favour of MWP, Sinclair would not have been bound by the decision, because he was not party to the arbitration.
The court found, with some difficulty, that MWP could not be estopped, as against Sinclair, from alleging that which was rejected in the arbitration. It is clear from the decision that the judge was tempted to find that the interests of commercial certainty should prevail, but that in circumstances where it was undisputed that estoppel per rem judicatam required mutuality, he was bound to find in favour of MWP on this issue.
Abuse of process
Sinclair submitted that allowing the claim to proceed amounted to an attack on the arbitral tribunal's decision and that this amounted to an abuse of court process. It was undisputed that a party may be prohibited from advancing a claim that is inconsistent with an earlier decision, but MWP submitted that no authority was applying this principle where the earlier decision was the decision of an arbitral tribunal.
The court found that there was no principle that the doctrine of abuse of process could not apply simply because the previous decision was that of an arbitral tribunal. In this regard, it referred to the speeches of Lord Diplock in Hunter v Chief Constable ( AC 529) and Lord Hoffmann in Arthur JS Hall v Simons ( 1 AC 615) to the effect that it would be unwise to limit the circumstances in which it is the court's duty to prevent its processes from being abused.
However, the judge noted that:
"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."
This follows from the principle that arbitrations are private to the parties concerned and third parties cannot be joined unless they consent.
In this case, the court decided on the facts that special circumstances justified a departure from this general rule:
- Sinclair was a witness in the arbitration and was cross-examined.
- Sinclair had funded Emmott's defence in the arbitration.
- The tribunal had concluded that the Max shares were held to Sinclair's order.
- The tribunal intended and expected that the effect of its award would be that EPIL would transfer the Max shares to Sinclair.
In the absence of these special circumstances, the judge held that the fact that the factual allegations made in the court proceedings mirrored those made in the arbitration would not have amounted to the subsequent proceedings being an abuse of process.
Given the court's finding as to abuse of process, it was unnecessary to deal with the issue of satisfaction to determine the application, but the court addressed it briefly. According to the principle of satisfaction, where A has a claim against B and C, which are jointly and severally liable to A in tort, and A recovers judgment from B, which pays the judgment sum to A, A cannot maintain an action for the same sum against C. Part of the rationale for the rule is that a claim by A against C would amount to a collateral attack on the judgment already given (per Lord Bingham in Heaton v AXA Equity ( 2 AC 329)). To this extent, the court had already relied on this principle in finding that MWP's claim was an abuse of process. In any case, the judge stated that it would be an "abuse of language" to talk of MWP having satisfaction in this case when, far from being satisfied in fact, its claim in the arbitration was dismissed.
This case is an interesting commentary on the interplay between related arbitral and court proceedings. The case confirms that, in principle, the abuse of process doctrine can apply where proceedings amount to a collateral attack on a previous arbitral award, but in the absence of special circumstances of the type present in this case, bringing court proceedings against an entity that was not party to a previous arbitration will be unlikely to amount to an abuse of process. As the judge noted, such special circumstances are likely to be rare.
At a practical level, the case also serves as a reminder of the need, when drawing up any form of commercial arrangement involving multiple parties or agreements, to ensure that the dispute resolution provisions in each contract marry up with one another, and that all relevant parties are brought within the ambit of the dispute resolution agreement. The drafting of multi-party arbitration agreements in particular can be complex, but giving thought to such issues at the drafting stage can help to avoid costly and time-consuming issues as to the correct forum if a dispute does arise.
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