Commercial Court strikes out claim as an abuse of process where it amounted to a collateral attack on a prior arbitration decision
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 an AIM-listed company (Max). MWP commenced arbitration proceedings against Mr Emmott for breach of contract and breach of fiduciary duty following Mr Emmott’s departure from MWP. The arbitral tribunal found in favour of Mr Emmott, finding that there had been no breach of fiduciary duty and that the Max shares were beneficially held by Mr Sinclair (who was not a party to the arbitration).
Subsequently, MWP brought a claim in the Commercial Court against Mr Sinclair, Sokol and the third defendant (EPIL) in respect of the Max shares, alleging that EPIL had received the shares on behalf of Mr Emmott in breach of fiduciary duty by Mr Emmott.
Mr Sinclair and EPIL (the Sinclair Defendants) brought an application for the claim to be struck out. The question 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 Sinclair Defendants relied on three arguments in support of their application:
- That there was privity of estate between Mr Sinclair and Mr Emmott, such that MWP was estopped from making allegations against Mr Sinclair that contradicted the earlier findings of the arbitral tribunal;
- That 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 Mr Emmott, such that any claims against parties who were jointly and severally liable with Mr Emmott were extinguished.
Teare J 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 Sinclair Defendants were as follows.
Privity of estate
The court referred to the decision in Powell v Wilshire2, in which there was a dispute over the ownership of an aircraft. Powell claimed 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 the aircraft was his. The Court had declared that Wilshire was the owner and Wilshire argued that Etherington was bound by that, such that he could not pass good title to Powell.
In the Court of Appeal, Arden LJ 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 lead to “commercial chaos” if Mr Sinclair was not bound by the decision in the arbitration. On the other hand, it is the essence of estoppel per rem judicatam that it works mutually, ie a person can only take the benefit of a decision if he 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 Mr 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 Mr Sinclair from alleging that which was rejected in the arbitration. It is clear from the judgment that Teare J was tempted to find that the interests of commercial certainty should prevail, but that in circumstances where it was not disputed that estoppel per rem judicatam required mutuality he was bound to find in favour of MWP on this issue.
Abuse of process
Mr Sinclair submitted that allowing the claim to proceed amounted to an attack on the finding of the arbitral tribunal and that this amounted to an abuse of the process of the court. It was not disputed that a party may be prohibited from advancing a claim that is inconsistent with an earlier decision, but MWP submitted that there was no authority 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 Constable3 and Lord Hoffmann in Arthur JS Hall v Simons4 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.
Teare J noted, however, 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 found on the facts that there were special circumstances justifying a departure from this general rule:
- Mr Sinclair was a witness in the arbitration and was cross-examined;
- Mr Sinclair had funded Mr Emmott’s defence in the arbitration;
- The tribunal had concluded that the Max shares were held to the order of Mr Sinclair; and
- The tribunal intended and expected that the effect of its award would be that EPIL would transfer the Max shares to Mr Sinclair.
Absent those special circumstances, Teare J said that the fact that the factual allegations being 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 not necessary to deal with this issue to determine the application but the court addressed it briefly.
The principle of satisfaction is that where A has a claim against B and C who are jointly and severally liable to A in tort and A recovers judgment from B, who 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 and Law Life Assurance5). 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, Teare J stated that it would be an “abuse of language” to talk of MWP having satisfaction in this case when in fact, far from being satisfied, its claim in the arbitration was dismissed.
This case is an interesting commentary on the interplay between related arbitral and court proceedings. It seems clear that (i) in principle the abuse of process doctrine can apply where proceedings amount to a collateral attack on a previous arbitral award, but (ii) absent special circumstances of the type present in this case, bringing court proceedings against an entity that was not party to a previous arbitration will not amount to an abuse of process. As Teare J 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 multiple 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 avoid costly and time-consuming issues as to the correct forum if a dispute does subsequently arise.