In PJSC National Bank Trust v Mints [2022] EWHC 871 (11 April 2022), Foxton J addressed a novel issue concerning the application of issue estoppel to a non-party in a prior arbitration proceedings. The Court refused an application to amend the Claimant’s pleadings alleging that the Respondents, whilst not being parties to the prior arbitration proceedings, were nevertheless bound by the findings in the arbitral award.
Background
The claimant banks (the “Banks”) contend that some of the defendants had dishonestly caused them to enter into disadvantageous transactions (the “Replacement Transactions”), which was a fraud on the Banks.
Since the Replacement Transactions contained arbitration clauses in favour of the London Court of International Arbitration (“LCIA”), the Banks’ contractual counterparties (the “LCIA Claimants”) commenced arbitration in 2018 seeking a declaration that the Replacement Transactions were valid (the “Arbitration”). The Bank counterclaimed in the arbitration for damages for fraud.
To establish the fraud, the Bank contended that the knowledge of the three defendants, (1) Boris Mints, (2) Dmitry Mints and (3) Alexander Mints (collectively, the “Respondents”), was attributable to the LCIA Claimants.
On 28th June 2019, the Banks commenced High Court proceedings alleging dishonesty against, inter alia, the Respondents (the “High Court Action”).
By an award dated 23rd June 2021, the Arbitral Tribunal dismissed the claims for declaratory relief by the LCIA Claimants and upheld the Banks’ counterclaim (the “Award”).
In September 2021, the Banks sought to amend the Particulars of Claim, alleging inter alia that the Respondents were precluded in the High Court Action from challenging certain findings made by the Arbitral Tribunal under the Award, either on grounds of issue estoppel or to prevent an abuse of process (the “Preclusion Arguments”).
The pertinent issue is therefore whether the Respondents are precluded from disputing or re-litigating the conclusions under the Award, even though they are not parties to the Arbitration.
It is well-established a court judgment binds not only the parties but also their “privies”: see Gleeson v Wippell & Co Ltd [1977] 1 WLR 510. In Gleeson (at 515A-H), Megarry VC formulated the test for a privy in interest as follows: –
“Privy […] is not established merely by having ‘some interest in the outcome of the litigation’ […] I cannot see that this provides any basis for a successful defendant to say that the successful defence is a bar to the plaintiff suing some third party, or for that third party to say that the successful defence prevents the plaintiff suing him, unless there is a sufficient degree of identity between the successful defendant and the third party. I do not say that one must be the alter ego of the other: but it does seem to me that […] there must be a sufficient degree of identification between the two to make it just to hold that the decision to which one was party should be binding in proceedings to which the other is party.”
The Respondents’ main arguments are as follows:-
- (a) Gleeson was wrongly decided. The concept of privity is limited to “a successor in title” who claims through or under a party to the prior proceedings, such as an executor, trustee in bankruptcy or assignee.
- (b) Alternatively, Gleeson should not be applied in the context of arbitration. The binding effect of an arbitral award should be limited to the parties, in a contractual sense, to the arbitration agreement.
Decision
Firstly, the Court considered that there is an attraction in bringing the doctrine of privity for the purposes of issue estoppel in arbitration proceedings in line with the doctrine of contractual privity (at §15). However, while the issue of who a party is to the arbitration agreement is essentially contractual in nature, the question of who is bound by an award engages wider public interests of finality (at §19).
Secondly, the contractual source of an arbitral tribunal’s substantive jurisdiction remains one of a number of reasons why any attempt to establish the preclusive effect of an award against anyone except the parties or their contractual privies will be an “extremely challenging task”. The Court would adopt a more restrictive approach when giving an award a preclusive effect against parties who are not contractual privies (at §§26-27).
Thirdly, the Court refused to decide whether Gleeson was wrongly decided since it has been cited with approval consistently since 1977, and it is not realistically open for a first instance judge to overrule the authority (at §§28-31).
Fourthly, the Court reasoned that the Gleeson test is a multi-factorial rather than a rule-based principle. However, there are a number of “signposts” which are of particular assistance:-
- (a) The starting point is that before a person can be bound by a judgment of a court, fairness requires that he should be joined as a party in the proceedings, and have the attached procedural protections.
- (b) The test of identification is sometimes approached by asking whether the party sought to be bound can be said “in reality” to be the party to the original proceedings, but the test must be approached with particular caution when it is alleged that a director, shareholder or another group company is privy to a decision against a company, because it risks undermining the legal distinction between a company and its shareholders or directors.
- (c) While the ability to join the purported privy to the original proceedings is not a necessary condition for the application of the doctrine, a claimant’s failure thereof could be a relevant factor. Likewise, if the proposed privy tries to join the original proceedings but the application was resisted by the successful party, this should also tell against a finding of privity (at §§33-34).
On the facts of the case, the Court concluded that it was not realistically arguable that the Respondents were privies of the LCIA Claimants, having regard to the exceptional nature of the Gleeson principle and the even greater difficulty in establishing that a non-party shall be bound by an arbitral award (at §§39-42).
Concluding remarks
The decision is important since it clarifies the circumstances whereby a non-party to an arbitral award could be bound by the findings of the award in subsequent proceedings. In particular, although there is no absolute rule against an arbitral award having res judicata effects against a party that is not contractually privy to the arbitration agreement, it would be, in Foxton J’s words, “extremely challenging” to establish the preclusive effect of the award against a non-party.
In Hong Kong, Stock JA in China North Industries Investment Ltd v Chum [2010] 5 HKLRD 1 at §81 considered the meaning of privity of interest (cited above) circuitous and not helpful in identifying when the necessary degree of identification is present. Stock JA instead considered that the required commonality “is a direct interest in the subject matter of the litigation, a parallel or corresponding interest in that subject matter and not simply a financial interest in the result of the action”. This test has been widely applied in Hong Kong, and whilst it is not a comprehensive formula applicable in all cases, it remains “a convenient working definition”: Parakou Shipping Pte Ltd v Jinhui Shipping and Transportation Ltd [2011] 2 HKLRD 1 at §103 per Reyes J.
The test in China North has been applied in a slightly different context from PJSC, whereby an applicant argues (unsuccessfully) that an arbitral award is contrary to the public policy of Hong Kong and should be set aside, since the Tribunal failed to take note of a prior judgment in the Shanghai No. 2 Intermediate People’s Court which decided the same issues raised in the arbitration: see Shanghai Fusheng Soya Food Co Ltd v Pulmuone Holdings Co Ltd (unrep., HCCT 48/2012, 25 April 2014). This case is different from PJSC in the sense that the prior decision the determination of which gives rise to issue estoppel is a judgment instead of an arbitral award, and therefore the Court need not consider whether the contractual foundation of arbitration has any effect on the application of the doctrine of issue estoppel.
It remains to be seen whether the Hong Kong Courts would adopt the approach of the English Court in PJSC when dealing with the preclusive effect of a prior arbitral award on a non-party.
Jose Maurellet SC and Arthur Poon co-authored this article. The judgement is available here.
