Prior arbitral award – abuse of process?

Michael Wilson & Partners Limited v Sinclair and others [2017] EWCA Civ 3 demonstrates the interplay between arbitration and litigation, considering whether legal proceedings commenced by A against C are an abuse of the court's process where arbitration proceedings between A and B have decided the issue in question. The Court of Appeal held that a prior arbitration award can found an argument that subsequent litigation against a third party is an abuse of process, but will rarely do so. On the facts of this case, the claim was not considered to be an abuse of process.

Background

In August 2006, Michael Wilson & Partners (MWP), a provider of legal and business consultancy services in the Central Asian and Caucasus Region, commenced arbitration proceedings against Mr Emmott, a director and employee of MWP.  It was alleged that Mr Emmott had received a beneficial interest in shares and funds from Max, a company listed on the AIM, as a bribe or secret profit from Mr Sinclair and his company Sokol Holdings Incorporated (collectively referred to as the Sinclair defendants, although they were not a party to the arbitration).  The legal title in the shares and funds vested in a third party, Eagle Point Investments Limited (EPIL).  MWP contended that Mr Emmott had received his beneficial interest in the shares and funds in breach of contractual obligations and of fiduciary duties which he owed to MWP as a partner.

The arbitration tribunal rejected the claim, holding that the shares were beneficially owned by the Sinclair defendants.  It was held that there had been no relevant breach of fiduciary duty by Mr Emmott. The award was unsuccessfully challenged by MWP under sections 68 and 69 of the Arbitration Act 1996.

First Instance

MWP then issued proceedings in England against four defendants: the Sinclair defendants, EPIL and Butterfield Bank (Bahamas) Limited.  The basis of the claims against the Sinclair defendants (as in the arbitration) was that Mr Emmott acquired his beneficial interest with their knowing assistance, or in the alternative, that the transfer of the beneficial interest constituted the payment of a bribe or secret commission for which they were liable.  In their defence, the Sinclair defendants argued that the shares and funds were received by EPIL on behalf of Mr Sinclair and not on behalf of Mr Emmott.  They denied that there had been a breach of an obligation owed to MWP by Mr Emmott for which they were liable.

The Sinclair defendants (with the support of Mr Emmott) applied for strike out under Part 3.4(2) of the CPR or summary disposal of the claim under Part 24.2 of the CPR. Their application succeeded on only one ground, namely that it would be an abuse of the court's process to permit MWP to make the same factual allegations as it had in the arbitration which had been rejected by the arbitrators. 

The judge at first instance held that the doctrine of abuse of process could apply when the decision in question was an arbitration award.  He commented that the central allegations in the claim brought by MWP in litigation had already been determined against MWP in the arbitration.  He considered that both Mr Emmott and Mr Sinclair had been "involved" in the arbitration.  Although Mr Sinclair had not been a party to the arbitration, and indeed had refused to be a party, Mr Sinclair had given evidence to the tribunal and had funded Mr Emmott's defence of the arbitration claim. 

The judge held that these were "special circumstances" which, when coupled with other factors, meant that the proceedings constituted an abuse of the court's process.

MWP appealed this decision.

The Appeal

MWP's appeal was allowed by the Court of Appeal on the basis of three issues:

How does the abuse of process doctrine apply where the prior determination is in the form of an arbitration award as opposed to a court judgement?

The issue was summarised by the Court of Appeal as being whether it is an abuse of the court's process for A to claim in legal proceedings against C, on a basis which has been decided against A in arbitration proceedings between A and B.

In his leading judgment (with which the other judges agreed), Lord Justice Simon confirmed that the judge at first instance had correctly stated the law in that there is no "hard edged" rule that a prior arbitration award cannot found an argument that subsequent litigation is an abuse of process.

Although a court will be cautious in circumstances where the strike out application is founded on a prior arbitration award, it was considered that that caution should not inhibit the court's duty to act in appropriate circumstances. The Court of Appeal also agreed with the observation made at first instance that it will probably be a rare case, and perhaps a very rare case, where court proceedings against a non-party to an arbitration can be said to be an abuse of process. The question of whether the present case was one of those rare cases fell to be determined.

Was the award admissible in subsequent litigation?

Although the arbitrators authorised the release of the award to Mr Sinclair, EPIL and the Bahamian court, MWP submitted that it was not open to the Sinclair defendants to use the award for the purposes of its strike out application.  This was based on the principle that factual findings made in one case are inadmissible in subsequent proceedings.  The court found, however, that, although factual findings are inadmissible in subsequent proceedings, a court may review an earlier judgment or award in order to see if a later claim is an abuse of its process.  The award was therefore admissible.

Assuming the doctrine of abuse of process applied, were the proceedings an abuse of process?

The Court of Appeal considered that the first instance judge had erred in his conclusion that the claim against the Sinclair defendants was an abuse of the court's process.  The test to be met to demonstrate abuse of process was an exacting one, whereby a claimant must show that it would be manifestly unfair that the same issues should be re-litigated or that to permit such re-litigation would bring the administration of justice into disrepute.  It was considered that the test was not met in this instance.

Although the first instance judge had identified "special circumstances" which (he considered) satisfied this test, the Court of Appeal considered that too much emphasis had been placed on the importance of the arbitration award to which the Sinclair defendants were not a party and gave too much weight to the position of Mr Emmott in the litigation despite the fact that he had not been sued by MWP.  Mr Sinclair had been asked to join the arbitration, but had declined to do so.  It was considered to be unfair that he now wished to rely on the award from that arbitration to claim an abuse of process.  Mr Sinclair had also stated in related Bahamian litigation that the arbitration was irrelevant to his dispute with MWP.

In the circumstances, the Court of Appeal held that this was not one of the rare cases where litigation against a non-party to a previous arbitration constituted an abuse of process.  MWP can now commence the long-delayed trial process against the Sinclair defendants in respect of the value of the shares and funds.

Comment

As well as serving as a useful review of the case law relating to the doctrine of abuse of process, the case has confirmed that in rare instances a court may strike out proceedings for abuse of process where a previous decision was made in an arbitration.

This judgement demonstrates the importance of ensuring that all relevant parties fall within the ambit of a dispute resolution clause, where practicable.  With arbitrations private to the parties concerned and consensual in nature, third parties cannot be joined without their consent.  Due care and attention must be paid at the time of drafting any dispute resolution clause, otherwise the utility of the arbitral process will be limited if not all relevant parties in the dispute are parties to the arbitration.