The Commercial Court takes a pro-arbitration approach to res judicata and its application in arbitration proceedings

England and Wales, India

In Union of India v Reliance Industries Ltd [2022] EWHC 1407 (Comm), Sir Ross Cranston (sitting as a High Court judge in the Commercial Court) found that an arbitral tribunal can preclude submissions made by a party on the grounds that they could and should have been made at an earlier stage in the proceedings but were not so made prior to an award being issued. By reiterating that the English law principle of res judicata applies in this way to arbitration proceedings, the court has delivered a pro-arbitration decision.

Background

The Union of India (“Government”) entered into two long-term production sharing contracts (“PSCs”) with three contractors for extracting oil and gas from two fields in the Arabian Sea. The three contractors were Reliance Industries Ltd (“Reliance”), BG Exploration and Production Ltd (“BG”), and a Government-owned company. Under the PSCs, the contractors were entitled to recover costs from the total yearly petroleum production, and these costs were capped by the PSCs. In certain specified circumstances, the cap could be exceeded if agreed to by a committee consisting of representatives from both the contractors and the Government, with the latter having an effective veto power. Disagreements within the committee could be resolved by arbitration. The PSCs were governed by Indian law.

In December 2010, Reliance/BG commenced a London-seated arbitration against the Government, seeking an increase to the cost cap. As of May 2022, the tribunal has issued eight substantive partial awards. One of these, issued in October 2018, was challenged by Reliance/BG before the Commercial Court in 2020 (Reliance Industries Ltd v Union of India [2020] 1 Lloyd’s Rep 489). The court later held that the tribunal had not considered certain documentary evidence and remitted related issues for a further arbitral hearing. During that further hearing, the Government filed submissions in relation to the documentary evidence and raised some objections, based on principles of Indian constitutional law. Reliance/BG inter alia contended that the objections were barred by res judicata.

The tribunal issued its award on 29 January 2021. It agreed with Reliance/BG stating that although the Government was now raising the objections in relation to the documentary evidence, such submission applied equally to the remaining case previously considered in the October 2018 Award. The Government had failed to provide any good reason as to why it had failed previously to make such objections. In the circumstances, the tribunal found that the submissions were barred on grounds of res judicata, and in particular the principle in Henderson v Henderson ([1843-60] All ER Rep 378). According to the Henderson principle, a party cannot raise matters in a subsequent proceeding which had not, but could and should have been, raised in an earlier proceeding.

The Government challenged the 2021 Award in the Commercial Court, principally raising two questions: firstly, whether the tribunal was correct in deciding the question of res judicata in accordance with English law, because the seat of arbitration was in London; and secondly, whether the Henderson principle applied to earlier phases in the same arbitral proceedings?

Submissions and decision

The court upheld the tribunal’s application of the Henderson principle and agreed that the Government was now precluded from making submissions that it could and should have made earlier during the proceedings. It held that the Henderson principle is part of procedural law and therefore governed by the law of the seat, and it can be applied to earlier phases in the same arbitration proceeding.

The Government had contended that the Henderson principle was part of substantive English law and therefore could not be applied where the substantive contract was governed by Indian law. However, it accepted, that if Henderson was a matter of procedural law, its objection would be rendered null.

The court referred to the Supreme Court decisions in Virgin Atlantic Airways Ltd v Premium Aircraft Interiors UK Ltd ([2014] AC 160) and Takhar v Gracefield Developments Ltd ([2020] AC 450), which had recognized the Henderson principle as being procedural in nature and as always directed against abuse of process. This had also been reflected in the Arbitration Act 1996, which casts the duties on the tribunal to give reasonable opportunity of a hearing to the parties (s 33(1)(a)), and to avoid unnecessary delays or expenses (s 33(1)(b)).

In the alternative, the court observed that English and Indian authorities on res judicata followed similar lines and the Supreme Court of India even had cited Virgin Atlantic with approval.

The Government had advanced three arguments against this conclusion, all of which were rejected by the court:

  1. Firstly, that the relevant observations in Virgin Atlantic and Takhar are obiter and not binding on the court: This argument was summarily rejected, because on the grounds that it would be “fanciful” for the court to not follow two Supreme Court decisions supported by all members of that court.

  2. Secondly, that compared to litigation, the Henderson principle had limited impact on arbitration, given its consensual nature: The Government relied on Nomihold Securities Inc v Mobile Telesystems Finance SA ([2012] Bus LR 1289), where the Commercial Court recognized some limits on res judicata in arbitration. Rejecting this argument, the court observed that Nomihold specifically agreed with the principle that a party is precluded from raising issues that it could and should have raised in an earlier reference. In any case, a later decision of the Technology and Construction Court in Daewoo Shipbuilding and Marine Engineering Co Ltd v Songa Offshore Equinox Ltd ([2020] EWHC 2353 (TCC)) had held that the Henderson principle applied in arbitration.

  3. Lastly, that if set up as a defence to a claim, the Henderson principle was substantive in nature: The court noted that in Virgin Atlantic and Takhar, the principle was discussed inter alia as a possible defence against claims. Consequently, the tribunal was correct in applying res judicata under English law.

As regards the second question, the Government argued that there is no binding precedent that the respondent (and not a claimant) may be debarred by application. The same has been applied in Daewoo Shipbuilding, however, this is as an obiter and the authorities discussed there are not on point. Therefore, the Government submitted that there is no authority on application of Henderson to respondents in an arbitration. The Government had not anticipated the claims, and fairness required that it should be allowed to take a fresh look at what arguments it could make.

The court agreed that there was no direct authority on this point. However, there was substantial general support for application of Henderson to all stages of the same proceeding and to defences as well as claims. The object of Henderson is to limit abuse and replication of process and to assist achievement of decisional finality. This is served equally in arbitration and litigation. In any case, the Government was not confronted with novel claims and hence, the tribunal was justified in using the Henderson principle.

The Government also had raised challenges to the award, on grounds that its case on Indian constitutional law was not heard and that the award was contrary to Indian public policy. The court rejected these challenges, on grounds that (a) the hearing was on narrow issues remitted to the tribunal; (b) the Henderson principle had precluded some arguments; and (c) the tribunal had indeed considered and then rejected the Government’s arguments.

Comment

The court’s judgment is undoubtedly pro-arbitration. It recognises that the principle of res judicata, aimed at preventing abuse and duplication of process, applies to arbitration, despite its consensual nature. The purpose of arbitration is to resolve disputes without unnecessary delay or expense. Understandably, the principle of res judicata is similarly aimed at ensuring that legal proceedings are conducted without undue delay. Arbitration differs from litigation in some respects, including as a dispute resolution mechanism of a consensual nature. Thus, the application of res judicata can sometimes be excluded or precluded. For example, when the parties involved in two different arbitration proceedings are not the same. However, the situation before the court was not of that nature. The Henderson principle could validly apply in ensuring pace and economy of the arbitral process. Further, it is not reasonable to avoid its application to defences in addition to claims, and to all stages in the same arbitration proceeding. The principle reasonably ensures hastened and fair dispute resolution without causing detriment to any party’s interests. Thus, the court has taken a robust pro-arbitration approach, unequivocally clarifying that the Henderson principle applies to claim and defence, and to all stages of the same arbitration proceeding.

Article co-authored by Karan Kamath, Intern at CMS.