REUTERS | Leonhard Foeger

Preliminary issues and issue estoppel in arbitration… proceed with caution

Issue estoppel may bar a party from amending their claim submissions to raise new claims after the determination of a preliminary issue which meant the end of their original claim.

The Issue

In arbitration proceedings the subject of the section 69 and section 68 Arbitration Act 1996 (AA 1996) appeal in Daewoo Shipbuilding & Marine Engineering v Songa Offshore Equinox Ltd, Daewoo claimed damages on the basis that Songa bore responsibility for errors in the design of two semisubmersible drilling rigs being built by Daewoo for Songa.

Daewoo sought determination of the responsibility for design faults under the contracts as a preliminary issue in simultaneous arbitrations in respect of the two rigs.

In correspondence leading to agreement of the preliminary issue, Daewoo stated that if the preliminary issue was decided against it, that would be the end of their claims in respect of the rigs. Songa agreed to the hearing of the preliminary issue on that basis.

Daewoo lost the preliminary issue, and sought to amend its original claim submissions to (somewhat ironically) raise new claims of failures to cooperate and act in good faith, based upon substantially the same facts.

A majority of the tribunal refused permission to amend on the basis that:

  • Amendment of the claim submissions would amount to an abuse of process as Daewoo could and should have brought or intimated its further claims before the hearing of the preliminary issue.
  • (In any event) Songa withdrew its opposition to the hearing of the preliminary issue in consideration for Daewoo’s promise not to make new claims, in a binding and legally enforceable agreement.

Daewoo brought a section 69 and section 68 appeal against the decisions to refuse amendment of the claim submissions.

The Judgment

Songa relied on the classic statement of issue estoppel in Henderson v Henderson as applying equally within different stages of a single set of proceedings. Daewoo relied on Bingham LJ’s judgment in Johnson v Gore Wood & Co applying the rule in Henderson to argue that the rule applied only to a second, separate set of proceedings concerning the same issue, and that in any event the claims it now brought had not been determined by the preliminary issue.

The judge conducted a careful consideration of more recent authority ([114]-[131]), emphasising in particular that:

  • In BT Pension Scheme Trustees v BT plc, Mann J applied Tannu v Moosajee in refusing to permit a party to withdraw a concession made in one preliminary issue hearing in later proceedings.
  • In Gruber v AIG Management France SA, Andrew Baker J held issues determined in a judgment on liability were binding in a later decision on quantum.
  • In Kensell v Khoury, Zacaroli J found issue estoppel could apply to prevent certain amendments to a claim after a defendant obtained summary judgment in respect of the original pleadings.

Mrs Justice Jefford concluded that Henderson v Henderson issue estoppel could apply to prevent Daewoo from raising new claims by amendment in the same proceedings. Daewoo was prevented from raising claims it could and should have made prior to the determination of the preliminary issue.

Proceed (to Preliminary Issue) with Caution

The result is in many ways intuitive. It offends basic fairness that a party should be able to promise certain consequences of the determination of a preliminary issue, before later bringing new claims. However, the foundation of the decision in issue estoppel, even where the proposed amendments had not been explicitly determined by preliminary issue, may surprise some. The correspondence leading to the agreement of the issue was considered at length both by the tribunal and Mrs Justice Jefford, and it is likely that it played a significant role in the “broad merits based approach” applied by the tribunal and accepted by the court (Jefford J at [131]).

Preliminary issues are often a cost effective way of narrowing the matters in dispute between parties and facilitating more efficient litigation, arbitration or settlement. However, parties must be careful in proposing and agreeing to such preliminary determination.

Parties proposing a preliminary issue should take note of the importance of the way in which the issue is framed and correspondence putting forward the issue. If a preliminary issue is suggested as having conclusive effects on one’s case in the remainder of a dispute, a party is likely to be bound to those stated consequences. Attempting to amend the original pleadings to set up a new case after the determination of such an issue is likely to be vulnerable to a Henderson v Henderson abuse of process challenge.

In agreeing to a proposal for the determination of a preliminary issue, a party should attempt to clearly set out the consequences of possible determinations. If possible, it should pin the proposing party to the claim’s withdrawal, or the tribunal to the claim’s dismissal, in the event the issue is decided against the proposing party.

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