ENGLISH COURT BLOCKS PARTY’S ATTEMPT TO ADVANCE NEW ARGUMENTS IN RESPECT OF POINT ALREADY DECIDED IN PRELIMINARY ISSUE

In the recent decision of Daewoo Shipbuilding and Marine Engineering Company Limited v Songa Offshore Equinox Ltd [2020] EWHC 2353 (TCC), the English Technology and Construction Court (the “Court”) dismissed an application seeking permission to appeal two arbitral awards on identical terms under s69 of the Arbitration Act 1996 (the “Act”) and to set aside the awards for serious irregularity under s68.

Background

Daewoo Shipbuilding and Marine Engineering Company Limited (“DSME”) and Songa Offshore Equinox Ltd (“Songa”) entered into two contracts for the design, construction and sale of two drilling rigs. DSME was to build the rigs for Songa to perform long-term drilling on the Norwegian continental shelf.

In 2015, DSME issued notices of ad hoc arbitration in accordance with the London Maritime Arbitrators Association’s rules as seated in London, and the two arbitrations proceeded concurrently before the same tribunal. DSME claimed for costs and extensions of time, alleging that delays and cost-overruns were caused due to defects in the Front-End Engineering Design (“FEED”) documentation, for which Songa bore contractual responsibility. Songa counterclaimed for unliquidated damages arising out of late delivery together with certain discrete claims.

DSME proposed that the issue of design responsibility under the FEED documentation be heard as a preliminary issue by the arbitral tribunal (“Tribunal”). In correspondence, DSME repeatedly took the position that if its case on preliminary issues failed (i.e. if it was found to bear contractual responsibility for the design errors) “that would be the end” of its claim. In other words, DSME would also bear responsibility for the delays and cost-overruns. After initial opposition, Songa accepted this preliminary issue proposal and the matter proceeded to a hearing on this basis.

DSME lost on the preliminary issue and the Tribunal held DSME contractually responsible for the alleged errors in the FEED documentation. DSME thereafter unsuccessfully sought permission to appeal the awards out of time (see our earlier blog post here). Subsequently, DSME sought to amend its claim in the arbitrations to advance a claim for costs and extensions of time on the new basis that Songa had failed to cooperate in the correction of the alleged design errors (“Amended Claims”).

After a two day hearing, the Tribunal issued majority awards (the “Awards”) refusing permission to amend, on the ground that DSME had agreed that if it lost the preliminary issue, that would conclude its claims. Accordingly, if the application to amend were granted this would give rise to an abuse of process.

DSME then filed an application before the Court for permission to appeal the Awards under s69 and to challenge them for serious irregularity under s68.

Section 69 application

DSME sought permission to appeal the Awards under s69(3)(c)(i) of the Act, contending that the Tribunal got various questions of law “obviously wrong” when denying permission for the Amended Claims. DSME also alleged (under s69(3)(c)(ii)) that the questions of law raised were points of general public importance, with the test of permission then being the lower threshold of the decision being “at least open to serious doubt”.

The first question the Court considered related to the effect of an Addendum No.2 that the parties had entered into in June 2015, one month before DSME filed for arbitration. Through Addendum No.2, DSME agreed to deliver the rigs to Songa, on the understanding that DSME’s right to refer to arbitration disputes relating to the delays and losses caused by defects in the FEED documentation would be reserved. The Tribunal had held that the Amended Claims were debarred by Addendum No.2, as DSME had only reserved claims relating to the FEED documentation. DSME contended that the Tribunal was wrong in law in its finding on this point.

DSME also contended that the Tribunal was wrong to find that the correspondence between the parties in relation to the preliminary issue had constituted a binding contract, by which DSME had promised not to make new claims.

The Tribunal had also concluded that as DSME had represented to Songa that a decision against DSME on the preliminary issues would put an end to DSME’s claim, any attempt by DSME to bring new claims would be an abuse of process. The Tribunal had relied on the classic case of Henderson v Henderson (1843) 3 Hare 100, which held that "the court requires the parties to that litigation to bring forward their whole case ... and will not permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward”. DSME’s principal case on this point was that the Tribunal had erred in law in its application of the concept of abuse of process, as this could only arise where there were fresh proceedings and not in relation to the same proceedings.

Section 68 application

DSME also applied for permission to challenge the Awards for serious irregularity under s68 of the Act. DSME argued that the Tribunal had not heard, and had given DSME no opportunity to be heard, on the issue of amendment of its defence to counterclaim, before the Tribunal reached its decision in the Award that the proposed amendments "may not be invoked in defence of Songa's counterclaims".

Section 69 decision

The Court refused DSME’s application for permission to appeal under s69, finding that DSME was estopped from advancing new arguments, based on its agreement that the preliminary issue would dispose of its case.

On the interpretation of Addendum No.2, the Court decided that the Tribunal had made no errors of law, and in particular no obvious error of law in this respect. It applied the familiar approach that the interpretation of a contract is a unitary exercise which may have both textual and contextual elements, the purpose of which is to ascertain the objective intention of the parties. This was exactly the exercise undertaken by the Tribunal.

The Court noted that the case had been “argued… in as much detail as if permission had been granted and it will be apparent from what I have said above that had permission been granted, I would have not have found that the Tribunal had made an error of law.”  While DSME’s s69 application could be dismissed on this ground alone, for completeness the Court also dealt with the other submissions advanced by DSME.

On the existence of a legal agreement between the parties arising from the correspondence in relation to the preliminary issue, the Court held that DSME had represented as clearly as it could that a finding against it on the preliminary issues would mean that the technical issues and the causes of delay would not need to be considered. If the Amended Claims were allowed, the exact  opposite effect would result. Therefore, the Tribunal had not been wrong in rejecting the Amended Claims. The Court noted that a binding contract arising out of this kind of procedural correspondence was “less usual but not unknown”.

The Court then reviewed the law relating to abuse of process estoppel in detail, concluding that there was no basis for the suggestion that Henderson v Henderson estoppel could not apply within the same proceedings or to different stages within a single set of proceedings. Such a possibility had been recognised in the Court of Appeal decision of Tannu v Moosajee [2003] EWCA Civ 815, and subsequently applied to the same proceedings. The recent decision of Kensell v Khoury [2020] EWHC 567 (Ch) was also considered, where it had been noted that the position that an abuse of process can be invoked “even at a later stage in the same proceedings is now clearly established”.

The Amended Claims were “patently an attempt to go back to square one, and having lost, come up with a different way of putting the same case”. The Tribunal was therefore right to reject DSME’s Amended Claims.

The Court considered DSME’s submissions on the “public importance” of the questions of law raised, but decided that this unusual case, involving a bespoke agreement and very specific questions of law, in fact lacked any general application or public importance.

Section 68 decision

The Court also confirmed that there was no ground for challenging the award for serious irregularity under s68 of the Act. The Amended Claims made clear that they would also be relied upon as a defence to Songa’s counterclaim. The issue of whether the Amended Claims could be relied upon as defences was in play, and DSME had indeed been given a proper opportunity to make submissions on the point.

Comment

The Court’s decision in this case makes clear that where a preliminary issue is framed as dispositive of the arbitral proceedings, a party may well be estopped, on the grounds of abuse of process, from later trying to contest the case within the same arbitration proceedings on a new basis. It is accordingly vital for parties to explore thoroughly all potential claims and defences at the outset of the proceedings.

Parties should always be mindful of the scope of any preliminary issues they agree the tribunal should determine, and the potential impact this would have on the overall proceedings. In practical terms, the case underlines the value of obtaining express and unequivocal confirmation from a Claimant that their failure on a preliminary issue of liability will mean the end of their claim.

For more information, please contact Craig Tevendale, Partner, Rebecca Warder, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.