English High Court considers application of arbitral award to ‘non-parties’

In the decision of PJSC National Bank Trust & Anor v Mints & Ors [2022] EWHC 871 (Comm), the English High Court considered whether the findings contained in an arbitral award could bind a third party, not privy to the arbitration agreement, in subsequent court proceedings.

The dispute concerned a claim for damages brought by two banks, National Bank Trust and Bank Otkritie Financial Incorporation (together, the Banks), against seven defendants. The Banks’ claims involved allegations that the First, Second and Third Defendants (D1-D3) were jointly and severally liable for acting unlawfully and in abuse of rights in respect of a transaction entered into by the Banks with third parties.

By way of background, a company founded by D1 (which D2 and D3 were involved with), obtained finance from the Banks by securing various pledges, including pledges from three Cypriot companies (Security Providers). One of the Banks later released the security in exchange for replacement security provided by the Security Providers.  It was later alleged by the Banks that the release of the initial security was procured by fraud on the part of D1-D3.

When one of the Banks commenced proceedings against the Security Providers, the Security Providers commenced an arbitration against that bank seeking declarations that the release was valid. In the arbitration, the Tribunal found that the dishonest acts of D1-D3 were attributable to the Security Providers and held in favour of the bank.

Prior to the conclusion of the arbitration, the Banks commenced court proceedings against D1-D3 (and others) and sought amongst other things to freeze the assets of D1-D3 pending the outcome of the arbitration.  Following the arbitral award, the Banks sought permission from the High Court to amend their Particulars of Claim to plead that each of D1-D3 were bound by the findings in the arbitration and accordingly were issue estopped from denying they had acted dishonestly.

D1-D3 argued that the binding effect of the Tribunal’s decision should be limited to those parties who were party to the arbitration agreement in a strict contractual sense.

Justice Foxton dismissed the Banks’ application for permission to amend their Particulars of Claim on the grounds that issue estoppel against D1-D3 could not be established. His Honour held that whilst an arbitral award can create an issue estoppel against parties to an arbitration as well as their ‘privies’, in this matter D1-D3 were not privies in a strict legal sense. In reaching his decision, Foxton J applied the test laid down in Gleeson v Wippell which provides that having regard to the subject matter of the dispute, there must be a sufficient degree of identification between the parties to the arbitration and the relevant other person to justify making the arbitration binding on that other person.

Justice Foxton found that even if allegations were established that D1-D3 controlled or funded some of the Security Providers and gave evidence for them in the arbitration, this did not support a finding of privity due to the distinct ‘legal personality of a company’.  Accordingly, Foxton J concluded that as D1-D3 were not privies, there was no abuse of process in D1-D3 advancing a case in the court proceedings which was inconsistent with the findings in the arbitration.

This decision confirms the legal position regarding the extent to which findings in an arbitration will bind a third party who is not a party to that arbitration. As recognised by Foxton J, in his decision, to bind a non-party to an arbitration award would be an “extremely challenging task” and difficult to reconcile with the consensual character of an arbitration.

Whilst this decision is not binding on courts in Australia, it provides an indication of the issues the courts may take into consideration when determining whether a non-party to an arbitration meets the necessary requirements of a privy for the purposes of the arbitration and may be bound in subsequent court proceedings to the findings of the arbitral award.

The full decision can be found here.