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“Finality is a goal” – the application of the Henderson v Henderson Principle in English-Seated International Arbitrations

  • United Kingdom
  • Commercial litigation
  • Investment treaty arbitration
  • Litigation and dispute management

26-07-2022

The English Commercial Court, in Union of India v Reliance Industries Ltd and another [2022] EWHC 1407 (Comm), considered whether an arbitral tribunal was right to reject a party’s submission on the basis of an English law principle that it should have been raised earlier in the arbitration, where the arbitration was English seated but the relevant contracts were governed by Indian law. The Court concluded that the English law principle was procedural rather than substantive and therefore the Tribunal was correct to apply it to the English seated arbitration. The Court agreed that it would have been an abuse of process for the Government of India (the “Government”) to make the submission, when it could have been made earlier in the arbitration, and the Court upheld the Tribunal’s partial award of USD 11 million.

Background

The case forms part of a long-running dispute between the Government and two oil and gas companies, Reliance and BG, relating to production sharing contracts (“PSCs”) for offshore oil and gas fields in India which the two companies are developing. The PSCs are governed by Indian law and the arbitration proceedings are seated in London, and therefore subject to the supervisory jurisdiction of the English Court. Under the PSCs they must share revenues with the Government, but can recover exploration and production costs. The long-running dispute relates to whether the actual costs claimed are recoverable under the PSCs.

The respondents (Reliance/ BG) commenced an English seated arbitration in relation to the dispute in 2010, which is still ongoing, and in a series of partial awards (eight in total) since 2010, the Tribunal has decided that BG and Reliance are entitled to recover over USD 400 million.

Challenge under the Arbitration Act

The Government brought two challenges under sections 68 and 69 of the Arbitration Act 1996 (“AA 1996”) against the Tribunal’s decision. In the arbitration, the Government had wanted to raise its threshold matters/objections submission concerning certain Indian constitutional law principles but was barred from doing so by the Tribunal.  According to the Tribunal, no good explanation had been provided for the fact that the Government had not raised the arguments in question prior to the release of an earlier final partial award on related issues.  The Tribunal applied the English law principle in Henderson v Henderson that a party is precluded from raising in subsequent proceedings matters which were not but could and should have been raised in the earlier proceedings (the “Henderson principle”).

Under the section 69 challenge, the Government raised a question of law as to whether the Tribunal was correct to decide an issue of res judicata according to English law (the Henderson principle), because the seat of the arbitration is in London. The Government contended that the PSCs were governed by Indian law and therefore in order for English law principles to apply it would need to be shown that identical principles exist under both systems of law (England and India).

Under the section 68 challenge, it was asserted that there was a “serious irregularity causing substantial injustice in the award” through the Tribunal’s failure to apply Indian constitutional law principles.

Substantive or procedural? Does it matter?

In the judgment, the Court referenced Lord Sumption in Virgin Atlantic Airways Limited v Zodiac Seats UK Limited [2013] USKC 46, [2014] AC 160, in explaining the difference between res judicata and an abuse of process. Lord Sumption set out that “res judicata and abuse of process are judicially very different” because res judicata is a rule of substantive law, whilst abuse of process is a concept which informs the use of the Court’s procedural powers. Lord Sumption considered them to be distinct but overlapping, both sharing the underlying purpose of limiting “abusive and duplicative litigation”. The significance is that where the governing law of the contract in dispute differs from the law of the seat, issues of res judicata and abuse of process may fall to be determined by reference to different systems of law.

Judgment

Both applications were refused by the Court.

In relation to the section 69 challenge, the Court held that the Henderson principle was procedural rather than a matter of substantive law. It is in place to protect against “wasteful and potentially oppressive duplicative proceedings”, in both arbitral and court proceedings. Since the arbitration was English seated, it was not wrong for the Tribunal to apply English law.

In relation to the section 68 challenge, the Court held that there was no unfairness in the Tribunal’s decision to prohibit the Government from advancing what it characterised as defences. In particular, the Government’s threshold/matters objections were wrongly categorised as defences, and it was untrue that the Government was shut out from defending itself. Further, the Court held that the Tribunal had not failed to deal with the essential issues under section 68(2)(d) AA 1996. The threshold under section 68(2)(d) is very high and on the facts the Tribunal had addressed the issues, by setting out and then rejecting the Government’s arguments.

Comment

This case is a reminder to users of arbitration that questions of law concerning the exercise of procedural powers by the Tribunal are subject to the law of the seat, and in many cases, this may be a different system of law to the governing law of the contract.  Parties should therefore choose their seat of arbitration carefully and, if proceedings are England or Wales seated, ensure that relevant arguments (including defences) are raised at the appropriate time in proceedings. Tribunals are entitled to use their procedural powers to preclude a party from advancing a claim, defence of argument that could and should have been argued at an earlier phase of an arbitration or in an earlier proceeding, and following this judgment it is unlikely that the scope of this power will be limited by any arguments regarding a tribunal’s duty of fairness under section 33 AA 1996.

Further, this case is a reminder of the high threshold which continues to be applied to challenges or appeals under sections 68 and 69 AA 1996.