Parakou Shipping v Jinhui Shipping

DMC/ArbnSandT/10/2

Hong Kong

Parakou Shipping Pte Ltd v Jinhui Shipping and Transportation Ltd and others

Hong Kong Court of First Instance: Reyes J: HCAJ No.184 of 2009: 30 September 2010

http://www.hklii.org/hk/jud/eng/hkcfi/2010/HCAJ000184_2009-73172.html

Mr Charles Sussex SC and Mr Christopher Chain, instructed by Messrs Hammonds, for the Plaintiff shipowner Mr John Scott SC, instructed by Messrs Barlow Lyde & Gilbert, for the Defendant charterers

STRIKING OUT: ABUSE OF PROCESS: COLLATERAL ATTACK ON PREVIOUS ARBITRATION DECISION: ‘RELATED PARTIES’

Summary

The Court held that its abuse of process jurisdiction can be extended to prevent a party from mounting in a subsequent litigation an illegitimate collateral attack against a previous arbitration decision. Courts will scrutinise the facts of each case carefully to see if there exists any manifest unfairness or the potential to bring the administration of justice into disrepute by allowing the litigation to proceed. In the present case, each of the defendants was the alter ego of the other. They were also related parties to Galsworthy, who took part in a previous arbitration London against the plaintiff. In this litigation, the plaintiff was essentially mounting a challenge against part of the arbitral decision. This constituted an illegitimate collateral attack on the arbitral decision, and thus an abuse of process. The plaintiff’s claim was accordingly struck out. [See now Update at the foot of this note.]

This note has been contributed by Ken Lee To-ching, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and pupil barrister in Hong Kong.

Background

The Plaintiff, Parakou Shipping, was a Singaporean company that owned, operated and chartered ships. The first Defendant, Jinhui Shipping and Transportation Ltd (JSTL), was a holding company for Jinhui group’s shipping interests. It typically held vessels through one-ship Panamanian companies. It was also the sole shareholder of the other Defendants and of an entity called ‘Galsworthy’.

The essence of the dispute was whether a binding charterparty for a vessel to be purchased by the Jinhui Group had been concluded in June/July 2008 between Parakou and Galsworthy as disponent owners. When the time came for the ship to be delivered into this charter, in February 2009, the market had fallen substantially. Parakou refused to accept delivery and Galsworthy accepted this as a repudiation of the charter.

As grounds for its refusal to take delivery, Parakou maintained that it had never agreed to enter into a contract with Galsworthy as disponent owners and that it had been misled into believing that the company in the Jinhui Group from which it was chartering the vessel was the registered owner of the vessel.

Galsworthy immediately commenced arbitration proceedings in London against Parakou. Parakou took part in those proceedings, alleging that if – contrary to its submissions - it was held to have entered into the charter with Galsworthy, it had been induced to do so by various misrepresentations as to the ownership of the vessel that had been made to it by Galsworthy’s brokers in the course of the negotiations.

The London Arbitration tribunal handed down its award on 21 August 2010. It held that a binding fixture had been concluded between Galsworthy and Parakou. The claim for misrepresentation was also dismissed. It found that Parakou had been prepared to charter from disponent owners “without a [performance] guarantee from an associated company of financial substance”. It was only after the collapse of the market that Parakou changed its mind about chartering with Ocean Glory and Galsworthy.

In August 2009, Parakou had commenced the present action in Hong Kong. In it, Parakou claimed that there was no charterparty between it and Galsworthy and, to the extent that the arbitration found to the contrary, that it had been induced to enter into the charterparty by the misrepresentations referred to above. In September 2010, the Jinhui interests sought to strike out the action as an abuse of process.

Judgment

Reyes J allowed the Defendants’ application, holding that the action was, in effect, a collateral attack on the London arbitration award.

The Court first reviewed its jurisdiction to strike out collateral attacks as an abuse of process. The strict doctrine of res judicata aims to prevent a person from being pursued twice for the same reason, by preventing a party from re-litigating a previous cause of action (cause of action estoppel) or re-opening issues previously determined (issue estoppel). By extension of these principles, the judge held that the Court also has the power to strike out cases where the parties are not exactly the same, but the circumstances are such that the spirit of the rules should nevertheless apply. This will be a highly fact-sensitive question. Courts will scrutinise the facts of each case carefully because the exercise of the jurisdiction to strike out effectively prevents a party from litigating a matter.

Further, not all collateral attacks would constitute an abuse of process. Where the parties to later proceedings are neither the parties, nor related parties, to those involved in the previous proceedings, a collateral attack would only be struck out for abuse if allowing the subsequent proceedings to continue would result in manifest unfairness or bring justice into disrepute (China North Industries Investment v Shum, Hong Kong Court of Appeal, CACV No.321/2006, 21 December 2007). “Related” in this context involves a relation of “blood, title or interest” (Carl Zeiss Stiftung v Rayner & Keeler (No.2) [1967] 1 AC 853). In particular, in considering whether there is such related interest, “the required commonality is a direct interest in the subject matter of the litigation, a parallel or corresponding interest in that subject matter and not simply a financial interest in the result of the action” (China North, citing Genesee Enterprises Ltd v Abou-Rached (2001) 84 BCLR (3rd) 277; departing from Megarry VC’s test in Gleeson v J Wippell & Co [1977] 1 WLR 510).

The present case clearly fell within this extended aspect of the Court’s abuse of process jurisdiction. The arbitral award was binding not only between Parakou and Galsworthy as the actual parties to the arbitration, but also between Parakou and the defendants in this case, as the latter were related parties to Galsworthy. JSTL was the 100% owner of the other defendants and of Galsworthy; all the latter companies were the alter ego of each other. They also shared a direct interest in the outcome of the London arbitration as it was in the interest of the shipping side of the Jinhui Group to establish the existence of charterparty between Parakou and Galsworthy. Although there were slight differences in the misrepresentations alleged, the key issues in the London arbitration and the Hong Kong action were the same.

The Court rejected Parakou’s argument that that the abuse of process jurisdiction could not extend to arbitration because there was no “court of competent jurisdiction”; Fidelitas Shipping Co LTd v V/O Exportschleb [1966] 1 QB 630 (CA) showed that for the purpose of res judicata, arbitration tribunals may be regarded as tribunals of competent jurisdiction. Thus, there was nothing to preclude court intervention to prevent a collateral attack on an arbitral decision based on the second aspect of its abuse of process jurisdiction. This was evident from the obiter dicta of Mance LJ in Sun Life Assurance Company of Canada and others v Lincoln National Life Insurance Co [2005] 1 Lloyd’s Rep 606, paras. 63-69. Although Sun Life concerned whether a stranger was bound by an interpretation of contract held in an arbitral decision, Mance LJ nevertheless went on to consider whether abuse of process could be argued by examining the circumstances of that case.

However, the present case was different from Sun Life, where there was no abuse of process. Here, the Jinhui group was holding onto the favourable London arbitral award, and it was Parakou which was cherry-picking which part of the London arbitral decision to challenge. Parakou accepted that part of the decision holding the existence of the charterparty, but were challenging whether or not there was misrepresentation by the defendants.

The two cases were also different because Sun Life concerned a third party who was a genuine stranger to the arbitral award, while in the present case, Parakou was effectively seeking to re-open the matter decided in an arbitration to which the defendants were parties or related parties. There was nothing to preclude a court from applying its abuse of jurisdiction in appropriate cases (that is, cases where there may be manifest unfairness or the potential to bring administration of justice into disrepute by allowing the second set of proceedings to go on) simply because on the one hand, litigation is public in nature, while arbitration private and consensual on the other. It only meant that courts should be cautious in dealing with cases involving arbitration.

Comment

So far as the editor is aware, this seems to be the first case in Hong Kong and England where an action was struck out for abuse of process because a party sought to mount a collateral attack on a previous arbitration decision involving the same opponent or its related parties. The Court here found no difficulty in extending its abuse of process jurisdiction to cover and apply it in this case, given the close relationship between Galsworthy and the defendants in this case, and the similarities between Parakou’s claims in both sets of proceedings. This decision is clearly to be welcomed, as it seeks to protect the integrity of arbitration proceedings. This seems to be the state of Canadian law as well: see Penny v Royal & Sun Alliance Insurance Co of Canada [2006] O.J. No. 2858.

What is slightly unclear, however, is how the courts would exercise this jurisdiction in cases involving arbitration and, in particular, whether there are any differences to the applicable test or the relevant considerations when one is dealing with parties to arbitration and their related parties on the one hand, and strangers on the other (see para.96 of judgment in Parakou).

The answer seems to be that common law principles on abuse of process would apply in the same manner, whether one is concerned with a collateral attack against a court decision or an arbitral decision. The test of abuse of process would also remain the same whether or not related parties to the decisions are involved. It may also be useful to look at the court’s approach in granting an anti-suit injunction against a party intending to mount collateral attacks on an arbitral award in foreign jurisdictions. In particular, the requirement of “unconscionability” is said to be analogous to “abuse of process” (see Turner v Grovit [2001] UKHL 65, [2002] 1 WLR 107). As the distinction between this case and Sun Life shows, it would generally be harder to hold a stranger to be in abuse of process by departing from the previous decision. This seems the more so, given the difference in nature between litigation and arbitration. A stranger may not be aware of the arbitration decision and, even if he is aware of it, it would seem difficult to hold him to that decision, as he did not consent to the arbitral process.

Update

The Plaintiff’s action in this case was secured by a bank guarantee and by a payment into court. After the Plaintiff’s claim was struck out, the trial judge, Reyes J, refused to stay the payment to the Defendant of the money in court, subject to a retention of US$1.5 million in court and the Defendant’s undertaking to pay into court any sum recovered from the Plaintiff. On 17 November 2010, the Hong Kong Court of Appeal (Tang Ag CJHC and Andrew Cheung J; CACV225/2010) dismissed an appeal by the Plaintiffs of the refusal to stay. The Court was of the view that the order of Reyes J provided sufficient security protection for the Plaintiff when the case was under appeal. Further, it commented that so far, the Plaintiff had not shown a good prospect of success. (KL 15 December 2010)