Preclusive effect of Res Judicata in International Commercial Arbitration: A Baffling Syndrome

[Prabhakar Yadav is a III Year student pursuing B.A.LL.B. (Hons.) at the National Law School of India University, Bangalore]

The doctrine of res judicata is a potent tool for any legal order which aims to achieve efficiency and consistency in the judicial administration. This objective is achieved by the fact that res judicata buries disputes to rest by creating a preclusive effect of prior judicial decisions on subsequent judicial proceedings. However, the situation is murky when it comes to importing this judicially cherished preclusive doctrine from the corners of litigation to arbitration.

In this backdrop, this post analyzes three crucial aspects that stand in the way of establishing the preclusive effect of res judicata in international commercial arbitration; that is, to determine: (i) when a prior judicial decision establishes a preclusive effect on subsequent arbitration proceedings; (ii) when a prior arbitral award establishes a preclusive effect on subsequent judicial proceedings; and (iii) when a prior arbitral award establishes a preclusive effect on subsequent arbitration proceedings. After understanding these three critical aspects, the central argument of this post is that arbitral awards that are rendered after applying due procedures establish the same preclusive effect in international commercial arbitration as they do in domestic litigation.

When does a prior judicial decision establish preclusive effect on subsequent arbitration proceedings?

It is a presupposition that formal judicial decisions which apply rules of evidence and civil procedure have sufficient procedural regularity. Hence, applying them would not create impediments:  in case arbitrators seek to give effect to preclusionary doctrines, such as—cause of action and issue estoppel—adjudged in a former suit in subsequent arbitration proceedings. But, there are two circumstances which undoubtedly warrant arbitral tribunals to determine whether claims or issues sought to be adjudged are barred by res judicata on account of prior judicial decisions.

First, it arises when the issue of arbitrability of a dispute is already adjudged in a previous judicial decision,[1] and subsequent to which one of the parties moves to arbitration tribunal to re-argue its claim. This claim is not permitted in international arbitration practice as it tantamounts to collateral estoppel. Furthermore, it defies the objective of the doctrine of res judicata—which abhors unnecessary vexation. Second, it arises in the case when parties commence litigation in the face of prior valid arbitration agreement, with either party not objecting to it. Subsequently, the losing party seeks to reargue its claim before the arbitration tribunal by invoking the arbitration clause in the agreement. This claim is also impermissible in international commercial arbitration, as here the losing party is indulging in forum shopping and abuse of process of court.[2] Thus, in these two situations, the prior judicial decision establishes a preclusive effect of cause of action and issue estoppel on subsequent arbitration proceedings.

When does a prior arbitral award establish a preclusive effect on subsequent judicial proceedings?

Arbitral tribunals in their effort to provide speedy disposal of disputes are not bound by strict rules of procedure. Hence, the awards rendered by them might not be conclusive—and thus might attract judicial scrutiny. Predominantly, the courts look at range of factors to determine whether the tribunal followed sufficient ‘procedural safeguards‘ before establishing an issue-preclusive effect of that award.[3] For instance, courts consider whether:

(1) the [arbitration] was conducted in a judicial-like adversary proceeding; (2) the proceedings required witnesses to testify under oath; (3) the [arbitral] determination involved the adjudicatory application of rules to a single set of facts; (4) the proceedings were conducted before an impartial hearing officer; (5) the parties had the right to subpoena witnesses and present documentary evidence; and (6) the [arbitrator] maintained a verbatim record of the proceedings … Finally, [whether] that reasoned decision [was] adopted by the director of the agency with the potential for later judicial review.[4]

However, per contra, there are also decisions where the courts have derided this kind of extensive examination of an arbitral award on procedural grounds for the purpose of determining preclusive effect, de hors the objective of the arbitration itself. For example, in a landmark judgment,[5] the Supreme Court of the United States observed that parties can limit the scope of preclusive effect of award—contractually. In those circumstances, the court would decide on the preclusive effect taking into account other factors such as the nature and purpose of an arbitration agreement, the relationship between parties, and the interest involved therein.[6] This approach prevents the parties’ disputes from getting bogged down in the strict rigors of judicial procedures in any subsequent judicial proceedings between them.[7] Thus, Shell made an emphatic observation promoting the contract based model for res judicata in international commercial arbitration.

Balancing these two divergent positions holistically, i.e.—complying procedural safeguards (as laid down in Vandenberg) and freedom of parties (as laid down in Shell)—it is argued that domestic courts are generally deferential to international arbitral tribunal findings, and give effect to the preclusive effect of an arbitral award, provided it is sufficiently clear and does not lead to injustice to either of the parties.

When does a prior arbitral award establish a preclusive effect on subsequent arbitration proceedings?

The last issue which arises out of various permutations and combinations in the matrix is whether a prior arbitral award establishes a preclusive effect on any subsequent arbitration proceedings. This was considered in IDS Life Ins. Co. v. Royal Alliance Association,[8] where the Court clarified on the scope of preclusive effect of a former arbitral award—ruling: “Although res judicata usually attaches to arbitration awards, it does so as a matter of contract rather than as a matter of law. The preclusive effect of the award is as much a creature of the arbitration contract as any other aspect of the legal-dispute machinery established by such a contract“.[9] Thus, parties can contractually limit the preclusive effect of a prior arbitral award on any subsequent arbitration proceedings between them.

However, it is to be noted that even though contractual liberty enables flexibility in subsequent arbitration proceedings, it does not tantamount totally that an arbitral panel should not give a preclusive effect to prior court decisions and awards.[10] This usually happens in absence of any pre-contractual arrangement. In those circumstances, the authority to give preclusive effect to prior decisions is deemed to be delegated to the arbitrator,[11] who is then bound to implement it in the interest of fairness and consistency.

Concluding Observations

Academic debates on the preclusive effect of prior arbitral award and judgments on subsequent arbitration proceedings continues to generate divergent opinions across jurisdictions. This post analyzed three such critical situations pertaining to when arbitrators should give effect to preclusionary doctrines in subsequent arbitration proceedings. It is stated that applying the rules of preclusion in those circumstances would encourage not only uniformity and finality of decisions, but also discourage the practice of forum shopping: thereby importing the potency of doctrine of res judicata from litigation to subsequent international arbitration proceedings.

Prabhakar Yadav

[1] Gordon RD, (2006): “Only One Kick at the Cat: A Contextual Rubric for Evaluating Res Judicata and Collateral Estoppel in International Commercial Arbitration”, Vol. 18, Florida Law Review, at 562.

[2] Gordon, note 1 above, at 563.

[3]Vandenberg v. Superior Ct., 982 P.2d 229, 237 (Cal. 1999). The Court basically considered the nature and legality of the prior forum and further looked into the scope of its jurisdiction.

[4] Imen v. Glassford, 201 Cal. App. 3d 898 (Cal. Ct. App. 1988).

[5] Hilliard v. Shell Western E&P, Inc., 885 F. Supp. 169.

[6] Hilliard, note 5 above, at ¶ 663- 667.

[7]See, IDS Life Ins. Co. v. Royal Alliance Ass’n, 266 F.3d 645,649,651 (7th Cir. 2001). Here, the Court held that parties are bound by the arbitration agreement and their commitment to resolve their dispute through this mechanism. No matter how bad their choice might be, courts have no business to interfere in the nature of that choice, either ex ante or ex post.

[8] Note 7 above.

[9] Note 7 above, at 651.

[10]See, John Morrell & Co. v. United Food & Commercial Workers, 913 F.2d 544, 563 (8th Cir. 1990). This case involved a circumstance where the arbitrator had disregarded the jury verdict reached prior to coming to its conclusions. The Circuit Court derided this practice and said: “For the arbitrator to reject the jury verdict was to disregard the law and to substitute his own brand of industrial justice for the deliberations and verdict of the jury”.

[11]See, United Industrial Workers v. Government of Virgin Island., 987 F.2d 162, 169 (3d Cir. 1993). The Court declared that “absent a collective bargaining agreement provision that requires arbitrators to be bound by earlier arbitration awards, the parties delegate to the arbitrator the power to decide the preclusive effect of prior arbitration awards”.

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