Res judicata and issue estoppel in arbitration

Procedural or substantive law?

Publication May 2016

Res judicata and issue estoppel exist at the intersection of procedural and substantive law. Deciding what law should apply remains at the discretion of arbitration tribunals. This makes res judicata a potential area of uncertainty in the arbitration process.

Whether and to what extent an arbitration tribunal determines itself bound by earlier judgments and findings of a court or tribunal may fundamentally affect the outcome of an arbitration. This includes which factual and legal issues are to be explored, tried and determined in the arbitration. When assessing the probable legal costs and overall strategy of an arbitration, a party will have to take this into account, particularly in international arbitrations likely to touch upon a number of legal systems and laws.

Sample scenario
For example, a supply contract governed by French law may contain an arbitration clause providing for disputes to be arbitrated in Hong Kong. In an arbitration, how should a tribunal seated in Hong Kong approach questions of res judicata and issue estoppel concerning an earlier determination of a court on a central issue in related proceedings not subject to the arbitration clause? What law should it apply? (If, for example, a US judgment had confirmed that goods supplied under the contract in the US were in breach of FDA regulations and therefore unfit for purpose.)

There are major differences between the common law and civil law approaches to the application of the doctrine of res judicata and its ambit.

Res judicata under common law

Res judicata as applied in common law jurisdictions covers a number of distinct concepts. Key amongst these are ‘cause of action estoppel’ and ‘issue estoppel’. Broadly speaking under common law, a plea or defence based on cause of action estoppel, if accepted, prevents a party pursuing a claim which has already been determined by a court of competent jurisdiction in previous litigation between the same parties (or their privies).

On the other hand a plea or defence of issue estoppel, if successful, prevents a party in proceedings from contradicting a finding of fact or law that has already been determined in earlier proceedings between the same parties (or their privies) – provided that the determination was central to the decision in those proceedings.

A ‘privy’ under common law is one who claims title or right under, through or on behalf of a party bound by a decision. A privy has been held to include persons or entities with an interest, legal or beneficial, in the previous litigation or its subject matter.

A further type of issue type estoppel related to res judicata is the rule in Henderson v Henderson which operates to prevent a party raising claims and defences that could have been raised in the earlier proceedings but were not.

Res judicata under civil law

In civil law jurisdictions the concept of res judicata is also followed, often in a codified form. Parties are barred under the principles of res judicata from litigating the same dispute again, once a final judgment has been rendered by a competent court.

It is generally acknowledged, however, that in civil law jurisdictions the concept of res judicata has a much narrower application. This is reflected, for example, in the French Civil Code (article 1351), which applies a strict triple identity test for the application of the doctrine of res judicata:

The authority of res judicata applies only to what was the object of a judgment. It is necessary that the thing claimed be the same; that the claim be based on the same cause; that the claim be between the same parties and brought by them acting in the same capacity.

The requirement under the third limb of the test that there be an absolute identity of parties can be contrasted with the common law position, which extends res judicata to apply to ‘privies’ of parties.

In some civil law jurisdictions, the concept of issue estoppel is not recognized (one reason being that the operative order of court rather than the underlying reasons or factual findings is seen to be binding); the rule in Henderson v Henderson (or its equivalent) is also not followed.

Procedural or substantive law?

The question of which law should be applied by an arbitration tribunal (as in the sample scenario outlined above) in its consideration of res judicata turns on whether res judicata (and its related concepts) should be seen as a question of procedural or substantive law.

The case for lex arbitri

In common law jurisdictions, res judicata can be said to be a rule of evidence and admissibility concerning the earlier decision, and whether it must be regarded as conclusive and binding.

In civil law jurisdictions, res judicata is usually codified in procedural codes. There would appear to be good reason why res judicata should therefore be regarded as essentially a question of procedural law rather than substantive law. As we know, the location of the seat of an arbitration is significant in that it determines the procedural rules which govern an arbitration (incorporating any mandatory local laws applicable to arbitration). The law of the seat of the arbitration (the lex arbitri) appears, therefore, to be the appropriate law to be applied by the arbitration tribunal when it considers the application of res judicata in an arbitration – if res judicata is a question of procedural law.

The case for lex causae

There is also a school of thought that res judicata is actually a substantive rule of law. In that case, the tribunal should apply the governing law of the contract (lex causae) when it considers the application of res judicata and issue estoppel.

In this regard, res judicata and issue estoppel can operate to prevent a party from advancing a claim or arguments in an arbitration which can be said to fundamentally affect the substantive rights of a party.

The wording of the arbitration agreement

Proper regard must be had to the actual agreement between the parties and their intention to be bound thereby. The wording of the arbitration and proper law clause in a contract might be viewed as sufficiently wide in ambit as to encompass and apply to issues of res judicata which might arise.

For example,

The parties irrevocably agree that all disputes and questions arising under or in connection with the negotiation, existence, legal validity or enforceability or termination of the Agreement shall exclusively be governed by and determined only in accordance with French Law.

No right or wrong answer

The concept of res judicata straddles the intersection between substantive and procedural law. There is no right or wrong answer, nor any established approach as to whether the lex causae or lex arbitri should be adopted by an international arbitration tribunal in its consideration of res judicata issues. It will probably remain within the discretion of the particular tribunal, to be decided after due consideration of all relevant factors to the particular dispute, including the arbitration agreement and earlier decision.

This makes res judicata a potential area of uncertainty for parties and their legal representatives going into arbitration.

Camille Jojo is a partner and Ben Ridgeon is an of counsel in the Hong Kong office of Norton Rose Fulbright.


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