The recent decision of the English High Court in Daewoo Shipbuilding & Marine Engineering Limited (DSME) v. Songa Offshore Equinox Ltd (Songa) [2020] EWHC 2353 (TCC) provides important guidance on the issue of abuse of process in international arbitration. The Court (Jefford J.) decided that the Henderson rule, requiring a party to present their entire case during proceedings, can apply within the same arbitral proceedings to preclude a party from bringing claims which could and should have been raised as a preliminary issue.

The decision highlights that a party should think twice before agreeing to have certain claims decided as preliminary issues, as it may be precluded from subsequently relitigating matters which fall within the scope of the preliminary issue.

The Facts

DSME commenced an arbitration against Songa under two turnkey contracts for the design, construction and sale of two semi-submersible drilling rigs. DSME was the builder under the turnkey contracts, whilst Songa was the buyer. The arbitration was seated in London and governed by the LMAA rules and English law.

The disputes referred to arbitration arose out of time and cost over-runs in the construction of the drilling rigs. DSME alleged that certain documentation Songa provided was defective and that this had caused the delays and cost over-runs for which Songa bore contractual responsibility.

DSME requested a preliminary issue on a question of construction of the turnkey contracts to determine which party bore design responsibility for the drilling rigs. DSME stated that it accepted that if the preliminary issue was decided against it, then that would be dispositive of its claims against Songa under the turnkey contracts. Songa consented and the Tribunal ordered the hearing of a preliminary issue relating to the construction of the turnkey contracts. The Tribunal found against DSME on the preliminary issue.

DSME subsequently sought to amend its case in light of the Tribunal’s award on the preliminary issue to bring new claims. This amended statement of case was contrary to DSME’s position that the determination of the preliminary issues would be dispositive of its claims.

The Tribunal rejected DSME’s application to amend its case on the basis that, if granted, the amendment would give rise to an abuse of process. The Tribunal reasoned that DSME could and should have brought, or at least intimated, its further claims before the hearing of the preliminary issue.

DSME subsequently challenged the Tribunal’s decision under sections 68 and 69 on the basis that the Tribunal applied an incorrect approach to determining whether DSME’s proposed amendments to its claims would amount to an abuse of process.

Jefford J. rejected the challenge and held that DSME was precluded from trying to relitigate matters which it could and should have raised as part of the preliminary issue. In doing so, Jefford J. provided a valuable analysis of the circumstances in which the determination of a preliminary issue in arbitral proceedings will preclude a party from a raising new claims in the same proceedings.

The High Court’s Decision: The Rule in Henderson v. Henderson Applies In Arbitral Proceedings

The key issue that the High Court was asked to determine was whether the Tribunal was correct that the long-standing rule of Henderson v. Henderson [1843] 3 Hare 100 could apply within the same arbitral proceedings.

The case of Henderson established a rule preventing parties from putting forward claims or arguments that they could have advanced in earlier proceedings. In Henderson it was said that:

“the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of a matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. “ (107)

DSME relied on the decision of Jackson J in Ruttle Plant Hire Ltd v Secretary of State for the Environment [2007] EWHC 1733 (TCC) to argue that the rule in Henderson cannot apply to amendments in the same set of arbitral proceedings. In Ruttle Plant Hire, Jackson J held that “the rule in Henderson v. Henderson cannot be invoked in order to prevent a party from pleading at a later stage in the litigation issues which might have been pleaded earlier” ([36]). On DSME’s analysis, during an arbitration it should always open to a party to amend its case, subject to paying costs and not causing the other party prejudice and the strict Henderson rule does not come into play.

Jefford J. rejected DSME’s argument noting that there was no principled reason why the rule in Henderson could not apply within the same set of arbitral proceedings ([128]). Jefford J. relied on the recent decision of Kensell v. Khoury [2020] EWHC 567 in which the Judge stated:

“So far as the authorities are concerned, the proposition that the Henderson principle can be invoked even at a later stage in the same proceedings is now clearly established […].

So far as the point of principle is concerned, I do not see why the existence of a broad discretion in the context of an application to amend is a reason to preclude altogether the application of the Henderson principle within the same action.” ([48-49])

In terms of how this principle extended to arbitral proceedings, Jefford J. summed up the position in paragraph 128 of the judgment as follows:

“The key point seems to me to be that […] an abuse of process may arise (albeit does not necessarily arise) where the issue could and should have been raised at an earlier stage and that the authorities to which my attention has now been drawn support the proposition that that may be the case at different stages of the same proceedings as well as in subsequent proceedings and that an abuse of process may properly be found to arise in the context of proposed amendments. The question of whether the issue or issues then raised have been determined or were within the scope of the matters to be determined or were relevant to the matters to be determined is all part of the broad merits based judgment of the facts.” ([128])

Applying this reasoning to the facts of the case, Jefford J. found that the Henderson rule could apply to prevent DSME from amending its case and the Tribunal was correct to conclude that the new claims ought to have been investigated and raised before, as a part of the preliminary issue ([130]). There was no “obvious error of law” in the Tribunal’s reasoning and DSME’s sections 68 and 69 challenges were, therefore, dismissed ([131]).

Be Wary of Agreeing to a Preliminary Issue

Lord Scarman once warned in Tilling v. Whiteman [1980] AC 1, 25 that preliminary issues “are too often treacherous short cuts. Their price can be, as here, delay, anxiety, and expense.” The facts of Daewoo Shipbuilding show that this warning remains pertinent.

This does not mean that a “treacherous short cut” should never be risked. Preliminary issues in arbitral proceedings, when used wisely, can serve a useful purpose. Viewed from the perspective of efficiency, a well-conceived preliminary issue can allow parties to narrow their dispute at an early stage of proceedings and avoid the time and costs of taking an entire dispute through the full arbitral process. By enabling parties to resolve certain aspects of their dispute at any early stage in proceedings a decision on a preliminary issue can serve to focus the parties on the truly pertinent issues and encourage settlement.

The Daewoo Shipbuilding case illustrates, however, that a great deal of care needs to be taken when framing or agreeing to a preliminary issue, to ensure that the effect of its determination is correctly understood. We now know that if a preliminary issue is framed as determinative of a party’s claims if decided in a certain way, then that party may be precluded from subsequently amending its case on grounds of abuse of process. To avoid this pitfall, when drafting and agreeing preliminary issues, parties are advised to define precisely what the effect of the determination of the preliminary issues will have on their claims and on the overall proceedings.