Note: to access a summary of the further award in this case, dealing with the merits of Owners' claim for an indemnity, click here 

On arrival at Tianjin on 21 June 2000, the surface of the cargo was found mildewed and rotten and, on completion of discharge, the receivers claimed that approx. 24% of the cargo for that port had sustained damage ranging from 30 to 80%. The ship was arrested on 13 July and subsequently released when security was posted for US$1.57 million approx. Receivers then commenced proceedings against the Owners on 11 August 2000 and, on 18 July 2001, the Tianjin Maritime Court entered judgment against the Owners for US$740,000 approx. The court held that the damage was not due to the inherent vice of the cargo (too high a moisture content upon loading) but to the Owners’ failure to ventilate the hatches appropriately.

Further similar damage was evident at the second port of discharge, Zhangjiagang. The receivers there also commenced a court action against the ship and Owners. However, Owners were able to stay that action, pending arbitration in London.

In the present arbitration, Owners claimed an indemnity from the time-charterers for the damages awarded against Owners by the Tianjin Court and for any amounts for which Owners might be held responsible in the London arbitration. The Charterers then brought a motion before the arbitrators to dismiss the Owners’ claim on the grounds of "issue preclusion" or "collateral estoppel". That doctrine would have precluded Owners from arbitrating (re-litigating) the issue of the cause of damage to the Tianjin cargo, since the Tianjin Maritime Court had already concluded that the cause of the damage to the goods was not the inherent vice of the cargo but the failure of the Owners properly to ventilate the cargo to avoid the risk of sweat damage. Against this, the Owners argued that the principle should not be applied in this case, partly because a number of the elements necessary for the application of the doctrine were not present in this case; partly because the courts of the People’s Republic of China (‘PRC’) do not apply the doctrine in litigation in the PRC with respect to issues previously determined in other cases in the PRC.

The Award
The arbitrators held that the pre-requisites for the application of the doctrine under both Federal and New York state law were those set out in the 1999 Second Circuit decision in the case of Securities Exchange Commission v. Monarch Funding Corp. They were:

1. the issues in both proceedings must be identical;
2. the issue in the prior proceeding must have been actually litigated and actually decided;
3. there must have been a full and fair opportunity for litigation of the issue in the prior proceeding;
4. the issue previously litigated must have been necessary to support a valid and final judgment on the merits.

The tribunal also found authority for the position under New York law that:

1. there was "no reason to give more conclusive effect to a foreign judgment than it would be accorded by the courts of the jurisdiction which rendered it";
2. Issue preclusion will apply only if it is quite clear that the requirements have been satisfied, lest a party be "precluded from obtaining at least one full hearing of his or her claim";
3. "since the doctrine of collateral estoppel poses a danger of placing termination of the litigation ahead of the correct result, it is narrowly applied."

The panel accordingly concluded that "an arbitration panel in the U.S should not apply the doctrine of issue preclusion to prevent the arbitration/rearbitration of an issue determined in a foreign court or arbitration (between two parties, one of whom is different than one of the parties in the U.S action) when the courts or arbitration bodies of or in the foreign nation do not themselves apply the doctrine in cases or proceedings in their own courts or arbitrations with respect to issues previously litigated there."

The tribunal then examined in detail the proceedings in the Tianjin Court and concluded:

• that, by reason of the Tianjin Court’s exclusion and rejection of Owners’ documentary evidence - such as the ship’s deck and deck maintenance logbooks, the extract of Hatch Ventilation and an expert analysis on the cause of damage - which, at the very least, the tribunal found relevant, important and admissible in the arbitration, the Owners "did not have a full and fair opportunity to litigate the issue for the cause(s) of damage, inherent vice, and whether the Owners exercised due care to properly ventilate and/or take proper care of the cargo";
• the judgments of the Tianjin Courts were based upon and stemmed "more from their application of the burden of proof applied, and their exclusion of evidence, than any thing else – certainly more than any full and fair exploration and analysis of the total evidence that can be (and apparently should have been) considered in evaluating why the cargo sustained the loss and damage that it did";
• that, for issue preclusion/collateral estoppel purposes, the above issues were not litigated or actually decided in the Tianjin litigation;
• the judgments and findings in the Tianjin Court decisions were "susceptible to collateral attack, change or modification" in the manner set out in certain learned articles that Owners had introduced in evidence;
• that, in consequence, there had been "enough showing of insufficient finality to make it impossible for this Panel to find any clear, fair or equitable entitlement to the application of the issue of preclusion in favour of the Charterers."

The Tribunal then went on to hold that it would be inappropriate for the panel to apply the doctrine on the facts of the case in the light of the evidence that the doctrine was not applied by the courts of the PRC.

Finally, the tribunal was "not at all satisfied" that the issues in the Tianjin proceedings were identical to the issues in the arbitration and, as a result, a further pre-requisite for the application of the doctrine remained unsatisfied.

Accordingly, the tribunal denied the Charterers’ motion and ordered the arbitration to proceed to a consideration of the merits of the Owners’ claims.