Reed Smith Client Alerts

In Fortune Pharmacal Co Ltd v. Falcon Insurance Company (Hong Kong) Ltd and Another [2023] HKCA 66, the Court of Appeal (CA) confirmed the Hong Kong position on res judicata to potentially encompass matters involving different but related parties.

Res judicata and abuse of process

The principle of res judicata, a Latin term meaning ‘a matter judged’, broadly prevents a party from re-litigating a claim, defence or issue already litigated. This is intended to ensure the finality of judgments and protect litigants from multiple litigations involving the same claims or issues.

Lord Sumption described the principle in Virgin Atlantic Airways Ltd v. Zodiac Seats UK Ltd (formerly known as Contour Aerospace Ltd) [2013] UKSC 46, as including a number of different legal principles. These included:

(a) A rule preventing re-litigation of the same cause of action (cause of action estoppel);

(b) A rule preventing re-litigation in one cause of action of an issue decided in an earlier cause of action and binding on the parties (issue estoppel); and

(c) A general procedural rule against abuse of process.

The Virgin Atlantic formulation also included rules: (d) preventing a successful claimant re-litigating on the same basis for further damages; (e) providing that a cause of action is extinguished once judgment is given (the doctrine of merger); and (f) preventing a party from raising in subsequent proceedings matters which were not, but could and should have been, raised in earlier proceedings (the rule in Henderson v. Henderson).

Notably, both cause of action and issue estoppel apply in respect of prior proceedings between the same parties or their “privies”, being one who claims title or right under, through or on behalf of a party bound by a decision (the principle of mutuality).

Facts and Court of First Instance (CFI) decision

The matter involved litigation proceedings and arbitration proceedings in respect of related claims, but not between identical parties.

The plaintiff (P) and the second defendant (D2) concluded a contract (the Contract) for D2 to carry out construction works. Separately, P entered into a conditional bond (the Bond) with both D2 and the first defendant (D1), an insurance company, whereby D1 agreed to discharge the damages sustained by P on default by D2.

A dispute arose, and, as the Contract and Bond were agreed between different parties and contained different dispute resolution clauses, the parties were later involved in two separate actions:

(a) P commenced litigation proceedings against D1 for breach of the Bond and D2 for breach of the Contract (the Litigation); and

(b) D2 commenced arbitration proceedings against P for breach of the Contract (the Arbitration).

Subsequently D2 applied for, and was granted, a compulsory stay of the Litigation against D2 in favour of arbitration. D2 also applied for and was granted a case management stay (Case Management Stay) against D1 (please refer to our previous alert).

An important consideration in granting the Case Management Stay was that D1 had given an undertaking (Undertaking) that it would be bound by the outcome of the Arbitration between P and D2. The CFI judge held that the Undertaking would prevent inconsistent findings in the Arbitration and the Litigation.

The present case concerned P’s application for leave to appeal against the Case Management Stay.