Arbitrability of intra-corporate disputes

Arbitration is a consensual process. It is axiomatic that parties may only arbitrate those disputes that they have agreed to submit to arbitration. In some cases, after a dispute has arisen, parties to that dispute may agree to refer the dispute to arbitration. Alternatively, and more commonly, parties agree by virtue of arbitration clauses drafted into their contracts to submit any subsequent disputes that may arise to arbitration.

There are good reasons why parties should pay attention to how their arbitration clause are worded. Where a dispute does not fall within the scope of the arbitration clause, that dispute would fall outside the jurisdiction of the arbitral tribunal and any award rendered on that basis is liable to be set aside or refused recognition and enforcement: see Article 34(2)(a)(iii) of the UNCITRAL Model Law; Article V(1)(c) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (“New York Convention”).

Parties should also note that there are certain subject matters that are non-arbitrable: see Article 34(2)(b)(i) of the UNCITRAL Model Law; Article V(2)(a) of the New York Convention). These tend to involve issues of statutory rights and remedies including marriage and divorce, criminal law, probate and estate (inheritance), patents and trademarks as well as insolvency (personal and corporate).

The learned author Gary Born expresses it as follows (see International Commercial Arbitration (Kluwer Law International, 3rd Ed, 2009) at page 768):

“… the types of claims that are non-arbitrable differ from nation to nation. Among other things, classic examples of non-arbitrable subjects include certain disputes concerning consumer claims; criminal offences; labour or employment grievances; intellectual property; and domestic relations. The types of disputes which are non-arbitrable nonetheless almost always arise from a common set of considerations. The non-arbitrability doctrine rests on the notion that some matters so pervasively involve public rights, or interests of third parties, which are the subjects of uniquely governmental authority, that agreements to resolve such disputes by ‘private’ arbitration should not be given effect.”

The Singapore High Court in Silica Investors Limited v Tomolugen Holdings Limited [2014] SGHC 101 recently examined the issue of the arbitrability of intra-corporate disputes. The issue before the court was whether a minority oppression claim under s 216 of the Companies Act (Cap. 50, 2006 Rev Ed) could be arbitrated.

Background

The Plaintiff, Silica Investors Limited, was the registered shareholder of 3,750,000 shares (representing about 4.2% of all the shares) in the 8th defendant, Auzminerals Resource Group Limited (“AMRG”). The majority and controlling shareholders of AMRG were the 1st Defendant, Tomolugen Holdings Limited (“THL”) which held 49,603,397 shares (representing about 55% of all the shares) in AMRG. THL was also the sole shareholder of the 2nd Defendant, Lionsgate Holdings Pte Ltd (formerly known as Tomolugen Pte Ltd), which held 8,135,001 shares (representing about 9% of all the shares) in AMRG.

The Plaintiff had purchased its shares from the 2nd Defendant pursuant to a Share Sale Agreement dated 23 June 2010 (the “Share Sale Agreement”) and a Supplemental Agreement dated 5 July 2010 (the “Supplemental Agreement”) entered into between the Plaintiff and the 2nd Defendant.

Clause 12.3 of the Share Sale Agreement provided for disputes between the Plaintiff and the 2nd Defendant to be referred to SIAC arbitration.

12.3 Dispute Resolution

Without prejudice to any right of the Parties to apply to any competent court for injunctive relief, any dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration in Singapore in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (“SIAC”) for the time being in force, which rules are deemed to be incorporated by reference in this clause. The tribunal shall consist of one arbitrator to be appointed by the chairman of the SIAC. The language of the arbitration shall be English.

The Plaintiff commenced a suit in the Singapore courts pursuant to s 216 of the Companies Act alleging minority oppression by several of the defendants. The Plaintiff’s four main allegations (see paragraph [6]) were that.

  1. The issuance of shares to THL by AMRG as payment for an alleged debt had the effect of diluting the Plaintiff’s shareholding by over 50%.
  2. The Plaintiff was wrongfully excluded from participating in the management of AMRG.
  3. The board of directors of AMRG were under the control and/or influence of several of the defendants and executed corporate guarantees to further those defendants’ interest at the expense of AMRG.
  4. Several of the defendants had misused AMRG’s resources for their own benefit and had concealed information from AMRG.

One of the reliefs sought by the Plaintiff as a minority shareholder was the winding up/liquidation of AMRG pursuant to Section 216(2)(f) of the Companies Act.

Threshold Question – Did the Plaintiff’s claims fall within the arbitration clause

The 2nd Defendant applied for a stay of the court proceedings on the basis of the arbitration clause and pursuant to section 6 of the International Arbitration Act (Cap. 143A) (“IAA”). For a list of posts dealing with stay of proceedings pursuant to arbitration, see here.

Subsequently, several of the defendants (who were not party to the Share Purchase Agreement) also sought a stay of the proceedings against them on the basis of the inherent jurisdiction of the court. For a more detailed discussion on the Singapore courts’ powers to stay its proceedings in support of arbitration, see our post “Court can exercise Inherent Powers to Stay Proceedings in support of Arbitration”.

The Singapore High Court held that the Plaintiff’s minority oppression claims fell within the arbitration clause (see paragraph [15] to [59]). A few legal points are worth noting here.

First, the court’s analytical framework for a stay is to determine (a) the proper characterisation of the Plaintiff’s claim; (b) the scope of the arbitration clause and (c) whether the Palintiff’s claim falls within the scope of the arbitration clause (see paragraph [14]).

Second, to properly characterise a plaintiff’s claim,

“…the Court is entitled to ascertain the essential dispute between the parties. However, it should not be a mere issue which falls to be decided in the course of the proceedings. To identify the matter in the proceedings, the Court may consider the pleadings and the underlying basis of the claim. The Court is guided by, but not limited to, the way in which the claim has been framed in the pleadings” (see paragraph [18]).

Third, the High Court recognised that there was a “controversy” as to whether separate claims arising from the same facts ought to be considered as one matter or separate distinct matters(see paragraph [43]). However, the High Court declined to provide its view on this issue. The relevance of the term “matter” stems from section 6 of the IAA, which provides:

Enforcement of international arbitration agreement

  1. —(1) Notwithstanding Article 8 of the Model Law, where any party to an arbitration agreement to which this Act applies institutes any proceedings in any court against any other party to the agreement in respect of any matter which is the subject of the agreement, any party to the agreement may, at any time after appearance and before delivering any pleading or taking any other step in the proceedings, apply to that court to stay the proceedings so far as the proceedings relate to that matter.

Fourth, the Singapore High Court reaffirmed the Singapore courts’ position that arbitration clauses ought to be read broadly (see paragraph [47] to [50]). In this case, the High Court considered that given the wide wording of the clause there was no indication that parties intended to exclude statutory claims from arbitration.

Is a Section 216 Companies Act claim arbitrable?

Pursuant to Section 6 of the IAA, a Singapore court shall stay its proceedings in favour of arbitration if the dispute before it falls within an arbitration clause. However, if the subject matter of the dispute cannot be arbitrated, then the Singapore court cannot stay its proceedings (see paragraph [60]).

After an exhaustive review of case law from England and Wales, Australia and Canada, the Singapore High Court held that save in certain circumstances, a minority oppression claim is not arbitrable. The key points from the High Court’s decision are as follows.

First, it was not possible to set down a bright line rule as to whether a minority oppression claim could be arbitrated – it would depend heavily on the factual matrix of the dispute, the plaintiff’s claim and the remedies sought. As a general principle, “just because a statutory claim may be redressed or remedied by an order that is only available to the courts, that does not mean the claim is automatically rendered non-arbitrable” (see paragraph [113]).

Second, a minority oppression claim would only be arbitrable where “all relevant parties (including third parties whose interest might be affected) are parties to the arbitration and…the remedy or relief sought is one that only affects the parties to the arbitration” (see paragraph [142]).

In this respect, the Singapore High Court considered section 12(5) of the IAA, which provides that an arbitral tribunal “may award any remedy or relief that could have been ordered by the High Court if the dispute had been the subject of civil proceedings in that Court”. It held that the section,

“…clearly cannot be construed as conferring upon arbitral tribunals the power to grant all statute-based remedies or reliefs available to the High Court. It has a more limited purpose…and an arbitral tribunal clearly cannot exercise the coercive powers of the courts or make awards in rem or bind third parties who are not parties to the arbitration agreement” (see paragraph [111]).

Third, most other minority oppression claims will have the following characteristics and will thus not be arbitrable (see paragraph [142]).

“…there are other shareholders who are not parties to the arbitration, or the arbitral award will directly affect third parties or the general public, or some claims fall within the scope of the arbitration clause and some do not, or there are overtones of insolvency, or the remedy or relief that is sought is one that an arbitral tribunal is unable to make.”

Fourth, the Singapore High Court declined to follow what it termed the broad approach of Fulham Football Club (1987) Ltd v Richards and another [2011] EWCA Civ 855;[2012] Ch 333 in which the courts would

“…allow all minority oppression claims to go for arbitration; if the arbitral tribunal is of the view that a winding up or buy-out order is appropriate, then the parties can go to Court to obtain the necessary orders, but if not, the award takes effect in the normal way; in the former case, the Court adopts the findings and remedies proposed by the arbitrator and merely proceeds to enforce the same by making the appropriate orders, eg, a winding up or buy-out order or cancel or vary a resolution”

In this respect, the Singapore High Court noted the unique facts of the Fulham case. The relief sought in that case was very limited. The applicant did not seek any winding up remedy and there was very little risk that such relief would be sought (see paragraph [67]).

Procedural Solution?

The Singapore High Court highlighted a “useful procedural rule” of the New South Wales Supreme Court Rules 1970 (the “Rules”). Part 72 of the Rules essentially permitted the concurrent hearing of a minority oppression claim in both the New South Wales court as well as in arbitration in a single forum (see paragraph [135]).

In ACD Tridon Inc v Tridon Australia Pty Ltd and others [2002] NSWSC 896, the New South Wales Supreme Court had recognised the problems raised by its holding that certain matters in the plaintiff’s claim were to be dealt with in arbitration and all other matters were to be dealt with by the court. In particular, the learned judge identified “strains on the legal resources of the parties, and a degree of duplication of the process of information-gathering, evidence and factual determination”.

Accordingly, what the New South Wales Supreme Court did was to refer all the matters that were to be heard by the court to the appointed arbitrator instead. That arbitrator would be, pursuant to Part 72 of the Rules, a referee of the court. Hence, the hearings before the court and the arbitrator would for all intents and purposes be one concurrent hearing.

The Singapore High Court declined to make such an order pursuant to the inherent jurisdiction on the court given the absence of an equivalent statutory power conferred on the Singapore courts to do so. Furthermore, the Singapore High Court considered that “in the absence of a contractual agreement to refer matters to adjudication by a tribunal other than a Court, the Plaintiff is entitled to avail itself of the Court’s processes” (see paragraph [137] to [138]).

Conclusion

Silicia v Tomolugen very helpfully provides guidance on the Singapore courts’ approach on how it will deal with the issue of the arbitrability of intra-corporate disputes, and more broadly when a plaintiff’s claim involves statutory claims and reliefs that can only be granted by the Singapore courts. It also serves as a useful reminder to commercial parties that there are real limits to arbitrating shareholder disputes.

If commercial parties would like to have a greater degree of certainty that their shareholder disputes are resolved in arbitration rather than in court, one possible approach would be to ensure that all shareholders are party to an arbitration agreement e.g. by including an arbitration clause as part of a shareholders’ agreement. Another possible approach might be to embed an arbitration agreement into the articles of association of the company. Given that the articles of association of a company operate as a contract between members (shareholders) of a company, that article should operate as an arbitration agreement between shareholder parties. Parties should however take local law advice as different jurisdictions have taken different approaches as to whether an arbitration agreement in a company’s articles of association will be upheld: see Jean-François Poudret and ‎Sébastien Besson, Comparative Law of International Arbitration (2007:Sweet & Maxwell) at pp 4 to 6.

An issue that does not appear to have been explicitly addressed by the High Court is as follows. In minority oppression claims, we are given to understand that as a matter of practice, the courts do not lightly order the liquidation of a company where it is a going concern and one faction is able to buyout the other faction. In these circumstances, where the court is unlikely to order a winding up of the company, should the Singapore courts then adopt a Fulham case approach and permit the minority oppression claim to be arbitrated, or should the possibility of a winding up remedy (as set out in the plaintiff’s pleadings) be a sufficient reason to not stay the court proceedings?

This case is not likely to be the final word on the issue in Singapore. We will update readers should the matter be appealed to the Singapore Court of Appeal.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
This entry was posted in Arbitration, Asean, Australia, Singapore, UK and tagged , , , , . Bookmark the permalink.

2 Responses to Arbitrability of intra-corporate disputes

  1. Pingback: SLW Commentary – Arbitration in 2014: Looking Ahead to 2015 | Singapore International Arbitration Blog

  2. Pingback: Singapore Law Gazette – Arbitration in 2014: Looking Ahead to 2015 | Singapore International Arbitration Blog

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