REUTERS | Ana Carolina Fernandes

Arbitrability of minority shareholder disputes: extending the reach

On 9 January 2017, the Singapore Court of Appeal handed down judgment in L Capital Jones Ltd and another v Maniach Pte Ltd. The case concerned a shareholder dispute and raised a number of legal issues. However, of most interest for the international arbitration community was the court’s ruling on the arbitrability of the respondent’s claim, which followed its earlier decision in Tomolugen Holdings Ltd v Silica Investors Ltd, delivered on 26 October 2015.

The respondent was a minority shareholder in a joint venture with the appellant. The shareholders’ agreement between the parties contained an arbitration clause providing for arbitration under the Singapore International Arbitration Centre (SIAC) Rules. Following a dispute regarding management of the joint venture, the respondent commenced minority oppression proceedings in the Singapore courts, under section 216 of the Singapore Companies Act, on a number of grounds. These included assertions that the appellant had taken steps in the Singapore and Australian courts to place subsidiary companies under administration, as a pretext for transferring the joint venture’s main asset to a third party company related to the appellant, for no direct consideration. The judge at first instance refused to stay the proceedings in favour of arbitration, holding that minority oppression claims were not arbitrable. The appellant appealed, but in the interim, the court issued its decision in Tomolugen.

In Tomolugen, the court held that there was nothing inherent in the nature of minority oppression claims that rendered them unarbitrable. Rather, the only question was whether the subject matter of the dispute fell within the public policy exception to the requirement for court proceedings to be stayed in favour of arbitration under section 11 of the Singapore International Arbitration Act. The court found that minority oppression claims did not tend to raise issues of public policy as they generally related to the relationship between shareholders without affecting any wider public interest. Something specific on the facts would therefore be required for the exception to apply.

In Maniach, the respondent accepted that, following Tomolugen, minority oppression claims were arbitrable. However, the respondent sought to rely on the public policy exception, arguing that part of its claim was founded on an allegation of abuse of court process and that there was therefore a public interest in ensuring that the courts (rather than arbitral tribunals) adjudicate such disputes. The court disagreed.

The court first affirmed its decision in Tomolugen, before turning to the question of whether the public policy exception was engaged on the facts. In the court’s view, the only issue that the tribunal would be required to decide was whether or not the appellant’s conduct was unfair and prejudicial to the respondent; that is, it would not be required to decide whether there had been an abuse of process of the Singapore or Australian courts. The court said that if the respondent wished to raise complaints of abuse of court process, the proper forum would be the court whose process was alleged to have been abused.

Accordingly, the court held that the respondent could not rely on the public policy exception, and the minority oppression claim was prima facie arbitrable. However, the court went on to refuse to stay the proceedings on the basis that the appellant had taken a “step in the proceedings” by making an application to strike out the claim on its merits; therefore, it had submitted to the Singapore court’s jurisdiction.

The court has thus, through its decisions in Tomolugen and Maniach, affirmed the position that minority oppression claims in respect of a Singapore incorporated company are generally arbitrable. This approach is in keeping with the Singapore courts’ pro-arbitration trajectory (the English court also affirmed this position in Fulham Football Club Ltd v Richards and another).

Nevertheless, the case appears to have further narrowed the potential scope for oppressed minority shareholders to rely on the public policy exception, a point that was left open in Tomolugen. (It is noteworthy that the decision in Tomolugen was delivered after the appeal in Maniach was lodged. It is an open question as to whether the public policy argument would even have been pursued had Tomolugen not been decided as it was. Indeed, the court in Maniach referred to it as an “afterthought”.)

The court stated that it would not:

“… ignore an arbitration agreement just because it wishes to determine whether it would be appropriate for it to issue a public rebuke against the Appellants for abusing the process of the court”.

It seems that a claimant will need to show more than an assertion that the factual matrix giving rise to the dispute involves an element of public interest. For the exception to apply, the element of public policy must be directly relevant to the legal question that the tribunal will be called upon to decide in order to resolve the dispute. In fact, the court went so far as to say that, although the tribunal would not be required to decide the question of abuse of court process, if the tribunal were to make any such findings, they would only be “incidental” to its resolution of the minority oppression claim.

Whilst abuse of court process and minority oppression are indeed separate legal questions, the court’s approach here raises the issue of the status that any such tribunal findings might have (if any), should a party bring a complaint of abuse of process before the relevant court (for example, the Australian courts in the present instance). The relevant court may well be in a jurisdiction that is not the seat of the arbitration and which may have little or no other nexus to the dispute that is the subject of the arbitration proceedings.

Tomolugen and Maniach confirm that the fact that a tribunal is unable to grant certain types of relief does not of itself render the subject matter of a dispute un-arbitrable as between the parties to an arbitration agreement. The parties may apply to court for a particular remedy where it cannot be granted by a tribunal, for example, a winding up order (as in Tomolugen). Whilst the parties would be bound by the findings in the arbitration, there is scope for procedural complexity, and potentially conflicting positions between the tribunal and the court proceedings. This is particularly so where the latter also affects the rights of third parties who may not have participated in the arbitration. Maniach could have been such an example, as one of the remedies sought was the rescission of a transfer of shares to a third party pursuant to a court order. These concerns have been recognised by the courts, but they have been held not to override the bargain between parties who have chosen to submit their disputes to arbitration; in the words of Patten LJ in Fulham FC v Richards (to which the court in Tomolugen referred), these are “the practical consequences of choosing that method of dispute resolution”.

Now that the threshold for the public policy exception has been set (and set fairly high), it remains to be seen whether parties will continue to seek to utilise the court process to bring minority oppression claims in circumstances where the dispute is also potentially covered by an arbitration agreement. In the absence of exceptional circumstances, the more prudent approach would appear to be to proceed via arbitration first, whilst recognising that one may still need to seek a further remedy through the courts in due course.

Kirkland & Ellis Chiraag Shah

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