In the recent case of NDK Ltd v HUO Holding Ltd, the Commercial Court considered whether claims that come under both the terms of the articles of association of a foreign company and a shareholders agreement fall within an arbitration agreement and are arbitrable.
Background
This dispute concerned a joint venture between three groups of investors (NDK, K and KXF). As is common in many joint ventures, key provisions relating to the shareholders’ rights to sell their shares and the rights of pre-emption were contained both in the articles of association of the joint venture entity (SPV) and the shareholders’ agreement to which the joint venture partners were party. The articles of association were governed by Cypriot law (with no jurisdiction clause). The shareholders’ agreement was governed by English law and contained an LCIA arbitration clause.
Following the transfer of shares by K to its recently acquired subsidiary (HUO) and the transfer of the beneficial ownership of KXF to a third party (Mr Pink), NDK made allegations of misconduct surrounding the transfers which were heard and decided upon in an LCIA arbitration in 2019. In 2020, NDK commenced proceedings in the Cypriot courts against K, KXF, HUO and others relying on the provisions in SPV’s articles of association, and seeking, among other things, declaratory relief, rectification of the register of members and damages.
HUO and KXF commenced an LCIA arbitration seeking an anti-suit injunction requiring NDK to abandon the Cypriot court proceedings on the basis that the proceedings had been brought in breach of the LCIA arbitration agreement.
In May 2021, the LCIA tribunal rendered a partial final award granting a final anti-suit injunction restraining NDK from advancing its claims against HUO and KXF in Cyprus.
NDK challenged the partial final award in England under section 67 of the Arbitration Act 1996, arguing that the tribunal lacked jurisdiction to make the award because:
- The claims brought in Cyprus under the articles of association did not fall within the LCIA arbitration agreement in the shareholders’ agreement. They were not connected with the relationship between the parties represented by the shareholders’ agreement.
- The matters raised in the Cypriot court proceedings were not, as a matter of English law, arbitrable.
Challenge upheld?
The court rejected NDK’s challenge.
Did the claims fall within the arbitration agreement?
Considering the commercial context, the court held that it was incontrovertible that the shareholders’ agreement was the key document governing the shareholders’ relationship rather than the articles of association. The court pointed to key factors as to why this was the case including the fact that the shareholders’ agreement contained greater detail on certain key provisions and that the parties had agreed that the shareholders’ agreement would prevail over the articles of association. While the articles of association and the shareholders’ agreement concerned the same relationship between the parties, that of being shareholders in SPV, the shareholders’ agreement was commercially the most significant document.
With regard to the arbitration agreement, the court found that any rational businessperson could only have intended that the arbitration agreement apply to any disputes that were related to or arose in connection with the subject matter of the shareholders’ agreement. This was the case even where the dispute was formulated solely by reference to the provisions of the articles of association (as NDK had done in the Cypriot court proceedings). It was clear from the substance of the claims that they related to or arose in connection with the shareholders’ agreement.
The court followed Fulham Football Club (1987) Ltd v Richards, by finding that the fact that NDK claimed relief that could not be obtained from an arbitral tribunal did not mean that the matters raised in the Cypriot courts fell outside the scope of the arbitration agreement. The court noted, as in Fulham Football Club, that in such cases the tribunal could adopt a bifurcated approach. In other words, determining the relevant facts in the arbitration with relief being sought from the relevant court based on the arbitrators’ determinations.
Is the dispute arbitrable?
NKD’s arguments as to why the dispute was not arbitrable were that:
- The question of who were SPV’s shareholders involved a matter of status.
- The claim for rectification of the register of members engaged the interests of third parties who deal with the company in reliance on its public register.
- Only a court can order rectification of the register of members.
The judge concluded that the fact that a tribunal does not itself have power to grant part of the relief sought does not render the underlying dispute as not arbitrable. Even in circumstances where it may require the successful party to bring court proceedings to give effect to the tribunal’s decision.
The judge was also not persuaded that characterising the issue of who should appear on the register of members as one of “status” means that the case requires a different analysis. The issues of whether shares were sold by A to B, or whether C had a legal right to acquire the shares from A which took priority over any such sale, are essentially private and commercial disputes, with registration being a means of giving effect to valid transfers once the relevant entitlement has been established.
The judge concluded that the fact that members of the public have access to a register of the members of a company is not sufficient to render a dispute as to who is entitled to the relevant shares as not being arbitrable. He considered that would suggest that the arbitrability of a dispute in relation to a company might depend on the extent to which there was a right of public access to any record which would have to be amended to give effect to the arbitral award. The judge referred to other circumstances in which arbitral tribunals are empowered to make decisions on documents that are publicly available, such as the ability to rectify, cancel or set aside deeds or other documents under section 48(5) of the Arbitration Act 1996.
On the issue of public interest, the judge differentiated between a conflicting claim by a third party to the same asset or where enforcing a claim between the arbitrating parties would directly interfere with a third party’s legal rights on the one hand and where the contents or accuracy of public records relating to an arbitrating party’s affairs, to which third parties have access, would be impacted by an arbitral award on the other. With regard to the latter, the judge considered that situation would in no way be sufficient to outweigh the strong public interest in allowing commercial parties to refer their disputes to arbitration and holding them to their agreement to do so.
The judge also noted that, in any event, it is open to a court, in an enforcement application, to refuse enforcement if relevant third-party interests would be adversely affected. He gave an example of where a third-party claims to be a bona fide purchaser for value from the vendor of shares which have been the subject of an order for specific performance by an arbitral tribunal in favour of another purchaser. In such a case, the court could refuse to enter judgment in terms of that part of the relief sought.
Comment
It is very common to find provisions such as those in this case in both the articles of association and a shareholders’ agreement in joint venture transactions. As the judge recognised, usually the hierarchy of the transaction documents recognises that it is the shareholders’ agreement that is to govern the relationship between the parties and it is the dispute resolution mechanism therein, often arbitration, that is the chosen forum to resolve the disputes arising out of the parties’ relationship. The court was wise to the intention to frame the dispute by reference to the articles of association only, and looked instead at the substance of the dispute and the commercial context to find that the dispute fell fairly and squarely within the arbitration agreement.
On the issue of arbitrability, the court followed previous authorities in rejecting the submission that just because the tribunal may not be able to effect the remedy granted, that automatically makes a dispute not arbitrable. The guidance provided on when the public interest or third party interests may render a dispute not arbitrable is also helpful and shows that courts will only render a dispute as not arbitrable where the third party’s legal right are interfered with.
The court took a common sense approach taking into account the commercial context and once again reaffirmed the pro-arbitration stance of the English courts.
