Summary

The extent to which parties may agree to submit intra-corporate disputes - in particular claims under company legislation - to arbitration has long been uncertain. In a decision handed down on July 21 2011, the Court of Appeal ruled in favour of the arbitrability of a shareholder's unfair prejudice claim brought under Section 994 of the Companies Act 2006, and provided important guidance on the arbitrability of corporate disputes in general. The judgment is in line with the English courts' strong pro-arbitration approach and will be of interest to parties that wish to agree to resolve intra-corporate disputes outside the national courts at the seat of the company, instead submitting them to a neutral arbitral tribunal. This is likely to be of particular interest in an international context where the company is located in one of the world's emerging economies.

Facts

Fulham Football Club (1987) Ltd v Richards(1) concerned an unfair prejudice petition brought by Fulham Football Club regarding allegations that Sir David Richards, the chairman of the Football Association Premier League, had acted as an unauthorised agent - to Fulham's detriment - with respect to the transfer of striker Peter Crouch between two of Fulham's rival clubs - Portsmouth and Tottenham Hotspur (for further details please see "Shareholders' unfair prejudice disputes may be arbitrated").

The Football Association Premier League was incorporated in 1992 to give the Premier League commercial independence. Each of the 20 clubs in the Premier League holds one share in the Football Association Premier League. The shares cannot be traded or sold, and are transferred only when a club is relegated. The Football Association Premier League and its member clubs are bound by, and required to comply with, the Football Association Premier League's articles of association, the Football Association rules and the Football Association Premier League rules. The two sets of rules contain widely drafted dispute resolution clauses which refer all disputes arising between clubs, or between a club and the Football Association Premier League or an official, to arbitration.

However, rather than initiating arbitration, Fulham brought court proceedings against Richards and the Football Association Premier League. It sought an injunction prohibiting Richards from acting as an unauthorised agent in future and, alternatively, requesting his removal from the position as chairman. Fulham contended that its unfair prejudice petition under Section 994 invoked the supervisory jurisdiction of the court, and that:

  • the subject matter was therefore not arbitrable; or
  • the arbitration clauses in question should be construed so as to exclude a dispute about unfair prejudice.

Richards and the Football Association Premier League requested a stay of the petition pursuant to Section 9 of the Arbitration Act 1996.

First instance decision

The judge at first instance had to consider two earlier conflicting decisions on whether statutory unfair prejudice claims may be stayed in favour of arbitration. In the first, Re Vocam Europe Ltd,(2) the High Court stayed an unfair prejudice petition where a shareholders' agreement had provided for all matters in dispute to be referred to arbitration. In the second, Exeter City Association Football Club Ltd v Football Conference Ltd,(3) the High Court refused a stay on the basis that the statutory rights conferred on shareholders to apply for relief were inalienable and could not be diminished or removed by contract (eg, an arbitration agreement) or otherwise. In the present case the High Court followed the first of the two cases, and the stay was granted at first instance.(4) Fulham appealed.

Court of Appeal decision

The Court of Appeal was unanimous in dismissing the appeal. Lord Justice Patten, delivering the leading judgment, held that neither the Arbitration Act 1996 nor the Companies Act 2006 contained an express provision excluding unfair prejudice disputes of this kind from arbitration. This raised the question of whether there was an implicit restriction or some other inherent reason why unfair prejudice claims should not be arbitrable.

In dealing with this question, the judge differentiated between the subject matter of the dispute (ie, the allegation of unfair prejudice), which he held to be clearly arbitrable, and the remedies which might be granted as a result. He acknowledged that there are certain remedies with respect to a company which a court alone can grant, such as the ability to order the winding-up of a company on just and equitable grounds under Section 122(1)(g) of the Insolvency Act 1986 or to make an order regulating the conduct of a company's affairs under Section 994 of the Companies Act 2006. These are orders which have a wider third-party or in rem effect that go beyond the parties engaged in the dispute; therefore, they cannot be granted by an arbitral tribunal. However, the fact that certain remedies are unavailable to an arbitral tribunal does not make the subject matter non-arbitrable. In other words, the inability of an arbitral tribunal to grant certain types of relief that affects third parties does not make it impossible for members of a company to agree to submit to arbitration disputes between themselves as shareholders.

When deciding on the arbitrability of the subject matter of a corporate dispute, the question to consider is whether the claim attracts "a degree of state intervention and public interest such as to make it inappropriate for disposal by anything other than judicial process". Where a dispute is between members of a company or between shareholders and the board relating to alleged breaches of the company's articles of association or a shareholders' agreement, this is to be seen as an essentially contractual, internal dispute which does not necessarily engage third-party rights or impinge on statutory safeguards imposed for the benefit of third parties. Therefore, it is generally arbitrable.

Furthermore, the judge stated that even where relief is sought which might have an effect on other shareholders that are not party to the arbitration - as might arguably be the case where the removal of a director was at issue - he saw "no reason in principle why [the other shareholders'] views could not be canvassed by the arbitrators" before deciding whether to make an award in the terms sought. He noted that Fulham was not seeking remedies which were outside the arbitral tribunal's powers. However, he commented obiter (ie, in passing) that even where a party seeks a remedy which can be granted by the courts alone, the arbitration agreement should operate as an agreement to allow the arbitrator first to decide on the subject matter of the claim and on whether a lesser remedy would be suitable, before approving an application to the court.

Lord Justice Longmore, delivering the second judgment, concurred and emphasised that there was no public policy reason for a general prohibition of arbitration agreements in relation to disputes about the internal management of a company.

Comment

The judgment illustrates the English courts' welcome willingness to give wide-ranging effect to arbitration agreements in the context of intra-corporate disputes. Applying the guidance in the judgment, it is hard to envisage situations in which claims brought under shareholder agreements might be considered non-arbitrable. As for claims brought under statute, in order to determine whether these are arbitrable, it will be necessary to identify whether the relevant provision has a wider purpose of safeguarding the interests of third parties (eg, creditors) or simply relates to the relationship between shareholders, or between the shareholders and the company.

The obiter suggestion of applying a two-stage process in circumstances where a remedy lies outside the arbitrator's jurisdiction could pose practical issues. There would be the potential for duplication of proceedings, with first the arbitral tribunal and then the court examining whether there should be, for example, a winding-up order. It is also unclear how a difference of opinion between arbitrators and the courts would be resolved if, for example, the court that was asked to grant the remedy (eg, a winding-up order) were to disagree with the arbitrator's approach and conclude that a lesser remedy - one that would have been within the arbitrator's power to grant - would be more appropriate. Before any such two-stage process is applied, further clarification on these practical issues would be necessary.

In the meantime, parties that include arbitration provisions in their shareholder agreements or articles of association and provide for an English seat of arbitration can have increased confidence that the English courts will give broad effect to such provisions.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.