The Court of Appeal rules on the arbitrability of shareholders claim

The question of the extent to which parties may agree to submit intra-corporate disputes, in particular claims under company legislation, to arbitration, has long created uncertainty. In a decision handed down on 21 July 2011, the Court of Appeal has ruled in favour of the arbitrability of a shareholder's unfair prejudice claim brought under section 994 of the Companies Act 2006 and has provided important guidance on the arbitrability of corporate disputes more generally. The judgment is in line with the English courts' strong pro-arbitration approach and will be of interest to parties who wish to agree to resolving their intra-corporate disputes outside the national courts at the seat of the company and submit them instead to a neutral arbitral tribunal. This is likely to be of particular interest in an international context where the company is situated in an emerging country.

The case of Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855 concerned an unfair prejudice petition brought by Fulham Football Club ("Fulham") regarding allegations that Sir David Richards, chairman of the Football Association Premier League ("FAPL"), had acted as an unauthorised agent with respect to the transfer of Peter Crouch from Portsmouth to Tottenham Hotspur Football & Athletic Company Limited ("Tottenham"), to the detriment of Fulham.

The FAPL 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 FAPL and these shares can not be traded or sold and are only transferred upon relegation of a club. The FAPL and its member clubs are bound by and required to comply with the FAPL's Articles of Association, the Football Association ("FA") Rules and the FAPL Rules. The FA and FAPL rules contain widely drafted dispute resolution clauses which refer all disputes arising between the clubs or between a club and the FAPL or an official to arbitration.

However, rather than going to arbitration, Fulham brought court proceedings against Sir Richards and the FAPL seeking an injunction prohibiting Sir Richard from acting as unauthorised agent in the future and alternatively requesting the removal of Sir Richard as chairman of the FAPL. 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; and/or
• the arbitration clauses in question should be construed so as to exclude a dispute about unfair prejudice.

Sir Richard and the FAPL requested a stay of the petition pursuant to section 9 of the Arbitration Act 1996. The judge at first instance had to consider two earlier conflicting decisions on whether statutory unfair prejudice claims should be stayed in favour of arbitration. In the first, Re Vocam Europe Ltd [1998] BCC 396, the High Court had 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 [2004] 1 WLR 2910, the High Court had 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 (such as an arbitration agreement) or otherwise. The High Court in Fulham followed the first of the two previous cases, and the stay was granted at first instance (Fulham Football Club (1987) Ltd v Sir David Richards and The Football Association Premier League Ltd [2010] EWHC 3111 (Ch)) (see our earlier e-bulletin on the first instance decision) and Fulham appealed.

The Court of Appeal's decision

The Court of Appeal was unanimous in dismissing the appeal.

Patten LJ, delivering the leading judgment, held that neither the Arbitration Act 1996 nor the CA 2006 contained an express provision excluding unfair prejudice disputes of this kind from arbitration. This raised the question whether there was an implicit restriction or some other inherent reason why unfair prejudice claims should not be arbitrable.

In dealing with this question, Patten LJ differentiated between the "subject matter" of the dispute, the allegation of unfair prejudice, which he held was clearly arbitrable, and the remedies which might be granted as a result. He acknowledged that there were certain remedies with respect to a company which a court alone could grant. Examples of these were the ability to order the winding-up of a company on just and equitable grounds under section 122(1)(g) Insolvency Act 1986 or to make an order regulating the conduct of the company's affairs under section 994 CA 2006. These were orders which had a wider "third-party" or in rem effect that went beyond the parties engaged in the dispute and could therefore not be granted by an arbitral tribunal. However, the fact that certain remedies where unavailable to an arbitral tribunal did not make the "subject matter" itself non-arbitrable. In other words, the inability of an arbitral tribunal to grant certain types of relief affecting third parties did not mean that it was not possible for members of a company to agree to submit disputes inter se as shareholders to arbitration.

When deciding whether a corporate dispute, ie the "subject matter", was arbitrable or not, the question to consider was whether the claim brought attracted "a degree of state intervention and public interest such as to make it inappropriate for disposal by anything other than judicial process". Where the dispute was 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 was to be seen as an essentially contractual (internal) dispute which did not necessarily engage third party rights or impinge on any statutory safeguards imposed for the benefits of third parties, and was therefore generally arbitrable. Patten LJ went further to say that even where relief was sought which might have an effect on other shareholders who were not party to the arbitration (for example, arguably, the removal of a director) he saw "no reason in principle why their views could not be canvassed by the arbitrators" before deciding whether to make an award in the terms sought.

Patten LJ noted that Fulham was not in fact seeking remedies which were outside the arbitral tribunal's powers. However, he commented obiter that even where a party was seeking a remedy which could only be granted by the court, the arbitration agreement should operate as an agreement to first let the arbitrator decide on the subject matter of the claim and on whether a lesser remedy would be suitable before approving an application to the court.

Longmore LJ, 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' willingness to give wide ranging affect to arbitration agreements in the context of intra-corporate disputes, an approach which is to be welcomed. Applying the guidance provided in the judgment it is hard to envisage situations in which claims brought under shareholder agreements may be considered non-arbitrable. As for claims brought under statute, in order to determine whether these are arbitrable or not, one will need to identify whether the relevant provision has a wider purpose aimed at safeguarding the interests of third parties (eg creditors) or simply relates to the relationship between the shareholders or the shareholders and the company.

The suggestion (albeit obiter) that there could be a two-stage process in circumstances where a remedy lies outside the arbitrator's jurisdiction, with an arbitrator first deciding on the "subject matter" of the dispute and whether the broader remedy which only the court can order is appropriate, before the matter is then referred on to the court, would however pose some potential 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 the arbitrators and the courts would be resolved if, for example, the court asked to grant the remedy (eg a winding-up order) did not agree with the arbitrator's approach, and concluded that a lesser remedy (which would have been within the arbitrator's power to grant) was more appropriate. If this two-stage process were to be adopted further clarification on how these practical issues would be addressed would be welcome.

In the meantime, parties who 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.