Singapore Court of Appeal provides guidance on applications to stay proceedings in favour of arbitration and scope of arbitrability

In Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2015] SGCA 57, a distinguished panel of the Singapore Court of Appeal considered an application to stay court proceedings in favour of arbitration under section 6 of the Singapore International Arbitration Act ("IAA"). They confirmed the appropriate standard of review to be adopted in respect of the existence and scope of the arbitration agreement as a prima facie standard.  The Court of Appeal also provided guidance on determining whether the subject matter of a claim is arbitrable or not, holding that minority shareholder claims under s.216 of the Companies Act (Cap 50, 2006) are arbitrable.  Finally, the Court of Appeal demonstrated flexibility in exercising its case management powers to regulate the conduct of court proceedings involving multiple parties, not all of whom are party to the arbitration agreement.

Background

The plaintiff entered into a share sale agreement (the "Share Sale Agreement") with the second defendant ("Lionsgate") for the sale of shares in Auzminerals Resource Group Limited (“AMRG”). The Share Sale Agreement contained an arbitration clause providing for SIAC arbitration in relation to "any dispute arising out of or in connection with [it]".  The plaintiff commenced court proceedings on the sole ground that AMRG's affairs had been conducted in an oppressive or unfairly prejudicial manner towards it as a minority shareholder, pursuant to s.216 of the Companies Act. The proceedings were brought against seven other defendants, various shareholders and directors in Lionsgate and AMRG, none of whom were party to the Share Sale Agreement and, therefore, the arbitration clause.

High Court Proceedings

Pursuant to s.6 of the IAA, Lionsgate applied for a stay of the court proceedings on the ground that part of the dispute fell within the scope of the arbitration clause in the Share Sale Agreement and the rest of the court proceedings should be stayed pending the resolution of the arbitration. The remaining defendants were also of the view that the proceedings against them should be stayed pending resolution of the arbitration and filed stay applications that were contingent on the success of Lionsgate’s application relying on the court’s inherent power of case management.

Section 6 of the IAA provides for a stay in so far as court proceedings relate to "any matter which is the subject of the [arbitration] agreement" unless the court "is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed". The plaintiff's unfair prejudice claim was supported by four distinct allegations.  Only one of these allegations was based on the existence of a particular clause in the Share Sale Agreement.  At first instance, the High Court found the unfair prejudice claim fell within the scope of arbitration clause because there was a sufficient factual connection between at least two of the four allegations and the Share Sale Agreement.  However, the High Court did not grant Lionsgate’s stay application because it found that the dispute was non-arbitrable.  Lionsgate appealed the decision.

Court of Appeal Proceedings

Standard of review under s.6 of the IAA

The first issue examined was the appropriate standard of review that courts should use when deciding a stay application under s.6 of the IAA.  The Court of Appeal noted that the principle of kompetenz-kompetenz – a tribunal's power to rule on its own jurisdiction – and s.6 of the IAA had the potential to give rise to a certain "friction".  This arises because, in deciding a stay application, a court would necessarily have to take a view on the existence and scope of the arbitration agreement in question. This was noted recently in a decision of the High Court (see our blog post, here). 

The Court of Appeal considered the travaux préparatoires of the UNCITRAL Model Law and the respective positions in England, Canada and Hong Kong, as well as the views of a court appointed amicus curiae – a rare occurrence in Singapore.  The Court of Appeal concluded that the "prima facie" approach should be adopted in Singapore, rather than a full review of the merits. 

Consequently, a court should grant a stay if it is satisfied that there is prima facie a valid arbitration clause which covers the dispute in question and then leave the tribunal to determine whether – on the merits – those conditions have in fact been met.  The Court of Appeal's decision is in line with three previous Singaporean decisions as well as the position in Hong Kong, various states in Canada and many other jurisdictions (notably, not England).

Two of the key reasons underpinning the decision were: (1) it was closest to what had been envisaged by the drafters of the IAA, and (2) the full merits review could "significantly hollow" the kompetenz-kompetenz principle of its practical effect because a claimant could strategically manoeuvre away from arbitration to have this issue decided in court by bringing its claim in court.

Arbitrability

The next issue discussed by the Court of Appeal was arbitrability; in short, whether the subject-matter of the dispute was such that it would be contrary to public policy for that dispute to be resolved by arbitration.

The plaintiff commenced court proceedings on the sole ground that AMRG's affairs had been conducted in an oppressive or unfairly prejudicial manner towards it as a minority shareholder, pursuant to s.216 of the Companies Act.  The plaintiff maintained that, as a matter of public policy, such a claim should not be resolved by arbitration. The Court of Appeal referred to Lord Hoffmann’s judgment in O’Neill v Phillips [1999] UKHL 24 which describes the essence of a claim for unfair prejudice as "upholding the commercial agreement between the shareholders of a company".  Section 216 of the Companies Act was therefore concerned with protecting the commercial expectations of parties and not with furthering any public interest.  As a result, it was open to parties to choose to resolve their differences relating to those commercial expectations by arbitration. There was, in general, no public element in disputes of this nature which mandated the conclusion that it would be contrary to public policy for them to be determined by an arbitral tribunal rather than by a court.

The Court of Appeal then turned to look at the two reasons given by the High Court for ruling the claim non-arbitrable:  (1) the potential inability of an arbitral tribunal to grant appropriate relief compared to the powers available to a court under s.216 of the Companies Act; and (2) procedural complexity arising out of the fact there were defendants who were not party to the arbitration agreement.  Regarding (1), the Court of Appeal held that the fact the relief sought might be beyond the power of the tribunal to grant does not, in and of itself, make the subject matter of the dispute non-arbitrable. It was merely a jurisdictional limitation. Regarding (2), this, at most, gave rise to regrettable substantial inconvenience but was not relevant to arbitrability. 

Scope of the arbitration clause

Having found the issues in the claim arbitrable, the Court of Appeal then considered whether the issues raised in the unfair prejudice claim fell within the scope of the arbitration clause in question. The parties agreed that two of the four issues raised by the plaintiff fell outside the scope of the arbitration clause.  Regarding the remaining two issues, the Court of Appeal found that the principles governing the construction of an arbitration clause were well settled, with the Court of Appeal construing the clause based on the presumed intentions of the parties as rational commercial parties: Premium Nafta Products Ltd v Fili Shipping Co Ltd [2008] 1 Lloyd’s Rep 619.  The court must also consider the underlying basis and true nature of the issue or claim, and not solely the manner in which it is pleaded.  Consequently, the court found a prima facie case that one of the claims made fell within the scope of the arbitration clause and that the court action between the plaintiff and Lionsgate only (and not the remaining six defendants who were non-signatories to the arbitration agreement) in respect of this one claim should therefore be stayed under s.6 of the IAA.

Staying remaining court proceedings: Court discretion

The Court of Appeal then had to consider what to do with the three remaining claims in the court proceedings which were not subject to a mandatory stay under s.6 of the IAA, along with the fourth claim against the remaining six defendants. The Court of Appeal considered that there were three possible options:

(a) stay all the court proceedings pending the resolution of the arbitration;

(b) stay the court proceedings only to the extent required under s.6 of the IAA, but on condition that the court proceedings which fall outside the s.6 stay be resolved before any arbitration is commenced; or

(c) stay the court proceedings only to the extent that is required under s.6 of the IAA, and allow the putative arbitration and the remaining court proceedings to run in parallel.

The Court of Appeal felt deciding on the appropriate option was a delicate task. There was an overlap in the parties, issues and remedies which would be involved in the putative arbitration and in the suit before the Court.  Having considered jurisprudence from Australia, Canada, England and New Zealand, the Court of Appeal noted the difficulty in endeavouring to maintain the strong legislative policy in favour of arbitration in circumstances where the dispute which is covered by the arbitration clause in question forms only part of a larger dispute with a broader horizon. The Court of Appeal concluded that the court, as the final arbiter, should take the lead in ensuring the efficient and fair resolution of the dispute as a whole and that this would turn on the facts of each individual case.  In reaching this conclusion, the Court of Appeal declined to follow the position in England and New Zealand that a stay on case management powers should only be given in "rare and compelling" circumstances.  

The reasoning of the Court of Appeal involved striking a balance between: (1) the plaintiff’s right to choose who to sue and where; (2) preventing a plaintiff from circumventing the operation of an arbitration clause; and (3) preventing an abuse of process and ensuring the efficient and fair resolution of disputes.  Adopting a pragmatic approach, the Court of Appeal therefore gave the plaintiff two weeks to decide whether to pursue the one allegation that was within the scope of the arbitration clause. If it chose not to pursue it, the court proceedings would not be stayed, but the plaintiff would also not be allowed to rely on that allegation as against the remaining defendants. If it did choose to pursue that allegation, then (subject to having an expedited arbitration) the court proceedings against all the defendants would be stayed.  In such a case, the Court of Appeal suggested that the plaintiff should consider making an offer to the other defendants to be bound by the arbitral findings, and noted that any refusal by them to accept which resulted in them re-litigating issues determined in the arbitration could amount to an abuse of process (for example, by challenging the arbitral tribunal's decision when the dispute returned to court if such challenge was contrary to the present stance of seeking a stay).

Comment

Coming from an esteemed bench, including both the current and a former Chief Justice, this case should put an end to any uncertainty as to the proper test to apply in deciding applications under s.6 of the IAA – it is now settled as a prima facie review on the validity and scope of the arbitration clause.

The decision is also interesting as the Court of Appeal appointed Professor Laurence Boo, an established arbitration academic and arbitrator, to provide an independent brief on the standard of review to be adopted in an application for a stay under s.6 of the IAA.  This is a rare example of the use of a court appointed amicus curiae.  In addition to the detailed discussion on the history, background and varying positions on the standard of review in other jurisdictions,  the use of the an amicus curiae (especially coming from such an esteemed bench) demonstrates a clear desire from the Court of Appeal to have finality on this issue.  It is also a further demonstration of the robust approach the Singapore courts take on appropriate deference to arbitral tribunals. 

Clients should keep in mind that where they are investing in a company, there is always the potential for multiple parties and multiple venues in in future disputes in relation to the conduct of such company.  This could result in increasing the time and cost of resolving such disputes.  It is therefore worth giving careful consideration to the appropriate forum and manner in which to bring claims concerning the conduct of the affairs of a company.  It is also important to carefully consider the choice of dispute resolution clauses in shareholders' agreements, SPAs and other agreements relating to the business of a company.

For more information please contact Alastair Henderson, Partner, Daniel Waldek, Senior Associate, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.