COURT OF APPEAL UPHOLDS HIGH COURT DECISION THAT A DISCLOSED PRINCIPAL IS ENTITLED TO ENFORCE AN ARBITRATION AGREEMENT DESPITE BEING A NON-SIGNATORY

In Filatona Trading v Navigator Equities [2020] EWCA Civ 109, the English Court of Appeal upheld a judgment of the High Court (which we discussed here) relating to an LCIA arbitration concerning ownership of a Russian textile company. The main issue in the appeal was whether a party who did not sign an agreement was entitled to enforce rights under it (including the right to arbitrate), on the basis that an agent had entered into the agreement on the non-signing party’s behalf.

The Court found, in the circumstances of this case, that the principal was able to enforce the agreement and so the LCIA arbitration initiated by the principal was validly commenced. The judgment offers important guidance on when a person who is not a signatory to a contract can enforce its terms, including the arbitration clause.

Background

We discussed the background to this case in more detail in our previous post here. Briefly, Ms Danilina and Mr Deripaska were signatories to a shareholders agreement (“SHA”) relating to the ownership of shares in a Russian textile company. Mr Chernukhin was not a signatory to the agreement, nor was he named in the SHA.  However, he argued that Ms Danilina entered into the agreement on his behalf and Mr Deripaska knew this. Mr Chernukhin was thus, he claimed, a party to the SHA as a disclosed principal, with Ms Danilina as his agent.

A dispute arose under the SHA and Mr Chernukhin commenced an LCIA arbitration. The tribunal issued an award, finding that Mr Chernukhin was a party to the SHA and that the tribunal had jurisdiction over the claim. Ms Danilina and Mr Deripaska challenged the award under s67 of the Arbitration Act 1996 (“the Act”), arguing that the tribunal had no jurisdiction over the claims by Mr Chernukhin as he was not a party to the SHA. Mr Deripaska also challenged the award under s68 of the Act on the basis that there was a serious irregularity affecting the award.

Commercial Court decision

The Commercial Court dismissed the claims of Ms Danilina and Mr Deripaska, finding that Ms Danilina had, in fact, entered into the SHA as an agent for Mr Chernukhin and that there was nothing in the SHA that prevented Mr Chernukhin from enforcing its terms. The Commercial Court judgment addressed other issues, including whether the tribunal had the power to order a buy-out of shares pursuant to Cypriot company law, but this and other issues were not the subject of the appeal.

Court of Appeal decision

The permission to appeal was granted on a limited basis and the Commercial Court’s finding of fact that Mr Chernukhin was a party to the SHA by virtue of the principal-agent relationship could not be challenged. The appeal instead focussed on whether “the terms and surrounding circumstances of the contract, either expressly or by necessary implication, excluded Mr Chernukhin from exercising contractual rights (including the right to arbitrate)”.

The Court of Appeal judgment noted that English law makes a “beneficial assumption” in commercial cases that an undisclosed principal is generally entitled to enforce the contract in their own name. It was stated that the same approach should apply where the person is a disclosed principal. The relevant question was whether there were “clear and unambiguous words or indications of an intent to exclude the known and identified principal”. There was a “heavy burden of persuasion” on the party who argues that an identified principal should be excluded from a contract.

Having regard to the contract in question and the surrounding circumstances, it was then considered (i) why Mr Chernukhin was not named as a party to the SHA and (ii) whether, in light of this circumstance, the SHA was to be construed as excluding him from the contract. It was likely that all parties knew that Mr Chernukhin was a party to the SHA, even though he was not named in the SHA, which was mainly related to his position in a Russian financial institution. There was nothing in the wording of the SHA that demonstrated a clear intention to prevent Mr Chernukhin from exercising rights under the SHA.

Comment

This case is a relatively rare instance of a s67 application reaching the Court of Appeal. The failure of the challenge in Filatona is a further example of the English courts’ reluctance to overturn arbitral awards and the courts’ non-interventionist approach.

For further information, please contact Nicholas Peacock, Partner, Rebecca Warder, Professional Support Lawyer, Nihal Joseph, Associate, or your usual Herbert Smith Freehills contact.