ENGLISH COURT OF APPEAL DETERMINES CLAIMS AGAINST INDIVIDUALS FALL OUTSIDE AN ARBITRATION CLAUSE IN A SHARE PURCHASE AGREEMENT

In the recent case of Manek and others v IIFL Wealth (UK) Ltd and others [2021] EWCA Civ 625 (available here) the English Court of Appeal rejected a challenge to the jurisdiction of the English Commercial Court made on the basis that (amongst other issues) the claims fell within an arbitration clause. The Court of Appeal decided that the relevant claims in deceit against individual majority shareholders did not in fact fall within the arbitration clause and could properly be heard by the English Commercial Court.

Background facts

The underlying dispute arose from the sale of minority shares in an Indian company called Hermes i-Tickets Private Limited (“Hermes”) by the minority shareholders (the "Minority Shareholders"). The Minority Shareholders alleged that they had been the victims of a fraud in relation to the sale, pursuant to which two majority shareholders (the "Majority Shareholders") allegedly persuaded them to sell their shares on the basis that "a good offer of around $40 million" had been received from a company called EMIF that wished to buy Hermes. The Minority Shareholders contended that the Majority Shareholders were in fact involved in a deal whereby Hermes was immediately sold on by EMIF to another company, Wirecard AG, for approximately €250m plus earn out.

The sale of the minority shares was made by way of two near-identical Share Purchase Agreements (the "SPAs") dated 9 September 2015, between the Minority Shareholders as individuals and the majority shareholders' company, GIR. The governing law clause of the SPAs was as follows:

“3.2 Governing Law:

3.2.1     The Agreement shall be construed in accordance with, and governed by the laws of Republic of India.

3.2.2     Any dispute arising out of or in connection with this Agreement including without limitation any question regarding its existence, interpretation, performance, validity, effectiveness or termination of the rights or obligations of any party, shall first be settled amicably by the Parties wherever practicable without recourse to litigation.

3.2.3     If such dispute cannot be resolved amicably by the Parties after a period of thirty (30) days after the receipt by one Party of a notice from the other Parties of the existence of the dispute then it shall be referred to and resolved with the provisions of the Indian Arbitration & Conciliation Act, 1996 as amended from time to time. The Arbitrator shall conduct the Arbitration proceeding in fast track manner and conclude and render binding final award within 6o days from the date of reference. The venue of such arbitrator [sic] shall be Mumbai.”

The Majority Shareholders contended that, as they were directors of GIR, they fell within the definition of GIR in the SPAs. They argued that on this basis they were parties to the arbitration agreement and accordingly entitled to enforce the arbitration clause. They also argued that correspondence between the parties constituted in any event  "an ad hoc agreement to arbitrate".

The Minority Shareholders argued that the Majority Shareholders had not in fact been party to the SPAs and that, even if they had been parties, then that was the case only insofar as they were directors of GIR. The underlying dispute between the Minority Shareholders and the Majority Shareholders did not relate to the Majority Shareholders' position as directors of GIR, as the claim was in deceit in relation to their representations made personally.

Majority Shareholders' application

The Majority Shareholders applied to set aside the High Court order which had been made in February 2018 (the "High Court Order"), which permitted the Minority Shareholders to serve the Claim Form and Particulars of Claim on the Majority Shareholders out of the jurisdiction.

The Court was required in the course of the application to address the following issues:

1. Was there a relevant arbitration agreement between the parties?
2. Was there an ad hoc arbitration agreement between the parties?

The Court also considered whether there was material non-disclosure by the Minority Shareholders when they obtained the High Court Order and whether England and Wales was the 'natural' forum or proper place for the litigation to be heard.

Court of Appeal decision

Relevant arbitration agreement

The Court noted that there had been "a threshold debate as to whether English or Indian law applied" to the first issue, but that in any event there was no material difference between Indian and English law on this point.

The Court considered whether the Majority Shareholders were parties to the arbitration agreement. While the definition of GIR in the SPAs defined "the Purchaser" as including the directors, this was only to reflect the fact that GIR would act through those individuals. The relevant wording in the definition did not result in the directors themselves becoming parties to the SPAs. As the Majority Shareholders had not become parties to the SPAs they could not be said to be parties to the arbitration agreement.

The Court noted that even if the Majority Shareholders had been party to the SPAs then they would have been parties only in the limited capacity as directors of GIR, rather than as individuals. As the claim for deceit against them was not made in their capacity as directors of GIR, but as individuals allegedly having made false representations, the claim would not in any event have fallen within the arbitration agreement.

In light of these conclusions the SPAs did not constitute a binding arbitration agreement between the parties which would include the claim in deceit pursued in the English Commercial Court. There was accordingly no basis to stay the English Commercial Court action in favour of arbitration, or to justify the setting aside of the High Court Order.

Ad hoc arbitration agreement

The Court noted that it was common ground that, as a matter of both English and Indian law, parties can agree to arbitrate their dispute whether or not there was a prior arbitration agreement and that any agreement "to such an ad hoc jurisdiction, which will usually have to be spelled out of correspondence, must be clear and unqualified".

The claim letter of 4 April 2017 sent on behalf of the Minority Shareholders did appear to suggest that the Majority Shareholders were parties to the SPAs and that the existing arbitration clause was therefore relevant. However, the Majority Shareholders were not in fact parties and so this statement had no effect. In addition, the letter had noted that "the Investors will pursue all available remedies including but not limited to those set out in the SPAs.", which made it clear that the Minority Shareholders were not solely considering actions  under the arbitration agreement. The claim letter simply notified a "potentially wide-ranging series of claims around the world against GIR, against…[the Majority Shareholders]…as individuals, and against others." Given this, it could not be said that the claim letter of 4 April 2017 constituted an offer to resolve in arbitration the disputes with the Majority Shareholders personally.

In addition, the response sent by the Majority Shareholders on 17 May 2017 could not be read as an acceptance of ad hoc arbitration. While the response letter sought to assert that the claims were governed by the SPAs, this was not the case, given that as a matter of law the Majority Shareholders were not party to the arbitration agreement. The Court also noted that the arbitration clause in the SPAs called for an expedited 60 day arbitration process, which would in any event have been "wholly inappropriate for the complex claims of dishonesty" which were alleged.

While there was a suggestion that the letters had led to a common understanding that the claims would be brought in arbitration and that the Minority Shareholders were now estopped from any alternative course, there was in fact no such common understanding. There was also no indication that the Majority Shareholders had taken any action to their detriment on the basis of the purported common understanding, as no arbitration had been commenced. In fact, GIR had attempted to arbitrate under the SPAs, but the Madras High Court had rejected this "as being merely a ruse to avoid the Commercial Court proceedings in London from going ahead".

The Court accordingly concluded that the correspondence did not amount to an agreement to arbitrate the claims in deceit against the Majority Shareholders individually.

Remaining issues

The Court went on to deal with whether there had been material non-disclosure and decided that this was not the case. The Court then considered in some detail whether England and Wales was the most suitable jurisdiction for the claims to be heard, noting that the case involved an alleged international fraud said to have arisen from misrepresentations made by the Majority Shareholders in England, where an Indian company had been sold to a Mauritian company and then on-sold to a German company. The Court ultimately decided that England was the proper place for the litigation to be heard.

Comment

This case will be of interest to users of both arbitration and litigation, as an example of how the English courts will determine whether particular claims fall within any relevant arbitration agreement. While the English courts continue to interpret arbitration clauses widely in order to achieve a commercial outcome, this case demonstrates that this approach will not sweep up claims which fall manifestly outside the arbitration clause.

Where jurisdiction is contested and one party is arguing that an agreement to arbitrate has been made in pre-action correspondence, the court will address the issue by the strict application of the correct legal principles. The fact that parties may have wrongly assumed that there was jurisdiction in such correspondence, or that the parties did not turn their minds closely enough to the extent of the jurisdiction will not change the strict legal position, unless what was said or done is sufficient to amount to an estoppel. It will typically be challenging to establish an estoppel of this kind, as this case demonstrates.

While this decision is highly fact-specific and relates to questions not only of English but also of Indian law, it is a useful reminder of the importance of careful drafting of arbitration clauses. If the parties intend an arbitration clause to extend to cover claims against individuals then that should be expressly provided for.

For more information, please contact Craig Tevendale, Partner, Rebecca Warder, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.