English Commercial Court decision in joint venture dispute shows reach of arbitration
In the recent decision of NDK Ltd v HUO Holding Ltd and another  EWHC 1682 (Comm), the English Commercial Court reaffirmed its support for arbitration by rejecting a challenge to the jurisdiction of an arbitral tribunal. The Court considered the relationship between a company’s articles and the terms of a shareholders’ agreement, concluding that an arbitration clause in the more significant document – the shareholders’ agreement – should apply to disputes arising from both agreements.
The dispute concerned a joint venture to operate a Russian coal mine. The company holding the licence to operate the mine was a Cypriot registered SPV (the SPV), and its shareholders comprised three companies, of which NDK Ltd (NDK) was the majority shareholder. The shareholders entered into a shareholders agreement (the SHA), which was governed by English law and contained a disputes clause in favour of arbitration under the LCIA rules. Under Cypriot law, the SPV was required to have articles of association (AA), and these were governed by Cypriot law, with no jurisdiction clause. Both the AA and SHA gave the shareholders pre-emption rights over the other shares.
A number of disputes arose after the relationship between the shareholders broke down, including NDK issuing proceedings in Cyprus against the remaining investors (the Defendants), alleging that they sold their shares to a third party in breach of the pre-emption rights. However, the Defendants commenced an LCIA arbitration against NDK, seeking an anti-suit injunction in restraint of the Cypriot proceedings, which was granted.
NDK applied to set aside the anti-suit injunction under s67 of the Arbitration Act, which provides a right to challenge an award on the basis of lack of jurisdiction.
NDK challenged the substantive jurisdiction of the tribunal awarding the anti-suit injunction and alleged that the SHA (and the arbitration agreement within it) had been terminated as a consequence of the repudiatory conduct of the Defendants. Broadly this presented two issues:
- NDK argued that, as a matter of construction, the claims brought under the AA did not fall within the LCIA arbitration agreement in the SHA. This was because they were advanced by reference to the statutory contract in the AA (the Construction Issue).
- NDK submitted that the proceedings were not, as a matter of English law, arbitrable. This was on public policy grounds, which included that the status of shareholders was not a contractual question; the proceedings related to the correction of the public register of shareholders, which impacted the rights of third parties; and only a court could order the rectification of the public register of shareholders (the Arbitrability Issue).
In response, the Defendants argued that the s67 challenge was invalid, as the questions raised did not concern the substantive jurisdiction of the tribunal. They contended that there was no dispute that the parties were subject to an LCIA arbitration agreement and any subsequent tribunal appointed under that agreement had jurisdiction to grant relief for breaches of it.
The Defendants emphasised the broad scope of the LCIA arbitration agreement, which included that "disputes, differences, controversies or claims between or among the Parties arising out of, relating to or in connection with this Agreement" were to be referred to LCIA arbitration.
They also relied on the principles laid down in the key earlier case of Fiona Trust. The English courts had decided in Fiona Trust that any Court interpreting an arbitration agreement should start from the assumption that the parties are likely to have intended any dispute arising out of their legal relationship to be decided by the same tribunal (or court). An extended version of the principle has also been accepted by the courts, in looking at whether an arbitration agreement in one contract can also cover disputes arising under another separate contract between the same parties. The extended Fiona Trust principle was key to the Defendants’ position.
The Commercial Court rejected the argument that the challenge did not concern the "substantive jurisdiction" of the tribunal and therefore fell outside s67. However, the Court found in favour of the Defendants on both the Construction Issue and the Arbitrability Issue, rejecting the s67 challenge.
In doing so, the Court applied the extended Fiona Trust principle, as the AA and the SHA both concerned the same relationship (being the parties’ relationship in the joint venture company) and the same subject matter (the entitlement to transfer the shares and pre-emption). The SHA was commercially more significant than the AA, which did not contain a jurisdiction clause, so the Court considered a rational business person would have intended for disputes relating to the SHA to be resolved in accordance with the arbitration clause. In any event, the claims fell within the broad scope of the arbitration agreement, as they were related to the SHA, and could have been pursued between parties to the SHA.
In relation to the Arbitrability Issue, the Court emphasised that it would only preclude the right to arbitrate on the grounds of public policy where there were compelling reasons to do so. On the facts, the matters were essentially private and commercial disputes, as the registration of shares was simply a means of giving effect to valid transfers once the relevant entitlement to the shares had been established.
In doing so, the Court adopted a similar approach to that in In Fulham Football Club, one of the best known authorities on the interaction between arbitration and shareholder claims. In that case, the Court of Appeal held that a unfair prejudice claim under section 994 of the Companies Act 2006 could be arbitrated.
The decision reiterates the English courts’ pro-arbitration stance and unwillingness to entertain challenges to arbitral awards.
The judgment also demonstrates the courts’ approach to agreements to arbitrate, which offers welcome certainty to commercial parties that have elected this jurisdiction as the seat of arbitration. The judgment comes as no surprise, as the courts have frequently referred to the public policy arguments in support of certainty when reviewing the jurisdiction of arbitral agreements.
The application in this case of the extended Fiona Trust principle in a joint venture context evidences the courts’ willingness to take a commercial approach when determining the relationship between a company’s articles and the terms of any shareholders’ agreement. Arbitration has certainly become increasingly attractive to those inking joint venture deals over the last decade and this trend is set to continue.