Saturday, February 18, 2012

Arbitrability of an Unfair Prejudice Claim (Part II)

(continued from earlier)

The next argument was that any unfair prejudice claim under s.994 attracts a degree of state intervention and public interest such as to make it inappropriate for disposal by anything other than judicial process, independent of the nature of the claim or the company in this particular case. In response, the Court undertakes a historical analysis of the unfair prejudice claim, observing that since the 1980 Companies Act, the scope of the unfair prejudice claim has consciously been given a life independent of the relief of winding up on just and equitable grounds. Thus, although the two may overlap, the legislature has made a conscious effort to allow the unfair prejudice claim and reliefs under it, for reasons which may not apply to other shareholders in the same class as the claimant, or to creditors. Thus, the unfair prejudice claim is more ‘personalised’ than the winding up of the company on just and equitable grounds. The Court observed that while some of the reliefs sought under an unfair prejudice claim could affect third parties, it was not inherently a class remedy. In cases where it did affect third parties, the Court could impose limitations of the reliefs that could be claimed through arbitration.

This conclusion was apparently at odds with Exeter, which had held relied on an Australian decision in A Best Floor Sanding Party Ltd v Skyer Australia Party Ltd [1999] VSC 170, to hold that the shareholders have an inalienable right to approach a Court for an unfair prejudice claim and had denied a stay. However, as the Court of Appeal here rightly points out, the applicable Australian statute was materially different from its English counterpart. It mere included unfair prejudice as an additional ground for winding-up, and not as an independent head of relief. Further, the reliefs sought there were for winding up and not merely a contractual dispute which formed the basis of an unfair prejudice claim. The Supreme Court of New South Wales in ACD Tridon Inc v Tridon Australia Pty Ltd [2002] NSWSC 896 has also similarly narrowed the scope of the Skyer Australia decision, lending further support to this interpretation. The Court observes that certain company law issues like the rights of members; and the duties of directors, or the consequences of insolvency are not such as may be arbitrated. However, the Court observes that Exeter incorrectly extended the rationale of Skyer Australia beyond these limited cases.

Here, the Patten LJ observes that,

the determination of whether there has been unfair prejudice consisting of the breach of an agreement or some other unconscionable behaviour is plainly capable of being decided by an arbitrator and it is common ground that an arbitral tribunal constituted under the FAPL or the FA Rules would have the power to grant the specific relief sought by Fulham in its s.994 petition. We are not therefore concerned with a case in which the arbitrator is being asked to grant relief of a kind which lies outside his powers or forms part of the exclusive jurisdiction of the court. Nor does the determination of issues of this kind call for some kind of state intervention in the affairs of the company which only a court can sanction. A dispute between members of a company or between shareholders and the board about alleged breaches of the articles of association or a shareholders’ agreement is an essentially contractual dispute which does not necessarily engage the rights of creditors or impinge on any statutory safeguards imposed for the benefit of third parties. The present case is a particularly good example of this where the only issue between the parties is whether Sir David has acted in breach of the FA and FAPL Rules in relation to the transfer of a Premier League player ... The statutory provisions about unfair prejudice contained in s.994 give to a shareholder an optional right to invoke the assistance of the court in cases of unfair prejudice. The court is not concerned with the possible winding-up of the company and there is nothing in the scheme of these provisions which, in my view, makes the resolution of the underlying dispute inherently unsuitable for determination by arbitration on grounds of public policy. The only restriction placed upon the arbitrator is in respect of the kind of relief which can be granted.

Having settled this point, the Court (following ACD Tridon) goes further to say that even in cases where a contractual dispute like the one here was being relied on as the basis of a winding up petition, the right to approach the court continued to be contingent on the underlying dispute being settled by arbitration. “The agreement could not arrogate to the arbitrator the question of whether a winding-up order should be made. That would remain a matter for the court in any subsequent proceedings. But the arbitrator could, I think legitimately, decide whether the complaint of unfair prejudice was made out and whether it would be appropriate for winding-up proceedings to take place or whether the complainant should be limited to some lesser remedy.

Finally, the Court considered the third and fourth prongs of argument. The third was held as not being supported by the statute, while the fourth was rejected on the basis that while the clause was very broad, inherent limitations would be read in based on the arbitrability of the subject matter of the dispute.

In sum, this is an important decision on the extent to which a company law dispute may be arbitrated. Admittedly, the facts of the case played a crucial role in the conclusion arrived at. However, the analysis of the nature of an unfair prejudice claim, and the concept of arbitrability provides useful guidance for future issues of a similar nature.

(Note: It was helpfully pointed out by a reader that on 22 February, the UK Supreme Court refused Fulham leave to appeal against the UKCA decision.)

5 comments:

Renu Gupta said...

Interesting case.

I have a question on a basic point. On what legal basis could David be construed as the contracting party?

Principles laid down by the UKSC in Dallah v. State of Pakistan, clearly recognize privity of contract for the purposes of arbitration.

Robert Goddard said...

Your readers may be interested to learn that the Supreme Court refused permission to appeal earlier this month. See: http://www.supremecourt.gov.uk/docs/PTA-1202.pdf

Shantanu Naravane said...

Thanks for that update Robert.

Renu, I am not sure I understand you correctly, but I don't think David needed to be a party to the arbitral agreement, since Fulham approached the Court for an injunction. In any case, his conduct as a director was relied on as the basis of an unfair prejudice claim against the Company, as opposed to being against him individually.

Renu Gupta said...

Thanks Shantanu. You are right. I missed that bit.

Anonymous said...

Is it possible to alter the arbitration agreement after commencement of proceedings under Section 21 of the A&C Act?