Monday, September 1, 2014

Oppression/Mismanagement and Arbitration Clauses

We had earlier briefly noted the decision of the learned Single Judge of the Bombay High Court in Malhotra v. Malhotra, where it was held that disputes in a petition properly brought under sections 397-398 of the Companies Act are not capable of being arbitrated. In essence, the learned Single Judge held that considering the nature and source of the oppression/mismanagement remedies and the scope of reliefs which can be granted by the CLB, petitions u/s 397-398 are not capable of being referred to arbitration. The Court further held, however, that if the petition is mala fide brought solely to defeat an arbitration agreement, then the same could be referred to arbitration.

Insofar as this latter holding is concerned (and assuming that petitions u/s 397-398 are otherwise not referable to arbitration), it is respectfully submitted that if a petition is brought u/s 397/398 solely to defeat an arbitration agreement or is otherwise vexatious or oppressive, that petition can well be dismissed outright. If it is so dismissed outright there may be no question of any reference to arbitration: nothing remains to be referred anywhere. However, it is respectfully submitted that the holding of the Court on the larger issue (that as a matter of law, petitions bona fide brought under s. 397-398 are not capable of being referred to arbitration) may require some further elaboration.

One may usefully contrast the approach of the Bombay High Court with that of the Court of Appeal in Fulham v. Richards. The Court of Appeal was concerned with the analogous question of whether unfair prejudice petitions can be referred to arbitration. We have discussed the decision in Fulham in detail earlier on this blog. The Court of Appeal affirmed the judgment of Vos J, holding 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…

While it is true to say that remedies u/s 402 are wider than what an arbitral tribunal can grant, that in itself may not mean that every petition u/s 397-398 necessarily invokes those reliefs and is therefore incapable as a matter of law of being referred to arbitration. The approach in Fulham, at first glance, appears distinct from the approach in Malhotra. Fulham appears to leave open some flexibility depending on the nature of the particular dispute and the nature of the reliefs sought. While the approach in Malhotra (if applied strictly to hold that petitions u/s 397-398 are not at all capable of arbitration) does have the advantage of certainty, that advantage is to some extent negated by the Court leaving open a window to argue that petitions are mala fide and "dressed up" and solely brought to evade an arbitration clause. It may well be possible to hold that where the reliefs are such as can be granted by the arbitral tribunal, then the petition u/s 397-398 is "dressed up" and hence is capable of being referred to arbitration. It remains to be seen how the exceptions laid down by the Court in Malhotra will be interpreted in future: if they are interpreted widely (without insisting on strict demonstration of mala fides, for instance) it may well be that the two approaches can ultimately be reconciled. 

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