In NDK Ltd v HUO Holding Ltd and another  EWHC 1682 (Comm), the English Commercial Court rejected a section 67 challenge brought by NDK in respect of an LCIA award which had granted an anti-suit injunction blocking proceedings commenced in the Cypriot courts.
What was the background?
The dispute arose out of a Russian mining joint venture between three groups of investors including NDK, which held 75% of shares in the Cypriot SPV. The investors were party to a Shareholders’ Agreement (the “SHA“) (which contained an LCIA arbitration clause), and as shareholders of the Cypriot company, they were also bound by the company’s Articles of Association (which had no jurisdiction clause). Both the SHA and Articles of Association gave shareholders pre-emption rights over the other shares. The relationship between the joint venturers broke down and a number of disputes arose. NDK initiated proceedings in Cyprus against the other two investors (the “Defendants“) who were alleged to have sold their shares to a third party in breach of the pre-emption rights. The Defendants obtained an award from the LCIA tribunal granting an anti-suit injunction. NDK subsequently applied to set aside the award under s.67 of the Arbitration Act 1996 for want of substantive jurisdiction. The challenge was made on the basis that the proceedings were outside the scope of the arbitration and not arbitrable.
Does an award granting anti-suit relief fall outside of s.67?
The Defendants’ first submission was that these matters did not concern the “substantive jurisdiction” of the tribunal and therefore fell outside of the scope of s.67. They argued that as there was no dispute that the parties had entered into an arbitration agreement, or that an LCIA tribunal had jurisdiction to grant relief for breaches of that agreement, the Tribunal’s decision to grant anti-suit relief in respect of proceedings in another forum was simply the exercise of its jurisdiction to determine whether there was a breach of the arbitration agreement. Therefore, the decision was not susceptible to jurisdictional challenge. They drew an analogy with a decision by a Tribunal that there had been a breach of a framework contract to which the arbitration agreement was ancillary, in which case the decision would not be reviewable on the merits.
The Commercial Court rejected this argument, noting that a decision as to the scope of the arbitration agreement and whether it extends to a particular dispute, falls within s.30(1)(a) of the English Act because the issue is whether there is a valid arbitration agreement extending to those claims. Foxton J considered that this submission created “unsatisfactory distinctions and consequences“, whereby the position might arise in which the arbitrators had jurisdiction to prevent the claims being brought elsewhere on the basis that they fell within the arbitration clause, but no jurisdiction to determine the claims themselves on the basis of the court’s conclusion under s.67.
Did the Shareholders’ Agreement arbitration clause govern the Articles of Association?
NDK argued that the claims in Cyprus, brought under the Articles of Association, were not governed by the arbitration clause in the SHA, and therefore the LCIA Tribunal had no jurisdiction to enjoin them.
Under the Fiona Trust principle, arbitration clauses governed by English law will be interpreted with a presumption that the parties, as rational businessmen, intend it to apply to all disputes arising from the relationship between the parties. This principle has been extended to multi-contract disputes, where both contracts are part of an overall package of agreements and the wording of the clause is capable of applying to disputes brought under the other contract (the “Extended Fiona Trust Principle“). NDK acknowledged the Extended Fiona Trust Principle but argued that it did not apply here because the Articles of Association and SHA had a fundamentally different legal character, the former being governed by company law, the latter being a private contract.
Foxton J rejected this submission. While Foxton J acknowledged that there were important differences between the statutory contract in a company’s articles of association and shareholder agreements, he held that these rights were both essentially contractual in nature and did not arise under two different legal orders, but were rather complementary. From a commercial perspective, the key document governing the relationship of the shareholders was the SHA (which contained a supremacy clause stating that it would prevail in the event of any inconsistency with the Articles of Association) and not the Articles of Association – the latter was often, including in this case, merely a remnant from the “off the shelf” company created by a corporate services provider.
Ultimately, the Commercial Court therefore applied the Extended Fiona Trust Principle. Foxton J was satisfied that the Articles of Association and the SHA both concerned the same relationship (the parties’ relationship in the joint venture company) and, in the relevant respects the same subject-matter (entitlement to transfer shares and pre-emption). The Articles of Association and the SHA were interdependent (as illustrated by the supremacy clause) and entered into contemporaneously. Further, as the SHA was commercially the most significant document and contained a broad arbitration clause, and the Articles of Association did not contain a jurisdiction clause, the Commercial Court held that a rational businessman would have intended for disputes relating to the SHA to be resolved in accordance with the arbitration clause, even if formulated solely by reference to the Articles of Association. The alternative would allow evasion of what was intended as a mandatory dispute resolution clause by reformulation of claims, and would risk litigation of claims relating to the same subject in two different fora.
The claims in question for breach of pre-emption rights constituted claims which “relate to” or arise “in connection with” the SHA and could all have been pursued between the parties to the SHA – “[t]he precise legal vehicle through which those substantive claims [we]re pursued d[id] not affect the answer to the question of whether they fall within the arbitration agreement“. The fact that some types of relief sought (rectification of the share register) could not be granted by the LCIA Tribunal did not mean that the matters raised in the Cyprus proceedings fell outside of the LCIA Arbitration Agreement- it was possible for relief to be sought from the courts based on the Tribunal’s determination.
Alternatively, were the matters raised in the Cyprus proceedings non-arbitrable under English law?
In the alternative, NDK argued that the Cyprus proceedings engaged matters which could only be granted by a court and were not arbitrable under English law including (i) the identity of the rightful shareholders of the company which involved a matter of status and not contract, (ii) rectification of the register which engaged the interests of third parties who deal with the company in reliance on the register. Foxton J did not consider the issues to be matters of status – the issue of share ownership was “essentially [a] private and commercial dispute“. The Commercial Court reiterated its analysis that the fact that relief could only be granted by a court did not make a dispute non-arbitrable, applying Fulham Football Club (1987) Ltd v Richards  EWCA Civ 855. The public interest of third-party access to accurate public records relating to an arbitrating party in this case was relatively weak, and did not outweigh the strong public interest in allowing commercial parties to refer their disputes to arbitration.
English Commercial Court maintains its pro-arbitration stance with robust defence of party agreement to arbitrate
This decision confirms the robust pro-arbitration stance of the English courts, who once again applied the Extended Fiona Trust principle, this time in a joint venture context. The Commercial Court adopted a practical approach to a suite of documents, recognising that in a joint venture context, the SHA was usually the most important commercial document and that any rational businessperson could only have intended that the arbitration clause would apply to any disputes between the parties including under the Articles of Association.
The Commercial Court also reiterated that there was a strong public interest in holding commercial parties to their arbitration agreements, and a compelling reason would be needed to hold a matter non-arbitrable. Foxton J emphasised that “English courts will not lightly conclude that a dispute between commercial parties is incapable as a matter of public policy of being submitted to arbitration“.
The arbitration-friendly and pragmatic approach of the Commercial Court is again evident in this decision, and is a factor which continues to attract commercial parties to choose England and Wales as their seat for arbitration proceedings.
For more information, please contact Craig Tevendale, Partner, Jake Savile-Tucker, Senior Associate, or your usual Herbert Smith Freehills contact.
The authors would like to thank Benjamin Foo for their assistance in preparing this blog post.