Singapore High Court: Whether an Arbitration Agreement Contained in a Shareholders’ Agreement Extend to Disputes Arising Under the Articles of Association

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In BTY v BUA and other matters[2018] SGHC 213, the Singapore High Court addressed the issue of whether an arbitration agreement contained in a shareholders’ agreement will extend to disputes arising between the same parties under the articles of association of the Company. The High Court, placing reliance on foreign and local judgements, refused to uphold such extension of an arbitration agreement. Detailed case analysis given below:

Factual Matrix

The Defendant was a joint venture company and Plaintiffs were shareholders in Defendant. The relationship between the parties was governed by a Shareholders Agreement (SHA) (titled as ‘Investment Agreement’) which also contained an arbitration clause. Several provisions of SHA were identical to the Article of Association (AOA) of Defendant, but it is pertinent to note that unlike SHA, the AOA did not have an arbitration clause. The SHA also contained a Supremacy Clause (Supremacy Clause) which specified that if there is a conflict between SHA and AOA, then SHA shall prevail.

Dispute arose between the parties and the Plaintiff instituted litigation against the Defendant for breach of AOA. Per contra, the Defendant applied for stay of litigation in favour of arbitration before the Assistant Registrar on the ground that if the alleged breach stands established, then it will also amount to breach of SHA which contained an arbitration clause and therefore by this analogy, the proper forum to resolve this dispute is arbitration and not litigation. The Assistant Registrar stayed the litigation initiated by the Plaintiff in favour of arbitration. This decision was appealed by the Plaintiff before the Singapore High Court in the present case.

Applicable Legal Principles

Section 6 of the International Arbitration Act (IAA) of Singapore

“Enforcement of international arbitration agreement

6.—(1) Notwithstanding Article 8 of the Model Law, where any party to an arbitration agreement to which this Act applies institutes any proceedings in any court against any other party to the agreement in respect of any matter which is the subject of the agreement, any party to the agreement may, at any time after appearance and before delivering any pleading or taking any other step in the proceedings, apply to that court to stay the proceedings so far as the proceedings relate to that matter.

(2) The court to which an application has been made in accordance with subsection (1) shall make an order, upon such terms or conditions as it may think fit, staying the proceedings so far as the proceedings relate to the matter, unless it is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed

.…

Arbitration Clause

Clause 29.2 of SHA contained an arbitration clause as under:

Any dispute, controversy or conflict arising out of or in connection with this Agreement including any question regarding its existence, validity or termination (a “Dispute”), shall be referred to and finally resolved by arbitration in Singapore and administered by the Singapore International Arbitration Centre (the “SIAC”) in accordance with the Arbitration Rules of the SIAC for the time being in force which rules are deemed to be incorporated by reference into this clause 29.

Parties Contentions

The Defendant invoked Section 6 of IAA relying on Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2016] 1 SLR 373 at [63], wherein the Court of Appeal of Singapore inter alia held that the litigation can be stayed in favour of arbitration if prima facie case on following issues can be established:

  1. that there is a valid arbitration agreement between the parties;
  2. that the dispute in the litigation (or any part of the dispute) falls within the scope of the arbitration agreement; and
  3. the arbitration agreement is not null and void, inoperative or incapable of being performed.

On the basis of b) as mentioned above, the Defendant argued that the litigation does fall within the scope of the parties’ arbitration agreement since the alleged breach of AOA by the Defendant in litigation is also covered by SHA on identical provisions and thus the dispute is within the scope of the arbitration clause under SHA.

The Plaintiff contended that its litigation does not fall within the scope of the arbitration clause contained in SHA since the dispute in litigation arises out of AOA and not out of the SHA. Further, it was also argued by Plaintiff that AOA constitutes an agreement separate and distinct from SHA.

Judgement

The Court placed reliance on Tomolugen Holdings Ltd (Supra) which sets out the applicable principles with regard to stay of Court proceedings in favour of arbitration. In Tomolugen Holdings Ltd (Supra), the Singapore Court of Appeal observed that in considering whether a dispute is covered by an arbitration agreement, the Court is concerned with establishing whether the dispute pertains to a “matter” that is subject to the arbitration agreement which involves two stages as follows

(a)     the court must first determine what the matter(s) is/are in the Court proceedings; and

(b)     it must then ascertain whether the matter(s) fall within the scope of the arbitration clause on its true construction.

Further, the Court of Appeal also took into account the fact that the Court proceedings which are sought to be stayed may be in respect of more than a single “matter”, and in those situations, the Court’s obligation is to stay only that part of the Court proceedings which concerns the matter or matters that fall within the ambit of the arbitration clause. As per Court of Appeal, this is clear from Section 6(2) of the IAA, which mandates a stay only “so far as” [emphasis added in original] the Court proceedings relate to the matter or matters which are the subject of the arbitration agreement.

What was the ‘matter’ in the instant litigation?

In the present case, the Plaintiff’s complaint was that the Defendant has adopted/approved its 2015 Accounts in breach of AOA. Thus, following the above principles as set out by the Court of Appeal in Tomolugen Holdings Ltd (Supra), the High Court, in the instant case, re-characterized the “matter” in this litigation as: whether the Defendant adopted or approved the 2015 Accounts in breach of the AOA?

Whether the ‘matter’ was the subject of the parties’ arbitration agreement?

The Court observed that the ‘matter’ in the litigation arose out of or in connection with AOA and not out of or in connection with SHA and, AOA and SHA are entirely separate agreements. The Court further found that the phrase “this Agreement” in the arbitration agreement encompasses only the SHA and does not extend to the AOA whether as a matter of incorporation, of construction or otherwise.

Thus, the Court concluded that the defendant has failed to discharge the burden which Tomolugen Holdings Ltd (Supra) casts upon it. The ‘matter’ in this litigation does not arise either ‘out of’ or ‘in connection with’ the SHA, as required by the parties’ arbitration agreement found in clause 29.2 of SHA.

Separate legal relationships on separate planes

The Court also held that SHA and AOA create two separate legal relationships between the parties which operate on two separate legal planes. Clause 29.2 of SHA on its proper construction applies only to the private contractual relationship between the parties created by SHA itself.

Disputes under AOA are not within the scope of Clause 29.2 of SHA and are governed by recourse to the Courts in accordance with ordinary principles of company law where ‘company law’ means the interaction of a company’s ‘constitution’, the statutory provisions of the Companies Act of Singapore and the gloss which the common law has applied to those statutory provisions and their precursors.

In addition, citing Austin J from the New South Wales case of ACD Tridon v Tridon Australia [2002] NSW SC 896, the Court also found that that private law plane (SHA) subordinates to company law plane (AOA). In other words, on company law matters, company law allows SHA to supplement company law but never to supplant it.

Supremacy Clause

The Defendant relied on Supremacy Clause in SHA which provided that the SHA is supreme and prevails over any conflicting or inconsistent provision in the AOA. By relying on Supremacy Clause, the Defendant contended that the parties specifically agreed that the AOA were to be controlled by the SHA. The Court rejected this contention holding that the Supremacy Clause operates on the private law plane, and not on the company law plane. The Court also observed that the parties could not have intended a ‘conflict or inconsistency’ within the meaning of the Supremacy Clause to arise simply because a provision which is present in the SHA is absent from the AOA. The effect would be to make the AOA identical in content to the Investment Agreement, making the entire scheme of having the two separate agreements run in parallel on their separate planes entirely redundant. This, the Court found, would have been contrary to the expressly-stated purpose of the SHA, which was to supplement the AOA. Further, the Court remarked that the Company cannot be allowed an impermissible attempt to amend the AOA without making such amendments public as required by the Companies Act of Singapore by way of such Supremacy Clause.

My Comments

The Court arrived at its conclusion based on legally and logically sound principles. To me, it simply means that the Constitution of a Company is a bigger set which governs all its legal relations with different set of people such as shareholders, creditors etc., whereas a Shareholders’ Agreement is specific only to the shareholders of a company. Thus, incorporating an arbitration clause from an agreement (SHA) which is specifically crafted for the benefit of a particular set of people (shareholders) to the Article of Association of a company which is applicable to all the legal relationships of the Company will be against the principles of party autonomy in arbitration and would be prejudicial to the interest of other such stakeholders.

It would be prudent to read the definition of ‘arbitration agreement’ under Section 2A of IAA with special emphasize on the term ‘in respect of a defined legal relationship’ as follows:

2A.—(1) In this Act, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not..

In my view, in this scenario, ‘a defined legal relationship’ can only include the legal relationship between the parties entering into the agreement. It cannot be made uniformly applicable to all other subsequent legal relationships of the company with any and every set of people where the company had not even included any arbitration clause. By incorporating identical terms from any other legal relationship of the company where it had specifically consented to arbitrate its disputes arising out of that particular defined legal relationship only and by adding a supremacy clause in any other subsequent legal contract will be against the settled principles of party autonomy in arbitration. It cannot be used as a way to bind a company to arbitrate a dispute which it had never anticipated or consented to arbitrate in true sense.

Further, if such reasoning is allowed then I’m afraid it will open flood gates of claims from all categories of stakeholders against the company which have any type of legal relationship with the company. It will provide an erroneous way to first draft a contract with a company on identical terms with its Articles and add an arbitration clause & supremacy clause to drag such company in arbitration proceedings for which the company as a juridical person had never consented in true sense.

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