In a recent case (FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation (Cayman Islands) [2023] UKPC 33 (20 September 2023)
URL: http://www.bailii.org/uk/cases/UKPC/2023/33.html ) the Privy Council decided that parties to an agreement providing that disputes must be referred to arbitration can be prevented from circumventing the agreement through winding up proceedings.
One of the parties applied for a stay of winding up proceedings. Ting Chuan, relying on the arbitration agreement in the Shareholders Agreement, applied to strike out the winding up petition or, alternatively, for an order dismissing or staying the petition under section 4 of the Foreign Arbitral Awards Enforcement Act (1997 Revision) (“FAAEA”) or under the inherent jurisdiction of the court until the disputes which underlay the petition had been arbitrated.
As Lord Hodge said “This appeal raises the question whether an agreement to settle disputes arising out of a shareholders’ agreement by arbitration may prevent a party to that agreement from pursuing a petition to wind up the company whose management is the focus of those disputes. The other side of the coin is whether an application to the Grand Court to wind up that company on the just and equitable ground makes all matters which are the subject matter of those court proceedings non-arbitrable, thereby rendering inoperative the agreement to resolve such disputes by arbitration.”
It is a very technical decision but reinforces the argument that in a common law jurisdiction governed by the New York Convention, arbitration takes precedence and the Court will in circumstances where the dispute would be covered by the arbitration agreement, order a stay of insolvency proceedings.
The Court, or Board of the Privy Council set out a relevance test process whereby the court decides whether the issues are covered by the arbitration agreement:
“There is also a broad consensus on how to approach the determination of matters which must be referred to arbitration. The court in considering such an application adopts a two-stage process. First, the court must determine what the matters are which the parties have raised or foreseeably will raise in the court proceedings, and, secondly, the court must determine in relation to each such matter whether it falls within the scope of the arbitration agreement. (See Tomolugen, para 42 above; WDR Delaware, para 47 above and Sodzawiczny, para 50 above).
The court must ascertain the substance of the dispute or disputes between the parties. This involves looking at the claimant’s pleadings but not being overly respectful to the formulations in those pleadings which may be aimed at avoiding a reference to arbitration. It involves also a consideration of the defences, if any, which may be skeletal as the defendant seeks a reference to arbitration, and the court should also take into account all reasonably foreseeable defences to the claim or part of the claim. (See Lombard North Central, para 37 above; Quiksilver, para 38 above, Tomolugen, para 42 above, WDR Delaware, para 47 above; and Sodzawiczny, para 53 above).
Secondly, while article II(3) of the New York Convention, which requires that the court refer a matter to arbitration, is silent as to the stay of the court proceedings, legislation implementing this provision of the New York Convention has generally made express provision for a stay pro tanto. Examples include section 9 of the Arbitration Act 1996 in England and Wales, section 10 of the Arbitration (Scotland) Act 2010 in Scotland, section 7 of the International Arbitration Act 1974 in Australia, and section 6 of the IAA in Singapore. In the Cayman Islands section 4 of the FAAEA speaks of “staying the proceedings” and makes no reference to the possibility of a stay pro tanto. Nonetheless, the context is a domestic statute implementing an international convention, in which broad and generally accepted principles should be adopted in interpreting such a statute: see Gol Linhas which the Board discussed in para 31 above. In Bennion, Bailey and Norbury on Statutory Interpretation (8th ed. 2020) the authors state at section 9.3: “Unless the contrary intention appears, the legislature is presumed to intend an enactment to be read in light of the principle that the greater includes the less.”
“This principle is derived from Roman law (“non debet cui plus licet, quod minus est non licere”: Corpus Juris Civilis, Digest 17.21 (Ulpian)). In the Board’s view in this context the greater includes the lesser. Counsel did not argue otherwise in this appeal. Accordingly, the Board considers that section 4 of the FAAEA allows a pro tanto stay of legal proceedings.”
Conclusion
Although a UK reader may wonder why this case is relevant to them it underscores the approach that Courts are following which is to upload the requirement to use ADR such as arbitration or mediation before proceeding to litigation. The movement is towards mandating the issue of ADR. In my view it is likely that this approach will also be adopted in the forthcoming Churchill v Merthyr Tydfil appeal concerning a stay and the pre action protocol in disrepair and nuisance cases. The question in that case is whether a council’s own complaints procedure constitutes ADR. That case should be decided shortly.
In the meantime if you wish to mediate or a contractual dispute resolution agreement says you have to, we have a panel of experienced mediators who can help. Just get in touch at enquiries@promediate.co.uk