In an eagerly awaited judgment of the Judicial Committee of the Privy Council (“JCPC”) delivered on 20 September 2023 in FamilyMart China Holding Co Ltd v Ting Chuan,[1] the JCPC addressed whether an arbitration agreement in a shareholders’ agreement prevents a party to that agreement from pursuing a petition to wind up the company which is the subject of the dispute. Put another way, is the court entitled to proceed with the determination of a winding up petition on the just and equitable ground if the underlying dispute is within the scope of the parties’ arbitration agreement? The judgment resolves the tension between (i) the rights of parties to resolve their disputes privately by arbitration if they so choose and (ii) the exclusive jurisdiction of the court to wind up a company, in favour of the former.
Overruling the Cayman Islands Court of Appeal (“CICA”) and reinstating the first instance decision of Kawaley J, the JCPC held that substantive matters of dispute pleaded in support of a winding up petition brought on the just and equitable ground are susceptible to being determined by arbitration, with the effect that the winding up petition would be stayed pending determination of the matters referable to arbitration.
This judgment reaffirms the primacy of party autonomy with respect to alternative dispute resolution methods in the Cayman Islands, and will be particularly welcomed by users of arbitration.
The FamilyMart judgment was delivered at the same time as the judgment of the UK Supreme Court in Republic of Mozambique v Privinvest Shipbuilding SAL (Holding) & Ors [2] (with Lord Hodge giving the judgment in both cases), which also addressed the meaning of “matter” in the context of arbitration agreements governed by the (English) Arbitration Act 1996.
Background
FamilyMart China Holding Co Ltd (“FMCH”) and Ting Chuan (Cayman Islands) Holding Corporation (“TCHC”) are shareholders in a joint venture entity incorporated in the Cayman Islands, China CVS (Cayman Islands) Holding Corp (the “Company”). TCHC is the majority shareholder, owning 59.65% of the issued shares in the company and FMCH is the minority shareholder, owning 40.35%. Their relationship is governed by a shareholders’ agreement (the “SHA”) which entitles TCHC to nominate a majority of the board members of the Company. The SHA contains a broad arbitration agreement providing for disputes in connection with or arising out of the SHA to be resolved by arbitration seated in Beijing, China under the ICC Rules.
The Petition and Cayman Islands Proceedings
On 12 October 2018, FMCH filed a petition to wind up the Company in the Grand Court of the Cayman Islands on the just and equitable ground, alleging a breakdown in the commercial relationship between the shareholders and mismanagement of the Company by the directors appointed by TCHC (the “Petition”). In the Petition, FMCH alleges that the Ting Hsin Group (“Ting Hsin”), the owner of TCHC, diverted profits in the Company to entities associated with TCHC and Ting Hsin, and prevented the minority directors (appointed by FMCH) from accessing information relating to the Company’s business. FMCH alleges that: (1) it has lost trust and confidence in the management of the Company’s affairs; (2) its relationship with TCHC has irretrievably broken down, and accordingly it is just and equitable that the Company be wound up. Alternatively, FMCH seeks an order requiring TCHC to sell its majority stake in the Company to FMCH.
TCHC applied to strike out or stay the Petition pending resolution of the underlying disputes by arbitration in accordance with the arbitration agreement in the SHA.
At first instance, Kawaley J granted TCHC’s application to stay the Petition in favour of arbitration under section 4 of the Foreign Arbitral Awards Enforcement Act (“FAAEA”), the Cayman Islands statute that implements the New York Convention.[3] FMCH argued unsuccessfully that the disputes underlying the Petition were non-arbitrable because allowing them to be arbitrated would amount to an impermissible incursion into the exclusive jurisdiction of the court to grant a winding up petition.
On appeal, the CICA set aside Kawaley J’s decision, overturning the stay of the Petition on the basis that all matters which are the subject matter of the Petition are non-arbitrable, thereby rendering the parties’ arbitration agreement inoperative. The CICA held that the court has exclusive jurisdiction to determine whether a company should be wound up on the just and equitable ground, which is a threshold question to be determined before any alternative relief may be granted under section 95 of the Companies Act (i.e. relief such as an order for a majority shareholder to buy out a minority shareholder) and therefore the disputes underlying the Petition are not susceptible to arbitration.
TCHC appealed to the JCPC.
JCPC proceedings
The parties agreed that the underlying disputes which are the subject of the Petition are within the scope of the arbitration agreement. The issue to be determined by the JCPC was whether those matters are arbitrable in light of the Petition having been presented.[4]
The judgment addressed in detail the legal authorities concerning what constitutes a “matter”, noting that there is “broad consensus”[5] among leading arbitration jurisdictions in the common law world on how to approach the determination of matters to be referred to arbitration. A two-step process is required: first, to identify the matter or matters in respect of which legal proceedings are brought and, secondly, to ascertain whether the matter(s) fall within the scope of the arbitration agreement on its true construction.
In the judgment of the JCPC, a “matter” is not the same as a cause of action. Rather, a “matter” is a “substantial issue that is legally relevant to a claim or a defence, or foreseeable defence, in the legal proceedings, and is susceptible to be determined by an arbitrator as a discrete dispute. If the “matter” is not an essential element of the claim or of a relevant defence, it is not a matter in respect of which the legal proceedings are brought.”[6]
The JCPC was alert to the potential for abuse by a party to an arbitration agreement, whereby it might raise peripheral or minor issues and contend that they amount to matters that require determination by arbitration, for the purpose of stifling the prompt determination of a winding up petition. Hence, there is a need for the Court to be “careful to prevent an abuse of process”[7] and a requirement for any issue to be “substantial” in order to constitute a “matter” referable to arbitration.
In the judgment of the UK Supreme Court in Republic of Mozambique, which substantially overlaps with the FamilyMart judgment in its analysis of the meaning of “matter”, the Supreme Court reached the opposite conclusion on the facts, holding the certain facts and matters (pleaded in the context of purported defences to litigation claims concerning bribery and corruption) did not amount to “matters” referable to arbitration. This demonstrates that a careful and fact-specific examination is required in each case in which this question arises, notwithstanding the general policy of the law being pro-arbitration.
The JCPC also considered whether any of the five matters advanced by TCHC were non-arbitrable with the effect that the arbitration agreement was inoperative for the purposes of section 4 of the FAAEA. The five matters advanced were: (1)-(2) the two underlying grounds of the Petition i.e. factual and legal allegations vis-à-vis alleged mismanagement of the Company; (3) whether it was just and equitable that the Company should be wound up; (4) whether FMCH should be granted the buy-out order; and (5) whether, if the buy-out order was inappropriate, a winding up order should be made.
In the judgment of the JCPC, the authorities dictate that there are two circumstances in which an arbitration agreement may be inoperative.[8] First, “subject matter non-arbitrability” arises where the dispute is “excluded by statute or public policy from determination by an arbitral tribunal”. Secondly, “remedial non-arbitrability” arises where “the award of certain remedies is beyond the jurisdiction which the parties can confer through their agreement on an arbitral tribunal.”
After analyzing the authorities, the JCPC held that an arbitral tribunal does not have the power to rule on matters (3)-(5) advanced by TCHC[9] and accordingly those matters are non-arbitrable. Thus only the Court may determine whether a company is to be wound up or alternative relief is to be granted.
However, the JCPC held that there is nothing to prevent an arbitral tribunal from determining the first two matters, which are “… controversies relating to legal or equitable rights which are of substance. They are matters which lie at the heart of the legal proceedings in the Cayman Islands for an order under section 95 of the Companies Act”[10]. The JCPC considered resolving matters (1) and (2) to be an essential precursor to the formation of the Court’s opinion as to whether it is just and equitable to wind up the Company, which in turn is the threshold for the grant of any alternative remedy under section 95 of the Companies Act (i.e. matters (3)-(5) advanced by TCHC).[11]
Accordingly, the JCPC held that the first two matters are “matters” for the purposes of section 4 of the FAAEA and ordered a stay of the Petition while those underlying matters are determined by arbitration pursuant to the arbitration agreement.[12] The stay of the Petition was granted pro tanto even though there is no express statutory provision for such a stay to be partial.[13]
Comment
In its judgment, the JCPC emphasized the primacy of parties’ autonomy in their choice of dispute resolution methods. Even where, as here, the consequence of certain matters being submitted to arbitration despite other matters remaining in the exclusive jurisdiction of the Court is to bifurcate the dispute, the JCPC found that such bifurcation does not justify any denial of the parties’ right to arbitrate those matters that are properly referable to arbitration.
The JCPC judgment is also notable for its emphasis upon the need to interpret national legislation implementing the New York Convention in its global context, by reference to international jurisprudence and commercial practice which is pro-arbitration. In doing so, the JCPC expressly rejected the analysis advanced by FMCH which would, in its judgment, have made the Cayman Islands an “outlier” in its approach towards upholding arbitration agreements.
This pro-arbitration approach will be welcomed by those who value the autonomy of parties to choose to resolve their disputes through arbitration.
