Articles

The author is indebted to PLMJ associates Ana Carolina Dall’Agnol and Sofia Nogueira Leite for their assistance in retrieving relevant material for this article. The views expressed in this article are those of the author only.

1. Introductory remarks

Statutory claims are claims that ‘arise out of legislation that might bind the parties, such as securities and antitrust legislation’.¹ While such claims are not within the obvious ambit of claims settled through arbitration, they are not at all alien to arbitral proceedings. First, the settlement of contractual claims that are referred to arbitration may call for a decision on preliminary issues with regard to the legislation that govern the parties’ contractual relationship. For instance, an arbitral tribunal seized of a dispute arising out of a licensing agreement may have to dispose of a preliminary issue of authorship governed by the applicable copyright legislation.² Second, parties to arbitral proceedings may seek remedies set out in the applicable legislation and/or raise claims based on statutory causes of action. For instance, the performance of distribution or licensing agreements may give rise to unfair competition claims,³ and/or claims based on EU competition law.⁴ Similarly, a minority shareholder may claim before an arbitral tribunal constituted in accordance with the arbitration agreement in the shareholder agreement that he was subject to unfair or oppressive treatment – within the meaning of the applicable corporate legislation – by its contractual partner(s) and fellow shareholder(s).⁵ Further, an arbitral tribunal called upon to rule on an alleged unlawful termination of contract under French law may decide on a request for a declaration that the termination amounts to a breach of Article L442-6-I(5) of the French Commercial Code, which prohibits abrupt break-off of established commercial relationships.⁶

It is now firmly settled that broadly worded arbitration agreements such as those that encompass claims ‘arising out of’, ‘with respect to’, or ‘in connection with’ the underlying contract empower arbitral tribunals to hear claims beyond contractual claims when they are sufficiently or materially connected to the contract containing the arbitration agreement.⁷ In most cases, the issue of whether a given statutory claim is sufficiently or materially connected to the relevant contract will be clear-cut. It is certainly so when the statutory claim arises as a preliminary issue, i.e. an issue that a tribunal must deal with prior to deciding the parties’ claims. By way of illustration, in an arbitration case where the author acted as counsel for the claimant, the respondent (a Portuguese bank) argued that it could not be held liable to indemnify the claimant because an administrative decision from the Portuguese central bank had – on the basis of Portuguese law – transferred liability to another bank. The claimant did not object to the tribunal’s jurisdiction to hear this claim as it was obviously materially connected to the contract (a discount agreement) underlying the dispute referred to arbitration. The liability in question indeed arose out of the respondent’s alleged misrepresentations, which the claimant argued had enticed it to entering into the contract at issue.

In other cases, however, the determination of whether a given statutory claim is sufficiently or materially connected to the contract containing the arbitration agreement is less straightforward. This is so particularly when the contractual rights or obligations, or the very contractual relationship at issue, are subject to statutory regulation.

The fact that this study is primarily focused on shareholder disputes, combined with the fact that the corporate legislations of common law jurisdictions grant shareholders wide-ranging protections (such as broad protections against oppression or directors’ misconduct), explain why this study relies primarily on case law from common law jurisdictions.

This subject is particularly relevant to shareholder disputes, especially those governed by common law or handled by counsel with a common law background, because they are usually framed with both contractual and statutory causes of action, based on the same set of facts. In turn, as shareholder agreements typically have a rather narrow subject matter – setting out voting and quorum rules, restrictions on the transfer of shares and shareholder exit mechanisms – they may not constitute a basis for arbitrating claims based on director misconduct and/or oppression or unfair prejudice within the meaning of statutory corporate law.

Furthermore, as this author was unable to retrieve any arbitral precedent relevant to the subject of this study, he has relied exclusively on case law from state courts. However, this should not be construed as implying that this study is not relevant in the context of arbitral proceedings, or disputes governed by civil law, especially as arbitral tribunals not infrequently construe arbitration agreements without any reference to a particular law or trade usage.⁸

In any event, in order to distinguish claims that are sufficiently connected to the contract, arbitral tribunals have the duty to look beyond the parties’ – and in particular claimants’ – legal characterisation of the claims. Relying on state courts’ judgments with regard to statutory claims and arbitration, this article provides some tools to distinguish the claims that are sufficiently connected to the contract from those that are solely within the scope of statutory regulations.

2. The arbitral tribunal’s duty to distinguish statutory claims from contractual claims

Parties sometimes contribute to blurring the distinction between what is connected to the contract and what is not when framing their claims as contractual, even though there may not be a clear-cut contractual basis for these claims. They may do so, in particular, in an understandable attempt to have their entire dispute adjudicated in one forum, which may be perceived as more neutral or efficient than the state court to which a given statutory claim ought to be referred by default. However, the consideration of whether this practice is understandable from a business or economic perspective cannot override the key principle that ‘parties can only be required to arbitrate that which they have agreed to arbitrate’.⁹ This principle implies that arbitral tribunals have the duty to look beyond the legal characterisation that the parties have given to their claims.

Parties also sometimes contend that arbitral tribunals are bound by the characterisation they gave to their claims. There is little, if any, support for this proposition in international commercial arbitration. Jurisdiction is not something that parties can engineer by framing their case in any particular way. Arbitral tribunals must determine the limits of their jurisdiction, both ratione personae and materiae, over claims before them on the basis of a full-fledged – not prima facie – analysis of these claims. As an author writing on the subject of commercial arbitration put it:

In contrast to a practice that has often been followed in the arbitration communities, a prima facie analysis is not acceptable … the arbitral tribunal is not allowed to assume jurisdiction by an interim decision on the basis of a prima facie reasoning, i.e., notably by relying provisionally on the claimant’s allegations.¹⁰

Gary Born similarly considers that arbitral tribunals must determine the scope of their jurisdiction by analysing ‘the underlying factual setting and actions’.¹¹ Another author writing on shareholder disputes reached the same conclusion:

Shareholder disputes are generally very complex and framed with multiple causes of action based on the same set of facts. Therefore, it is important to ascertain the substance of a shareholder dispute as opposed to the form in which it is pleaded. Regardless of the legal characterization of a shareholder dispute, the key is whether it falls within a category that will be captured by the arbitration clause.¹²

It is perhaps a US court that formulated this proposition in the most efficient way:

To decide whether an arbitration agreement encompasses a dispute a court must determine whether the factual allegations underlying the claim are within the scope of the arbitration clause, regardless of the legal label assigned to the claim.¹³

Finally, discussions may also arise as to whether an attempt by one party to have the claims re-characterised as statutory claims and dismissed on jurisdictional grounds is a jurisdictional challenge or an objection to the merits of the claims. For instance, a party may argue that a claim framed as arising under a shareholder agreement is, in reality, a statutory claim for director misconduct entirely disconnected from the shareholder agreement at issue. The party that filed this claim may in turn contend that this challenge goes to the merits of the dispute and the substance of its alleged rights under the shareholder agreement.

Such discussions wrongly conflate the issue of whether a claim has merits (i.e. whether it is well-grounded as a matter of law and fact) with the issue of whether a claim has any connection with the subject matter of the agreement containing the arbitration clause. To make a decision on the preliminary ‘connection’ issue, arbitral tribunals must conduct a full-fledged analysis of the claims before them to determine whether they are, in substance, connected with the agreement containing the arbitration clause. In analysing the connection of the claims with the contract containing the arbitration agreement, arbitral tribunals do not take any decision on whether these claims are well-grounded or not. They do not rule on the merits of the dispute.

3. The scope of a broadly worded arbitration agreement

It is sometimes argued that broadly worded or construed arbitration agreements encompass any statutory claim. Two international arbitration experts recently stated the following:

[A]n arbitration clause which refers to "all disputes arising out of the contract" or "in connection with the contract" must be understood broadly to include … other statutory claims based on the applicable law if capable of being dealt with in arbitration.¹⁴

However, such an open-ended construction of arbitration agreements blurs the distinction between arbitral tribunals and state courts as it vests the former with the authority to hear any claim between the parties to a contract, regardless of whether this claim is at all connected to the contract at issue.

One approach adopted by the Court of Appeal of Singapore in L Capital Jones Ltd and Jones the Grocer Group Holdings Pte Ltd v Maniach Pte Ltd is that arbitral tribunals must determine whether this connection is sufficient for them to assume jurisdiction over a given statutory claim.¹⁵ This case arose out of a shareholder agreement that contained an arbitration agreement which provided for arbitration of ‘any dispute or difference … between the Parties as to the construction of this Agreement or as to any matter of whatsoever [sic] nature arising thereunder or in connection therewith’.¹⁶ Further to a series of decisions and actions taken by the appellants (the company and its majority shareholder), the respondent (the minority shareholder) brought court proceedings seeking relief under section 216 of Singapore Companies Act (which sets out remedies ‘in cases of oppression or injustice’). The facts grounding this minority oppression claim were threefold. The minority shareholder claimed that (i) it had been excluded from the management of the company ‘in breach of a common understanding between [itself] and L Capital Jones’, (ii) the majority shareholder had wrongly claimed that the company was near insolvency with the sole purpose of stripping the company of its assets, and (iii) the majority shareholder had abused its voting power ‘by exercising those powers in bad faith and for a collateral purpose’.¹⁷

The first-instance tribunal had found these claims to fall within the scope of the arbitration agreement, stressing that the shareholder agreement ‘regulate[d] the relationship between [the Respondent] and the only other shareholder of [the company] in their capacity as shareholders’, and that ‘the word "connected" was so "capacious" that [it] felt compelled to accept that the minority oppression claim was at least prima facie connected to the Shareholder Agreement’.¹⁸

The Court of Appeal upheld the first-instance tribunal’s decision that these three claims were connected with the shareholder agreement and thus fell within the scope of the arbitration agreement contained in it. However, it criticised the first-instance tribunal for its broad-brush analysis of the claims at issue. It stated as follows:

We must disagree with the Judge’s overly broad analysis of the Scope Issue. In our judgment, it is critical to consider in some detail the distinct strands of the Respondent’s minority oppression claim in order to determine whether they fall within the scope of the arbitration agreement.¹⁹

The Court of Appeal then went on to analyse whether or not the three above-mentioned claims had a sufficient connection with the shareholder agreement. It concluded that they had. As regards the first claim, the Court of Appeal noted that ‘common understanding’ at issue was reflected in the shareholder agreement.²⁰ As regards the last two claims, it underlined that a clause of the shareholder agreement set out an obligation to act fairly and in the interest of the other shareholder.²¹ Accordingly, the Court of Appeal held the last strand of the minority oppression claim to be sufficiently connected to the shareholder agreement, because ‘this clause inevitably influences the understandings and expectations of fair treatment among the shareholders, and is hence likely to affect the court’s determination of what constitutes oppression’.²²

4. How arbitral tribunals may determine whether a statutory claim is sufficiently connected to the contract containing the arbitration agreement

Just like the Court of Appeal of Singapore did in the case L Capital Jones Ltd and Jones the Grocer Group Holdings Pte Ltd v Maniach Pte Ltd, arbitral tribunals must compare the subject matter of the statutory claim with the subject matter of the agreement containing the arbitration agreement.²³ If they reach the conclusion that the statutory claim at issue could be maintained without any reference to the contract containing the arbitration clause, this is a strong indication that the statutory claim at issue is not sufficiently connected to the contract to be referred to arbitration. This analysis is highly fact-specific, as the cases summarised below demonstrate.

In Kenneth Ford v Nylcare Health Plans of the Gulf Coast, Inc. et al., the United States Court of Appeals for the Fifth Circuit had to determine whether a false advertising claim brought before it under a US statute (the Lanham Act) had to be referred to arbitration. Mr Ford had entered into an agreement with the respondents to provide certain medical services to beneficiaries covered under health plans provided by the respondents. This agreement contained an arbitration clause which provided for the arbitration of ‘[a]ny controversy or claim arising out of or relating to this Agreement, or the breach thereof’.²⁴ Some years later, Mr Ford brought an action before the state courts against, inter alia, the respondents’ practices in advertising the benefits of their health plan to his patients,²⁵ which he claimed constituted false advertising under the Lanham Act. The respondents filed a petition to compel arbitration, arguing that ‘the allegations in the complaint supporting Dr. Ford’s false advertising claim [we]re interwoven with the agreement sufficiently to make the claim arbitrable’.²⁶

The Court of Appeal sided with Mr Ford. It first recalled that ‘test for whether a tort claim is sufficiently related to the agreement to be arbitrable … focuses on the factual allegations in the complaint instead of the legal labels attached to the causes of action’.’²⁷ The Court added that, in order to prevent parties to an arbitration agreement from dodging that agreement through ‘artful pleading’, the courts ‘look at the facts giving rise to the action and to whether the action ‘could be maintained without reference to the contract’.²⁸ Applying this test, the court ruled that Mr Ford’s false advertising claim did not arise out of or in relation to the agreement with the respondents.²⁹ The Court of Appeal stated as follows:

Dr. Ford could maintain this action without reference to the agreement. The action is based on the manner in which the [respondents] advertised their services to consumers. The competitive injuries alleged by Dr. Ford come in the form of patients and revenue lost as a result of consumers being misled into participating in the HMOs’ health plan … Dr. Ford clearly would suffer the same injuries regardless of the agreement or a breach thereof … In other words, the fact that an agreement exists between Dr. Ford and the HMOs is legally irrelevant and indeed can be treated as nonexistent as far as his false advertising claim is concerned.³⁰

The Court of Appeal of Singapore applied a similar test in the Larsen Oil and Gas Pte Ltd v Petroprod Ltd case.³¹ Petroprod Ltd (‘Petroprod’) and four of its wholly-owned subsidiaries had entered into a management agreement with Larsen Oil and Gas Pte Ltd (‘Larsen’) pursuant to which the latter was to provide management services to the former. Thereafter, Petroprod was placed in liquidation and its liquidators brought court proceedings against Larsen. Petroprod’s liquidators sought to avoid the payments (i) Petroprod had made to Larsen on the ground that they amounted to unfair preferences or transactions at an undervalue within the meaning of the Bankruptcy Act and the Companies Act, and (ii) those made through Petroprod’s four subsidiaries on the basis of the Conveyancing and Law of Property Act, alleging that those payments were intended to defraud Petroprod as a creditor of its subsidiaries.

Larsen filed a petition to stay the proceedings and refer the dispute to arbitration pursuant to the arbitration clause in the management agreement, which provided that ‘[d]isputes which cannot be resolved amicably shall be resolved by arbitration in Singapore in accordance with the provisions of the Singapore Arbitration Act, Chapter 10’.³² Larsen contended that Petroprod’s claims were founded on Larsen’s alleged breach of the management agreement.

The court clearly distinguished the Petroprod’s statutory claims from the management agreement itself:

Petroprod’s claims against Larsen were founded entirely on the avoidance provisions of the BA and Companies Act. The focus of these provisions is to address situations where value has been subtracted from the insolvent company to the detriment of the general creditors, independent of the nature of the relationship between the parties … The only relevance of the [management agreement] to Petroprod’s claims against Larsen was that it provided some evidence that the payments made from Petroprod to Larsen could have been for some legitimate commercial reason other than to prefer Larsen as a creditor. The questions of whether Larsen had committed a breach of the [management agreement] by causing Petroprod to make those payments was irrelevant.³³

In other words, Petroprod’s statutory claims against Larsen could be maintained without reference to the management agreement. As such, these claims were held no to have a sufficient connection to the management agreement. Such claims could therefore not have been settled through arbitration; the Singapore courts were the proper forum.³⁴

5. Application of the sufficient-connection test in shareholder disputes

Shareholder disputes are a particularly fertile ground for overlaps between contractual and statutory claims. Shareholders, usually minority shareholders, may find they are being treated unfairly by fellow (majority) shareholders, in concert with the directors of the company. Both minority and majority shareholders may also be bound by a shareholders’ agreement that purports to regulate their relationship as shareholders of that company. In parallel, and particularly so in common law jurisdictions, they may in their shareholder capacity benefit from wide-ranging protections against oppression from fellow shareholders or director misconduct, under the provisions of the applicable law. In this context, it is all the more important to apply the above-mentioned test to ensure that only the claims that fall within the scope of the arbitration agreement are referred to arbitration. The courts of the State of New York, the Canadian courts and the Supreme Court of New South Wales (Australia) have shown the way.

In Hotcaveg v Lightman, a case before the Supreme Court of the State of New York,³⁵ a minority shareholder in Strauss Displays, Inc. (Ms Hotcaveg) argued that her fellow, majority shareholders had entered into several self-interested transactions to the detriment of Strauss Displays, Inc., in ‘violation of their duties and obligations as officers, directors and controlling stockholders’.³⁶ She sought an order from a New York court preventing the majority shareholders from dissipating the company’s assets. The majority shareholders in turn requested that the dispute be referred to arbitration because the shareholders of Strauss Displays, Inc. were bound by an arbitration clause in the shareholders’ agreement.

The Supreme Court of the State of New York refused to stay the proceedings, regardless of the arbitration clause in the shareholders’ agreement, holding as follows:

[T]he gravamen of the cause of action alleged is the claimed violation by the individual defendants of their fiduciary and trust obligations as directors and officers of the corporation in whose right the suit was brought. It can hardly be said that such alleged violations constitute, in the language of the arbitration clause, "Any dispute or disagreement among the parties with respect to any provisions of this agreement or its interpretation". It is clear that the preincorporation agreement executed by the parties was intended to cover only the relationship among the stockholders, inter se.³⁷

In other words, Ms Hotcaveg’s claims could be maintained without reference to the shareholders’ agreement and did not fall under the scope of the applicable arbitration clause. As such, the claims relating to majority shareholders’ misconduct should be settled by state courts.³⁸

In a case decided by the Quebec Court of Appeal, a minority shareholder (Mr Tremblay) argued that he was being oppressed by the majority shareholder of the company Poutrelles Delta, in breach of (i) the shareholders’ agreement that they had entered into, and (ii) the oppression remedy provision of the Canada Business Corporations Act.³⁹ Among other things, Mr Tremblay argued that the majority shareholder had breached the shareholders’ agreement by appointing the main shareholder of a competitor of Poutrelles Delta as chairman of the board of directors.⁴⁰ The shareholders’ agreement provided for the resolution through arbitration of ‘any dispute, disagreement or claim between the parties relating to the provisions of this contract, their interpretation or application or of the failure of any party to this agreement to abide by these provisions’.⁴¹

The Court of Appeal decided that it was not required to compel Mr Tremblay to ‘make use of the arbitration process in the Poutrelles Delta shareholders’ agreement’.⁴² In particular, the Court of Appeal stated that it did not ‘find the essence of the allegations and conclusions of Mr Tremblay’s action to require the interpretation or application of the provisions of the shareholders’ agreement’.⁴³ It held as follows:

Mr. Tremblay’s remedies do not really relate to the interpretation, application or enforcement of the shareholders’ agreement. They are oppression remedies designed to secure the proper management of Poutrelles Delta … Even on a generous and liberal view of the text of the arbitration clause, it does not extend to the adjudication of disputes relating to the parties’ rights and obligations as shareholders under the law of general application, and especially those provisions of law relating to the duty to act in good faith and the fiduciary duties of directors.⁴⁴

The above-mentioned decisions of the New York State Supreme Court and Court of Appeal of Quebec are authority for the proposition that a statutory claim based on allegations of director misconduct and/or oppression or unfair prejudice may not be caught by an arbitration agreement contained in a shareholders’ agreement that does not purport to regulate how the company should be run. By contrast, when the allegations of oppression derive from the exercise of a provision in a shareholders’ agreement, they naturally fall within the scope of the arbitration agreement, as illustrated in the two cases set out below.

In Peter Woolcock v K. Craig Bushert, Cosmic Frontier Group Inc., the Court of Appeal for Ontario had to determine whether the action brought by Mr Woolcock had to be stayed in favour of arbitration.⁴⁵ Mr Woolcock (who held 50% of Cosmic Frontier Group Inc.’s capital, the other half being held by Mr Bushert) argued that the court proceedings should not be stayed in relation to its oppression remedy-related claims, which he claimed were not rooted in the contract containing the arbitration clause, but in statutory law. The Court of Appeal disagreed, holding that the factual context of this claim related to matters addressed in the shareholders' agreement. The Court stated as follows:

Woolcock’s oppression remedy-related claims flow from his assertions that Bushert improperly exercised his rights under the buy-sell provision of the Agreement and excluded Woolcock from access to and participation in Cosmic. His complaint, essentially, concerns the events leading up to and the consequences of Bushert’s purported acquisition of Woolcock’s shares in Cosmic. These relate to one of the foundational matters addressed in the Agreement: the involuntary disposition by one Cosmic shareholder of his shares in Cosmic to the other shareholder.⁴⁶

In other words, Mr Woolcock’s claim could not be maintained without reference to the agreement at issue. Accordingly, this claim had to be referred to arbitration.

In the case Chen Zhao, La Kaffa International Co Ltd v Yang Yang Qian and Infinite Plus Pty Ltd before the Supreme Court of New South Wales,⁴⁷ the claimants claimed relief before Australian courts for the oppression they allegedly suffered at the hands of the respondents. Claimants – the first claimant being the the predecessor-in-interest to the second claimant – and the first respondent (Ms Qian) had entered into a shareholders’ agreement that regulated certain aspects of their relationship as shareholders of the company Infinite Plus. While the oppression claim was based on section 232 of the Australian Corporations Act, which prohibits oppressive conduct,⁴⁸ it derived from a buy-out notice that Ms Qian had issued to the claimants under clause 13 of the shareholders’ agreement. Clause 13 allowed a non-defaulting shareholder to issue a buy-out notice to any co-shareholders found to have breached the shareholders’ agreement. This notice triggered a process leading to the buy-out of the defaulting shareholder’s stake in Infinite plus.

Ms Qian launched arbitration proceedings under the shareholders’ agreement and concomitantly requested the Australian court, seized by the claimants, to stay the court proceedings until completion of the arbitration proceedings.⁴⁹ While Ms Qian argued that ‘the subject of the oppression proceeding f[ell] within the ambit of the arbitration agreement in cl. 13 because the allegation of oppression [was] based upon Ms Qian’s purported exercise of her buy-out rights under cl. 10.5 "whether justified or not" ’,⁵⁰ the claimants submitted that ‘the conduct of Ms Qian, the subject of the oppression proceeding, [did] not involve a breach of the shareholders agreement; rather it ar[ose] out of breaches of the Corporations Act’.⁵¹

The Supreme Court of New South Wales held that:

[T]he essential claim made in the statement of claim is that by reason of the conduct of Ms Qian in issuing the [buy-out] notice in August 2016, based on alleged breaches of the shareholders agreement by [the first claimant] which had not been remedied, [the first respondent] has engaged in oppressive conduct within the meaning of s. 232 of the Corporations Act by purporting to exercise her rights to buy-out the shares held in the company by [the first claimant]. Relevantly, [the first claimant] denies the validity of the [buy-out notice], he denies the alleged breaches of the shareholders agreement and he also denies his alleged failure to remedy such breaches. That, in my view, is a dispute arising out of or relating to the shareholders agreement and alleged breaches of such agreement.⁵²

Put differently, as the claim for oppression of claimants could not be maintained without reference to the shareholders’ agreement, it had to be referred to arbitration, until completion of which the court proceedings launched by the claimants had to be stayed.⁵³

6. Conclusions

Arbitral tribunals whose authority derives from broadly worded arbitration agreements should not assume that their remit encompasses all and any statutory claims between the parties to the agreement containing the arbitration agreement. Instead, they should determine whether the factual allegations underlying the claim are within the scope of the arbitration clause (regardless of the legal label the parties assigned to the claim). If they reach the conclusion that the statutory claim at issue could be maintained without any reference to the contract containing the arbitration clause, this is a strong indication that the statutory claim at issue is not sufficiently connected to the contract to be referred to arbitration. It follows that, the narrower the subject matter of the underlying contract, the more likely it is that the statutory claim at issue may fail this sufficient-connection test.

If the subject matter of a given agreement is narrow, whilst this agreement is superimposed on rights and obligations regulated in law, assuming jurisdiction over any and all statutory claim between the parties may be unwarranted. Such argument that courts ‘should not attribute to the parties an intention to have different parts of their dispute resolved before different tribunals’,⁵⁴ was for instance rejected by the Supreme Court of New South Wales. While the claimant urged the court to refer all of the claims brought before state courts to arbitration, the court resisted such construction of the arbitration agreement at issue and referred only some of the claims before it to arbitration. It held as follows: ‘That does not seem to me to be a compelling argument in the case of a Shareholders’ Agreement, where the contractual arrangements are superimposed on company law rights’.⁵⁵ Some aspects of a given dispute may fall outside the scope of an arbitration agreement. This consideration should not, however, impact the reasoning and conclusion of arbitral tribunals upon applying the ‘connection’ test.

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