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The Threshold For Setting Aside An Arbitral Decision Remains High – Arbitration & Dispute Resolution


The recent decision of NDK Ltd v HUO Holding Ltd [2022]
EWHC 1682 (Comm) is evidence of English courts’ continued
support for arbitration and the significant hurdler one faces to
appeal arbitral awards. In this decision, s. 67 challenges of the
Arbitration Act 1996 (the
Act“) were rejected by the Commercial
Court (the “Court“).

Background

This dispute arose out of a joint venture agreement entered into
by three groups of investors in the company they held shares in,
SPV Limited (“SPV“). These investors
each owned corporate vehicles with shares proportioned between
them: NDK Ltd (“NDK“), K Holdings Ltd
(“K Co“) and KXF. SPV was required to
have both Articles of Association
(“AA“), and the relationship between the
shareholders was further regulated by a shareholders’ agreement
(“SHA“). Both the AA and the SHA
contained provisions regulating the shareholders’ ability to
sell their shares.

The joint venture agreement eventually fell apart leading to a
number of disputes. The first dispute was referred to LCIA
arbitration in 2015 (the “First
Arbitration
“), where NDK took the position that the
SHA had been terminated. While the First Arbitration was unfolding,
K Co purported to transfer its shareholding in SPV to HUO Holding
Ltd (“HUO“), as K Co had acquired HUO as
a subsidiary. HUO was sold to a third party (“Mr.
Pink
“), transferring the beneficial ownership of the
shares. KXF also transferred beneficial ownership over to Mr.
Pink.

The tribunal in the First Arbitration rejected NDK’s claim
that the SHA had been terminated. This led to NDK commencing
proceedings in Cyprus (the “Cyprus
Proceedings
“), alleging that Mr. Pink was acting as a
nominee for a competitor of Mine Co in acquiring beneficial
interest in SPV, the transfers were undertaken as part of a
fraudulent conspiracy in breach of the terms of the AA, and that
the purpose and effect of the transfers had been dishonestly
misstated and had the effect of inducing NDK not to exercise rights
of pre-emption under the AA.

The relationship of the three shareholders in SPV was regulated
by the SHA which was governed by English law and provided for LCIA
arbitration (the LCIA Arbitration Agreement). NDK,
K Co and HUO (the LCIA Claimants“) sought
relief under the LCIA Arbitration Agreement.

The LCIA Claimants contended that the Cyprus Proceedings were
brought in breach of the LCIA Arbitration Agreement, and commenced
a new arbitration seeking an anti-suit injunction requiring the
Cyprus Proceedings to be abandoned (the “Second
Arbitration
“). Two more arbitrations were commenced
and consolidated by the LCIA (the “Consolidated
Arbitration
“). The relief sought included declaration
that the SHA remained valid and binding. The Consolidated
Arbitration was ongoing when the PFA was handed down in relation to
the Second Arbitration granting anti-suit relief. The Consolidation
Arbitration award was then issued, which held the SHA was still
valid and binding.

The ss. 67 and 68 Challenges

NDK brought challenges under ss. 67 and ss. 68 of the Act to the
PFA, as well as a challenge under ss. 67 and 68 to the Consolidated
Arbitration award. Section 67 provides a right to challenge an
award based on the jurisdiction of the tribunal. The concept of
substantive jurisdiction in relation to an arbitration tribunal is
described in section 30 of the Act which states the following:

30 (1) Unless otherwise agreed by the parties,
the arbitral tribunal may rule on its own substantive jurisdiction,
that is, as to:

(a) whether there is a valid arbitration
agreement,

(b) whether the tribunal is properly
constituted, and

(c) what matters have been submitted to
arbitration in accordance with the arbitration agreement.

NDK argued the Cyprus Proceedings did not fall within the LCIA
Arbitration Agreement for two reasons:

1) As a matter of construction, the claims
brought in respect of the statutory contract constituted by the
Articles of Association do not fall within the LCIA Arbitration
Agreement in the SHA (the “Construction
Question
“).

2) The matters in the Cyprus Proceeding are not
arbitral as a matter of English Law (the
Arbitrability Question“).

The Construction Question

In addressing the first question, the Court applied the
principle from Fiona Trust & Holding Corporation v
Privalov
[2007] UKHL 40 (the “Fiona Trust
Principle
“) that the construction of an arbitration
clause begins with the assumption that the parties, as rational
commercial actors, are likely to have intended for any dispute that
arises out of the relationship entered into to be decided by the
same tribunal. The Court also applied the principle from Terre
Neuve Sarl v Yewdale Ltd
[2020] EWHC 772 (Comm)), (known as
the “Extended Fiona Trust Principle“),
which holds that an arbitration agreement in one contract can
extend to disputes in another where the wording of the clause is
capable of applying to both contracts.

In rejecting NDK’s argument that the Extended Fiona Trust
Principle did not apply due to the AA and SHA being fundamentally
different, the Court looked to the commercial purpose as well as
the relationship of the agreements in question (para 36). In doing
so, they relied on the fact that the key document governing the
relationship of the shareholders in SPV from a commercial
standpoint was the SHA. Both documents were contractual in nature,
and the SHA contained a supremacy clause evidencing the AA and SHA
were meant to operate together, and that the SHA would prevail in
the face of inconsistency (paras 53-54). It was also noted that
NDK, K Co, and KXF became shareholders the same day they entered
into the SHA, and that any subsequent shareholders would be
required as a condition of share transfer to adhere to the SHA,
becoming parties to the statutory contract (para 57).

The Court applied the Fiona Trust and Extended Fiona Trust
Principle to conclude that the matters that arose from the Cyprus
Proceedings between the parties of the SHA constituted claims that
related to the SHA, and therefore fell within the terms of the LCIA
Arbitration Agreement (para 60). Further, the fact that the relief
sought by NDK (rectification of the register of members) could not
be obtained from the arbitrators did not lead to the result that
the matters raised in the Cyprus Proceedings fell outside the scope
of the LCIA Arbitration Agreement (para 61).

The Arbitrability Question

In the alternative, NDK argued the Cyprus Proceedings contained
non-arbitral public policy matters under English law. NDK submitted
that (i) the question of who was a shareholder in the company
involved matters of status, and was thus not a contractual
question, (ii) the claims in the Cyprus Proceedings regarding
rectification of the register members engaged the interests of
third parties, and (iii) the relief sought (a rectification of the
register of members) was a relief that only a court could grant
(para 67).

In rejecting all three arguments, the Court emphasized there are
many disputes referred to arbitration for which the relief sought
has implications on registers to which there is public access (para
69). The Court relied on Fulham Football Club (1987) Ltd v
Richards
[2011] EWCA Civ 855, where the relief sought would
have required a change to corporate filings but the Court of Appeal
accepted that this relief could be obtained from the arbitrators.
Further, the fact that an arbitrator does not have power to grant
the relief sought does not render the underlying dispute
non-arbitral, although it may require the successful party to bring
court proceedings for the purpose of giving effect to the arbitral
determination (para 70).

Concluding Thoughts

The English Commercial Court’s ruling is consistent with
past decisions that point to the high hurdle in appealing arbitral
awards, regardless of how creative a party is in trying to bring a
decision within s. 67 or s. 68 of the Act.

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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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