Background: 

Section 6 of the International Arbitration Act (IAA), requires the court to stay litigation proceedings which "relate" to "any matter which is the subject of the [arbitration] agreement."

Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2016] 1 SLR 373, sets out the principles that should be applied when interpreting section 6 of the IAA, which is that the issues to be decided should be divided into the following two sub categories:

• What is the "matter" in respect of which the litigation has been brought?
• Is that matter the "subject" of the arbitration agreement?

Facts:

The plaintiffs were minority shareholders in the defendant, a joint venture company.

The shareholders' agreement (Shareholders' Agreement) and the defendant's articles of association (Articles) contained several provisions which were identical, and which, among other things:

• Regulated the composition of the defendant's board of directors.
• Stipulated that certain corporate matters required all shareholders' consent.

The Shareholders' Agreement also contained an arbitration agreement requiring "any dispute (…) arising out or in connection with this Agreement" to be referred to arbitration (Arbitration Agreement). The Arbitration Agreement was not restated in the Articles.

The plaintiffs commenced court proceedings against the defendant for breach of the Articles, pursuant to the defendant's alleged failure to seek and obtain the plaintiff's approval of the accounts which were lodged by the defendant with the Accounting and Corporate Regulatory Authority (ACRA), as required under the Articles.

The defendant applied for a stay of the litigation on the basis that the alleged breach of the Articles would, if established, also constitute a breach of the same provisions in the Shareholders' Agreement, which contained the Arbitration Agreement.

The assistant registrar stayed the litigation and the plaintiff appealed the stay.

Decision:

The Singapore High Court refused to stay the court proceedings finding that the Shareholders Agreement and the Articles created two separate legal relationships between the parties and operated on two separate "legal planes". Therefore, so far as was ascertainable, the parties did not intend for any disputes arising from the legal relationship between the parties created by the Articles, to be settled by arbitration.

The defendants invoked section 6 of the IAA arguing that the dispute in litigation fell within the scope of the Arbitration Agreement. The court applying the principles established in Tomolugen to the interpretation of section 6 of the IAA considered the following two issues.

What was the "matter" in respect of which the litigation had been brought?

The court reviewed the principles set out in Tomolugen for the purpose of characterising the "matter" in the litigation, and noted that each party had characterised it differently, and "in a self-serving attempt to colour, if not pre-empt, the outcome of the enquiry on the second sub-issue".

The court found that the "matter" in the litigation was whether the defendant had adopted or approved the accounts in breach of the Articles. If the plaintiff were correct, the defendant's act would be ultra vires, without any need whatsoever to have regard to the provisions of the Shareholders' Agreement.

Was that matter the "subject" of the Arbitration Agreement?

The court found that the Shareholders' Agreement and the Articles created two separate legal relationships between the parties which operated on two separate "legal planes." The Arbitration Agreement, on its proper construction, applied only to the private contractual relationship between the parties created by the Shareholders' Agreement itself. Disputes under the Articles were not within the scope of the Arbitration Agreement and were governed by recourse to the courts in accordance with ordinary principles of company law.

The court elaborated on these separate "legal planes" in great detail in its findings. On the one hand, a shareholders' agreement is a private contract, deriving its contractual force purely from the private law of obligations. On the other hand, articles of association form a company's constitution, which derives its contractual force from company law, not private law. A company's constitution is a public contract, in so far as it is given binding force by virtue of company law (including registration), not the private will and acts of the parties, and it is relied upon by third parties.

The court provided several examples to illustrate how these legal planes differ in case law and in practice. Importantly, it noted that company law subordinates a private agreement, such as a shareholders' agreement, to company law, on company law matters. On company law matters, a shareholders' agreement may supplement company law but never supplant it. This is partly because company law exists not only to benefit and protect shareholders, but also its creditors, and third parties in general.

In the present case, determining the validity of corporate acts, and whether corporate acts are done ultra vires, was a company law matter within the purview of the Articles. 

Following a careful analysis of the Shareholders' Agreement, the court considered that its wording showed that it was also the parties' intent, objectively ascertained, that the Shareholders' Agreement should be subordinate to company law, conferring primacy on the defendant's constitution in the Articles.

The court then found that it was not within the parties' intention, objectively ascertained, that the Arbitration Agreement should apply to disputes arising from the legal relationship between the parties created by the Articles that was separate from the legal relationship created by the Shareholders' Agreement.

Arbitrability

Although the issue was not raised by the plaintiff, the court noted that the dispute would also not fall within the scope of the Arbitration Agreement because it fell within a class of disputes which is not capable of settlement by arbitration.

As considered in Tomolugen, disputes that are not capable of settlement by arbitration are those which, at their core, are of a public character and the outcome of which will affect the interests of third parties, and impinge upon statutory safeguards for the benefit of third parties (in the Tomolugen case, insolvency law disputes).

In the present case, the outcome of the dispute could have affected a public register on which the defendant's accounts were lodged. The "matter" in dispute was whether the defendant had adopted or approved accounts in breach of the Articles. If the plaintiff was correct that, on the substance, the accounts did not reflect a true and fair view of the defendant's financial position, then the defendant would have disclosed inaccurate information to its creditors and that information would have to be expunged from the register. To the court, this could have affected third parties who may have acted on reliance on the accuracy of the public register, and so engaged the public interest in the "matter."

Comment

This decision further clarifies the Singapore courts' approach to section 6 of the IAA, and their interpretation of the criteria set out in Tomolugen by which the Singapore courts decide on a stay of litigation in favour of arbitration. In particular, it emphasises the fundamental difference between the private nature of arbitration, which only binds the parties to it and the public nature of litigation, which can bind or affect third parties.

Beyond its value from an arbitration law perspective, this decision provides extensive commentary and a useful review of the case law regarding the difference in nature and effect between contract law and company law.

Case

BTY v BUA and other matters [2018] SGHC 213 (15 October 2018) Vinodh Coomaraswamy J.