Court upholds the right to contract out of s.994
The Court of Appeal has delivered a judgment in the case of Fulham Footbal Club (1987) Ltd -v- Richards. This case which, was discussed in a previous article, concerns the enforceability of an arbitration clause in a shareholders agreement. The Court of Appeal upheld the earlier decision that the arbitration clause was valid and must be enforced, thereby allowing court proceedings under s.994 of the Companies Act 2006 to be stayed. This case is a strong endorsement of the basic principle that parties are entitled to contract to follow an alternative dispute resolution process and the courts will enforce that contract.
This will be the case even if the remedies under that alternative dispute resolution process are more limited than would be available in court proceedings. As previously discussed, the Judge at first instance had concerns about the position where the remedy that would be ordinarily sought would be outside of the power of an arbitrator. The Court of Appeal dismissed this concern and made it clear that this was at the risk of the parties, it was not a good reason to decline to enforce an otherwise valid arbitration clause.
What this means is that attacks on an arbitration clause in a shareholders agreement will be limited to the contractual validity of the clause itself and in particular the scope of the clause. If the clause as drafted does not cover the dispute that has arisen then recourse to the court may still be available.
One interesting point which is left undecided by the case is whether or not the same principle would be applied in relation to s.122 of the Insolvency Act 1986. This provides for the ability to petition the court to wind up a company on “just and equitable” grounds. However, a clear steer is given in the judgment. Lord Justice Patten states at paragraph 83 of the judgment that he is of the view that a similar result would be reached if the case related to an application under s.122. There had been some discussion in argument about whether the fact that this was a “class remedy” had an impact of the question of whether an arbitration clause should be upheld. The Judge took the view that “the arbitration agreement would operate as an agreement not to present a winding up petition unless and until the underlying dispute had been determined in the arbitration”.
This envisages a two stage process. The substantive issues being decided via arbitration with the parties then going back to court, if required, in relation to the appropriate relief that should flow from the arbitrator’s finding. This could potentially significantly increase the costs and delay involved in resolving a dispute.
The court has clearly indicated that they will uphold the right of parties to contract out of the court process under s.994. However, anybody contemplating inserting an arbitration clause into a shareholders agreement needs to be sure that they know what they are doing. A badly drafted or ill thought out arbitration provision could leave a party in a much weakened position.
To access a full copy of the court of appeal judgment please follow this link.
Reviewed in 2015