On 20 September 2023, the Board of the the Judicial Committee of the Privy Council (the "Board") released a unanimous judgment in FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 that clarified the line between the court's jurisdiction to wind up and the way that parties must determine "essential precursor" matters by arbitration where a compulsory arbitration agreement exists.
The parties and background
The well-known FamilyMart convenience store chain is operated in the People's Republic of China by China CVS (Cayman Islands) Holding Corp ("FamilyMart"), which is co-owned by the appellant and majority shareholder ("Ting Chuan") and the respondent minority shareholder ("FMCH"). The FamilyMart shareholders' agreement is governed by the laws of the Cayman Islands and contains an agreement to arbitrate disputes seated in Beijing, China under the ICC Arbitration Rules. Winding-up or liquidation proceedings were not specifically mentioned in the arbitration agreement.
On 12 October 2018, FMCH presented a petition in the Grand Court of the Cayman Islands to wind up FamilyMart under the Companies Act (as revised) of the Cayman Islands, on 'just and equitable' grounds because of alleged misconduct by Ting Chuan in the management of the company. The issues presented ("Matters") were:
- questions as to FMCH's loss of trust and confidence in Ting Chuan because of alleged misconduct by the directors;
- questions as to whether the fundamental relationship between FMCH and Ting Chuan had broken down;
- whether it was just and equitable for FamilyMart to be wound up; and
- whether FMCH should be granted statutory alternative relief in the form of an order requiring Ting Chuan to sell its shares as an alternative to winding up.
While FMCH did not intend to wind up the FamilyMart business, under Cayman Islands law, FMCH as the minority shareholder must establish that winding up is merited on the basis that it is 'just and equitable' before it can obtain a court order for the buyout of Ting Chuan's shareholding, which is what it really wanted. In response, Ting Chuan applied to strike out or stay the petition on the basis that it was contractually agreed that the underlying shareholder disputes must be arbitrated.
The Grand Court of the Cayman Islands struck out certain elements of FMCH's petition and granted a stay of the remainder of the petition until the underlying matters had been arbitrated. The Cayman Court of Appeal overturned this decision on the basis that no part of the winding-up petition could be arbitrated. Ting Chuan then appealed to the Board, which determined that the first two Matters must be arbitrated before the petition could proceed.
The parties had agreed that the Matters could have been decided by arbitration, but the key question was whether the winding-up petition ousted the jurisdiction to arbitrate, as the court retains the jurisdiction to decide all matters relating to a winding-up. The conflict comes from the requirement for a court to stay proceedings in favour of arbitration under the Foreign Arbitral Awards Enforcement Act (1997 Revision) of the Cayman Islands, where there is an agreement to arbitrate a dispute on any particular "matter" unless the arbitration provision is inoperative, void or incapable of being performed.
What's the "matter"? Can it be arbitrated?
In determining which "matters" must be referred to arbitration, domestic courts adopt a two-stage test:
- firstly, the court determines what matters the parties have raised, or foreseeably will raise, in the court proceedings; and
- secondly, the court determines whether each matter raised falls within the scope of the arbitration agreement.
The Board opined that a "matter" is a substantial issue that is legally relevant to a claim, a defence (or foreseeable defence) which could be determined by an arbitrator as a discrete dispute, rather than an issue which is peripheral or tangential. If it is not an essential element of the claim or defence, then it is not a "matter" in respect of which the legal proceedings are brought and should not be arbitrated separately.
The court's jurisdiction cannot be displaced on certain subject matters
The Board found that there were two broad circumstances where an arbitration agreement could be inoperative: (1) in disputes excluded by statute or public policy from arbitration ("Excluded Disputes"), and (2) where the parties cannot confer jurisdiction to the arbitral tribunal to award certain remedies.
The Board found that, among common law jurisdictions like the Cayman Islands, Excluded Disputes are matters involving public rights and concerns or third-party interests in a way that arbitration should not be given effect.
The power to wind-up a company remains the exclusive jurisdiction of the courts and so that "matter" is an Excluded Dispute. However, discrete, inter partes disputes that lead to the court being asked to wind-up a company, like those relating to the breach of obligations under a shareholders' agreement or orders for one party to buyout another's interests, can be "matters" suitable for arbitration.
Deciding what "matters" should be arbitrated
The test of what "matters" should go to arbitration requires an exercise of judgment and common sense. While it could lead to "fragmentation" of the parties' disputes, through effective case management by both the court and arbitral tribunal, it is possible to ensure a cost-effective result.
The Board ultimately found that arbitrating whether there was (1) a loss of confidence and trust, and (2) a fundamental relationship breakdown between FMCH and Ting Chuan was an "essential precursor" to the court's determination on the just and equitable grounds for winding-up FamilyMart. The parties could then proceed before the court on winding-up without affecting FamilyMart's or other third parties' rights. The Board ordered a mandatory stay of the winding-up petition until such precursor "matters" were determined.
This decision provides welcome clarity from the highest authority in Cayman on where arbitration jurisdiction stops. The court's inherent jurisdiction over winding-up proceedings cannot be displaced by an agreement to arbitrate. Public policy, third-party rights and the court's control over winding-up remedies will prevail, no "matter" what.
How can we help?
FamilyMart emphasises the need to be as clear as possible about what "matters" are to be arbitrated without trespassing into the court's exclusive jurisdiction. The team at Bedell Cristin can not only help you draft a "fit for purpose" arbitration clause but also ensure that you understand the "art of the possible" under arbitration clauses to which you or your clients are already subject.
