Fulham Football Club (1987) Ltd. v. Richards: Analysis with respect to Arbitrability

The London Court of International Arbitration

Facts in Brief. 3

Arbitrability. 4

Statutory Prohibition and Third Party Rights. 4

Mitsubishi Case and Problems with Fulham Football 6

Critique and Suggestions. 7

Facts in Brief

In the instant matter, Fulham Football brought court proceedings against Sir David Richards. Sir David was the Chairman of FAPL at that time (Football Association Premier League).[1] It was alleged that Sir David acted as an unauthorized agent during the transfer of a player, Peter Crouch. Arbitration as a form of dispute resolution was available under the FAPL Articles of Association and Rules.[2] However Fulham tried to invoke section 994 (Unfair Prejudice Petition) of the Companies Act, 2006 (CA) of the UK. Sir David and the FAPL requested a stay of the petition in favour of the arbitration. The court of first instance decided in favour of the stay stating that the dispute fell within the arbitration agreement. It also said that the statutory right of a member to present an unfair prejudice petition was not an inalienable one and could be removed or diminished by contract.[3]

The Court of Appeal upheld the ruling of the lower court but on different grounds. According to Patten L.J., the most important question in this case was whether there was any statutory provision or public policy ground which would render an agreement to refer an unfair prejudice dispute to arbitration unenforceable. Thus the real question was in relation to the arbitrability of the dispute.[4]

Arbitrability

This idea of Arbitrability means that in an arbitration agreement, arbitration is available only if the subject-matter is capable of arbitration. It relates to the actual substance or the matter that is going to arise. It also goes to the nature of the dispute.

Non-arbitrability means legal non-arbitrability and not factual inarbitrability. Identifying the basis for non-arbitrability must have a legal basis. It comes from an express law or from a judicial opinion. International Commercial Arbitration is jurisdiction specific and hence, every jurisdiction has different laws and customs. The question on who determines arbitrability depends on where and when the matter reaches the court.

Two contrasting decisions were discussed in the present case.[5] The first was In Re Vocam Europe Ltd.[6] In this matter, the court allowed arbitration saying that neither the arbitration act nor the CA 2006 holds that such unfair prejudice claims are non-arbitrable. However in Exeter City Association Case[7], it was held that the statutory rights conferred on shareholders to apply for relief were inalienable and could not be diminished or removed by an agreement. Hence, the court held such matters to be non-arbitrable.

Statutory Prohibition and Third Party Rights

An important question in this matter was whether the arbitration agreement is prohibited by any statutory provisions? Patten L.J. said that there are no statutory prohibitions (Arbitration Act and Companies Act) that provides that unfair prejudice are non-arbitrable.[8] Another important question that required a greater degree of scrutiny was with respect to the public policy.[9] Patten L.J. explained the differences that exist between ‘subject-matter of the dispute’ and ‘relief that can be granted’. According to him, there was nothing in the instant case that would say that the subject matter of this dispute (unfair prejudice claim) is not arbitrable.[10] He agreed that there are certain matter on which the arbitrator cannot grant relief. Such matters involve winding up claims, criminal matters etc.[11] However just because certain matters are non-arbitrable does not mean that shareholders of a corporation cannot agree to submit their other disputes to arbitration.

The question of public policy was intricately linked to ‘third party rights’. He said that:[12]

“A dispute between members of a company or between shareholders and the board about alleged breaches of the articles of association or a shareholders agreement is an essentially contractual dispute which does not necessarily engage the rights of creditors or impinge on any statutory safeguards imposed for the benefit of third parties.  The present case is a particularly good example of this where the only issue between the parties is whether Sir David has acted in breach of the FA and FAPL Rules in relation to the transfer of a Premier League player.”

Hence such issues were generally held to be arbitrable. In order to ascertain the ‘limits to what can legitimately be arbitrated’[13], the court discusses an excerpt from Gary Born that explains why arbitration is ‘unsuitable for use in connection with a dispute in which the interests and representations of third parties need to be taken into account or where the appropriate relief is an order which creates rights in rem or affects the public at large’[14]:

“Although the better view is that the Convention imposes limits on Contracting States‟ applications of the non-arbitrability doctrine, the types of claims that are non-arbitrable differ from nation to nation.  Among other things, classic examples of nonarbitrable subjects include certain disputes concerning consumer claims; criminal offenses; labor or employment grievances; intellectual property; and domestic relations. The types of disputes which are non-arbitrable nonetheless almost always arise from a common set of considerations.  The non-arbitrability doctrine rests on the notion that some matters so pervasively involve public rights, or interests of third parties, which are the subjects of uniquely governmental authority, that agreements to resolve such disputes by “private” arbitration should not be given effect”.[15]

We see that the abovementioned excerpt identifies a list of non-arbitrable subjects that arise from a common set of considerations in most of the jurisdictions. Thus what needs to be seen is whether the matter of public interest is such that it cannot be determined within the limits of a private contractual process like arbitration.[16]

Mitsubishi Case and Problems with Fulham Football

Let us now come to the case of Mitsubishi Motors v. Soler Chrysler-Plymouth,[17] where it was stated that:

“We must assume that if Congress intended the substantive protection afforded by a given statute to include protection against waiver of the right to a judicial forum, that intention will be deducible from text or legislative history.”

The Fulham judgment is in consonance with the reasoning provided in the Mitsubishi. Fulham never said that the by bringing an unfair prejudice claim to arbitration, the shareholders have to waive their right to approach the court. Neither the Arbitration Act nor the Companies Act provides that arbitration will exhaust other remedies. The two pronged approach adopted by the court is also quite interesting in this respect. If it turns out at a later stage that the arbitral tribunal is not capable of providing the desired remedy, the aggrieved persons can still approach the court. In this manner, the shareholders will not be denied of their statutory rights.

However there are some problems that were left open by the Fulham Football judgment. The Fulham judgment is ambiguous to the extent that it fails to explain the circumstances under which a shareholder can go beyond the provisions of company law. That is to say, is there a way through which an arbitration proceeding is given total primacy over a statutory company law proceeding? Presently, the answer seems to be no. Private resolution of disputes by shareholders will be a win-win situation for all. The court proceedings are often tedious and time consuming. Many times, there are simply small differences for which a court proceeding is not at all desirable. The private nature of arbitration makes sure that such small trivialities could be solved behind the curtains and without being afraid of the things to go public.

The solutions differ from jurisdiction to jurisdiction. There is no hard and fast rule in this respect. However it seems that the test of non-arbitrability is given a similar meaning in most of the jurisdictions.

Critique and Suggestions

As we discussed earlier, Insolvency issues are generally not sent to arbitration as when a company goes for liquidation, it is actually in a state of limbo. Thus its identity itself is in question. In Larsen Oil and Gas Pvt. Ltd. v. PetroProd Limited[18], the court applied the principle of non-arbitrability i.e. non-arbitrability must be present in the national legislation and it cannot be taken from vacuum. Hence, this Singapore judgment also tried to explain that the exclusion of arbitration must be through a legislation and not otherwise. Similar proposition has been explained in the present case. The importance of the Fulham Football judgment lies in the fact that it recognized that corporate disputes are arbitrable so long as they are not affecting third party rights or public policy or are explicitly prohibited.

Party Autonomy is at the heart of this judgment. Longmore L.J. cited Section 1 (b) of the Arbitration Act which stated that:

“the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest”.

Thus we see that public policy as a tool has its limits. It can only act as a safeguard necessary in the public interest.[19] The court explained that matters relating to internal management of a corporation should not be prohibited from reaching to arbitration. As such there is no public interest involved in such matters. Unless such public interest is manifest, the matter should not be prohibited to go to arbitration.[20]

The downside of this judgment is that arbitration has become so pervasive that today shareholders no longer enjoy their special right to approach the courts. They will have to fight the matter in arbitration if it is capable being so. The two pronged approach propounded in Fulham rests on the likelihood of a particular remedy. Bypassing special statutory protections to shareholders in favour arbitral clauses located in rules or articles of association does not seem to be prudent. I do not understand the purpose that it would serve. Instead of approaching the courts, the aggrieved persons will have to approach the arbitral tribunals. It would be good in cases where the arbitral tribunal is capable of passing the requisite award. However, in cases where the arbitral tribunal is incapable of providing for a particular remedy, the things will surely become interesting as well as confusing. This might also a negative impact upon the aspirations of the minority shareholders.

Instead of using ‘remedy’ as a criteria, it is better simply to see whether a dispute is contractual or non-contractual in nature.[21] This was even stated by the court:[22]

“A dispute ... about alleged breaches of the articles of association or a shareholder's agreement is an essentially contractual dispute which does not necessarily engage the rights of creditors or impinge on any statutory safeguards for the benefit of third parties.”

Thus the author finally thinks that the rule propounded in Fulham Football is an accepted one. In most of the jurisdictions, it is mandated that the exclusion of arbitration must be through a legislation. And merely because a statutory forum exists does not mean that a matter is not capable of being resolved through arbitration. It is ultimately the subject-matter or the nature of the dispute that decides its arbitrability. International Commercial Arbitration is an evolving subject and it has come a long way. I am sure that the future judgments on arbitrability will be able fully clarify the questions that remain with respect to public policy, third party rights and arbitration.

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[1] [2012] 2 W.L.R. 1008 at 2.

[2] Ibid. at 4.

[3] [2011] Ch. 208 at 79.

[4] Ibid. at 25.

[5] Ibid. at 14.

[6] [1998] BCC 396.

[7] Exeter City Association Football Club Ltd v. Football Conference Ltd., ([2004] 1 WLR 2910).

[8] Supra note 1 at 35.

[9] Ibid. at 25.

[10] Ibid. at 40.

[11] Ibid. at 42.

[12] [2012] 2 W.L.R. 1008 at 77.

[13] Ibid. at 39.

[14] Ibid.

[15] Born, Gary, International Commercial Arbitration, (Wolters Kluwer: 2009).

[16] Supra note 4 at 40.

[17] 473 U.S. 614 (1985).

[18] [2011] SGCA 21.

[19] Supra note 1 at 92.

[20] Ibid. at 93.

[21] This idea was also discussed in Paul Jorgensen, Unfair Prejudice in the United Kingdom: An Inalienable Right for Shareholders Comes to an End as Courts Resolve Split between Exeter and Vocam, 4 Y.B. On Arb. & Mediation 316.

[22] Supra note 4 at 77.