ENGLISH HIGH COURT RESOLVES PRIMA FACIE CONFLICT BETWEEN DISPUTE RESOLUTION CLAUSES IN FAVOUR OF ARBITRATION AGREEMENT

In the recent decision in Melford Capital Holdings LLP and others v Digby [2021] EWHC 872 (Ch), the English High Court (the Court) resolved a prima facie conflict between two dispute resolution clauses in an agreement (one providing for the exclusive jurisdiction of the English courts and the other providing for arbitration) in favour of the arbitration clause. The Court interpreted the exclusive English jurisdiction clause as providing for the supervisory jurisdiction of the English courts.

Background

The factual background to the decision is complex, involving proceedings in the English courts for injunctive relief, proceedings in the courts of Guernsey, and an ongoing arbitration. The defendant, Digby (the Former Partner), had been a Partner in Melford Capital Partners (Holdings) LLP (Melford Holdings) and Melford Capital Partners LLP (Melford Capital) (together, the Melford Entities), but resigned in January 2020 following a break down in the business relationship between the Former Partner and the other partners, who had passed resolutions expelling him.

The Underlying Agreements and Clauses

Melford Holdings was governed by a limited liability partnership agreement (the Melford Holdings Partnership Agreement), which was governed by Guernsey law and contained a clause providing for the exclusive jurisdiction of the courts of Guernsey (the Guernsey EJC). Melford Capital was governed by a limited liability partnership agreement (the Melford Capital Partnership Agreement) which was governed by English law, and contained two different dispute resolution clauses, both of which were broadly drafted. One was an exclusive jurisdiction clause in favour of the English courts which provided that: "The parties irrevocably agree that the courts of England have exclusive jurisdiction to settle any dispute or claim that arises out of or in connection with this agreement" (the English EJC), while the other provided for arbitration under the rules of the LCIA : "Any dispute arising out of or in connection with this agreement, including any question regarding … the legal relationships established by this agreement, shall be referred to and finally resolved by arbitration under the Rules of the London Court of International Arbitration…" (the Arbitration Clause).

The English Proceedings

In April 2020 the Melford Entities successfully applied to the English High Court for injunctive relief. The relief granted restrained the Former Partner from calling a meeting of investors of Melford Capital (as he had planned to do so, but agreed to postpone for 10 days) and from otherwise using confidential information alleged to have been obtained by the Former Partner between April and October 2019. In May 2020 the Melford Entities also brought claims in the English courts against the Former Partner for breach of confidence, various injunctions, and a claim for damages, with the Former Partner serving a defence in respect of each.

In his counterclaim (the Counterclaim), the Former Partner sought: (i) declarations that he had not been validly expelled as a member of the Melford Entities; (ii) a declaration that he was not bound by the opinion of the auditors as to the value of his interest in Melford Holdings; and (iii) if he had been expelled, for the court to provide substitute machinery for valuing his interest. The Melford Entities filed an acknowledgement of service, but disputed the jurisdiction of the Court to try the Counterclaim.

The Arbitration Proceedings

In October 2020, the Melford Entities commenced LCIA arbitration (the Arbitration Proceedings) to determine whether (i) the Former Partner was validly expelled as a member of Melford Capital; and (ii) the Former Partner was bound by the decision of Melford Capital's auditors as to the sum to be paid to him as the value of his share.

The Guernsey Proceedings

Melford Holdings and others also commenced proceedings in Guernsey seeking a declaration that the Former Partner had been expelled and was no longer a member of Melford Holdings, as well as an anti-suit injunction. In November 2020, leave was given by the court in Guernsey to serve proceedings out of jurisdiction upon the Former Partner (the Guernsey Proceedings).

The Current Applications

Following their acknowledgement of service, Melford Holdings applied to the Court for a stay or dismissal of the Counterclaim, arguing that the underlying dispute related to the Melford Holdings Partnership Agreement and was subject to the Guernsey EJC (the Melford Holdings Application).

Both Melford Entities applied to the Court for a stay of the Counterclaim against Melford Capital under s9 Arbitration Act 1996, arguing that the underlying dispute related to the Melford Capital Partnership Agreement, was subject to an agreement to arbitrate and that the Arbitration Proceedings were accordingly underway to resolve the dispute (the S9 Application).

Decision

The Court granted a stay of the Former Partner's Counterclaim in respect of both the Melford Holdings Application and the S9 Application.

The Melford Holdings Application

The Former Partner argued that by bringing the proceedings in the English courts the Melford Entities had waived their right to rely on the Guernsey EJC. The Former Partner maintained that in order to properly defend himself he needed to be able to assert his case "in response to the grounds giving rise to the claim to the injunctive relief" while also arguing that the Melford Entities had also sought substantive relief.

The Melford Entities argued that bringing proceedings in London for the injunctions was necessary because: (i) they only had a short period of time to gather evidence and instruct counsel; (ii) the downloading of information had taken place in London, and the threatened investor meeting was to take place in London; (iii) ease enforcement on the Former Partner was "crucial"; (iv) there existed a "real concern" that the Former Partner would not regard himself as bound by an order of the Guernsey Courts; (v) the commercial consequences for not obtaining effective injunctions within the 10 day postponement would have been "very serious".

The Court held that the Melford Entities were entitled to seek the "limited" relief sought in the English courts for the reasons they had set out. The Court further considered that if this finding was incorrect, the Melford Entities did not waive or otherwise lose the right to "rely upon agreed forms of dispute resolution… in this instance". The English proceedings had been brought to "address the urgent problems they faced", and that there was "no attempt to litigate all of the matters then or expected to be in dispute between the parties". The Court placed emphasis on the "prayer for relief" which "[made] the position plain". In the eyes of the Court, the Counterclaim was an attempt to "broaden the dispute" and the matters "[did] not need to be brought by way of counterclaim". The Court further foresaw a risk of fragmentation if the matters covered by the Counterclaim were litigated in the English courts, in Guernsey, and by way of arbitration.

The S9 Application

The Court accepted that under English law "if a matter falls within the scope of an arbitration agreement on its true construction, the court should stay the proceedings pro tanto, unless the court is satisfied under s9(4) that the arbitration agreement is null and void, inoperative or incapable of being performed."

Dealing first with whether there was a valid arbitration agreement, the Court considered the sub-issue of the prima facie conflict between the English EJC and the Arbitration Clause.

The Court observed that it was "impossible to hold that the arbitration agreement was entered into for no good purpose", and noted that it would be "uneasy about adopting a course that would result in the evisceration of a clause designed to ensure that sophisticated business-people… could… resolve their dispute by arbitration when they have gone to some trouble to agree to that very course in their principal commercial agreement". As such, having considered a number of earlier authorities, the Court construed the English EJC as the English courts retaining a "supervisory jurisdiction over any arbitration" (i.e. an English seat for the arbitration) rather than render the Arbitration Clause inoperative.

Having found there to be a valid arbitration agreement, the Court turned to the question of whether the matters fell within the scope of the Arbitration Clause. The Court considered that this was a "two-stage enquiry", where the court must "first… determine what the matter or matters are in respect of which the court proceedings have been brought; secondly.. determine in respect of each such matter whether it falls within the scope of the arbitration agreement on its true construction".

The Court noted that the Arbitration Clause was very broad, including "any dispute" which "[arose] out of or in connection with" the Melford Capital Partnership Agreement, further including “any question regarding…the legal relationship established by this agreement”. The Court was satisfied the Counterclaims fell within the Arbitration Clause, and, as with the Melford Holdings Application, it could not be said that the right to rely on the Arbitration Clause had been waived by seeking the injunctions in London.

Comment

In giving effect to the agreement of the parties to arbitrate their disputes by interpreting the English EJC to refer to the supervisory jurisdiction of the English courts, the decision of the Court illustrates the desire of English courts to uphold arbitration as the chosen means of resolving disputes among commercial parties who are likely to intend their disputes be resolved in the same forum.

The resolution of any possible conflict between dispute resolution clauses in an agreement will, however, ultimately turn upon the precise language of the clauses in question. Parties should seek to ensure their dispute resolution clauses (including their arbitration clauses) are as clearly drafted as possible. As this case illustrates, ambiguity or conflicting choices of dispute resolution options can lead to further disputes, higher costs and delay.

For more information, please contact Andrew Cannon, Partner, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

The authors would like to thank Luke Hard for his assistance in preparing this blog post.