FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation: Dividing Disputes Between Arbitration and Court

In FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation (“FamilyMart”),[1] the Judicial Committee of the United Kingdom’s Privy Council (“JCPC”) held that when a party to an arbitration agreement seeks a remedy that is only available in court, the arbitration agreement still applies to the extent that the matters in dispute are arbitrable. In short, a court may bifurcate the dispute, and order a stay of the court proceeding pending the outcome of the arbitrable matters.

The JCPC also confirmed that effect should be given to an arbitration agreement unless (1) the agreement is contrary to the public policy of the court or (2) there is a rule of law or statutory provision that renders the matters within the scope of the arbitration agreement incapable of resolution by arbitration.[2]

The Facts

FamilyMart involved a dispute between two holding companies that together controlled a convenience store business in mainland China, which was a going concern (i.e., was solvent). The minority shareholder (“FMCH”) was a Japanese company with considerable experience in the convenience store business across Asia through one of its subsidiaries. The majority shareholder (“Ting Chuan”) was part of a group of companies owned by the Taiwanese Wei family.

Believing that Ting Chuan was diverting profits from the joint venture to members of its corporate group, FMCH sought to have the joint venture wound up under the Companies Act[3] of the Cayman Islands, where the joint venture convenience store business was incorporated, on the basis that it would be “just and equitable” for a court to do so.[4] In the JCPC’s view, “the real aim” of FMCH’s petition to court was to have the Grand Court of the Cayman Islands require Ting Chuan to sell its majority stake in the business to FMCH.[5]

A shareholder agreement between the two parties contained an arbitration agreement, and it was conceded by FMCH at the Court of Appeal that the dispute fell within the scope of the arbitration agreement. The question for the JCPC therefore was whether FMCH’s petition to court “has made the matters raised in that petition not susceptible to arbitration.”[6]

Those matters were identified as the following:

(1) Whether FMCH has lost trust and confidence in Ting Chuan and in the conduct and management of the Company’s affairs. Ting Chuan particularises this matter into three sub-headings: (i) whether the majority directors owe various duties to the Company, (ii) whether the majority directors have breached those duties or engaged in misconduct, and (iii) whether Ting Chuan caused, permitted or procured the majority directors to act in breach of their duties or to engage in the alleged misconduct

(2) Whether the fundamental relationship between FMCH and Ting Chuan has irretrievably broken down. In particular: (i) whether an understanding was reached between the shareholders by 2003 and, if so, what were the terms of that understanding, (ii) was the understanding superseded at any point in time after 2003, for example by reason of the conclusion of the SHA, and (iii) whether Ting Chuan acted contrary to that understanding after 2012.

(3) Whether it is just and equitable that the Company should be wound up.

(4) Whether FMCH should be granted the alternative relief, which it prefers, under section 95(3)(d) of the Companies Act, namely an order requiring Ting Chuan to sell its shares in the Company to FMCH, and, if so, what is the value of those shares.

(5) Whether, if such alternative relief is not appropriate, an order winding up the Company should be made and whether the persons identified by FMCH should be appointed as joint official liquidators.[7]

The JCPC concluded that matters (1) and (2) “are substantive disputes between FMCH and Ting Chuan which provide the factual basis for the winding up petition on the just and equitable ground”, and therefore must be determined by an arbitral tribunal (unless the parties were to jointly waive their right to arbitration).[8] This required a mandatory stay of the winding up petition in relation to matters (1) and (2) under the Foreign Arbitral Awards Enforcement Act of the Cayman Islands (the “FAAEA”),[9] and, accordingly, a discretionary stay in respect of matters (3) to (5) on the basis that matters (1) and (2) are the precursor to any determination on those matters.

Reasoning

The JCPC considered the New York Convention in detail recognizing that it quite successfully fulfilled its aim “to establish a single uniform set of international legal standards for the recognition and enforcement of arbitration agreements and awards.”[10] Specifically, the JCPC interpreted Article II(3) of the New York Convention, which is implemented in the FAAEA. Article II(3) provides:

The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.[11] [emphasis added]

In particular, the JCPC considered the meaning of “a matter” and of “inoperative.” The JCPC found it appropriate to consider “the jurisprudence of several countries as guides”, given that their statutes – unsurprisingly – contain similar provisions.[12] Therefore, the JCPC’s interpretation of Article II(3) might be considered persuasive, though not binding, on Canadian courts, when interpreting that provision, as enacted through Canadian statutes such as Ontario’s International Commercial Arbitration Act, 2017.[13]

With respect to “a matter,” the JCPC relied on the Court of Appeal of Singapore’s decision in Tomolugen Holdings Ltd v Silica Investors Ltd,[14] to conclude as follows:

[A] “matter” is a substantial issue that is legally relevant to a claim or a defence, or foreseeable defence, in the legal proceedings, and is susceptible to be determined by an arbitrator as a discrete dispute. If the “matter” is not an essential element of the claim or of a relevant defence, it is not a matter in respect of which the legal proceedings are brought. … [A] “matter” is something more than a mere issue or question that might fall for decision in the court proceedings or in the arbitral proceedings.[15]

Based on this understanding of the term, the JCPC divided the matters in dispute into the five listed above.

The JCPC considered an arbitration agreement “inoperative” when there is either (1) “subject matter non-arbitrability”, i.e. the matters at issue between the parties are incapable of being settled by arbitration (for example, a criminal law matter), or (2) remedial non-arbitrability, i.e., the remedies sought are unavailable to an arbitral tribunal.[16]

In FamilyMart, the issue was one of remedial non-arbitrability, because it was common ground between the parties that a company could only be wound up by a court rather than an arbitral tribunal. However, the JCPC described the “underlying concept” of subject-matter non-arbitrability, which is “that there are certain matters which in the public interest should be reserved to the courts or other public tribunals for determination.”[17] Certain types of disputes are “excluded by statute or public policy from determination by an arbitral tribunal.”[18]

FMCH argued that bifurcation between an arbitral proceeding and a court proceeding was a public policy question, on the grounds that it would cause undue delay. This was rejected by the JCPC, which found that unnecessary delay could be avoided by proper case management. The JCPC also found case law to support the proposition that courts will grant a stay while arbitral matters are first addressed.[19]

The JCPC also found that a court would effectively be bound by the findings of fact at arbitration, much in the same way that a court would be bound by an agreed statement of facts between the parties.

Commentary

FamilyMart is a further reminder that courts will seek to enforce arbitration agreements to the extent possible. The JCPC cites the pithy statement of Lord Dunedin in A Sanderson & Son v Armour & Co Ltd: “If the parties have contracted to arbitrate, to arbitration they must go.”[20]

In FamilyMart, bifurcation was required because the arbitration agreement between the parties was inoperative with respect to matters (3) to (5) due to the non-arbitrable nature of the remedies being sought. Accordingly, the JCPC required the dispute to be arbitrated up to the point at which a court determination was necessary, i.e., the dispute required arbitration for matters (1) and (2).

It should also be observed that the JCPC found no contractual prohibition on initiating a petition.[21] FMCH did not breach the arbitration agreement by doing so. At the same time, in the JCPC’s view, the arbitration agreement required the petition to be stayed. Thus, as a procedural question, it may be open to a party to initiate a court proceeding even while recognizing that it will likely be stayed pending the outcome of an arbitration. Indeed, it may even be advisable to do so, particularly when a remedy sought cannot be granted by an arbitral tribunal; for example, in Ontario, where a party must commence an action in order to perfect their lien rights, it is necessary to commence a lien action in order to “perfect” the lien and advisable to thereafter agree to a stay in favour of mandatory arbitration. Broadly speaking, by initiating a court proceeding, a party can demonstrate that it is not seeking an impermissible remedy from the tribunal, but rather is laying the groundwork for a properly bifurcated process.

Finally, the JCPC’s affirmation as to what constitutes a “matter” under Article II(3) of the New York Convention provides helpful guidance for Canadian practitioners in determining whether a legal issue has risen to the level that necessitates referral to arbitration (assuming an arbitration agreement is in place and is operative). As the JCPC observed, there is considerable jurisprudence on this topic in several countries; however, this is less so in Canada. While the devil remains in the details as to whether an issue will meet the threshold of “relevance” on the facts of a given case, the general principle is clear that the issue must be essential – rather than secondary or peripheral – to the claim or defence, in order for it to constitute a “matter” in respect of which legal proceedings are brought.

Fundamentally, as noted above, FamilyMart confirms that effect should be given to an arbitration agreement unless (1) the agreement is contrary to the public policy of the court or (2) there is a rule of law or statutory provision that renders the matters within the scope of the arbitration agreement incapable of resolution by arbitration.

[1] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33.

[2] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 29.

[3] Companies Act (2022 Revision).

[4] Companies Act (2022 Revision), Section 92(e).

[5] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 8.

[6] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 13.

[7] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 23.

[8] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 105.

[9] Foreign Arbitral Awards Enforcement Act (1997 Revision).

[10] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 31, citing Enka Insaat ve Sanayi AS v OOO “Insurance Co Chubb”, [2020] UKSC 38 at para 126.

[11] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958), available at https://www.newyorkconvention.org/english.

[12] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 31.

[13] International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5. See also, e.g., United Nations Foreign Arbitral Awards Convention Act, RSC 1985, c 16 (2nd Supp).

[14] Tomolugen Holdings Ltd v Silica Investors Ltd, [2015] SGCA 57.

[15] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 61.

[16] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 70.

[17] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 72.

[18] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 70.

[19] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 101.

[20] A Sanderson & Son v Armour & Co Ltd, [1922] UKHL 268, 1922 SC (HL) 117 (Scot) at 126.

[21] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 91.

For more information, please contact: