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Infinite Plus Pty Ltd [2017] NSWSC 470

The Parties

Infinite Plus Pty Ltd ("The Company") acted as a franchisor and operator of stores under the brand “ChaTime”. The shareholders of the Company, in accordance with a share purchase agreement of June 2011 (hereinafter: "the Shareholders Agreement"), were Ms. Qian (22%), Mr. Zhao ( 23%) and La Kaffa International Co Ltd - a company incorporated in the Cayman Islands ("La Kaffa Cayman").

Shortly after signing the Shareholders Agreement, La Kaffa Cayman entered into an agreement with a related company named La Kaffa International Co Ltd Taiwan ("La Kaffa Taiwan") to transfer all of its shares of The Company. However, no clear indication was presented to the court regarding the completion and registration of the transfer of the shares. Moreover, according to the Shareholders Agreement, the other shareholders and The Company itself had a right of first refusal and the transferee had to enter into a deed to undertake all the obligations to them. In practice, no consent was given and no evidence was presented for the undertaking.

The Dispute

In 2016 a dispute broke out between Mr. Zhao and Ms. Qian on the grounds of their functioning as directors in the company. Ms. Qian felt that Mr. Zhao improperly excluded her from the management of the Company and therefore issued to him an Expulsion Notice according to the Shareholders Agreement. The Notice included details of the alleged breach and an estimate of the value of his shares in accordance with a buy-out procedure that the Shareholders Agreement sets in such case.

Mr. Zhao, on the other hand, dismissed the Notice due to "the vagueness" of the alleged violations, and was quick to submit to the court a statement of relief under s 233 of the Corporations Act (apparently because of his fear of the arbitration clause in the Shareholders Agreement). He argued, inter alia, that Ms. Qian's vague claims interfere with his performance in the company and discriminate against him, or alternatively, if La Kaffa Taiwan is a shareholder, that Ms. Qian did not share with it her intention to take action against him, as the Shareholders Agreement stipulates.

Subsequently, he filed an originating process and later amended it to include La Kaffa Taiwan as a plaintiff, in which they sought, inter alia, orders such as: to stay the "arbitration process"; to purchase Ms. Qian's shares on a price to be determined by a court (or self-purchase by the company) or alternatively, to prevent her from a managerial position.

Only then did Ms. Qian issue a notice of arbitration under Art 3 of the United Nations Commission on International Trade Law Arbitration Rules[1], and in accordance with Section 13 of the Shareholders Agreement, which stated as follows:

"Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the arbitration rules of the United Nations Commission on International Trade law then in forc The appointing authority shall be Hong Kong International Arbitration Centre (HKIAC)…."

The "dispute" was defined in the arbitration notice as the Expulsion Notice and Mr. Zhao's violations and denials of them. Ms. Qian offered a seat in Sydney and an arbitrator.

The application before the court and the parties' arguments

Ms. Qian then filed an interlocutory process to permanently stay the proceedings before the court and refer the parties to arbitration pursuant to Article 8 of the Model Law, or alternatively, to stay until final determination of the arbitral proceeding by virtue of Article 7(2) of the IAA, or, alternatively, by virtue of the court discretion under s 67 of the Civil Procedure Act 2005. According to Ms. Qian, the "matter" is related to the Shareholders' Agreement or the breach thereof.

Mr. Zhao objected, claiming that: A. the notice of arbitration was invalid or B. Ms. Qian failed to complete the Buy-out procedure in the case of a breach so that she lost her right to act upon the Expulsion Notice, if was C. the dispute was not within the ambit of the arbitration agreement or D. La Kaffa Taiwan Is not a party to the arbitration agreement and therefore the proceedings cannot be stayed.

The judgment

First, the Court determined that the agreement is indeed a "foreign arbitration agreement" in accordance with Article 7 of the IAA, both since s 7(1)(d) applies (as La Kaffa Cayman domiciled in or is an ordinary resident of the Cayman Islands- a Convention country) and since s7(1)(b) applies (as the Shareholders Agreement provides that the arbitration processes is governed by the law of Hong Kong).

The court then turned to the arguments of the parties and initially rejected (as a factual finding) the first two arguments of Mr. Zhao (arguments A+B - in light of the wording of the Shareholders Agreement and the behavior of the parties).

The court discussed at length the third argument (that the dispute before it "is not a dispute or claim arising out of or relating to this Agreement") and quoted first from several judgments, regarding relevant rules of interpretation. The court quoted rom Rinehart v Welker [2012] NSWCA 95 at [117], on general interpretation as follows:

"When the parties to a commercial contract agree…to refer to arbitration any dispute or difference arising out of the agreement, their agreement should not be construed narrowly. They are unlikely to have intended that different disputes should be resolved before different tribunals, or that the appropriate tribunal should be determined by fine shades of difference in the legal character of individual issues, or by the ingenuity of lawyers in developing points of argument."

And at [123] with regard to the term "arising out:

"So far as the clause in question is concerned the phrase "under this deed" has consistently been given a narrower construction than phrases such as "arising out of the deed" or "in connection with the deed".

The court also quoted from WDR Delaware Corporation v Hydrox Holdings Pty Ltd [2016] FCA 1164, with regard to the term "matter" in s 7(2), that:

"The word “matter” in s7(2)(b) of the IAA is not used in the constitutional sense…[107] The matters to be determined in any given proceeding are distinct from the proceeding itself and multiple matters may exist within the one legal proceeding"

Based on the above, the court rejected Mr. Zhao argument that the dispute was related to the breach of the Corporations Act and not arising out of or related to a breach of the Shareholders' Agreement. The court clarified that Mr. Zhao's claims (that Ms. Qian's actions were unjustified) is in fact a dispute over the existence of a breach on his part.

The court also clarified (relying on Byrne v A J Byrne Pty Limited [2012] NSWSC 667), that the list of matters specified in S 232 does not constitute necessary a list of breaches of the Corporations Act, but only cases in which the court has the authority to grant the remedies claimed by virtue of S 233. The court noted that the plaintiffs did not even claim breach of the Corporations Act in the statement of claim.

The court continued to discuss arbitrability and noted that the case before it does not even include “in rem” types of relief under s 233(1) which may not be available in arbitration. The court cited a number of Australian judgments in which it was held that claims for relief under s232 of the Corporations Act are capable of being resolved by arbitration and mentioned that "the plaintiffs did not advance any submissions challenging them". Accordingly, the Court noted that "claims for relief under Section 232 of the Corporations Act and its corresponding counterpart of the UK, 994 of the Companies Act, were held by the arbitration".

Therefore, the court decides that it must stay the proceeding before it by virtue of the provisions of section 7(2), except for the relief requested by Mr. Zhao that La Kaffa Taiwan will acquire Ms. Qian's shares, as it is not a party to the arbitration agreement (so s7(2) does not apply).

However, the court decided to stay this proceeding too by virtue of the exercise of its discretion under s 67 of the Civil Procedure Act, in order to "avoid a multiplicity of proceedings" and as "it would be contrary to the just, quick and cheap resolution of the real issues in the proceeding".

The court was then required to determine whether, for the same reason, the claims of La Kaffa Taiwan should also be stayed. For this purpose, the Court was prepared to assume that La Kaffa Taiwan is a shareholder even though it did not undertake the liabilities of La Kaffa Cayman, as required by the Shareholders Agreement.

The Court also noted that no claim was raised regarding the applicability of Section 7(5) – that is that La Kaffa Taiwan acts on behalf of La Kaffa Cayman, which is a party to the arbitration agreement - and therefore assumed that the section did not apply.

Despite all this, the court concludes that the claims of La Kaffa Taiwan should also be stayed from the same reasons and by virtue of the exercise of its discretion under s 67 of the Civil Procedure Act. The court based its judgment on Casceli v Natuzzi S.p.A. [2012] FCA 691, to which it was referred, and decided that the principle claims were the claims by Mr. Zhao against Ms. Qian and that La Kaffa Taiwan's oppression claim depended on it.

The Court noted that there was no need for an order in connection with Art 8 of the Model Law as Ms. Qian withdrew her application in this regard.

Conclusions

A large part of the judgment is dedicated to a good comprehensive review of previous cases on interpretation of arbitration agreements and arbitrability - in my opinion, in a somewhat unnecessary manner. The wording of the arbitration clause was quite inclusive (and Mr. Zhao's claims were weak), so that the following quote from Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd (1993) 43 FCR 439 could be satisfied:

"Case citations and examples could be multiplied but there is little point. When the language of the arbitration clause in question is sufficiently elastic, then the more liberal approach of the courts to which Kirby P and others have referred can have some purchase…"

A slightly more challenging argument on this matter was that statutory remedies were claimed. However, even here, the court referred to previous judgments on this exact matter, and in the absence of “in rem” types of relief and "public interest", it seems that this is not a groundbreaking case, but at most the continuation of the pro arbitration approach in Australian courts.

In my opinion, the more important part of the judgment is the Court's discretion to stay the proceedings with La Kaffa Taiwan. The court decided that the principal dispute is between Mr. Zhao and Ms. Qian, and based on Casceli v Natuzzi S.p.A. to stay La Kaffa Taiwan's oppression claim. However there was no reference to the fact that La Kaffa Taiwan had absolute control of the Company (55%) and appointed three directors on its behalf (out of five). In light of this and despite the impression that La Kaffa Taiwan was dragged into the legal process by Mr. Zhao, it is hard to say that he could restrict Ms. Qian alone (she may have just been smart enough to focus the dispute with him or La Kaffa Taiwan's arguments were not good enough). Of course there could be other facts before the court, but in any case this seems to be a more significant part in the judgment supporting a pro arbitration approach.

Finally, another interesting point is the applicability of Section 7(5)- the Court noted that the claim that La Kaffa Taiwan acted on behalf of La Kaffa Cayman was not raised before him (and perhaps another question is whether it is possible to view La Kaffa Taiwan as an assignee of the shareholders' agreement and whether the doctrine of conditional benefit applies). However, in view of the facts it may have been possible to actually argue that La Kaffa Taiwan acted on behalf of Mr. Zhao and therefore section 7(2) applies. In general, there are a number of legal doctrines according to which one can also be viewed as a party to the arbitration agreement - corporate ties and piercing the corporate veil[2], an agent (and perhaps implicit consent) and equitable estoppel[3].

[2] IMC Aviation Solutions Pty Ltd v Altain Khuder LLC - [2011] VSCA 248

[3] Port Cargo Service, LLC and Michoud Blvd. Commerce Center, LLC v. Certain Underwriters at Lloyd’s London, et al., Case No. 18-6192, 2018 Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753 (11th Cir. 1993) Sourcing Unlimited, Inc. v. Asimco International, Inc., 526 F.3d 38 (1st Cir. 2008)