INTRODUCTION
Boardroom disagreements are as old as companies themselves. From small businesses to multinational companies, shareholders often clash over control, dividends and even the direction of the company. These disputes can quickly spiral, threatening not just personal relationships but the survival of the business altogether.
In these tense moments, aggrieved shareholders are immediately faced with the prevalent question; should we go to court or resolve the issue quietly through arbitration? Unfortunately, the answer isn’t always straightforward. While arbitration, often times is the more attractive option due to its privacy, speed and flexibility, the law draws a line on what disputes can actually be settled by arbitration and what disputes must be settled through the conventional courts. This dividing line is what is commonly referred to as “the principle of arbitrability.”[1]
This article explores this principle of arbitrability, particularly in the settlement of shareholders’ disputes in Nigeria.
UNDERSTANDING THE PRINCIPLE OF ARBITRABILITY
Arbitrability refers to the legal capacity of a dispute to be resolved by arbitration rather than litigation. Generally, rights in personam i.e. private disputes between individuals or entities, such as contractual disputes are arbitrable. In contrast however, rights in rem i.e. rights affecting the public or third-party interests, such as criminal matters, matrimonial causes are not arbitrable [2]. This seems simple enough, however, this seemingly simple principle becomes remarkably complex when applied to shareholders’ disputes which often blur the lines between rights in personam and rights in rem.
At its core, arbitrability poses a fundamental question, Can this dispute be resolved through arbitration? It highlights the delicate balance between party autonomy, which is the bedrock of arbitration and public interest, which oftentimes require judicial oversight. While the law allows parties the freedom to choose arbitration as their preferred mode of dispute resolution, that freedom is not without limits as certain categories of disputes, by their nature or public policy considerations, remain within the exclusive jurisdiction of the courts.
In view of the Nigerian landscape, it bears mentioning that the importance of determining the arbitrability or otherwise of a dispute is expressly reinforced by the provisions of Section 55(3)(b) of the Arbitration and Mediation Act (“AMA”), 2023, which provides as follows:
“The court may set aside an arbitral award, where –
(b) the court finds that the –
(i) Subject matter of the dispute is otherwise not capable of settlement by arbitration under the laws of Nigeria.”
Similarly, Section 1(5) of the AMA, 2023 outlines the scope of the Act, stating thus:
“This part shall apply to –
a) International commercial arbitration, subject to any agreement in force between federal republic of Nigeria and any other country or countries;
b) Inter-state commercial arbitration within the federal republic of Nigeria.”
To provide further context, Section 91(1) of the AMA, 2023 defines the term “commercial” to include;
“Matters arising from all relationships of a commercial nature whether contractual or not, such as any trade transaction for the supply or exchange of goods or services, distribution agreement, commercial representation or agency, factoring, leasing, construction works, consulting, engineering, licensing, investment, financing, banking, insurance, exploitation agreement or concession, joint venture and other forms of industrial or business cooperation, carriage of goods or passengers by air, sea, rail or road.”
These provisions collectively demonstrate the limited scope of arbitrable matters in Nigeria to those of a “commercial nature”. Additionally, the Court of Appeal, in the case of United World Ltd. Inc. v. M.T.S. Ltd. [3] had the opportunity to weigh in on the question of arbitrability and held thus:
“A matter shall be referred to arbitration when it becomes or is to be interpreted to mean that a difference or dispute exists between the parties. The difference or dispute must necessarily arise from the clauses contained in the agreement.
The dispute or difference which the parties to an arbitration agreement agree to refer must consist of a justiciable issue triable civilly. A fair test of this is whether the difference can be compromised lawfully by way of accord and satisfaction. Thus:
(a)an indictment for an offence of a public nature cannot be the subject of an arbitration agreement;
(b)nor can disputes arising out of an illegal contract;
(c)nor disputes arising under agreements void as being by way of gaming or wagering;
(d)equally, disputes leading to a change of status, such as divorce petition, cannot be referred, nor, it seems can any agreement purporting to give an arbitrator the right to give a judgment.”
THE CONSTITUTIONAL CONUNDRUM: SECTION 251 AND THE JURISDICTION OF THE FEDERAL HIGH COURT OVER SHAREHOLDERS’ DISPUTE
At the heart of the arbitrability debate in shareholders’ disputes lies the provisions of Section 251 of the 1999 Constitution of the Federal Republic of Nigeria (as amended) (hereinafter referred to as “the constitution”). This provision vests the Federal High Court with “exclusive jurisdiction” over certain matters, including those arising under the Companies and Allied Matters Act (CAMA). Specifically, the provisions of Section 251 (1)(e) of the constitution, grants the Federal High Court exclusive jurisdiction in civil causes and matters “arising from the operation of the Companies and Allied Matters Act or any other enactment replacing the Act or regulating the operation of companies incorporated under the Companies and Allied Matters Act”
This constitutional provision seemingly creates a troubling parallel with tax disputes, which Nigerian courts have consistently held non arbitrable. In the case of Esso Petroleum and Production Nigeria Ltd & SNEPCO vs. NNPC [4], the Court of Appeal held that the Federal High court, to the exclusion of any other court, exercises jurisdiction over tax disputes and accordingly held any such tax disputes as inherently non arbitrable. The reasoning was straightforward, where the Constitution grants a court exclusive jurisdiction over certain matters, parties cannot contract out of it, regardless of their agreement to arbitrate.
Since the same Section 251 vests exclusive jurisdiction over matters regulated by the Companies and Allied Matters Act (CAMA) on the Federal High Court, many are left to wonder whether the same principle which the courts applied in determining the arbitrability of tax disputes in Nigeria will also be applied to shareholders’ disputes.
The constitutional argument appears compelling on its face. If shareholders’ disputes arise under CAMA, and the Constitution gives the Federal High Court exclusive jurisdiction over CAMA matters, then logic suggests such disputes cannot be arbitrated. However, this conclusion fails to account for the distinction between the source of the rights of shareholders and the nature of the dispute itself.
To understand why applying the taxation analogy to shareholders’ dispute may be flawed, we must examine the nature of shareholder relationships. Unlike tax obligations, which arise purely from statute and public policy, shareholders’ relationships are fundamentally contractual in nature [5]. The shareholders’ agreement, the memorandum, articles of association and even subscription agreements create a web of contractual obligations between shareholders and between shareholders and the company.
Section 46 of CAMA 2020 explicitly recognizes the contractual nature of this relationship. It provides that the memorandum and articles of association of a company, when registered, binds the company and its members as if they had been signed and sealed by each member. In our considered view, this “statutory contract” forms the foundation upon which shareholders can enter into arbitration agreements.
It is our considered opinion that when shareholders include an arbitration clause in a shareholders’ agreement, they are exercising their freedom of contract to determine how the disputes arising from their contractual relationship will be resolved. The dispute may involve the interpretation of CAMA provisions, but its essence remains contractual.
This distinction matters enormously. The Courts in other jurisdictions have consistently held that the mere involvement of company related issues does not, by itself, render a dispute non arbitrable. In the case of Fulham Football Club (1987) Ltd v. Richards [6], the English Court of Appeal held that where the dispute is between the members of a company or between shareholders and the board, relating to alleged breaches of the company’s articles of association or a shareholders’ agreement, such dispute is essentially a contractual (private) dispute and does not necessarily involve or impugn third party rights or any statutory safeguards imposed for the benefits of third parties and as a result, such disputes are generally arbitrable. [7]
PARSING THE SPECTRUM: DISTINGUISHING ARBITRABLE FROM NON-ARBITRABLE SHAREHOLDERS’ DISPUTES
As we had earlier stated, the question of the arbitrability or otherwise of shareholders’ disputes in Nigeria cannot be answered with a simple yes or no. Instead, we must recognize a spectrum of disputes, some clearly arbitrable, others clearly not and some occupying an uncertain middle ground.
At one end of the spectrum lie disputes that are purely contractual, such as disagreements over profit-sharing arrangements specified in a shareholders’ agreement, breach of non-compete clauses etc. As we have established, the freedom of contract and by extension to arbitrate in Nigeria is limited by statute and case law. However, arbitration agreements between parties are generally enforceable where the subject matter is arbitrable. The disputes enumerated above, arise from private agreements and involve rights that parties can freely negotiate and waive. As such, in our opinion, there is no compelling or conceivable public policy reason why such matters should not be arbitrable.
At the other end lie disputes that involve public interests or require remedies that only the courts can grant. These include applications for winding up the company by the provisions of Section 570 of CAMA, applications for orders confirming a reduction of share capital under the provisions of Section 131 of CAMA. These matters involve statutory procedures designed to protect not just the parties but also creditors, other shareholders and the general public. In our considered view, the courts must retain exclusive jurisdiction over such matters especially as they involve the grant of certain remedies, such as winding up orders that affect creditors and relevant stakeholders.
The middle ground presents the most challenging dilemma. For example, under the provisions of Section 353 and 354 of CAMA 2020, members are allowed to petition the court where the affairs of the company are being conducted in a manner oppressive or unfairly prejudicial or discriminatory to some members of the company. Are such disputes arbitrable? In our view, the answer depends on whether the conduct complained of violates the contractual obligations between the shareholders or constitutes a purely statutory wrongdoing.
Additionally, and in summation, we are of the opinion that the test of the arbitrability of Shareholders’ dispute should not be whether the dispute “arises under” CAMA in some abstract sense but rather, whether the dispute involves rights that parties could lawfully and privately resolve through arbitration. Several factors should guide this analysis. First, when faced with this dilemma, we enjoin the courts or the tribunal, whichever the case may be, to consider whether the dispute affects only the parties to the arbitration agreement or whether it has wider ramifications for other stakeholders e.g. creditors etc. logically speaking, disputes between two shareholders over share valuation affect only them and in our opinion, should be arbitrable. However, disputes as to whether to reduce the company’s share capital affect creditors and should remain in court.
Secondly, courts and/or the arbitral tribunal should examine whether the relief sought can be granted by either forum. It is pertinent to note that by the provisions of Section 570 of CAMA, 2020 the Federal High Court has the jurisdiction to wind up companies. However, arbitral tribunals, in our opinion, can award damages, order specific performance and/or make declarations about the shareholders’ rights under their agreement. And finally, the autonomy of parties should be respected where doing so does not in any way conflict with public policy.
THE DOCTRINE OF SEPARABILITY AND ITS IMPLICATIONS FOR SHAREHOLDERS’ DISPUTES
A crucial principle in arbitration law that pertinent this discourse is the “doctrine of separability” [8]. This doctrine, recognized by the provisions of Section 14(2) of the AMA 2023, provides that an arbitration clause forms a separate agreement from the main contract. So, where the main contract is void, voidable or even terminated, the arbitration clause survives and serves as the prevalent dispute resolution method.
This doctrine has far-reaching implications for shareholders’ disputes. Where shareholders include an arbitration clause in their agreement, that clause operates independently. Disputes about whether the agreement was validly formed, whether shares were properly issued or whether certain actions violated CAMA do not automatically render the arbitration clause inoperative. The arbitral tribunal still has jurisdiction to determine these questions as preliminary matters as provided in the wordings of Section 14(1) of the AMA, 2023.
However, we must emphasize that separability has limits. It cannot rescue an arbitration clause covering disputes that by law is deemed non arbitrable. where the Constitution, statute or even case law prohibits the arbitration of certain matters, the arbitration agreement and/or clause, however broad its wording, cannot override that prohibition. Separability ensures the arbitration agreement’s survival; it does not expand the scope of what can be arbitrated.
PRACTICAL CONSIDERATIONS: DRAFTING ARBITRATION CLAUSES IN SHAREHOLDERS’ AGREEMENTS
Given the uncertainty surrounding the arbitrability of shareholders’ dispute, great care must be exercised when drafting an arbitration clause in a shareholders’ agreement. A poorly drafted clause can create ambiguity as to whether or not parties intended to arbitrate certain disputes, potentially leading to simultaneous proceedings in both the court and arbitration.
The arbitration clause should clearly define its scope. Rather than using generic language like “all disputes arising from or relating to this agreement….” parties should consider specifying the categories of disputes covered by the arbitration clause while acknowledging that certain applications and remedies must proceed through the courts. For instance, an arbitration clause may provide that all disputes relating to the breach of contractual obligations, share valuation, dividend policies and appointment of directors shall be submitted to arbitration, while explicitly excluding applications for winding up or applications for reliefs against unfairly prejudicial conduct by members of the company.
In our considered view, such explicit delineation serves multiple purposes. Firstly, it demonstrates that the parties have carefully considered which disputes should be resolved through arbitration, indicating a genuine intention to arbitrate certain matters. Secondly, it provides clarity for the parties, tribunals and courts alike, thereby reducing the likelihood of costly and prolonged jurisdictional challenges.
CONCLUSION
Undoubtedly, the constitutional provision granting exclusive jurisdiction to the Federal High Court over CAMA related matters creates a surface tension with the widely popular arbitration. However, a deeper analysis reveals that this tension is more apparent than real.
Once properly understood, shareholders’ disputes are predominantly contractual disputes that happen to involve parties connected through a corporate structure. And on that note, we reiterate that the provisions of Section 251 of the constitution does not automatically transform every shareholder disagreement into a matter of public concern that must be adjudicated and determined by the courts.
In Nigeria, there is no codified law that distinguishes disputes that are arbitrable and those that are not, which means courts have the flexibility and the onus to develop a definitive framework that balances constitutional provisions with the desire of contracting parties to resolve their disputes privately.
Until that is achieved, we as practitioners must navigate this uncertain terrain with care, drafting precise arbitration clauses bearing in mind the nature of disputes that might arise. Certainly, the boardroom battles will continue but the medium for resolving them need not remain uncertain if our courts embrace a consistent, nuanced approach to arbitrability that recognizes the fundamentally contractual nature of most shareholders’ disputes.
Please note that the foregoing does not in any way constitute legal advice. Kindly contact the authors for any legal advice on the subject matter
REFERENCES
[3] (1998) 10 NWLR (Pt. 568) 106
[4] [No. CA/A/507/2012]
[5] Shareholder Agreements | Legal Implications | Companies Act 2013 – SS LAW CODES
[6] [2011] EWCA Civ 855
[8] https://www.barandbench.com/columns/doctrine-of-separability-and-determination-of-the-proper-law-of-the-arbitration-agreement
Please do not treat the foregoing as legal advice as it only represents the public commentary views of the authors. All enquiries about this should please be directed at the key contacts
