Suing an undisclosed principal under an arbitration agreement: Filatona Trading Ltd and another v Navigator Equities Ltd and others

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In the context of a challenge under section 67 of the Arbitration Act 1996 (AA 1996), in Filatona Trading Ltd and another v Navigator Equities Ltd and others, the English Commercial Court considered the circumstances in which an undisclosed principal may be sued under an arbitration agreement. The English Commercial Court also heard a challenge under sections 67 and 68 of the AA 1996 on the basis that an arbitral tribunal had awarded relief from shareholder oppression that is not available in the English courts, namely, a buy-out of a foreign company’s shares pursuant to Cypriot statute (the law of the place of incorporation of the company whose shares were being purchased).

This blog piece focuses on some practical considerations relevant to both questions considered by the court.

Undisclosed principals

An undisclosed principal can sue on a contract (and be sued), where:

  • Its agent has actual authority and is acting within the scope of their authority in entering into the contract.
  • There is nothing in the contract or surrounding circumstances to:
    • displace the assumption that the other party is willing to contract with an undisclosed principal; or
    • to indicate that the contract is confined to the named parties.

Arbitration agreements are no exception to the rules in respect of undisclosed principals.

In Filatona Trading Ltd and another v Navigator Equities Ltd and others, Teare J was at pains to point out that very clear words are required before a court will conclude that a contract is confined to the named parties (see paragraph 294). If it was otherwise, the business utility of the rules in respect of undisclosed principals would be undermined. Certainly, it is not enough that parties are named in a contract (and the undisclosed principal is not).

Accordingly, proving that the contract is confined to the named parties is a high bar to meet.

In fact, the test for whether an undisclosed principal can sue on a contract made by its agent has been put in negative terms, namely, that unless the contract says that the named party is not acting on behalf of others, the law will allow the agent to prove that it was acting on behalf of another (that is, the undisclosed principal (see Fred Drughorn Limited v Rederiaktiebolaget Trans-Atlantic)). Similarly, the relevant question has been described as whether the terms of the contract unequivocally and exhaustively identify the parties to it; if not, then the contract is not confined to the named parties.

So, what should we be looking for when trying to ascertain whether a contract is confined to the parties named in it or whether a party is only prepared to accept a contract with the named party? Relevant considerations include:

  • Whether any principal is identified in the contract at all. If the contract expressly identifies a different principal upon whose behalf an agent has contracted, this may be enough to indicate that the contract is confined to the named parties (see, for example, Foster v Action Aviation Limited). Thus, where a party has concerns over the contracting party or is concerned that there may be an additional undisclosed principal acting in the background, ensuring that the contract discloses a principal may be enough to protect them.
  • The type of contract. It is important to think about what the purpose of the contract is and what it requires the named parties to it to do. For example, if the contract in question is a relational contract requiring a high degree of communication, co-operation and predictable performance from the parties over a long period of time (for example, as might be the case for long-term local authority services contracts), then it might be thought less compatible with such a contract for there to be any uncertainty over who the true parties were that could be created by the presence of an undisclosed principal.
  • The characteristics of the undisclosed principal. Plainly, who the undisclosed principal is, and their relationship to the purported agent, are relevant considerations and may indicate whether or not a contracting party would be willing to treat them as a party to the agreement. For example, where (as in Filatona Trading Ltd & another v Navigator) the undisclosed principal was the beneficial owner of one of the named contracting parties and the contract itself expressly purported to bind the beneficial owners of the named parties but via a party who was actually an agent of the undisclosed principal, this was considered sufficient to indicate the willingness of the contracting party to treat the undisclosed principal as a party to the agreement.
  • Entire agreement clauses. Depending on its terms, an entire agreement clause may be considered evidence running against the idea that a party intended to sue or be sued by a person other than the named counterparty to the agreement. However, it seems unlikely that, on its own, an entire agreement clause (again, depending on its terms) would be enough to indicate that the agreement was confined to the named parties. Entire agreement clauses rarely go far enough to state that the named parties to the agreement are the only parties that can sue on the agreement (see Kaefer Aislamientos de CV v AMS Drilling Mexico SA de CV).
  • Successor/non-assignment clauses. Depending on their wording, contractual provisions which indicate that the rights and obligations under the contract may not be assigned, or may only pass to a party’s successor in title, may indicate that the names of the parties to the agreement was of paramount importance. Accordingly, such clauses may also be seen as evidence going against the assertion that an unnamed party may sue or be sued on the agreement. Again, however, on its own it is unlikely that such clauses would be enough for a court to conclude that the contract was confined to the named parties. Express wording precluding an undisclosed principal from enforcing the contract is probably required.
  • Contractual estoppel. One of the arguments run in Filatona Trading Ltd and another v Navigator was that there was a contractual estoppel precluding an undisclosed principal from enforcing the contract; this argument was unsuccessful on the basis that none of the other contractual provisions relied upon was sufficient to preclude an undisclosed principal. Really, a contractual estoppel is the label applied when there is a contractual provision which precludes a party from making an assertion that is contrary to the contractual provision. In this context, it might be a clause that specifically states that there is no undisclosed principal. Short of that, however, it is difficult to see how a contractual provision that does not expressly preclude enforcement by, or the existence of, an undisclosed principal, could create a contractual estoppel capable of indicating that the contract is confined to the named parties.

The buy-out relief

Under section 48(1) of the AA 1996, “the parties are free to agree on the powers exercisable by the arbitral tribunal as regards remedies”. Accordingly, and whilst under English law generally an arbitral tribunal may not have the power to award relief otherwise unavailable under English law, the parties can by their agreement change this.

In the Filatona Trading Ltd and anotherr v Navigator Equities Ltd and others case, Teare J construed a contract empowering the arbitral tribunal to hear: “all disputes and disagreements arising from [the agreement] or in connection therewith” and providing the tribunal with the power to “settle” any such dispute. Teare J considered that this was sufficient to permit the tribunal to award relief which would not otherwise be available under English law, namely, the buy-out of a Cypriot company under Cypriot law.

The judge’s reasoning was that, as a Cypriot court had power to award buy-out relief, and the parties had referred all disputes arising out of or in connection with the agreement to arbitration that would otherwise have come before a Cypriot court, they must have intended that such relief could be awarded by an arbitral tribunal as well. In other words, Teare J concluded that the parties could not have intended that a dispute in respect of a buy-out was to be conducted before the Cypriot courts and all other disputes in arbitration.

This is a broad interpretation and, on one level, the judge’s approach appears to conflate disputes (that is, the parties’ desire to have all disputes decided pursuant to arbitration) and the remedies available under the relevant law to deal with them. The logic in Teare J’s decision does not necessarily follow when the parties’ choice of law to be applied by the arbitral tribunal is taken into account.

The judge’s decision is being appealed, although it is not known on which grounds. However, for the time being, Teare J’s approach indicates that the courts will give the broadest possible latitude to parties in respect of the remedies that a tribunal has power to award where the parties have agreed to refer all disputes arising out of or in connection with the relevant contract to arbitration. To ensure that there is no confusion where the parties wish to make relief available that is not available under English law, this should be expressly provided for by the parties, as envisaged by section 48(1) of the AA 1996.

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