If a party brings court proceedings in breach of an agreement to arbitrate, the other party can apply to the court under section 9 of the Arbitration Act 1996 to stay those court proceedings, if they are brought “in respect of a matter which under the agreement is to be referred to arbitration”. It is normally clear whether the matter is one which the parties have agreed to arbitrate, but this was not the case in Republic of Mozambique v Privinvest Shipbuilding SAL (Holding) & Ors [2023] UKSC 32, and the Supreme Court set out how the courts should determine what is a "matter" to be stayed under section 9.
Factual background
The Republic of Mozambique (Mozambique) had set up three special corporate vehicles (SPVs) to enter into supply contracts for a tuna fishing fleet, shipyards, and maritime security, with various companies in the Privinvest group (Privinvest). The supply contracts were governed by Swiss law and contained arbitration agreements. The SPVs borrowed the funds for the contracts from various banks. Mozambique provided sovereign guarantees for those loans which were signed by the then Finance Minister Manuel Chang. Those guarantees were governed by English law and provided for jurisdiction of the English courts.
Mozambique later claimed that the guarantees were illegal and that Mr Chang had no authority to execute them. It claimed that there had been a conspiracy relating to the contracts and guarantees of which it was a victim, that Privinvest had paid substantial bribes including one to Mr Chang to sign the guarantees, and that as a result Mozambique was exposed to a potential liability under the guarantees of about USD2b (plus further macro-economic losses).
Privinvest admitted some of the payments but said that they had been done for legitimate reasons unconnected with the contracts or the guarantees. It said that the contracts were valid, genuine and commercial contracts, which had been essentially performed, and that Mozambique would derive benefit from them. Mozambique said that what was supplied either failed to conform to contract or did not materially benefit it.
Background to the appeal
Mozambique issued English court proceedings against Privinvest and others for bribery, conspiracy to injure by unlawful means, dishonest assistance and knowing receipt, and made proprietary claims. Privinvest applied for a stay of the court proceedings under section 9 of the Arbitration Act 1996, on the basis that although Mozambique was not a party to the supply contracts, it was bound by them under Swiss law.
The stay was initially refused on the basis that the claims were not “matters” which the parties had agreed to arbitrate in the supply contracts, and Privinvest appealed against this finding. The parties agreed that for the purposes of the appeal, the courts could proceed on the assumption that Mozambique was bound by the arbitration agreements.
Two of Mozambique’s original allegations did rely on the supply contracts being instruments of fraud and therefore invalid, but it dropped those claims before the appeal. The Court of Appeal allowed Privinvest’s appeal, holding that the question of whether the supply contracts were valid and genuine was a defence to all the claims against Privinvest, so all those claims fell within the arbitration agreements. Mozambique appealed to the Supreme Court.
Meaning of "matter"
The Supreme Court noted that the section 9 power came from the court’s obligation under the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) to refer a matter brought in court proceedings to arbitration where the parties have agreed to do so. This meant it should look at what the other leading jurisdictions involved in international arbitration had said about how to identify the matters to be stayed. It said that the consensus was that the courts should adopt a two-stage process:
- It should first determine what the matters are which the parties have raised or foreseeably will raise in the court proceedings.
- It should then determine whether each such matter falls within the scope of the arbitration agreement.
When applying the first stage of the process, the court must:
- Look at the substance of the dispute (not the wording used for the claim, as it may have been phrased in particular way in order to avoid a stay) and the defences raised (or that are reasonably foreseeable)
- Be aware that staying a matter does not necessarily mean staying the whole of the dispute
- Be aware that a "matter" is a:
- substantial issue
- legally relevant to a claim or defence (or a foreseeable defence) in the legal proceedings
- which is susceptible to be determined by an arbitrator as a discrete dispute
- Apply judgment and common sense – the issue should be reasonably substantial and relevant to the outcome of the legal proceedings of which a party seeks a stay.
When applying the second stage of the process (does the matter fall within the scope of the arbitration agreement), the court must have regard not only to the true nature of the matter but also to the context in which the matter arises in the legal proceedings.
Application of first stage of analysis
In this case, the substance of the dispute was whether the supply contracts and guarantees had been obtained though bribery and whether the defendants had knowledge of the alleged illegality of the guarantees and Mr Chang’s lack of authority to execute them. The validity and genuineness of the supply contracts was not an essential part of the claims, and nor was it an essential part of any defences.
The court did accept that the supply contracts might be relevant when it came to the quantification of Mozambique’s loss beyond the amount of the bribes themselves. This is because part of Privinvest’s defence here was that the supply contracts gave something of considerable value which Mozambique has squandered. However the court said that it did not have to decide this point because of its conclusion at the second stage of the analysis.
Application of second stage of analysis
The court had to determine whether each matter identified fell within the scope of the arbitration agreement. This involved construction of the individual agreement, which in this case was a question of Swiss law. The court held that the claims did not fall within the scope of the arbitration clauses because they were not sufficiently connected to the supply contracts.
As to the supply contracts being potentially relevant to Privinvest’s partial defence on quantum, the court said that when ascertaining the scope of an arbitration agreement, it must have regard to what rational businesspeople would contemplate. Parties to an arbitration agreement are deemed to have intended that arbitration should be the single forum for resolution of their disputes rather than the court (this is the approach in both Swiss and English law). However common sense would suggest that rational businesspeople would not seek to send to arbitration such a subordinate factual issue arising in such legal proceedings. Therefore there should not be a partial stay for this matter.
Comment
It will usually be clear whether a matter is one which the parties had agreed to arbitrate, but with the increasing incidence of fraud-related claims, the cases in which it may become harder to identify may increase, and so this is timely guidance from the Supreme Court.