UK Supreme Court interprets the "stay" provisions of s9 of the Arbitration Act 1996: rules Mozambique's claims fall outside scope of arbitration agreements and rejects s9 application for stay

Introduction

In Republic of Mozambique v Privinvest Shipbuilding SAL and others [2023] UKSC 32, the Supreme Court has unanimously found the Republic of Mozambique (Mozambique)'s claims for, among other things, bribery, conspiracy and dishonest assistance against the defendants to be "matters" which fall outside the scope of the arbitration agreements in a number of related supply contracts, for the purposes of section 9 of the Arbitration Act 1996 (the Act). Accordingly, the claims brought in the English court will not be stayed and can proceed to trial.

This is the first time that the interpretation and application of the stay provisions of s9 of the Act have been considered by the Supreme Court.

Background

The underlying dispute concerns three supply contracts for maritime projects developing Mozambique's exclusive economic zone (the supply contracts). Mozambique established three Special Purpose Vehicles (SPVs) which entered into the supply contracts with several shipping companies (Privinvest). Each of these supply contracts was governed by Swiss law and contained Swiss-seated arbitration clauses.

Privinvest subcontracted its performance of the supply contracts. The SPVs took out loans and bonds from several banks (the loan agreements) to finance the sums they owed under the supply contracts. Mozambique guaranteed the SPVs' performance of their obligations under the loan agreements by providing sovereign guarantees to the banks. The loan agreements and the guarantees were governed by English law and provided for the exclusive jurisdiction of the English courts.

Mozambique commenced proceedings in the English court against Privinvest and others in 2019 claiming it is a victim of a conspiracy by the defendants and alleging that Privinvest and its owner paid bribes to state and bank officials to procure the supply contracts and the loan agreements which were backed by the guarantees. Mozambique claimed that it had incurred c.$2 billion of liability under the guarantees due to these alleged actions. In response, Privinvest and its subcontractors commenced arbitrations against the SPVs and Mozambique under the supply contracts. Privinvest also made an application under s9 of the Act for a stay of the English court proceedings in favour of arbitration. The key issue was therefore whether the matters in the legal proceedings Mozambique brought before the English court were matters which the parties agreed to arbitrate within the scope of the arbitration clauses in the supply contracts.

The subcontractors (co-claimants in the arbitration) and Mozambique (co-respondents) were non-signatories to the supply contracts. However, the parties agreed that the English court was to decide the s9 application on the assumption that, as a matter of Swiss law (being the law of the arbitration agreements in the supply contracts), the non-signatories were bound by those arbitration agreements.

The High Court dismissed the stay applications under s9 of the Act, finding that Mozambique's claims were not sufficiently linked to the supply contracts and there were no "matters" in respect of which those legal proceedings had been brought which fell within the scope of the arbitration clauses. This position was overturned by the Court of Appeal which considered the validity of the supply contracts to be a part of the dispute before it and that the dispute therefore fell within the scope of the arbitration agreements in the supply contracts.

The Supreme Court's decision

The law

Section 9 of the Act states that " A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter" (emphasis added).

In considering the appeal, the Supreme Court reviewed the jurisprudence in relation to s9 and other similarly worded statutory provisions in other leading arbitral seats including Hong Kong, Australia and Singapore (recognising in particular that this was appropriate when the text of a legislative provision had its roots in an international convention, in this case the New York Convention 1958).  It then summarised the consensus position on the determination of "matters" which must be referred to arbitration, as follows:

1. S9 involves a two-stage approach. First, the court must identify the matter or matters in respect of which the legal proceedings are brought. Second, the court must ascertain whether the matter or matters fall within the scope of the arbitration agreement.
2. In carrying out this exercise, the court must ascertain the substance of the dispute or disputes between the parties, looking at the claimant's pleadings and foreseeable defences. However, the "matter" need not encompass the whole dispute between the parties.
3. A "matter" is a substantial issue that is legally relevant to a claim or defence, or foreseeable defence. If the "matter" is not an essential element of the claim or is peripheral or tangential to the subject matter of the legal proceedings, then it is not a matter in respect of which the legal proceedings are brought and does not, therefore, require a stay.
4. The evaluation of the substance and relevance of the "matter" is a question of judgment and common sense. It is not sufficient merely to identify that an issue is capable of constituting a dispute within the scope of an arbitration agreement without carrying out an evaluation of whether the issue is reasonably substantial and whether it is relevant to the outcome of the legal proceedings of which a party seeks a stay whether in whole or in part.
5. On the question of whether the "matter" falls 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. While it may not yet be a point on which there is international consensus, existing jurisprudence and common sense supported this final point.

Application to this case

Mozambique's claim involved allegations against Privinvest and others of, amongst other things, payment of bribes, conspiracy to injure Mozambique, unlawful means conspiracy, dishonest assistance and knowing receipt. In essence, Mozambique claimed that it did not get value for money from the guarantees. The Supreme Court noted that Mozambique, having withdrawn certain of its claims, did not challenge the validity of the supply contracts.

The Supreme Court assessed each of the grounds of claim, alongside Privinvest's defences, in turn. It found that it was not necessary for the court to examine the validity of the supply contracts in order to assess Mozambique's claims in the proceedings. The validity and genuineness of the supply contracts were not an essential part of Privinvest's defence to Mozambique's claims and the question of Privinvest's knowledge of providing "substandard goods and services at inflated prices" was not an essential part of Mozambique's claims (and proving the opposite was true was not an essential part of Privinvest's defence to such claims).

The Supreme Court concluded that the commerciality of the supply contracts or the value for money of those contracts were not "matters" in respect of which the legal proceedings were brought. Accordingly, the claims and defences brought in the legal proceedings were not "matters" which were to be referred to arbitration and a stay under s9 should not be ordered.

Did a partial defence on quantum claimed affect the Supreme Court's view?

Privinvest argued that the quantification of Mozambique's claims was, itself, a "matter" in the legal proceedings.  Privinvest asserted that it provided valuable goods and services under the supply contracts that Mozambique had "squandered", and that this value should reduce any damages claimed by Mozambique. The question before the court was whether, under Swiss law, this dispute and Privinvest's partial defence to the damages claimed was within the scope of the arbitration agreements.

The Supreme Court found that in adopting a common-sense approach to the substance of a commercial dispute, the extent of loss and damage allegedly suffered by the claimant may be a substantial matter which is in dispute between the parties and that in this case, the loss allegedly suffered by Mozambique which arises from the implementation of the supply contracts was a significant part of the commercial dispute between the parties. However, the court found it was unnecessary to decide whether or not this is sufficient to make it a “matter” within the legal proceedings because of the Supreme Court's interpretation of the scope of each of the three arbitration agreements.

The Supreme Court agreed with the High Court's view that the existence of multiple different arbitration clauses in each of the supply contracts meant that the parties must have intended that each provision was intended principally only for that particular contract. This "narrow approach" was a "common sense proposition" in a dispute involving many parties and many contracts. Accordingly, the Supreme Court considered that it must have regard to what "rational businesspeople" would think when ascertaining the scope of an arbitration agreement. In this case, the partial defence arose in the context of legal proceedings where the claims advanced were outside the scope of the arbitration agreement, so, in this context, rational businesspeople would not intend or want such a "subordinate factual issue" to be arbitrated. The arbitration agreements must be construed accordingly.

Comment

This judgment clarifies the English courts' approach to determining whether matters fall within the scope of an arbitration agreement for the purposes of a stay under s9 of the Act. It demonstrates that the court will analyse the substance of claims rather than the way they are presented by the parties. If a "matter" is not an essential element of the claim, or relevant defence to that claim, then it is not a "matter" which requires a stay.

A broadly drafted arbitration clause will usually encompass most possible disputes between contracting parties. However, this case highlights the particular challenges which may be presented by fraud or corruption claims, particularly where the factual matrix is broader than the contract containing the arbitration agreement. These claims can raise more substantive jurisdictional issues as to whether or not they fall within the scope of the arbitration clause and the outcome can, as in this dispute, be highly fact and case specific. Parties are advised to be aware of this point and the attendant risk of disputes across more than one forum.

While this is a decision of the Supreme Court of the United Kingdom, the judgment recognises that s9 of the Act has its roots in an international treaty, the New York Convention 1958. The careful consideration of the jurisprudence of other jurisdictions and the Supreme Court's interpretation and application of similarly worded stay provisions may therefore give this decision a wider international relevance.

This judgment means that the litigation brought by Mozambique against Privinvest and others will now proceed to trial, currently scheduled to start in early October.

For more information, please contact Craig Tevendale, Partner, Hannah Ambrose, Partner, Vanessa Naish, Professional Support Consultant, Liz Kantor, Professional Support Lawyer or your usual HSF contact.

The authors would like to thank Sihame Sebbar for her contribution towards this post