September 26, 2023

United Kingdom Supreme Court Clarifies When Court Proceedings Will Be Stayed in Favour of Arbitration

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UNITED KINGDOM SUPREME COURT CLARIFIES WHEN COURT PROCEEDINGS WILL BE STAYED IN FAVOUR OF ARBITRATION

The U.K. Supreme Court has recently clarified the English courts’ power under Section 9 of the Arbitration Act 1996 (“Section 9”) to stay proceedings which are properly the subject of an arbitration agreement.

The decision in Mozambique v Privinvest[1] is notable insofar as it is the first time the Supreme Court has considered the English court’s power to order a stay under Section 9. The Supreme Court took the opportunity to rationalise and clarify the existing English case law and bring the interpretation of Section 9 by the English courts into line with international authorities on the same framework in the New York Convention.

The decision clarifies that the court must first seek to identify the “matters” in respect of which the proceedings have been brought, before determining whether they fall within the scope of a relevant arbitration agreement. The Court confirmed that what constitutes a “matter” for these purposes is a question of judgment and common sense but it must be a substantial issue that is legally relevant to a claim or a defence, or foreseeable defence, in the proceedings, and is capable of being determined by an arbitrator as a discrete dispute. Issues that are peripheral or tangential will not suffice.

From a practical perspective, Mozambique v Privinvest provides greater clarity as to how the English court will approach these questions in the context of a complex multi-jurisdictional, multi-agreement transaction.

Background

The decision of the Supreme Court was handed down in the context of the “tuna bonds” litigation, a complex set of disputes that arose in relation to three transactions intended to help develop the Republic of Mozambique’s maritime exclusive economic zone.

Each transaction involved a supply contract entered into between a special purpose vehicle wholly owned by Mozambique and one of several Privinvest companies. The supply contracts were each financed by a bank loan guaranteed by Mozambique. The supply contracts were governed by Swiss law and contained arbitration clauses providing that disputes should be referred to arbitration seated in Switzerland. Each of the loans and guarantees was governed by English law, with disputes subject to the exclusive jurisdiction of the courts of England and Wales.

In 2019, Mozambique brought a claim in the English courts against several of the counterparties to the transactions, including Privinvest and its affiliates. Mozambique alleged that Privinvest and its affiliates had paid substantial bribes to Mozambican officials and employees of the relevant banks to secure the transactions. Mozambique claimed that it was exposed to potential liabilities of up to US$2 billion and suffered other alleged losses as a result of the bribes. It sought to recover those losses through claims based on allegations of bribery, unlawful means conspiracy, dishonest assistance, knowing receipt and proprietary claims. Privinvest denied that the payments were bribes and argued that the supply contracts were valid, genuine, commercial contracts from which Mozambique derived real benefit.

Privinvest argued that the validity and commerciality of the supply contracts was an essential element of all the claims made against it and fell within the scope of the arbitration agreements. As such, Privinvest sought a stay of the proceedings under Section 9. Section 9 provides as follows:

“(1) A party to an arbitration agreement against whom legal proceedings are brought…in respect of a matter which under the agreement is to be referred to arbitration may…apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.

(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.”

Which issues in the claim constituted “matters” within the meaning of Section 9 and whether such matters were within the scope of the arbitration agreements in the supply contracts were questions that fell to be determined as a preliminary issue. At first instance, the High Court dismissed Privinvest’s application, holding that there was an insufficient connection between Mozambique’s claims and the validity and commerciality of the individual supply contracts. The Court of Appeal overturned the High Court’s decision, finding that the “matters” in respect of which the legal proceedings were brought included the validity and commerciality of the supply contracts, and that issue was sufficiently connected with the supply contracts so as to fall within the scope of the relevant arbitration agreements. The proceedings were therefore liable to be stayed under Section 9.

Supreme Court’s Decision

The Supreme Court’s unanimous judgment overturns the Court of Appeal’s decision, dismissing Privinvest’s application for a stay under Section 9. In short, the Supreme Court concluded that Mozambique’s claims were not “matters” within the scope of the arbitration agreements.

The Applicable Test Under Section 9

Section 9 gives effect to Article II(3) of the New York Convention. The Supreme Court therefore looked to international practice as a guide to the interpretation of the provision.

After considering relevant domestic and international authorities, the Supreme Court concluded that “there is now a general international consensus among the leading jurisdictions involved in international arbitration in the common law world…on the determination of ‘matters’ which must be referred to arbitration.” This consensus was that there is a two-stage approach, namely:

i) What are the “matters” which the parties have raised, or foreseeably will raise, in the court proceedings?

ii) In relation to each such “matter,” does it fall within the scope of the arbitration agreement?

The Supreme Court helpfully outlined several further propositions arising from the relevant authorities:

  • A “matter” for the purposes of Section 9 is “a substantial issue that is legally relevant to a claim or a defence, or a foreseeable defence, in the legal proceedings, and is susceptible to be determined by an arbitrator as a discrete dispute.”
  • This excludes matters that are “peripheral or tangential to the subject matter of the legal proceedings.”
  • A “matter” need not encompass the whole of a dispute—Section 9 empowers the court to stay part of the proceedings if appropriate.
  • Whether a particular issue constitutes a “matter” for the purposes of Section 9 “entails a question of judgment and the application of common sense rather than a mechanistic exercise.” The court must evaluate “whether the issue is reasonably substantial and whether it is relevant to the outcome of the proceedings of which a party seeks a stay whether in whole or in part.”
  • When addressing the second stage of the test, “the court must have regard to…the context in which the ‘matter’ arises in the legal proceedings,” while also recognising a party’s right to determine which claims it wishes to advance.
  • However, the court should not be overly deferential to the formulation of a party’s pleadings. It should instead be looking to the substance of the dispute when applying the test.

What Were the “Matters” in Dispute?

In applying the first stage of the two-part test, the Supreme Court identified the substance of the parties’ dispute as being whether (1) the relevant transactions were secured through bribery and (2) Privinvest and its affiliates had knowledge of the alleged illegality at the relevant time.

By the time the case came before the Supreme Court, Mozambique had conceded that the validity of the supply contracts was a matter that fell within the arbitration agreements and it was no longer in issue. However, the Supreme Court found that the validity and commerciality of those agreements was not an issue that was relevant to establishing liability in each of Mozambique’s claims for (i) bribery, (ii) dishonest assistance and (iii) unlawful means conspiracy. All depended on the payment of bribes, which could have been paid whether or not the contracts were valid and binding.

In each case, provided Mozambique established that bribes had been paid by Privinvest, it would follow that Mozambique had suffered loss at least equal to the value of that bribe. The Supreme Court found, however, that the commerciality of the supply contracts, i.e. the extent to which Mozambique derived benefit from them, would be relevant to the quantification of any losses claimed by Mozambique over and above the value of the bribes paid.

While no authorities could be identified in which Section 9 had been invoked to stay a “matter” concerning quantification (which would effectively bifurcate the proceedings), the Supreme Court acknowledged that such questions could themselves often constitute substantial issues.

In this case, the extent of any losses caused to Mozambique through the implementation of the supply contracts formed “a significant part of the commercial dispute between the parties.” However, whether it constituted a “matter” for the purposes of Section 9 was moot, given the Supreme Court’s subsequent conclusions under the second limb of the test.

Were any “Matters” Within the Scope of the Arbitration Agreement?

In light of its reasoning under the first limb of the test, the only potential “matter” for the purpose of a stay under Section 9 identified by the Supreme Court was the quantification of Mozambique’s alleged financial losses arising out of the supply contracts.

The Supreme Court reiterated that the scope of an arbitration agreement must be determined by reference “to what rational businesspeople would contemplate,” observing that “rational businesspeople are likely to intend that any dispute arising out of their contractual relationship be decided by the same tribunal.” The parties in this case were not to be taken to have agreed to refer the quantification of damages to arbitration in proceedings where the underlying legal claims were themselves otherwise outside the scope of the arbitration agreements.

As a final point, the Court also endorsed the proposition (which had been rejected by the Court of Appeal) that a party may be prevented from enforcing their right to arbitration (via a stay under Section 9) where they had “no real or proper purpose” for doing so. In the context of related contribution proceedings, issues of quantum would have to be dealt with and therefore the parties had lost, or were expected to lose, confidentiality in respect of that issue. In those circumstances, the Court indicated that, even if the quantification of the claim did fall within the scope of the arbitration agreements, it was “difficult to see a real and proper purpose” for seeking a stay.

Comment

This case shows the potential complexities that can arise when including different dispute resolution provisions in agreements related to the same sets of transactions. Although the courts of arbitration-friendly jurisdictions will still generally seek to give effect to the presumption that rational businesspeople intend for all disputes arising between them to be heard in the same forum (the so-called Fiona Trust principle), this presumption does not displace the requirement to interpret an arbitration agreement under the law applicable to it. Commercial parties should seek specialist advice when considering the dispute resolution mechanisms in their contracts and their efficacy in the event a multi-contract dispute arises.

With regard to Section 9 specifically, the Supreme Court’s decision is, with respect, sensible and practical. The Supreme Court was careful to ensure that English law is aligned with the international framework supporting arbitration and the authorities from other arbitration-friendly common law jurisdictions.

One comparatively minor aspect of the Supreme Court’s judgment that is perhaps more controversial is the suggestion that a party may be deprived of its right to a stay in circumstances where the court finds that there is no “real and proper purpose” for enforcing the arbitration agreement. There is no such exception in the wording of Section 9, and the section provides the Court with no discretion in ordering a stay. The Supreme Court observed that, in this case, there may be no real and proper purpose in Privinvest enforcing the arbitration agreement given the likelihood the issue of quantum would have to be considered in the contribution proceedings anyway and there would be a loss of confidentiality in respect of that issue. That conclusion perhaps downplays the other potential or perceived benefits of settling a dispute by way of arbitration in a given jurisdiction, under a specific set of rules, and relies on a somewhat speculative assessment of how the proceedings will play out.

While providing helpful clarification of what the applicable legal test is, the Court’s application of that test was (as it always will be) highly fact specific. The Court’s decision insofar as it concerns the application of the test may therefore be of limited practical guidance in complex disputes in the future.

Footnotes

[1] [2023] UKSC 32

Authors and Contributors

Jonathan Swil

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Matthew Skinner

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Chris Collins

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