The UK Supreme Court’s recent judgment in Republic of Mozambique v. Privinvest Shipbuilding SAL and others, provides an extremely valuable analysis of the proper basis for staying legal proceedings in favour of arbitration under section 9 of the Arbitration Act 1996.
Between 2013 and 2014, three companies wholly owned by Mozambique entered into contracts with companies in the Privinvest Group for the supply of equipment and services for development of Mozambique’s Exclusive Economic Zone. These contracts were governed by Swiss law and contained arbitration clauses.
To fund these supply contracts, the companies borrowed funds from four banks, including three in the Credit Suisse Group. This borrowing was secured by sovereign guarantees granted by Mozambique. These guarantees were governed by English law and gave exclusive jurisdiction to the courts of England and Wales.
In 2019, Mozambique commenced proceedings in the English High Court against the Privinvest Group companies and the Credit Suisse banks, together with several employees of both. Mozambique claimed that it had been a victim of a conspiracy involving the payment of bribes by Privinvest companies to corrupt state officials and employees of Credit Suisse, which exposed Mozambique to potential liabilities of approximately US$2 billion under the guarantees. Mozambique brought claims of bribery, unlawful means conspiracy and dishonest assistance.
Section 9 application
Privinvest applied for a stay of the English High Court proceedings, pursuant to section 9 of the Arbitration Act 1996. Section 9 provides that a party to an arbitration agreement against whom legal proceedings are brought can apply to the court to stay proceedings ‘in respect of a matter which under the agreement is to be referred to arbitration’.
Privinvest submitted that, as Mozambique’s claims against it involved determination of whether the supply contracts were valid and genuine, those claims were ‘matters’ within the scope of the arbitration agreements in the supply contracts.
Judgments of the lower courts
The High Court refused the application for the stay, holding that Mozambique’s claims were not sufficiently connected with the supply contracts as to fall within the arbitration clauses contained therein.
The Privinvest companies appealed to the Court of Appeal, which overturned the High Court’s decision. The Court of Appeal considered that the ‘matters’ in respect of which the legal proceedings were brought against the Privinvest companies included the question of whether the supply contracts were valid and genuine, concluding that – as a finding that the contracts were valid and genuine would be a defence to all the claims against the Privinvest companies – all those claims therefore fell within the scope of the arbitration agreements in the supply contracts.
Mozambique appealed to the Supreme Court arguing, among other things, that the Court of Appeal had erred in its analysis of the meaning of ‘matter’. It submitted that the commercial soundness of the supply contracts were mere factual issues that did not amount to a relevant legal defence to Mozambique’s claim and were therefore not ‘matters’ in respect of which the legal proceedings had been brought.
The Supreme Court’s decision
The Supreme Court unanimously allowed the appeal.
Having reviewed prominent cases from England, Hong Kong, Singapore and Australia on the determination of ‘matters’ which must be referred to arbitration, Lord Patrick Hodge concluded that there is now a general international consensus on the point among the leading jurisdictions involved in international arbitration in the common law world, which are signatories of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (known as the New York Convention).
- The court must adopt a two-stage process: First, the court must determine what the matters are which the parties have raised or foreseeably will raise in the court proceedings. Second, the court must determine in relation to each such matter whether it falls within the scope of the arbitration agreement.
- The ‘matter’ need not encompass the whole of the dispute between the parties.
- A ‘matter’ is a substantial issue that is legally relevant to a claim or defence, or foreseeable defence, in the legal proceedings and is susceptible to be determined by an arbitrator as a discrete dispute. If the ‘matter’ is not an essential element of the claim or of a relevant defence to that claim, it is not a matter in respect of which the legal proceedings are brought.
- The exercise involving the judicial evaluation of the substance and relevance of a ‘matter’ entails a question of judgment and the application of common sense, rather than a mechanistic exercise. It is not sufficient merely to identify that an issue is capable of constituting a dispute or difference 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.
Examining each of Mozambique’s claims for bribery, unlawful means conspiracy or dishonest assistance, Lord Hodge concluded that none required an examination of the validity of the supply contracts, as a defence that the supply contracts were valid would not be a relevant defence in respect of liability.
Lord Hodge acknowledged that if there were bribes, the bribes would have been to obtain the supply contracts and Mozambique’s guarantees, and that it may well be that the price fixed in the supply contracts was such as to fund the bribes. However, he considered that that would simply have been the mechanism by which the bribes were funded, and that was not a substantial matter in the proceedings.
While evaluation of whether the supply contracts were valid was not relevant to the question of liability, the extent to which Mozambique received value under the contracts clearly was relevant to the quantification of damages. Lord Hodge expressed the view that the quantification of loss ‘may be’ a substantial matter which is in dispute between the parties. However, he did not have to reach a firm conclusion on this as he found that the dispute on quantification was not within the scope of the arbitration agreements.
On the basis of the above, with regard to the scope of the arbitration agreements, the only question was whether the partial defence on quantum arising in the context of the legal proceedings – in which the legal claims were not within the scope of the arbitration agreements – was a matter which the parties are to be treated as having agreed to refer to arbitration.
As Lord Hodge explained, in ascertaining the scope of an arbitration agreement, the court must have regard to what rational businesspeople would contemplate. In his view, rational businesspeople would not seek to send to arbitration the subordinate factual issue of quantum when all issues relating to liability will be determined in court proceedings. In support of this conclusion, Lord Hodge noted that there are no recorded cases under section 9 of the court granting a partial stay of legal proceedings for determination by an arbitral tribunal of a dispute about the quantification of damages claimed in those legal proceedings in which the contested legal claims were beyond the scope of the arbitration agreement.
The judgment is an extremely valuable analysis of relevant case law – both domestic and international – on the interpretation of stay of domestic court proceedings in favour of arbitration. While the case provides very helpful guidance, the fact that the analysis of section 9 application from case to case necessarily involves the use of common sense means that there is still plenty of scope for dispute between parties.
In this particular case, while at first blush the commerciality of the underlying supply agreements may appear to be inextricably interwoven with the claims in these proceedings, the close analysis of the elements of the claim and the substance of the dispute demonstrates that they are not. This case shows how easy it is to be tripped up by taking an oversimplified or broad-brush approach to the evaluation of a claim.
  UKSC 32.