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.

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445
Hannah Ambrose
Hannah Ambrose
Partner
+44 20 7466 7585
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112
Elizabeth Kantor
Elizabeth Kantor
Professional Support Lawyer
+44 20 7466 2406

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

ENGLISH COURT CONSIDERS STEPS IN LEGAL PROCEEDINGS WHICH PREVENT A SUCCESSFUL STAY APPLICATION

In Fairpark Estates Ltd and others v Heals Property Developments Ltd [2022] EWHC 496 (Ch), the English High Court upheld an order dismissing the appellants’ application for a stay of legal proceedings. The Court found that the appellants had taken steps in the proceedings to answer the substantive claims, so could not apply for a stay under s.9(3) of the Arbitration Act 1996 (Act).

HHJ Richard Williams held that the appellants took a step in the proceedings to answer the respondent’s claims by:

  1. providing final undertakings in a Consent Order which effectively disposed of an application for injunctive relief; and
  2. requesting and obtaining a further extension of time to respond to the monetary claims, and failing to reserve their rights to apply for a stay when doing so.

Continue reading

ENGLISH COURT DETERMINES THAT AN APPLICATION TO STAY LEGAL PROCEEDINGS IN FAVOUR OF ARBITRATION SHOULD BE HEARD BEFORE A SUMMARY JUDGMENT APPLICATION

In the recent case of Deposit Guarantee Fund for Individuals v Bank Frick & Co AG [2021] EWHC 3226 (Ch), the English High Court has held that a defendant’s application to stay court proceedings in favour of arbitration pursuant to s9 of the Arbitration Act 1996 (Act) should be heard before its alternative summary judgment application.

The Court also held that the defendant had not, in seeking for the summary judgment application to be heard prior to the stay application, taken a “step in the proceedings to answer the substantive claim”, within the meaning of s9(3) of the Act, such that its conduct did not constitute a submission by the defendant to the court’s jurisdiction so as to deprive it of the right to apply for a stay under the Act.

Continue reading

ENGLISH COURT CONSIDERS APPLICATION FOR PART 20 CLAIMS POTENTIALLY SUBJECT TO ARBITRATION AND ISSUE ESTOPPEL

In Tugushev v Orlov and others [2021] EWHC 926 (Comm), the English High Court refused to grant a defendant permission to pursue two claims against a co-defendant on the basis that they had agreed to refer them to arbitration. However, permission was granted for a third claim, despite the fact that the applicant had pursued foreign proceedings on some of the same issues in the past.

This decision confirms that English courts will interpret the scope of arbitration clauses when required, and in doing so, may find that they capture claims based on connected contracts between the same parties. The judgment also evidences a common sense approach to issue estoppel in circumstances where it might otherwise cause injustice.

Continue reading

ENGLISH HIGH COURT RESOLVES PRIMA FACIE CONFLICT BETWEEN DISPUTE RESOLUTION CLAUSES IN FAVOUR OF ARBITRATION AGREEMENT

In the recent decision in Melford Capital Holdings LLP and others v Digby [2021] EWHC 872 (Ch), the English High Court (the Court) resolved a prima facie conflict between two dispute resolution clauses in an agreement (one providing for the exclusive jurisdiction of the English courts and the other providing for arbitration) in favour of the arbitration clause. The Court interpreted the exclusive English jurisdiction clause as providing for the supervisory jurisdiction of the English courts.

Continue reading

ENGLISH HIGH COURT REJECTS DEFERRAL OF A STAY APPLICATION FOR LITIGATION WITH PARALLEL ARBITRATIONS ON FOOT

This post has been updated to reflect developments up to 17 March 2021.

In Republic of Mozambique v Credit Suisse International and others [2020] EWHC 1709 (Comm) here, the English High Court gave directions to proceed to a hearing of an application for a stay of English court proceedings under s9 of the 1996 Arbitration Act (the “Act“). The court rejected arguments brought by a number of defendants that determination of the s9 application should be deferred until the arbitrators in ongoing Swiss arbitrations had decided the question of jurisdiction. The court considered the effect on those defendants who were not party to the arbitrations and also the realistic timescale of 2.5-3 years before the arbitral proceedings would be completed. Based on that analysis, the court gave directions for the hearing of the s9 application in January 2021.

Continue reading

ENGLISH COURT OF APPEAL UPHOLDS STAY OF COURT PROCEEDINGS IN FAVOUR OF ARBITRATION, AS RELIEF UNDER THE COMPANIES ACT 2006 FELL WITHIN THE ARBITRATION AGREEMENT AND WAS ARBITRABLE

In Bridgehouse (Bradford No. 2) Ltd v BAE [2020] EWCA Civ 759, the English Court of Appeal upheld a stay of court proceedings in favour of arbitration under s9 of the English Arbitration Act 1996 (the “Arbitration Act”). The issue in dispute related to a company’s claim for relief under section 1028(3) of the Companies Act 2006 (the “Companies Act”), a provision which gives the court the power to give directions to put a previously dissolved but restored company in the same position as if it had never been dissolved.

The Court of Appeal rejected Bridgehouse’s (“BB2”) arguments, finding that the dispute fell within the parties’ arbitration agreement and was capable of arbitration. This decision is significant because it once again confirms the starting presumption that by entering into an arbitration agreement, the parties intend to arbitrate all disputes between them. It also analyses the extent to which disputes that engage public interest factors or may require the involvement of the courts or third parties can be arbitrable.

Facts

BAE Systems plc (“BAE”), entered into a contract (“the Contract”) with BB2 under which BAE was to procure the sale to BB2 of two parcels of land for sums totalling £93 million. The Contract stated that if BB2 suffered an “Event of Default”, BAE had the right to terminate the contract. An “Event of Default” included “being struck off the Register of Companies or being dissolved or ceasing for any reason to retain its corporate existence”.

On 31 May 2016, BB2 was struck off the register and dissolved for failure to file its accounts and annual return for the year ended 31 December 2015. BAE gave notice to terminate the Contract on the basis that there had been an Event of Default.

On 24 June 2016, BB2 made a successful application to the Registrar of Companies for administrative restoration. Section 1028(1) of the Companies Act provides that “The general effect of administrative restoration to the register is that the company is deemed to have continued in existence as if it had not been dissolved or struck off the register.” Therefore, BB2 was effectively restored to its pre-dissolution position.

The Contract contained two conflicting dispute resolution provisions. Clause 19.1(a) of the Contract was to apply if “any dispute arises between the parties to this agreement arising out of the provisions of this agreement”, in which case the dispute was to be referred to ad hoc arbitration (the “Arbitration Clause”). Separately, the Contract contained a jurisdiction clause providing that the English courts had exclusive jurisdiction to settle disputes.

BAE initially issued proceedings in the Chancery Division seeking a declaration that the Contract had been validly terminated. However, following BB2’s successful application under section 9 of the Arbitration Act for a stay in favour of arbitration, the matter was referred to arbitration.

The arbitration

The arbitrator determined that BAE had validly terminated the Contract. The Arbitrator rejected, among others, BB2’s contention that any effective termination had to be reassessed retrospectively as a result of BB2’s restoration to the register by virtue of section 1028(1) of the Companies Act. The Arbitrator considered that section 1028(1) did not serve to undo BAE’s decision to terminate the Contract during the period between striking off and restoration.

In its submissions in the arbitration, BB2 reserved the right (if its primary position failed) to make an application to the court for relief under section 1028(3) of the Companies Act, which provides that the court has the power to “give such directions and make such provision as seems just for placing the company and all other persons in the same position (as nearly as may be) as if the company had not been dissolved or struck off the register”.

Chancery Division proceedings

As foreshadowed in its reservation of rights in the arbitration, and following an unsuccessful challenge to the arbitral award under s69 of the Arbitration Act, BB2 issued a claim in the Chancery Division seeking relief under section 1028(3) of the Companies Act.

BAE applied for BB2’s claim to be stayed under s9 of the Arbitration Act, claiming that any such dispute should also be resolved by (a second) arbitration. BB2 opposed this application for a stay, arguing primarily that its claim did not fall within the scope of the Arbitration Clause of the Contract because it did not arise out of the provisions of that Contract. If that was wrong, BB2 contended that the arbitration agreement was “inoperative” because the dispute was not capable of being settled by arbitration, on the basis that either the Arbitration Act or English public policy prohibited the reference of statutory remedies such as this one to arbitration.

The Chancery Division granted a stay in favour of arbitration, and BB2 appealed. The questions for the Court of Appeal were:

  • Did the Arbitration Clause apply to BB2’s claim for relief under section 1028(3) of the Companies Act?
  • Was that application in any event capable of arbitration (in other words, was the dispute “arbitrable”)?

Court of Appeal proceedings

Applicability of the Arbitration Clause

BB2 argued that the issue between the parties no longer arose out of the provisions of the Contract, which was the purported scope of the Arbitration Clause. Instead, the question was whether statutory relief should be granted. BB2 relied in particular on the fact that section 1028(3) of the Companies Act is, in principle, capable of affecting third parties, who would not be bound by the outcome of the arbitration.  BB2 said that made it inherently unlikely that the Arbitration Clause was intended to apply to such matters. BB2 also relied on the exclusive jurisdiction clause in the Contract, which it said was evidence that the parties envisaged some matters would fall outside the scope of the Arbitration Clause and fall to be determined by the courts rather than in arbitration.

In rejecting these arguments and determining that the dispute “arose out of the provisions of the Contract”, the Court of Appeal held as follows:

  1. BB2 only required the relief because BAE had terminated the Contract. The fact that the dispute related to whether relief should be given pursuant to statute did not mean that it did not also arise out of the Contract.
  2. The question of whether BB2 was entitled to relief under section 1028(3) of the Companies Act was intimately connected with section 1028(1), a provision which had already been ruled on by the arbitrator, so it clearly fell within the arbitrator’s remit.
  3. Following Fiona Trust, there was a presumption that the parties are likely to have intended any dispute arising from their relationship to be decided by the same tribunal. It could not be inferred from the existence of the exclusive jurisdiction clause that the Arbitration Clause was of more limited application than it would otherwise be taken to have. The exclusive jurisdiction clause ensured that the English courts would have jurisdiction over issues arising from the arbitration or an expert determination (as the Contract provided that an independent person could act as an expert rather than arbitrator). The Arbitration Clause should therefore be presumed to apply to this dispute.
  4. Very often, and indeed in this case, an application under section 1028(3) of the Companies Act would be of no significance to anyone but the immediate parties. If in a particular case third party interests were engaged, that might have implications for the relief that an arbitrator could grant. But that did not mean that disputes as to the application of section 1028(3) could not fall within the Arbitration Clause at all.

Arbitrability

The court considered both whether the Companies Act prohibited reference to arbitration and whether arbitration was precluded by public policy considerations. BB2 argued that applications under section 1028(3) engaged public interest factors which rendered them unsuited to arbitration, which is why Parliament tasked “the court” with granting relief. They were ancillary to applications to restore a company to the register, which could not be determined by arbitration.

The Court of Appeal held that the dispute was capable of arbitration:

  1. There was nothing in the Companies Act which precluded arbitration, including the reference to “the court” in section 1028(3). The fact that an arbitrator cannot grant all the remedies available to a court is not a reason to treat an arbitration agreement as having no effect, and is not determinative of whether the subject matter is arbitrable.
  2. Section 1(b) of the Arbitration Act explains that it is founded on the principle that the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest. Following previous case law, this was a “demanding test”.
  3. Relief under section 1028(3) did not affect company status and an application for such relief would normally be private, affecting only the company and one or more specific individuals or entities. This was comparable to essentially “internal disputes” which were the subject of unfair prejudice petitions under section 994 of the Companies Act, and which had already been held by the English court to be arbitrable.[1] There was a distinction between statutory sections which were motivated by public policy considerations and those which needed to be the subject of court proceedings out of public interest.
  4. Applications under section 1028(3) of the Companies Act were not unsuited to an arbitrator: they required consideration of what directions and provisions were just for placing that company and other persons in the same position as if it had not been dissolved or struck off, which fell within the arbitrator’s capabilities. Although this could lead to procedural complexity (as there would inevitably need to be an order for restoration made by the court), procedural complexity alone would not generally be capable of giving rise to non-arbitrability. Indeed, section 48 of the Arbitration Act provides for an arbitrator to have “the same powers as the court…to order a party to do or refrain from doing anything”.

The Court of Appeal dismissed the appeal.

Comment

This case is a further reminder that the English courts will give short shrift to arguments which seek to undermine the parties’ arbitration agreement. Where parties agree to arbitrate, they will be held to their bargain, and the court will construe potentially competing dispute resolution provisions to give effect to that agreement to arbitrate.

The Court of Appeal’s judgment is also significant because it analyses the circumstances in which a dispute is capable of being arbitrated where statutory provisions involving the court are engaged. In addition to drawing a close analogy with Fulham Football Club (1987) Ltd v Richards (where arbitration was held to be available in the context of unfair prejudice petitions under section 994 of the Companies Act), the court also referred to a similar conclusion reached by the Singapore Court of Appeal in Tomulugen Holdings Ltd v Silica Investors, in which it held that minority shareholder claims are arbitrable.

It is clear that exceptions to party autonomy in order to safeguard public interests are subject to a demanding test – they require an impact on company status, and implications beyond the company and any particular counterparty (key examples of non-arbitrable questions being the winding up and restoration of companies). Disputes are likely to be arbitrable where they are private, essentially “internal” in nature and do not affect the “status” of the company. Moreover, procedural complexity or potential impact on third parties are not complete barriers to arbitration, even if some issues will need to be determined by the court.

For more information, please contact Craig Tevendale, Partner, Elizabeth Kantor, Associate, or your usual Herbert Smith Freehills contact.

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445

Elizabeth Kantor
Elizabeth Kantor
Senior Associate
+44 20 7466 2406


[1]        Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [2012] Ch 333