Staying court proceedings: what’s the matter?

By Jeremy Glover, Partner, Fenwick Elliott

In the case of Republic of Mozambique v Privinvest Shipbuilding SAL (Holding) and others [2023] UKSC 32, the Supreme Court allowed an appeal by the Republic of Mozambique (“the Republic”) against a decision staying court proceedings under section 9 of the Arbitration Act 1996. 

The decision here turned on a discussion about how to identify the “matter”caught by the arbitration clause in question.

Section 9 of the 1996 Act provides:

“(1) 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)

(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.”

The Republic had entered into three contracts with Privinvest Shipbuilding SAL (“Privinvest”)for the supply of vessels and shipping infrastructure as part of the Republic’s development of its Exclusive Economic Zone (“EEZ”), in particular through tuna fishing and the exploitation of its gas resources. The contracts contained arbitration agreements. A dispute arose after the Republic alleged that Privinvest was paying bribes to the Republic’s offices. The Republic said it was exposed to a potential liability of about US$2 billion and issued court proceedings against Privinvest who applied for a stay. 

The Commercial Court

Each of the supply contracts had different arbitration agreements. In the Commercial Court, Waksman J stated that the issue of law which arose was how to approach the identification of the “matter” which was caught by the arbitration clause, in respect of which the legal proceedings had been brought. The judge analysed the Republic’s claim as being the alleged corrupt procuring by the defendants of transactions with the special purpose vehicles (“the SPVs”) or the Republic, which were (i) the supply contracts; (ii) the financial facilities; and (iii) the guarantees. The alleged corrupt scheme involved all three elements of which the guarantees were the key element for the Republic as they exposed the Republic to loss. 

Waksman J concluded that the disputes raised by the Republic’s claims did not have a sufficient connection with the individual supply contracts. The judge noted that there were three separate arbitration clauses in three separate supply contracts which suggested that the parties intended that, in each agreement, the dispute resolution procedure was principally for the particular supply contract. The judge stated that: 

“The more disparate and disjointed the collection of dispute resolution clauses (or absence in the case of the Proindicus sub-contract), the more one should conclude that so far as is consistent with the language of the relevant arbitration clauses, they should be confined to their immediate contractual context. In other words, the potency of the Swiss version of the ‘one-stop shop principle’ is much attenuated”.

The judge analysed each of the claims listed and concluded that each was not sufficiently connected to the supply contracts to fall within the relevant arbitration clauses. The Court of Appeal disagreed. 

The Court of Appeal, in allowing the appeal, considered that it was reasonably foreseeable that the validity of the supply contracts was bound to be relied on by Privinvest. The Court of Appeal also emphasised the sanctity of the parties’ agreement and stated: 

“Thus, whether or not there is futility in practical terms of any stay is immaterial. Equally, the fact that there may be (on the facts of this case particularly acute) unwelcome case management complications if all or parts of claims are stayed is irrelevant. These are complexities which flow from s. 9 and ones which will often arise in multi-party, multi-issue litigation such as this”.

Supreme Court

In the Supreme Court, Lord Hodge considered the meaning of a “matter” in respect of which legal proceedings are brought. Section 9 involved a two-stage process. 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 on its true construction.

Having reviewed a number of decisions including cases from Australia and Singapore, Lord Hodge said that he considered that there was now a “general international consensus among the leading jurisdictions involved in international arbitration in the common law world which are signatories of the New York Convention on the determination of ‘matters’” which must be referred to arbitration.

He summarised that consensus as follows:

1. The court, in its consideration of such an application, adopts 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, and second, the court must determine in relation to each such matter whether it falls within the scope of the arbitration agreement. In carrying out this exercise, the court must ascertain the substance of the dispute or disputes between the parties, including taking into account all reasonably foreseeable defences to the claim or part of the claim.
2. The “matter” need not encompass the whole of the dispute between the parties.
3. A “matter” is a substantial issue that is legally relevant to a claim or a defence, or foreseeable defence, in the legal proceedings, and is susceptible to be determined by an arbitrator as a discrete dispute. If it 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. A “matter” is something more than a mere issue or question that might fall for decision in the court proceedings or in the arbitral proceedings.
4. A court should approach its evaluation by the application of judgment and the application of common sense, not a mechanistic exercise. It is not simply evaluating whether an issue is capable of constituting a dispute or difference within the scope of an arbitration agreement. The evaluation must consider whether the issue was 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. 

In addition, although there was not (yet) consensus, there was a fifth point. When turning to the second stage of the analysis, namely whether the matter falls within the scope of the arbitration agreement on its true construction, 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.

Lord Hodge said that in addressing the first stage of the section 9 exercise, the court was not tied to the pleadings but should look to the substance of the claims and likely defences. Here, standing back from the detail, it was clear, first, that in seeking damages resulting from the entering into the guarantees as part of the three transactions, the Republic was asserting that it did not get value for the monetary obligations which were purportedly entered into on its behalf. Were it otherwise, the Republic would not be seeking the repayment of any sums for which it might be held liable under the guarantees. Second, it is clear that no challenge was made to the validity of the supply contracts; instead, damages and indemnities were sought.

The components of a claim for bribery are (i) that a secret payment or other inducement has been made to an agent which gives rise to a realistic prospect of a conflict between the agent’s personal interest and that of his principal; and (ii) the recipient of the bribe (or the person at whose order the bribe is made) must be someone with a role in the decision-making process in relation to the transaction in question. But the payment does not need to be linked to a particular transaction; it is sufficient that the agent is tainted with bribery at the time of the transaction between the payer of the bribe and the principal. 

The claim here did not require an examination of the validity of any of the supply contracts. Nor was it necessary to prove dishonesty or that any fraudulent representation was made to the principal. Further, a defence that the supply contracts were valid and were on commercial terms would not be relevant to the question of a defendant’s liability to account for the bribe. The law assumes that the price of the goods and services purchased by or on behalf of the principal was increased by at least the amount of the bribe.

Lord Hodge said that, standing back from the detail, if there were bribes, the bribes would have been to obtain the supply contracts and the Republic’s guarantees. It may well be that the price fixed in one or more of the supply contracts was such as to fund the payments which are alleged to be bribes. But that was simply the mechanism by which the payments were funded. In relation to the question of Privinvest’s liability, the commerciality of the supply contracts or the value for money given by the implementation of those contracts were not matters in respect of which the legal proceedings were brought.

Lord Hodge agreed with Waksman J that the Republic’s claims did not fall within the scope of the three arbitration agreements. This left the question as to whether, in the context of the legal claims which the Republic pursued, the partial defence on quantum, namely that each of the supply contracts gave something of considerable value which the Republic had squandered, gave rise to a dispute referable to arbitration under the arbitration agreement contained in each of the supply contracts which the Privinvest supply companies entered into with the SPVs. 

Lord Hodge agreed with Waksman J that the existence of multiple arbitration clauses here suggested that a narrow approach to the sufficiency of the connection was required. He stated that the parties must have intended that each provision was a dispute resolution procedure principally intended for that particular contract. That was a common-sense proposition in the context of a dispute involving many parties and many contracts.

Lord Hodge said that in ascertaining the scope of an arbitration agreement, the court must have regard to what rational businesspeople would contemplate. The Swiss law principle of “in favorem arbitri” in the construction of an arbitration agreement reflected the idea that parties to an arbitration agreement were deemed to have intended that arbitration should be the single forum for resolution of their disputes rather than the court. This was analogous to the approach in English law: rational businesspeople are likely to intend that any dispute arising out of their contractual relationship be decided by the same tribunal. 

Here, there was no question of the arbitration agreements extending to cover the Republic’s allegations on which it relied to establish the legal liability of Privinvest. The question for the court was whether the partial defence on quantum arising in the context of these 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. Lord Hodge said that it was not: “Section 9 of the 1996 Act is to be applied with common sense. Rational businesspeople would not seek to send to arbitration such a subordinate factual issue arising in such legal proceedings and the arbitration agreements must be construed accordingly.”

To reinforce this point, Lord Hodge noted that there were also no recorded cases under section 9 of the court granting a partial stay of legal proceedings for the 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 an arbitration agreement. In other words, there was no evidence of court decisions effecting the bifurcation of a dispute as to quantification of damages from contested claims as to liability.

The Republic’s appeal was allowed. 

Conclusions

The decision establishes a clear set of principles to be applied whenever the question arises. In the context of an application for a stay under section 9 of the 1996 Arbitration Act, an issue in the proceedings is a "matter" that the parties have agreed to refer to arbitration. Lord Hodge in the Supreme Court focussed on the need to adopt a common-sense approach in identifying the real substance of the dispute, which is not something that is always found in the formal pleadings. 

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