Clarification from the UK Supreme Court on a stay of legal proceedings under Section 9 Arbitration Act 1996

11 minute read
12 October 2023

The English courts have recently considered relevant jurisprudence on the matter of a stay of legal proceedings in favour of an arbitration agreement. In Republic of Mozambique (acting through its Attorney General) (Appellant) v Privinvest Shipbuilding SAL (Holding) and others (Respondents) (, the UK Supreme Court overturned a Court of Appeal decision and refused to stay proceedings brought by the Republic of Mozambique ("Mozambique") in the English courts against companies in the Privinvest group ("Privinvest").

Disputes arose between Mozambique and Privinvest in respect of three supply contracts, all of which contained arbitration agreements. Mozambique however referred claims alleging bribery, conspiracy and fraud to the English courts in February 2019. In response, Privinvest applied to the English courts for a stay under Section 9 of the Arbitration Act 1996, claiming that Mozambique's claims fell within the scope of the arbitration agreements.

At first instance, the Commercial Court rejected Privinvest's application, finding the disputes outside the scope of the arbitration agreements contained within the contracts. The Court of Appeal however later upheld the application, finding that a possible defence to Mozambique's claims, as to the validity of the supply contracts, created a sufficient connection between the scope of the arbitration agreements. The stay sought by Privinvest was therefore granted.

Mozambique appealed to the Supreme Court who allowed the appeal. In considering the appeal, the Supreme Court provided insight into the principles that should be applied to a Section 9 application and which will be widely applicable.

Background to the application

  • The dispute arose in relation to three supply contracts entered into between three special purpose vehicles ("SPVs") owned by Mozambique and three Privinvest supply companies. The supply contracts were entered into in 2013 and 2014 in connection with the development of the Republic of Mozambique's Exclusive Economic Zone, particularly through tuna fishing (hence the case being referred to as the 'tuna bonds' scandal).
  • Mozambique secured loans from London based banks to finance its purchase of equipment and services under the supply contracts, and the borrowing was secured by sovereign guarantees from the Republic of Mozambique (the "finance guarantees").
  • Privinvest and the other counter-parties to the supply contracts then subcontracted their obligations on a back-to-back basis to related entities.
  • The supply contracts each contained arbitration agreements. The supply contracts and arbitration agreements were governed by Swiss law.
  • Privinvest claim that the supply contracts have been essentially performed and the goods delivered. Mozambique does not accept this, claiming that what Privinvest has supplied does not conform to contract or is not of material benefit to Mozambique.
  • Mozambique commenced proceedings in the English courts in February 2019 claiming conspiracy and alleging that Privinvest had paid bribes to officials, exposing it to a potential liability of USD 2 billion under the finance guarantees.
  • In November 2019, Privinvest applied for a stay of the proceedings under Section 9 of the Arbitration Act.

Stays under Section 9 Arbitration Act 1996

Section 9 of the Arbitration Act provides that a party who has legal proceedings brought against them in respect of a "matter" which falls within the scope of an arbitration agreement to which they are party may apply to the court to stay the proceedings. Unless the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed, a stay will be granted.

First instance – stay dismissed

It was agreed at a directions hearing of the Section 9 application that the issue was to be resolved on the presumption that, as a matter of Swiss law, the parties were bound by the arbitration agreements and evidence was heard from Swiss law experts. Despite the back-to-back nature of the sub-contracts, there were differences in that the governing law and dispute resolution provisions differed to those of the Swiss law supply contracts.

The judge concluded that the issues in question, arising from Mozambique's claims, were not sufficiently connected with the individual supply contracts to fall within the respective arbitration agreements, deciding that there were no matters in respect of which the legal proceedings had been brought which were subject to the arbitration agreements. Privinvest's Section 9 application for a stay was therefore dismissed.

Court of Appeal – stay granted

Privinvest sought and was granted permission to appeal. Prior to the hearing, Mozambique agreed that certain matters did fall within the arbitration agreements and so would not contest those but maintained its allegations in relation to other matters.

The Court of Appeal went on to allow Privinvest's appeal, declaring that all of Mozambique's claims fell with the scope of the arbitration agreements.

The Supreme Court decision

The Supreme Court, on appeal, considered only Section 9 and the scope of the arbitration agreements and questions of liability were to be addressed separately.

The Supreme Court unanimously overturned the Court of Appeal's decision, finding that Mozambique's claims did not fall within the scope of the arbitration agreements. The claims will therefore be heard by the English courts, rather than privately by an arbitral tribunal.

Key takeaways

In considering what is a "matter" for the purposes of Section 9, the Supreme Court considered relevant jurisprudence including with reference to Article II(3) of the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the "New York Convention"), which is given effect in England through Section 9. The court cited the relevance of the New York Convention including with reference to its judgment in Enka Insaat, noting that it was also relevant to consider the jurisprudence of other countries as guides to interpretation of Section 9 so far as they have similarly worded provisions. The court concluded that there is a "general international consensus" in international arbitration in common law jurisdictions in determining matters that should be referred to arbitration. This was summarised:

  • First, in a two stage process, the court must:
    • Determine what the matters are which the parties have raised or foreseeably will raise in the court proceedings.
    • Determine in relation to each 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 should, applying practical and common-sense enquiry, be a substantial issue, an essential element of a claim or of a relevant defence to the claim and is not "peripheral or tangential to the subject matter of the legal proceedings". It is something more than "a mere issue or question" and there should be focus on the substantial nature and relevance of a referred matter to the legal proceedings. The judicial evaluation of the substance and relevance of the matter requires a question of judgement and the application of common sense – is the issue reasonably substantial and is it relevant to the outcome of the legal proceedings?
  • This judicial evaluation of the substance and relevance of the matter requires judgement and the application of common sense. So, it is not sufficient to identify a matter "capable of constituting a dispute or difference with the scope of an arbitration agreement" without evaluating whether the issue is reasonably substantial or relevant to the outcome of the proceedings.
  • The judgment contemplates a further element to this assessment, that common sense must be applied in undertaking the second part of the part assessment, as to whether a matter falls within the scope of the arbitration agreement, so having regard to the true nature of the matter and its context within the legal proceedings.

If a matter is not an essential element of the claim or a relevant defence to the claim then it is not a "matter" which requires a stay. Mozambique's claims fell outside the arbitration agreement.

The court must first identify the matters in relation to which the proceedings have been brought and then determine whether they fall within the scope of the arbitration agreement.

In applying that assessment to the case, the court noted that it was not tied to the pleadings but should look at the substance of the claims and likely defences. In doing so and considering the claims which were based on allegations of bribery, the court found that related issues including possible defences were not "matters" for the purposes of Section 9 and so the application should not be granted.

It was noted by the court that there may be a partial defence to quantification of the dispute that Mozambique had received benefit under the supply contracts but that it had squandered that value. However, in considering whether such a dispute would be sufficiently connected to the supply contracts, the court referred to "what rational businesspeople would contemplate" and a Swiss law principle that an arbitration agreement reflects the idea that parties to an arbitration agreement are deemed to have intended the arbitration be a single forum for their dispute but also to the common sense principle discussed above. That militated in favour of finding that the parties cannot have meant to send "such a subordinate factual issue" to arbitration, also noting that there were no recorded cases under Section 9 of a court granting a partial stay.

The Supreme Court's analysis provides helpful guidance as to what might be considered a "matter" for the purposes of a Section 9 application. The guidance is helpfully wide, taking into consideration international jurisprudence on the question with reference to the New York Convention to find "a general international consensus". Of course, the decision is fact specific, taking into consideration as it does a complex contractual matrix, and it is unlikely to have bearing on the English court's support for arbitration. It is though notable that, in this case, the presumption that parties intend for their disputes to be heard in one forum did not prevent the courts from concluding that these issues should be heard in court, whilst other issues in dispute between the parties would still be subject to arbitration.

If you have any questions about the points raised in this article, please contact Mike Stewart, Tom Price or Mary Lindsay.

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