Republic of Mozambique v. Privinvest Shipbuilding SAL (Holding) & Ors – UK Supreme Court gives important guidance on stays under Section 9 of the Arbitration Act 1996

On 20 September 2023, the UK Supreme Court handed down judgment in the long-running alleged fraud case, known as the ‘tuna bonds’ scandal, Republic of Mozambique v. Privinvest Shipbuilding SAL (Holding) & Others [2023] UKSC 32. The Supreme Court unanimously allowed the appeal with Lord Hodge giving the judgment (Lord Lloyd-Jones, Lord Hamblen, Lord Leggatt and Lord Richards agreeing).

Background

The disputes between the Claimant Republic of Mozambique (“Republic”) and the Defendants arose out of three transactions in 2013 and 2014, when three SPVs, each indirectly owned by the Republic, borrowed money from London-based banks, including various Credit Suisse entities, to finance the purchase of equipment and services under three supply contracts with some of the Defendants (“Supply Contracts”), in connection with the development of an Exclusive Economic Zone in the Republic, in particular through tuna fishing and gas exploitation.

The Supply Contracts were governed by Swiss law, and contained an arbitration agreement. The borrowing was secured by sovereign guarantees (“Guarantees”), signed by Mr. Manuel Chang, then the Republic’s Minister of Finance. 

The Republic commenced proceedings in the English High Court in respect of the Guarantees, alleging it was the victim of a conspiracy involving the Defendants, including Privinvest and its ultimate owner, whom it accuses of paying substantial bribes to corrupt officials of the Republic, and employees of Credit Suisse involved in funding the transactions. The conspiracy is alleged to have exposed the Republic to a potential liability of US$2 billion under the guarantees. The Republic brought claims for bribery; unlawful means conspiracy; dishonest assistance; knowing receipt; and proprietary claims.

The issue for the Supreme Court

The appeal was concerned with the interpretation and application of section 9 of the Arbitration Act 1996 (“Section 9”), and in particular the scope of the arbitration agreements within the Supply Contracts, and whether the ‘matters’ in the English court proceedings are ‘matters’ which the Parties agreed to send to arbitration, and as such whether the court proceedings should be stayed pending arbitration proceedings. Section 9(1) and (4) provide:

“(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.”

“(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.” 

For the purpose of determining the preliminary issue, the parties agreed that the court was to proceed on the assumption that the Republic is bound by the arbitration agreements. The issue for the court was whether the ‘matters’ which the Republic pursued fell within the scope of these arbitration agreements. 

Supreme Court’s Guidance on Section 9

The Supreme Court set out various findings of law clarifying the interpretation of Section 9 and similar legislative provisions:

• It is trite that English law adopts a pro-arbitration approach, which can involve a liberal interpretation of an arbitration agreement. This liberal approach forms the context in which the court must interpret Section 9.  [45]-[46]
• It is appropriate to consider the jurisprudence of several countries as guides to the interpretation of Section 9, in so far as they have statutory provisions worded in a similar way. There was a general international consensus among the leading jurisdictions involved in international arbitration in the common law world on the determination of ‘matters’. [71]-[78]
  
  o    First, in considering an application under Section 9 (or similar) this involves a two-stage process, the court must first identify the matter in respect of which proceedings are brought, then the court must ascertain whether it falls within the scope of the arbitration agreement on its true construction. This involves looking at the substance of the dispute.
  
  o    Second, the ‘matter’ need not encompass the whole of the dispute between the parties.
  
  o    Third, 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 issue. If a ‘matter’ is not an essential element of the claim/defence, it is not a matter in respect of which the legal proceedings are brought. It cannot be ‘peripheral or tangential’. 
  
  o    Fourth, the evaluation of the substance and relevance of the ‘matter’ entails a question of judgment and the application of common sense, rather than a mechanistic exercise. It is not sufficient merely to identify an issue capable of constituting a dispute/difference within the scope of an arbitration agreement, without evaluating whether the issue is reasonably substantial and relevant to the outcome of the legal proceedings of which a party seeks a stay. 
  
  o    Fifth, when turning to the second stage of the analysis, namely whether a 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 the context in which the matter arises in the legal proceedings. 
• The court in ascertaining the scope of an arbitration agreement must have regard to what rational business people would contemplate. Rational businesspeople are likely to intend that any dispute arising out of their contractual relationship be decided by the same tribunal. [105]

Application to Facts

Applying the two-stage test, the Supreme Court concluded that the Court of Appeal’s factual conclusions were wrong in deciding that certain issues were ‘matters’ within the English court proceedings. In particular, neither the validity and genuineness, nor the commerciality, of the Supply Contracts were substantial matters on which the Privinvest companies were bound to rely in the English court proceedings, i.e. they were not essential to any relevant defence to the Republic’s claims, and as such were not ‘matters’ under Section 9. [94]

Further, whilst the Republic might believe that Privinvest knew, when entering into the supply contracts, that it was providing substandard goods/services at inflated prices, this was not an essential part of the Republic’s claims, and proving the opposite was not an essential part of a relevant defence to those claims. [94]

A separate argument raised by the Privinvest companies, was that a partial defence raised on quantum, namely that each of the supply contracts gave something of value which the Republic squandered, gives rise to a dispute referable to arbitration. The Supreme Court found that this partial defence, arising in the context of legal proceedings, in which legal claims are not within the scope of the arbitration agreements, was not a ‘matter’ which the parties treated as having agreed to refer to arbitration. Rational businesspeople would not send to arbitration such a subordinate factual issue arising in such legal proceedings, and the arbitration agreements must be construed accordingly. [107]