Mozambique v Privinvest: UK Supreme Court clarifies the conditions for a stay of court proceedings in favour of arbitration

On 20 September 2023, the UK Supreme Court delivered its judgment in Republic of Mozambique v Privinvest Shipbuilding SAL (Holding) and others [2023] UKSC 32. The judgment provides important guidance on the conditions for a stay of court proceedings brought in respect of a “matter” covered by an arbitration agreement, pursuant to section 9 of the Arbitration Act 1996.
 

Background

The Supreme Court's judgment arises out of the complex "tuna bonds" litigation in the English courts, concerning claims by Mozambique against Privinvest Shipbuilding (and other defendants) in respect of a US$2 billion fraud allegedly perpetrated by the defendants. In summary:

• In the litigation before the English courts, Mozambique alleges that it is the victim of various economic torts, including bribery and conspiracy, as a result of the defendants' conduct. The defendants’ wrongdoing is alleged to have resulted in Mozambique being exposed to a potential liability of US$2 billion (and various other losses) in connection with guarantees signed by Mozambique's former Finance Minister.
  
   
• A sub-group of the defendants – the Privinvest Defendants – alleged that Mozambique's claims were "matters" falling within the scope of arbitration agreements in Swiss-law governed supply contracts between the Privinvest Defendants and three Mozambique companies wholly owned by Mozambique (the Supply Agreements). (The Mozambique companies' obligations under the Supply Agreements had been financed by loans which were, in turn, covered by the guarantees provided by Mozambique.) 
  
   
• Mozambique was not a party to the Supply Agreements but, pursuant to Swiss law, the Privinvest Defendants argued that Mozambique was bound by the arbitration agreements in the Supply Agreements. The Privinvest Defendants therefore applied for a stay under section 9 of the Arbitration Act 1996, section 9(4) of which provides that the court should stay proceedings “in respect of a matter which…is to be referred to arbitration” under an arbitration agreement between the parties to the proceedings, unless the agreement is null and void, inoperative or incapable of being performed. 
  
   
• The Privinvest Defendants' section 9 application was refused at first instance, but allowed by the Court of Appeal in light of the reasonably foreseeable defences of the Privinvest Defendants (which the Court of Appeal held raised matters covered by the arbitration agreements in the Supply Agreements). 

Section 9 of the Arbitration Act 1996: the meaning of a “matter” and the importance of substance over form

In deciding Mozambique’s appeal, the Supreme Court (in a judgment written by Lord Hodge) emphasised the general “pro-arbitration” approach of the English courts, and drew on international case law to conclude that “there is 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.”

That consensus view was said to be reflected in four key propositions:

1. Section 9 requires a two-step process, considering (i) the substantive “matter” raised and (ii) whether that matter is within the scope of the arbitration agreement. In applying the two-step process, the court must ascertain the substance of the dispute – and not merely consider the formulations used in pleadings (which may be artificial or aimed at avoiding a reference to arbitration). The court should also take into account the defences raised, both actual and reasonably foreseeable.
   
    
2. The “matter” does not need to encompass the whole of the dispute between the parties. As such, a qualified (or "pro tanto") stay can be obtained, applying to the extent that a matter is within the scope of the arbitration agreement. Indeed, section 9 expressly provides for a stay in respect of some, but not all, of the relevant court proceedings.
   
    
3. A “matter” is a substantial issue that is (i) legally relevant to a claim or foreseeable defence and (ii) susceptible to be determined by an arbitrator as a discrete dispute. A “matter” is not, therefore, a peripheral issue or something tangential to the subject matter of the legal proceedings – instead, it must be an “essential element” of the claim or relevant defence.
   
    
4. Identifying the substance and relevance of a "matter" is an exercise of common sense and judgment – not a mechanistic exercise. This requires more than merely identifying that an issue is capable of constituting a dispute or difference within the scope of an arbitration agreement. Instead, what is required is a proper analysis as to whether the issue is: (i) “reasonably substantial” and (ii) relevant to the outcome of the legal proceedings in respect of which a stay is sought.

Lord Hodge also noted that the grant of a stay would be refused if a party "could have no real or proper purpose" for seeking that stay, adopting the analysis of Andrew Smith J in Lombard North Central plc v GATX [2013] Bus LR 68. In Lombard North, Andrew Smith J drew support for that proposition from one of the principles underlying the Arbitration Act 1996 in section 1(b) (i.e., that the autonomy of parties to agree on how to resolve their disputes is subject to such safeguards as are necessary in the public interest).

Lord Hodge also suggested that a further proposition could be supported (albeit to a lesser extent) by existing international case law: that the context in which the “matter” arises in legal proceedings could result in an otherwise substantial matter being excluded from the scope of the arbitration agreement. In support of this point, Lord Hodge referred to Autoridad del Canal de Panamá v Sacyr, SA [2018] 1 All ER (Comm) 916, in which a stay was refused on the basis that the matter identified in support of the stay was not, when viewed in context, the "substance" of the matter raised before the English courts.

Privinvest's application for a stay

Applying the approach set out above, the Supreme Court held that Mozambique's claims against the Privinvest Defendants (which arose under tortious causes of action for bribery, unlawful means conspiracy and dishonest assistance) concerned two matters: (1) whether the transactions, including both the Supply Agreements and the guarantees, were obtained through bribery, and (2) whether the defendants had knowledge at the relevant time of the alleged illegality of the guarantees and the alleged lack of authority of Mozambique’s Minister of Finance to execute them.

Those matters (and their reasonably forseeable defences) were found to not be within the scope of the arbitration agreements. They did not require the examination of the validity of any of the Supply Agreements. In particular, a defence that the Supply Agreements “were valid and were on commercial terms” would not be relevant to the question of the Privinvest Defendants' liability.

Similarly, and although the Supreme Court was prepared to find that the quantum component of Mozambique’s claim could qualify as a separate "matter", the Court was not prepared to find that quantum was within the scope of the reference to arbitration as a standalone matter. This was justified on the basis that any such stay would result in an awkward fragmentation of the proceedings, with liability decided by the English courts, and quantum decided by an arbitral  tribunal – which could not have been intended by the parties. Further, the Court held that it was difficult to see how the Privinvest Defendants could have a "real and proper purpose" for seeking a stay in relation to quantum issues alone, given those issues would need to be addressed in the English court proceedings in any event due to claims raised by other defendants against the Privinvest Defendants.

Accordingly, Mozambique was successful in its appeal.

The Supreme Court's decision should be read alongside the previously leading judgment on section 9 stays: Sodzawiczny v Ruhan [2018] Bus LR 2419, subject to the Court's observation that 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 of which a party seeks a stay whether in whole or in part". Insofar as the decision in Ruhan might be read to suggest otherwise (i.e., to support a superficial, issues-based approach to determining whether court proceedings are in respect of a "matter" covered by an arbitration agreement), the Supreme Court has held that Ruhan was in error.

The Supreme Court's judgment is available here. The Supreme Court’s decision was handed down on the same day as the Privy Council’s decision in FamilyMart China Holdings v Ting Chuan [2023] UKPC (available here), which adopts the same analysis in respect of the Cayman Islands’ equivalent to section 9 of the Arbitration Act 1996.