In a complex commercial dispute involving numerous allegations and contracts, some of which contain arbitration agreements, determining whether a stay in favour of arbitration should be granted can be complex. The UKSC’s recent judgment in Republic of Mozambique v Privinvest and others [2023] UKSC 32 tackled this situation, laying down fundamental guidance for the English courts.
Stays in favour of arbitration
Article II(3) of the New York Convention (NYC) places the courts of Contracting States under an obligation to refer parties to arbitration where they have so agreed.
In England, this is incorporated into domestic law by s.9 Arbitration Act 1996. Principally, s.9(1) provides that
“A party to an arbitration agreement against whom legal proceedings are brought…in respect of a matter which under the agreement is to be referred to arbitration may… apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.”
Whether a dispute falls within the scope of the relevant arbitration agreement will clearly be an important part of this analysis; but s.9(1) (and Article II(3)) also refers to the court proceedings being brought “in respect of a matter” the parties have agreed to refer to arbitration. What, if any, additional overlay does this bring; and how might it affect the court’s approach? These were the issues at the heart of Privinvest.[1]
Factual background
The case involved a series of transactions by which the Republic apparently attempted to finance, and acquire, equipment to develop marine economic activity. SPVs owned by the Republic entered into financing contracts with certain banks, which the Republic guaranteed. The funds were then put towards the conclusion of three supply contracts between the SPVs and three of the Respondents (Privinvest). Those supply contracts were all governed by Swiss law, and subject to Swiss seated arbitration agreements.
The Republic found itself heavily exposed under the guarantee. It alleged that this was caused by bribes paid to government officials by Privinvest and others. Accordingly, it brought a claim against them in the English courts alleging a number of causes of action including bribery, unlawful means conspiracy, dishonest assistance, and knowing receipt.
Issues for the UKSC – what is the approach to identifying “proceedings in respect of a matter”
Relying on the arbitration agreements in the supply contracts, Privinvest sought a stay of the claims against it under s.9 (the case proceeded on the assumption that, under Swiss law, the law applicable to the arbitration agreements, the Republic was bound to them despite not being a signatory). On the facts, the key issue said to engage the arbitration agreements was the relevance to the proceedings of the validity/legitimacy of the supply contracts.
At first instance the judge refused a stay. The Court of Appeal disagreed, it thought that issue would invariably be a key part of Privinvest’s defence, and granted the stay.
The UKSC granted permission to appeal. Broadly speaking the issue before it was how the court assesses, under s.9. (and, by extension, Article II(3)) whether the proceedings before it actually concern a matter to be referred to arbitration (i.e. here, the validity/legitimacy of the supply contracts).
On that, in summary, the UKSC held [72-80]
- The process involves two stages; to determine what the matters are which are (or foreseeably will) be raised in the court proceedings and to determine whether each is within the scope of the arbitration agreement. In doing so, the court looks at the substance of the dispute, including any reasonably foreseeable defences.
- A “matter” need not encompass the whole of the dispute – s.9 expressly contemplates stays of part.
- A “matter” is a substantial issue legally relevant to a claim or defence (or foreseeable defence) susceptible to be determined by an arbitrator. It must be an “essential element” of a claim or relevant defence, in the proceedings and not an issue which is peripheral or tangential. Otherwise it is not a “matter” in respect of which the proceedings are brought.
- The evaluation of this is a question of judgment and common sense; it is not sufficient merely to identify that an issue is capable of being within the scope of an arbitration agreement without evaluating whether it is reasonably substantial and relevant to the whole or part of proceedings.
- Finally, the context in which a matter arises in the legal proceedings may inform the court’s conclusion on the second question; whether it falls within the scope of the arbitration agreements.
Application to the facts
Applying the above, the UKSC took a different view from the Court of Appeal. On analysis of the components of each of the Republic’s claims, the supply contract issues were not legally relevant as an answer to the controversies before the court [87,89,91,92-93].
The validity/legitimacy of the supply contracts was not, therefore, a relevant “matter” raised by the proceedings insofar as assessing the liability of Privinvest was concerned. A more difficult question was whether the same could be said of assessing the quantification of the Republic’s loss. The UKSC, thought, for example, that it could be said this was a substantial issue in the proceedings to which the question of the implementation of the supply contracts might be a significant part [98] .
Ultimately, however, the UKSC found that it did not need to reach a conclusion on that point as the dispute on quantification would fall outside the scope of the arbitration agreements. In so doing, the UKSC essentially deployed its observation in the last bullet noted above; whilst noting that Swiss law governed the interpretation of the arbitration agreement and that this contained similar principles to English law on the expectations of rational businesspeople, it concluded that in the context of the proceedings before the court (i.e. where there was no question that the arbitration agreements could extend to the liability issues) the parties could not be taken to have intended a partial defence on quantum to be referred to arbitration [99-109].
The net result was that the UKSC dismissed Privinvest’s application for a stay.
Comment and conclusion
Particularly where there is alleged large-scale wrongdoing, or unforeseen events, commercial disputes can transcend parties’ individual contractual relationships and become complex multi-party proceedings involving numerous, sometimes tortious, causes of action.
Where arbitration agreements are present in those underlying relationships, the issues Privinvest raises are important, practical, ones. They can have significant implications for the overall profile of where the controversy (broadly speaking) will be resolved.
In that sphere, the UKSC’s judgment emphasises that, if a party asserts that an issue is caught by an arbitration agreement, there needs to be an, autonomous, assessment of what the proceedings fundamentally concern to see if there is any real overlap. If not, then the litigation can proceed unaffected. Some may raise eyebrows; after all it will be a judge who makes that assessment. On the other hand, it might be said, the law provides the tool, in the wording of s.9/Article II(3), for assessing whether cases are simply about something else.
Whilst it should be noted that the principle is of general application, in many cases the outcome will be different. Privinvest raised somewhat exceptional facts. By contrast, in a dispute focussed on the parties contractual rights and relationship, issues within the scope of the relevant arbitration agreement would likely to be front and centre of any proceedings.An example was provided on the same day as Privinvest. In FamilyMart [2023] UKPC 33, the JCPC handed down a judgment containing substantially identical analysis on the point of principle (Lord Hodge delivered both judgments). FamilyMart involved an petition by a shareholder of a Cayman company to have it wound up on the basis that relations with the other shareholder had totally broken down. The shareholders’ agreement contained an arbitration clause so the issue was whether the petition should, accordingly, be stayed. Whilst the JCPC considered that the actual determination/grant of the petition was non-arbitrable, the substantive matters on which it was based (the breakdown in relations) were precisely issues which the parties had agreed to refer to arbitration. A stay in relation to those matters was therefore granted, whilst the petition was put on hold pending their determination.
For further information, please contact:
Stephen Lacey, Linklaters
stephen.lacey@linklaters.com
[1] s.9 and Article (II)(3) also contain exceptions where the arbitration agreement is null and void, inoperative or incapable of being performed. These were not in issue in the case under discussion.
