UK Supreme Court Renders Important Judgment Concerning Section 9 Stays Under the Arbitration Act 1996

On 20 September 2023, the UK Supreme Court (the "Supreme Court") handed down an important judgment clarifying the proper approach to applications under section 9 of the Arbitration Act 1996 (the “Act”). The judgment arises in Republic of Mozambique (“RoM”) v. Privinvest Shipbuilding SAL (Holding) & Ors¹  – the long-standing litigation over an alleged c. US$2 billion fraud (known as the ‘tuna bonds’ scandal) – and addresses a preliminary question relating to a section 9 application to stay all of RoM’s claims. The Supreme Court held that RoM’s claims are not matters falling within the scope of the arbitration agreements. They will therefore be determined by the English court – instead of privately before an arbitral tribunal – with the applicant having failed to establish the criteria for a stay of those court proceedings.

This Legal Update summarises this important Supreme Court decision, focusing on the court's approach to ascertaining a “matter” for section 9 purposes, which was applied consistently in a Privy Council judgment² of the same date.

Key Takeaways

• The Supreme Court’s decision provides welcome clarity on the interpretation and application of section 9 using a two-stage test. It is essential reading for parties contemplating, or facing, an application under section 9 of the Act.

• Parties bringing or defending stay applications in other common law jurisdictions which have provisions similar to section 9 (e.g. Scotland, Hong Kong, Singapore and Australia) may find this judgment informative given the “general international consensus” (amongst common law jurisdictions that are signatories to the New York Convention) on how to approach the determination of “matters” which must be referred to arbitration, clearly articulated by the Supreme Court (see below).
• The Supreme Court and Privy Council both agree that 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 dispute. If the “matter” is not an essential element of the claim or a relevant defence, it is not a matter in respect of which the legal proceedings are brought.
• While the principles, enunciated below, are clear, each case must be assessed in light of its particular circumstances (and the relevant law(s) in play).

Background to the Dispute

Three corporate vehicles, wholly owned by RoM (the “SPVs”), concluded supply contracts with three Privinvest supply companies for the development of Mozambique’s exclusive economic zone, including through tuna fishing (the “Contracts”).  The SPVs borrowed money from various banks to purchase equipment and services under those contracts; that borrowing was secured by sovereign guarantees granted by RoM (the “Guarantees”).

The Contracts are governed by Swiss law and provide for arbitration, whereas the Guarantees are governed by English law and disputes are reserved for the exclusive jurisdiction of the English courts.

RoM issued English court proceedings accusing the Privinvest supply companies (plus Privinvest’s subcontractors, together “Privinvest”), the banks and other concerned individuals of bribing RoM’s officials and seeks damages for being exposed to a potential liability of US$2 billion under the Guarantees due to an alleged conspiracy. Specifically, RoM seeks damages and indemnities for: (i) bribery; (ii) unlawful means conspiracy; (iii) dishonest assistance; (iv) knowing receipt; and (v) deceit. It also brings proprietary claims.

Section 9 Stay and the Issue on Appeal

While RoM is not a signatory to the Contracts, Privinvest argue that RoM is a party to them by virtue of Swiss law and hence bound by the arbitration agreements in them. On that basis, they sought a stay of all of RoM’s claims under section 9 of the Act.  The question of whether RoM (and the Privinvest subcontractors) are bound by the Contracts is to be decided by the Commercial Court in October 2023. For the purposes of this section 9 decision, the parties agreed that the judges could assume that they are bound.

Section 9 of the Act enables 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” to apply to the court to stay the proceedings so far as they concern that matter.

The preliminary issue for the Supreme Court was whether RoM’s claims were “matters” which fell within the scope of the arbitration agreements under section 9. The lower courts have been divided to date: the High Court said ‘no,’ but the Court of Appeal said ‘yes.’  Unanimously allowing RoM’s appeal, the Supreme Court agreed with the High Court that RoM’s claims were not “matters” falling within the scope of the arbitration agreements under section 9.

Supreme Court Decision: Legal Findings

Meaning of  “matter”

The Supreme Court made the following findings of law:

• English law adopts a liberal, pro-arbitration approach to the interpretation of arbitration agreements.
• As section 9 gives effect to Article II(3) of the New York Convention, when interpreting section 9, the court should look at other jurisdictions’ case law to the extent that they have similarly worded provisions to section 9.
• The Supreme Court reviewed cases from leading common law jurisdictions that are signatories to the New York Convention (including Hong Kong, Singapore, the Cayman Islands and Australia) and held that there is “general international consensus” when it comes to the determination of “matters” which must be referred to arbitration.
• For section 9 applications, the court must adopt a two-stage test, to ascertain:
  1. what are the matters which the parties have raised (or will foreseeably raise) in the court proceedings; and
  2. whether each matter falls within the scope of the arbitration agreement.
• Under stage 1, the court must consider the substance of the claims and the defences (the court should not be tied to the pleadings as they might be formulated in particular ways to seek, or avoid, reference to arbitration), as well as all reasonably foreseeable defences.
• Stage 2 involves looking at the true nature of the matter and the context in which the matter arises in the court proceedings (while there may not be international consensus yet on this point, common sense supports this approach).
• Stays can be granted in relation to part of the court proceedings only (so the “matter” need not encompass the whole of the parties’ dispute).
• A “matter” is a “substantial issue” that is legally relevant to a claim or (foreseeable/actual) defence and is susceptible to be determined by an arbitrator as a discrete dispute i.e., the matter must be an essential element of the claim or defence, it cannot be an issue that is “peripheral or tangential” to the subject matter of the legal proceedings.
• Judges, when evaluating this, must use their judgement and common sense rather than adopting a mechanistic approach.

Scope of arbitration agreements

Ascertaining the scope of an arbitration agreement is a question of construction which, in this case, involved principles of Swiss law. In Swiss law, the key question is whether “the dispute in its context in the legal proceedings is sufficiently connected to the particular supply contract to fall within the scope of the arbitration agreement contained therein.”

The Supreme Court made the following important points of principle:

• Where there are multiple arbitration agreements, a narrow approach to the sufficiency of the connection is required.
• The court must have regard to what rational businesspeople would contemplate.
• English jurisprudence has held that rational businesspeople are likely to intend that any dispute arising out of their contractual relationship will be heard by the same tribunal.
• Similarly, under Swiss law parties are deemed to have picked arbitration as a single forum for their disputes (rather than the court).

Separately, the Supreme Court (and the Privy Council) also disagreed with prior case law that the practical futility of a stay will in all circumstances be irrelevant.

Supreme Court Decision: Application of the Law to the Case Facts

“Matter”: The Supreme Court applied the two-stage test set out above and concluded that while the Court of Appeal was correct to consider whether a matter was a “substantial matter” in the court proceedings, their factual conclusions were wrong. The validity, commerciality and genuineness of the Supply Contracts were not essential to any relevant defence to RoM's claims and so were not “matters” under section 9 in relation to Privinvest’s liability.

Further, since RoM asserts that it did not get value for the monetary obligations it entered into, the extent to which such value was given will be an issue relating to the quantification of RoM’s claims, albeit no case under section 9 exists solely in relation to the quantification of a claim.  The Supreme Court did not see a need to determine if the quantification of RoM’s claims is a “matter” in the legal proceedings because it found that the application failed on the scope argument, below.

Scope: The Supreme Court said there was no question of the arbitration agreements extending to cover RoM's allegations on which it relies to establish the legal liability of Privinvest (set out in ‘Background to the Dispute’ above).

RoM’s partial defence on quantum (which arises out of legal claims not found to be within the scope of the arbitration agreements), was equally construed as not being within the scope of the arbitration agreements. The Supreme Court said rational businesspeople would not send such a “subordinate factual issue” to arbitration where it arose merely as a partial defence to liability claims (which are outside the scope of the arbitration agreement) advanced in legal proceedings. Their conclusion was supported by the fact that “there was no evidence of court decisions effecting the bifurcation of a dispute as to quantification of damages from contested claims as to liability.”

Our authors, and the wider international arbitration team, are well placed to advise on section 9 applications and all matters pertaining to international arbitration.