THE AUTHOR:
Anastasia Medvedskaya, Associate at McNair International
In many complex legal disputes, there is an initial issue to be resolved about the scope of the arbitration agreement. It involves determining whether the matters in the ongoing legal proceedings in English courts are matters that the parties have agreed to settle through arbitration. On 23 September 2023, the Supreme Court issued a judgment interpreting s.9 of the Arbitration Act 1996 in a dispute between the Republic of Mozambique (“Mozambique”) and Privinvest Shipbuilding SAL and others (together referred to as “Privinvest”). The UK Supreme Court unanimously allowed the appeal and Lord Hodge delivered the judgement.
Background of the Dispute and Appeal to the Supreme Court
The dispute between Mozambique and Privinvest became known as the “tuna bond scandal”. In this dispute, Mozambique claims that Privinvest and its alleged ultimate owner Mr. Safa provided over USD$ 136 million in bribes to officials and Credit Suisse bankers in order to obtain favourable contract terms, including one aimed at exploiting the country’s abundant tuna resources in its coastal waters. In particular, it stemmed from the execution of supply contracts concluded between special purpose vehicles wholly owned by Mozambique and Privinvest (“Supply Contracts”) which were financed through loan agreements in respect of which Mozambique provided sovereign guarantees (“Guarantees”).
The Supply Contracts were governed by Swiss law, and each provided for Geneva-seated arbitration. The Guarantees were governed by English law and provided for dispute resolution before the courts of England and Wales.
In 2019, Mozambique commenced proceedings before the English courts, claiming to be the victim of an unlawful means conspiracy, bribery, and dishonest assistance because, inter alia, the Guarantees were procured through bribes paid to employees of the financing companies and officials of Mozambique. Specifically, Mozambique alleged that Privinvest companies engaged in substantial bribery of Mozambique’s officials, which exposed the country to potential liabilities of around $2 billion under the Guarantees. A further issue was Mozambique’s allegation that the Supply Contracts were shams and that no goods or services were supplied under them, or they were of no value.
Privinvest contented that the Supply Contracts have, for the most part, been fulfilled and that it has provided valuable goods and services. Privinvest also applied for a stay under s.9 of the Arbitration Act 1996. While Mozambique is not a party to the Supply Contracts, Privinvest’s position was that, as a matter of Swiss law, Mozambique is bound by the arbitration agreements within them.
At first instance [2020] EWHC 2012 (Comm), Mr Justice Waksman held that the claims in the English proceedings were not matters falling within the scope of the arbitration agreements in the Supply Contracts since the claims of bribery and corruption were not “sufficiently connected” with the Supply Contracts. Specifically, the remedies sought by Mozambique were not concerned with the purchase prices under the Supply Contracts. The Court of Appeal [2021] EWCA 329 overturned the decision of the High Court. Lady Justice Carr found that Mozambique’s allegation that the Supply Contracts were “instruments of fraud” was sufficiently connected with the arbitration agreement since it required the analysis of the validity of the Supply Contracts. In the Court of Appeal’s opinion, the dispute revolved around the allegation that the Supply Contracts were “instruments of fraud” or “shams”. These allegations tackled their validity directly — a matter deeply connected to the contracts themselves. This connection was recognised by Mozambique during the preliminary issue hearing about the agreement’s scope. Despite initially challenging the jurisdiction based on English public policy, Mozambique did not persist with this argument. The Court of Appeal expressed reservations about dismissing the arbitration based on a public policy argument, given the explicit agreement between the parties to resolve such issues through arbitration under Swiss law [at para. 89].
While the substance of the Mozambique claims is still pending before the English courts, and the decision in the underlying dispute is still awaited in the course of this year after a trial held in autumn 2023, the sole question put before the Supreme Court was whether in this case there was a matter which (1) should have been referred to arbitration and (2) is therefore susceptible to triggering a stay under s.9 of the Arbitration Act 1996.
The Relevant Test Under S.9 Arbitration Act 1996
The Supreme Court explained that the application of s.9 Arbitration Act 1996 involved a two-stage test: the Court must (1) identify the matter or matters which the parties have raised or foreseeably will raise in the court proceedings, and (2) determine in relation to each such matter whether it falls within the scope of the arbitration agreement [[2023] UKSC 32, para. 48].
What Are the Matters Referred to Arbitration?
The Supreme Court recalled that English courts follow the general international consensus on the determination of “matters” which must be referred to arbitration. A “matter” is a substantial issue that is legally relevant to a claim or a defence that is susceptible to determination by an arbitrator as a discrete dispute rather than an issue that is peripheral or tangential. In applying s9 of the 1996 Act, the courts should have regard to (i) the substance of the dispute and foreseeable defences [paras. 72-73], (ii) the scope of the matter [para. 74], (iii) the fact that a “matter” is a substantial issue that is legally relevant to a claim or a defence which is susceptible to determination by an arbitrator as a discrete dispute, rather than an issue which is peripheral or tangential [paras. 75-76], (iv) a common-sense approach [para. 77], (v) and the context in which the matter is brought [paras. 78-80].
Findings of the Supreme Court in the Case at Hand
In this case, the Supreme Court found that Mozambique sought damages in tort resulting from the Guarantees which were obtained through bribery. The validity of the Supply Contracts was an incidental matter that would only be relevant for the quantification of Mozambique’s losses. The conclusions of the Supreme Court in relation to matters falling within the scope of the arbitration agreement for the purposes of s.9 of the 1996 Act must be applied with common sense. In ascertaining the scope of an arbitration agreement, the court must have regard to what rational businesspeople would contemplate. Given that the scope of the legal claims fell outside the ambit of the arbitration agreement, it stands to reason that pragmatic businesspersons would refrain from subjecting a subsidiary issue such as the quantification of damages to arbitration. Consequently, the arbitration agreements necessitate an interpretation whereby the partial defence concerning quantum of losses is not encompassed as a matter designated for arbitration by the parties’ agreement.
Conclusion
It is common ground amongst arbitration practitioners that when parties are bound by an arbitration agreement, state courts are bound to stay the proceedings in favour of the arbitration unless the agreement to arbitrate is manifestly void. In that sense, Article 9 of the Arbitration Act 1996 is not dissimilar from Article 2 of the New York Convention 1958. Where there is uncertainty or disagreement as to what issues fall within the scope of the arbitration agreement and s 9 is relied upon, the Supreme Court decision provides useful guidance as to how to define the scope of the matters in play. The key takeaway from the Supreme Court’s guidance is that s 9 requires a fact-sensitive analysis which requires some recourse to common sense.
This “common-sense approach” undoubtedly gives a large margin of substantive discretion to each court that analyses the matters in arbitration. As Prof. Loukas Mistelis observed during the McNair Annual Legal Review of 2023, the risk of such an approach is that it could lead to “divergent outcomes” in different jurisdictions.
ABOUT THE AUTHOR:
Anastasia Medvedskaya is an Associate at McNair International. She specialises in international commercial and investment arbitration and public international law. She has acted as counsel for investors and States in several investment treaty disputes and in commercial arbitration cases under the ICSID, ICC, LCIA, and UNCITRAL rules. She has also assisted in arbitration-related proceedings related to challenges against and enforcement of arbitral awards, and Public International Law matters, including before the International Court of Justice and the European Court of Human Rights. Prior to joining private practice, Anastasia worked with EY Paris working alongside damages experts. You may contact Anastasia at: amedvedskaya@mcnairinternational.com.
