REUTERS | Navesh Chitrakar

What’s the matter? English Court of Appeal clarifies meaning of section 9 of Arbitration Act 1996

The recent decision of the English Court of Appeal in Republic of Mozambique v Credit Suisse International and others reaffirms the arbitration-friendly approach taken by the English courts and the mandatory nature of stays under section 9 of the Arbitration Act 1996 (AA 1996).  The decision also illustrates the difficulty that can be faced by the courts in applying section 9 in complex multi-party, multi-issue disputes.

Under section 9 of the AA 1996, the court must stay proceedings brought in breach of an arbitration agreement between the parties unless satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed.

In this judgment, the Court of Appeal warned against allowing considerations of usefulness and case management to interfere in the decision-making on the application of section 9 in situations where some issues may be covered by an arbitration agreement and others are not.  The Court of Appeal noted that:

“ […] whether or not there is futility in practical terms of any stay is immaterial. Equally, the fact that there may be unwelcome case management complications if all or parts of claims are stayed is irrelevant. These are complexities which flow from section 9 and ones which will often arise in multi-party, multi-issue litigation such as this.” (Paragraph 71.)

It is thus necessary to avoid being “(even if only sub-consciously) influenced by the instinctive desire to avoid fragmentation” (paragraph 86).

Background

Mozambique (acting via various special purpose vehicles (SPVs)) entered into three Swiss-law governed supply agreements with entities in the shipbuilder group, Privinvest, to develop the nation’s fishing fleet and coastal security infrastructure.

Two of the supply agreements contained the same arbitration clause: “all disputes arising in connection with this project, if not amicably resolved between the parties, shall finally be settled by ICC arbitration held in Geneva in accordance with ICC Rules”.

The third supply agreement contained an arbitration clause worded as follows: “any dispute, controversy or claim arising out of or in relation to this contract, including validity, invalidity, breach or termination thereof, shall be resolved by arbitration in accordance with Swiss Rules of International Arbitration of the Swiss Chambers Arbitration Institution in accordance with these Rules.”

The SPVs were in receipt of bank financing for their obligations under the supply agreements (with funds be paid directly to the Privinvest entities by the relevant banks). This financing was supported by sovereign guarantees given by Mozambique itself. Both the loans and guarantees were set out in contracts governed by English law, and all contained an exclusive jurisdiction clause in favour of the courts of England and Wales.

The financing banks paid the Privinvest entities in full for the work done. However, the loans were not repaid by the SPVs. Mozambique’s liability under the guarantees amounted to around USD2.1 billion.

Mozambique brought proceedings in the English courts alleging that the sovereign guarantees were null and void, having been obtained (together with the supply agreements) by the payment of “kickbacks” to various officials and other influential individuals in Mozambique by, among others, the Privinvest defendants. Mozambique also made various claims for bribery, dishonest assistance, knowing receipt, conspiracy to injure by unlawful means and proprietary claims.

The Privinvest defendants applied for a stay of the English court proceedings under section 9 of the AA 1996 on the basis that, as a matter of scope, both forms of arbitration clause in the supply agreements covered all the claims made by Mozambique against the Privinvest defendants. Further, although Mozambique was not a signatory to the supply agreements, the Privinvest defendants contended that, as a matter of Swiss law, it was a party to them as the ultimate beneficiary of the agreements.

At first instance (and as a preliminary issue), the High Court determined that Mozambique’s claims in the proceedings did not fall within the scope of the arbitration agreements (making its determination with the parties’ agreement on the basis that Mozambique was indeed a party to those supply agreements under Swiss law). The judge found that the claims against the Privinvest defendants did not fall within section 9 of the AA 1996. The decision was arguably a deviation from the typical approach in the English courts in recent years.

Court of Appeal decision

The Court of Appeal held that the lower court judge had erred in his conclusions. Notably, it disagreed with the judge as to what constituted a “matter” for the purposes of section 9 of the AA 1996.  In the judgment, Carr LJ emphasised the distinction the court must make between a “matter” and a cause of action, a “matter” being any issue capable of constituting a dispute under the relevant arbitration agreement. Thus, the court, citing Sodzawiczny v Ruhan and others, must look “at the nature and substance of the claim and the issues to which it gives rise, rather than simply to the form in which it is formulated in a pleading”.

The court must:

  • First identify the “matters” in respect of which the proceedings are brought. This will require it to consider not only the claims made and defences identified, but also other reasonably foreseeable defences.
  • Secondly, it must determine whether those matters (once determined) are matters that the parties have indeed agreed to be referred to arbitration. This second stage requires the proper construction of the relevant arbitration agreement.

Carr LJ quoted, with approval, Popplewell J (as he then was) in Sodzawiczny:

The search is not for the main issue or issues, or what are the most substantial issues, but for any and all issues which may be the subject matter of an arbitration agreement. If the court proceedings will involve resolution of any issue which falls within the scope of the arbitration agreement between the parties, the court must stay the proceedings to that extent. This is necessary to give effect to the principle of party autonomy which underpins the Act.” [Emphasis added.]

Conclusion

As the first appellate authority on what constitutes a “matter” for the purposes of section 9 of the AA 1996, the case upholds the position set out in Sodzawiczny. This decision reinforces the English courts’ common sense approach to arbitration agreements and makes clear that parties before the English courts will struggle to avoid arbitration by seeking to carve-up a case artificially.

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