On 20 September 2023, the Supreme Court handed down judgment in the Republic of Mozambique’s appeal in the case that is widely known as the Tuna Bonds case. In doing so, it provided critical guidance on the scope of and approach to Section 9 of the Arbitration Act 1996 (the Act).
Background
The underlying dispute concerns loan facilities totalling c.US$1.7bn from various Credit Suisse entities and the Russian bank VTB to finance projects related to the development of Mozambique's Exclusive Economic Zone. Each of the facilities were subject to English law and jurisdiction and were extended to special purpose vehicles (SPVs) indirectly wholly-owned by the Republic, and backed by sovereign guarantees. Supply contracts for various elements of the development were agreed between certain Privinvest companies and the SPVs. The supply contracts were each governed by Swiss law and an arbitration agreement.
After Mozambique defaulted on its loans, the country was plunged into financial crisis.
In 2019, Mozambique brought proceedings in the English Courts alleging it was the victim of a conspiracy whereby Privinvest and its executives paid substantial bribes to both Government officials and employees of Credit Suisse in order to secure the supply contracts and bank financing. It asserts that the bribery, unlawful means conspiracy and dishonest assistance exposed it to potential liability of US$2 billion under the sovereign guarantees and other losses.
Privinvest applied for a mandatory stay of the English proceedings under Section 9 of the Act, asserting that the claims fell within the scope of the arbitration agreements in the supply contracts.
Section 9 of the Arbitration Act
Section 9 of the Act provides that, if a party to an arbitration agreement has legal proceedings brought against it "in respect of a matter under" that agreement, it can make an Application to the Court to stay those proceedings in favour of arbitration.
In assessing whether Section 9 of the Act applies, the Court will undertake a two stage enquiry:
- identify which "matters" have or foreseeably will be raised in the legal proceedings; and
- ascertain whether those matters fall within the scope of the arbitration agreement between the parties.
If the Court agrees that these two requirements are satisfied, then it will allow the Application and the English court proceedings will be stayed in favour of arbitration.
Supreme Court Judgment
After the High Court determined that no stay ought to be granted, the Court of Appeal disagreed, considering the matters in respect of which the English proceedings were brought did fall within the scope of the arbitration agreements.
Permission to appeal to the Supreme Court was subsequently granted in respect of Section 9 of the Act and the scope of the arbitration agreements only.
In overturning the decision of the Court of Appeal, the Supreme Court held that a "general international consensus" existed among the leading common law signatory jurisdictions to the New York Convention as to the approach to provisions such as Section 9 of the Act1.
After confirming the requirement of the two-stage enquiry above, it went on to determine in respect of the first stage:
- The Court should be guided by a common-sense approach and focus on the substance of the dispute by reference to the parties' pleadings. However, the Court should not be "overly respectful" to pleading formulations that may represent artificial attempts by parties to circumvent arbitration agreements.
- A "matter" does not need to encompass the whole of the dispute between the parties (and therefore a partial stay may be granted). Rather, a "matter" is a substantial issue that is legally relevant to the claim or defence in the proceedings. It must be an essential element of the claim and necessary in establishing a claim or defending it – it is not sufficient if a matter is merely an ancillary or tangential issue or question to be decided.
In respect of the second stage, the Court concluded that one should consider what a rational business person would contemplate when determining the scope of an arbitration agreement and that such a person would likely intend that a dispute arising out of a contractual relationship should be decided by the same legal system as the contract was formulated in. In short, the English court will not be prepared to retain jurisdiction over the liability side of a case whilst sending the quantum element of a case to arbitration.
In applying this two stage-approach to the facts before it, , the Supreme Court concluded that Mozambique's claims for indemnity and compensation in relation to bribery, unlawful means conspiracy and/or dishonest assistance did not require the consideration of whether the supply contracts were valid, meaning that they did not form a "matter" for the purposes of section 9 of the Arbitration Act. The Court considered that Privinvest's attempts to link these claims to the commerciality of the supply contracts and/or the value for money given by their implementation were not relevant to answering the claims.
The Court contemplated whether Privinvest's attempts could give rise to quantum defences. However, it determined that the quantification of losses was a subordinate issue in that rational businesspeople would not send such an issue to arbitration when it arose merely as a partial defence to liability claims falling outside the arbitration agreements in the supply contracts.
Takeaway
The Supreme Court's decision will now be vital reading for anyone considering an application under Section 9 of the Act. The main takeaways are:
- An application under Section 9 will be subject to a two-stage test: (1) to identify which "matters" have been, or foreseeably will be, raised in the legal proceedings; and (2) to ascertain whether those matters fall within the scope of the arbitration agreement between the parties.
- "Matters" will be assessed using a common sense approach and will look at essential elements of a party's claim / defence.
- The English Court will not be held to pleadings that may have been formulated with the aim of circumventing arbitration agreements.
This decision also stands as a word of caution for parties with arbitration provisions in their contracts. The very existence of an arbitration clause will not always ensure that any and all claims will be considered in arbitration; each case and arbitration clause must be considered on its own merits by reference to the specific circumstances and applicable law.
1Convention on the Recognition and Enforcement of Foreign Arbitral Awards
