Republic of Mozambique (acting through its Attorney General) (Appellant) v Privinvest Shipbuilding SAL (Holding) and Others (Respondents) [2023] UKSC 32

Introduction

On 20 September 2023, Lord Hodge, Lord Lloyd Jones, Lord Hamblen, Lord Leggatt, and Lord Richards delivered the United Kingdom Supreme Court judgement on the case of the Republic of Mozambique (acting through its Attorney General) as the Appellant) v Privinvest Shipbuilding (Holding), (and other defendants). The Supreme Court unanimously overturned the decision of the Court of Appeal in favour of the Republic of Mozambique, refusing Privinvest’s application for a stay and providing the opportunity for the case to proceed to trial. The Supreme Court found the Republic of Mozambique’s claims against Privinvest’s defendants for the tortious causes of action of bribery, conspiracy, and dishonest assistance to be “matters” which fall outside the scope of the arbitration agreements in the various related supply contracts, for Section 9 of the Arbitration Act 1996, (“the 1996 Act”).

The main legal issue at the heart of the dispute

This is the first time the Supreme Court has considered the interpretation and the scope of the application of Section 9 of the 1996 Act.  

Background

Legal Background – The relevant Provisions of Law

Section 9(1) of the Act 1996 provides that a party to an arbitration agreement may apply to the court to stay legal proceedings regarding a “matter”, which should be referred to arbitration under the arbitration agreement. In such circumstances, Section 9(4) of the Act 1996 states, “the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.”

Facts

The case involved three Swiss law-governed supply contracts in 2013 and 2014 between three special purpose vehicles (“the SPVs”) (each of which is indirectly wholly owned by the Republic) and three Privinvest shipping companies. The SPVs entered into finance contracts with London-based Banks, (Credit Suisse International (“CSI”), Credit Suisse AG (“CSAG”), and Credit Suisse Securities (Europe)Ltd (“CSSE”) (together “Credit Suisse”), and another bank, VTB Capital plc (“VTB”). The contracts were to finance and acquire equipment to develop marine economic activity, which the Republic of Mozambique guaranteed. The funds were put towards the three supply contracts entered into with the sixth to eighth defendants (“the Privinvest supply companies”) in connection with the Republic’s development of its Exclusive Economic Zone through tuna fishing and exploiting its gas resources. The supply contracts each contained an arbitration agreement. Although the parties subject to the Section 9 proceedings had not signed the agreements, the Supreme Court assumed they were all governed by Swiss law and subject to Swiss seated arbitration agreements.

The borrowing was secured by sovereign guarantees signed by Mr Manuel Chang, who was then the Republic of Mozambique’s Minister of Finance, acting on behalf of the Republic. Under the guarantee, the Republic was exposed to potential liabilities of approximately US$2 billion (tuna bonds). It alleged that this vulnerability was caused by bribes paid to government officials by Privinvest and Others. In 2019, the Republic of Mozambique brought a claim against Privinvest for bribery, unlawful means conspiracy, dishonest receipt, and knowing receipt against the Privinvest entities in the English court under the guarantees. The Privinvest entities applied for a stay under Section 9 of the Act, stating that all of the claims were matters falling within the arbitration agreements.

Procedural History

In 2020. the High Court dismissed the stay applications under section 9 of the Act 1996, finding the Mozambique claims to be insufficiently linked to the supply contracts and there were no “matters” for which the legal proceedings had been brought which fell within the scope of the arbitration clauses, thus refusing a stay of proceedings.

 In contrast, in 2021, the Court of Appeal decided in favour of a stay of proceedings for Privinvest companies because the question of whether the supply contracts were valid and genuine was considered. The Judges agreed that the contracts were valid and genuine, and it would sufficiently be a defence to all of the claims against Privinvest companies. All of the claims would fall within the scope of the arbitration agreements in the supply contracts.  

Analysing the Supreme Court Decision

In 2023, the Republic of Mozambique swayed the Supreme Court by arguing that the Court of Appeal erred in its analysis of the meaning of “matter”. The Republic submitted that the commercial soundness of the supply contracts were mere factual issues that did not amount to a relevant legal defence to Mozambique’s claim. The Republic submitted that the concept of  “matter” in the passages used by Popplewell J in the case of Sodzawiczny v Ruhan [2018] Bus LR 2419, relying on Andrew Smith J’s judgement in Lombard North Central plc v GATX Corpn [2012] EWHC 1067 (Comm); [2013] Bus LR 68 (“Lombard North Central”) and the judgement of Sundaresh Menon CJ in the Singapore Court of Appeal in Tomolugen., broadened the concept of “matter” to cover any issue which falls within the scope of the arbitration agreement.

The Supreme Court decided the Court of Appeal’s reliance on the relevant principles of what constitutes a “matter” in Section 9, summarised by Popplewell J’s passage in the case of Sodzawiczny, ‘if taken in isolation, can mislead as to the state of the law when one considers the generally accepted principles laid down by International Jurisprudence.’ The Supreme Court decided ‘no judicial summary of the law should be treated as if it were a statutory text,’ [50], and Popplwell J’s summary was implicitly qualified by the reasoning in the cases of Lombard North Central and Tomolugen and needs to be assessed considering those cases as well as other international jurisprudence.

In addition to analysis of prominent cases from England, and Singapore, the Supreme Court reviewed cases from Hong Kong and Australia on the determination of ‘matters’ which must be referred to arbitration. The conclusion reached from analysis of international jurisprudence recognised that there is a consensus on the point among the leading jurisdictions involved in international arbitration in the common law world, which are signatories of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (known as the New York Convention). of the law of international commerce.

The five key propositions from the consensus view of Section 9 of the Act 1996

1.     The Court must adopt a two-stage process.

(i)              The court must determine the matters the parties have raised or foreseeably will raise in the court proceedings.

(ii)            The court must determine in relation to each such matter whether it falls within the scope of the arbitration agreement.

2.     A “matter” need not contain the full dispute between the parties and may apply only to the extent that the legal proceedings are to be referred to arbitration.
3.     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 a “matter” is not an essential element of the claim or of a relevant defence to that claim, it is not a matter in which the legal proceedings are brought.
4.     Determining the substance and relevance of the “matter” requires judgment and the application of common sense. This exercise requires assessing whether each issue is reasonably substantial and relevant to the outcome of the legal proceedings subject to the stay application.
5.     The context in which a “matter” arises in the legal proceedings must be considered, as well as its true nature when assessing whether it is a matter falling within the scope of the arbitration agreement. The Supreme Court accepted that this principle relied on a common-sense approach and not any settled position in foreign jurisprudence.

Applying the five principles to the “matters” that The Republic of Mozambique brought before the English Courts

Lord Hodge concluded that the Republic of Mozambique’s claims for bribery, unlawful means conspiracy, and dishonest assistance or Privinvest’s defences, including the validity of the supply contracts, would not be relevant regarding liability. If there were bribes, they would have been to obtain the supply contracts and Mozambique’s guarantees. As considered by Lord Hodge, the price fixed in the supply contracts would have been the mechanism by which the bribes were funded, and that was not a substantial matter in the proceedings.

The validity of the supply contracts was not relevant to the question of liability. However, the extent to which Mozambique received value under the contracts was relevant to quantifying loss ‘maybe’ a substantial matter in dispute between the parties. Lord Hodge did not have to conclude this issue, as he found that the dispute on quantification was not within the scope of the arbitration agreements. The Republic of Mozambique’s claims were not “matters” for Section 9 required to be referred to arbitration under the arbitration agreements, as Mozambique’s claims were considered principally with the ancillary guarantees.

Privinvest’s partial defence on quantum concerning the value provided by each of the supply contracts and the extent to which this should reduce any damages awarded to the Republic of Mozambique did not fall within the scope of the arbitration agreements. The contracts each included non-identical arbitration agreements. By applying a narrow and common-sense interpretation, the defence on quantum did not fall within the scope of arbitration agreements. The Supreme Court reaffirmed the scope of the arbitration agreement as a question of contractual construction. The Supreme Court applied the Fiona Trust Principle – “rational business people would not seek to send to arbitration such a subordinate factual issue [quantification] in such legal proceedings”. There is no existing case law under Section 9 of the Act for a partial stay being granted for quantification to be decided by an arbitral tribunal. In the case of Sodzawiczny v Ruhan [2018], the Court observed Bus LR 2419 as not being “sufficient merely to identify that an issue is capable of constituting a dispute or difference within the scope of an arbitration agreement without carrying out an evaluation of whether a matter is reasonably substantial and whether it is relevant to the outcome of the legal proceedings of which a party seeks a stay whether in whole or in part.” The Supreme Court held that Sodzawiczny was in error, broadening the concept beyond measure.

Commentary: The impact of the decision

This Supreme Court decision clarifies the approach to determine whether “matters” fall within the scope of an arbitration agreement for a stay under s9 of the Act 1996 through the overturning of Sodzawiczny and the Court of Appeal judgement of this case.

The court will analyse the substance of claims rather than the form, and if a “matter” is not an essential element of the claim or a relevant defence to that claim, then it is not a “matter” which requires a stay. Each case and arbitration clause will be considered on their own merits by reference to the specific circumstances and applicable law. The same analysis was handed down on the same day as the Privy Council’s decision in FamilyMart China Holdings v Ting Chuan [2023] UKPC, which adopts the same analysis regarding the Cayman Islands’ equivalent to section 9 of the Act 1996.

In practice, parties that put forward bribery, fraud, and corruption claims in international arbitration should consider a public trial’s impact, reputation, and relationships with other counterparties. Section 9 of the Act 1996 welcomes transparency, with bribery claims being brought in a relationship governed by arbitration agreements no longer guaranteed as exclusively brought in the private forum of arbitration proceedings. Tribunals are encouraged to determine such issues raised by parties and proactively request further evidence where concerns arise during proceedings, ultimately reducing the risk of a challenge to an award at the enforcement stage.

The Trial begins, and some claims are dropped.

The Republic of Mozambique can sue Privinvest in the London ‘Tuna Bond case. On October 2, 2023, the Republic of Mozambique paid US$130 million to financial institutions (UBS) as part of an out–of–court settlement with Credit Suisse to end a legal dispute in the London Commercial Court over the “hidden debts” case. The settlement means Mozambique will lose out on more than $11 billion. On October 5, 2023, Mozambique dropped its claim for a macroeconomic loss against the key remaining defendant, the UAE-Lebanese shipbuilder Privinvest. The trial between the Republic of Mozambique, Privinvest, and the sanctioned Russian VTB Bank is underway. This case offers an opportunity to ensure accountability for those involved and justice for the people of Mozambique to know who is responsible for the “hidden debt”, which has left them bearing the consequences of corruption with 1.9 million people pushed into poverty. 

Political Immunity and Accountability

The ongoing issue of holding the political figures involved accountable remains. The ongoing battle to extradite Mr Chang, the former Finance Minister of Mozambique from 2005 to 2015, from South Africa to Mozambique and not the United States has remained at the forefront for four and a half years. It was in the interest of the current President Nyusi to hear the case in Maputo, Mozambique, as Mr Chang allegedly signed off government guarantees on US$2 billion in secret loans from Russia’s VTB bank and Credit Suisse. These loans were for three parastatals to buy a fleet of fishing and patrol boats from Abu Dhabi-based Privinvest Shipbuilding. President Nyusi was the defence minister then, and the three parastatals that received the US$2 billion were involved in defence and security. The facts concerning the loans indicate the President’s alleged knowledge of the dishonesty from the corrupt dealings. 

In May 2023, the Constitutional Court of South Africa refused the Mozambique government leave to appeal against the 2021 high court ruling to extradite its former finance minister Manuel Chang to the United States to face corruption charges.  Mr Chang was extradited in July 2023, and in November 2023, a  New York federal judge denied a bid by the former finance minister of Mozambique to toss charges that he participated in the alleged $2 billion “tuna bond scandal”. Mr Chang argued he had been imprisoned in South Africa for four years, which he stated violated his Article 6 speedy trial right. The fraud and corruption trial of three former Mozambican Government Officials and five Business executives indicted in the alleged US$2 billion Fraud and Money Laundering scheme that victimised US Investors will be heard in New York. Mr Chang faces up to 55 years in prison if convicted. Mr Chang’s defence for the upcoming trial includes not being aware of the fraud despite his signature being on the loan agreement. His lawyer, Mr Adam Ford, alleges Mr Chang was required to sign a document because that was his role in the government.

The trial will advance in 2024, and the possibility of all misappropriation of funds coming to light may be timely with the upcoming 2024 Mozambique general elections. If President Nyusi loses the election and it is determined that he is involved, he will no longer have state immunity. It raises doubts whether President Filipe Nyusi could be called upon to answer in the case after his term of office as President of Mozambique. This question remains open and will depend on how the trial in New York unfolds.  It is also not known whether Privinvest would still be interested in dragging President Nyusi to a possible trial in London, (see Paragraph 39 of [2023] EWHC 2215 (Comm)), if he no longer occupies the post of Head of State. The case’s decision in New York in 2024 will likely significantly impact the 2024 Mozambique elections and the prevention of corruption and bribery in Africa.

Written by Fehreen Khan