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Hey - What’s the “Matter” in arbitration?

Posted on 23 October 2023

Two Cases, Five Factors, and a World of Implications…

Parties who contract to arbitrate their disputes often seek instead to try to push the dispute into the courts. This can be for a variety of reasons (it is often the need to bring in directors, shareholders, etc into a conspiracy or fraud claim). Sometimes, however, it isn't clear whether the claim belongs properly in arbitration or not. Put another way, the question is deceptively simple: What “matters” have the parties agreed to arbitrate? In two recent judgments delivered on the same day (and authored by the same Law Lord), The Republic of Mozambique v Privinvest Shipbuilding SAL (Holding) and others [2023] UKSC 32 (“Mozambique”) and FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation (2023) UKPC 33 (“FamilyMart”), the UK Supreme Court and Privy Council has sought to provide much needed clarity on the subject in the context of applications to stay court proceedings in favour of arbitration.

Background: Mozambique

In Mozambique, the Republic of Mozambique (“Republic”), through three special purpose vehicles (“SPVs”), entered into supply contracts with a corporate group (the “Suppliers”) for the development of its Exclusive Economic Zone. The supply contracts were governed by Swiss law and provided for Swiss-seated arbitration. To finance the supply contracts, the SPVs entered into loan agreements backed by sovereign guarantees, both of which were governed by English law and subject to the exclusive jurisdiction of the English court. The Republic subsequently alleged that the Suppliers conspired with and bribed its officials and some of the bankers, causing the Republic to enter into the sovereign guarantees, thereby exposing it to a potential liability of some US$2 billion. It initiated proceedings in the English court against the Suppliers for bribery, conspiracy to injure by unlawful means, dishonest assistance, knowing receipt, and proprietary claims. The Suppliers contended that these claims were "matters" falling within the arbitration agreement in the supply contracts and applied to stay the proceedings in favour of arbitration under section 9 of the Arbitration Act 1996 (“AA 1996”). The High Court dismissed the application, but the Court of Appeal allowed the Suppliers’ appeal. The Republic appealed to the Supreme Court.

Background: FamilyMart

Meanwhile, in FamilyMart, FamilyMart China Holding Co Ltd (“FMCH”) and Ting Chuan (Cayman Islands) Holding Corporation (“TC”) held around 40% and 60% shares respectively in a Chinese convenience store business (the “Company”). Their relationship was governed by a shareholders’ agreement (“SHA”), which was subject to Cayman law and provided for Beijing-seated arbitration under the ICCA Rules. FMCH alleged that the majority directors appointed by TC caused the Company to divert its profits to entities connected with TC and prevented FMCH’s minority directors from accessing crucial business information. FMCH thus petitioned to wind up the Company so it could buy out TC’s shares (a necessary step under Cayman Islands’ company law). TC countered by seeking to strike out the petition or stay the proceedings pending arbitration. The Grand Court of the Cayman Islands stayed the proceedings under section 4 of the Foreign Arbitral Awards Enforcement Act (“FAAEA”). The Court of Appeal of the Cayman Islands later set aside this decision, leading to a further appeal to the Judicial Committee of the Privy Council.

Determining “Matter

Under both AA 1996 and FAAEA, if an arbitration agreement provides for a “matter” to be referred to arbitration, the court must stay court proceedings commenced in respect of that matter, unless the arbitration agreement is “null and void, inoperative or incapable of being performed”.

In both Mozambique and FamilyMart, the judgments were given by Lord Hodge, who recognised that both provisions give effect to Article II of the New York Convention. The judge surveyed international jurisprudence from Singapore, Hong Kong, Australia and the British Virgin Islands and distilled five key factors to determine whether a “matter” should be referred to arbitration:

  • The court employs a two-stage process.
    • First, it identifies the matters raised or foreseeable in court proceedings.
    • Secondly, it assesses whether each matter falls within the scope of the arbitration agreement. In carrying out this exercise, the court must ascertain the substance of the dispute between the parties, considering the parties’ pleadings (but without overreliance), as well as defence raised or reasonably foreseeable.
  • An arbitration agreement need not encompass the entire dispute between the parties. If only part of the dispute is subject to arbitration, the court can grant a stay of court proceedings to that extent.
  • A “matter” is a substantial issue that is an essential element to a claim, defence, or foreseeable defence in the legal proceedings. It must be susceptible to determination by an arbitrator as a discrete dispute. This excludes peripheral or tangential issues.
  • Evaluating the substance and relevance of a matter is a question of judgment and requires the application of common sense. The court must carry out an evaluation of whether the issue is reasonably substantial and whether it is relevant to the outcome of the proceedings.
  • The court must have regard to the true nature and the context in which a matter arises in the legal proceedings. Even if there is a substantial matter, the context in which the matter arose may exclude it from the scope of the arbitration agreement.

Decisions

In Mozambique, the Supreme Court held that the crux of the Republic’s claim was the allegation that the transactions were entered into through bribery and the Suppliers had knowledge of that bribery. That the supply contracts were valid and on commercial terms was not relevant to the Suppliers’ defence to the claim. As such, the Republic’s claims were not “matters” that had to be referred to arbitration in accordance with the arbitration agreement contained in the supply contracts, and so the court proceedings should not be stayed. The Supreme Court also held that the sub-issue of quantification of loss, which would involve considering the value of goods and services provided under the supply contracts, was also beyond the scope of the arbitration agreement, concluding that rational businesspeople like the parties would not seek to send to arbitration such a subordinate factual issue arising in litigation, and the arbitration agreements had to be construed accordingly.

By contrast, in FamilyMart, the Privy Council agreed a stay was necessary. Five “matters” before the court were identified. The first two considered whether TC’s actions resulted in FMCH losing trust and confidence in the Company’s management and whether the relationship between the shareholders had irretrievably broken down. The remaining three concerned whether it was “just and equitable” for the Company to be wound up and, if so, what consequential orders should be made. The Privy Council held that the latter matters were non-arbitrable as the power to wind up a company lies within the exclusive jurisdiction of the courts and an arbitration agreement purporting to confer such a power was inoperative to that extent. The Privy Council however accepted that the first and second matters were “matters” which fell within the ambit of the arbitration agreement. Since the determination of these two matters was an essential precursor to the remaining matters, a case management stay was granted.

Comment

The latest approach adopted by the Supreme Court in Mozambique is to be welcomed for aligning English law with that of other major jurisdictions in the international arbitration market, such as Singapore and Australia. Instead of focusing narrowly on “any issue which is capable of constituting a dispute or difference”, the English court now takes a broader view on the “substantial nature and relevance” of a referred matter to the legal proceedings. While this arguably makes the test more difficult to apply, the five factors identified provide helpful guidance as to how particular issues will be determined, should the matter come before an English court. Any potential fragmentation of proceedings, which should be uncommon, can also be mitigated by appropriate case management directions by the court or tribunal.

Mozambique also serves as a timely reminder that irrespective of how widely and cohesively an arbitration agreement is drafted, there remains a risk that the dispute in question may inevitably fall outside of its scope. This is particularly so in the context of complex transactions governed by separate documents, and corruption or fraud allegations.

FamilyMart involves the additional dimension of interaction between arbitration and the winding up jurisdiction of the court. It is clear that the courts will not allow a party to frustrate an arbitration agreement simply by pursuing liquidation if the underlying dispute forms the basis for the winding up petition. Interestingly, FamilyMart also indicates that, although any substantial matter in legal proceedings relevant to the claim which is within the scope of an arbitration agreement will normally give rise to a mandatory stay, the court retains the power to guard against abuse of process. Thus, a stay may be refused if an applicant has no real or proper purpose for seeking it.

The take-away from this is that a carefully worded arbitration agreement is likely to be able to provide advance clarity to clients in terms of what are necessarily future disputes that the parties wish to agree to arbitrate, and those that they do not. Please speak to a member of our International Arbitration team for further information.  

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