English Court of Appeal rules that Privinvest can go to arbitration over ‘hidden debt scandal’ bribery allegations: clarifies test for stay of proceedings for arbitration
Wednesday 24 November 2021
Duncan Bagshaw
Howard Kennedy, London
duncan.kennedy@howardkennedy.com
Sanchita Agrawal
Howard Kennedy, London
sanchita.agrawal@howardkennedy.com
Background
The history to this case is well-known, having been extensively reported upon in the media, and known as the ‘Tuna Bond’ or ‘Hidden Debt’ scandal. The events were seismic for the Republic of Mozambique, causing a devaluation of its currency and a debt crisis in the African state.
In 2013, three SPVs owned by the Republic entered into supply contracts with companies in the Privinvest Group. The Privinvest Group agreed to supply various equipment and services which were intended to support the establishment of an exclusive economic zone and the growth of marine industries in Mozambique, including tuna fishing.
The three primary contracts (Proindicus, EMATUM and MAM), which were made variously with Mozambican companies, contained arbitration clauses which variously provided for International Chamber of Commerce (ICC) and Swiss Arbitration Centre arbitration, with seat in Switzerland. The contracts were governed by either Swiss law or by English law.
The funding for the very large sums required to be paid under the contracts was provided by Credit Suisse, VTB Bank and other banks. The borrowing was guaranteed by the Republic pursuant to sovereign guarantees. The guarantees all were governed by English law, with a jurisdiction clause in favour of the courts of England and Wales. In total, these arrangements have ultimately resulted in the Republic allegedly owing around US$2bn.
The whole affair fell into crisis when the extent of the borrowing became clear and financial institutions withdrew financial support for the state. Mozambique denied its obligation to satisfy the sovereign guarantees. The Republic claimed that the entry into the contracts with the Privinvest Group was part of a large conspiracy, involving the bribery of officials of the Mozambique government and improper payments to employees of companies in the Credit Suisse group.
The events prompted an immediate crisis in relation to Mozambique's credit status and currency due to the revelation of the existence of the debts and the Republic's denial of its obligation to pay.
Mozambique also took criminal action against its own former officials, including the arrest of former finance minister Manuel Chang, who was arrested in South Africa and remains in a South African prison, and several other Mozambican former officials.
The Republic commenced proceedings in London against the Privinvest companies in February 2019, alleging bribery, conspiracy to injure by unlawful means, dishonest assistance, knowing receipt and proprietary claims. The Republic claimed declarations that the sovereign guarantees were not binding upon it; it sought damages from Credit Suisse and Privinvest for being parties to the conspiracy.
Credit Suisse denied that the guarantees were vitiated by the alleged bribery and suggested that, even if certain Credit Suisse employees had taken improper payments, that did not affect the Republic’s obligations, particularly where, as it appeared, the Republic’s own officials to the highest level had been part of the alleged conspiracy. Credit Suisse also claimed damages against the Privinvest companies and individuals, on the basis that, if the guarantees were not enforceable, that was due to the fault of those companies and individuals who were the architects of the conspiracy with the Government officials. Credit Suisse brought additional claims against various other individuals including government officials and the individuals behind the Privinvest companies.
Privinvest also denied the Republic’s claims and applied for stays of most of the action against it, under Section 9 of the Arbitration Act 1996 (the 1996 Act) on the grounds that the issues in the proceedings involving Privinvest should be resolved in arbitration in accordance with the arbitration agreements in the Privinvest contracts.
The Court of Appeal
The Court of Appeal was hearing an appeal against the judgment in the High Court whereby Privinvest's application for a stay under the 1996 Act was dismissed.
The contested issues on appeal were as follows:
- whether the judge has erred in his construction of the Arbitration Agreements, and specifically whether he was wrong to conclude that they should be construed narrowly; and
- Whether the judge erred in failing to find that the Republic's allegations of bribery, dishonest assistance, unlawful means, conspiracy knowing receipt and claims for proprietary relief fell within the scope of the Arbitration Agreements.
Ground 1
In the leading judgment given by Lady Justice Carr, the Court of Appeal found that, under Section 9 of the 1996 Act, the court must identify the ‘matter’ in respect of which proceedings are brought, to decide if it falls within the arbitration agreement. As per Section 9(4) of the 1996 Act, ‘on an application under this section, the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed.’ As long as there is any ‘matter’ which falls within the arbitration agreement, the Court must order a stay without exercising discretion.
There are two stages of inquiry for the Court:
- to identify ‘matters’ in respect of which the proceedings are brought; and
- to assess whether those matters are ‘matters’ which the parties have agreed are ‘to be referred to arbitration’.
The relevant principles were summarised in Sodzawiczny v Ruhan and others (2018) EWHC 1908 (relying heavily on Lombard North Central PLC v GATX Corporation (2012) 1 Lloyd's Rep 662 (Andrew Smith J), Autoridad del Canal de Panama v Sacyr SA (2017) 2 Lloyd's Rep 351 (Blair J); and China Export & Credit Insurance Corporation v Emerald Energy Resources Ltd (2018) EWHC 1503 (Sir Richard Field) (in which Duncan Bagshaw appeared as counsel)) as follows.
- Any issue which is capable of constituting a dispute which may fall within the scope of an arbitration matter must be treated as a ‘matter’.
- Where issues have not been identified or developed at that stage, the court should seek to identify the issues which it is reasonably foreseeable may arise.
- If there are any issues which fall within the scope of the arbitration agreement, the court must stay the proceedings to that extent.
- Finally, the court should 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 of Appeal interpreted the above to mean that the exercise involves looking for the substantial issues to which the claim gives rise, which may include defences raised.
The Court of Appeal held that the High Court was entitled to accept Swiss law evidence that the one-stop shop approach advocated in Fiona Trust & Holding Corp v Privalov (2007) EWCA Civ 20 carried less force in Swiss law than it did in English law. Furthermore, Lady Justice Carr stated, ‘Fiona Trust does not countermand a context-sensitive approach to construction.’
The Privinvest companies also criticised the judge’s finding that arbitration agreements are to be construed narrowly. Lady Justice Carr disagreed with this characterisation, stating, ‘I do not consider that, fairly read, the Judge made that finding, at least no such finding in such stark terms. What he in fact said (at (95)) was that the fact of multiple arbitration clauses suggested that ‘…in general terms, a narrower approach to the sufficiency of the connection is required.’
Lady Justice Carr asserted that the judge was entitled to come to this broad conclusion on the basis of his earlier conclusions that 'i)in favorem arbitri was a supplemental principle that did not override the objective exercise required by Swiss law and ii) the relevant connection between the matters said to be arbitrated and each Arbitration Agreement had to be sufficient, something to be viewed in the context of the particular case.’
Nevertheless, the Court of Appeal held that whether the judge was right to adopt a ‘narrower’ approach to the construction of the Arbitration Agreements does not make a material difference to the outcome of the appeal, as what is more important is whether the judge erred in failing to find that the Republic’s allegations fell within the scope of the Arbitration Agreements.
Ground 2
The Court of Appeal held that the Judge erred in finding that the Republic’s allegations were not sufficiently connected to the supply contracts, as the allegations went to the validity of those contracts. The allegation that the supply contracts were instrument of fraud – alternatively, a sham – was one of several underlying the conspiracy claim. The Republic did not seek a positive finding that this allegation fell within the Arbitration Agreement as it did not think it would need such a finding to succeed against Privinvest.
However, the validity of the supply contracts was bound to be relied on by Privinvest in its defence and it was reasonably foreseeable that such would be the case. Such a defence would be sufficiently connected to the supply contracts, as it would assert the validity of the contracts. As such, it would be connected to the Arbitration Agreements, ‘even adopting the narrowest of tests.’
The Court of Appeal went on to say that this defence would arise in response to every cause of action pleaded. As a result, all the claims against Privinvest are matters which fall within the Arbitration Agreements.
Conclusion
This is a significant decision. It reinforces that where there is an arbitration agreement, even in one of multiple contracts, and any allegation would cause reliance on that agreement, whether it be in the claim itself or in the defence, parties should consider whether an arbitration tribunal would be the correct forum for the dispute before going to the court.
The decision also illustrates the approach of the English courts to situations where complex litigation involves some matters falling within arbitration clauses, and other matters which have to be litigated in court. The clear approach is that, even where certain matters will have to be litigated, the English court is likely to enforce the arbitration agreement to its full extent according to its proper construction.
Advisers and companies potentially involved in arbitrations may wish to keep this decision in mind if faced with any situation where there are issues which could fall to be resolved within arbitration proceedings or in court proceedings.
Howard Kennedy is instructed in the litigation by one of the Mozambican officials. Our client was not involved in the appeal. Nevertheless, our remarks in this article should not be taken to indicate any concluded view or any representation as to what our client may say about this case.