What’s the ‘matter’?
R Craig Connal KC
RCCKC Arbitration, Glasgow
rcckc@protonmail.com
In two rulings issued on the same day, the UK’s top judges examine how to decide what is a ‘matter’ which has to be sent to arbitration. They go on to consider some of the challenges which arise in making that decision, and touch on circumstances where a ‘matter’ will not be referred to arbitration, before then applying their analysis to the two very different factual situations before them. The decisions are of world-wide interest both because of the eminence of the judges but also because the same need to identify a ‘matter’ arises under the New York Convention.
Why does it matter?
Parties have locked horns in litigation. One party wants some or all of the dispute removed from the courts and sent to arbitration. As the judges pointed out,that involves a two-stage approach – first, decide what the matters before the court are, and then whether they fall within the ambit of the arbitration agreement.
How did the judges approach the analysis?
The starting point, interestingly, was to conclude that a ‘pro-arbitration’ approach, leading to a liberal interpretation of arbitration agreements, formed part of the context in which the case should be considered. Next – and critically for the value of these rulings – the judges pointed out the appearance of precisely the same issue under Article II(3) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘New York Convention’). Given the significance of the New York Convention in international arbitration and its widespread adoption in national laws, ‘in the interests of uniformity the words should not be given a local interpretation controlled by [...]. “domestic precedents of antecedent date”, but rather should be construed “on broad principles of general acceptation”’. That led the judges to directly review jurisprudence not only from the United Kingdom, but also, for example, from Australia, Hong Kong and Singapore (which emerged as particularly influential). Many of the quoted decisions in turn had carried out wider reviews of international jurisprudence.
The result
The judges concluded that there was a consensus – at least among the leading international arbitration jurisdictions in the common law world – aimed to summarise what that was. First, follow the two-stage process outlined above. Bear in mind that the claims may have been contrived to avoid reference to arbitration. Look also at the defences, but here the challenge is that a defendant wanting arbitration will keep defences very brief, hence, ‘the court should also take into account all reasonably foreseeable defences to the claim or part of the claim’. Second, the ‘matter’ need not be the whole of the dispute.
Third,‘a “matter” is a substantial issue that is legally relevant to a claim or a defence, or foreseeable defence, in the legal proceedings, and is susceptible to be determined by an arbitrator as a discrete dispute’. Does that help practitioners? Something not an ‘essential element’ or an issue which is ‘peripheral or tangential’ would not qualify. Furthermore, said the judges, a ‘matter’ ‘is something more than a mere issue or question that might fall for decision in the court proceedings or in the arbitral proceedings.’ , more guidance – working out what the ‘matter’ is – is ‘a question of judgment and the application of common sense rather than a mechanistic exercise. It is not 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 the issue is reasonably substantial and whether it is relevant to the outcome of the legal proceedings.’
Fifth, – and the judges were not sure if there was yet the same consensus on this – the context in which the matter arises may be relevant. That could exclude the ‘matter’ from the arbitration agreement. A party had autonomy as to which of potentially several claims it wished to advance.
Looking at practicalities, procedural complexity caused by reference to arbitration does not render the matter non-arbitrable. But a request to stay for no real purpose or for an improper purpose could be refused. ‘Rational businesspeople may as a general rule prefer that their disputes are determined in the same forum: […] An arbitration agreement may be interpreted generously to achieve that end [...] But, where, on a proper interpretation of the arbitration agreement, the parties have contracted to refer to arbitration disputes which do not extend to all the matters raised in the legal proceedings, giving effect to the parties’ contract will involve fragmentation of the disputes. The disadvantages caused by such fragmentation can be mitigated by effective case management by both the court and the arbitral panel.’ An interesting note of positivity – or perhaps optimism - to end that passage on.
The FamilyMart case
The Judicial Committee of the Privy Council hears appeals from a variety of former British territories (here, the Cayman Islands). The judges who sit are, in the main, the judges of the UK Supreme Court. Simplifying the underlying facts, there was a shareholders’ agreement with an arbitration clause. Shareholders fell out. One group sought either a winding-up or a compulsory buy-out of the other’s shares. In response, they were met with a demand for arbitration on all, or at least some, of the issues. ‘No’ came the reply – winding-up is essentially a public process and arbitration is unsuited to dealing with the issues. The Court summed up the essence of the dispute as ‘whether the arbitration agreement is inoperative or, in other words, the matters at issue between the parties are incapable of being settled by arbitration or the remedies sought are unavailable to an arbitral tribunal’.
Unfortunately, there was no agreement internationally as to what kinds of disputes are non-arbitrable. The Court cited Born on International Commercial Arbitration which said ‘the nonarbitrability doctrine rests on the notion that some matters so pervasively involve either “public” rights and concerns, or interests of third parties, that agreements to resolve such disputes by “private” arbitration should not be given effect.’ On remedies, arbitrators could not order the winding-up of companies, but could order party-to-party remedies such as share buy-outs. Many jurisdictions recognised that some matters in dispute – such as breach of a shareholders’ agreement - in a just and equitable winding-up could be arbitrated first. Only a court could decide on winding-up thereafter. Bifurcation would not necessarily lead to delay if the arbitral tribunal ‘exercises robust case management in fulfilment of their task in reaching a speedy resolution of an arbitrated dispute’. The winding-up petition would be stayed to allow the underlying shareholder dispute to be arbitrated.
The Mozambique case
Both the underlying facts, and the allegations flowing from them, were extremely complex . In essence, Mozambique borrowed from London banks to fund supply contracts with Privinvest. The supply contracts had arbitration clauses and the borrowing was secured by guarantees. Mozambique then claimed bribery of corrupt officials and employees of the Bank and made a wide range of claims arising from what they labelled a conspiracy. Relying on the arbitration clauses, Privinvest sought a stay. Having dropped claims which admittedly were within these clauses, Mozambique then argued that the validity and soundness of the supply contracts were not ‘on the critical path’ and even if proved did not amount to a defence to the claims. Privinvest retorted that it was artificial to say the case was about the guarantees – it was about corruption in the supply contracts.
Looking at the first of Mozambique’s claims – for bribery – the Court agreed it did not ‘require an examination of the validity of any of the supply contracts [...] Further, a defence that the supply contracts were valid and were on commercial terms would not be relevant to the question of a defendant’s liability to account for the bribe.’ The second claim was an unlawful conspiracy to defraud Mozambique by making them liable under the guarantees. Again, concluded the judges, validity and commerciality of the supply contracts were no defence. They might be relevant to quantum. The same conclusion applied to a claim for dishonest assistance. The Court summarised the central issue as follows:
‘One must have regard to the substance of the controversy between [Mozambique] and Privinvest in order to render ineffective the artificial manipulation by a claimant of its pleadings to circumvent an arbitration agreement which covers that substance [...] In this case, the substance of the controversy is whether the transactions, including both the supply contracts and the guarantees, were obtained through bribery and whether the defendants had knowledge at the relevant time of the alleged illegality of the guarantees and [the signatory’s] lack of authority to execute them. An assertion of the extent to which each of the supply contracts gave value for money provides no answer to the assertion […] that there was such bribery and such knowledge. The assertion that the “matters” in respect of which the legal proceedings are brought are allegations of corruption in relation to the conclusion of the supply contracts states the matter too broadly’.
Accordingly, the ‘matters’ in respect of which proceedings were brought were not covered by the arbitration clauses.
Having come to that conclusion, the Court was then faced with a second argument – whether ‘the partial defence on quantum, namely that each of the supply contracts gave something of considerable value which [Mozambique] has squandered, gives rise to a dispute referable to arbitration under the arbitration agreement contained in each of the supply contracts which the Privinvest supply companies entered into’. There were no recorded cases in the UK of such an argument having succeeded. While rational businesspeople would usually contemplate all issues being decided by the same tribunal, the arbitration clause did not cover the case on liability. Here, said the Court, those same businesspeople ‘would not seek to send to arbitration such a subordinate factual issue arising in such legal proceedings and the arbitration agreements must be construed accordingly’. There was also no ‘real and proper purpose’ in taking the point. So Privinvest failed in getting out of the Courts into arbitration.
Conclusion
To an outside observer it is sometimes a mystery why litigants expend enormous amounts of effort (and presumably cash) battling over where the merits should be fought out. It is understandable, perhaps, where one of the choices is the ‘home turf’ of one party. Perhaps in other cases it is less clear. Will the guidance offered by these decisions be of assistance in future cases? The word of choice, again, is ‘perhaps’. With the guidance including the need to apply common-sense – of which there will be as many versions as there are decision-makers – differences of view will be inevitable. In addition, some of the challenges – such as the skeletal pleadings on the merits of a party seeking arbitration – will not make answers easier to come by. Finally – because readers will form their own views – to this writer the task of identifying and discarding what are ‘artificial approaches’ seems especially difficult. As a tailpiece (and with appropriate deference to the top minds involved) is dropping claims undoubtedly covered by a clause to assist the argument that an overall composite transaction is not so covered, not as artificial as anything else?