Stay of court proceedings – when do matters relate to an arbitration agreement?
Dr Hermann Knott
Kunz Rechtsanwälte Partnerschaft mbB, Koeln
hermann.knott@kunz.law
Courts and arbitration have a long-standing and close relationship at many stages of the proceedings. One of them relates to the stay of court proceedings in matters where the parties have entered into an arbitration agreement. The principle is enshrined in Article II(3) of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 and in Article 8 of the UN Commission on International Trade Law’s Model Law on International Commercial Arbitration. In England, Section 9 of the Arbitration Act 1996 permits a party who has legal proceedings brought against it in respect of a ‘matter’ which falls within the scope of an arbitration agreement to which it is a party to apply to the court to stay the proceedings. Unless the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed, a stay shall be granted.
Staying procedures often become relevant in disputes among shareholders in cases where the shareholders’ agreement provides for the resolution of disputes by arbitration. Winding-up procedures are a statutory remedy as an alternative to arbitration. Another example are cases where claims are based on fraud, and it is not clear whether the relevant dispute relates to arbitration agreements concluded between the parties.
Both situations have been recently addressed in England in at least two instances: one by the Judicial Committee of the Privy Council (‘Privy Council’) under Section 4 of the Foreign Arbitral Awards Enforcement Act of Cayman Islands in FamilyMart China Holding Company Limited v Ting Chuan Holding Corporation (Cayman Islands)[1] (related to a shareholders’ dispute) and another by the UK Supreme Court in Republic of Mozambique v Privinvest Shipbuilding SAL (Holding) and others[2] (related to claims based on fraud). The fraud case concerns the Republic of Mozambique’s claims based on bribery, unlawful means, conspiracy and dishonest assistance against Credit Suisse, former Credit Suisse employees and five United Arab Emirates and Lebanese companies (the ‘Privinvest Companies’) and others.
The UK Supreme Court’s decision in Mozambique v Privinvest
Three of the Privinvest Companies and special purpose vehicles owned by Mozambique had entered supply contracts for equipment to develop an economic zone in the country (the ‘Supply Contracts’). The Supply Contracts were governed by Swiss law and contained arbitration clauses with different wording. Mozambique alleges that bribes were paid in connection with its provision of sovereign guarantees which were given to secure the funding of the Supply Contracts. Mozambique alleges a conspiratorial scheme against it and a central allegation is that the defendants paid bribes to various individuals in Mozambique, including the former Finance Minister Manuel Chang.
The Privinvest Companies sought a stay of all of Mozambique’s claims against them pursuant to Section 9 of the Arbitration Act 1996 on the basis that the Supply Contracts contain arbitration clauses. To succeed in their application, the Privinvest defendants have to show that (1) both Mozambique and all the Privinvest defendants are parties to the arbitration agreements in question; and (2) the matters alleged in the claims raised by the republic fell within the scope of the arbitration agreements. Mozambique raised its claims in relation to the issuance of the sovereign guarantees securing the financing of the Supply Contracts. These guarantees are governed by English law with an exclusive jurisdiction clause in favour of the Courts of England and Wales.
At first instance, the High Court held that the claims were not within the scope of Section 9 because the claims were not sufficiently connected with the Supply Contracts. The Court of Appeal reversed that decision, holding that the Privinvest Companies’ defence, namely that Mozambique had received valuable consideration under the Supply Contracts, related to the validity of these agreements. Therefore, they constituted ‘matters’ which fell within the scope of the arbitration agreements.
The Supreme Court unanimously overturned the Court of Appeal’s decision, finding that Mozambique’s claims did not fall within the scope of the arbitration agreements. Mozambique’s claims will therefore be heard in the English courts, rather than privately in arbitration.
In considering what is a ‘matter’ for the purposes of Section 9, the Supreme Court considered relevant jurisprudence of Australia, Hong Kong and Singapore which have similarly worded provisions to guide its interpretation. The Supreme Court concluded that there is a ‘general international consensus’ in international arbitration in common law jurisdictions in determining matters that should be referred to arbitration. This can be summarised as follows:
First, in a two-stage process, the court must determine (i) what matters the parties have raised or foreseeably will raise in the court proceedings, and (ii) in relation to each matter, whether it falls within the scope of the arbitration agreement. To be arbitrable, the matter need not encompass the whole of the dispute between the parties.
A common-sense enquiry should be applied to decide whether the issue is an essential element of a claim or of a relevant defence to the claim and is not peripheral in its nature. If a matter is not an essential element of the claim or a relevant defence to the claim, then it is not a ‘matter’ which warrants a stay.
The court must first identify the matters in relation to which the proceedings have been brought and then determine whether they fall within the scope of the arbitration agreement.
In applying that assessment to the case, the Supreme Court noted that it was not tied to the pleadings but should look at the substance of the claims and likely defences. In doing so, and considering the claims which were based on allegations of bribery, the court found that related issues, including possible defences, were not ‘matters’ for the purposes of Section 9 and so the application should not be granted. The UK Supreme Court considered that the claims were principally related to the guarantees which were ancillary to the Supply Contracts.
With this the Court gives important guidance for future applications seeking a stay of proceedings. It acknowledged that there may be a partial defence to quantification of the dispute resulting from the defendant’s position that Mozambique had received benefits under the Supply Contracts. However, in considering whether such a dispute would be sufficiently connected to the Supply Contracts, the court referred to ‘what rational businesspeople would contemplate’ and a Swiss law principle that an arbitration agreement reflects the idea that parties to an arbitration agreement are deemed to have intended the arbitration be a single forum for their dispute but also to the common-sense principle discussed above. The Court concluded in favour of finding that the parties cannot have meant to send ‘such a subordinate factual issue’ (ie, that of quantification) to arbitration. In this context, the Court observed that there were no recorded cases under Section 9 of a court granting a partial stay.
It is notable that, in this case, the presumption that the parties intend for their disputes to be heard in one forum did not prevent the Court from concluding that these issues should be heard in court, while other issues in dispute between the parties would still be subject to arbitration. As a consequence, especially in cases involving fraud claims, the party intending to seek a stay of court proceedings should carefully consider the bases and legal nature of the fraud claims and the scope of the arbitration clause to decide whether the matter is covered by the arbitration agreement. In this context, the Court observed that the Supply Contracts contained non-identically worded arbitration agreements which is a factor narrowing their scope. This aspect should already be taken into account at the stage of drafting arbitration agreements.
The Privy Council’s decision in FamilyMart China Holding Company Limited v Ting Chuan Holding Corporation (Cayman Islands)
This case relates to a shareholder dispute. China CVS (Cayman Islands) Holding Corp operates a convenience store business in the People’s Republic of China under the ‘FamilyMart’ brand. The shares in CVS were owned by Ting Chuan holding the majority and respondent FamilyMart China. The relationship between Ting Chuan and FamilyMart is governed by a shareholders’ agreement which in turn is governed by the laws of the Cayman Islands and provides for an agreement that any disputes in connection with or arising out of the shareholders’ agreement shall be submitted to arbitration in accordance with the ICC Arbitration Rules in Beijing.
In October 2018, FamilyMart presented a petition in the Grand Court of the Cayman Islands to wind up CVS under the Cayman Islands Companies Act (‘Companies Act’), on the grounds that it was just and equitable to do so. This was based on alleged misconduct by Ting Chuan in connection with the management of CVS. In fact, FamilyMart was not intending to wind up the business, establishing that it is just and equitable to do so to enable FamilyMart to obtain a court order for the buyout of Ting Chuan’s shares.
Ting Chuan applied to strike out or stay the petition under Section 4 of the Foreign Arbitral Awards Enforcement Act (FAAEA), on the basis that the underlying disputes between the shareholders should be resolved by arbitration. In principle, the Grand Court of the Cayman Islands granted a stay of the court proceedings until the underlying matters had been arbitrated. The Court of Appeal overturned this decision on the basis that no part of the winding up petition was susceptible to arbitration.
As in Mozambique v Privinvest, it was Lord Hodge who gave the judgment. The parties agreed that the dispute falls within the scope of the arbitration agreement. The Privy Council notes that the central dispute between the parties, then, is whether FamilyMart’s petition has made the matters raised in that petition not susceptible to arbitration.
Section 4 of the FAAEA has similar wording to Section 9 of the Arbitration Act 1996. The Privy Council relied on the definition of a ‘matter’ being a substantial issue that is legally relevant to a claim or a defence which is susceptible to determination by an arbitrator as a discrete dispute, rather than an issue which is peripheral or tangential; and the test entails a matter of judgement and the application of common sense. The Privy Council acknowledged that giving effect to the parties' choice of the method of dispute resolution may involve the fragmentation of their disputes, but noted that the effects of such fragmentation can be mitigated by effective case management by both the court and the arbitral tribunal.
The Privy Council further held that there is a general consensus in the common law world that the power to wind up a company lies within the exclusive jurisdiction of the courts. An arbitral tribunal can, however, grant certain remedies, such as ordering a share buyout, where no third party has a legal interest, and if there is no element of public interest involved. In an application to wind up a company there may be matters in dispute, such as allegations of breaches of a shareholders' agreement, which can be referred to an arbitral tribunal notwithstanding that only a court can make a winding-up order.
Applying these principles, the Privy Council held the following matters as arbitrable: (i) whether FamilyMart had lost trust and confidence in Ting Chuan and the management of the CVS, and (ii) whether the parties' relationship had irretrievably broken down. Whether or not an order to wind up the company should be made, is not a matter which is arbitrable. Nor does an arbitrable tribunal have the power to make a ruling on whether it is just and equitable that CVS should be wound up or whether a share buyout should be ordered. The Privy Council did, however, grant a discretionary stay of the winding-up petition in relation to CVS under the discretion given to it by Section 95(1)(d) of the Companies Act to make ‘any other order that it thinks fit’. This order allows to first determine in arbitral proceedings the matters subject to a stay (ie, the two matters mentioned at the beginning of this paragraph). The resolution of these two matters will be an essential element for the assessment of whether it is just and equitable to wind up CVS.
Finally, the Privy Council held that, while the arbitration agreement required certain matters to be determined by arbitration, that obligation did not amount to a contractual prohibition against the initiation of winding up proceedings as contemplated by Section 95(2) of the Companies Act.
Conclusion and takeaways
The decisions in Mozambique v Privinvest and FamilyMart establish important precedents for the competition between court and arbitration proceedings for the resolution of disputes in two areas where they are often overlapping: claims based on fraud and shareholders’ agreements. The English courts principally take an arbitration-friendly approach. With respect to stay proceedings they take, however, a close look at the intention of the parties and the nature of the dispute applying a common-sense approach. It is very important that the effect of the dispute being divided in two parts, one resolved by arbitration and the subsequent in court, is not considered to be a reason to deny a stay.