Eye on Emerging Markets
In this, our seventh edition of Eye on Emerging Markets, we look at the role of lawyers and the legal profession in striving to meet Africa’s ongoing infrastructure development needs, Brazil's pioneering new framework for sustainable sovereign bonds and the smart metering landscape in India. Last but not least, we report on a recent Supreme Court judgment in London involving the Republic of Mozambique, in which the courts clarified that they can sometimes still have a role even in disputes relating to agreements containing arbitration agreements.
We look forward to continuing to assist our clients in their investments in emerging markets, across our cross-practice, global emerging markets focused team.
Supreme Court Renders Important Judgment - Arbitration Act 1996
Can secondary market trading be replicated in the world of Islamic finance?
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The Smart Metering Landscape
Ash McDermott discusses emerging markets in our latest Ten Key Questions episode
The role of lawyers in Africa’s ongoing infrastructure boom
The SCCA Arbitration Rules 2023
Brazil's Pioneering Framework for Sustainable Sovereign Bonds
What is their applicability in emerging markets?
Electronic Trade Documents Act
What effect will the Act have on global trade?
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Our Eye on ESG blog provides insights and analysis to help navigate the ESG landscape on a global scale. We cover a range of timely ESG updates and issues, including regulatory, policy, political and industry-related developments, as well as judicial developments and case law.
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Ian Coles | Africa & Mining
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Luiz Aboim | Litigation
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Anne Wicks | Global Energy
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OECD Arrangement on Officially Supported Export Credits
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Raid Abu-Manneh | International Arbitration
Eye on Emerging Markets | Q3 2023
Co-written by Kirsti Massie of Mayer Brown, and
Aditya Periwal and Upasana Soni of AZB & Partners.
The Smart Metering
Landscape in India
Smart meters are a new generation of energy meters which allow consumers to better understand their consumption patterns, as well as helping distribution companies (Discoms) to conduct system monitoring and customer billing without manual intervention1. The smart metering landscape in India is a rapidly-developing space. In 2021, the Indian Government's Ministry of Power announced an estimated outlay of INR 3037.58 billion (approximately £29bn) over five years under the Revamped Distribution Sector Scheme (RDSS) to implement prepaid smart meter projects across India in a phased manner. However, with rapid developments come challenges. This article will look at the key talking points in this area, including regulation, financing and legal concerns, as well as considering some points of comparison with the roll-out of the smart metering system in the UK, a process which began in 2011.
The driving force behind India's developing smart
India has set a target to achieve net zero emissions by 2070. Pursuant to this objective, the government of India approved the RDSS, a reforms-based and results-linked roll-out scheme which aims to bring about improvement in the operational efficiency and financial sustainability of all state-owned Discoms by providing them with financial assistance for strengthening supply infrastructure2. REC Limited (REC) and Power Corporate Finance Limited (PCF) have been appointed as the nodal agencies for the operation and facilitation of the RDSS. The RDSS facilitates installation of prepaid smart meters for consumers along with associated advance metering infrastructure (AMI) through public-private partnerships.
In terms of motivation for developing their smart metering landscapes, India and the UK are very much aligned – they are both prompted by their net zero targets and the recognition that providing consumers with real time information regarding their electricity consumption (and the cost thereof) can impact behaviour in terms of energy usage, aid energy efficiency measures and also help grid operators better manage generation and the grid. Note, however, that the UK's target is more immediate: to reach net zero by 2050 (compared with 2070 in India).
The Indian regulatory landscape
While the regulatory regime for implementation of smart metering is still at a nascent stage in India, pursuant to RDSS, REC has issued a model standard bidding document (Model Bid Document) for the appointment of advance metering infrastructure service providers (AMISP) for smart system metering in India on a design, build, finance, own, operate and transfer (DBFOOT) basis3. Several Indian state Discoms have invited proposals for appointment of AMISP on DBFOOT and such proposals are to a great extent in line with the Model Bid Document, with some exceptions on a case-to-case basis. The Model Bid Document contemplates various eligibility and qualification criteria for a bidder, which should be complied with to set up a smart meter project in India.
Key features of the Model Bid Document include:
Smart meters are a new generation of energy meters which allow consumers to better understand their consumption patterns, as well as helping distribution companies (Discoms) to conduct system monitoring and customer billing without manual intervention1
a) Sub-contracting under the Model Bid Document
Usually, in infrastructure projects in India, an EPC contract is executed between the project SPV and a single contractor. Such contractor then, if required, enters into sub-contracting arrangements with its sub-contractors and the project SPV is not party to such sub-contracting arrangements. Further, unless the bidder is itself the EPC contractor, the bidder of the project is also typically not a party to any of the contracting/sub-contracting arrangements.
However, as per the Model Bid Document, the bidder is required to enter into contracts (in Form 23) with all sub-contractors at the time of bid submission. Since the term 'sub-contractor' has been defined to include all indirect sub-contractors, the bidder would need to enter into such a contract with not only the primary contractor(s) engaged by it to carry out the project, but also the sub-contractors to whom such primary contractor(s) would delegate a part of the work.
While it is understandable that this requirement exists at the pre-bidding stage, since the SPV/AMISP has not yet been incorporated, it is peculiar that an identical obligation has also been placed on the selected bidder post the issuance of the letter of award as well. Section 3, Clause 29 of the Model Bid Document provides that within 14 days of receipt of a letter of award, the successful bidder is required to submit a copy of the agreement between each of the sub-contractors and the bidder, guaranteeing back-to-back service and support for the duration of the project, if the sub-contractor is not the bidder.
This proposed structure under the Model Bid Document results in the sole bidder acquiring the rights, title, interest, warranty rights, etc. in respect of the smart meter project instead of the AMISP. This aspect requires clarification from the Discom to ensure that the SPV ultimately owns and operates the smart meter project and should therefore have all the rights and remedies against the contractor. It is also pertinent to note that the model AMISP contract permits the appointment of a sub-contractor with an intimation to the Discom.
(b) Payment security mechanism under the AMISP contract
A key feature of the model AMISP contract is that, prior to the awarding of the AMISP contract to a bidder, the Discom is required to establish a direct debit facility. Such direct debit facility includes a bucket filing approach whereby all consumer recharges and bill payments from the eleventh working day of every month up to the tenth working day of the next month will be routed directly to the SPV's/AMISP's bank account until such time that the undisputed amount of the payment due, including amount due towards supplementary invoices issued by the AMISP, is recovered in its entirety. Once the entire undisputed amount of the payment due, including amount due towards supplementary invoices, is recovered, the direct debit facility will no longer transfer any money to the SPV. In the event the overall monthly amount due to the SPV as the sum of the consumer payments is not reached until the tenth working day of the next month, the shortfall/deficit amount will be paid along with the undisputed amount due to be paid, including any amount to be paid towards supplementary invoices issued by the SPV, for the immediately succeeding month.
In case the Discom fails to clear any payment (including disputed amount) of the SPV within 45 days of receipt of invoices, interest would have to be paid by the Discom at the rate equal to the marginal cost of the funds-based lending rate (MCLR) for one year of the State Bank of India plus 400 bps (MCLR shall be as applicable on the 1st of April of the relevant financial year in which the date of release of delayed payment lies). Additionally, in the format of the AMISP contract, the total contract price as well as the various charges to be paid by the Discom (such as service charges payable to the SPV/AMISP, the lumpsum meter charges, etc.) are populated based on the bid documents submitted by the selected bidder. The payment is made by the Discom on a monthly basis.
(c) Events of default and termination payments
The termination of an AMISP contract can occur on account of certain events of default attributable to the AMISP or Discom. Some of the AMISP events of default include: (a) failure to procure and arrange requisite finances for the implementation of the project; (b) failure to furnish performance security; (c) failure to maintain shareholding of the AMISP in accordance with the provisions of the AMISP contract; and (d) failure or inordinate delay on the part of the AMISP to provide solutions under the AMISP contract.
Similarly, some of the events of default of the Discom include: (a) failure to establish a direct debit facility through online consumer payments; and (b) breach of its obligations which has an adverse effect on the performance of the AMISP obligations under the AMISP contract. In a circumstance where the AMISP contract is terminated on account of the AMISP event of default: (i) after the Installation Milestone, the AMISP is entitled to a termination payment equivalent to 60% of the value of the termination payment determined in accordance with the terms of the AMISP contract; or (ii) prior to the Installation Milestone, the AMISP will be entitled to 60% of the value of assets proposed to be handed over to the Discom as certified by the independent valuer.
In a circumstance where the contract is terminated on account of the Discom's event of default: (i) after the Installation Milestone, the AMISP will be entitled to receive 100% of the value of the termination payment as determined in accordance with the AMISP contract; or (ii) prior to the Installation Milestone, the AMISP will be entitled to 100% of the asset value as determined under the AMISP contract.
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a bidder could be a sole bidder as an individual entity or a consortium of firms/companies who are eligible to participate as per the laws of India;
at the time of bid submission, a bidder is required to hold a valid pre-qualification and technical empanelment certificate for the required communication technology (Empanelment Certificate). The Empanelment Certificate is issued by REC pursuant to a request for empanelment tender from time to time. Once the Empanelment Certificate is issued by REC, the holding and subsidiary companies of the certificate awardee are automatically empanelled, meaning the holding company and subsidiaries of the Empanelment Certificate holder are eligible to submit bids for the appointment of AMISP;
the model draft of an AMISP contract is required to be executed by the selected bidder, Discom and AMISP. The term of the AMISP contract will continue to be in force until the earlier of (i) 10 years from the date of execution of the contract; or (ii) as soon as the meter months4 exceeds the total meter months5; and
the bidder/lead bidder needs to have a registered office in India at the time of submission of bid.
The UK Regulatory approach
The UK has adopted a somewhat different regulatory approach. A key feature of the UK's smart meter scheme is the need for interoperability and interchangeability of smart meters. All smart meter technology needs to demonstrate that it is interoperable and interchangeable with other smart meter technologies and suppliers' networks. The reason behind this is largely a result of the installation of smart meters being an obligation imposed on electricity suppliers.
A key feature of the UK energy market is the right on the part of consumers to select and change their electricity and/or gas suppliers, the thinking being that this ability to switch promotes competition and drives down prices for consumers. The fact that a particular supplier has installed a smart meter in a customer's home should not, and indeed must not, act as a barrier to that customer subsequently switching supplier. Any new suppliers' systems must be capable of working with the previously installed smart meter. A new supplier must be readily able to take over the operation or indeed install a replacement meter if necessary.
Whilst electricity suppliers have an obligation to install smart meters, there is another key player in the UK market in terms of smart meters – Smart DCC Limited. This entity has a Smart Meter Communication Licence and is responsible for linking smart meters in homes with energy suppliers' systems. As mentioned above, the obligation is on energy suppliers to install smart meters and this obligation is set out in the supply licence conditions. Each electricity supplier has to have a supply licence which is issued by Ofgem, the UK energy regulator. Smart meters must be installed at no upfront cost to consumers.
Indian regulatory requirements as to lock in and share
The smart metering tenders proposed by REC and issued by various state Discoms contain certain share transfer restrictions as the AMISP project is being implemented by a special purpose vehicle (SPV) (i.e., AMISP). The Model Bid Document prescribes that in case the bid has been awarded to a consortium, the members of the consortium are required to hold the entire equity capital of the SPV/AMISP for a period of two years after the Installation Milestone (i.e., installation and operationalization of all the smart meters envisaged for the AMISP project).
However, throughout such a period, the lead member of the consortium is required to hold 51% of the equity capital of the SPV/AMISP. Two years after the Installation Milestone, the members of the consortium can dilute their equity stake in the SPV/AMISP to 51% for the remaining duration of the project. However, throughout the term of the project, the lead member is required to hold 26% of the equity capital of the SPV/AMISP.
The AMISP contract also prescribes that any direct or indirect change in the shareholding of the SPV would also require prior approval of the Discom. Further, while the Model Bid Document permits the sole bidder to submit the bid, the share transfer restrictions applicable to a sole bidder are ambiguous.
Moreover, in accordance with Press Note 36 issued by the Indian Government, in the event that a Discom grants its prior approval for any direct or indirect change in the shareholding of an SPV/ AMISP and the proposed transferee of the selected bidder's share in the AMISP is an entity of a country which shares a land border with India or the beneficial owner of such entity is situated in/is a citizen of any such country, prior approval of the Indian Government will be required.
UK transfer restrictions
India's share transfer restrictions have similarities with the share transfer restrictions applied to successful bidders in the UK offshore wind sector. There again, offshore wind projects are awarded as part of a competitive tender process and the projects themselves are complex and involve significant capex. They are also an important part of the energy transition and the achievement of net zero goals. Projects are awarded not only based on price bid but also on demonstrated skills and expertise and essentially the ability to deliver the project.
The UK regulator is keen to ensure that the ability to deliver the project is not eroded through share transfers, particularly during construction phase and early years of operation when technical issues are more likely to manifest themselves and need to be addressed.
Recent smart meter projects in India
Recent smart metering projects have been successfully undertaken by GMR Group's SMR Smart Electricity Distribution Limited, which won a tender to install 7.57 million smart meters across different regions of Uttar Pradesh for a contract price of USD 927 million8. Singapore sovereign wealth fund, GIC and Genus Power Infrastructure Limited have also set up a USD 2 billion smart meter platform.9 GIC will invest in projects through its affiliate Gem View Investment Pte Ltd. Reportedly, GIC will hold a 74% stake while Genus Power Infrastructure Limited will hold a 26% stake in the joint venture.10 The project will be implemented under RDSS for deployment of smart meters across India.11
The smart metering landscape in India is certainly an area attracting a high level of interest and investment and presents numerous opportunities for investors. As flagged above, it is also facing a range of challenges. It can be seen that although the motivation behind the Indian scheme is similar to the motivations underpinning the UK approach, the planning, roll-out and regulation in India have some key necessary differences.
It is interesting to note that even with careful planning being undertaken, the UK experience illustrates the complexity of a smart meter roll-out – originally the deadline in the UK was for each home to have a smart meter by the end of 2020. This has been delayed and there is now a new target of 85% of UK households to have a smart meter by the end of 2024.
If nothing else, the UK has proven that for a smart metering scheme to be successful, it must be meticulously planned, carefully regulated and not rushed. India seems to be ticking these boxes, but as detailed above, it still has some way to go.
Contractual considerations and requirements under the Indian Regulations
Currently, the harmonized list of infrastructure sectors7 issued by the Ministry of Finance does not include smart meter projects.
Financing of the SPV – considerations under Indian regulations
Typically, in infrastructure projects in India, the SPV can be funded by the selected bidder/consortium members or through its affiliates, parent and/or ultimate parent company. As part of the bid submission, the Model Bid Document requires every investing entity (including the affiliate, parent and ultimate parent company) to provide a board resolution in Form 19. Under the Model Bid Document, the format of Form 19 is drafted such that it is an undertaking to invest in the 'equity capital' of the SPV/AMISP. Further, Form 19 contains a note requiring that 'the equity investment obligations by the sole bidder/each member of the bidding consortium/investing affiliate or parent or ultimate parent should add up to 100%'. Therefore, it seems the intent of the Model Bid Document is that investments by way of shareholder loans, subscription of preference shares and debentures (whether convertible or not) are not permitted and all investments in the SPV/AMISP can only be made through subscription to equity. However, it should be noted that such a restriction has the potential to result in an unsustainable capital structure and a non-commercial business approach. In reality, bidders are planning to submit bids by making edits to Form 19 and including clarificatory language which would allow the SPV to be funded through shareholder loans, preference shares and debentures. Nonetheless, clarification in respect of the same should be obtained from REC.
The smart metering landscape in India is certainly an area attracting a high level of interest and investment and presents numerous opportunities for investors. As flagged above, it is also facing a range of challenges.
Whilst electricity suppliers have an obligation to install smart meters, there is another key player in the UK market in terms of smart meters – Smart DCC Limited.
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Written by Beatriz Lavigne and Priscilla Santos
In a significant move to reaffirm Brazil's commitment to sustainable development and align with the growing interest of international investors in impact investing and the expanding thematic bond markets worldwide, the Brazilian Government introduced the "Brazilian Framework for Sustainable Sovereign Bonds" on September 5, 2023 (“Framework”), developed in collaboration with the Inter-American Development Bank (IDB) and the
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While the Brazilian Government has outlined the initial objectives of the package, there remains a need for more detailed plans regarding their implementation, as several initiatives (e.g. carbon market) must pass through legislative bodies (such as the national congress) before they can be put into effect.
Furthermore, the implementation of eligible projects outlined within the Framework requires a lengthy administrative process, including procurement/bidding processes and obtaining environmental licenses. These procedures can potentially lead to delays in achieving the desired outcomes of the framework. Additionally, the Brazilian regulatory framework is known for its complexity, which may pose significant challenges to the execution of certain initiatives. Coupled with issues related to the inefficiency of the state, these factors can further complicate the implementation process of the Framework.
Where do we go from here?
Despite the challenges we may encounter in the regulatory and legal landscape for implementing the Framework, the national level, it has the potential to enhance sustainable finance in Brazil and set a pioneering standard for reporting practices and resource allocation within the private sector – consequently, it could enhance legal stability in the market and make it more attractive to investors. On the international stage, the Framework has the capacity to bolster Brazil's standing in the realm of sustainable finance and investment, elevating its profile among foreign investors and strengthening confidence in Brazil's alignment with global sustainable development objectives.
This perspective gains further credibility with Brazil's recent announcement about public consultation concerning the government's proposal for a Brazilian sustainable taxonomy, which aims to offer guidance on, among others, reliable information regarding sustainable finance. As per the outlined schedule, the taxonomy is set to be formally released in 2024, with mandatory adoption expected for 2026. The proposed taxonomy may indeed have an impact on financial transactions and agreement provisions – we look forward to being part of that discussion!
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The Framework has been certified by Sustainalytics for its alignment with the principles established by the International Capital Market Association (ICMA) and will serve as a guiding reference for the issuance of such sovereign bonds, which are backed by resources directly tied to budgetary expenditures that contribute to the advancement of sustainable development in the country.
Significantly, this marks the first instance where the Federal Government has committed to offering sovereign debt bonds to the financial market with explicit sustainability criteria.
To oversee the implementation of this framework, the Brazilian Federal Government has established a Sovereign Sustainable Finance Committee (“CFSS”), led by the Ministry of Finance and comprising representatives from various ministries, tasked with evaluating and selecting qualified projects aligned with the eligibility criteria set forth in the Framework.
According to Ministry of Finance, after conducting a series of investor roadshows in early September, the aim is to issue bonds in the aggregate amount of R$ 2 billion. Through this bond issuance, Brazil seeks to enhance its appeal to direct foreign investors, with the intention of fostering greater economic growth and development within the country.
From an eligibility criteria standpoint, the Framework outlines criteria across 17 key areas, encompassing pollution control, renewable energy, biodiversity, climate adaptation, universalization of basic sanitation, socioeconomic development, and infrastructure accessibility, among others, to ensure sustainability and responsible practices.
From a supervisory perspective, the CFSS will oversee the distribution and monitoring of funds through its Integrated System of Financial Administration, utilizing the Integrated Planning and Budget System for financing purposes. Also, it will bear the responsibility of furnishing the requisite information to elaborate disclosure reports, considering the necessity to scrutinize, at a finer level of detail, the alignment between eligible expenditure categories and budgetary allocations. Moreover, the Federal Budget Office will assume the role of supplying supplementary information pertaining to the budgetary execution of eligible expenses.
The allocation reports will provide detailed information on the amount disbursed in the following categories:
Type of expense (current expenses, investments, and financial investments);
Recent expenses (reimbursement) and current expenses;
Expense category as a percentage of total expenses, distinguishing the proportion of co-financing; and
Remaining balance of unallocated net proceeds.
On the other hand, the impact reports will include:
Qualitative information on the impacts and outcomes associated with the amount disbursed for each expense category; and
Quantitative data on the impacts and outcomes linked to the amount disbursed for each expense category.
Additionally, there will be an independent third-party assurance report accompanying the aforementioned reports, which will verify if the allocation complies with the eligibility criteria outlined in the Framework, ensuring transparency and accountability in the implementation of sustainable initiatives.
...this marks the first instance where the Federal Government has committed to offering sovereign debt bonds to the financial market with explicit sustainability criteria.
In accordance with the Framework, Brazil aims to fully allocate net proceeds within 24 months from the date of issuance. Until allocation is completed, any unallocated proceeds will be managed in accordance with the relevant government debt management legislation and the National Treasury’s cash availability guidelines. In case of unallocated proceeds, they shall not be directed towards activities characterized as GHG-intensive or controversial, as per the exclusion criteria outlined in the Framework.
The Framework set forth two types of reports (allocation and impact reports) which will be published annually, either upon the maturity of the bonds or upon the full allocation of their net resources. The initial report will be issued within one year of the issuance of the respective bond, followed by subsequent reports every 12 months, which will be publicly available on the National Treasury Secretariat’s website.
Written by Kwadwo Sarkodie and Lauren Howells
In a recent article published by African Law & Business, Kwadwo Sarkodie and Lauren Howells explore how large-scale projects are likely to provide part of the solution, as long as those projects have the resilience to cope with the consequences of an increasingly unpredictable climate, while limiting the environmental effects that projects themselves have. Kwadwo and Lauren discuss how infrastructure projects in Africa need to consider the impact of climate and weather action, both now and in future, as well as ensuring that they are designed and implemented with adaptability and sustainability in mind. As Africa’s development progresses, lawyers have a central role in working to ensure that major engineering projects achieve their objectives while promoting sustainable and inclusive development across the continent.
Africa’s pressing priorities include mitigating the consequences of climate change, managing the needs of a rapidly urbanising population, and the growing demands for housing, infrastructure
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To read the full article, please click here.
Written by Raid Abu-Manneh, Rachael O'Grady, Sam Prentki, Kwadwo Sarkodie, Luiz Aboim, Thais Stella, Alanood Sinjab, Ali Auda and Lisa Dubot
The judgment arises in Republic of Mozambique (“RoM”) v. Privinvest Shipbuilding SAL (Holding) & Ors – the long-standing litigation over an alleged c. US$2 billion fraud (known as the ‘tuna bonds’ scandal) – and addresses a preliminary question relating to a section 9 application to stay all of RoM’s claims. The Supreme Court held that RoM’s claims are not matters falling within the scope of the arbitration agreements. They will therefore be determined by the English court – instead of privately before an arbitral tribunal – with the applicant having failed to establish the criteria for a stay of those court proceedings.
This Legal Update summarises this important Supreme Court decision, focusing on the court's approach to ascertaining a “matter” for section 9 purposes, which was applied consistently in a Privy Council judgment of the same date.
The Supreme Court’s decision provides welcome clarity on the interpretation and application of section 9 using a two-stage test. It is essential reading for parties contemplating, or facing, an application under section 9 of the Act.
Background to the Dispute
Three corporate vehicles, wholly owned by RoM (the “SPVs”), concluded supply contracts with three Privinvest supply companies for the development of Mozambique’s exclusive economic zone, including through tuna fishing (the “Contracts”). The SPVs borrowed money from various banks to purchase equipment and services under those contracts; that borrowing was secured by sovereign guarantees granted by RoM (the “Guarantees”).
The Contracts are governed by Swiss law and provide for arbitration, whereas the Guarantees are governed by English law and disputes are reserved for the exclusive jurisdiction of the English courts.
RoM issued English court proceedings accusing the Privinvest supply companies (plus Privinvest’s subcontractors, together “Privinvest”), the banks and other concerned individuals of bribing RoM’s officials and seeks damages for being exposed to a potential liability of US$2 billion under the Guarantees due to an alleged conspiracy. Specifically, RoM seeks damages and indemnities for: (i) bribery; (ii) unlawful means conspiracy; (iii) dishonest assistance; (iv) knowing receipt; and (v) deceit. It also brings proprietary claims.
Section 9 Stay and the Issue on Appeal
While RoM is not a signatory to the Contracts, Privinvest argue that RoM is a party to them by virtue of Swiss law and hence bound by the arbitration agreements in them. On that basis, they sought a stay of all of RoM’s claims under section 9 of the Act. The question of whether RoM (and the Privinvest subcontractors) are bound by the Contracts is to be decided by the Commercial Court in October 2023. For the purposes of this section 9 decision, the parties agreed that the judges could assume that they are bound.
Section 9 of the Act enables a party to an arbitration agreement against whom legal proceedings are brought “in respect of a matter which under the agreement is to be referred to arbitration” to apply to the court to stay the proceedings so far as they concern that matter.
The preliminary issue for the Supreme Court was whether RoM’s claims were “matters” which fell within the scope of the arbitration agreements under section 9. The lower courts have been divided to date: the High Court said ‘no,’ but the Court of Appeal said ‘yes.’ Unanimously allowing RoM’s appeal, the Supreme Court agreed with the High Court that RoM’s claims were not “matters” falling within the scope of the arbitration agreements under section 9.
Supreme Court Decision: Legal Findings
Meaning of “matter”
The Supreme Court made the following findings of law:
Scope of arbitration agreements
Ascertaining the scope of an arbitration agreement is a question of construction which, in this case, involved principles of Swiss law. In Swiss law, the key question is whether “the dispute in its context in the legal proceedings is sufficiently connected to the particular supply contract to fall within the scope of the arbitration agreement contained therein.”
The Supreme Court made the following important points of principle:
On 20 September 2023, the UK Supreme Court (the "Supreme Court") handed down an important judgment clarifying the proper approach to applications under section 9 of the Arbitration Act 1996 (the “Act”).
The project power, water and communications infrastructure similarly need to be designed and implemented with adaptability and sustainability in mind.
English law adopts a liberal, pro-arbitration approach to the interpretation of arbitration agreements.
As section 9 gives effect to Article II(3) of the New York Convention, when interpreting section 9, the court should look at other jurisdictions’ case law to the extent that they have similarly worded provisions to section 9.
The Supreme Court reviewed cases from leading common law jurisdictions that are signatories to the New York Convention (including Hong Kong, Singapore, the Cayman Islands and Australia) and held that there is “general international consensus” when it comes to the determination of “matters” which must be referred to arbitration.
Parties bringing or defending stay applications in other common law jurisdictions which have provisions similar to section 9 (e.g. Scotland, Hong Kong, Singapore and Australia) may find this judgment informative given the “general international consensus” (amongst common law jurisdictions that are signatories to the New York Convention) on how to approach the determination of “matters” which must be referred to arbitration, clearly articulated by the Supreme Court (see below).
The Supreme Court and Privy Council both agree that 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 the “matter” is not an essential element of the claim or a relevant defence, it is not a matter in respect of which the legal proceedings are brought.
While the principles, enunciated below, are clear, each case must be assessed in light of its particular circumstances (and the relevant law(s) in play).
For section 9 applications, the court must adopt a two-stage test, to ascertain:
what are the matters which the parties have raised (or will foreseeably raise) in the court proceedings; and
whether each matter falls within the scope of the arbitration agreement.
Stage 2 involves looking at the true nature of the matter and the context in which the matter arises in the court proceedings (while there may not be international consensus yet on this point, common sense supports this approach).
Stays can be granted in relation to part of the court proceedings only (so the “matter” need not encompass the whole of the parties’ dispute).
A “matter” is a “substantial issue” that is legally relevant to a claim or (foreseeable/actual) defence and is susceptible to be determined by an arbitrator as a discrete dispute i.e., the matter must be an essential element of the claim or defence, it cannot be an issue that is “peripheral or tangential” to the subject matter of the legal proceedings.
Judges, when evaluating this, must use their judgement and common sense rather than adopting a mechanistic approach.
Under stage 1, the court must consider the substance of the claims and the defences (the court should not be tied to the pleadings as they might be formulated in particular ways to seek, or avoid, reference to arbitration), as well as all reasonably foreseeable defences.
Supreme Court Decision: Application of the Law to the Case Facts
“Matter”: The Supreme Court applied the two-stage test set out above and concluded that while the Court of Appeal was correct to consider whether a matter was a “substantial matter” in the court proceedings, their factual conclusions were wrong. The validity, commerciality and genuineness of the Supply Contracts were not essential to any relevant defence to RoM's claims and so were not “matters” under section 9 in relation to Privinvest’s liability.
Further, since RoM asserts that it did not get value for the monetary obligations it entered into, the extent to which such value was given will be an issue relating to the quantification of RoM’s claims, albeit no case under section 9 exists solely in relation to the quantification of a claim. The Supreme Court did not see a need to determine if the quantification of RoM’s claims is a “matter” in the legal proceedings because it found that the application failed on the scope argument, below.
Scope: The Supreme Court said there was no question of the arbitration agreements extending to cover RoM's allegations on which it relies to establish the legal liability of Privinvest (set out in ‘Background to the Dispute’ above).
RoM’s partial defence on quantum (which arises out of legal claims not found to be within the scope of the arbitration agreements), was equally construed as not being within the scope of the arbitration agreements. The Supreme Court said rational businesspeople would not send such a “subordinate factual issue” to arbitration where it arose merely as a partial defence to liability claims (which are outside the scope of the arbitration agreement) advanced in legal proceedings. Their conclusion was supported by the fact that “there was no evidence of court decisions effecting the bifurcation of a dispute as to quantification of damages from contested claims as to liability.”
Our authors, and the wider international arbitration team, are well placed to advise on section 9 applications and all matters pertaining to international arbitration.
Where there are multiple arbitration agreements, a narrow approach to the sufficiency of the connection is required.
The court must have regard to what rational businesspeople would contemplate.
English jurisprudence has held that rational businesspeople are likely to intend that any dispute arising out of their contractual relationship will be heard by the same tribunal.
Similarly, under Swiss law parties are deemed to have picked arbitration as a single forum for their disputes (rather than the court).
Separately, the Supreme Court (and the Privy Council) also disagreed with prior case law that the practical futility of a stay will in all circumstances be irrelevant.
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1  UKSC 32.
2 See  UKPC 33, also referred to at paragraph 70 of the Supreme Court’s judgment.