The Supreme Court of the UK has issued its first decision concerning international arbitration. The case concerned the interpretation of section 103(2) of the English Arbitration Act 1996, which restates Article V(1)(a) of the New York Convention.  It grants the court the power to refuse to enforce an international arbitration award where there was no valid arbitration agreement.  In the case under scrutiny, Dallah v Pakistan, Pakistan tried to resist enforcement of an ICC award made against it by a prominent three-member international arbitration tribunal on the ground that it did not sign the arbitration agreement.  Both the first instance judge and the Court of Appeal found that the arbitral tribunal's determination that it had jurisdiction to hear the dispute, on the basis that Pakistan had submitted to arbitration, could not be upheld and refused to enforce the award (as previously reported – see  Law-Now on 16 September  and Law-Now on 7 August).

In a judgment handed down today the Supreme Court unanimously dismissed the appeal.  In doing so, it held that no arbitration agreement existed to which Pakistan was a party and that there were no other grounds for enforcing the award.

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Full Article

The Supreme Court of the UK has issued its first decision concerning international arbitration. The case concerned the interpretation of section 103(2) of the English Arbitration Act 1996, which restates Article V(1)(a) of the New York Convention. It grants the court the power to refuse to enforce an international arbitration award where there was no valid arbitration agreement. In the case under scrutiny, Dallah v Pakistan, Pakistan tried to resist enforcement of an ICC award made against it by a prominent three-member international arbitration tribunal on the ground that it did not sign the arbitration agreement. Both the first instance judge and the Court of Appeal found that the arbitral tribunal's determination that it had jurisdiction to hear the dispute, on the basis that Pakistan had submitted to arbitration, could not be upheld and refused to enforce the award (as previously reported – see Law-Now on 16 September and Law-Now on 7 August).

In a judgment handed down today the Supreme Court unanimously dismissed the appeal. In doing so, it held that no arbitration agreement existed to which Pakistan was a party and that there were no other grounds for enforcing the award.

Background

Dallah, a Saudi company which provides accommodation and other services to pilgrims in Mecca, entered into negotiations with the Ministry of Religious Affairs of the Government of Pakistan ("GoP") in order to provide accommodation to Pakistani pilgrims undertaking the Hajj. The negotiations culminated in an agreement signed by Dallah and a body corporate established by the GoP, the Awami Hajj Trust (the "Trust"). Following a change of government in Pakistan in 1996, the GoP brought Dallah before the Pakistani courts seeking a declaration that Dallah had repudiated the agreement. In response, Dallah instigated ICC arbitration proceedings in Paris pursuant to the arbitration clause contained in the agreement. At this time, the Trust had ceased to exist and Dallah brought the arbitration proceedings against the GoP, which declined to take part in the arbitration proceedings. In a first partial award on jurisdiction, the arbitral tribunal applying "transnational principles" held that the GoP was bound by the arbitration clause and eventually awarded $20m to Dallah in a final award.

When Dallah sought to enforce the award in England, the GoP successfully agreed before the first instance that it (as opposed to the Trust) had not been a party to the arbitration agreement and that enforcement of the award should therefore be resisted pursuant to Article V(1)(a) of the New York Convention, as restated in section 103(2)(b) of the Arbitration Act 1996. Section 103(2)(b) of the Arbitration Act provides that enforcement may be refused if the party against whom it is invoked "proves" that the arbitration agreement was not valid, Aikens J considered that "If a party has to prove a matter, that must mean, in the context of English civil proceedings, prove the existence of the relevant matters on a balance of probabilities".

The Court of Appeal upheld his judgment and ruled that:

  • Under section 103(2)(b) of the Arbitration Act, the judge had to conduct a full re-hearing of the matter and not a simple review of the tribunal's decision on its own jurisdiction;
  • The law applicable to the validity of the arbitration agreement was French law (substantive rules) as it was the law of the seat of arbitration;
  • Applying French law, the GoP was not a party to the arbitration agreement and the award was not enforceable;
  • The discretion given to the judge in Article V is a narrow one and should certainly not be exercised where the person against whom the award is invoked was not party to the arbitration agreement; and
  • The fact that the GoP did not challenge the award before the courts of the seat does not amount to an issue estoppel.

Judgment of the Supreme Court

The Supreme Court unanimously upheld the judgment of the Court of Appeal. On the proper application of French law (as the law of the country where the award was made) the GoP was not a party to the arbitration agreement and was not bound by it. In the circumstances, the Supreme Court was unwilling to exercise its discretion under Article V(1) and section 103(2) to enforce or recognise the award, which it found to have been made without jurisdiction. Accordingly, Dallah's appeal was dismissed and its attempt to enforce its award against assets in the UK failed.

In reaching its decision, the Court considered the following issues:

  • The relevance of the fact that the arbitral tribunal had itself ruled affirmatively on the issue of its own jurisdiction, based on its view that the GoP (not jus the Trust) had construed to arbitrate;
  • Whether the GoP could establish, applying French law principles, that it was not a party to the arbitration agreement; and
  • The nature and existence of any discretion to be found in Article V(1) and section 103(2), which provide that "recognition and enforcement of the award may be refused" (emphasis added) if the arbitration agreement is proved to be invalid.

In respect of the first of these issues, it was well understood that a tribunal in an international arbitration has jurisdiction to determine its own jurisdiction. But it did not follow that this should operate to exclude that issue from being re-examined when the award comes to be enforced. In the circumstances, Article V safeguarded the fundamental right of a party which had not agreed to arbitration to object to the jurisdiction of the tribunal. The Supreme Court saw no basis for departing from the plain language of Article V(1)(a) as incorporated by section 103(2)(b), which entitled and bound the Supreme Court to revisit the tribunal's decision on jurisdiction.

The Supreme Court therefore had to determine the second issue, namely whether the GoP could prove that it was not a party to the arbitration agreement. Although the burden of proof was on the GoP, this was not an insurmountable obstacle. As explained by Lord Mance in his leading judgment, "Dallah starts with advantage of service, it does not start fifteen or thirty love up." In fact, applying French law principles, there was no common intention on the part of the GoP to be a party to the arbitration agreement. The whole structure of the agreement between Dallah and the Trust was such as to distance the GoP from any direct contractual involvement. The GoP's only role was to guarantee the Trust's obligations. On the evidence before it, the Supreme Court held that the GoP was not a party to the arbitration agreement.

The final issue was whether, even if the GoP was not bound by the arbitration agreement, the Supreme Court should exercise its discretion under Article V(1) and section 103(2) to enforce the award anyway. Dallah submitted that even if the GoP could prove that it was not bound by the agreement, the Supreme Court should exercise its discretion to enforce the award. The Supreme Court refused to do this, saying that, in the absence of some fresh circumstance such as another agreement, it would be remarkable if the word "may" in Article V(10 and section 103(2) enabled a court to recognise or enforce an award which it found to have been made without jurisdiction.

Comment

This decision supports one of the fundamental principles enshrined in the New York Convention: that a party is entitled to oppose the enforcement of an award on the grounds that it is not based on a valid agreement to arbitrate. The Supreme Court has unanimously upheld that principle.

Nevertheless, the practical result of Dallah has serious consequences for international arbitration users: issues of jurisdiction determined by a prestigious three-member international arbitral tribunal were found to be subject to a full re-hearing of the evidence by a single national court judge. In addition, the Court of Appeal and Supreme Court have conducted appeals based on the legal merits of that single judge's decision, without the benefit of hearing the factual evidence. The parties in Dallah have also been subject to four jurisdictional hearings on the same factual issue, one before the tribunal and three before the English courts, with obvious cost implications for speedy and efficient resolution of jurisdictional issues.

None of this would have occurred had the transaction documents been structured differently. Parties that are entering into transactions that might require enforcement of arbitral awards in England and Wales should think carefully about transactional structure issues. In particular, where a third party is using a special purpose vehicle it will be important to ensure that there is a performance guarantee, or some other mechanism, from the third party containing a separate, valid, arbitration agreement.

Further reading:

Dallah Real Estate and Tourism Holding Co v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 03/11/2010.