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By Richard Bamforth and Andrew Aglionby

The first judgment by the Supreme Court in an arbitration case, Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, was handed down on Wednesday 3 November 2010. The Supreme Court upheld the decisions of the Court of Appeal and High Court which refused to recognise and enforce a New York Convention award in favour of Dallah. Those decisions were notable as rare examples of the English court refusing to enforce a New York Convention award.

Hailed by Lord Collins as of “international importance”, the judgment had been eagerly awaited by the arbitration community because the case raised questions as to the extent to which an English court will, at the enforcement stage, investigate whether the arbitral tribunal had jurisdiction over the parties, and also the extent of the court’s discretion to refuse recognition and enforcement of a New York Convention award.

The facts

In 1996 Dallah signed an agreement with the Awami Hajj Trust (a trust set up by ordinances of the Government of Pakistan) for the provision of housing to pilgrims making the hajj to Mecca. The agreement contaied an arbitration agreement, which referred any disputes to ICC arbitration in Paris, but which did not specify the applicable governing law. The ordinances establishing the Trust lapsed shortly after the agreement was signed, and the Trust ceased to exist as a legal entity. A dispute arose as to the scope of the project, and Dallah brought ICC arbitration proceedings in 1998 against the Government, claiming that the Government was a true party to the underlying agreement. In a first partial award on jurisdiction, the tribunal (which included Lord Mustill) upheld this contention ,and subsequently in 2006 Dallah were awarded USD 20 million.

Dallah then sought to enforce the award in England. The Government objected to enforcement under section 103(2)(b) of the Arbitration Act 1996, on the ground that “the arbitration agreement was not valid [...] under the law of the country where the award was made” because the Government was not a party to it.

The issues

The court’s power to review the issue of jurisdiction

One of the central issues which the Supreme Court had to consider was the nature of the exercise which an enforcing court must undertake when deciding whether an arbitration agreement exists. Although the court was, strictly speaking, undertaking a statutory interpretation of section 103(2)(b) of the 1996 Act (the ground on which the Government sought to resist enforcement of the award), the court’s deliberations have a wider significance because the English statutory provision reflects faithfully the equivalent wording of the New York Convention. The judgment, therefore, has potential ramifications for the interpretation of the reviewing powers of the courts of other signatory jurisdictions as regards the enforcement of New York Convention awards.

Dallah’s primary submission was that only a supervisory court (here, the French court) has standing to undertake a full examination of the tribunal’s jurisdiction and that it does so on an application to set aside the award for lack of jurisdiction. In contrast, Dallah submitted, a mere enforcing court must do no more than undertake a limited review of the tribunal’s jurisdiction and the precedent question of whether there is a valid arbitration agreement which binds the relevant parties. Where the tribunal has already ruled on its own jurisdiction and the tribunal’s conclusions can be regarded on their face as plausible or “reasonably supportable”, the court should refuse to become involved. Dallah highlighted the eminence, high-standing and great experience of the ICC tribunal which had determined its own jurisdiction, in order to bolster its argument that the court should give due weight to the tribunal’s findings.

The Supreme Court did not accept that anything less than a full investigation of the issue of the jurisdiction of the tribunal should be carried out in order for it to ascertain whether section 103(2)(b) of the 1996 Act has been made out by a party resisting enforcement on the grounds that the arbitration agreement was not valid (nor binding on the relevant parties). The detailed judgments of Lords Mance and Collins contain lengthy discussion on the principles which underpinned their decision – in anticipation, possibly, of accusations that the English courts are prone to undermine the arbitral process.

Lord Collins acknowledged the trend, both national and international, to limit reconsideration of the findings of tribunals, both in fact and in law. He also acknowledged that the New York Convention had introduced a “pro-enforcement” policy for the recognition and enforcement of awards. But he defended the decision to allow a full investigation of the issue of jurisdiction, in terms which in fact seek to give due weight to one of the cornerstones of arbitration – that is, its consensual nature. Lord Collins highlighted that such intervention by the court under section 103(2) was limited to those circumstances where the “fundamental structural integrity of the arbitration proceedings” was in issue (a citation from the judgment in Kanoria & Others v Guinness [2006] EWCA Civ 222). The structural integrity of arbitration proceedings is never more in issue than where one party alleges that it was not a party to the purported arbitration proceedings.

Lord Mance studied meticulously the language of both section 103(2)(b) of the 1996 Act and Article V of the New York Convention, concluding that there is nothing in their language which indicates only a limited review by the enforcing court. Neither Article VI nor section 103(5) contain any suggestion that a person resisting recognition or enforcement in one country has any obligation first to seek to set aside the award in the country where it was made.

The significance of the tribunal’s view on its jurisdiction

As for the significance of the fact that the tribunal had ruled on its own jurisdiction, the court said that the tribunal’s own view has no legal or evidential value when the issue is whether it had legitimate authority in relation to a party. The court may have regard to the reasoning and findings of the alleged arbitral tribunal, if they are helpful, but it is neither bound nor restricted by them. Citing from the 1996 Report on the Arbitration Bill of the Departmental Advisory Committee on Arbitration Law, Lord Hope said that an arbitral tribunal may rule on its own jurisdiction but cannot be the final arbiter of jurisdiction “for this would provide a classic case of pulling oneself up by one’s own bootstraps”. And, perhaps in order to meet any accusations of English court interventionism, Lord Collins charted the history of the doctrine of competence-competence (by which arbitral tribunals are entitled to consider their own jurisdiction), highlighting with reference to French, German and US case law, the fact that the doctrine is not applied to mean that the tribunal’s word is the last word on its jurisdiction. The last word will lie with a court, either in a challenge brought before the courts of the arbitral seat, or in a challenge to recognition or enforcement abroad.

Establishing whether the Government was a party

Having decided that it had the power fully to investigate the question of whether the Government was a party to the arbitration agreement, the Supreme Court applied French law because it was the law of the country where the award was made, as is required by section 103(2)(b) of the 1996 Act where the parties have not stipulated a governing law of the arbitration agreement. Consequently, in order to ascertain whether the non-signatory Government was a party to the arbitration agreement under French law, the court considered whether it was the common, subjective intention of the Government, Dallah and the signatory Trust that the Government be bound by the arbitration agreement, taking into account the involvement and behaviour of each during the negotiation, performance and termination of the underlying agreement (Société Isover Saint-Gobain/Sociétés Dow Chemicals, Paris Cour d’Appel, 21 October 1983). Applying that test, the court concluded that the Government was not a party to the arbitration agreement and section 103(2)(b) of the 1996 Act was therefore made out.

Discretion

Dallah’s subsidiary argument was that, even if the Government had successfully proved that it was not a party to the arbitration agreement, and therefore the ground for refusing enforcement under section 103(2)(b) of the 1996 Act for lack of a valid arbitration agreement was made out, the court had a discretion nevertheless to order enforcement. Dallah submitted that this discretion derived from the word “may” in section 103(2) of the 1996 Act: “Recognition or enforcement of the award may be refused if the person against whom it is invoked proves…” (our emphasis). Dallah argued that the court should exercise its discretion to order enforcement because the Government had not taken any steps to challenge the award in the courts of the supervisory seat.

The court held that the word “may” did not denote a wide discretion such as would allow a court to agree to enforcement even where a ground for refusal under the New York Convention had been made out to the extent that the “fundamental structural integrity of the arbitration proceedings” was affected. The wording merely allows a court to consider other circumstances which might on some recognisable legal principle affect the prima facie right to have enforcement or recognition refused. The court gave the examples of an estoppel; an agreement (presumably such as a settlement agreement); where the arbitral procedure was not in accordance with the agreement of the parties but the resisting party had suffered de minimis prejudice (as held obiter in China Agribusiness Development Corporation v Balli Trading [1998] 2 Lloyd’s Rep 76); and in theory where the English court would refuse to apply a foreign law which makes the arbitration agreement invalid where the foreign law outrages its sense of justice or decency, for example where it is discriminatory or arbitrary.

Points to note about the wider ramifications of the decision

1. The court highlighted how the doctrine of Competence-competence is sometimes misinterpreted to mean that the tribunal’s word on jurisdiction is the last word, and firmly denied this. The tribunal’s decision is subject to scrutiny by the courts of the seat of the arbitration as well as those of the place of enforcement, and the former have no greater investigatory rights than the latter.

2. The English court’s power fully to investigate the tribunal’s jurisdiction, where enforcement is being resisted under section 103(2)(b) of the 1996 Act, derives from Article V(1)(a) of the New York Convention which it faithfully reflects. To the extent that other signatory jurisdictions have implemented Article V(1)(a) faithfully, it is difficult to see how the relevant statutory provision in that jurisdiction could be interpreted differently.

3. The parties failed to stipulate a governing law for their arbitration agreement. Where a party seeks to resist enforcement on the grounds of the absence of a valid arbitration agreement and where the parties have not specified the law governing their arbitration agreement, section 103(2)(b) of the 1996 Act requires the jurisdictional issue to be addressed under the law of the place where the award was made. Parties should be mindful in those circumstances that their choice of seat has wider ramifications than merely the supervisory powers of the courts, as the law of the seat will determine whether third parties which have not signed the arbitration agreement are in fact party to it.

4. Of course, the best course is for parties expressly to consider at the outset who they want to be bound by their arbitration agreement and ensure that the drafting achieves this.

Richard Bamforth and Andrew Aglionby are partners in Olswang’s commercial litigation and arbitration group.