Saturday, November 6, 2010

UK Supreme Court on Non-signatory Parties in Arbitration: Part I

We have previously discussed issues surrounding privity in arbitration agreements; and in a recent post, Shantanu looked at a recent decision of the Supreme Court of India on the point which lays down the proposition that an award cannot be enforced against a party merely by virtue of its association with the matter or the parties involved (in the facts of the case, the 'association' was in the nature of a guarantor relationship). We had also examined another decision of the Supreme Court in Indowind where the Court affirmed the sanctity of the corporate veil in determining who the parties to an arbitration agreement are. In these cases, the Court has taken a strict view of who a 'party' to an arbitration agreement is. In a recent decision of the UK Supreme Court, a similar view appears to have been taken in the context of enforcement of awards: Dallah Real Estate v. Ministry of Religious Affairs, Government of Pakistan. In particular, Lord Mance and Lord Collins examined the issue of when non-signatories may be treated as parties in great detail. The decision also decides important questions pertaining to the conflict of laws (such as whether the doctrine of renvoi would operate in the context of the New York Convention).

The Appellant ('Dallah') sought to enforce an award of an ICC Tribunal (with its seat in Paris) made against the Government of Pakistan ('Government'). The Government was not a signatory to the relevant arbitration agreement. The signatories were Dallah and Awami Hajj Trust ('Trust').

Dallah had proposed to the Government that it would provide certain facilities to pilgrims. In particular, Dallah proposed to the Government that it would "provide housing for pilgrims on a 55-year lease with associated financing". The Government approved of this the proposal in principle, and a Memorandum of Understanding was concluded between Dallah and the Government. Under this MoU, "land was to be purchased and housing facilities were to be constructed at a total cost not exceeding US$242 million and the Government was to take a 99-year lease subject to Dallah arranging the necessary financing to be secured by the Borrower designated by THE GOVERNMENT under the Sovereign Guarantee of THE GOVERNMENT." The President of Pakistan – acting in accordance with the terms discussed in the MoU and in subsequent communications between the parties – meanwhile promulgated an ordinance establishing and granting legal recognition the Trust. The Trust was to act as the Borrower as per the terms of the MoU. Further negotiations between Dallah and the Government led to the signing of the agreement ('Agreement') between Dallah and the Trust on 10 September 1996. The Agreement contained an arbitration clause.

Under the constitution of Pakistan as it stood at the relevant times, ordinances had to be either laid down before Parliament or would lapse unless re-promulgated after a specified duration. The re-promulgation of the ordinance continued for some duration, but after a change in the government of Pakistan, the ordinance was not re-promulgated after November 1996. Accordingly, in view of the applicable domestic laws of Pakistan, the Trust ceased to exist as a legal entity in December 1996. In 1998, in view of some disputes, Dallah sought to adjudicate the issues by means of arbitration under the Agreement.

On these facts, the Tribunal found that the Government was a 'true party' to the Agreement and an award was made against the Government.

In the English Courts, the Government relied on Section 103(2)(b) of the (UK) Arbitration Act, 1996 which states that enforcement of an award can be refused when "the arbitration agreement was not valid ….. under the law of the country where the award was made." The Government's argument was accepted by the Courts below, and the matter came up in appeal before the UK Supreme Court.

Lord Mance began his analysis by noting, "the 'validity' of the arbitration agreement depends in the present case upon whether there existed between Dallah and the Government any relevant arbitration agreement at all..."

First, the question arose whether the validity of the award was to be seen under French law. In this regard, it was accepted before the Court that the words "under the law of the country where the award was made" referred to French law. However, it was also common ground between the parties that "Under French law, the existence, validity and effectiveness of an arbitration agreement in an international arbitration …. need not be assessed on the basis of a national law, be it the law applicable to the main contract or any other law, and can be determined according to rules of transnational law..." In other words, this transnational law of arbitration or supra-national law of arbitration was to be treated as a part of French law. In order to determine what this supra-national test is, the UK Supreme Court referred to the decision of the Paris Court of Appeal – "According to the customary practices of international trade, the arbitration clause inserted into an international contract has its own validity and effectiveness which require that its application be extended to the parties directly involved in the performance of the contract and any disputes which may result therefrom, provided that it is established that their contractual situation, their activities and the normal commercial relations existing between the parties allow it to be presumed that they have accepted the arbitration clause of which they knew the existence and scope, even though they were not signatories of the contract containing it..." The UK Supreme Court agreed to apply this test, and noted "It is difficult to conceive that any more relaxed test would be consistent with justice and reasonable commercial expectations, however international the arbitration or transnational the principles applied." Nonetheless, giving weight to the fact that the applicable law was French law, and considering that French law co-opted supra-national law in this regard, the Supreme Court accepted this test as being the correct one to apply, and noted that effectively this was a test which required the 'common intention to arbitrate' of the parties to the proceedings to be ascertained.

The ICC Tribunal had adopted a similar test in holding that the Government was a true party to the award, and hence, next came the issue of whether the arbitrators' decision on the point was open to review. The Supreme Court held on this point that language of the English Act as well as the general principles of arbitration law point strongly "to ordinary judicial determination of that issue. Nor do Article VI and s.103(5) contain any suggestion that a person resisting recognition or enforcement in one country has any obligation to seek to set aside the award in the other country where it was made..." Thus, the standard at the stage of enforcement is that of a full judicial review, and is not limited to the grounds for setting aside and award. Lord Mance then proceeded to explain the relationship between enforcement proceedings and setting aside proceedings thus: "It is true that successful resistance by the Government to enforcement in England would not have the effect of setting aside the award in France. But that says nothing about whether there was actually any agreement by the Government to arbitrate in France or about whether the French award would actually prove binding in France if and when that question were to be examined there. Whether it is binding in France could only be decided in French court proceedings to recognise or enforce, such as those which Dallah has now begun. I note, however, that an English judgment holding that the award is not valid could prove significant in relation to such proceedings, if French courts recognise any principle similar to the English principle of issue estoppel (as to which see The Sennar (No. 2) [1985] 1 WLR 490). But that is a matter for the French courts to decide." Lord Mance also held that there is no difference in the standard of review in cases where the arbitrator assumes jurisdiction, and in cases where the arbitrator determines the existence of jurisdiction.

After a detailed examination of the correspondence between the parties, Lord Mance held that the Tribunal had erred in holding that the common intention test was satisfied.

(Continued in a subsequent post)

1 comment:

Badrinath Srinivasan said...

This judgement is one of the most important ones in the recent past. From a qualitative perspective, the elucidation of principles by Lord Collins seems more brilliant than by Lord Mance. The case is notable also because the UK courts have refused to enforce the award of which lord Mustill (with great reluctance, though) was a part.