UK: Supreme Court Refuses to Enforce ICC Arbitration Award

Last Updated: 23 December 2010
Article by Tony George and Carl Walker

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

The Supreme Court has unanimously dismissed the appeal of Dallah Real Estate and Tourism Holding Company ('Dallah') from the Court of Appeal's decision that Dallah should be refused leave to enforce an ICC arbitration award against the Government of Pakistan ('the Government') in England. This is the first case to reach the Supreme Court on the interpretation of the New York Convention and provides an interesting analysis of the relationship between arbitral tribunals and the courts and the extent to which it is open to a court to review a tribunal's ruling on its own jurisdiction. The Supreme Court concluded that although an arbitral tribunal has power to rule on its own jurisdiction, this is subject to review by the courts.

Background

The dispute arose out of an agreement between Dallah and Awami Hajj Trust ('the Trust') under which Dallah was to acquire land for the construction of housing near Mecca, which would be leased to the Trust. The Government had established the Trust in 1996 to provide various services to Pakistani citizens participating in the Hajj, and had participated in pre-contractual discussions, but was not named as a party to the agreement. The agreement included a clause referring any disputes to ICC arbitration.

Following the fall of Ms Benazir Bhutto's government in November 1996, the Trust ceased to exist as a legal entity and Dallah commenced arbitration against the Government in May 1998 claiming that the Government, acting on behalf of the Trust, had unlawfully repudiated the agreement. Throughout the proceedings, the Government had denied being a party to any arbitration agreement, had maintained a jurisdictional reservation and had not done anything to submit to the jurisdiction of the tribunal or to waive its sovereign immunity. The ICC tribunal held, however, that the Government was a true party to the agreement concluded between Dallah and the Trust, and was therefore bound by the arbitration clause contained in that agreement. The tribunal concluded that it had jurisdiction to determine Dallah's claim against the Government and issued an award against the Government in the sum of approximately US$20.5 million.

This appeal arose from steps taken by Dallah to enforce the award against assets of the Government in England. Hitherto, the Government had succeeded in resisting this enforcement on the ground that the arbitration agreement was not valid under the law of the country where the award was made – France, as required by s. 103 of the English Arbitration Act 1996.

So far as relevant, Section 103 of the Act (which reflects Article V(1) of the New York Convention) provides, as follows:

"(1) Recognition or enforcement of a New York Convention award shall not be refused except in the following cases.

(2) Recognition or enforcement of the award may be refused if the person against whom it is invoked proves-

(b) that the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made."

The Key Issues

The key issues before the Supreme Court were:

  1. To what extent was the Court entitled to review the tribunal's ruling that it had jurisdiction to decide the case, considering the Kompetenz-Kompetenz principle1;
  2. Whether the Government could establish that it was not a party to the agreement, as a matter of French law;
  3. Whether the Supreme Court should exercise its jurisdiction to allow enforcement even if a statutory defence to enforcement was established.


To what extent was the Court entitled to review the tribunal's ruling that it had jurisdiction to decide the case, considering the Kompetenz-Kompetenz doctrine?

Dallah's primary case was that the only court that could undertake a full examination of the Tribunal's jurisdiction would be a French court on an application to set aside the award for lack of jurisdiction. It was submitted that any enforcing court (other than the court of the seat of the arbitration) should adopt a different approach and should do no more than 'review' the Tribunal's jurisdiction and the precedent question whether there was any arbitration agreement binding on the Government. It was argued that this should be only a limited review, as the Tribunal had power to consider and rule on its own jurisdiction (the Kompetenz-Kompetenz doctrine), that it did so after full and close examination of the evidence, and that its award on jurisdiction should therefore be given strong evidential effect. The argument followed that the Court should refuse to intervene so long as the Tribunal's conclusions could be regarded on their face as plausible or reasonably supportable.

The Supreme Court unanimously rejected this argument, with Lord Mance stating that the correct position could be accurately summarised as follows:

"Under Section 103(2)(b) of the 1996 Act/Article V.1(a) NYC, when the issue is initial consent to arbitration, the Court must determine for itself whether or not the objecting party actually consented. The objecting party has the burden of proof, which it may seek to discharge as it sees fit. In making its determination, the Court may have regard to the reasoning and findings of the alleged arbitral tribunal, if they are helpful, but is neither bound nor restricted by them."

The Supreme Court held that although a tribunal has the power to determine whether it has jurisdiction for its own purposes, a court, whether within the country where the tribunal is located or within a foreign country where an attempt is made to enforce the award, can and must revisit the question of jurisdiction. The arbitral tribunal could only have jurisdiction by consent and could not give itself jurisdiction if there was no relevant consent under the applicable law.

Whether the Government could establish that it was not a party to the agreement, as a matter of French law?

The Supreme Court went on to reject Dallah's argument that the Government was a party to the agreement by reason of the parties' common intention that it should be such. In analysing this issue, the Supreme Court took the view that the facts that the Government (a) was itself involved in the contractual negotiations between Dallah and the Trust, (b) was named in the original Memorandum of Understanding and (c) remained interested throughout the project, did not of themselves mean that the Government, or Dallah, intended that the Government should be party to the agreement.

Lord Mance considered that the structure of the agreement made it clear that the Government was deliberately distancing itself from any direct contractual involvement. In reaching this conclusion, his Lordship noted that the Government's only role under the agreement was to guarantee the Trust's loan obligations and to receive a counter-guarantee from the Trust and its trustee bank. The Court identified several other factors which led to the conclusion that there was no common intention, including:

  1. Dallah was advised throughout the transaction by a leading firm of lawyers in Pakistan which was responsible for the drafts of both the Memorandum of Understanding between Dallah and the Government and for the actual agreement between Dallah and the Trust. The Court considered that the lawyers must have well understood the difference between an agreement with a state entity and an agreement with the state itself;
  2. There was a clear change in the proposed transaction between the time of the Memorandum of Understanding and the time of the actual agreement. It changed from an agreement with the Government to an agreement with the Trust;
  3. The Trust was a body corporate capable of holding property in its own right and capable of suing and being sued.

Whether the Supreme Court should exercise its jurisdiction to allow enforcement even if a statutory defence to enforcement was established?

Dallah's fallback argument was that the word 'may' in s. 103(2) of the 1996 Act ("recognition and enforcement of the Award may be refused") gave the court a discretion to allow an award to be enforced even in circumstances where the court had concluded that there was no agreement to arbitrate. The Supreme Court had little hesitation in rejecting this argument, with Lord Mance stating that:

"Absent some fresh circumstance such as another agreement or an estoppel, it would be a remarkable state of affairs if the word 'may' enabled a court to enforce or recognise an award which it found to have been made without jurisdiction, under whatever law it held ought to be recognised and applied to determine that issue."

Comment

Whilst it is a rare occurrence for an English court to refuse to acknowledge an international arbitration award, it seems unsurprising that the Supreme Court, and indeed the lower courts, did not allow enforcement in this case, given that the Government had clearly not consented to be bound by any arbitration agreement and that the arbitration agreement was not valid as a matter of French law.

Footnotes

1 The principle whereby an arbitration tribunal has power to consider and rule on its own jurisdiction.

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