Background to Dallah v Pakistan

In recognition of the importance of the enforceability of arbitral awards to transnational commerce, the New York Convention (Convention) strictly limits the grounds on which a court may refuse a request for the enforcement of an arbitral award.

One of the limited bases for refusing enforcement is where the agreement to arbitrate is not valid under the law to which the parties have subjected it or, failing such indication, the ‘law of the country where the award was made.’1

In the recent decision of Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46 (Dallah v Pakistan), the Supreme Court of the United Kingdom relied on the above ground in upholding two lower court decisions refusing to enforce an arbitral award in favour of Dallah, a Saudi Arabian real estate development company.

The award of approximately US$20.5 million was made by an International Chamber of Commerce arbitral tribunal against the Government of Pakistan (Government) in an arbitration pursuant (according to the tribunal) to an agreement made between Dallah and a trust (Agreement) established under a promulgated Ordinance of the President of Pakistan (Trust).

The Supreme Court refused to overturn the earlier decisions on the basis that, pursuant to French law (the law of the country where the award was made), the Government was not bound by the arbitration agreement. Accordingly, the Supreme Court found that the arbitral tribunal did not have the jurisdiction to make an award against the Government.

Why was the arbitral award not enforced?

The Government was neither a named party, nor a signatory to the Agreement.

Under French law, the Supreme Court found that the Government would only be bound by the Agreement (and the arbitral award) if all the parties to the arbitration, including the Government, had the common intention (express or implied) to be bound.2

No common intention was found to exist in the circumstances of Dallah v Pakistan because, inter alia:

  • Dallah had been advised in relation to the Agreement by a leading Pakistani law firm, which meant that Dallah must have understood that it was entering into an agreement with a state entity, rather than the state itself
  • the negotiation of the Agreement evidenced a ‘clear change’ from a proposed agreement with the state, to an agreement with the Trust
  • the Trust was established as a body corporate with the power to sue and be sued by its name
  • the agreement to arbitrate was based on the ICC model arbitration clause, but had been amended so as to specify that the parties to the arbitration agreement were Dallah and ‘the Trust’, and
  • proceedings in relation to a dispute arising out of the Agreement prior to the arbitration had been commenced in the name of the Trust, rather than the Government.3

The Supreme Court reached this decision notwithstanding that:

  • the Government was a guarantor for the Trust in respect of a financing facility to be arranged by Dallah under the Agreement4
  • the Trust could assign or transfer its rights under the Agreement to the Government without the prior written consent of Dallah5, and
  • the Government was involved in the negotiation and performance of the Agreement.6

Although the Supreme Court found that each of these factors suggested a strong link between the Trust and the Government, this was ‘on its face irrelevant to the issue’ of whether the parties intended the Government to be bound by the Agreement.7 As regards the involvement of the Government in the Agreement, the Supreme Court found that this was understandable in the circumstances and ‘did not itself mean that the Government (or Dallah) intended that the Government should be party to the Agreement deliberately structured so as to be made … between Dallah and the Trust.’8

Why is Dallah v Pakistan important?

From a commercial perspective, Dallah v Pakistan highlights a number of important factors which should be considered when entering into transnational commercial contracts.

In particular, the case exposes the difficulties involved in attaining an enforceable award against a non-party to the agreement to arbitrate. Even where a very close connection exists between the non-party and the contracting party, this is unlikely of itself to be sufficient to give a tribunal jurisdiction to make an enforceable award against the non-party.

It should also be noted that, whilst the test in Dallah v Pakistan focused (in accordance with French law) on the existence of a common intention for the non-party to be bound, a more onerous test is likely to apply under other substantive laws (such as Australian law).9

Dallah v Pakistan therefore emphasises:

  • the advantages of contracting directly with the entity controlling the assets (in this case the state), rather than a subsidiary or state-owned enterprise (SOE), and
  • the importance of ensuring, where it is necessary or desirable to contract with a subsidiary or SOE, that the contracting party has (and will continue to have) sufficient resources to satisfy any award made in respect of a dispute between the parties.

In addition to the above, the decision in Dallah v Pakistan highlights that, in the context of a due diligence in respect of an entity which is party to international arbitration, proper consideration must be given to whether those proceedings are with or against a non-party to the arbitration agreement. If this is the case, careful inquiry should be made into why this is appropriate.