Dallah: one test, two different findings

Introduction
Facts
Proceedings
UK judgment
Paris Court of Appeal decision
Comment

Introduction

It is a truism that relativity applies in arbitration. An award can be set aside by the courts of the English seat of arbitration and yet be declared enforceable in France – Putrabali was a recent example.(1) The paradox can be explained by reference to the French philosophy of arbitration: the seat of arbitration carries little, if any, consequences for the courts of the place of enforcement. Another example is a case in which arbitrators sitting in France found that a state was bound by the arbitration agreement signed by a state-controlled entity; this decision was subsequently upheld by the courts of the seat of arbitration applying French law. In the meantime, however, the English courts had taken the opposite view, applying the same French law test, that the same awards could not be enforced in England.

In a decision of February 17 2011(2) the Paris Court of Appeal rejected an application brought by the Pakistani Ministry of Religious Affairs to set aside three International Chamber of Commerce (ICC) awards rendered in Paris in an arbitration opposing the government and Saudi Arabian real estate company Dallah Real Estate and Tourism Holding Company.(3) The Paris Court of Appeal held that the arbitral tribunal was correct in finding that the government was bound by the arbitration agreement and that it consequently had jurisdiction over the government, despite the latter not being a signatory to the arbitration agreement. This decision, however, came in stark contrast to the UK Supreme Court's decision of November 3 2010,(4) which – applying French law to the same issue – refused enforcement of the same arbitral awards on the grounds that the arbitral tribunal had incorrectly decided that it had jurisdiction over the government.

The conflicting decisions in Dallah again illustrate the possibility for an arbitral award to have a different fate depending on how the courts of the seat of arbitration and the courts of the places where enforcement is sought approach arbitration. It is all the more interesting that the English and French courts, while following their own distinct course of reasoning, purported to apply the same French law test to the circumstances. They obviously differed on how the test should be applied, although both recognised that a full review of the circumstances that were relevant for the determination of the issue of consent to arbitration that was before them was in order. One explanation may be found in the differences in how common law and civil law courts approach facts determination. Another explanation has to do with how English and French courts apply the doctrine of privity of contract to arbitration agreements, where a non-signatory party having powers of control over a signatory party (eg, the power that a holding company has over an affiliate or the power of a state over a state-owned body) arguably played a significant role in the circumstances that led to the dispute.

Facts

Dallah is a member of a group providing services for Hajj pilgrims travelling to holy sites in Saudi Arabia. In February 1995 Dallah made a proposal to the government to provide for the construction and long-term lease of residential buildings for the housing of Pakistani pilgrims travelling to Mecca. On July 24 1995 a memorandum of understanding was concluded between Dallah and the government, whereby Dallah undertook to buy property in Mecca and to build the necessary housing facilities.

On January 21 1996 the president of Pakistan promulgated Ordinance VII, establishing the Awami Hajj Trust for the collection and investment of pilgrims' savings and the organisation of pilgrimage facilities. Further ordinances were then promulgated to recreate and continue the trust, since under Article 89(2) of the Constitution, a promulgated ordinance "should stand repealed at the expiration of four months from its promulgation". Further negotiations with the government led to the signing of an agreement between Dallah and the trust – not the government – on September 10 1996. Although the government was not a signatory to the agreement, Clause 27 provided that the trust could assign or transfer its rights and obligations under the agreement to the government without the prior consent of Dallah. The agreement also made reference to a guarantee to be provided by the government. The agreement contained an arbitration clause, pursuant to which any disputes between the trust and Dallah were to be referred to ICC arbitration in Paris.

Following a change of government in Pakistan, the ordinance created and maintained the trust was not renewed(5) and, on December 11 1996, the trust ceased to exist as a legal entity. Consequently, on January 19 1997 a government official – who was also head of the trust – terminated the agreement.

Proceedings

Soon after, the same official initiated an action on behalf of the trust before the Pakistani courts seeking:

• a declaration that the agreement had no force and effect; and
• a permanent injunction restraining Dallah from asserting a contractual relationship with the trust on the basis of the agreement.

The case was dismissed in February 2008 on the grounds that the trust had legally ceased to exist when the action was brought.

Shortly thereafter, in May 1998, Dallah commenced ICC arbitration proceedings in Paris against the government for wrongful termination of the agreement. The arbitral tribunal rendered three successive awards on June 16 2001, January 19 2004 and June 23 2006.(6) Throughout the arbitration the government denied being a party to any arbitration agreement and maintained a jurisdictional reservation. Nevertheless, in its first partial award the arbitral tribunal concluded that the government was a party to the agreement bound by the arbitration agreement and that it had jurisdiction to determine Dallah's claim against the government. In the second partial award, the arbitral tribunal held that the government was liable for the termination of the agreement; and in its final award, the arbitral tribunal awarded Dallah approximately $20 million in damages and legal costs.

Leave to enforce the final award was obtained by Dallah in August 2009 in France and in October 2009 in England. However, the government opposed enforcement before the UK courts and commenced annulment proceedings before the Paris Court of Appeal against all three awards.

UK judgment

On January 12 2010 the UK Supreme Court refused the stay sought by Dallah pending the outcome of the action to set aside the three awards brought by the government before the Paris Court of Appeal.

The Supreme Court followed its traditional approach, which is based on the conflict of laws method. Whether the governmentshould be considered a party to the arbitration agreement, despite it not being a signatory to the arbitration agreement, was a matter to be determined pursuant to the law of the seat of the arbitration – in the event, French law. If the application of French law led to the conclusion that the government could be considered a party to the arbitration agreement, enforcement of the awards could be granted; in the contrary, it would be denied.

The Supreme Court determined that the applicable test was that established in the French Dalico decision(7) – namely, that the existence of consent of a non-signatory to an arbitration agreement is to be established on the basis of the common intent of the parties, after considering their subjective intent in light of their objective behaviour. In Dalico the French Supreme Court had upheld three ICC arbitral awards and acknowledged the existence of a valid arbitration agreement, the validity of which was challenged by the Lybian city of El Mergeb pursuant to principles of Lybian contract law. The court held that the existence of an arbitration agreement was to be established by having regard to the common intent of the parties without reference to any national law. Purporting to apply the Dalico test, the five-judge bench of the Supreme Court unanimously declined to enforce the awards and dismissed Dallah's appeal, concluding that the government could not be considered a party to the arbitration agreement – confirming the similar findings of the London High Court and Court of Appeal.(8)

Paris Court of Appeal decision

On February 17 2011 the Paris Court of Appeal refused to set aside the three awards, upholding the arbitral tribunal's finding that the government's implication was sufficient to justify the extension of the arbitration agreement. The Paris court did not refer to any rule of conflict of laws since French law recognises transnational principles applicable to determine the existence, validity and effectiveness of an international arbitration agreement without reference to any national law.

Following a detailed analysis of the government's various actions, the court concluded, at variance with the UK Supreme Court's findings, that:

"the implication of the [government]... together with its behaviour during the pre-contractual negotiations, confirm that the creation of the Trust was a pure formality and that the [government]… behaved as if it were the true Pakistani party during the economic operation."(9)

The Paris Court of Appeal therefore dismissed the government's plea that the award be set aside.

Comment

Scope of judicial review of arbitrator's jurisdiction
While both the UK and the French courts concluded that they had the authority to conduct a full review of the arbitral award on jurisdiction, they did not review the award on jurisdiction to the same extent.

The UK Supreme Court held that under Section 103(2)(b) of the English Arbitration Act and Article V.1(a) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, where, as in the present case, the issue is one of initial consent to arbitration, the court must determine for itself whether the objecting party actually consented and may determine the question afresh. The Supreme Court considered that in making such determination, the court may have regard to the reasoning and findings of the arbitral tribunal if they are helpful, but it is neither bound nor restricted to them. The Supreme Court therefore retried the whole issue of jurisdiction, hearing fresh evidence and calling new witnesses.

It is also the usual trend of French courts, when verifying the arbitrators' jurisdiction in the context of annulment or enforcement proceedings, to conduct a review of "all legal and factual elements that are relevant to determine the scope of the arbitration agreement and draw the corresponding conclusions regarding the arbitrators' compliance with their mission".(10) In practice, however, the Paris Court of Appeal limits itself to reviewing the legal and factual elements which have been considered by the arbitral tribunal – unless the parties bring new evidence – in order to assess whether the arbitrators complied with French law criteria for determining jurisdiction. It is not the practice of French civil and commercial courts to hear factual witnesses.

Contrary findings when applying same law to same facts
On the one hand, the UK Supreme Court concluded that:

"the course of events does not justify a conclusion that it was Dallah's and the [government]'s common intention or belief that the [government] should be or was a party to the Agreement, when the Agreement was deliberately structured to be, and was agreed, between Dallah and the Trust."(11)

On the other hand the Paris Court of Appeal, after a detailed account of the arbitral tribunal's findings of facts, concluded that:

"the implication of the [government]… together with its behaviour during the pre-contractual negotiations, confirm that the creation of the Trust was a pure formality and that the [government]… behaved as if it were the true Pakistani party during the economic operation."(12)

How could the UK Supreme Court and the Paris Court of Appeal have reached such irreconcilable conclusions?

This may be explained by the different approach adopted by each court. The English courts adopted a restrictive approach (ie, one that was premised on the pre-eminence of contractual arrangements), thus requiring a demonstration that consent of the government to arbitration was real notwithstanding a contractual structure that insulated the government from the arbitration clause, while the Paris Court of Appeal adopted a more practical approach that deliberately favoured substance over form (ie, the French court purported to determine, from an economic point of view, who of the trust or the government was the true Pakistani party to the agreement).

First, the two courts construed the negotiations leading to the conclusion of the agreement differently. Before the conclusion of the agreement between Dallah and the trust, the government was entirely involved in the negotiation with Dallah. The government and Dallah had even executed a memorandum of understanding. For the Paris Court of Appeal, this was an indication of the government's involvement from the start. The UK Supreme Court considered that this 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, after the Trust's creation, between Dallah and the Trust".(13)

During the performance of the agreement, the government itself sent two letters urging Dallah to set up saving schemes for the pilgrims and to give wide publicity to such schemes. For the Paris Court of Appeal, these letters were critical in showing the government's constant involvement in the performance of the agreement, which it had previously negotiated. Although Lord Mance acknowledged that "the [government]'s… involvement… is clear", he then concluded that such letters did not demonstrate that the parties intended or believed that the government should be or was a party to the agreement.

Finally, the fact that the agreement was not terminated by its signatory, the trust, but by Mr Mufti, a government official, by a letter sent in his capacity as secretary of the Ministry of Religious Affairs, was decisive for the Paris Court of Appeal regardless of whether Mufti was the secretary of the board of trustees, whether the trust had its own letterhead or whether the proceedings had been initiated by the trust shortly thereafter. In contrast, according to Mance, the termination letter had to be put "in its context" and in perspective with the subsequent proceedings initiated on behalf of the trust.

In light of the above, it appears that the UK Supreme Court was very restrictive in its interpretation of the existence of a common intent to arbitrate and required such intention to be expressed unequivocally. It may be that the UK Supreme Court decided to be more restrictive because the case involved government interests and the affairs of a state entity. Indeed, Mance specifically referred to the French Pyramids decision, in which the Paris Court of Appeal adopted quite a restrictive approach when annulling an award which had extended an arbitration agreement to Egypt, as an illustration of the "careful analysis" required in the context of a situation involving a state. It may also be that although the UK Supreme Court applied French law, it was influenced by English concepts, such as the concept of privity.

In contrast, the Paris Court of Appeal did not look for evidence of a common intent or facts which might presume the intent of the parties. It merely focused on establishing whether, in light of the operation contemplated by the agreement, the government was objectively, from an economic point of view, the true Pakistani party to the agreement. Instead of the subjective intention of both parties, the Paris Court of Appeal assessed whether the government objectively behaved as a party to the agreement.

Different fate of award depending on places of arbitration and enforcement
Dallah is remarkable in that it illustrates the possibility for an arbitral award to have a different fate depending on where the arbitration had its seat and the place of enforcement. The French approach is an illustration of the absolute autonomy of international arbitral awards, which are not integrated into the legal system of a state until they have been enforced. Such principle has been established in France since the 1994 Hilmarton decision, whereby the Supreme Court accepted that an arbitral award can be enforced in France despite the fact that it has been set aside by the courts of the seat of arbitration on the basis that:

"an international arbitral award, which does not belong to any state legal system, is an international decision of justice and its validity must be examined according to the applicable rules of the country where its recognition and enforcement are sought."(14)

Put differently, it is up to the courts of the place of enforcement to assess whether the award meets the standards of recognition in that country.

The UK Supreme Court's refusal, in the present case, to stay the proceedings pending the outcome of the French annulment proceedings may not, however, be construed as the Supreme Court's endorsement of the Hilmarton case law. On the contrary, in his opinion Mance held that although:

"successful resistance by the [government] to enforcement in England would not have the effect of setting aside the award in France… 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… But that is a matter for the French courts to decide."(15)

The mere reference to the principle of issue estoppel appears to be in contradiction with any suggestion that the English court may have any sympathy for the Hilmarton doctrine.

While the awards will not be enforceable in England, Dallah will be able to try to enforce them anywhere else. Under the New York Convention, the most important courts are indeed those of the seat.(16)

It remains to be seen whether the French Supreme Court will uphold the Paris Court of Appeal's decision, since the government lodged an appeal against it on June 15 2011.

For further information on this topic please contact Elie Kleiman or Julie Spinelli at Freshfields Bruckhaus Deringer by telephone (+33 1 44 56 44 56), fax (+33 1 44 56 44 00) or email ([email protected] or [email protected]).