In the recent case of Dallah Real Estate & Tourism Holding Co v Ministry of Religious Affairs, Government of Pakistan1, the High Court of England concluded that Pakistan was not a party to the arbitration agreement, even after an arbitral tribunal in Paris had ruled otherwise and rendered its award. This case is a rare example of the English courts' refusal to enforce an award under the Arbitration Act 1996 which implemented the terms of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"). The decision opens up issues of jurisdiction and enforcement under the New York Convention, to which Japan is a signatory.
The New York Convention and exceptions to enforcement
The New York Convention provides for the recognition and enforcement of foreign arbitral awards in member nations, of which there are currently 142. Under the terms of the New York Convention, the courts of member nations must recognise foreign arbitral awards as binding and enforce them, unless the party against whom the award is being invoked can prove that there is reason to refuse enforcement under Article 5 of the New York Convention. Article 5 provides for various exceptions to the rule of recognition and enforcement. The exceptions are, in brief:
- the parties to the arbitration agreement were under an incapacity or the arbitration agreement is not valid under the governing law or the law of the country where the award is made;
- the party against whom it is invoked was not given proper notice of the appointment of the arbitrator or was otherwise unable to present his case;
- the award contains decisions on matters beyond the scope of the submission to arbitration;
- the composition of the arbitral authority or arbitral procedure was not in accordance with the agreement between the parties or, failing such agreement, the law of the country in which the arbitration took place;
- the award has not yet become binding, or has been set aside or suspended in the country in which, or under the law of which, the award was made;
- the subject matter of the dispute is not capable of settlement by arbitration in the law of the country in which enforcement is sought; and
- the recognition or enforcement of the award would be contrary to public policy.
Article 5 of the New York Convention is implemented in the UK by virtue of section 103 of the Arbitration Act 1996 (the "Act").
The "public policy" exception was considered in our October 2008 newsletter following a recent decision in the Supreme Court of India, Venture Global Engineering v Satyam Computer Services Limited2. The decision in Venture Global has been subject to criticism in the international arbitration community, as it shows a growing willingness of the Indian courts to subject arbitral awards to substantive scrutiny, and ultimately frustrate enforcement, based on a wide interpretation of the grounds to resist enforcement under the New York Convention. By contrast, the decision of the English High Court in Dallah is unlikely to be as heavily criticised. This is because the decision relates to the narrow issue of the validity of the arbitration agreement, rather than the notional and fluid "public policy" exception Nevertheless, the decision provides useful guidance on the approach of the English courts to section 103 of the Act.
Dallah Real Estate & Tourism Holding Co v Ministry of Religious Affairs, Government of Pakistan
Dallah is a Saudi Arabian company which provides services for Muslims performing the Hajj pilgrimage to Mecca. In 1994 the Government of Pakistan decided to set up a trust to invest in real estate projects in Mecca. Dallah and the Government of Pakistan entered into a Memorandum of Understanding by which Dallah was to acquire land in Mecca and contract with the trust for the use of the land. Subsequently, Dallah and the trust, a separate legal entity, entered into the contracts for development of housing on Dallah's plot. These contracts referred disputes to ICC arbitration in Paris. The trust was established on the basis of a temporary ordinance. When this lapsed the trust ceased to exist.
A contractual dispute arose between Dallah and Pakistan which Dallah referred to arbitration in Paris. Pakistan resisted jurisdiction, insisting that it was not a party to the contracts and refused to participate in the arbitration.
After obtaining its award in Paris, Dallah initiated enforcement proceedings in London. However, Pakistan resisted enforcement claiming that the arbitration agreement was invalid. This is one of the grounds for refusing enforcement under the New York Convention as implemented by the English Arbitration Act (section 103(2)(4)) which states:
"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 court took a wide view of this provision and held that it should be construed to include the issue of whether, in fact, the party against whom the award is invoked is bound by the arbitration clause.
To determine the question of whether Pakistan was party to the arbitration agreements, the court and the tribunal took different views as regards which law applied (the parties having not specified which law should be applied to that part of the contract). Whereas the tribunal had applied transnational law, the court decided that French law should apply, that law being the law of the seat. French law specified that the law of the country where the contract was entered into (in this case, Pakistan) governed the question of legal capacity to enter into the agreement. Under the law of Pakistan, the agreement would have needed the signature of the President of Pakistan. Therefore, the court concluded that Pakistan was not a party.
Conclusion and Practical Considerations
Like Venture Global, Dallah sets a precedent for a wide interpretation of the grounds to resist enforcement (although the decision in Dallah is more likely to be received with approval by the international arbitration community). It is important to remember, however, that both these decisions are exceptional and by no means form a rule as to how the New York Convention will be interpreted in the future.
The judgment in Dallah also provides an interesting example of investors' difficulties when contracting with states or state owned entities. In light of the case it is advisable that companies:
- always seek local advice as regards the capacity and correct procedures for a state party's entry into commercial contracts;
- always ensure that the counterparty remains accountable for the duration of the contract; and
- consider whether it would be advantageous to include an express agreement on the law applicable to the arbitration agreement (in order to reduce uncertainty as its interpretation).