Bound by convention?

Arbitration has muscled its way to the forefront of international contract law, but as Andrew Savage and Patrick Angenieux find, a recent high-profile dispute challenges the supposedly inviolate 1958 New York Convention

In a recent decision in Dallah Real Estate and Tourism v Government of Pakistan (3 November 2010) the Supreme Court addressed for the first time a ­number of important international arbitration issues.

In particular it dealt with one of the most ­controversial issues, namely the effect of arbitration agreements on non-signatories and, more specifically, whether a state can be bound by an arbitration clause contained in a contract it did not sign and to which it is not a named party, but which it caused a state entity to enter into.

The court also provided valuable guidance as to the application of the leading ­international treaty in international ­arbitration, the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the NY Convention).

Trouble in Mecca

The dispute arose out of a $345m (£218m) agreement between the Saudi Arabian ­company Dallah Real Estate and Tourism and a Pakistani corporation with a ­separate legal personality set up by the state of ­Pakistan (the trust) for the construction of accommodation towers near Mecca.

The towers were to be leased by Dallah to the trust for 99 years, with a view to ­providing affordable accommodation to Pakistani pilgrims. In the event, neither party performed their obligations. Within months of the execution of the agreement the ­government of Benazir Bhutto, which had supported the deal, fell and the trust ceased to exist.

In 1998 Dallah commenced arbitration proceedings under the International Chamber of Commerce (ICC) arbitration clause in its agreement with the trust and claimed damages for breach of contract directly against Pakistan. The government took ­little part in the arbitration and maintained strict jurisdictional reservations at all times.

In 2001 an ICC arbitral tribunal in Paris found the arbitration clause extended to the government due to its involvement in the negotiation, performance and purported termination of the agreement, and in the disputes that ensued and the organic links between government and trust.

The tribunal found in favour of Dallah on the merits. In 2006 Dallah sought enforcement of the tribunal’s final award of $20m under the NY Convention. The ­government resisted enforcement on the basis that it never was a party to the arbitration clause under Article V(1)(a) of the NY Convention. It was agreed that French law determined the answer to this question.

Answer in French

When the case reached the English courts, the High Court (2008) and the Court of Appeal (2009) found that the Pakistani government was not a party to the agreement and its arbitration clause and therefore refused to enforce the award. The case came before the Supreme Court last summer.

As a matter of French law, an arbitration clause will be extended to a party that is ­neither a signatory nor a named party to the contract containing the clause, provided the conduct of the signatories and the non-­signatory during the negotiation, execution and performance of the contract, and (if ­relevant) its termination and any ensuing dispute, evidences a common intention of all these parties that the non-signatory be a party to the contract.

Plainly, a state will often be involved in transactions including state entities. ­However, analysis by the Supreme Court established that, although the government was involved with the transaction, the ­parties did not have the requisite common intention, so that the state was not a party to the contract or its arbitration clause.

The NY Convention is one of the most important reasons for the dramatic ­expansion of international arbitration in recent decades. Ratified by 145 countries, it ensures that arbitral awards are recognised easily and enforced around the world. In many cases the enforcement process set up by the ­NY Convention is akin to a mere ­rubber-stamping exercise by the courts.

In accordance with the pro-enforcement policy of the NY Convention, grounds for resisting recognition or enforcement are strictly limited. One of these grounds is the lack of a valid arbitration agreement between the parties. Dallah’s case was that ­enforcement courts could not fully reopen the issue of the existence of a valid arbitration agreement and thus examine all evidence and determine the question afresh.

In considering this argument, the Supreme Court ruled that, while enforcement courts will have regard to the findings and ­reasoning of arbitrators, they will only take them into account if they are helpful. Enforcement courts are neither bound nor restricted by the tribunal’s reasoning.

Second, the Supreme Court clarified that, while arbitrators are entitled to decide their own jurisdictions in priority over any state courts as a matter of English law, their ­decision in this respect remains subject, potentially, to the control of enforcement courts under the NY Convention after the ­tribunal issues its award.

Finally, the Lords clarified the nature of the discretionary powers of enforcement courts to allow recognition or enforcement in spite of a valid defence being established under the NY Convention. They decided that this power is not an ­openended discretion, but limited to the consideration of other circumstances that might, on a recognisable legal principle such as ­estoppel, affect the prima facie right to have the enforcement or recognition of the award refused.

“Absent some fresh circumstances, 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,” Lord Mance concluded.

Andrew Savage is head of the international dispute resolution group and Patrick ­Angenieux is a solicitor at Watson Farley & Williams