19 December 2011
Without effective enforcement, international arbitration can be pointless. The New York Convention1 (the Convention), widely recognised as the foundation instrument of international arbitration, is the means by which international arbitration awards are given teeth in almost 150 countries around the globe. However, recent decisions on the same issue in the English and French courts have shown that enforcement under the Convention is not as straightforward in practice as it is in principle.
The Arbitral Award in Dallah
Pursuant to a memorandum of understanding signed in 1995, Dallah Real Estate and Tourism Holding Company (Dallah), a Saudi Arabian company, agreed with the Ministry of Religious Affairs for the government of Pakistan to provide housing for Muslim pilgrims who wished to undertake the Hajj. It appears, however, that the agreement containing the relevant arbitration clause was entered into between Dallah and an entity known as the Awami Hajj Trust. In December 1996, following a change of government in Pakistan, the Awami Hajj Trust ceased to exist as a legal entity. Dallah subsequently commenced an International Chamber of Commerce (ICC) arbitration in Paris against the government of Pakistan, seeking compensation.
Dallah appointed Lord Mustill as its arbitrator and the ICC, under its rules, appointed Justice Dr. Nassem Hasan Shah to act as the Pakistani government’s arbitrator, with the highly respected Lebanese arbitrator Dr. Ghaleb Mahmassani appointed to chair the tribunal. In its first partial award, the tribunal held that the Pakistani government was a true party to the agreement and, as such, should be bound by the arbitration clause. The arbitral tribunal rendered the final award in 2006, in which it ordered the Pakistani government to pay approximately US$20.5 million to Dallah.
Enforcing the Award in England
Sections 100 to 103 of the Arbitration Act 1996 (the Act) implement the Convention. Section 101(1) emphasises that enforcement of a Convention award is mandatory, subject to limited exceptions (set out in Section 103(2)), which provide a high threshold for denying enforcement, including the incapacity of a party to an arbitration agreement, invalidity of the arbitration agreement and the award being contrary to public policy. The onus of proving such exceptions rests upon the party opposing enforcement and it is not for the claimant to demonstrate that an award does not contravene the Convention.
The Act demonstrates a clear policy in favour of the enforcement of Convention awards, also reflected in the approach of the English courts in decisions including Norsk Hydro ASA v. State Property Fund of Ukraine,2 where the court said that “there is an important policy interest, reflected in the country’s treaty obligations, in ensuring the effective and speedy enforcement of … international arbitration awards.”
That policy is not, however, without its limits, as demonstrated by the decision of the Supreme Court of the United Kingdom (Supreme Court) in the Dallah case.3 Enforcement of the arbitral award was refused at first instance in this case on the grounds that the government of Pakistan was not a party to the arbitration agreement. This decision was upheld by the Court of Appeal of England and Wales (Court of Appeal), which was followed by an appeal to the Supreme Court. The Supreme Court considered whether enforcement should be refused on the grounds of Section 103(2)(b) of the Act, which provides that “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.”
Contrary to the findings of the arbitral tribunal, the English courts found that there was no “common intention” that the government of Pakistan would be party to the agreement and that therefore, as a matter of French law (the law of the seat of the arbitration), the government was not a party to the arbitration agreement and the agreement was not valid for the purposes of Section 103(2)(b) of the Act.
The headline message from this case is that the English courts will deny enforcement under the Convention in circumstances where they do not believe that a valid arbitration agreement exists. Lord Collins emphasised that a party can challenge jurisdiction in the courts of the arbitral seat and can also resist enforcement in the court before which the award is brought for recognition and enforcement on the same basis. These options are not mutually exclusive although “in some cases a determination by the court of the seat may give rise to an issue of estoppel or other preclusive effect in the court in which enforcement is sought.”
But a Little While Later, in the French Courts ...
A few months later, the Paris Court of Appeal was faced with a request, in parallel proceedings, by the government of Pakistan to set aside the same arbitral award in an application for annulment of the arbitral award under Article 1502(1) of the French Code of Civil Procedure (the Code). This provision allows the setting aside of an award rendered with a seat in France if the award was rendered with no valid arbitration agreement.
Although the hearing before the French court took place after the decision of the Supreme Court described above, the English decision was only mentioned in passing because, under French law and the Convention, the French court, as the court of the seat of the arbitration, was not required to stay its own proceedings in favour of the English action (or even to take this into account).
The French court decision4 rejected the government’s arguments and held that the arbitral tribunal validly extended the scope of the contract arbitration agreement to Pakistan.5 This decision is entirely at odds with the English decision but, in both cases, each court applied the law of the seat of the arbitration, French law, to the issue. What, then, was different in the French decision?
Putting aside differences in style, the French decision does not apply legal principles that are any different from those relied on by the English courts. Under French law, the court that reviews the award at the annulment stage (where a party alleges lack of jurisdiction) conducts its own analysis of all relevant factual and legal aspects of the matter before the arbitrators. In other words, French courts, although perceived to be extremely liberal in their approach to international arbitration awards, do review the legal and factual grounds of an award when assessing whether the tribunal had jurisdiction or not. This is in marked contrast to the French court’s liberal attitude when it comes to respecting the principle of “competence-competence” at the outset of the arbitration.
In Dallah, the French court analysed all aspects of the case and the various documents relied upon by the arbitrators to reach the conclusion that they had jurisdiction over the government of Pakistan. In doing so, it applied French case law that was also identified and applied in the English decision. The departure came in the way that the French court assessed the evidence and the weight to be given to certain documents. In finding that the government of Pakistan “behaved as if the contract was its contract” and “as the real Pakistani party in the economic operation,” the French court took a different view on the importance given to pre-contractual negotiations between the parties and the interpretation of key correspondence. In doing so, it came to the same answer as the arbitrators.
From a French perspective, the English decision appears to be more focused on assessing the reasoning of the arbitrators’ award — which it strongly criticised. In contrast, the French court did not address the award at all but instead decided afresh the issue of the extension of the arbitration clause to the Pakistani government.
So where does this leave us? The conflicting decisions may not send those wishing to enforce awards hurrying to Paris and those wishing to evade them rushing to London, but there are two important lessons here. The first lesson is that the choice of enforcing court may be crucial; the second, preemptive lesson, highlights the importance of ensuring that parties to a negotiated agreement actually sign it. It may be obvious advice but it could avoid some difficult future arguments on jurisdiction, not to mention time and costs.
1. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958
2.  EWHC 2120 (Comm)
3.  UKSC 46
4. Cour d’appel de Paris, 17 février 2011, Gouvernement du Pakistan – Ministère des Affaires religieuses c. Société Dallah Real Estate and Tourism Holding Company, n° R/G 09/28533.
5. An appeal was recently lodged by the Government of Pakistan before France’s Supreme Court which should issue a decision sometime in 2012