International arbitration: Courts of England and Wales refuse to enforce ICC award

In a rare decision, the Commercial Court recently refused to enforce an ICC award, on the ground that the arbitration agreement was not valid under section 103 of the Arbitration Act 1996 (the “Act”). Section 103 concerns arbitration agreements that are invalid under the law of the country where the arbitration is held.

The legal framework underlying international arbitration, the New York Convention, has over 132 state signatories (including the UK), and provides a powerful system for the recognition and enforcement of arbitral awards. Under its terms, states agree that they will recognise and enforce arbitral awards made in the territories of other contracting states, subject to certain exceptions. Foreign arbitral awards can be enforced with the same effect as a domestic court decision.

The Act implements the New York Convention into law in England and Wales. Section 103 of the Act prescribes the limited circumstances where recognition or enforcement may be refused. One such ground is section 103(2)(b). This states that recognition or enforcement may be refused if the party against whom it is invoked proves:

“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 case

The claimant, Dallah Real Estate and Tourism Holding Co (“Dallah”), contracted with the defendant, the Government of Pakistan (“Pakistan”), to construct accommodation units. Rather than naming Pakistan, the construction agreement named a trust, established as a statutory corporation with a distinct legal personality and capacity to contract, as the contracting party. Under clause 23 of the construction agreement, any disputes would be referred to arbitration in Paris under the ICC Arbitration Rules.

A dispute arose and Dallah commenced ICC arbitration proceedings. Pakistan challenged the jurisdiction of the ICC court and refused to participate. In a unanimous decision, the tribunal held that Pakistan was bound by the arbitration agreement and was bound to the tribunal’s jurisdiction. The final award ordered Pakistan to pay damages and costs to Dallah.

Pakistan challenged Dallah’s right to enforce the final award of the tribunal in England under section 103 of the Act, on the ground that Pakistan was not a party to the construction agreement, and there was therefore no valid arbitration agreement between the parties under section 103(2)(b) of the Act.

The Judge (Aikens J) agreed with Pakistan, and set aside a previous order granting permission to enforce the final award. Dallah failed in its attempt to enforce the tribunal’s decision in England and Wales.

The parties had agreed on many issues, including:

• Pakistan was not named as a party to the agreement or the arbitration clause, whereas the trust was. Each had distinct legal personalities under Pakistani law.
• The parties had not identified which law the arbitration agreement would be subject to, for the purpose of deciding whether it was “valid” for the purposes of section 103(2)(b) of the Act. This meant that any question concerning validity would need to be determined by French law, as France was the country where the final award was made (the seat of the arbitration having been in Paris).

The Judge held that a court applying French law would, when inquiring into whether a state (such as Pakistan) had concluded a contract, have regard to the local law of that state (i.e. Pakistan). Pakistani law provided that a state could only be bound by a contract if it had been made in the name of the President. As this had not occurred, Pakistan was not a party to, and so was not bound by, the arbitration agreement.

Comment

Enforcement of New York Convention arbitral awards has always been easier in some jurisdictions than in others. The Courts of England and Wales have, traditionally, been more ready than most to recognise and enforce awards. For this reason, the decision in this case is unusual. Not only did the court refuse to enforce the ICC tribunal’s decision, but it also disagreed with a key finding of the arbitral tribunal (which included amongst its members Lord Mustill), namely whether Pakistan was bound by the arbitration agreement.

The ICC tribunal had decided its jurisdiction and the scope and validity of the arbitration agreement by reference to “transnational general principles and usages reflecting the fundamental requirements of justice in international trade and the concept of good faith in business”. It had also considered the whole history of negotiations between Dallah, Pakistan and the trust, on the basis that, in international arbitration, the effects of an arbitration clause can extend to parties that did not actually sign the underlying contract (the construction agreement) but were nevertheless involved in its negotiation.

Arbitration tribunals often seek to extend the scope of arbitration agreements to non-signatories, so as to avoid perceived injustice. This is a complex and contentious area. Occasionally, the scope of the arbitration agreement is extended on questionable legal grounds. Aikens J adopted a different approach. He focussed on the arbitration clause, and how the law governing that clause (French Law) would deal with its validity. The outcome is an onerous one for Dallah, the party that had successfully fought and won the arbitration.

Despite this decision, it should be emphasised that research recently presented by the Centre of Commercial Law Studies at Queen Mary (University of London), and PricewaterhouseCoopers, found that 84% of those surveyed said that parties honoured awards in more than three quarters of cases, and only three per cent had experience of an award debtor failing to comply and requiring enforcement action.

Further reading: Dallah Real Estate and Tourism Holding Co v The Ministry of Religious Affairs, Government of Pakistan [2008] EWHC 1901 (Comm)