Choose Your Opponent Carefully! – The possibilities of extending an arbitration agreement to non-signatories

There are a number of theories on how the binding effect of an arbitration agreement can extend to non-signatories. The most commonly accepted are cases of assignment or succession. More disputed theories include legal concepts such as alter ego or the group of company doctrines for which an international consensus is still lacking.

This issue was the subject of the recent UK Supreme Court decision of Dallah Real Estate and Tourism Holding Company (Appellant) v The Ministry of Religious Affairs, Government of Pakistan (Respondent) [2010] UKSC 46.

Dallah Real Estate and Tourism Holding Company (“Dallah”) had negotiated a large-scale lease project relating to housing facilities with a duration of 99 years with the Pakistani Government. At first, a Memorandum of Understanding was signed between Dallah and Pakistan. Changes in the factual circumstances underlying the contract led to renegotiations between Dallah and Pakistan. Consent was ultimately achieved. However, the contract – which also contained an arbitration clause calling for arbitration in Paris under the ICC Rules – was not entered into by the Pakistani Government but by a trust (”the Trust”) created by virtue of an ordinance of the President of Pakistan. For a permanent establishment of the Trust, a decision of the parliament would have been required under the Pakistani constitution, but instead of obtaining approval by the parliament, the Trust’s existence was extended by means of repeated promulgation of ordinances. After changes in the political landscape in Pakistan at the end of 1996, no further ordinances were issued and the Trust, being Dallah’s contractual partner under the lease agreement, ceased to exist.

Consequently, Dallah commenced arbitration proceedings against the Pakistani Government, claiming that the Government had been the true contracting party behind the Trust. The arbitral tribunal issued an award against the Pakistani Government which Dallah then attempted to enforce in England.

Both the High Court and the Court of Appeal denied the enforcement of the award on the basis of Article V(1)(a) New York Convention. Leave for appeal to the UK Supreme Court was granted, and the Supreme Court found that, in assessing the personal scope of the arbitration agreement, the key question was whether there was a common intention between Dallah and the Government of Pakistan for the Government of Pakistan to become a party to the arbitration agreement. Under Article V(1)(a) New York Convention, the Supreme Court and the previous instances applied French law (France being the country where the award was made) when answering this question. One of the aspects the Court based its decision on was the fact that the Respondent was a state party. It found that, when interpreting the intent of a potential state party to an arbitration agreement, due consideration must be given to “the fact that the potential state party to the arbitration agreement would lose its state immunity if it were to become a party to the arbitration agreement”.

Apart from this main issue, the court also made a number of other interesting rulings and clarifications in relation to enforcement and jurisdiction issues. For example, the Court ruled that failure to challenge an award due to lack of an arbitration agreement does not constitute a case of issue estoppel that would prevent a party from relying on the issue when resisting enforcement. On another note, it also confirmed the wide consensus that the endorsement of the principle of Kompetenz-Kompetenz does not prevent a state court from reviewing the arbitrators’ decision on their own jurisdiction. Further, confronted with the argument that the arbitral tribunal consisted of distinguished and renowned arbitrators who had acted with utmost diligence when deciding on their jurisdiction, the court clarified that the arbitral tribunal’s decision on its own jurisdiction “has no legal or evidential value” for the court’s review.

Finally, Dallah raised the in eventu argument that the use of the phrase “may be refused” in Article V(1) New York Convention bestowed upon the court a discretion to decide whether it would refuse enforcement and that, given the circumstances of the case, the Court should refrain from doing so even if it found that the Pakistani Government was not bound by the arbitration agreement. The Court ruled that the case at bar left no scope for such discretion as the lack of an arbitration agreement could not be outweighed by general complaints about the Pakistani Government’s bad behavior.

Overall, while dealing mainly with the issue of the parties’ intent, the UK Supreme Court’s decision offers an in-depth analysis of a number of issues relating to the extension of the binding effect of arbitration clauses to non-signatories. Irrespective of whether one wishes to agree with the Court’s findings or not, the decision once again shows us quite plainly that the question of who is the correct respondent for a claim might ultimately not be answered by the arbitral tribunal deciding on the dispute, but by the state courts deciding on the enforcement of a specific award in a specific country.