Update on Dallah vs. Pakistan - Contradictory decisions in France and England on the binding effect of arbitration agreement to non-signatories

As reported in our Blog on 26 November 2010, the UK Supreme Court in its decision of 3 November 2010, applying French law, had denied enforcement of an ICC arbitral award rendered in favor of Dallah Real Estate and Tourism Holding Company (“Dallah”) against the Ministry of Religious Affairs, Government of Pakistan (“Pakistan”).

The contract underlying the dispute related to the long-term leasing of housing facilities to be built by Dallah and subsequently rented by Pakistan. For this purpose, a Memorandum of Understanding (the “MoM”) had been signed between the parties. The contract containing the arbitration clause (the “Contract”), was ultimately entered into on 10 September 1996 between Dallah and a special trust (“the Trust”) created by Pakistan. This Trust, however, ceased to exist shortly after the conclusion of the Contract. Dallah then initiated arbitration proceedings against Pakistan, arguing that Pakistan was a quasi-party to the Contract. The arbitral tribunal endorsed this position and rendered an award in favor of Dallah.

The UK Supreme Court’s denial of enforcement was based on the court’s finding that there was no common intention between Dallah and Pakistan in respect of Pakistan becoming a party to the arbitration agreement. Contrary to this conclusion, on 17 February 2011, the Paris Court of Appeal decided on a challenge brought by Pakistan against the award, rejecting the application to set aside the award.

Similar to the enforcement proceedings in the UK, Pakistan, in front of the Paris Court of Appeal, argued that the arbitral tribunal had not had jurisdiction to issue the award against Pakistan. It contended that the MoM signed between Pakistan and Dallah and the Contract concluded by Dallah and the Trust were two independent documents, and that the MoM became moot upon signature of the Contract. It further argued that it had never been the common intention of the parties to bind Pakistan to the arbitration agreement.

The Paris Court of Appeal rejected those arguments based on several considerations. It noted that, between the signature of the MoM and the conclusion of the Contract, Pakistan had been Dallah’s sole negotiating partner, and Pakistan’s representatives had featured prominently on the Trust’s Board of Trustees. Further, the Contract had been subject to the approval of Pakistan. Additionally, both before and after signing the Contract, correspondence in relation to the Contract had been issued with Pakistan’s letterhead. This also included the notice of termination of the Contract, which was considered by the Paris Court of Appeal to clearly constitute a notice on behalf of Pakistan.

On an overall level, the Paris Court of Appeal concluded that the Trust had been established for purely formal reasons and that Pakistan’s conduct clearly indicated that it considered itself a party to the Contract. Based on this, the motion to set aside the award was rejected.

The contradictory decisions of the French and English courts show that the extension of arbitration agreements to non-signatories of a contract is far from being a clear issue. Despite the fact that both courts applied the same legal regime, they did not come to the same conclusion. In an enforcement context, this confirms the importance for parties to carefully consider their options and plan their strategy following the issuance of an award.