"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Sunday, November 7, 2010

Delocalisation and Other Principles in Dallah Estate: A Descriptive Comment (Part I)

Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs, Government of Pakistan is one of the most important decisions in the recent past in international arbitration. The UK Supreme Court has not laid down something new here. Though it has reiterated what was the consistent opinion in international arbitration, the reiteration assumes significance in view of the widespread issues that the Supreme Court had to deal with. The judgement(s) provide a starting point for research on several topics in international arbitration such as delocalisation of international arbitration, validity of arbitration agreements, situations where award in the seat was not recognized but were nevertheless enforced, extension of arbitration agreement to non-signatories, competence of the tribunal to rule on its jurisdiction, renvoi etc.  In a few days (the judgement was delivered on 3rd November 2010), there have been several comments in the blawgosphere on the case. We’ll give a list of the comments to this case at the end of this series of posts.

At the heart of the controversy was the question as to whether the Government of Pakistan (Pakistan) was a party to the agreement between Dallah Real Estate and Tourism Holding Company (Dallah) and the Awami Hajj Trust (Trust) as per French Law. Dallah argued that Pakistan did. It failed in convincing all tiers of the English courts. Facts first.

[Some facts are from the judgements of the lower courts. So don’t be surprised if you don’t find them in the UKSC decision]

24.07.1995:     Dallah enter into a Memorandum of Understanding (MOU) with Pakistan for providing houses for pilgrims and procuring necessary financing for the project. Under the said MOU, Pakistan was supposed to provide a sovereign guarantee to the creditors.

21.01.1996:     Pakistan promulgated an ordinance and Pakistan establishing the Trust. In accordance with Article 89 of the Constitution of Pakistan (quoted below), an Ordinance promulgated would be automatically repealed at the expiry of four months from the date of its promulgation

89. Power of President to promulgate Ordinances.
 (1) The President may, except when the National Assembly is in session, if satisfied that circumstances exist which render it necessary to take immediate action, make and promulgate an Ordinance, as the circumstances may require.

 (2) An Ordinance promulgated under this Article shall have the same force and effect as an Act of  [Majlis-e-Shoora (Parliament)] and shall be subject to like restrictions as the power of  [Majlis-e-Shoora (Parliament)] to make law, but every such Ordinance-
(a) shall be laid-

(i) before the National Assembly if it  [contains provisions dealing with all or any of the matters specified in clause (2) of Article 73], and shall stand repealed at the expiration of four months from its promulgation or, if before the expiration of that period -a resolution disapproving it is passed by the Assembly, upon the passing of that resolution;

(ii) before both Houses if it [does not contain provisions dealing with any of the matters referred to in sub-paragraph (i)], and shall stand repealed at the expiration of four months from its promulgation or, if before the expiration of that period a resolution disapproving it is passed by either House, upon the passing of that resolution; and

        (b) may be withdrawn at any time by the President.

(3) Without prejudice to the provisions of clause (2) an Ordinance laid before the National Assembly, shall be deemed to be a Bill introduced in the National Assembly.”  

Further ordinances were promulgated, the last being on 12th August 2006, to keep the Trust alive.

Under the Ordinances, the Secretary of the Ministry of Religious Affairs (MRA) was to be the Secretary to the Board of Trustees.

10.09.1996:     Dallah, who where advised by their legal counsel, entered into an agreement with the Trust to formalize the transaction. The proposal for structuring the transaction so that the Trust, rather than the government, signed the Agreement came from Dallah.

06.11. 1996:    The political party in Pakistan fell from power and a new government was formed. No other ordinance was passed to ensure continuity of the Trust. The Ordinance lapsed due to the operation of Article 89 and the Trust ceased to exist on 11.12.1996.

Arbitration was invoked by Dallah against the Government of Pakistan

26.06.2001:     First Partial Award on jurisdiction. The  Tribunal unanimously held that the Tribunal had jurisdiction and that "an agreement to arbitrate under the ICC Rules exists between the Claimant and the Defendant, and such Defendant is the proper Defendant party to the Arbitration". Further, it held that the arbitration agreement “is not to be assessed, as to its existence, validity and scope, either under the laws of Saudi Arabia or under those of Pakistan, nor under the rules of any other specific local law, connected or not, to the present dispute".

19.01.2004:     Second Partial Award on liability

23.06.2006:     Final award by the Tribunal consisting of Lord Mustill, Dr Nassim Shah and Dr Ghaleb Mahmassani, awarded US$ 20,588,040 in favour of Dallah and against Pakistan.

[Note that it had taken more than five years for the arbitration to be complete]

09.10.2006:     Dallah, vide an ex-parte order, obtained leave of the court to enforce the award as a judgement of the court.

23.03.2008:     Pakistan, through an arbitration application, asked the commercial court to set aside the ex-parte order on two counts:
  1. Pakistan as a State was immune from enforcement proceedings
  2. The award should not be enforced because there was no valid arbitration agreement.
The New York Convention has been incorporated in the Arbitration Act, 1996. S 103(2)(b) of the Act provides:

103 Refusal of recognition or enforcement
(2) 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;

At the stage of arguments before the Commercial Court, both the parties agreed upon the following, in the words of the commercial court:

(1) The GoP [i.e. Pakistan] is not named as a party to the Agreement or the arbitration clause (clause 23), nor did it sign any part of the Agreement.
(2) The Agreement named the Trust as a party and the Agreement was signed and concluded on behalf of the Trust.
(3) The Trust was, under Pakistani law, established as a statutory corporation with a legal personality and the capacity to contract.
(4) At all relevant times the GoP and the Trust were separate legal entities with distinct legal personalities as a matter of Pakistani law
(5) Upon the lapse of Ordinance LXXXI of 1996 at midnight on 11/12 December 1996, the Trust ceased to exist as a legal entity.
(6) The parties to the "arbitration agreement" (whoever they might be and whatever that is taken to be – see below) did not identify any particular law to which the "arbitration agreement" was "subjected" for the purposes of section 103(2)(b) of the Act. Therefore any question concerning the validity of the "arbitration agreement" had to be decided according to the law of the country where the Final Award was made, viz. France.
(7) No separate argument would be advanced by the GoP on its ability to claim state immunity from these proceedings in its capacity as a state entity, but it reserved its position on that issue both in this jurisdiction and elsewhere.”

The commercial court framed around eight issues:

  1. What is the correct construction of section 103(2)(b) of the Act?
    1. What is the meaning of arbitration agreement in S 103(2)(b)?
    2. Whether the phrase in this provision, “the arbitration agreement was not valid” also covered a situation where the person against whom the award was made was not a party to the arbitration agreement?
    3. Whether “within the law of the country where the award was made would include the conflict of law rules of the seat which refer to a third country’s laws?
  2. What is the scope of enquiry by a court when a party challenges the recognition and enforcement of a NYC award under S 103(2)(b)?
  3. The parties are in agreement that the arbitration agreement would be tested on the touchstone of the French Law. But what are the French law principles applicable in the case?
  4. According to Article 173 of the Constitution Of Pakistan, the State of Pakistan can only validly enter into and be bound by an agreement if the agreement mandatory procedure as stated therein was followed? In this case, it was not. So the question is whether the English court was bound to account for Pakistani Laws, including that of the Pakistani Constitution?
  5. Whether Pakistan was bound by the arbitration agreement?
  6. Since under Section 103(2)(b), the burden of proof is on the party seeking refusal to recognize and enforce the arbitral award, whether Pakistan has established that the arbitration agreement was not valid under the French Law?
  7. Even if Pakistan has established the above, whether Pakistan is estopped from contending, due to issue estoppel, that the arbitration agreement was invalid?
  8. Even if Pakistan has established 7 & 8 in its favour, whether  the court should exercise its discretion under S 103(2)(b) to enforce the award?
 We will analyse the decision in detail, and therefore, in several parts in view of its importance to international arbitration and the complexities involved. So far, we have, in detail, dealt with the relevant facts and the issues surrounding the case. We shall continue with our analysis on the commercial court in the next post. In the subsequent posts, we shall analyse the decisions of the Court of Appeal and the Supreme Court.

Before we sign off, we invite readers to note that it took more than five years for the arbitration to be complete. The tribunal consisted of eminent personalities of international arbitration. Yet, the case took this much time. Parties need a lot of time for the preparation of their respective cases. We do not have a record of the entire proceedings to comment on the reason for such delay. But five years is slightly more than the normal. How would international arbitration be called efficient if dispute resolution takes such a long time?

The decisions of the courts in this case can be accessed from the following links:

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