Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs, Government of Pakistan (Part II)

In a previous post (with a different title) we had introduced the English case of Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs, Government of Pakistan and we had commented on the issues that the lower courts had to deal with. In this post, we'll start off from where we had stopped. We'll deal with the legal principles of international arbitration as discussed by the Commercial Court.

Issue 1: What is the correct construction of section 103(2)(b) of the Act?

a.      What is the meaning of arbitration agreement in S 103(2)(b)?

According to the judge, there are two kinds of arbitration agreements contemplated under the English Law. One is the agreement to refer the present or future disputes to arbitration. The other is the actual “reference” of a particular dispute to arbitration. The court recognized that in other jurisdictions the difference between the arbitration agreement and the reference does not have any substantial legal consequence. Under English Law, however, the arbitration agreement and the 0reference are treated as two different agreements. Even the New York Convention, it seems, maintains this distinction. For example, Article V.1(a), which cross refers to Article II, speaks of the Arbitration agreement while Article V.1(c) refers to the reference:

Article V

1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:

 (a) The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or

…

 (c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced;

[Readers may please note that S 34 (setting aside arbitral award) of the UNCITRAL Model Law on International Commercial Arbitration, 1985 makes a similar kind of reference to “submission to arbitration”, probably because it replicates the grounds under Article V of the New York Convention on refusal of recognition and enforcement of awards. Section 7 of the Indian Arbitration Act, 1996 provides:

(4) An arbitration agreement is in writing if it is contained in-

(a) A document signed by the parties;

(b) An exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) An exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

Off the cuff, it is doubtful if such a distinction needs to be made in the context of Indian Law or even the English Law. The Commercial Court has cited a few judgements and a standard book for this distinction. So we’ll examine the utility served by the distinction and its legal consequence in some future post. For those interested, the authorities cited by the court are: Albert Jan van den Berg “The New York Arbitration Convention 1958” at pages 295-6 and 314-6; Black Clawson International Ltd v Papierwerk Waldhof-Aschaffenburg AG [1981] 2 Lloyd’s Rep 446; Mustill & Boyd on Commercial Arbitration (2nd Ed. 1989 page 61)].

The object of taking note of this distinction by the Judge was to decide whether “arbitration agreement” in S 103(2)(b) also included the “reference”. The court held that since such a distinction made in the New York Convention was also followed under the Act, the term “arbitration agreement” referred to only the “arbitration agreement” and not the “reference”.

[Hypothetically, even if no such distinction is made, it does not make much difference. In such case, the notice invoking arbitration would be seen as a step taken in furtherance of an arbitration agreement. If the parties, in their reference, submit a dispute not covered by the arbitration agreement, such reference could be treated as an amendment to the arbitration agreement. If any party is of the view that the arbitral tribunal had no jurisdiction to decide a dispute, the party could nevertheless participate in the process under protest, unless the forum’s law gives the right of a party challenging the jurisdiction of the tribunal to approach the courts in the forum if the tribunal decides against such challenge or even otherwise.]

b.      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?

Initially the court was skeptical to buy Pakistan’s argument that the ground that the arbitration agreement was not valid also included a circumstance where there was no arbitration agreement at all. However, the commercial judge had the grace to admit that “once Mr Landau referred me to the analysis of Mance LJ in Dardana Ltd v Yukos Oil Co and Petroalliance Services Co Ltd, I accepted that I must be wrong and was, in any case, bound by Court of Appeal authority. I will not therefore set out here my own analysis”. [Formatting omitted] In Dardana Ltd v Yukos Oil Co and Petroalliance Services Co Ltd, Mance LJ held:

“At the first stage, a party seeking recognition or enforcement must, under s 102(1), produce the duly authenticated award or a duly certified copy and the original arbitration agreement or a duly certified copy. The arbitration agreement means an arbitration agreement in writing, as defined in s 5. Once such documents have been produced, recognition or enforcement may be refused at the second stage only if the other party proves that the situation falls within one of the heads set out in s 103(2). The issue before us concerns the content of and relationship between the first and second stages.

…

The words “in pursuance of an arbitration agreement” could in other contexts require the actual existence of an arbitration agreement. But they can also mean “purporting to be made under”. Construed in the latter sense the overlap and inconsistency to which I have referred are avoided. Any challenge to the existence or validity of any arbitration agreement on the terms of the document on which the arbitrators have acted falls to be pursued simply and solely under s.103(2)(b).”

In Annex 6 to the judgement of the Commercial Court, the judge has analysed in detail the reason for the above finding. Most of Annex 6 deals with an account of the judgement of Mance LJ (as he was then) in Dardana Ltd v Yukos Oil Co and Petroalliance Services Co Ltd. Relevant extracts of Annex 6 are below (pardon the long quotes):

‘He noted that [S 100 of the Arbitration Act, 1996] provided that the award to be recognised or enforced under the Convention must be "…an award made in pursuance of an arbitration agreement…”. He construed this as meaning an award "purporting to be made under an arbitration agreement". Therefore all that was required at the first stage of recognition and enforcement was production of apparently valid documents, including an apparently valid arbitration clause, by reference to which the arbitrators accepted that the parties had agreed to arbitrate. Accordingly, he decided, it is only at the second stage, when the prima facie right to recognition and enforcement is challenged, that the court will consider the issue of whether the apparently valid arbitration clause was, in fact, an agreement to arbitrate between the party seeking recognition and enforcement of the award and the party against whom the award was to be invoked. Also at that stage the court can consider, under section 103(2)(b), any issue of whether (under the relevant law applicable) the arbitration agreement was validly made.

 Therefore, in section 103(2)(b), the phrase "the arbitration agreement was not valid under…" the relevant law, must be construed as including the issue of whether, in fact, the party against whom the award is to be invoked is indeed bound by the arbitration clause which gave the arbitrators their jurisdiction to make the award.’

c.       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?

As a preliminary matter, we’ll look at the Indian Law on this point. Whenever India is the seat and the parties have chosen English Law, for example, it would mean that the relevant court should refer to substantive English Law without any reference to conflict of laws rules of England and Wales which refer to the laws of some other country. This principle has probably been adopted to make choice of substantive law in international arbitration simpler. The law on this point in India is found in S 28(1)(b)(ii) of the Indian Arbitration and Conciliation Act, 1996:

“(1) Where the place of arbitration is situate in India, -

…

(b) In international commercial arbitration, -

…

(ii) Any designation by the parties of the law or legal system of a given country shall be construed, unless otherwise expressed, as directly referring to the substantive law of that country and not to its conflict of laws rules;”

For that matter, even the UNCITRAL Model Law on International Commercial Arbitration, 1985, in Article 28(1) statesc (probably the source of the Indian Act's corresponding provision):

“The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. Any designation of the law or legal system of a given State shall be construed, unless otherwise expressed, as directly referring to the substantive law of that State and not to its conflict of laws rules.”

Now, coming back to the case, the judge held that the New York Convention itself, incorporated in the Arbitration Act, 1996, makes uniform some of the Conflict of Laws rules pertaining to arbitration. One such Conflict of Laws rule is that the parties are free to agree on the substantive law governing issues pertaining to the validity of the arbitration agreement. Thus, the issues pertaining to validity of the arbitration agreement must be decided in accordance with the substantive law of France dealing with the validity of arbitration agreement. This was not disputed by the parties or their experts. According to the Joint Memorandum of the French Law experts:

"Where a French court is called upon to decide the challenge of an arbitral award rendered by a tribunal seated in France, it has not to apply French conflict of laws in order to determine whether the arbitral tribunal has jurisdiction”.

However, according to Pakistan, under the French substantive law on this aspect, the approach is to conduct a “broad factual enquiry” and consider all circumstances, including factual aspects pertaining to the foreign law on the issue. This would include statute, constitution of a foreign country. Now, if this is the case, then the question is whether Pakistani Law mandates that contracts should only be entered in a particular manner by the Government of Pakistan and, if so, whether the contract in question was entered into by the Government of Pakistan complying with the Pakistani Laws.

This issue was taken up separately by the Commercial Court as Issue 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?).

We are done with the analysis of only one out of eight issues. The rest of it and the analyses of the Court of Appeal and the Supreme Court judgements will be taken up in future posts.