Should the Arbitration Clause be Given a Mythological Status?

Developments in the last few decades, including the very recent ones in the USA (see in American Express Co. v. Italian Colors Restaurant and preliminary comments here and here), have accorded a near-mythological status, so much that arbitration clauses have been enforced when the effect of the same clearly promoted anti-competitive and anti-consumer behaviour. As compared to such developments, the Indian legal system, with all its faults, provides adequate remedies for the party with weak bargaining power. For instance, a consumer can opt either to arbitrate or to approach the consumer fora when a binding arbitration clause exists in the consumer contract. The question, at the end of the day, is whether arbitration  as a process and the arbitration clause really deserves the place it is given.

One Question Two Jurisdictions Two Views

Should the court refer a dispute to arbitration containing claims some of which are arbitrable and some are not?

Jurisdictions: India & the USA

Judgements:

Sukanya Holdings Pvt. Ltd. v. Jayesh Pandya (AIR 2003 SC 2252) (14.04.2003)

A Division Bench of the Supreme Court consisting of MB Shah & Arun Kumar, JJ (of the ONGC v SAW Pipes fame) held that where a dispute contains arbitrable and non-arbitrable claims, the dispute should not be referred to arbitration. Their reasoning is summarized below:

• The Act does not oust the jurisdiction of the civil court in case parties don't take steps to get the matter referred to arbitration (such as applying under Section 8). The Act contains no express provision answering the question in hand. It does not provide for splitting of the causes of action or the parties and referring some of them to arbitration. Further, it does not address a situation where one or few of the parties to the court proceedings were not subjected to an arbitration agreement. In the absence of such provisions,
• The phrase 'a matter' used in Section 8 implies that the matter in its entirety should be referable to arbitration.
• Since Section 8 of the Act does not speak of bifurcation of cause of action. If section 8 is interpreted to allow such a recourse, it would be equivalent to laying a wholly new procedure not provided for under the Act. If that was the intention, the Legislature would have used appropriate language permitting such bifurcation.
• Even so, bifurcation of the suit into parts to be decided by the arbitral tribunal and by the courts would lead to delay, increase in costs and the possibility of conflicting judgements by two different forums.

It is also worth noting that the Supreme Court did not consider that Section 8 was discretionary in nature- it differentiated the said provision with Section 34 of the 1940 Act which gave discretion to the court to refer the dispute to arbitration. Therefore, under Section 8, the court had to mandatorily refer a matter which is the subject of an arbitration agreement to arbitration.

KPMG LLP v. Robert Cocchi 565 US        (2011) (07.11.2011)

Early this month, the US Supreme Court held that if a dispute contains claims, some of which are arbitrable and others are not, the arbitrable claims have to be referred to arbitration even if it led to “piecemeal litigation”. The court based its conclusion on the mandatory nature of section 2 of the Federal Arbitration Act, 1924 and held that the District Court is bound to refer the arbitrable claims in the dispute to arbitration even if it led to “inefficient maintenance of separate proceedings in different forums”.

It is amusing that two jurisdictions take two different views on the same question even when the provisions of law were of the same nature (mandatory and not discretionary). We’ll let the readers decide which of these two is correct but not before we mention a few aspects. One, it is universally acknowledged that statutes do not and cannot cover all situations that might crop up in the future. It is for the courts to use legal tools such as interpretation etc and render justice even if the situation is not squarely addressed by the statute. Just because the statute does not provide for something does not meant that courts should take a “hands-off approach”. Two, the same bench did not take a hands-off approach when it came to Saw Pipes.

On the face of it, this blawgger is of the opinion that the correctness of the judgements above would depend on whether the Supreme Court of India’s concern that bifurcation would lead to delays, increased costs and inconsistent decision was real. In labour jurisprudence, criminal proceedings and domestic enquiry could be taken up simultaneously for the same cause of action.

Roundup of Prominent Developments in India and Abroad on Arbitration

Union of India v. Krafters Engineers (Supreme Court of India)

In Union of India v M/s Krafters Engineers, the Supreme Court of India clarified the law on the power of the arbitrator to award interest when the contract prohibits it. See the comments in the Indian Corporate Law Blog and the Lex Arbitri Blog.

Jivraj v Hashwani (UK Supreme Court) Nurdin Jivraj v Sadruddin Hashwani is an important case decided (pdf) by the UK Supreme Court. The issue was whether an arbitration clause requiring that the arbitrators should be from a particular religious community was valid. The English Court of Appeal had previously held that such a requirement violated the English Employment Equality (Religion or Belief) Regulations 2003 and was therefore void. The Court of Appeal had also held since the arbitration clause became substantially different if the void portion of the arbitration was severed, the entire arbitration clause was void. The UK Supreme Court overturned the decision of the Court of Appeal and held that the Employment Equality (Religion or Belief) Regulations 2003 was not applicable as arbitrators were not employees under the Regulations but were independent providers of service. Comments on the judgement can be found in UKSC Blog, Kluwer Arbitration Blog, Indian Corporate Law Blog and Lex Arbitri Blog.

Barclays Bank v Nylon Capital (English Court of Appeal on Expert Determination)

 
In this case, the English Court of Appeal had to decide on the question as to whether the court should stay proceedings brought for a declaration as to the interpretation of an agreement for the reason that the issue falls within the domain of the expert appointed as per the expert determination clause in that agreement. The said clause provided that the expert shall determine the matters in dispute between the parties and such determination may include dispute as to the interpretation of any provision of the agreement or even his jurisdiction. Such determination was to be final and binding on the parties. The court decided as follows:

• Even if the agreement confers jurisdiction on the expert to decide a question pertaining to the jurisdiction of an expert, the court is the “final decision maker” on the question.
• In construction of arbitration clauses, there is a presumption that sensible businessmen intended that any dispute arising out of an agreement should be decided by the arbitral tribunal. However, there is no such presumption as regards expert determination clauses. Therefore, the question as to whether a matter was to be referred to an expert or not is a matter of construction of the expert determination clause with “no presumption either way”.
• It is an established principle that courts would not interfere with the determination of experts except in narrow circumstances. Courts would interfere where the expert determines the issue referred to him in a manner contrary to the mandate conferred upon him by the parties. Whether the expert had acted contrary to his mandate is a question of law.
• Unlike an arbitrator who is bound to proceed with fairness, an expert can determine how he can proceed, subject, of course, to any stipulation in the agreement.
• Where the court is asked to determine whether a dispute is within the expert’s jurisdiction and if the agreement provides that such a question should be decided by the expert, the court should decide, first, if there is a dispute; second, the court should decide if it is in the interests of justice and convenience that it should decide the dispute.
• When an expert determines questions pertaining to his jurisdiction, such determinations are not final even if the parties agree. Such determinations can always be challenged.
• Where a party challenges the jurisdiction of the expert to determine a dispute, the said party could approach the court and the court would determine the issue of jurisdiction of the expert.

Use of And/ Or in Legal Documents:

Indian Corporate Law Blog had a small post a few days back providing the link to an article on the use “And/ Or” in legal writing.

Kishanganga Arbitration:

Lex Arbitri has a post on the latest developments in the Kishanganga arbitration between India and Pakistan.

Arbitration: Links

Access MJ Antony's piece in Business Standard on the latest judgements of the Indian Supreme Court on arbitration from this link. In this article, MJ Antony criticises the time taken by the judiciary to decide on issues pertaining to arbitration.

Ankit Goyal & Vivekananda N have penned an article in moneycontrol.com on India and the Singapore International Arbitration Centre (SIAC). Generally, parties in India prefer to have their arbitrations in Singapore than in prominent arbitration centres like London, Paris or Switzerland.

ADR Prof Blog has a post on the possibility of limiting the applicability of the US Supreme Court's decision in AT & T v Concepcion. We had a couple of posts on the decision (here and here). The attempt to read-down the decision is because of the Majority's view that the fact that the impugned arbitration clause provided that in case the arbitral award was greater than the last settlement offer of AT&T, AT & T would pay $ 7500 and twice the attorney fees to the petitioners. According to the court, this would adequately compensate the petitioners in case they were entitled to it. The court was of the view the the petitioners were better of as individual petitioners than as a member of a class. 

AT & T v. Concepcion: A Descriptive Comment: Part II

In the last post, we had seen a portion of the majority judgement in AT & T v. Concepcion. We also had comments from Mr. Sumit Rai summarizing the political facet of the case.

In this post, we summarize the rest of the majority judgement:

• A shift from bilateral to class arbitration makes the process slower and costlier. There are several procedural issues that need to be decided in a class arbitration Examples are issues such as determination of class, whether the parties are sufficiently representative of the class etc.
• According to the statistics of arbitrations conducted under the aegis of the American Arbitration Association (AAA), bilateral consumer arbitrations between January and August 2007 have taken six months on average and four months when decided on the basis of documents alone. On the other hand, class arbitrations, till 2009 september, about 283 class arbitration have been initiated under AAA. Out of 283, 162 have been settled, dismissed or withdrawn. Not even one out of the remaining 121 has been decided on merits. The median time of those cases inactive cases is 583 days and the mean is 630 days. [Median: The median of a finite list of numbers can be found by arranging all the observations from lowest value to highest value and picking the middle one. If there is an even number of observations, then there is no single middle value (Source: Wikipedia). Mean refers to the average]
• In class action, procedural formality is a necessity. If procedures are too informal, those members of the class who were absent wouldn’t be bound by the arbitration. It is unthinkable that an arbitrator should be entrusted with protecting due process rights of third parties. In fact, class arbitration was not even envisaged when the Federal Arbitration Act was enacted.
• Class arbitration increases risk for defendants. Errors in awards would not go corrected because of the limited review of arbitral awards. The Defendants would be more willing to accept costs of these errors in case these consumer disputes are bilateral rather than if the errors were made in class arbitrations where damages would be very high.
• Arbitration is not suited for class actions. In class litigation, questions of law and fact are reviewed. However, in class arbitration, review is done on very limited grounds, especially when the parties cannot contractually expand the grounds for review.
• Since the arbitration agreement provides that in case the arbitral award is greater than the last settlement offer of AT&T, AT & T would pay $ 7500 and twice the attorney fees to the petitioners. This according to both the courts below would adequately compensate the petitioners in case they were entitled to it. The District court was right in concluding that the petitioners were better of as individual petitioners than as a member of a class which would probably get relief after months, if not years and even if they succeed, they would only get a few dollars. 

The Supreme Court reversed the decision of the Circuit Court and remanded the matter to the trial court. The decision would be critically analysed in a future post.

AT & T v. Concepcion: A Descriptive Comment

In a post in Lex Arbitri blog, one of us had noted that there has been significant number of dissents in many of the landmark cases decided by the US Supreme Court on arbitration. Even in AT & T v. Concepcion, the subject of analysis, the USSC held in favour of AT & T with a wafer-thin majority of five judges (with four dissenting). In this post, we summarize a portion of the majority judgement.

Case:                          AT & T Mobility LLC v. Concepcion

Court:                         US Supreme Court

Judgement Date:       27.04.2011

Majority:                    Scalia, J., Roberts, CJ., Kennedy,  Thomas, & Alito, JJ. (Thomas, J. concurring)

Dissent:                     Breyer, Ginsburg, Sotomayor & Kagan, JJ.

Facts:

For facts, see this post.

Issue:

Whether State Laws invalidating arbitration agreements prohibiting class arbitration procedures are unenforceable as per the Federal Arbitration Act?

Majority:

The majority opinion is summarized below:

1. Section 2 of the Federal Arbitration Act provides that “a written provision in a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction... shall be void, irrevocable and enforceable, save upon such grounds as exist at law, or in equity for the revocation of any contract.” This provision reflects the liberal federal policy favouring arbitration and the fundamental principle that arbitration is a matter of contract. The reason why the FAA allows parties to structure their arbitration agreement is to allow efficient, streamlined procedures, tailored for a particular dispute.
2.  The latter part of Section 2 also provides that an arbitration agreement could be invalidated on grounds such as fraud, duress and unconscionability but not by defences that apply to arbitration. In other words, an arbitration agreement could be declared invalid on grounds by which contracts could be declared invalid.
3. California Law provides that courts may refuse enforcement of a contract that is unconscionable at the time of its making or the courts may, instead, limit the applicability of such unconscionable clause.
4. Californian Law classifies most class action waivers in consumer contracts as unconscionable (“Discover Bank Rule”). In the Discover Bank case, the Californian Supreme Court held that a class action waiver in a consumer contract is unconscionable:
• If the waiver is found in a consumer contract of adhesion where disputes between contracting parties involve small amounts of damages, and
• If there is an allegation that the party with the superior bargaining power has made out a scheme to deliberately cheat large number of consumers.
5. The Discover Bank Rule seems to target a party with superior bargaining power from its own fraud or wilful injury to the person or property of another.
6. Under Section 2, a rule that generally relies on the uniqueness of arbitration as the basis of holding the arbitration agreement invalid. Section 2 would even pre-empt a state law that has a disproportionate effect on arbitration even if it does not rely on the uniqueness of arbitration for invalidating the arbitration clause.
7. The Discover Bank Rule interferes with arbitration- it allows a party to demand class arbitration ex-post, that is, after the dispute has arisen. Although the rule applies only when the contract is adhesive, the time is long past when consumer contracts are anything but adhesive.
8. The “small damages” ingredient of the Discovery Bank Rule is “toothless and malleable”. “small” damages cannot be defined. The “Scheme-to-Cheat allegation” ingredient does not have a limiting effect- all it requires is an allegation.
9. In Stolt-Nelson, the Supreme Court had examined whether in the absence of express agreement for class arbitration, the arbitral tribunal could allow such a course of action. The court held that it could not for the reason that it resulted in a fundamental change in the character of the arbitration from being merely a bilateral one. Classwide arbitration is a different species altogether- it involves different procedures and higher stakes. The procedures for selection of the arbitrator are different etc. Since Discover Bank Rule manufactures class arbitration in an otherwise arbitration agreement providing for bilateral arbitration is inconsistent with the Federal Arbitration Act.

 In the next post, we would summarize the remaining portion of the majority judgement.

Arbitration and Contract Law: Some Judgements & Links

Contract Law Theory:

Contracts Profs blog calls these set of podcasts the hottest download ever. Check out the post in Contracts Prof that gives links to papers relating to Contract Law Theory. Contract Law Theory lovers would definitely enjoy these.Some of the podcasts are available as papers in SSRN and can be accessed from here.

Randy Barnett (Georgetown), "Contract is Not Promise; Contract is Consent"

Jean Braucher (Arizona), "The Sacred and the Profane Contract Machine: The Complex Morality of Contract Law in Action"

Gregory Klass (Georgetown), “Promises, Etc.”

Avery W. Katz (Columbia), "Virtue Ethics and Efficient Breach"

Juliet Kostritsky (Case Western), "The Promise Principle and Contract Interpretation"

Tenancy Agreements:

Mohamad Ahmed v Atma Ram Chauhan (MANU/SC/0614/2011) is an important decision on Lease Agreements. The decision starts off with a statement made by Deepak Verma, J:, which reads:

"One half of the lis between landlord and tenant would not reach courts, if tenant agrees to pay the present prevalent market rate of rent of the tenanted premises to the landlord."

Empirical legal scholarship aficionados might get upset for the fact that the judge's number is just an estimate and is not backed by data. But the judge is probably right in opining that it is not right on the part of the tenant in paying a rent that was fixed quarter of a century ago. The court stated that "majority" of the cases were filed by landlords because they did not get fair rent from the tenants. So the court, in the guise of laying down some guidelines "for such type of litigation" introduced judiciary made legislation (what are the state legislatures doing?).

The first guideline is in the form of a default rule. According to the Supreme Court, if parties have not agreed for any escalation in their agreement, the default escalation rate would be 10% every three years. The first guideline is in the form of a direction to the authority deciding on fair rent under the Rent legislation to go by a valuation report or on the basis of reliable estimates of building materials in surrounding ares let out on recent in the recent past.

The second guideline is akin to Section 64A of the Sale of Goods Act, 1930 which reads:

"(1) Unless a different intention appears from the terms of the contract, in the event of any tax of the nature described in sub-section (2) being imposed, increased, decreased or remitted in respect of any goods after the making of any contract for the sale or purchase of such goods without stipulations as to the payment of tax where tax was not chargeable at the time of the making of the contract, or for the sale or purchase of such good tax- paid where tax was chargeable at that time.-

(a) if such imposition or increase so takes effect that the tax or increased tax, as the case may be, or any part of such tax is paid or is payable, the seller may add so much to the contract price as will be equivalent to the amount paid or payable in respect of such tax or increase of tax, and he shall be entitled to be paid and to sue for and recover such addition, and

(b) if such decrease or remission so takes effect that the decreased tax only, or no tax, as the case may be, is paid or is payable, the buyer made deduct so much from the contract price as will be equivalent to the decrease of tax or remitted tax, and he shall not be liable to pay, or be sued for, or in respect of, such deduction."

The second guideline states that

1. property tax, water tax, maintenance charges, electricity charges would be borne by the tenant and
2. any enhancement in the rates of the above would be borne by the tenant alone.

The purpose of giving this guideline seems to give the landlord a rent free from any deduction. While this guideline is in accord with the standard practices, the issue is whether this rule is a mandatory rule or a default rule (that is, subject to agreement between the parties). According to this blawgger, this should be subject to an agreement to the contrary.

The third and the fourth guidelines allocate the responsibility of maintenance between the tenant and the landlord. Major repairs is the responsibility of the landlord and the usual maintenance is the responsibility of the tenant. In case the tenant wants to do major repairs, he is to seek written permission from the landlord and both of them should agree on the modalities of cost-sharing. 

Another radical guideline is that in case the tenant pays market rate as rent, he cannot be evicted for at least five years. Now, what if the landlord wants to get the tenanted premises for his own purpose? This might cause major hardships to the landlord.Two more guidelines deal with the determination of rent.

This blawgger is of the opinion that some of these guidelines seem to take a wrong approach. The five year immunity guideline is an example.

Class Action Waivers, the Canadian and the American Supreme Courts:

What is with phone services companies and class action waivers? The Canadian and the Supreme Courts had to decide validity of class action waivers in arbitration clauses contained in phone services contracts. The Canadian Supreme Court held in Michelle Siedel v. TELUS Communications Inc. that the Consumer Protection Law (CPL) of the province allowed a "public interest plaintiff" to sue to enforce the CPL's standards. Therefore, class action waivers in such cases are, according to the Canadian Supreme Court, not valid. (Link to the Judgement)

The United States Supreme Court had to consider in AT & T v Concepcion if class action waivers in arbitration clauses were valid. Like the Canadian case, this case was also against a phone services company. The arbitration clause provided that the customer was deemed to have his right to invoke arbitration against AT&T only under his individual capacity and not as a representative of any class action. The Supreme Court had to decide whether such a clause was valid. The Court held, to the consternation of many consumer rights activists, that a class action waiver was valid and enforceable. We had analysed the Court of Appeal judgement in an earlier post. Access it from here. The Supreme Court's decision can be downloaded from here.

Booz Allen:

In Booz Allen Hamilton v SBI Home Finance, the court held that a suit for enforcement of a mortgage by sale is not arbitrable. The court also stated some general rules to decide on questions pertaining to non-arbitrability. We'll deal with this case in a detailed post. Apart from arbitrability, this judgement is also interesting for one another issue. In this case, the Supreme Court held:

"While considering an application under section 11 of the Act, the Chief Justice or his designate would not embark upon an examination of the issue of `arbitrability' or appropriateness of adjudication by a private forum, once he finds that there was an arbitration agreement between or among the parties, and would leave the issue of arbitrability for the decision of the arbitral Tribunal."

Thus, according to the court, arbitrability questions would only be decided by the arbitral tribunal under Section 11. This, on the face of it, appears to be contrary to the justifications given in SBP  Co. v. Patel Engineering. We will have a small series of posts on the decision. For now, check out Lex Arbitri Blog's descriptive comment on the case.

Choice of Law of Arbitration Agreement: Corrections and Clarifications

One of our readers has commented on a recent post in this blog on Choice of Law in International Commercial Arbitration. The comments are pointed and raise several issues. Owing to the interesting issues raised in the comment, this blawgger has thought it fit to devote an entire post on the issues raised therein. Also, the comment points out a few errors in the said post. We’ll take this opportunity to correct or/and clarify. Each comment is dealt with under a separate heading.

Image from here.

Choice of five regimes: Whether a Choice or Whether a Matter of Applicability

The comment is probably correct in stating that it is not that parties could choose five regimes. It may so happen that five or even more regimes could apply to an international commercial arbitration. This is what even Redfern et al meant.

Choice of Law Governing Enforcement of Award:

As regards the comment that law governing enforcement cannot be chosen, it is not that parties have no choice. There exists an indirect choice- they can approach the jurisdiction of their choice (the choice is somewhat restricted by the relative advantage of choosing one jurisdiction over another, the existence of assets etc). But once a jurisdiction is chosen, there cannot be any law other than the law of that jurisdiction that would apply.

Choice of Law Governing the Capacity of Parties to the Arbitration Agreement:

As regards choice of the law governing capacity of the parties to enter into the arbitration agreement,there is a choice for the parties and the choice is through the choice of law of arbitration agreement itself. Even the Indian case of NTPC v Singer (link to the case in the post) itself states that “The substantive law governing arbitration, which concerns questions like capacity, validity, effect and interpretation of the contract etc."]. Several authorities also agree on this. Therefore, parties could have a choice on issues regarding validity of arbitration agreement. (It might probably be right to argue that parties cannot choose to apply two different laws for capacity and for validity of the arbitration agreement)  If the parties have expressly chosen the law of the arbitration agreement, issues pertaining to capacity of the parties to enter into the arbitration agreement would be governed by that law and not the seat. Readers are requested to cite an Indian or a foreign case that states otherwise. As regards incapacity, Article 34 of the Model Law refers to incapacity of “a party to the arbitration agreement”. The said ground, as confirmed by the report of the UNCITRAL in its 18^th session, is not different from the ground in the New York Convention. The relevant New York Convention ground (for refusing enforcement) is quoted in the original post and seems to suggest that incapacity is to be judged from the perspective of the law applicable to the arbitration agreement.

Law of Arbitration Agreement in the Absence of Express Choice by the Parties:

We had discussed the existence of two opinions on this issue in detail. NTPC v Singer states that in the absence of an express choice, the substantive law of arbitration would be the same as that of the contract. If so, then a choice of substantive law of contract would be deemed to be an indication of the law of the arbitration agreement and therefore the issues pertaining to incapacity, validity, etc of the arbitration agreement would be governed by the substantive law of contract.

On the English approach, the comment suggests that in the absence of an express choice of law of arbitration agreement, the recent trend is to take the law of the seat as the law of arbitration agreement. In Dallah Real Estate v Pakistan, the arbitration clause read:

"23. Any dispute or difference of any kind whatsoever between the Trust and Dallah arising out of or in connection with this Agreement shall be settled by arbitration held under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Paris, by three arbitrators appointed under such Rules."

 There was no express choice of law of arbitration agreement in the arbitration clause. Pakistan resisted enforcement of the arbitral award on the ground that the arbitration agreement was not valid under the law of the country where the award was made, in accordance with Section 103(2)(b) of the English Arbitration Act, 1996. The law where the award was made was French law. According to the English Courts, there was no arbitration agreement with Pakistan as per the French law and therefore, the English Courts refused enforcement for the reason that it was not valid in the law of the place where the award was made.This is in consonance with the New York Convention.Now, it could be argued that both approaches are different. On close analysis, they do not appear to be so. Sonatrach deals with the case where there was an express choice of substantive law of contract. It appears that the English Law is that where there is no express choice of substantive law, either of contract or arbitration agreement, the substantive law for both purposes is the law of the seat. Dallah adopts this approach. In Sonatrach, there was an express choice of the substantive law of contract. In such a case, the approach seems to be that the substantive law of arbitration agreement follows the substantive law of contract. This is a prudent approach. Therefore, the correct position in international arbitration appears to be that in case the substantive law of contract is provided, then the law of arbitration agreement follows the substantive law of contract. In case the substantive law of contract is not provided, then the substantive law of contract is, according to authorities, presumed to be the law of the seat. Even in this case, the substantive law of arbitration agreement follows the substantive law of contract, which is nothing but the law of the seat of arbitration.

As regards the implications of Bhatia, the judgement has made choice of law rules in India more out-of-sync with regard to international arbitration and therefore requires an independent treatment. We'll deal with this in subsequent posts on the topic.

AT & T v Concepcion

The United States Supreme Court has decided in favour of AT & T in the much awaited decision of AT & T v Concepcion. The decision can be downloaded from here. A post in this blog on the background of the case can be accessed from here. We'll have a detailed post on the judgement in the near future.

Link to the Paris Court of Appeal Decision in Dallah Real Estate v Pakistan

In the last post, we had dealt with the Paris Court of Appeal decision in the case of Dallah Real Estate v. Government of Pakistan. The Court of Appeal decision can be accessed from this link. Thanks to one of the members in the Linkedin International Arbitration group who was gracious enough to send me the judgement.

The Paris Court of Appeal Decision in Dallah Real Estate v Pakistan

Thanks to one of the members in the Linkedin International Arbitration group, this blawgger was able to get hold of the decision of the Court of Appeal of Paris in Dallah Real Estate and Tourism Holding Co. v. Government of Pakistan. We have had about three posts (more would come, hopefully in the near future!) on the case. Basically, we had discussed a few principles involved in the case and had two posts (here and here) on the English Commercial Court's decision. We now analyse the French Court of Appeal (CoA) decision and compare the same to what the Commercial Court decided.

The only issue that the CoA was really concerned with was whether Pakistan was a party to the arbitration agreement. While discussing the facts, the court noted that the Awami Hajj Trust established by an Ordinance of the Government of Pakistan ceased to exist only after the agreement was executed (for facts, see this post). The CoA held that Pakistan was a party to the arbitration agreement for the following reasons:

• As per the MoU (Memorandum of Understanding) signed between Dallah and Pakistan, Dallah was to submit the terms and conditions of the agreement, the financial plans etc to Pakistan and the financier was to be an entity designated by Pakistan. Further, the Pakistan had the right as per the MoU to 
• The only interlocutor with Dallah was the Government of Pakistan. the negotiations took place exclusively between Pakistan and Dallah
• The officials of the Ministry of Finance, Pakistan were members of the board of the Trust.
• The financial plans etc were given by Dallah to the Government during the pre-contractual stage
• Although Dallah has written a letter which states that the Trust was the sole contracting partner , as per the understanding between Dallah and the Government, the government designated in the letter head of the government the financier for the project.
•  It was clearly indicated to the Chairman of Dallah by one of the members of the Board of the Trust that it was for the Government to approve the contractual relationship between Dallah and the Trust.
• During the performance of the contract, officials of the Pakistani Government exchanged correspondence in respect of the agreement.

It may be noted that the English Commercial Court decided that the Government of Pakistan was not a party to the agreement. The Commercial Court (CC) accepted that the Trust was created by the Ordinance and that the Government had control over the Trust (through the board). Further, the CC also admitted that the participation of the Government in the agreement was substantial: the agreement was signed by a Government  official although he signed it as a member of the board; the Trust had a unilateral right to assign the contract to the Government; the government provided the contract bank guarantee on behalf of the Trust. Nevertheless the CC concluded that the Government was not party. The reasons were:

• The Managing Trustee of the Trust signed the contract
• The guarantee provided to the affiliate of Dallah was an independent contract. merely furnishing the bank guarantee does not indicate that the third party intended to be bound by the contract. The obligations of the trust were independent to that of the Government in furnishing guarantee
• Pakistan was not a party to the agreement
• The assignment clause itself was indicative of the fact that the Government did not have any rights in the agreement.  
• The most important aspect in favour of Pakistan was that the MoU contemplated that the Government would be a party while in the agreement the Government was not a party.
• Although the letters nominating the financier were sent to Dallah under the letter head of the Government, the nomination was already done by the Trustees.
• Although the arbitrators concluded that it was the Government which actually funded the Trust, the conclusion was not correct because the funds were to come from the piligrims and philanthropists
• Although the termination letter was under the letter head of the Ministry of Religious Affairs, he could not have acted as a member of the Board of the Trustee as by then the Trust had ceased to exist.
• It was not that by not re-promulgating the Ordinance, the Government decided to step in the shoes of the Trust.
• Before the Judge in Pakistan, the government had sought a declaration that the agreement was repudiated due to the default of Dallah. This implied that the Government did not consider itself to be a party to the agreement.

I leave it to the readers to decide which one is of these judgements is more convincing. We'll look at this extremely interesting divergence between the French and the English courts in a future post.

Dallah Real Estate, Best Xerox and Universal Metal

Some issues/ decisions on arbitration.

Lex Arbitri Blog had brought to our attention that the French Court of Appeal had decided in Dallah Real Estate v. Pakistan that the arbitral award was valid. This was in complete contradiction to the decision of the UK Supreme Court which refused to enforce the same arbitral award. The Conflict of Laws. Net Blog has a detailed post on the French Court of Appeal decision. Do check it out.

Best Xerox Centre v. Xerox Modi India Ltd.

Best Xerox Centre had filed a complaint under the Competition Act, 2002 against Xerox Modi India Ltd. alleging abuse of dominant position. The allegation is that the abuse of dominant position is for coercing Best Xerox Centre (BXC) to sign the Full Service Maintenance Agreement (FSMA) with an arbitration clause in which Xerox Modi (Xerox) had the exclusive right to appoint the arbitrators.

According to BXC, in order to lure customers for selling the products of Xerox, Xerox provided equitable terms of contract, including the arbitration clause wherein both BXC and Xerox had to contribute in appointing the arbitrators. However, once BXC purchased the machines of Xerox, in the service agreement (FSMA) entered for the purpose of servicing the machines of Xerox, the arbitration clause provided for the unilateral constitution of the tribunal by Xerox.

The Competition Commission of India held that there was no prima facie case of abuse of dominant position and also held:

“The Commission is not the forum for challenging the terms of any arbitration clause, unless there is any anti competitive element involved.”

We had, in a previous post, discussed about the unilateral right of a party to appoint the arbitral tribunal under the arbitration agreement. 

Universal Metal Company Ltd. v. GAIL (India) Ltd.

As per the Gas Sales Agreement (GSA) between the petitioner, Universal Metal Company Ltd. (Universal) and GAIL (India) Ltd. (GAIL), GAIL had the right to levy certain charges on Universal. When GAIL levied such charges, Universal petitioned to the PNGRB alleging that levy of such charges by GAIL was arbitry and unjust. The Petroleum and Natural Gas Regulatory Board (PNGRB) heard the matter and held that in view of Article 13 of the GSA which provided for reference of disputes to arbitration and in view of Section 24(1) of the Petroleum and Natural Gas Regulatory Board Act, the PNGRB is under an obligation to dismiss the matter and refer the same to arbitration. Section 24(1) reads:

“Save as otherwise provided for arbitration in the relevant agreements between entities or between an entity or any other person, as the case may be, if any dispute arises, in respect of matters referred to in sub-section(2) among entities or between an entity and any other person, such dispute shall be decided by a Bench consisting of the Member (Legal) and one or more members nominated by the Chairperson: Provided that if the members of the Bench differ on any point or points, they shall state the point or points on which they differ and refer the same to a member other than a member of the Bench for hearing on such point or points and such point or points shall be decided according to the opinion of that member.”(emphasis not in the original)

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

In the previous post on this topic, we had discussed a portion of the landmark case of Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs, Government of Pakistan. We had in an earlier post given an overview of the case and started off the discussion on the case by discussing a very portion of the Commercial Court’s decision. In this post, we intend to analyse the decision of the Commercial Court further. As with most of our posts, we would simultaneously analyse the Indian law on too.

Issue 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)?

One of the parties had argued that the court had to conduct a “full hearing of all the relevant evidence” while the recognition and enforcement of a New York Convention award is challenged while the other party had argued that the nature of enquiry was a review of the arbitral tribunal’s decision on jurisdiction simpliciter.  What comes out of this question is this: according to Dallah, the argument was that the court cannot go into a full rehearing of whether Pakistan had proved, in accordance with French law, that it was not a party to the arbitration agreement. Pakistan took a contrary position. It was in Dallah’s interests that the scope of enquiry was limited.  

However, court was in favour of the former, ruling that the grounds under S 103(2)(b) were those of fact requiring the challenging party “to adduce all evidence necessary to satisfy the burden of proof on it to establish the existence of one of the grounds…”  The relevant provision states:

“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;”

Thus, it is inherent in the language of S 103(2) that the party against whom the award is invoked (Pakistan) proves that the arbitration agreement was not valid under French Law. Thus:

“If a party has to "prove" a matter, that must mean, in the context of English civil proceedings, prove the existence of the relevant matters on a balance of probabilities.”

Issue 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?

A question as to foreign law is a question of fact, usually established through the use of experts. In this case, the French Law experts of both sides submitted a Joint Memorandum on the law in France on the principles pertaining to whether Pakistan had validly agreed to arbitration as per the arbitration agreement in issue., though they disagreed on several aspects. Following were some of the principles explicated by them:

• The test to decide whether Pakistan was a part of the arbitration agreement was to see if it was the common intention of all the parties to the said agreement to be bound by the arbitration agreement.

• The common intention could be established on the basis of facts. For this, the courts would look into all surrounding facts to see if they pointed to an intent to be bound by the arbitration clause.

• The ascertainment of subjective intention of the parties to be bound by the arbitration clause would be based on the objective conduct of the parties.

• The French Jurisprudence Constante* is that the international arbitration agreement “must be extended to parties directly implicated in the performance of the contract and in any disputes arising out of the contract.”

• It must be established that, notwithstanding the absence of any signature to the international arbitration agreement, “respective contractual situations and existing usual commercial relations” of the purported parties such an agreement gave rise to a presumption that the purported parties had bound themselves to the arbitration agreement.

• To establish common intention, “good faith” must be taken into account.

• A State or a State entity, when it enters into an arbitration agreement, waives the State immunity from the jurisdiction of the arbitral tribunal and the immunity against execution of the arbitral award against it.

We will continue the discussion on the remainder of third issue in a future post. The discussion on the third issue is extremely interesting and we might devote an independent post on the remaining portion of it.

* Jurisprudence Constante, a term of French origin, translates roughly as “uniform jurisprudence”. It refers to “a long series of previous decisions applying a particular rule of law carries great weight and may be determinative in subsequent cases.” According to Wikipedia, “Jurisprudence constante is a legal doctrine according to which a long series of previous decisions applying a particular rule of law is very important and may be determinative in subsequent cases. This doctrine is recognized in most civil law jurisdictions, in the civil law of Louisiana, for example. The rule of law applied in the Jurisprudence constante directly compares with stare decisis. But the Louisiana Supreme Court notes the principal difference between the two legal doctrines: a single court decision can provide sufficient foundation for stare decisis, however, ‘a series of adjudicated cases, all in accord, form the basis for jurisprudence constante’.” [The Wikipedia reference has been verified and seems to be correct. See foot note 17 to the case cited in the article. The case can be accessed from this link.]

AT&T v. Concepcion

The United States Court of Appeals for the Ninth Circuit had to decide the validity of an arbitration agreement found in a Wireless Service Agreement. The facts:

Feb 2002: Vincent and Liza Concepcion entered into an agreement called the Wireline Service Agreement  (WSA) with the predecessor of AT&T. The WSA governed the relationship between the Concepcions and AT&T pertaining to cell phone service and purchase of new phones.

AT&T had advertised that the cell phones were free but had charged sales tax at 7.75% of the phone's value in the retail market. The Concepcions sued AT&T alleging fraud. The WSA provided that any dispute in the agreement should be submitted to arbitration. The arbitration clause also contained a class action waiver clause. A class action suit is filed by one person or several persons on behalf many others. As per WSA, Concepcion was deemed to have his right to sue AT&T only under his individual capacity and not through any class action.

Jan 2006: The Concepcions sued AT&T for charging sales tax when the phone was advertised as free. A class action suit was filed by Laster.

Sep 2006: The District Court had consolidated the claims of Conceptions with that of the Laster class action.

Dec 2006: AT&T amended the arbitration clause by providing, in effect, that:

If Arbitration Award > AT&T’s last written settlement offer, then the customer would be paid USD 7,500.

Mar 2008: AT&T applied to the court to compel the Concepcions and Laster to arbitrate the dispute in their individual capacities under the new arbitration agreements.

The District Court denied the motion of AT&T holding, inter alia, that the class action waiver provision in the arbitration agreement was unconscionable as per California law and that the Federal Arbitration Agreement did not pre-empt the California unconscionability law.

Against this decision, AT&T appealed to the US Court of Appeals. The decision of the Court of Appeals is summarized:

• Under the FAA (Federal Arbitration Act) arbitration agreements are valid and enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract” (Section 2 of the FAA).
• The Federal Arbitration Act did not, either expressly or impliedly, pre-empt the California Unconscionability Law. The objective of the FAA was to remove hostility towards arbitration and treat an arbitration clause like a contract. Assuming that there is a contract with a class action waiver, the class action waiver clause would nevertheless fall foul of the California Law.
• Further, S 2 clearly recognizes that arbitration agreements should be denied if they are invalid due to grounds such as unconscionability.
• Declaration of class action waiver clauses as invalid, if it satisfies the criteria laid down in past decisions, does not reduce the efficiency of arbitration.
• In previously decided cases, courts have held that since class actions “serve the important policy function of deterring and redressing wrongdoing, particularly where a company defrauds large numbers of consumers out of individually small sums of money”, class action waivers are unconscionable if certain conditions are satisfied:
• The class action waiver is found in a “consumer contract of adhesion”;
• Disputes between parties involve small sums of money as damages;
• The allegation is that complaint is that the party with superior bargaining power has cheated a large number of consumers for a small amount of money;
• The purported waiver has resulted in exempting the wrongful party from its own fraud or wrongful injury to another.
• Since the WSA was a contract of adhesion (because the Concepcions were given no opportunity to negotiate), since the damages involved here were a small amount of USD 30.22 and since the allegation against AT&T is that they have cheated a large number of customers by advertising the phones as free when they knew they would charge sales tax on the phone, the class action waiver provision in the arbitration agreement was unconscionable as per California Law

The US SC is hearing arguments in the case of AT&T v. Concepcion. Touted as one of the most important cases in the recent times, the AT&T case seemingly involves complex questions pertaining to class action, consumer rights, federalism and arbitration. More on the Supreme Court proceedings in a future post. But before closing off we make two points:

1. In First Options of Chicago v. Kaplan 514 US 938 (1995), the US Supreme Court held:

"When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally (though with a qualification we discuss below) should apply ordinary state law principles that govern the formation of contracts... The relevant state law here, for example, would require the court to see whether the parties objectively revealed an intent to submit the arbitrability issue to arbitration."

2. Thank god India does not have this state law – central law problem in arbitration that USA suffers from! 

For a brilliant set of links on the case (briefs, oral arguments in the SC, blog posts, short articles, Amicus Briefs- even professors of arbitration and contract law have made submissions as amici, commentary) check out this page. The compilation of links on the case is simply amazing. Hats off!

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.  

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 3^rd 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 12^th 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:

UK Supreme Court

Court of Appeal

Commercial Court