Thursday, November 11, 2010

Dallah v. Pakistan: Why The Buzz?

Since, this case promises to be a landmark judgment in current development of international arbitration revolving around the most fundamental concepts of arbitration such as the "principle of competence-competence", "parties to an arbitration agreement" and "enforcement of awards" which is very important for the beginners and advanced learners of arbitration alike, I shall try and put forth this case and issues involved in as simple and defined way as possible.

Lord Collins has already described this as a caseof “International Importance” in the context of interpretation of Article V(1) (a) of theNew York Convention(NYC) whereby an award can be set aside if it is not valid. This case went up till the Supreme Court of UK which affirmed the decisions of the High Court and the Court of Appeal. Also, apart from this case there are only 2 other reported cases where the English courts have refused enforcement of international arbitration awards under NYC, namely Irvani v Irvani,1999 and Kanoria v Guiness,2006.

In the instant case, a contract was entered between Dallah and Awami Haj Trust (A trust formed by the Government of Pakistan). Under the contract, The Awami Haj Trust would acquire land from Dallah and collaboratively develop housing facility for the Haj pilgrims. Any disputes to be referred to ICC Paris. The Awami trust was formed through an ordinance and ceased to exist when the ordinance was lapsed and not renewed. The dispute, thus when arose was brought against the government of Pakistan at ICC Paris by Dallah. The contention of Dallah was that the government is the valid successor of the Trust. The government however, throughout the arbitration maintained its stand that it was a third party not related to the contract and for this reason not a correct party to the arbitration. The tribunal decided in favour of Dallah and the award was brought in London for enforcement. After rounds of legal arguments at the High Court and Court of Appeal , the decision of the apex court would have definitely come as a shock to Dallah where all its hopes came crashing down. The summary of the case as released by the Supreme Court of UK can be found

The main ratios given by the High court and Court of Appeal which became of great importance in international arena were:
  • Determination of whether an award is enforceable under Section 103(2)(b) of the English Arbitration Act 1996 (Which is the enabling section for Article V.I of the NYC) required just a review of the arbitral tribunal’s award or a full opening and hearing of the relevant matters and issues: The court supported the later stance. This very point has become a major concern because it not only gives a strong blow to UK as an arbitration friendly jurisdiction but also raises issues of finality of an arbitration tribunal’s award and more importantly the efficacy and relevance of Article V of NYC and the purpose it is meant to serve. The article by Gary Born and Timothy Lindsay discusses this issue in great detail which was published on Kluwer Arbitration Blog in 2009 when the Court of Appleal had given its decision and the matter was still to be appealed in the Supreme Court.
  • Whether the supervisory court has primacy (which refers to the courts in France) over the matter. The court of Appeal had also rejected this argument by Dallah and held that there was no such particular or mandatory requirement and it is not necessary that the award had to be challenged in France as a pre-requisite to resist enforcement elsewhere.
Having mentioned 2 main issues at the lower courts I shall now move on to the other 2 major points which were discussed by the Supreme Court.
  • The Doctrine of Kompetenz-Kompetenz or Competence- Competence: The discussion of the court on this point is rather very delicate and if slightly misconstrued or widened can open flood gates for cases going to courts post arbitration in many jurisdiction ( as is already case in India!). The Supreme Court in paragraph 22 of its judgment strongly relied on paragraph 659 of Fouchard, Gaillard, Goldman which says that ““Even today, the competence-competence principle is all too often interpreted as empowering the arbitrators to be the sole judges of their jurisdiction. That would be neither logical nor acceptable. In fact, the real purpose of the rule is in no way to leave the question of the arbitrators’ jurisdiction in the hands of the arbitrators alone. Their jurisdiction must instead be reviewed by the courts if an action is brought to set aside or to enforce the award.” Further, citing the US China Minmetals case in paragraph 25 it also pointed that the concept of competence-competence is “applied in slightly different ways around the world”, but it “says nothing about judicial review” and “it appears that every country adhering to the competence-competence principle allows some form of judicial review of the arbitrator’s jurisdictional decision …..”. The court held that even in French Law (which was the seat of arbitration in the absence of any express choice of law) the court had full powers and discretion to refuse the recognition of an award which was made in absence of a valid arbitration agreement though it would not be possible if the question of existence of arbitration agreement is directly brought to the court without arbitration actually taking place. As can been derived, the message which the court aims to send is that though a court should encourage arbitration and deny entertaining the case at the initial stage prior to the arbitration proceedings, it should go deep into the matter if it feels so after the award has already been given.
  • The application of arbitration agreements to non-signatories (including States) in French law, and the role of transnational law or rules of law in French law: The second step involved was to see if the government of Pakistan was a party at all to the arbitration agreement. The Supreme Court followed a step by step procedure to determine this. As I have mentioned earlier, since there was no choice of law in the arbitration agreement, French law was decided to govern this as Paris was the seat of arbitration. The court tried to find out if there was a common intention of the government of Pakistan to join the arbitration agreement. The court also referred to a famous French arbitration case, the Dow Chemical case where a third party could be brought into arbitration on considering various factors and group of companies concept. However, after applying the concepts of French Law, government of Pakistan had successfully proved that there was no common intention on its part to be bound by the arbitration agreement. The essential factors which led to such a decision by the Supreme Court are:
    Ø Dallah was advised by a firm who very well without any doubt understood the difference between contracting with a State entity and with the State itself.
    Ø There was a clear change in the proposed transaction from an agreement with the State to an agreement with the Trust.
    Ø The Trust was established as “a body corporate having perpetual succession and a common seal with power to acquire, hold and dispose of property, and may by its name, sue and be sued.”
    Ø The Agreement (including the arbitration agreement) was plainly an agreement between Dallah and the Trust, and the Government was referred to in the Agreement only in its capacity of guarantor of loans to the Trust.
    Ø It was the Trust which first commenced proceedings against Dallah in Islamabad.
It might very much seem like lifting the corporate veil and finding that the Government of Pakistan is not behind the trust.
  • On Discretion: It was also argued by Dallah that under Article V of the NYC the Court can exercise its discretion to enforce an arbitration award even in a situation where the Court has found that there was no agreement to arbitrate. The Supreme Court however on this point said that though Article V contained a certain amount of discretionary element, the court could not have applied that discretion would in absence of a valid arbitration agreement. Thus, according to the court, the tribunal lacked jurisdiction to make the award and thus it could not have exercised its jurisdiction.
The verdict has been given but it is yet to be seen what sort of implication this case would have on future international arbitration cases and how it is received in the international arena. Chances are that the crticisim may be majorly on the point that if Dallah has suffered loss and the Trust has ceased to exisist, who is the right party to claim damages against? Is the government not the successor in such a case?

I strongly hope it does not play the spoilsport which was played by the Satyam Venture case in misconstruing the Bhatia International case in India.

Views, Comments and feedback on this Case and on this write up is greatly welcomed.


  1. On your last point, just because the Trust ceased to exist, why does that make the Pakistani Government a guarantor? If Dallah had wanted, they could have requested such a guarantee at the start.

    I believe the Supreme Court are correct. A tribunal can determine their jurisdiction, but not to the extent of claiming jurisdiction over a party who never entered into an arbitration agreement. Arbitration is a consensual contractual arrangement. The right to decide jurisdiction derives from that arrangement. If it does not exist, then no such jurisdiction has ever been created.

    My only concern is that it might have been sensible to challenge the jurisdiction in France first.

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  3. Many thanks for the comment Mr. Peter Foreman. Under paragraph 6 at Page 4 of the text of the judgment, the extract from Annex A which contains the detailed financial structure indicates Government of Pakistan as the Guarantor. Paragraphs 42 – 43 & 133 – 136 of the judgment contain further references of the Government of Pakistan as the Guarantor. This very stance makes me afraid about the criticism that may arise and hence, the reason why I expressed it in the last paragraph. Also, further, such decision might leave Dallah without any remedy if it were correct in its claims.

    Indeed, as you have pointed, it is very true that arbitration is governed by party autonomy and a third party cannot be dragged in if it were not related to it but it is interesting to see under paragraph 139 of the judgment that there existed a set of proceedings earlier which were initiated by the Government of Pakistan against Dallah. So, there are instances where the trust and the government have remained separate entities only on paper but not in action. This was probably the reason why the distinguished tribunal (as was recognized by the High Court) held the Government of Pakistan liable. As I have mentioned in my post, even if the Supreme Court is correct, the ratio can be dangerous if not applied with caution if future cases.

    Your concern on the jurisdiction issue is very apt. It is valid that challenge to the jurisdiction first in France would be better but the Supreme Court overruling this contention has pointed that there is no such mandatory requirement. This very stance may also attract a lot of confusion and difference of opinion in various jurisdictions around the world.


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