UK Supreme Court on Non-Signatory Parties in Arbitration: Part II

 

(Continued from Part I which is available here)

We can now briefly turn to the judgment of Lord Collins. Lord Collins elaborated the position on broadly similar reasoning. On the issue of the standard of review to be adopted, he observed, "The principle that a tribunal has jurisdiction to determine its own jurisdiction does not deal with, or still less answer, the question whether the tribunal's determination of its own jurisdiction is subject to review, or, if it is subject to review, what that level of review is or should be...
it does not follow that the tribunal has the exclusive power to determine its own jurisdiction, nor does it follow that the court of the seat may not determine whether the tribunal has jurisdiction before the tribunal has ruled on it. Nor does it follow that the question of jurisdiction may not be re-examined by the supervisory court of the seat in a challenge to the tribunal's ruling on jurisdiction. Still less does it mean that when the award comes to be enforced in another country, the foreign court may not re-examine the jurisdiction of the tribunal..." (This test may well be satisfactory when an arbitrator assumes jurisdiction without the interference of a Court – what about a situation where, in the Indian context, the arbitrator is appointed by the Chief Justice after a judicial determination?)

Lord Collins then discusses in detail the application of an arbitration agreement to non-signatory parties. Instead of the approach of Lord Mance (of applying supranational law as part of French law; or supranational law as applied by French courts), Lord Collins begins with a broad analysis of the issue on the general principles of international commercial arbitration. In the words of Lord Collins, "The issue has arisen frequently in two contexts: the first is the context of groups of companies where non-signatories in the group may seek to take advantage of the arbitration agreement, or where the other party may seek to bind them to it. The second context is where a State-owned entity with separate legal personality is the signatory and it is sought to bind the State to the arbitration agreement. Arbitration is a consensual process, and in each type of case the result will depend on a combination of (a) the applicable law; (b) the legal principle which that law uses to supply the answer (which may include agency, alter ego, estoppel, third-party beneficiary); and (c) the facts of the individual case..."

Lord Collins then discussed the point on the applicability of the doctrine of renvoi. "It is likely that renvoi is excluded from the New York Convention: see van den Berg, The New York Convention of 1958 (1981), p 291. But it does not follow that for an English court to test the jurisdiction of a Paris tribunal in an international commercial arbitration by reference to the transnational rule which a French court would apply is a case of renvoi. Renvoi is concerned with what happens when the English court refers an issue to a foreign system of law (here French law) and where under that country's conflict of laws rules the issue is referred to another country's law. That is not the case here. What French law does is to draw a distinction between domestic arbitrations in France, and international arbitrations in France. It applies certain rules to the former, and what it describes as transnational law or rules to the latter..."

Lord Collins then discussed the facts which in his view meant that the 'common intention' test was not satisfied:

First, throughout the transaction, Dallah was advised by a leading Pakistani law firm, which was responsible for the drafts of both the MoU and the Agreement. Secondly, there was a clear change in the proposed transaction from an agreement with the State to an agreement with the Trust. The MoU was expressed to be made between Dallah and the Government, whiile the agreement was not. Thirdly, at the time of its establishment, the Trust was established as a body corporate. Fourthly, the Agreement contained references to the Government only in its capacity as a guarantor and there was nothing to indicate that it was a party to the Agreement itself.

On these factual grounds, Lord Collins held that the Government could not be treated a s aparty, and there was no valid arbitration agreeemnt between the Government and Dallah.

Further, Lord Collins went on to criticise the Tribunal on the grounds that it "drew the conclusion that the organic control of the Government over the Trust, although insufficient to lead to the disregard of the separate legal entity of the Trust, constituted nevertheless an element of evidence as to the true intention of the Government to run and control directly and indirectly the activities of the Trust, and to view the Trust as one of its instruments." This observation perhaps goes to indicate that the test for determining whether a non-signatory is a party to an arbitration agreement or not is the same as that for determining whether the cirporate veil should be lifted. It is often thought that non-signatories can be made party to an arbitration agreement in two ways – one, by pleading that the corporate veil should be lifted; and secondly, by relying on arguments that as a matter of arbitration law (and not as a matter of company law), the non-signatory should be treated as a party. What Lord Collins's criticism (arguably obiter) indicates that there are no two tests – the test is a common one. This also appears to be the only exception left open in Indian law after Indowind.

The judgment of the UK Supreme Court is available here. The impugned decision of the Court of Appeal is available here.

A Kluwer Arbitration Blog note on the decision of the Court of Appeal is available here. The commentator raises the concern, "On a more fundamental level the Dallah decision raises the question whether the New York Convention is fulfilling its objectives if national courts ruling on enforcement of Convention awards interpret Article V as permitting them to reopen and completely rehear challenges to a tribunal's finding on the validity of the arbitration agreement, and hence its own jurisdiction..." This concern – somewhat reminiscent of the concerns expressed in relation to the intervention of the Indian judiciary in arbitration – is noteworthy and is as applicable to the Supreme Court's decision; yet as a matter of principle, the Supreme Court explains in great detail how the regular standard of review operates and is applicable in enforcement proceedings when the issue of validity of the agreement is in question. It is also important to note that nowhere can the decision be read as supporting such a threshold of judicial review on questions of the merits of the case, once jurisdiction has been established.

 

UK Supreme Court on Non-signatory Parties in Arbitration: Part I

We have previously discussed issues surrounding privity in arbitration agreements; and in a recent post, Shantanu looked at a recent decision of the Supreme Court of India on the point which lays down the proposition that an award cannot be enforced against a party merely by virtue of its association with the matter or the parties involved (in the facts of the case, the 'association' was in the nature of a guarantor relationship). We had also examined another decision of the Supreme Court in Indowind where the Court affirmed the sanctity of the corporate veil in determining who the parties to an arbitration agreement are. In these cases, the Court has taken a strict view of who a 'party' to an arbitration agreement is. In a recent decision of the UK Supreme Court, a similar view appears to have been taken in the context of enforcement of awards: Dallah Real Estate v. Ministry of Religious Affairs, Government of Pakistan. In particular, Lord Mance and Lord Collins examined the issue of when non-signatories may be treated as parties in great detail. The decision also decides important questions pertaining to the conflict of laws (such as whether the doctrine of renvoi would operate in the context of the New York Convention).

The Appellant ('Dallah') sought to enforce an award of an ICC Tribunal (with its seat in Paris) made against the Government of Pakistan ('Government'). The Government was not a signatory to the relevant arbitration agreement. The signatories were Dallah and Awami Hajj Trust ('Trust').

Dallah had proposed to the Government that it would provide certain facilities to pilgrims. In particular, Dallah proposed to the Government that it would "provide housing for pilgrims on a 55-year lease with associated financing". The Government approved of this the proposal in principle, and a Memorandum of Understanding was concluded between Dallah and the Government. Under this MoU, "land was to be purchased and housing facilities were to be constructed at a total cost not exceeding US$242 million and the Government was to take a 99-year lease subject to Dallah arranging the necessary financing to be secured by the Borrower designated by THE GOVERNMENT under the Sovereign Guarantee of THE GOVERNMENT." The President of Pakistan – acting in accordance with the terms discussed in the MoU and in subsequent communications between the parties – meanwhile promulgated an ordinance establishing and granting legal recognition the Trust. The Trust was to act as the Borrower as per the terms of the MoU. Further negotiations between Dallah and the Government led to the signing of the agreement ('Agreement') between Dallah and the Trust on 10 September 1996. The Agreement contained an arbitration clause.

Under the constitution of Pakistan as it stood at the relevant times, ordinances had to be either laid down before Parliament or would lapse unless re-promulgated after a specified duration. The re-promulgation of the ordinance continued for some duration, but after a change in the government of Pakistan, the ordinance was not re-promulgated after November 1996. Accordingly, in view of the applicable domestic laws of Pakistan, the Trust ceased to exist as a legal entity in December 1996. In 1998, in view of some disputes, Dallah sought to adjudicate the issues by means of arbitration under the Agreement.

On these facts, the Tribunal found that the Government was a 'true party' to the Agreement and an award was made against the Government.

In the English Courts, the Government relied on Section 103(2)(b) of the (UK) Arbitration Act, 1996 which states that enforcement of an award can be refused when "the arbitration agreement was not valid ….. under the law of the country where the award was made." The Government's argument was accepted by the Courts below, and the matter came up in appeal before the UK Supreme Court.

Lord Mance began his analysis by noting, "the 'validity' of the arbitration agreement depends in the present case upon whether there existed between Dallah and the Government any relevant arbitration agreement at all..."

First, the question arose whether the validity of the award was to be seen under French law. In this regard, it was accepted before the Court that the words "under the law of the country where the award was made" referred to French law. However, it was also common ground between the parties that "Under French law, the existence, validity and effectiveness of an arbitration agreement in an international arbitration …. need not be assessed on the basis of a national law, be it the law applicable to the main contract or any other law, and can be determined according to rules of transnational law..." In other words, this transnational law of arbitration or supra-national law of arbitration was to be treated as a part of French law. In order to determine what this supra-national test is, the UK Supreme Court referred to the decision of the Paris Court of Appeal – "According to the customary practices of international trade, the arbitration clause inserted into an international contract has its own validity and effectiveness which require that its application be extended to the parties directly involved in the performance of the contract and any disputes which may result therefrom, provided that it is established that their contractual situation, their activities and the normal commercial relations existing between the parties allow it to be presumed that they have accepted the arbitration clause of which they knew the existence and scope, even though they were not signatories of the contract containing it..." The UK Supreme Court agreed to apply this test, and noted "It is difficult to conceive that any more relaxed test would be consistent with justice and reasonable commercial expectations, however international the arbitration or transnational the principles applied." Nonetheless, giving weight to the fact that the applicable law was French law, and considering that French law co-opted supra-national law in this regard, the Supreme Court accepted this test as being the correct one to apply, and noted that effectively this was a test which required the 'common intention to arbitrate' of the parties to the proceedings to be ascertained.

The ICC Tribunal had adopted a similar test in holding that the Government was a true party to the award, and hence, next came the issue of whether the arbitrators' decision on the point was open to review. The Supreme Court held on this point that language of the English Act as well as the general principles of arbitration law point strongly "to ordinary judicial determination of that issue. Nor do Article VI and s.103(5) contain any suggestion that a person resisting recognition or enforcement in one country has any obligation to seek to set aside the award in the other country where it was made..." Thus, the standard at the stage of enforcement is that of a full judicial review, and is not limited to the grounds for setting aside and award. Lord Mance then proceeded to explain the relationship between enforcement proceedings and setting aside proceedings thus: "It is true that successful resistance by the Government to enforcement in England would not have the effect of setting aside the award in France. But that says nothing about whether there was actually any agreement by the Government to arbitrate in France or about whether the French award would actually prove binding in France if and when that question were to be examined there. Whether it is binding in France could only be decided in French court proceedings to recognise or enforce, such as those which Dallah has now begun. I note, however, that an English judgment holding that the award is not valid could prove significant in relation to such proceedings, if French courts recognise any principle similar to the English principle of issue estoppel (as to which see The Sennar (No. 2) [1985] 1 WLR 490). But that is a matter for the French courts to decide." Lord Mance also held that there is no difference in the standard of review in cases where the arbitrator assumes jurisdiction, and in cases where the arbitrator determines the existence of jurisdiction.

After a detailed examination of the correspondence between the parties, Lord Mance held that the Tribunal had erred in holding that the common intention test was satisfied.

(Continued in a subsequent post)

Two Global Indicators: Measuring India’s Performance

Doing Business

Doing Business 2011, a co-publication of the World Bank and the International Finance Corporation, was released earlier this week. As far as India’s position is concerned, nothing significant has altered compared to its ranking in last year’s report. Of a total of 183 countries covered in the report, India ranks 134 (one place above its ranking of 135 in the 2010 report). Even within individual sub-categories against which countries are measured, there has been no significant improvement in India’s performance.

The report indicates two specific areas where reforms in India have been implemented recently:

Starting a business India eased business start-up by establishing an online VAT registration system and replacing the physical stamp previously required with an online version.

Paying taxes India reduced the administrative burden of paying taxes by abolishing the fringe benefit tax and improving electronic payment.

On the other hand, India’s ranking continues to be low when it comes to enforcing contracts, where it is 182 (second from the bottom). This reflects upon the efficiency of the dispute resolution system, which is plagued by delays and costs.

While one may always quarrel with the veracity or even the necessity or relevance of such a report carrying a cross-country analysis, the fact of the matter is that the results do not bode well for India’s continued rise as a leading economic power, as this report suggests.

Human Development

Economic indicators tell us only part of the story. How does increase in business activity and economic progress impact livelihood of people inhabiting a country and affect human development? Coincidentally, this week also witnessed the release of the Human Development Report 2010 by UNDP. Indian ranks 117 out of a total of 169 countries based on human development indicators. On a positive note, India ranks high among countries who have witnessed improvements in HDI over the 1970-2010 period as measured by annual percentage growth rate in per capita GDP. However, this leaves unanswered questions when it comes to non-economic indicators. As the report notes:

India’s deregulation since the early 1990s. India has a long tradition of entrepreneurial activity, with well established business families and networks. Many business families supported the independence movement and were politically aligned with post-independence governments. The extensive regulations during the first few decades after independence restricted corporate activities but did not threaten domestic business interests. The 1990s liberalization removed restrictions on corporate activity and steadily opened the economy to foreign competition—in effect, reducing regulatory burdens in return for greater efficiency. The evidence on business development in new sectors and on entrepreneurs emerging from different socioeconomic groups suggests a new dynamism. But there is intense debate about rising inequality, the need for complementary social actions, and problems with specific aspects of corporate governance and state-business relations.

Privity in Arbitration Agreements

The issue of privity to an arbitration agreement has been the subject of much controversy, especially in the context of the grant of interim measures under section 17 (by the arbitral tribunal) and section 9 (by the Court). In SN Prasad v. Monnet Finance, the Supreme Court had occasion to revisit this very issue, albeit in a different context.

The facts which fell for the Court’s consideration were quite straightforward. The appellant had, by virtue of a letter, stood as guarantor for a loan made by the first respondent to the second respondent. Shortly after, the first and second respondents entered into a loan agreement for that very amount, to which the third respondent stood as guarantor. This loan agreement contained an arbitration clause. Subsequently, under this arbitration clause, the first respondent obtained an award against the second and third respondents, and sought to enforce it against the appellant. The appellant, as would be expected, contended that he was not party to the loan agreement in which the arbitration clause was contained, and hence was not bound by the award.

Now, there were two ways in which the respondents could have established that the appellant was bound by the agreement- first, to argue that the arbitration clause was incorporated into the earlier guarantee by means of incorporation by reference (section 7(5)), which has been discussed earlier here); or that the arbitration agreement was created by ‘an exchange of statements of claim and defence in which the existence of the arbitration agreement is alleged by one party and not denied by the other’ (section 7(4)(c)). The Court, after considering both these contentions, rightly considered them worthy of dismissal.

The first of these was not really an issue before the Court. Section 7(5) provides that ‘The reference in a contract to a document containing an arbitration clause’ may constitute an arbitration agreement. Since the letter of guarantee predated the loan agreement, and contained no reference to any possibility of arbitration, this provision was of no assistance. What was more controversial, and led to potentially relevant observations by the Court was the applicability of section 7(4)(c) to the matter at hand. Section 7(4)(c) provides that an arbitration agreement is in writing if it is contained in ‘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’. The first respondent, in the course of a section 11 application under the loan agreement entered into with the second and the third respondent, had also listed the appellant under the heading ‘Names of other parties to arbitration agreement’. There was no assertion there was an arbitration agreement between the respondent and the appellant in the body of the application. However, it was contended that this inclusion of the appellant’s name was sufficient for the purposes of section 7(4)(c), and the non-denial by the appellant led to a binding arbitration agreement between the parties.

The Court roundly rejected this argument, on two bases-

First, it was pointed out that an allegation of the existence of an arbitration agreement requires more than an oblique reference of the sort being relied on by the respondent. In the words of the Court,

To constitute an arbitration agreement under section 7(4)(c) of the Act, what is required is a statement of claim containing a specific allegation about the existence of an arbitration agreement by the applicant and `non- denial’ thereof by the other party. An `allegation’ is an assertion or declaration about a fact and also refers to the narration of a transaction. As noticed above, in the entire application under section 11 of the Act, there was no allegation as to the existence of any arbitration agreement between first respondent and the appellant. Column (3) containing “Names of other parties to arbitration agreement with addresses” cannot be considered to be an assertion or declaration about the existence of an arbitration agreement between the first respondent and appellant. Section 7(4)(c) of the Act cannot therefore be relied upon to prove the existence of an Arbitration agreement.

Secondly, and more interestingly, the Court also placed great stock by the fact that at the time when the section 11 application was filed in 1998 and decided in 2000, “the prevailing view was that the orders under section 11 of the Act were administrative orders”. This meant that the application could not be considered a statement of claim; and also, reduced the probative value of the findings of the Chief Justice. However, while the Court suggests that this is not the basis of its decision, it’s opinion that SBP v. Patel Engineering, decided in 2005, did not affect the nature of the section 11 proceedings in 2000 may not withstand scrutiny. It is very well recognised that while judgments may seem to make law, in principle, they are only declaring the law. Hence, when in 2005, SBP held that section 11 applications are judicial, it did not mean that they became judicial after 2005. It also meant that they were always judicial. This same issue has been considered and debated by the House of Lords in decisions like Kleinwort Benson v. London City Council, [1998] UKHL 38, and Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners, [2006] UKHL 49, where the House of Lords has concluded that the legal effect of judicial decisions dates back. Hence, although section 11 was interpreted as an administrative proceedings in 2000, after SBP, it is deemed to have been a judicial proceeding even in 2000. Although accrued rights cannot be affected by a subsequent judicial decision, when characterising the nature of the proceedings, which is what the Court was doing here, the effect of SBP will have to date back. Fortunately, however, this was not one of the important bases of the decision, and the conclusion arrived at by the Court cannot be faulted.

In sum, the Court held that in the absence of an arbitration agreement, either in writing, or expressly alleged in a statement of claim, an award cannot be enforced against a party merely by virtue of their association with the matter or the parties involved.