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Directly opposing decisions from UK Supreme Court and Paris Court of Appeal on arbitration

06 April 2011

The UK Supreme Court and the Paris Court of Appeal have rendered contrary decisions applying the same law to the same facts in cases between Dallah Real Estate (Dallah) and the Government of Pakistan (Pakistan).

The court decisions in Dallah Real Estate & Tourism Holding Co v Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, 3 November 2010 / Gouvernement du Pakistan, Ministere des Affaires Religieuses v Société Dallah Real Estate & Tourism Holding Company, Paris Court of Appeal, No 09-28533, 17 February 2011, concerned the validity of an ICC arbitration award rendered in Paris. The Paris Court of Appeal rejected Pakistan’s application to set aside the award, finding that the arbitral tribunal had correctly founded its jurisdiction over Pakistan, even though it had not signed the original agreement. In contrast, the UK Supreme Court, which also applied French law, declined to enforce the same award, finding that the arbitral tribunal did not have jurisdiction.

Dallah was a Saudi Arabian company providing services to pilgrims travelling to Saudi Arabia. In July 1995, Dallah and Pakistan entered into a Memorandum of Understanding (MOU) by which Dallah agreed to build accommodation for Pakistani pilgrims in Mecca. In January 1996, Pakistan established a trust for the principal purpose of collecting donations from pilgrims, investing such donations and taking measures to facilitate pilgrimages (Trust). After a change in government, the Trust was terminated in December 1996.

In September 1996, the Trust and Dallah had entered into an agreement (the Contract) for the construction of accommodation in Mecca. Pakistan was not a party to the Contract. The Contract contained a dispute resolution clause providing for ICC arbitration in Paris. The project was not carried out and, in May 1998, Dallah initiated ICC proceedings against Pakistan.

The arbitral tribunal upheld its jurisdiction and, in June 2006, awarded Dallah approximately US$20,000,000. Dallah sought the enforcement of the award before the UK courts. Pakistan resisted enforcement and applied to the Paris Court of Appeal to have the award annulled.

UK Supreme Court

The UK Supreme Court had to decide whether Pakistan, which had not signed the Contract, should be regarded as a party to the arbitration agreement, or whether enforcement could be denied under Article V(1)(a) of the New York Convention on the grounds that there was no valid arbitration agreement. As the award was made in France, this question had to be determined in accordance with French law.

The experts on French law for both sides agreed that, as noted in the landmark case of Municipalité de Khoms El Mergeb v Société Dalico, Cour de Cassation, 1994 Rev Arb 116, the existence of an agreement to arbitrate is established by the “common will of the parties, without the need to refer to the law of a state.” They also agreed that, under French law, an arbitration clause could be extended to a non signatory if the parties’ “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.”, quoting Orri v Société des Lubrifians Elf Acquitaine, Paris Court of Appeal, 1992 Rev Arb 95. The UK Supreme Court noted that it had to decide these matters independently.

Reviewing the arbitral tribunal’s jurisdiction, the UK Supreme Court concluded that the tribunal had wrongly decided that Pakistan intended to be party to the agreement to arbitrate. In particular:

  • The structure of the Contract (including the deliberate change in structure and in parties from the MOU) made clear that the government did not want to be directly involved in the Contract. Moreover, Dallah was advised by a leading law firm throughout the negotiation of the MOU and the Contract, which must have understood the difference between an agreement with a state entity and the state itself. The fact that the Trust never held any assets was a neutral factor.
  • The involvement of Pakistan in the negotiation of the Contract and as a party to the MOU did not mean that it intended to be a party to the Contract. The UK Supreme Court noted that employees of Pakistan addressed various correspondence to the Trust between April and November 1996, but stated that “[t]he government’s position and involvement in these respects is clear but understandable.” Nor was it conclusive that a senior government employee, who had been secretary to the Trust before it ceased to exist, wrote to Dallah on government letterhead to state that Dallah was in breach of the Contract, and to note that the contract was accordingly terminated: he may not have been writing on behalf of the government, as he may not have been aware that the Trust had ceased to exist, or may have believed this did not prevent it from litigating matters that had arisen during its existence.

Paris Court of Appeal

The Paris Court of Appeal made findings on the law very similar to those of the UK Supreme Court. It relied on the Dalico decision (quoted in part above) to establish the validity of the arbitration agreement. It also noted that it had the authority to conduct a review of the arbitral tribunal’s decision on jurisdiction.

However, recounting the facts, the Paris Court of Appeal highlighted that during the entire pre contractual negotiation period, Dallah had dealt and negotiated exclusively with Pakistan, that the approval of the project depended only on Pakistan, and that Pakistan actively sought assistance from banks in its own name for the project. Turning to the performance of the Contract, it noted that two employees of Pakistan, neither of whom had any role within the Trust, wrote to Dallah to discuss savings plans, the organisation of these savings plans, and a publicity campaign. It stated that no justification could be found for this intervention.

The Paris Court of Appeal also noted (as had the UK Supreme Court) that, after the Trust had ceased to exist, a senior government employee wrote to Dallah on government letterhead to state that Dallah had breached the Contract and therefore accepted its termination. Unlike the UK Supreme Court, it found that everything in this letter indicated that the government employee was accepting the termination of the Contract in the name of Pakistan.

The court therefore concluded that the establishment of the Trust was purely formal and that Pakistan behaved as a “the true party to the economic transaction”. The Paris Court of Appeal therefore declined to set aside the award and ordered Pakistan to pay the amount requested by Dallah for costs, EUR100,000.

Comment: Despite fully agreeing on the applicable legal principles, the UK Supreme Court and the Paris Court of Appeal reached opposite decisions. The explanation naturally lies in the application of these legal principles to the facts. The UK Supreme Court was concerned with obtaining evidence that Pakistan had intended to be bound by the contract itself. The Paris Court of Appeal, on the other hand, sought evidence that Pakistan was “the true party to the economic transaction.” According to this reasoning, if one behaves as a party to an economic operation (for instance by conducting the negotiations or issuing instructions to the other party, as Pakistan had done), one is also presumed to have been a party to the underlying agreement, and therefore to its arbitration provision. It remains to be seen whether Pakistan will seek to have the decision of the Paris Court of Appeal reviewed by the Cour de Cassation, France’s highest court for civil matters. As things stand, the award is enforceable in France but not in the United Kingdom.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.