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Jurisdiction in arbitration - who decides: the tribunal or the court?

In a decision of international importance, the Supreme Court clarifies that, when a party disputes whether it is a party to an arbitration agreement at the enforcement stage, the final word on the issue lies with the court, not the arbitral tribunal.

The court must conduct a full rehearing of the tribunal’s decision on jurisdiction, not a limited review (Dallah Real Estate & Tourism Holding Co v Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, 3 November 2010).

The New York Convention (the NYC) is one of the greatest advantages of international arbitration, as it permits arbitral awards to be enforced more easily in countries which are party to the NYC, as a general rule, than court judgments. However, the NYC contains certain narrow exceptions which allow a court to refuse to enforce an award. These exceptions relate to the most fundamental principles in an arbitration: essentially, whether the tribunal has jurisdiction, whether the arbitration procedure accords with due process, and whether there has been any breach of public policy. One of the exceptions, in Article V(1)(a) of the NYC, which the Supreme Court had to consider in this case, provides that enforcement may be refused if the arbitration agreement is invalid. This would mean that the arbitral tribunal had no jurisdiction.

In 1996, Dallah Real Estate & Tourism Holding Co (Dallah) entered into an agreement to build accommodation in Mecca for Pakistani pilgrims at the Hajj. The agreement provided for ICC arbitration in Paris in the event of a dispute. The project was driven by the Government of Pakistan (the Government), but Dallah’s counterparty was a trust established by the Government for the project. The trust was established by ordinance, and relied on the ordinance being renewed for its continued existence. The ordinance was not renewed, and the trust ceased to exist. Meanwhile, the parties fell out. As the trust no longer existed, Dallah commenced, and in due course won, an ICC arbitration in Paris against the Government, rather than the trust. A crucial finding by the tribunal was that it had jurisdiction over the Government, even though the Government was not named as a party to the contract, on the basis (in short) that the Government’s participation in the project made it in reality a party to the agreement with Dallah and the arbitration clause contained in it. Dallah sought to enforce the award in England. The Government resisted enforcement and relied on Article V(1)(a) of the NYC, arguing that it was not a party to the arbitration agreement.

A key issue in international arbitration is the balance of power between the tribunal and the court as to which of them decides whether the tribunal has jurisdiction, if jurisdiction is in dispute. It is uncontroversial that the tribunal has the power to decide whether it has jurisdiction, under a globally recognised doctrine called competence competence (ie the tribunal has competence to determine its own competence). The question in this case was how far the court should defer to the tribunal’s prior determination that it had jurisdiction, or whether it should conduct a full rehearing of the issue.

The Supreme Court’s decision was that a full rehearing was required. The language of Article V, which stated that a party challenging enforcement must “furnish proof” of the grounds on which it relied, led to that conclusion. This was also the logical answer: it would not make sense for a tribunal to have the power to decide whether or not the agreement was valid when the tribunal’s decision making power depended on that agreement being valid. The Supreme Court rejected the proposition that the competence competence doctrine required it to defer to an arbitral tribunal’s decision that it had jurisdiction. Competence competence gives the tribunal the power to decide whether it has jurisdiction, said the court, but it does not prevent the court from conducting a full review of the tribunal’s decision.

The Supreme Court went on to agree with the High Court, which had conducted a full rehearing on the question of whether the Government was a party to the arbitration agreement, that the tribunal had applied the wrong test under French law (the law of the arbitration agreement) and had therefore reached the wrong conclusion.

A losing party may choose either to challenge an award in the court of the place where the successful party seeks to enforce it, or in the courts of the seat of the arbitration: in this case, France. These alternative paths generally provide similar (ie similarly narrow) grounds for resisting an award. Dallah argued that the Government was estopped (ie prevented) from resisting enforcement in England because it had not challenged the award in France. The Supreme Court rejected this argument, noting that the NYC did not require a challenge to an award at the seat of arbitration as a pre condition to resisting enforcement. However, the Supreme Court did suggest that, if a losing party challenged an award at the seat, that decision might give rise to an issue estoppel, preventing the enforcing court from reaching a different decision if the same issues arose before it.

Article V of the NYC provides that enforcement of an award “may” be refused if one of the grounds in Article V is proven. It is therefore accepted that an enforcing court has a discretion to enforce an award even if there is a ground for enforcement to be refused. Dallah argued that the award should be enforced in this case, even though the Supreme Court had decided that the Government was not a party to the arbitration agreement, because of the Government’s failure to challenge the award in the courts of France. The Supreme Court gave this argument short shrift. Helpfully, it gave some guidance on the ambit of the discretion. The Supreme Court said that the discretion was narrow and would only be exercised in support of some “recognisable legal principle”. For example, a party might not be permitted to resist enforcement if it raised an argument (say, that the tribunal had no jurisdiction) for the first time at the enforcement stage, and not earlier, in the arbitration. However, it was unlikely that the discretion would be exercised often, given the fundamental nature of the protections in Article V. It was almost inconceivable, said the Supreme Court, that an award would be enforced once it had been decided that the tribunal had no jurisdiction.

Stop press: The Court of Appeal in Paris (the seat of the arbitration) has ruled that the arbitral tribunal had been right to retain jurisdiction, rejecting the government of Pakistan's request to set aside the award.

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, or tel +44 (0)20 3088 3710.