Much to the surprise of many seasoned international arbitration practitioners, the D.C. Circuit vacated a US$ 185.3 million Final Award against Argentina, essentially nullifying a hard-fought, four-and-a-half year arbitration between the parties. The court vacated the Award on the basis that the “arbitral panel rendered a decision . . . without regard to the contracting parties’ agreement establishing a precondition to arbitration,” namely the clause in the Argentina-UK bilateral investment treaty (BIT) requiring claimants to submit disputes to the Argentine courts for 18 months before resorting to arbitration. In the underlying UNCITRAL arbitration, the tribunal had considered whether the dispute was admissible without having been first submitted to the Argentine courts. It ruled that such submission was not essential because it in this case it would have been an exercise in futility: the claimant could not have obtained relief anyway from the Argentine courts, given the Republic’s apparent interference with access to the courts and its punishment of all would-be local court litigants by excluding them from contract renegotiations. The tribunal concluded that in these circumstances, the 18-month provision could not “be construed as an absolute impediment to arbitration,” and therefore deemed BG Group’s arbitration claims admissible.

By contrast, the D.C. Circuit concluded that this entire analysis was misplaced, since in its view the BIT terms—which it analyzed principally by reference to U.S. domestic law on contractual intent to arbitrate, rather than under the Vienna Convention—were clearly designed to require prior recourse to the Argentine courts. The court found that the tribunal had exceeded its powers by permitting direct access to arbitration contrary to that expressed intent. Indeed, the court suggested that under U.S. case law, the tribunal should not have even engaged in an analysis of the feasibility or usefulness of prior resort to the Argentine courts, because as a threshold matter it had no proper authority under the BIT to admit such issues for substantive consideration.

In the most narrow sense, the D.C. Circuit’s decision did not directly repudiate the years of fairly consistent rulings by ICSID and UNCITRAL tribunals with respect to the 18-month local court requirement under similar Argentine BITs. That is because the BG Group tribunal had not relied on the BIT’s most-favored-nation (MFN) clause, upon which prior tribunals had rested their decisions, even though BG Group did argue that point. Nonetheless, the D.C. Circuit’s analysis implicitly suggests that it also might have overturned an MFN-based decision, since by the Court’s logic, the tribunals who rendered those decisions likewise would have had no authority to bypass the BIT parties’ allegedly clear intent to require local court proceedings in all circumstances. If the decision is read in this broader way, it can be seen as impugning the core logic of many prior decisions. This would include Maffezini v. Spain (ICSID Case No. ARB/97/7, 1 September 2000), where the tribunal allowed an Argentine investor to invoke (by way of an MFN clause) the Chile-Spain BIT to avoid the domestic court prerequisite in the Argentina-Spain BIT; Siemens v. Argentina (ICSID Case No. ARB/028, Decision on Jurisdiction, 3 August 2004), where the tribunal permitted a German investor to invoke the Argentina-Chile BIT to proceed directly to arbitration; National Grid plc v. Argentina (UNCITRAL, Decision on Jurisdiction, 20 June 2006), where the tribunal permitted a British investor to invoke a more favorable term in the Argentina-US BIT to avoid 18 months of litigation in the Argentine courts; and several other cases in the same line. Until the D.C. Circuit’s opinion, the jurisprudence appeared to be converging on consensus regarding the 18-month waiting requirement, even though much controversy remained about the broader application of MFN clauses in other, less procedural, contexts.

Now, with one 17-page decision, a national court not only has completely up-ended the result in one major case, but also in the process unsettled what most observers had thought to be a progression towards certainty, predictability and finality with respect to this issue. Much can—and undoubtedly will— be written about the substance of the court’s analysis. But at heart, it serves as a reminder that some degree of uncertainty is inherent in international arbitration in any forum, so long as there is any mechanism for review and challenge of arbitral awards. This is just as true for the “alternative” routes of ad hoc UNCITRAL or non-ICSID institutional arbitration as it is for ICSID arbitration, since all non-ICSID mechanisms allow for national court challenges under the New York Convention, and national courts (once vested of the matter) may be tempted to apply their own national laws, including on core issues such as arbitrability. Arguably, the uncertainty of national court review may be even greater than that of ICSID annulment review, since most national court judges are comparatively unfamiliar with investment treaty jurisprudence and may be less concerned about contributing to the growth of consensus or emerging doctrine. The choice between the two systems, thus, should not be framed as a quest for predictability and finality, but rather as something more fundamental: a decision about which decision-makers will evaluate challenges, and what rules and standard of review they will use in deciding.

By Jean E. Kalicki and Dawn Yamane Hewett

The declaratory award (on the tribunal’s jurisdiction) was made pursuant to an arbitration agreement contained in a bill of lading for the carriage of African Fertilizer’s cargo from Romania to Nigeria. The English court had given the claimant, Shipsnavo, leave to enforce the arbitration award and to enter judgment again the defendant, African Fertilizers.

The English court had previously issued an injunction restraining African Fertilizer from continuing an arbitration in Romania, as well an interim declaration that such arbitration proceedings, together with court proceedings commenced in Romania, were both in breach of the arbitration agreement.

Shipsnavo had sought an order for enforcement under s66 of the Arbitration Act 1996 because it was concerned that, should African Fertilizer be successful in its Romanian court proceedings, then it would seek to enforce that judgment under Article 34 of the Brussels Regulation 44/2001, notwithstanding the arbitration award. If Shipsnavo had already obtained an English judgment, then it could seek to resist the recognition of an irreconcilable judgment of the Romanian court.

African Fertilizers resisted the application on the ground that the English court had no jurisdiction to make such an order because the material terms of the award were in purely declaratory terms.

First, it argued that enforcement of an award of a purely declaratory nature is not possible (notwithstanding the ruling – albeit on appeal – in West Tankers). Second, it argued that a judgment entered under s66 of the 1996 Act does not constitute a judgment within the meaning of Article 34 of the Brussels Convention, relying on the ECJ case Solo Kleinmotoren v Boch.

The first limb raised questions of the distinction between “recognition” and “enforcement” in the context of New York Convention awards. African Fertilizers argued that the West Tankers decision was incorrect, that Shipsnavo really intended simply “recognition” of their award in order to defend any adverse Romanian court judgment, and enforcement was not appropriate. The court disagreed, aligning itself with the West Tankers decision and giving primacy to the party’s right to the benefit of the award. The court preferred the plain meaning of “enforce” in s66 of the Act, and cited both textbooks and case law in support of its jurisdiction to enforce a declaratory award.

The second limb was also rejected. The court distinguished the Solo Kleinmotoren decision as being a case about a court approved settlement, in which the ECJ held that a settlement agreement recorded in a court order is not a judgment for the purposes of Article 34(3). Beatson J commented that a settlement is essentially contractual, and while the “submission to arbitration is consensual, the outcome of the arbitration and contents of the award are not”. Further, there were public policy considerations. Citing Briggs on Civil Jurisdiction, Beatson J noted that an English court could not give “leave to enforce an arbitral award and then be required to recognise and enforce a foreign judgment which undermined or contradicted that arbitral award”.

However, there are public policy considerations not considered by the court. Shipsnavo’s objective in seeking to enforce the declaratory award was to pre-empt the enforcement of any irreconcilable judgment that may be given by the Romanian court. What happens if the Romanian courts do find in favour of African Fertilizers? The parties could each have irreconcilable judgments from England and Romania, arising from the same agreement.

While the pro-arbitration stance of the English courts is welcome, this approach can result in inconsistent judgments within Europe. It may be that the current proposals to reform the Brussels Regulation will go some way to temper this risk. The European Parliament’s Legal Affairs Committee (LAC) has proposed maintaining the arbitration exception to the Regulation, but with clarifications for the interface between arbitration and the courts. The first reading of the LAC’s report is reported to take place on 18 April 2012 and the process can take several years to pass through the European parliament. Are those reforms appropriate? And meanwhile, are there risks for the health of the inter-twining systems of justice that are arbitration and litigation?

As previously discussed in this blog, the Second Circuit drew criticism in 2002 by applying the forum non conveniens doctrine to dismiss an action brought by the Russian state gas company’s insurer to enforce an award not only against the Ukrainian state gas company named in the award, but also against the Ukrainian government. See Monegasque de Reassurances S.A.M. (Monde Re) v. Nak Naftogaz of Ukraine, 311 F.3d 488 (2d Cir. 2002); Charles H. Brower II, Reflection on Forum Non Conveniens: Monde Re Was Right?!?.

Contrary to general opinion in the field, this author supported the Second Circuit’s decision in Monde Re because the plaintiff did not only seek summary enforcement of the award against its counterparty to the arbitration, but also sought relief against a third-party government based on veil-piercing theories that would have raised difficult questions of foreign law, required the collection of evidence from government sources in foreign capitals, and drawn U.S. courts into a politically charged dispute about energy security in Europe. See Brower, supra.

At a high level of generality, the alignment of parties and the procedural history in Figueiredo called forth memories of Monde Re: the claimant brought an arbitration and received an award against a state-controlled program in Peru (“Water for All”), then sought enforcement in New York not only against the named counterparty, but also against the Republic of Peru based on veil-piercing arguments. Figueiredo Ferraz e Engenharia de Projecto Ltda. v. Republic of Peru, 655 F. Supp. 2d 361, 367 (S.D.N.Y. 2009). However, the similarity stops there. Contrary to the situation in Monde Re, the district court held that the veil-piercing arguments could be resolved without further collection of evidence because the Peruvian Ministry of Housing, Construction and Sanitation had itself: (1) made partial payments of sums due under the award; (2) asserted, in intra-governmental correspondence, that the Ministry of Economy and Finance had an obligation to satisfy the award; and (3) initiated proceedings to set aside the award in Peruvian courts. Id. at 371.

Also contrary to the situation in Monde Re, the case did not raise questions that would have drawn U.S. courts into explosive political controversies involving two or more foreign states. Given the simplicity of the issues and the absence of political baggage, the district court exercised its discretion not to dismiss the enforcement action on forum non conveniens grounds. Id. at 374-77.

In a final contrast to Monde Re, the Second Circuit reversed the district court’s denial of forum non conveniens dismissal, based almost exclusively on Peru’s interest in applying a domestic statute that prohibits state agencies from paying more than three percent of their annual operating budgets to satisfy any particular judgment. Figueiredo, 2011 WL 6188497, at *4-*5. Many observers read the Second Circuit’s decision as an unwelcome December surprise that (1) lowers the threshold for forum non conveniens dismissals in enforcement proceedings, and (2) increases opportunities for second-guessing of district courts inclined to retain jurisdiction over enforcement proceedings.

As in Monde Re, however, observers seem to have lost sight of critical facts underlying the Second Circuit’s decision in Figueiredo. These include the facts that: (1) Peru represented the legal seat of arbitration; (2) the arbitral tribunal rendered its decsion “ex aequo et bono” and awarded the claimant more than $21 million; (3) the Ministry requested a Peruvian court to set aside the award on the grounds that Peruvian law limits recovery to the amount of the contract for international arbitrations involving a non-domestic party; (4) the Peruvian court denied set-aside because the claimant “had designated itself a Peruvian domiciliary in the agreement and the arbitration,” with the result that “the arbitration was a ‘national arbitration’ involving only domestic parties”; (5) when seeking enforcement of the award in New York, the claimant described itself as a Brazilian corporation; and (6) Peru’s appellate brief stridently argued that the claimant should be deemed a Peruvian national, given the position it had taken in the agreement, the arbitration and the set-aside proceedings. Id. at *1 (emphasis added); Brief of Peru at 57-59; Reply Brief of Peru at 29. In short, one might describe the claimant’s tactics as vexatious, cloaking itself in a Peruvian flag to secure the higher measure of damages available in “national” arbitrations, then cloaking itself in a Brazilian flag to avoid the three-percent payment cap for national arbitrations.

As one reads the appellate briefs of the parties on the topic of nationality, the claimant distinguishes between corporate domicile and nationality, whereas Peru seems to equate the two—an outcome that seems consistent both with the Peruvian court’s conclusions in the set-aside proceedings and with U.S. definitions of corporate citizenship for purposes of diversity jurisdiction. Compare Brief of Figueiredo Ferraz e Engenharia de Projecto Ltda. at 70-72, with Brief of Peru at 57-59, and Reply Brief of Peru at 29. See also Figueiredo, 2011 WL 6188497, at *1; 28 U.S.C. § 1332(c)(1) (assigning citizenship to corporations based on place of incorporation and principal place of business).

While the district court’s analysis accepted the claimant’s distinction between domicile and nationality, the Second Circuit (1) emphasized the Peruvian court’s description of the arbitration as a “‘national arbitration’ involving only domestic parties,” and (2) seemed exceedingly reluctant to allow an ostensibly Peruvian entity to use enforcement proceedings to avoid the application of Peru’s statutory cap on payments when dealing with the Peruvian government in a contract both executed and performed in Peru. Compare Figueiredo, 655 F. Supp. 2d at 372, with id., 2011 WL 6188497, at *1, *5.

Whatever the proper legal designation of the claimant’s nationality, the case reveals anomalies in the New York Convention and the Federal Arbitration Act. If one assumes that the claimant donned Peruvian nationality as a matter of law, the case clearly escapes the scope of international arbitration, inasmuch as it represents a legal relationship solely between Peruvian entities, with contractual performance solely in Peru, and conduct of the arbitration proceedings solely in Peru. Viewed from that perspective, the case represents a national arbitration that falls squarely outside the scope of most instruments on international commercial arbitration.

Going back to the early history of international instruments on the topic, the 1923 Geneva Protocol on Arbitration Clauses applies only to agreements “between parties[] subject respectively to the jurisdiction of different contracting parties.” Geneva Protocol on Arbitration Clauses, art. 1, Sept. 24, 1923, 27 L.N.T.S. 157. The 1927 Geneva Convention on the Execution of Foreign Arbitral Awards applied only to awards “made in pursuance of an agreement . . . covered by the [1923 Geneva Protocol],” meaning an agreement between parties having diverse nationalities. Geneva Convention on the Execution of Foreign Arbitral Awards, art. 1, Sept. 26, 1927, 92 L.N.T.S. 302.

Similarly, the 1961 European Convention on International Commercial Arbitration applies only to agreements and awards “arising from international trade between physical or legal persons having . . . their habitual place of residence or their seat in different Contracting States.” European Convention on International Commercial Arbitration, art. I(1)(a), Apr. 21, 1961, 484 U.N.T.S. 364.

Likewise, in the preamble to the 1975 Inter-American (Panama) Convention on International Commercial Arbitration, states parties express their desire to “conclud[e] a convention on international commercial arbitration.” Inter-American Convention on International Commercial Arbitration, pmbl., 1438 U.N.T.S 248. While none of the operative articles expressly limits that instrument’s coverage to international commercial disputes, the limitation finds confirmation in Article 3, which provides: “In the absence of an express agreement between the parties, the arbitration shall be conducted in accordance with the rules of procedure of the Inter-American Commercial Arbitration Commission [(IACAC Rules)].” It seems unlikely that states parties, such as the United States, contemplated application of the IACAC Rules to purely domestic arbitrations in which the disputing parties failed to identify a set of arbitration rules. See H.R. Rep 101-501, reprinted in 1990 U.S.C.C.A.N. 675, 676-77 (emphasizing the Panama Convention’s role in facilitating “international commerce,” “trade,” and “foreign investment”). Cf. John P. Bowman, The Panama Convention and Its Implementation Under the Federal Arbitration Act, 11 Am. Rev. Int’l Arb. 1, 37 (2000) (“Application of the Panama Convention to international commercial arbitration permeates the Convention from beginning to end.”).

Finally, and most recently, the UNCITRAL Model Law on International Commercial Arbitration applies only to “international commercial arbitration,” defined to encompass situations where: (1) the parties have their places of business in different states; (2) the arbitration is seated outside the state in which the parties have their places of business; (3) a substantial place of contractual performance lies outside the state in which the parties have their places of business; or (4) the parties have expressly agreed that the subject matter of the dispute relates to more than one country. UNCITRAL Model Law on International Commercial Arbitration, art. 1(1), (3), U.N. Doc. A/40/17/Annex I (June 21, 1985).

In other words, on one view, Figueiredo involved relationships so squarely grounded in Peru that the resulting arbitration could not possibly have qualified for coverage by almost any of the leading instruments on international commercial arbitration—except, of course, the New York Convention.

True to its official name, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, applies to any award rendered on the territory of a foreign state (or, if the state of enforcement has adopted the reciprocity reservation, the Convention applies to any award rendered on the territory of a foreign state party). Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. I(1), (3), June 10, 1958, 330 U.N.T.S. 38.

Unlike almost every other leading instrument, the New York Convention does not require the disputing parties to have diverse nationalities or to engage in transactions that cross national borders. While the New York Convention aims primarily “to facilitate arbitration in international commerce,” and while an early ICC prototype had referred to “international awards,” concerns about a-national awards and the difficulties of defining international commerce prompted delegates to the New York Convention’s 1958 drafting conference to reorient that instrument’s coverage towards foreign awards. Albert Jan van den Berg, The New York Arbitration Convention of 1958, at 17 (1981). As a result, the New York Convention technically applies to foreign awards grounded in a single jurisdiction. Thus, for purposes of enforcement in the United States, an award falls under the Convention even if rendered in Paris between two French wine merchants under a contact for the sale of French wine. Id.

In his seminal work on the New York Convention, Albert Jan van den Berg described this phenomenon as a “harmless ‘side-effect’” that “scarcely occurs in practice” and had “not occurred in any of the reported cases.” Id. at 18. In addition, he opined that the New York Convention’s uniquely broad scope might prove useful in cases where the losing parties to domestic arbitrations possess substantial bank accounts in foreign jurisdictions. Id. While van den Berg’s assessment holds true as a general matter, one wonders if the “side-effect” remains so “harmless” when private parties exploit it to reach the assets of their own governments, thus draining the national treasury in violation of otherwise applicable national laws.

Confirming the potential for mischief in the circumstances just outlined, one need not search long for precedent rejecting the efforts of disgruntled national corporations to circumvent the limits of domestic redress against their own governments by invoking the machinery of international dispute settlement. Cf. Loewen Group, Inc. v. United States, ICSID Case No. ARB(AF)/98/3, Award ¶ 223 (June 26, 2003) (finding it “inconceivable” that states would negotiate treaties to provide their own citizens with international avenues for redress of regulatory disputes). This holds true even in the context of the New York Convention, where the only court to address the issue outside the Second Circuit invoked the forum non conveniens doctrine to dismiss an enforcement action brought by a foreign entity against its own government with respect to an arbitration involving public utilities and seated in the state of the disputing parties’ nationality. Termorio S.A. E.S.P. v. Electrificiadora del Atlantico S.A. E.S.P., 421 F. Supp. 2d 87, 103-04 (D.D.C. 2006).

Of course, the New York Convention’s unusually broad scope should not apply to cases that, like Figueiredo, arise under the Panama Convention. As mentioned above and recognized by some courts, the Panama Convention does not cover foreign awards involving parties, transactions, and arbitral proceedings grounded in a single foreign jurisdiction. See Energy Transport Ltd. v. M.V. San Sebastian, 348 F. Supp. 2d 186, 199 (S.D.N.Y. 2004) (“For example, if parties sought enforcement in the United States of an award rendered in Panama, involving only Panamanian citizens conducting a domestic transaction, the New York Convention would likely apply but the Inter-American Convention would not because of the award’s purely domestic character.”); Bowman, supra, at 39 (“Under the Panama Convention, . . . a foreign award rendered . . . in Uruguay, involving only Uruguayan citizens engaged in a domestic transaction, may not be enforceable.”).

However, this clear understanding of the Panama Convention’s scope reveals an anomaly in the FAA. Despite the obvious differences between the respective scopes of the Panama and New York Conventions, the United States inexplicably implemented the Panama Convention through a statutory provision that incorporates by reference most of the New York Convention’s implementing legislation. See 9 U.S.C. § 302. As a result, while the Panama Convention applies only to international commercial arbitration, the United States has extended its coverage by statute to awards grounded in a single foreign jurisdiction. Bowman, supra, at 39 n.104, 75. While “harmless” in most cases, this little-known “side-effect” could prove both unexpected and aggravating to foreign governments dealing with their own citizens in domestic transactions, on matters of public importance.

Given the United States’ relative lack of interest in localized disputes between foreign governments and their own nationals on matters of local importance, it seems wise for U.S. courts to preserve forum non conveniens dismissals as a possible antidote for the rare situations in which the New York Convention’s and the FAA’s unusually broad scope threatens to produce surprising results. Far from provoking allegations of treaty violations, such dismissals seem more likely to draw appreciation from states parties dealing with their own citizens on matters of the public interest.

For the reasons stated above, the Second Circuit’s decision in Figueiredo deserves more sympathetic consideration than accorded by most observers. Likewise, the forum non conveniens doctrine deserves slightly better treatment than the categorical rejection adopted by the draft Restatement on the U.S. Law of International Commercial Arbitration. By failing to leave any opening for forum non conveniens dismissals, the Restatement’s drafters run the risk that their final product will draw the same respect expressed by the majority in Figueiredo, which damned the ALI’s work by failing to mention it at all.

Questions regarding arbitration in Dubai usually focus on enforcement in general, and, particularly, the interrelation between the civil law “onshore” regime and the common law “offshore” jurisdiction of the Dubai International Financial Centre (DIFC). Certain key developments in relation to these regimes from the last few years are set out below.

I. BACKGROUND: THE ARBITRAL REGIME OF THE DIFC

The DIFC is an example of ‘a jurisdiction within a jurisdiction’, a construct adopted in several Middle Eastern countries and adapted to provide certainty and familiarity to international business in an attempt to attract investment.

The DIFC is a financial free zone, located in the Emirate of Dubai (known as “offshore” and “onshore” Dubai respectively). In spite of its location in the centre of a civil law jurisdiction, the DIFC is an autonomous common law jurisdiction, empowered, pursuant to UAE law, to enact its own legal and regulatory framework for all civil and commercial matters. The language of the supervisory court, the DIFC Court,¹ is English.

The DIFC Arbitration Law is modelled on the UNCITRAL Model Law, as amended in 2006, and entered into force in 2008. Pursuant to this law, there is no requirement for parties to have any connection with the DIFC in order to provide for an arbitration to be seated in the jurisdiction.² In contrast, arbitrations seated in “onshore” Dubai are governed by Articles 203-218 of the UAE Code of Civil Procedure 1992, largely based on the former Egyptian Civil Procedure Law.³

In February 2008, the DIFC inaugurated the DIFC-LCIA Arbitration Centre (the Centre), which is the product (as the name suggests) of a joint venture between the London Court of Arbitration (LCIA) and the DIFC. The DIFC-LCIA Arbitration Rules (the Rules) are closely modelled on the LCIA Arbitration Rules. The Centre functions with the assistance of the LCIA Secretariat and has full access to its expertise and general systems.

II. THE ENFORCEMENT REGIME: AN UPDATE

A. Enforcement in “Onshore” Dubai

1. Awards rendered in Dubai

Pursuant to Article 215 of the UAE Code of Civil Procedure, a “domestic” arbitration award must be recognised by the local court, with the effect of converting it to a court judgment. As there is no system of precedent nor comprehensive court reporting system in the UAE, there is no consistent barometer of the Dubai Courts’ attitude to domestic awards. However, key cases are often reported at conferences or are the subject of publications by counsel. Concerns regarding the Dubai Courts’ attitude to enforcement of awards have a long history, harking back to the widely reported case of Bechtel v. the Department of Civil Aviation of the Government of Dubai in 1994, in which the Dubai Court of Cassation refused to enforce a US$ 25 million award in favour of the Claimant on the grounds that the arbitrator had failed to require the witnesses to swear an oath in the manner prescribed by the UAE Civil Procedure Code. Since 1994, arbitration practitioners in the region have developed a list of “dos and “don’ts”, in an effort to minimise the risk of annulment.⁴ Practitioners are periodically reminded of the need to follow this list. In 2009, for example, the Court of Cassation was faced with an appeal of a Court of Appeal decision to set aside an award on the basis that the arbitrator had not signed each page of the award. The Court of Cassation’s judgment confirmed that an award could be set aside if the signature of the arbitrator (or majority of the tribunal) did not appear on the pages of the award containing the final relief granted and the tribunal’s reasons for granting that relief. In this particular case, the arbitrator had signed the page setting out its decision and part of the reasoning for its decision. The Court of Cassation deemed this sufficient to uphold the validity of the award and proceeded to reverse the decision of the Court of Appeal.⁵

Recently, local practitioners have expressed confidence that the Dubai Courts’ attitude towards arbitration awards has changed since Bechtel.⁶ It is worth noting that, awards rendered under the rules of the Dubai International Arbitration Centre (DIAC) are almost always seated in Dubai, and when compared with DIAC’s large caseload, the discussion of enforcement “scare” stories is limited.

However, a new arbitration law, based upon the UNCITRAL Model Law, would obviously provide greater certainty as to the boundaries of the Dubai Courts’ authority to set aside awards.

2. Awards Rendered in the DIFC

Further to Article 43 of the DIFC Arbitration Law, a party may apply for an order of the DIFC Courts recognising an arbitration award rendered in the DIFC.

Article 7 of Dubai Law No 12 of 2004 (Article 7), states that any judgment “ratified” by the DIFC Courts will be enforceable in “onshore” Dubai (and thereafter, in the other Emirates, pursuant to Federal Law No (11) of 1973 Regulating Judicial Relations between Member Emirates in the Federation) without any further review by the Dubai Courts, provided the judgment is final, has been translated into Arabic and is “appropriate for enforcement”.⁷ Recognition pursuant to Article 43 of the DIFC Arbitration Law qualifies as “ratification” for the purposes of Article 7.⁸ To date there has been no judicial guidance as to the meaning of “appropriate for enforcement”. The 2009 Protocol on Enforcement between the DIFC Courts and the Dubai Courts signed in April 2009 (the Protocol), reiterates the contents of Article 7, particularly that the Dubai Execution Court is to enforce a DIFC judgment without re-reviewing the case, and sets out the procedure by which enforcement pursuant to Article 7 is to take place.

Two key developments occurred in 2011 in relation to Article 7 and the Protocol. The first arbitration award rendered in a DIFC-seated arbitration and recognised by the DIFC Courts pursuant to Article 43, was enforced “onshore” pursuant to Article 7 and the Protocol. At the time in question, approximately 40 DIFC court judgments or orders had already been enforced pursuant to the Protocol. This sets an important precedent, and allows for tentative advice to be provided as to the practice, rather than simply the theory, of “onshore” enforcement of an “offshore” award. The award in question, Property Concepts FZE and Lootah Network Real Estate & Commercial Brokerage, was ratified by the DIFC Court of First Instance on 19 October 2010 and ordered the Defendant to pay damages of approximately US$ 7.2 million plus interests and costs.⁹

Secondly, on 31 October 2011, Dubai Law No 16 of 2011 (Law No 16), passed primarily to expand the jurisdiction of the DIFC Courts, also amended Article 7. The test for enforcement remains the same, but the procedure for enforcement as set out in the Protocol is now enshrined in law. It is worth noting that the phrase “final and appropriate for enforcement” (as per the English translation of Article 7 and the Protocol) is worded as “final and executable” in the English translation of Law No 16. However, the phrase in Arabic is the same in all three instruments, and the test therefore appears unchanged.

3. Foreign Arbitration Awards: Enforcement under the New York Convention

Following the UAE’s accession to the New York Convention (the Convention) in 2006, any arbitration awards rendered in the UAE will be enforceable in the 146 states party to the Convention subject to the limitations specified in its Article V. Conversely, the UAE has an obligation to enforce foreign arbitration awards in accordance with the terms of the Convention. Even though the focus of this discussion is Dubai, it is worth noting that the first foreign arbitration awards enforced in the UAE under the Convention were enforced by the Fujairah (one of the seven Emirates that make up the UAE) Courts in late 2010. Two London Maritime Arbitration Association awards, rendered in 2007, were enforced “in absentia” on the basis of “documents-only”. The defendant did not contest the enforcement.

Decisions of the Dubai Courts are not systematically reported. However, the existence of two enforcement actions under the Convention before the Dubai Courts are generally known amongst the local arbitration community. In the first, the Dubai Court of First Instance refused to enforce a Stockholm Chamber of Commence award with no reasons. The decision is being appealed. The second enforcement action, in respect of an award in a dispute between a subsidiary of Macsteel International, incorporated in the Jebel Ali Free Zone, and a Dubai-incorporated company, rendered under the Rules and seated in London, was upheld by the same court. As a contested action, the decision has been hailed as a key “step forward”. It is generally understood that the disputing party relied upon technical arguments that drew upon the pre-Convention enforcement regime. It is notable that not only did these arguments not prevail in the Dubai Court of First Instance, but that the Fujairah court, in its judgment, made no reference to the pre-Convention regime.

B. Enforcement in “Offshore” Dubai

As there are limited or no relevant precedents, the legal regime set out below is discussed on more of a theoretical basis, simply to complete the picture.

1. DIFC Arbitration Awards

As set out above, a DIFC award is recognised pursuant to Article 43 of the DIFC Arbitration Law (as occurred in Property Concepts FZE and Lootah Network Real Estate & Commercial Brokerage). The DIFC Courts will then proceed to enforce the award.

Subject to the parties’ agreement and any request for interpretation or correction of an award, an application for an award to be set aside (and therefore any attempt to resist recognition on this basis) must be made within three months of the applicant receiving the award.¹⁰ The grounds on which an application to set aside can be made are adopted from the UNCITRAL Model Law, as amended in 2006, and are largely limited to safeguarding the procedural integrity of the process, for example, relating to violation of due process rights. In addition, the DIFC Courts may set aside an award on their own volition if they deem that the dispute is not arbitrable under DIFC Law or the outcome of the award is contrary to the public policy of the UAE.¹¹

2. “Onshore” Dubai Arbitration Awards

Arbitration awards rendered in “onshore” Dubai would, theoretically, be enforced in accordance with Law No 16, following ratification by the Dubai Courts (Law No 16 operates equally in respect of Dubai court judgements being enforced in the DIFC as for DIFC judgments being enforced in Dubai, subject to slightly different formalities). No relevant precedent has yet been reported.

3. Foreign Arbitration Awards

The DIFC, as a financial free zone, has an obligation to comply with the international obligations of the UAE.¹² As part of the UAE, awards rendered in the DIFC also benefit from rights granted to the UAE under international law.

It has been suggested that a more certain way of enforcing foreign arbitration awards in “onshore” Dubai, rather than to seek direct enforcement under the Convention before the Dubai Courts, is to combine two of the enforcement routes described: (i) firstly, obtaining recognition of a foreign award under the Convention before the DIFC Courts where the judges are more familiar with the UAE’s international obligations under the Convention and where the grounds for refusing enforcement are drafted in line with those under the Convention (they mimic the grounds for setting aside domestic arbitration awards set out above); and (ii) secondly, enforcing the DIFC-ratified award in “onshore” Dubai pursuant to Law No 16. The developments described above would appear to support this view.

III. CHOOSING THE DIFC AS AN ARBITRAL SEAT

In light of recent developments and its geographical location, the DIFC is likely to be viewed as an attractive seat of arbitration, whether as a neutral seat for two non-UAE parties or for disputes involving one or more UAE parties. In fact, lawyers often enquire about the possibility of seating any arbitration with a Middle East connection in the DIFC. However, given the DIFC’s position as a second jurisdiction within the Emirate of Dubai, and further to a judgment rendered by the (as he then was) Deputy Chief Justice of the DIFC Courts, Michael Hwang, in July 2009, parties wishing to choose the DIFC as the juridical seat of their arbitration should be reminded of the need to express their intention in specific terms.

The case in question, Amarjeet Singh Dhir v. Waterfront Property Investment Limited and Linarus FZE,¹³ was the first case heard by the DIFC Courts in connection with the DIFC Arbitration Law and the Centre. In spite of the Claimant’s arguments to the contrary, Michael Hwang considered that, in the circumstances and given the parties’ knowledge of the different jurisdictions, the arbitration was seated in “onshore” Dubai, pursuant to an arbitration clause which specified: (i) the applicable law as the “laws of the Emirate of Dubai”; (ii) any dispute (following a period for amicable settlement) to be resolved through arbitration conducted in accordance with “the DIFC-LCIA rules of arbitration applicable to the Dubai International Financial Centre”; and (iii) the place of arbitration as “Dubai”. In essence, the choice of the Rules will not protect a party that has not expressly stated the DIFC as the arbitral seat. Michael Hwang summarised the position as follows:

The moral of this case is that, if parties want the DIFC Arbitration Law to apply and the DIFC Court to have jurisdiction over an arbitration, they should expressly select the DIFC as the seat in their arbitration agreement.¹⁴

IV. THE DUBAI WORLD TRIBUNAL

No discussion of arbitration in the UAE would be complete without mention of one recent decision of the Special Tribunal to decide Disputes related to the settlement of the financial position of Dubai World and its subsidiaries (the Dubai World Tribunal or DWT). Although the DWT and its rulings in respect of arbitration clauses require their own blog entry to be developed fully, we set out the ruling in a recent case that exemplifies its policy in respect of arbitration agreements. The DWT is composed of three DIFC judges,¹⁵ and, therefore may also be informative as to the line such judges will take in the DIFC Courts.

By way of introduction, the DWT was established pursuant to Dubai Decree No 57 of 2009, as amended by Dubai Decree No 11 of 2010 (the Decrees), to hear disputes brought by or against Dubai World and its subsidiaries in the aftermath of Dubai World’s restructuring first announced in late 2009. The DWT formed part of a legislative insolvency package aimed at offering Dubai World’s many creditors a degree of certainty and a neutral forum to pursue their claims. The Decrees had the effect of mandatorily excluding the jurisdiction of the Dubai Courts (including the DIFC Courts) in respect of these claims. The DWT’s jurisdiction and decisions draw upon the laws of various jurisdictions: it is seated in the DIFC; many of the claims brought before the DWT arise out of contracts governed by UAE law;¹⁶ and the court procedure was determined, prior to October 2011, by the Rules of the DIFC Courts (modeled largely on the English Civil Procedure Code) and since October 2011, in accordance with the Rules of the DWT (a variation on the Rules of the DIFC Courts). Its decisions are final and not subject to appeal.

In its judgment dated 11 July 2011, in the case of Hedley International Emirates Contracting LLC v. Nakheel PJSC,¹⁷ the DWT upheld its “policy” position towards arbitration clauses, to “respect and enforce arbitration agreements made between the Corporation and its creditors” and to expect parties to continue with pending arbitration proceedings in accordance with the terms of the relevant contract.¹⁸ The DWT dismissed jurisdiction in the case on the basis that the claim in question was subject to an arbitration clause. In its decision, the DWT noted that it was bound by Article II(1) of the Convention, which prescribed that it must recognise binding arbitration agreements. More telling was the warning, in the final paragraph of its decision, that applicants in future claims presented to the DWT, but dismissed for lack of jurisdiction because they are governed by a binding arbitration agreement, would find themselves faced with an adverse costs award on an indemnity basis.

Reza Mohtashami & Merryl Lawry-White¹⁹

Facts and Decision

The applicant (Kempinski Hotels) was a Swiss company which contracted to manage a hotel of the respondent (an Indonesian company called PT Prima) in Jakarta. The Indonesian Ministry of Tourism subsequently issued three decisions requiring the contract to be performed by an Indonesian company. Although certain proposed amendments to the contract were then raised between the parties, no amendments were effected nor did Kempinski Hotels change the entity operating the hotel to an Indonesian company.

After some time, following an alleged material breach by Kempinski Hotels, PT Prima purported to terminate the contract and Kempinski Hotels commenced SIAC arbitration proceedings in 2002 alleging wrongful termination. The contract was governed by Indonesian law. PT Prima defended the legality of its termination and also mounted counterclaims for alleged breaches of contract by Kempinski Hotels.

The tribunal, consisting of a sole arbitrator, released its first award relating to the effect of the Ministry’s decisions, by holding, inter alia, that the contract remained valid but had become incapable of performance in the manner stipulated. Following cross-examination of each party’s experts and written submissions, the tribunal released a second award. The second award held that there were alternative methods of performance consistent with the Ministry’s decisions. Consequently, any supervening illegality did not necessarily bar Kempinski Hotels from bringing a claim for damages if Kempinski Hotels could show that the contract was wrongfully terminated.

According to PT Prima, after the release of the second award, it learned that Kempinski Hotels had, prior to the release of the second award, entered into a new management venture, in full compliance with the Ministry’s decisions, to provide hotel management services in respect of another hotel located within a one mile vicinity of PT Prima’s hotel. PT Prima wrote to the tribunal to seek clarification on the first and second awards in light of this information. The tribunal held a conference to decide how the arbitration should proceed.

After the conference, the tribunal directed Kempinski Hotels to provide specific disclosure on four questions concerning the new management venture. Kempinski Hotels issued its response to those queries. The tribunal made another order directing Kempinski Hotels to disclose certain information relating to the new management venture. Kempinski Hotels stated that the new venture was irrelevant to the issue of liability in respect of PT Prima’s termination of the contract and sought directions for the further conduct of the arbitration.

Thereafter, the tribunal directed written submissions on the disposition of the dispute to be tendered. The tribunal subsequently published its third award. It held that (a) the new management venture was inconsistent with the contract; (b) the methods of performance that remained open after the Ministry’s decisions were no longer possible; and (c) the possibility of damages remained for the period between the date of alleged termination of the contract and the date the methods of performance ceased being possible. The tribunal requested submissions on damages.

PT Prima duly filed the relevant submissions. Kempinski Hotels took out proceedings before the Singapore High Court to set aside the third award instead. Thereafter, PT Prima requested the tribunal to make its determination on the issues of damages payable. Kempinski Hotels’ submissions however did not contain any argument on damages.

The tribunal issued a fourth award holding that, because no steps were taken to make performance of the contract lawful, an award of damages to Kempinski Hotels was not possible. The arbitrator also made a costs awards after requesting for submissions on costs. Kempinski Hotels took out similar proceedings to set aside the fourth and costs awards as well.

Before the Singapore High Court, Kempinski Hotels sought to set aside the awards on five grounds and failed on all but a pleading point which forms the focus of this note.

The learned Judge’s reasoning can be summarized as follows. Art 34(2)(a)(iii) of the Model Law (set out in the First Schedule of Singapore’s International Arbitration Act) provides that an arbitration award can be set aside when the matters decided by the tribunal were beyond the scope of the submission to arbitration. To determine whether matters in an award were within or outside the scope of submission to arbitration, a reference to pleadings would usually have to be made. An arbitrator is bound to decide the case in accordance with the parties’ pleadings, and the arbitrator is not entitled to go beyond the pleadings and decide on points which the parties have not given evidence or submissions.

Comment

A question of prejudice

Two questions can be posed. We start with the more intuitive question: what was the prejudice to Kempinski Hotels here?

If one accepts — as alluded to by the learned Judge — that pleadings exist to permit no surprises on the relevant issues so as to allow a party proper opportunity to meet the case against it, intuitively it is difficult to see where the surprise or prejudice to Kempinski Hotels was in this case.

After the issue of the new management venture was raised by PT Prima and the Tribunal had made directions for specific disclosure on that issue, the parties tendered not one but two rounds of submissions and one round of further expert opinions before the Tribunal published its third award. That must have given Kempinski Hotels ample opportunity to ventilate its position concerning the new management venture, even if the matter had only surfaced after the first award was published.

Indeed if PT Prima’s raising of the new management venture had caught Kempinski Hotels by surprise, the learned Judge would have simultaneously found a breach of natural justice by the tribunal for failing to give Kempinski Hotels a proper opportunity to meet the case against it. Yet far from contending so, one of Kempinski Hotels’ complaints concerning natural justice was that the tribunal had failed to consider Kempinski Hotels’ defences relating to the new management venture. Implicit in this submission is an admission that the opportunity to raise arguments concerning the new management venture was given and was taken.

The aim of having pleadings needs little introduction: pleadings define the issues to give the other party fair notice of the case which it has to meet and also enable the relevancy and admissibility of evidence to be determined. The importance of proper pleadings is undeniable. But in so far as fair notice had already been given and taken by the tendering of multiple rounds of submissions, having the result of a case turn on the precise state of pleadings may be, as other authorities have vividly noted, putting the cart before the horse. That must be so, whether in litigation or arbitration.

A question of principle and practice

The second question that can be posed is: can it be said that the new management venture falls within the scope of matters submitted to arbitration?

The Court of Appeal in CRW cited its earlier decision in PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597 (“Asuransi”) for the two-stage assessment the court has to embark upon when considering Art 34(2)(a)(iii). Specifically, the court has to determine:

(a) first, what matters were within the scope of submission to the arbitral tribunal; and

(b) second, whether the arbitral award involved such matters, or whether it involved “a new difference … outside the scope of the submission to arbitration and accordingly … irrelevant to the issues requiring determination”.

Art 34(2)(a)(iii) — with the specific expression “submission to arbitration” used therein — traces its lineage back to Art V(1)(c) of the New York Convention and Art 2(c) of the 1927 Geneva Convention. The report of the Drafting Committee of the New York Convention explained that:

“the expression ‘submission to arbitration’ was used in a broad sense, and was intended to include not only an arbitration clause in a contract, but also a specific ‘compromis’”. (emphasis added)

This could be read to mean that a matter is properly within the scope of arbitration as long as it falls within an arbitration clause in a contract or a compromis (which can be defined for present purposes as a submission agreement to arbitrate after a dispute arises). A literal reading of the equally authentic French text of the New York Convention supports this reading. When literally translated, the French text catches “a difference not contemplated by the submission agreement or not falling within the terms of the arbitral clause”. If one applies a literal reading of the French text of the New York Convention to the present case, there appears to be nothing to suggest that the arbitration agreement in this case precluded the tribunal from considering the new management venture.

Nonetheless, it has been suggested that if such a reading of Art V(1)(c) was intended, the Drafting Committee would have simply used the expression “arbitration agreement” which it used in Art V(1)(a) of the New York Convention, instead of the expression “submission to arbitration”. Most authors agree that this means that if tribunals deal with matters not falling within the questions submitted to the tribunal (also known as the tribunal’s mandate), that would be caught by Art V(1)(c) as well. It is suggested here that this view is consistent with the consensual nature of arbitration. Parties can confer a mandate on the tribunal that delimits the issues submitted to arbitration in spite of the presence of an existing arbitration agreement, and there is no reason why the law should deny binding effect to that mandate any less than an arbitration agreement.

In arbitral practice, the matters submitted for arbitration can be gleaned from various documents, such as the equivalent of a Notice of Arbitration, the equivalent of a Response to the Notice of Arbitration, a Terms of Reference, and of course, the pleadings. The ICC Terms of Reference for instance requires a list of issues to be set out unless the arbitral tribunal considers it inappropriate. It is commonplace for a ICC tribunal and parties to set out a list of issues but to include a statement that the list of issues will be subject to review and modification in accordance with the parties’ submissions. In like vein, the ICC Practical Guide for the drafting of Terms of Reference suggests adding the following reservation:

The issues to be determined shall be those resulting from the parties’ submissions and which are relevant to adjudication of the parties’ respective claims and defenses. In particular, the Arbitral Tribunal may have to consider the following issues (but not necessarily all of these, and only these, and not in the following order…). [emphasis added]

This approach of having regard to the parties’ submissions as they develop through the course of the arbitral proceedings, rather than the strict state of the pleadings, may not sit well with the holding at hand. The holding could permit a party to effectively re-open a case based on allegedly deficient pleadings even if the particular matter that was not pleaded had already been substantively (and many times, exhaustively) argued before the tribunal.

The facts of the case are easy. There was a dispute over a charter party and an arbitration seated in London had issued an award against Glory of Wealth Shipping Pte Ltd (“Glory of Wealth Shipping”). Glory of Wealth Shipping applied to challenge the award before the English High Court on grounds of irregularity (“the first English application”). The opposing party, Galsworthy, applied for security of costs, which was granted by the English High Court. Glory of Wealth Shipping failed to furnish security, leading to a dismissal of their application without a hearing on the merits. Glory of Wealth Shipping also appealed against the arbitral award on a point of law, but the appeal was heard and dismissed by the English High Court.

Subsequently, Galsworthy obtained permission from the Singapore courts to enforce the award in Singapore. Glory of Wealth Shipping applied to set aside the order granting permission to enforce the award. The application was heard and dismissed by an Assistant Registrar, and failed again on appeal.

But the view of the learned Judge hearing the appeal at the High Court differed from the Assistant Registrar’s on one preliminary issue. That issue was whether Glory of Wealth Shipping was entitled to apply to set aside the order granting permission to enforce the arbitral award when it had already challenged the award before the English courts.

The Assistant Registrar was of the view that Glory of Wealth Shipping was still entitled to take up the application to set aside the leave to enforce the award and had proceeded to hear the application on its merits. The learned Judge, however, held that Glory of Wealth Shipping was not entitled to make the application because it had “elected” to proceed in the English courts and the application in the Singapore High Court amounted to “an abuse of process”.

The reasoning of the learned Judge can be summarised as follows:

(a) Glory of Wealth Shipping’s application to set aside the order granting leave to enforce was a “considered decision on its part to avoid the need to furnish security to the English court”.

(b) Glory of Wealth Shipping had “elected their forum of challenge and they ought to be bound by it”.

(c) There were no exceptional circumstances permitting the derogation from the principle of comity of nations requiring the Singapore courts to be slow to undermine the orders of foreign courts.

(d) If the application was allowed, it could result in a “duplication or conflict of judicial orders”.

(e) If the first English application was heard on the merits and failed, Glory Wealth Shipping would be entitled to challenge the enforcement of the final award in the enforcement court if the grounds and standards between the supervising and enforcement jurisdiction are different.

The learned Judge consequently held that a party seeking challenge of an arbitral award can either apply to the curial court to set aside the award, or, apply to the enforcement court to set aside any leave granted to the opposing party to enforce. These options were, as he described, “alternative and not cumulative”.

This phrasing is inadequate because it covers too much and too little at once. It over-includes because it lends itself to the mistaken impression that the options are mutually exclusive, such that one option can no longer be exercised once the other has been elected. It under-includes because it does not explain whether one option can still be exercised if the legal grounds relied upon for the second option are different from the first.

It may be useful to set out with precision how the options of an unsuccessful party in an arbitration interact. Generally, under the New York Convention, three general principles, which are by no means exhaustive, can be set out:

a) The unsuccessful party in the arbitration can resist enforcement at the enforcement jurisdiction, without having to first apply to set aside the award at the seat (see Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, per Lord Mance at [28]).

(b) The unsuccessful party in the arbitration can apply to set aside the award at the seat, whilst at the same time, resist enforcement if enforcement is being sought in another jurisdiction. That explains why Art. VI of the New York Convention allows an enforcement court to order a stay of the enforcement proceedings if setting aside proceedings are pending at the curial court.

(c) Regardless of whether the setting aside of an award is successful at the seat, the ruling of the curial court can create an issue estoppel in jurisdictions where such a doctrine (or its equivalent) exists (see Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, per Lord Collins at [98]). However, even if there is a successful annulment, the unsuccessful party in the arbitration may still find itself having to defend enforcement proceedings because certain courts may still enforce an award that had already been set aside (see Pabalk Ticaret Sirketi v Norsolor, Cour de cassation, 9 October 1984, 1985 Rev Crit 431; Hilmarton Ltd v OTV, Cour de cassation, 23 March 1994 (1995) 20 Yb Comm Arb 663; République arabe d’Egypte v Chromalloy Aero Services, Paris Cour d’appel, 14 January 1997 (1997) 22 Yb Comm Arb 691; Soc PT Putrabali Adyamulia v Soc Rena Holding, Cour de cassation, 29 June 2007 (2007) 32 Yb Comm Arb 299; Chromalloy Aeroservices v Arab Republic of Egypt, 939 F Supp 907 (DDC 1996).

The foundation of these principles stems from the way setting aside proceedings and enforcement proceedings are in fact designed as two separate and independent juridical proceedings. One may, and more critically, may not affect the other if, for instance, a result has already been reached in one or if setting aside proceedings are already pending.

Consequently, if a party aborts a setting aside proceeding before it is heard, that should not prejudice its application to defend enforcement proceedings in another jurisdiction. It is fully within that party’s prerogative to take the view that any security for costs ordered against it in the setting aside proceedings would not justify carrying through with the setting aside proceedings. In such a circumstance, it is entirely within that party’s option to terminate the setting aside proceedings, and respond to enforcement proceedings only when enforcement proceedings are commenced by the successful party in the arbitration.

It is therefore difficult to see how an “abuse of process” happened in Galsworthy. A possible abuse of process could arguably be made out in the rare instance where the unsuccessful party withdraws setting aside proceedings at the very last minute after a hearing of the merits when it became clear that it was losing that application, so as to avoid a final judgment which may have preclusive effect on subsequent enforcement proceedings. But even then, any abuse was of the process in the court of the seat, and not at the court of enforcement.

By dint of reasoning, the language of “election” used by the Singapore High Court in Galsworthy was unfortunate. There was no obligation on Glory Wealth Shipping to challenge the award in England, and even if it did so but aborted it ostensibly because of a security for costs order, that in itself does not affect its separate and independent right to defend enforcement proceedings in Singapore.

Darius Chan (Wilmer Cutler Pickering Hale & Dorr, London)

Overview

The new Ordinance will be of considerable interest (and importance) to all parties and practitioners dealing with or considering arbitration in Hong Kong. In this blog we provide a brief overview of certain key features of the new regime including:

1. the abolition of the distinction between ‘domestic’ and ‘international’ arbitration (and the transitional provisions which apply in the context of domestic proceedings);

2. the influence of the Model Law;

3. the availability of interim measures (including the basis on which the Hong Kong Courts may grant interim measures in support of foreign arbitral proceedings);

4. the new codified obligation of confidentiality;

5. the promotion of alternative dispute resolution (including the specific provisions of the Ordinance relating to so-called ‘med-arb’ and ‘arb-med’); and

6. the particular provisions which apply with regard to the enforcement of arbitral awards (including awards rendered in Mainland China).

1. Abolition of the distinction between domestic and international proceedings

One of the most significant changes introduced by the new legislation, and one which will be celebrated by most practitioners and parties alike, is the abolition of the dual regime for ‘international’ and ‘domestic’ arbitrations. Under the previous legislation, and in keeping with the practice adopted in many other major arbitral centres (including Singapore), a distinction was drawn between ‘international’ and ‘domestic’ arbitrations, with different provisions of the previous Arbitration Ordinance (Cap. 341) applying accordingly.

In practice, what this new reform means is that practitioners no longer need concern themselves with analysing the characteristics of the parties and the dispute in order to work out which particular provisions apply to any given arbitration. Instead, the intention is that all arbitrations in Hong Kong will be governed by a single unified regime based on the Model Law, and the drafting of arbitration agreements seated in Hong Kong need not differentiate international from domestic proceedings.

There is a caveat to this. Under pressure from certain sectors (most notably the construction industry), Hong Kong legislators chose to retain the key features of the ‘domestic’ regime in a series of ‘opt-in’ provisions set out in Schedule 2 of the new Ordinance. These will apply in place of certain of the Model Law-based provisions, where parties so choose. These specialised ‘opt-in’ provisions include, for example: (i) the ability of the courts to determine preliminary points of law; (ii) appeals to the courts allowed on questions of law arising from arbitral awards; (iii) challenges to awards permitted on grounds of serious irregularity; and (iv) provision for the consolidation of arbitrations or hearings. These features may, of course, be of use to many users of arbitration depending on their particular circumstances, but a distinguishing feature of the Hong Kong legislation (and one which sets it apart from other jurisdictions, notably England & Wales) is that these are ‘opt-in’ provisions; parties will only be subject to the greater court intervention prescribed under Schedule 2 if they expressly provide for this in their arbitration agreement.

A further caveat which is important to note – albeit one which is transitional in nature – is that the various ‘opt-in’ provisions set out in Schedule 2 will apply automatically to all arbitration agreements which provide for ‘domestic arbitration’ and which are entered into before or within six years of the new Ordinance coming into effect. In the longer term, however, it is anticipated that parties in the construction industry will be the primary users of the ‘opt-in’ system, albeit that other international parties may choose to avail themselves of this regime should they wish.

2. The influence of the Model Law

As noted above, the drafters of the new Ordinance have opted to rely heavily on the internationally-recognised and accepted framework of the Model Law. The new Ordinance generally follows the Model Law’s headings and chapters, which, in turn, mirror the chronological steps of a typical arbitration procedure. The Ordinance states clearly which features of the Model Law have been adopted (whether in whole or in part) and which aspects of the Ordinance are unique to Hong Kong.

The fact that the Ordinance draws heavily on the Model Law is a positive development which reflects Hong Kong’s position as a leading centre for arbitration. The Model Law (which was last updated in 2006) establishes certain minimum standards for national arbitration legislation. Amongst other things, the Model Law describes the (limited) circumstances in which domestic courts should be permitted to intervene in the arbitral process, confirming that arbitral tribunals are empowered to grant a wide-range of interim measures and rule on their own jurisdiction (the principle of kompetenz-kompetenz). The Model Law also provides that parties should be free to agree upon the procedure of any arbitration (subject to certain fundamental safeguards) and provides an outline framework which can be adopted in the absence of agreement (including provision for what is to happen in the event of default by any party). These features can all be found in the new Hong Kong Ordinance.

It would not be correct, however, to suggest that the Ordinance follows the Model Law slavishly. In certain instances, the language of the Model Law has been modified in order to impose a slightly different standard. For example, Article 18 of the Model Law provides that parties should have a “full” opportunity to present their respective cases, whereas the equivalent provision in the Hong Kong Ordinance (Section 46) provides that parties should have a “reasonable” opportunity to do so. In other instances, the provisions of the Model Law have been replaced entirely with bespoke clauses which reflect the peculiarities of arbitration in the region (the regime for the enforcement of arbitral awards being one such example, as described in greater detail below). Generally speaking, however, Hong Kong has adopted many of the salient features of the Model Law with little or no amendment. In that respect, the new Ordinance can be said to reflect best international practice.

3. Interim measures

One of the central themes underpinning the new legislation is the notion of minimal court intervention, with provisions of the new Ordinance vesting as much power as possible with arbitral tribunals. Adopting the Model Law’s provisions regarding interim measures, arbitral tribunals seated in Hong Kong are able to grant temporary measures, for example, to preserve assets or evidence, or to maintain or restore the status quo – and the Ordinance expressly confirms that this power includes the granting of injunctions. In addition, and again in line with the Model Law, Hong Kong arbitral tribunals can award preliminary orders preventing parties from frustrating any interim measure.

Separately, arbitral tribunals seated in Hong Kong are empowered inter alia to award security for costs and direct the discovery of documents or delivery of interrogatories – retaining the ‘general powers’ of an arbitral tribunal provided under the previous regime. Moreover, and an important feature of the new legislation, arbitral tribunals may make peremptory orders, which in other jurisdictions are a useful but underused resource of arbitral tribunals, specifying time limits for parties’ compliance in order to assist with the enforcement of their orders or directions.

Section 45 of the Ordinance also empowers the Hong Kong Courts to grant certain interim measures in support of arbitral proceedings – whether seated in Hong Kong or not – albeit that the Courts may decline to grant such relief if it is considered more appropriate for the interim measure sought to be granted by the arbitral tribunal. Furthermore, the Hong Kong Courts may only grant interim measures in support of proceedings seated outside of Hong Kong if: (a) the arbitral proceedings are capable of giving rise to an arbitral award which may be enforced in Hong Kong; and (b) the interim measure sought belongs to a type or description of interim measure which may be granted in Hong Kong.

4. Confidentiality

A feature of the new legislation likely to prove attractive to many parties is the inclusion of express provisions in relation to confidentiality. Although confidentiality is often perceived as a major advantage of arbitration, it is not always guaranteed. In certain jurisdictions (including, for example, Singapore and England & Wales) an obligation of confidentiality is said to be ‘implied’ into the arbitration agreement between the parties, albeit that the precise boundaries of this obligation are somewhat uncertain. In other jurisdictions, notably Australia, the concept of imposing any obligation of confidentiality in arbitral proceedings by law has been rejected by the national courts.

The new Hong Kong Ordinance expressly prohibits parties from disclosing any information relating to the arbitral proceedings or the award, subject to the usual exceptions regarding disclosure to professional advisors or disclosure required by law. In addition, and marking another significant change from the previous regime, the default position under the new Ordinance is that court proceedings relating to arbitration are to be conducted in closed court. Parties with arbitrations seated in Hong Kong can therefore assume that duties of confidentiality will bind their proceedings without the need for any additional drafting in this regard.

5. Mediation

A further specialised feature of the new Ordinance, and one which has been borrowed and enhanced from the old regime, is that express provision is made for both ‘med-arb’ (where a mediator is appointed to try and resolve the dispute before arbitral proceedings are commenced) and ‘arb-med’ (where the arbitral tribunal assumes the role of mediator part way through the proceedings in an effort to bring about an early settlement). These provisions follow the spirit of the recent Civil Justice Reform in Hong Kong in promoting ADR (at present, if a litigant in the Hong Kong courts fails unreasonably to engage in mediation, they face potentially adverse costs consequences) and set Hong Kong apart from other leading arbitration centres.

Under the Ordinance, a member of an arbitral tribunal is permitted to serve as a mediator after arbitration proceedings have begun, provided that all parties give their written consent. The Ordinance provides that, in these circumstances, the proceedings are to be stayed in order to afford the mediation the maximum chance of success – although if the mediation fails, the arbitrator-mediator is required to disclose to all parties any confidential information obtained during the mediation which he considers to be “material to the arbitral proceedings”. This latter requirement may deter some parties from engaging in frank discussions during any mediation (particularly during any caucus sessions with the arbitrator-mediator), which may impede the effectiveness of the overall process. Furthermore, parties should also be wary of anything which might jeopardise the enforceability of a subsequent arbitral award; whilst the Ordinance states that the existence of the ‘arb-med’ process will not in itself give rise to a ground for challenge if the relevant provisions of the legislation are respected, recent case law from the Hong Kong Courts illustrates that awards may be set aside on grounds of public policy if the ‘arb-med’ process is conducted in such a manner as to create an impression of bias (Gao Haiyan v Keeneye Holdings Ltd [2011] HKEC 514).

6. Enforcement of arbitral awards

One final feature of the new Ordinance which is worth flagging concerns the regime for the enforcement of arbitral awards, which departs from the provisions of the Model Law in favour (largely) of the enforcement procedure established under the previous regime. The key point is that arbitral awards are enforceable in the same manner as a court judgment but leave of the court is required. Moreover, separate provisions in the new Ordinance distinguish between: (i) awards rendered in Mainland China; (ii) awards rendered in New York Convention states (referred to in the Ordinance as “Convention Awards”); and (iii) other awards (e.g. awards rendered in Taiwan). Whilst the evidentiary requirements are the same for all three categories of award (the party seeking enforcement must produce an original or certified copy of both the award and the underlying arbitration agreement), the rules which govern enforcement will depend on the place in which the award was rendered. For example, subject to certain limitations, awards rendered in Mainland China may not be enforced in Hong Kong if an application for enforcement is also outstanding on the Mainland (Section 93 of the Ordinance). These features illustrate that, whilst the Hong Kong Ordinance largely reflects international practice, there are certain aspects of the legislation which are tailored to the particular circumstances of the region.

Conclusion

Hong Kong is already a major centre for international arbitration in Asia. As the gateway to China, enjoying the rule of law and New York Convention signatory status, Hong Kong is a natural option for international parties looking to trade in the region. The reforms introduced by the new Ordinance, couple with the recently promulgated HKIAC Administered Arbitration Rules and the opening by the ICC of a branch of its Secretariat in Hong Kong, are likely to enhance further Hong Kong’s position as a major hub for dispute resolution in the Asia-Pacific region and as an important centre for international arbitration more generally.

Justin D’Agostino, Simon Chapman and Ula Cartwright-Finch
Herbert Smith

The case arose out of a contract between the petitioner, a Japanese-based company, and the respondent, an Indian-based company, pursuant to which the petitioner agreed to provide Chinese-produced telecommunications equipment to the respondent in India. The respondent was to make payments for the equipment to an escrow account at an Indian-based commercial bank from which the petitioner would withdraw the funds. The contract was governed by English law and provided that any disputes arising from or relating to the contract were to be resolved by arbitration in Singapore. In early 2008, the petitioner delivered equipment pursuant to the contract and issued invoices and bills of exchange to the respondent in the amount of approximately $47.5 million. The respondent accepted the delivery of the equipment without complaint but only paid the petitioner approximately $5.6 million of the total amount due, citing cash-flow problems.

Anticipating a favorable arbitral award, the petitioner sought an ex parte order attaching a debt owed to the respondent by a New York-domiciled customer in the amount of $18,480 under New York’s Civil Practice Law and Rules § 7502(c). Section 7502(c) provides for the pre-award attachment of assets located in New York in connection with an arbitration regardless of where it is seated:

“[New York courts] may entertain an application for an order of attachment or for a preliminary injunction in connection with an arbitration that is pending or that is to be commenced inside or outside this state, whether or not it is subject to the United Nations convention on the recognition and enforcement of foreign arbitral awards, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief.”

In its decision, the appellate court began by recounting the statutory history of § 7502(c). The court explained that the New York Court of Appeals (the highest court in the New York judicial system) concluded in a much-criticized 1982 decision – Cooper v. Ateliers de la Motobecane, 57 N.Y.2d 408 (1982) – that New York courts had no authority to order the attachment of property in connection with an arbitration. The Court of Appeals had held in Cooper that New York statutory law in effect at the time permitted a court to issue an order of attachment only in an action for damages, not in a connection with an arbitration. Moreover, the Court of Appeals had held that, even if an attachment order could be issued, such an order would be inconsistent with the New York Convention because the Convention precludes courts from doing anything other than ordering an arbitration to proceed. The latter holding had placed New York in a distinct minority among courts internationally, as well as in the United States. (For further background, see Gary Born, International Commercial Arbitration 2030-2042 (2009).)

In response to the Cooper decision, the New York legislature added § 7502(c) in 1985. However, the provision as enacted at that time permitted New York courts to issue orders of attachment or preliminary injunctions only in connection with arbitrations seated in New York that were not subject to the New York Convention. It was not until 2005 that the New York legislature amended § 7502(c) to add the current language to the statute, extending its application to arbitrations seated outside of New York and to arbitrations under the New York Convention. This amendment foreshadowed UNCITRAL’s addition of Article 17J to the UNCITRAL Model Law the following year. Article 17J expressly provides that courts located outside the arbitral seat can issue interim measures in aid of international arbitrations.

After discussing the statutory history, the appellate court analyzed whether the $18,840 debt could properly be attached in the absence of personal jurisdiction over the respondent. (The court lacked personal jurisdiction because the respondent had no offices, employees, or bank accounts in New York, had only occasionally solicited business in New York, and had not undertaken any business activities in connection with the contract at issue in New York.) The court determined that the attachment was proper.

In reaching this conclusion, the court distinguished Shaffer v. Heitner, 433 U.S. 186 (1977), a leading U.S. Supreme Court decision that had held that a state court could not exercise personal jurisdiction over a party merely because the party owned property in the state. The appellate court reasoned that the Supreme Court had noted in dicta in Shaffer that this principle did not preclude an action to attach property in a forum as security for a judgment being sought in another forum, even where the property owner had no other contacts with the forum in which the property was located to give rise to personal jurisdiction. The appellate court concluded that this “security” exception applied in the arbitration context under § 7502(c) because the petitioner was not seeking to rely on the property to confer personal jurisdiction but rather was “merely seek[ing] to have the property attached for future execution in the event a recovery is ordered by the out-of-state forum.”

The appellate court further noted that two safeguards built into § 7502(c) – a requirement that the petitioner must show that any arbitral award made would be ineffectual without the attachment and a provision that the attachment order expires if the petitioner fails to initiate an arbitration within 30 days of the attachment being granted – addressed any concerns regarding fairness. Oddly, the Sojitz court did not address its prior interpretation of the New York Convention in Cooper – holding that the Convention precluded grants of provisional relief in aid of an international arbitration. That holding was a matter of U.S. federal law (because U.S. treaties have the status of federal law) and, as a consequence, not subject to being “overruled” by state law – including state legislation such as the amendment to § 7502(c). The Sojitz court presumably, and correctly, reconsidered and reversed its prior interpretation of the New York Convention in Cooper, but its opinion does not explain this reasoning. Assuming that this logic is followed in the future, the Sojitz decision provides a useful tool for parties to international arbitration whose counter-parties have assets located in New York and comes as a welcome development in the field of international arbitration.

By Gary B. Born & Thomas R. Snider

One recent example of a pathological international arbitration involves the by-now infamous Dallah case. There, some ten years after a distinguished arbitral tribunal seated in Paris applied French principles of international arbitration law to conclude that the Government of Pakistan was bound by a contract, the UK Supreme Court reached the opposite result – applying the same principles of French law to deny enforcement of an arbitral award against Pakistan on jurisdictional grounds. Then, only months later, the Paris Court of Appeal reached the opposite conclusion – confirming the tribunal’s award and rejecting Pakistan’s jurisdictional objection under French law. This series of developments, involving two very eminent and experienced national courts, is very unhappy; those developments, and particularly the UK Supreme Court’s decision, contradict both the New York Convention and the objectives of the international arbitral process.

On its facts, the Dallah case is straightforward. Dallah Real Estate and Tourism Holding Company (“Dallah”), a Saudi Arabian company, entered into a Memorandum of Understanding in 1995 with the Government of Pakistan to provide housing in Saudi Arabia for Pakistani pilgrims to Mecca. Thereafter, various Pakistani Government ministers negotiated the terms of an agreement with Dallah to implement the Memorandum of Understanding. In connection with those negotiations, the President of Pakistan issued an ordinance establishing the Awami Hajj Trust (“Trust”), a separate legal entity with independent legal personality. In September 1996, the Trust entered into an agreement with Dallah (“Agreement”), containing the terms previously negotiated by the Government – including an ICC arbitration clause, but no choice of law clause. Despite its previous involvement in negotiations with Dallah, Pakistan was not a signatory to the Agreement.

The Agreement was ill-fated, lasting only four months or so. During that period, Pakistani Government ministers wrote to Dallah (on Government letterhead), addressing issues that had arisen under the Agreement and directing Dallah on how to perform the Agreement. In December 1996, three months after the Agreement was concluded, the Trust ceased to exist (because the Pakistani Government did not renew its existence). One month later, in January 1997, a Pakistani Government official wrote to Dallah (again on Government letterhead) purporting to terminate the Agreement. The Trust then sued Dallah for breach of the Agreement in Pakistani courts. Those courts eventually dismissed the Trust’s claims (on the basis that the Trust no longer existed) – after which Dallah commenced an ICC arbitration against Pakistan (in May 1998), seeking to recover substantial costs it had incurred in connection with the Agreement. Pakistan resisted, among other things, on grounds of jurisdiction.

In a jurisdictional award (in June 2001), an arbitral tribunal composed of Lord Michael Mustill, Nassim Hasan Shah and Ghaleb Mahmassani declared that Pakistan was bound by the arbitration clause in the Agreement. Sitting in Paris, the tribunal looked to French international arbitration law (which it characterized as incorporating “the transnational general principles and usages reflecting the fundamental requirements of justice in international trade and the concept of good faith in international business”). Applying these principles of French law, the tribunal held that Pakistan was the alter ego of the Trust and thus bound by both the Agreement and its arbitration clause. The tribunal subsequently made a final award (in June 2006) awarding Dallah $20 million plus legal costs.

Dallah sought enforcement of the award in England under the New York Convention and the English Arbitration Act, 1996, and, subsequently, also sought exequatur of the award in France. For its part, Pakistan resisted enforcement of the award in England, arguing under Article V(1)(a) of the Convention that there was no valid arbitration agreement between it and Dallah. In August 2009, exequatur of the award was granted in France, while the English enforcement proceedings lasted until November 2010, when the UK Supreme Court denied enforcement of the tribunal’s award ([2010] UKSC 46). (See also my previous posts of 21 August 2009 and 12 April 2010.)

The UK Supreme Court’s decision denying recognition deserves careful attention. The Court is highly respected in the field of international arbitration, with its members enjoying distinguished reputations in international matters, commercial and otherwise, while its judgment in Dallah was clearly the product of careful thought.

The Supreme Court reached its decision to deny recognition of the arbitral award following what it termed an independent investigation of whether the tribunal had jurisdiction: “[the Court must] revisit the tribunal’s decision on jurisdiction” and is “neither bound nor restricted by” the tribunal’s conclusions. Explaining that it was applying French law reflected in Dalico and related French Cour de cassation decisions, the UK Supreme Court held that there had been no “common intention” for the Government of Pakistan to be a party to the arbitration agreement. Focussing narrowly on the formal signatories and literal terms of the Agreement, the Court found that “there was no material sufficient to justify the tribunal’s conclusion” that the Government was a party to the agreement to arbitrate.

Only months after the UK Supreme Court’s decision (on 17 February 2011), the Paris Court of Appeal rejected Pakistan’s application to annul the awards against it under Article 1502(1) of the French Code of Civil Procedure (Case No. 09/28533, 09/28535 and 09/28541). Like the UK Supreme Court, the Paris Court of Appeal applied French international arbitration law (looking to the parties’ “common intentions” under Dalico and similar decisions). But, unlike the UK Supreme Court, the Paris Court of Appeal had no difficulty in concluding that Pakistan had been intended to be a party to the Agreement. The French court took a broad, pragmatic view of the parties’ conduct, focussing in particular on the Government’s (sole) involvement in negotiating the Agreement, in implementing its terms and in terminating the Agreement: the Government “behaved as if the Contract was its own; … this involvement [of the Government], in the absence of evidence that the Trust took any actions, as well as [the Government’s] behaviour during the pre-contractual negotiations, confirm that the creation of the Trust was purely formal and that [the Government] was in fact the true Pakistani party in the course of the economic transaction.”

It remains to be seen how the French Cour de cassation will ultimately decide any appeal from the Paris Court of Appeal. Considering matters as they currently stand, however, the regrettable course of the Dallah case and conflict between the French and English decisions are pathological: they are contrary to both the purposes and specific terms of the New York Convention and they produce a potentially serious injustice. The most fundamental objectives of the Convention include ensuring uniform treatment of arbitral awards, and facilitating the effective enforcement of such awards, in the Convention’s Contracting States. Those goals are undermined when, a decade after an arbitral tribunal decides that parties concluded a binding agreement, courts in different Contracting States reach conflicting conclusions as to the correctness of the tribunal’s award – with a foreign court disagreeing with the courts of the arbitral seat over the application of its own law. For at least three reasons, outlined below, this is not what the drafters of the New York Convention intended, nor what parties concluding international commercial contracts and arbitration agreements intend.

First, the terms of the Convention provide a mechanism specifically designed to avoid conflicts between annulment and enforcement decisions. In particular, Article VI of the Convention (and section 103(5) of the English Arbitration Act) provides enforcement courts with authority to stay (or adjourn) decisions on enforcement pending the outcome of annulment proceedings in the arbitral seat. Dallah was a text-book example of a case where Article VI should have been applied: the Paris Court of Appeal was about to decide almost precisely the issue before the UK Supreme Court – an issue, moreover, that was governed by French law, that had already been decided by a French-seated arbitral tribunal and that involved an arbitral award that had already been granted exequatur by a first instance French court. In these circumstances, the arguments for staying English enforcement proceedings pending the French court’s decision were overwhelmingly powerful.

Article VI grants authority to recognition courts to stay enforcement actions in appropriate cases (where they “consider [it] proper”). This provides a mechanism, designed to further the Convention’s objectives of uniformity by avoiding conflicting decisions in different Contracting States, which is especially appropriate and useful in cases where the courts of the arbitral seat have particular competence on an issue. In Dallah, the decisive issue was one of French arbitration law (the law of the putative arbitral seat, indisputably applicable under Article V(1)(a)’s choice-of-law rules), which had already been decided by a French-seated tribunal; moreover, French courts had unique expertise on the relevant issues (of their own law), were seised of the issue and about to render a decision and they were undoubtedly neutral and objective. Basic principles of common sense and judicial prudence counselled that the UK Court should have awaited the imminent outcome of proceedings in the arbitral seat.

Despite this, the UK Supreme Court refused to grant a stay of recognition proceedings under Article VI, commenting in passing that “since Dallah has chosen to seek to enforce in England, it does not lie well in its mouth to complain that the Government ought to have taken steps in France.” Although the explanation is not entirely clear, it appears that the UK Supreme Court faulted Dallah for not having itself first sought exequatur in French courts before seeking recognition in England – hence, the UK Court’s refusal to stay English recognition proceedings pending Dallah’s exequatur action. That rationale ignores both the specific language and underlying objectives of Article VI – which aim to avoid exactly the conflicting decisions that Dallah produced. More fundamentally, the UK Supreme Court’s apparent rationale is impossible to reconcile with the New York Convention’s deliberate elimination of any requirement that award creditors obtain double exequatur (previously required under the Geneva Convention). Given that, an award creditor like Dallah is entirely free to seek to enforce its award abroad without first seeking exequatur in the arbitral seat. Contrary to the UK Court’s suggestion, Article VI of the Convention, and the policies of efficiency and uniformity it furthers, remain fully applicable in such circumstances.

Second, the New York Convention also provides that, in an enforcement proceeding, the party resisting enforcement bears the burden of proof, both under Article V(1)(a) and otherwise. This is made express in the introductory provisions of Article V(1) and is a fundamental element of the Convention’s basic purpose – again, specifically altering the position under the Geneva Convention. Although these principles are non-controversial, the UK Supreme Court’s decision in Dallah is very difficult to reconcile with them – with the Court instead imposing on the award creditor (Dallah) the burden of producing “material sufficient to justify the tribunal’s conclusion.” That holding misunderstands the Convention and its burden of proof: critically, it was not properly for Dallah to prove the existence of a valid agreement to arbitrate under Article V, but for Pakistan to disprove the existence of such an agreement.

Despite this, the UK Supreme Court declared that: “[t]he scheme of the New York Convention … may give limited prima facie credit to apparently valid arbitration awards based on apparently valid and applicable arbitration agreements, by throwing on the person resisting enforcement the onus of proving one of the matters set out in Article V(1) …. But that is as far as it goes in law. Dallah starts with advantage of service, it does not also start fifteen or thirty love up.” This reasoning misapprehends the meaning and purpose of Article V of the Convention.

Article V establishes the basic rule that it is for the party resisting recognition of an award to prove the applicability of an exception to the Convention’s general obligation (under Articles III and IV) to recognize foreign awards. Importantly, Article V prescribes a substantive burden of persuasion – not merely a procedural allocation of pleading roles – which can have significant consequences in many categories of cases. It is beyond debate that the Convention’s allocation of the burden of proof applies fully to all of Article V’s exceptions, including cases involving claims that there was no valid arbitration agreement under Article V(1)(a). Again importantly, this reverses the allocation of the burden of proof which exists at the stage of enforcing agreements to arbitrate, where the burden of proving the existence of such an agreement is on the party seeking to require arbitration.

The Dallah Court’s tennis analogy cannot be reconciled with the New York Convention’s allocation of the burden of proof in enforcement proceedings. Under Article V, Dallah does not merely enjoy the “advantage of service,” or even the advantage of a couple of points in one game of tennis. Rather, if the metaphor is to be pursued, Dallah had already won an entire match, which concluded with a presumptively valid arbitral award — and the question was whether the outcome of that match should be ignored in recognition proceedings. Under Article V, only where the award debtor (here, Pakistan) itself affirmatively proves that there is no valid arbitration agreement should this exceptional result be permitted. The UK Court’s conclusion that that Dallah had nothing more than the “advantage of service” and was required to provide material demonstrating the existence of a valid agreement to arbitrate is fundamentally contrary to both the plain language and obvious purpose of Article V.

Third, the Convention also requires Contracting States, like the United Kingdom, to apply the law specified in Article V(1)(a) to the validity of agreements to arbitrate – and not to apply their own local law to this issue. In Dallah, that law was indisputably French law (because, in the absence of a contrary choice by the parties, it was the law of the putative arbitral seat). Critically, however, the UK Supreme Court recited the words of the French international arbitration principles articulated in Dalico and other French decisions, but appears not to have applied the real substance of the French standards when evaluating the parties’ actual conduct and agreements.

That conclusion is confirmed by a comparison of the substantive analyses of the UK Supreme Court and of the French courts. Thus, the UK Supreme Court largely ignored factual elements that were central to the Paris Court of Appeal’s (and arbitral tribunal’s) decisions. In particular, the UK Supreme Court largely discounted the fact that, until the day before the execution of the Agreement, all negotiations and formal correspondence (on Government letterhead) took place exclusively between Dallah and the Pakistani Government. Similarly, the Supreme Court ignored the fact that the Prime Minister of Pakistan presided over meetings of the Trust (despite holding no position in it) and that it was the Pakistani Government which both created and later terminated the Trust – the latter act dissolving Dallah’s nominal contractual counter-party. And the UK Supreme Court devoted only passing attention to the fact that the Pakistani Government was actively involved in directing performance of the Agreement and formally terminating the Agreement (again, in correspondence from Government officials on Government letterhead), while the Trust had not been involved at all in either performance or termination of the Agreement. In contrast, the Paris Court of Appeal placed substantial weight on all these circumstances, holding that the Government’s actions both before and after conclusion of the Agreement could only be explained by its status as a real party to the Agreement.

One might debate the evidentiary weight of these various factors – though they point fairly decisively against the UK Supreme Court’s conclusions. The more fundamental point, however, concerns Article V(1)(a)’s choice of¬ law rule for the law governing the arbitration agreement – often described as one of the Convention’s crowning achievements. That rule requires Contracting States not merely to formally recognize foreign standards for the validity of arbitration agreements, but also to apply the substance of those standards in practice, just as the relevant foreign courts would do so.

In Dallah, it is difficult to avoid the conclusion that the UK Supreme Court ultimately failed to appreciate the substance of French law and – to an extent, understandably – applied what amounted to a classically English approach to contract law. Lord Mance hinted at this, referring with evident discomfort to the French standard: “It is difficult to conceive that any more relaxed test would be consistent with justice and reasonable commercial expectations…”

This discomfort is not surprising. The reluctance of English courts to consider precontractual negotiations – as contrasted to the approach in many other civil and common law jurisdictions – is familiar. Equally familiar is the English courts’ emphasis on express terms of contractual agreements and hesitations to embrace notions of good faith. Those rules are fair enough in English settings – indeed, that is why parties frequently agree to English law, applied by English courts or English-seated arbitral tribunals, to govern their commercial contracts. Critically, however, these are not rules of French law – and, as the competing decisions in Dallah illustrate, the application of these English approaches to contract law can, expressly or otherwise, produce very different results from those which obtain under French law. Under Article V(1)(a), it is essential that courts not merely apply just the words, but also the substance and spirit of the legal rules specified by the Convention’s choice-of-law standards. More fundamentally, the challenges of applying foreign law confirm the wisdom of Article VI’s provisions for stays of enforcement proceedings when annulment proceedings are underway in the courts of the country where the award was made.

In sum, the Convention did not contemplate a process that permits a jurisdictional objection to be relitigated effectively from scratch in a foreign court – ten years after the arbitrators’ jurisdictional decision and fifteen years after the events in question. Instead, like commercial parties, the drafters of the New York Convention intended that international arbitration be speedy, efficient and effectively enforced; the drafters of the UNCITRAL Model Law had similar objectives, including by requiring prompt challenges to jurisdictional awards (in Article 16(3)). Regrettably, Dallah does not achieve any of these objectives: it misapplies the Convention’s provisions on burden of proof, stays of enforcement and choice of law, producing a result that frustrates the most basic objectives of the arbitral process.

By Gary B. Born and Michal Jorek

“Public policy is often invoked by a losing party in an attempt to manipulate an enforcing court into re-opening matters which have been (or ought to have been) determined in an arbitration. The public policy ground is thereby raised to frustrate or delay the winning party from enjoying the fruits of a victory. The court must be vigilant that the public policy objection is not abused in order to obtain for the losing party a second chance at arguing a case. To allow that would be to undermine the efficacy of the parties’ agreement to pursue arbitration.”

Two recent decisions may be a sign that the “unruly horse” is being tamed in the most unlikely of places – India and Belize.

India has long been perceived as a jurisdiction which can be problematic for enforcement of foreign arbitral awards. At least that was the recorded perception of corporate users of arbitration according to the Queen Mary/PWC 2008 survey “International Arbitration: Corporate attitudes and practices”. This perception was bolstered by the Supreme Court decisions of ONGC v Saw Pipes in 2003 and Venture Global Engineering v Satyam Computer Services Ltd in 2008. In Saw Pipes the Supreme Court took a broad approach to the meaning of public policy and held that a domestic arbitral award could be set aside on the grounds of public policy if it was “patently illegal”; i.e. contravened Indian legislation. In Venture Capital, the Supreme Court set aside another arbitral award on the same basis, but this time it was a foreign arbitral award. It held that the provisions of the Indian Arbitration Act which allow an arbitral award to be set aside on the basis of domestic public policy applied because the relief ordered was for the sale of shares in an Indian company which could only be effected under Indian law. The concern was therefore that the Indian courts would apply a broad test of public policy to foreign arbitral awards where there was a sufficient connection with India – out of keeping with the reluctance in more developed jurisdictions to invoke the public policy exception.

The recent decision of the Delhi High Court in Penn Racquet Sports v Mayor International Ltd (delivered in January 2011) appeared to buck this trend. It held that a more restrictive approach to the definition of public policy should be applied to the enforcement of foreign arbitral awards. Contrary to the approach taken by the Supreme Court in Saw Pipes and Venture Capital to the meaning of public policy, the Delhi High Court held that recognition and enforcement of a foreign award cannot be denied just because the award contravenes Indian law. Rather it must be contrary to the fundamental policy of Indian law, the interests of India or justice or morality. In reaching this conclusion, the Delhi High Court took into account a 1994 decision of the Indian Supreme Court in Renusagar Power Co Ltd v General Electric Co where the same distinction was drawn between the approach to domestic and foreign arbitral awards based on international texts and court authorities.

Does this herald a great step forward in the approach of the Indian courts to the application of the public policy exception? It is certainly a welcome development but it does not entirely resolve the fears that sprung up after the decisions of Saw Pipes and Venture Capital. The allegation in Penn Racquet Sports was that the award was contrary to public policy because the arbitral tribunal had incorrectly interpreted a term of the contract which was itself governed by Austrian law. It was therefore not an award to which it could be easily argued that it fell within the provisions of the Indian Arbitration Act which relate to domestic arbitral awards (as was the case with the award in Venture Capital). That risk may still remain for foreign awards where there is a connection with India and the scope of the Indian Arbitration Act has not been restricted to exclude a challenge to the award on the grounds it is a domestic award.

Like India, recent anti-arbitration decisions from the Belize courts have made it a jurisdiction with a question mark over it. In 2009 in Attorney General v Belize Telemedia Limited and Belize Social Development, the Belize Supreme Court issued a world wide injunction restraining the enforcement of an arbitral award before steps had even been taken to enforce it. It was held that the Attorney General was entitled to the interim injunction because he had an arguable case that an international arbitral award obtained by Belize Telemedia was contrary to public policy. The basis for this argument was that the award concerned a contract between the parties which was alleged to contravene the laws of Belize, despite the fact that the Tribunal had expressly considered these issues. In 2010 two anti-arbitration injunctions were issued by the Belize court restraining international arbitration proceedings brought against the Government of Belize under the UK-Belize Bilateral Investment Treaty (Attorney General v Jose Alpuche & others and Attorney General v The British Caribbean Bank Limited). While these injunctions did not directly relate to public policy in the context of enforcement, they failed to acknowledge the competence of the Tribunal to determine its own jurisdiction. This mirrors a classic error that may be adopted when considering the public policy exception; to accept that this allows them to review the merits of the decision of the Tribunal.

However, in December 2010, in stark contrast to the preceding decisions, the Belize Supreme Court gave a pro-enforcement decision in BCB Holdings Limited and The Belize Bank Limited v Attorney General. In this case the court specifically considered the grounds of public policy. An application had been made by BCB Holdings and The Belize Bank to enforce an international arbitral award which concerned a settlement agreement between the parties pursuant to which they had been granted certain tax treatment. The application for enforcement of the arbitral award was made under the Belize Arbitration Act which incorporated the provisions of the New York Convention. The Attorney General argued that the award should not be enforced because the underlying agreement was contrary to the laws of Belize and so fell within the public policy exception. The Belize court disagreed. Drawing on a number of international decisions and authorities, it held that the public policy exception had to be construed narrowly and that the court should avoid interfering with the Tribunal’s decision on the substantive issues. As the Tribunal had considered the illegality issues now raised by the Attorney General on enforcement, it rejected the submission that it should find the arbitral award contrary to public policy on the grounds of illegality. This decision was clearly a progressive step in keeping with an increasingly international standard approach to the public policy exception.

There is an emerging international consensus that public policy in the context of enforcement should have a restrictive interpretation. Are the recent decisions of the Indian and Belize courts a sign that this consensus is now embracing previously uncertain jurisdictions? While it might be too early to draw any firm conclusions, these decisions do represent a good indication that the self-reinforcing effect of international jurisprudence is starting to reap its rewards.

Matthew Gearing & Angeline Welsh, Allen & Overy LLP