Under a Memorandum of Understanding (memorandum) signed by Dallah (D) and the Government of Pakistan (GoP), D agreed that it would acquire land in Mecca and build accommodation for pilgrims. GoP established a trust (the trust) as a vehicle for the project and an agreement (the agreement) was entered into between D and the trust for this purpose. The agreement between D and the trust referred disputes to ICC arbitration in Paris.

In December 1996, the presidential ordinances which established the trust lapsed and it ceased to exist. In 1997, a dispute arose and D commenced arbitration proceedings against GoP, alleging that GoP was the trust's successor. GoP challenged the jurisdiction of the arbitral tribunal on the ground that it was not party to the agreement.

In a partial award, the tribunal found that it had jurisdiction to determine D's claim and that GoP was bound by the arbitration clause. Following a further partial award on liability, the arbitral tribunal went on to issue a final award in D's favour and awarded it substantial damages. (For full details of the facts of this case, see Legal update, Court refuses to enforce ICC award.)

D sought enforcement of the final award in the English courts. It obtained permission to enforce the award on a without notice application. However, the court subsequently set aside the order giving permission on the ground that there was no valid arbitration agreement between the parties, within the meaning of Article V(1)(a) of the New York Convention (implemented in English law in section 103(2)(b) of the Arbitration Act 1996) (see Legal update, Court refuses to enforce ICC award). The Court of Appeal and then the UK Supreme Court upheld the decision to set aside the permission order (see Legal updates, Court of Appeal upholds Dallah decision and Dallah Supreme Court decision: full update).

The Supreme Court found that parties challenging enforcement were entitled to a full judicial determination on evidence of the issue of jurisdiction and that a full rehearing was required for preliminary awards on jurisdiction. It considered the applicable principles of French law, citing the French Cour de cassation case Orri v Société des Lubrifiants Elf Aquitaine [1992] Jur Fr 95 (11 January 1990), which establishes that when determining if a party is bound by an arbitration agreement, courts must apply the test of the "common intention". The Supreme Court concluded that there was no evidence to support a common intention that GoP would be bound by the agreement. It refused to exercise its discretion to enforce the award, pursuant to section 103(2) of the Arbitration Act 1996, commenting that it would be a "remarkable state of affairs" if an award made without jurisdiction were enforced as a matter of discretion.

In the meantime, D had sought enforcement of the final award in the French courts and GoP had applied to the Paris Court of Appeal to set aside all three awards.

GoP's application to set aside the awards was made pursuant to Article 1502 1° of the French Code of Civil Procedure which states that a decision granting the recognition or enforcement of an award is subject to appeal "if the arbitrator has ruled upon the matter without an arbitration agreement or based on a void and lapsed agreement." GoP alleged that it was not a party to the agreement and consequently, that the arbitral tribunal did not have jurisdiction over the matter.

GoP argued that the memorandum and the agreement were two autonomous legal documents, that only the trust had signed the agreement, and that the parties never had the common intention that GoP should be bound by the arbitration agreement.

After reviewing the facts, the Paris Court of Appeal found that GoP had acted as if it was the actual party to the agreement and that it was therefore bound by the agreement.

When considering whether GoP was bound by the agreement, the court did not address the question of the autonomy of the memorandum and the agreement and the issue of the lack of signature of the agreement by GoP. The court only considered the manner in which the agreement was negotiated and performed. It considered the following actions:

For all these reasons, the Paris Court of Appeal found that GoP was bound by the agreement and consequently rejected GoP's request to set aside the award.

The fact that the UK courts and the French Court of Appeal reached very different conclusions can be explained by the different approaches of the courts. On the one hand, the UK courts re-tried the issue of jurisdiction and reviewed issues of both fact and law, in this case French law. By contrast, the French court did not focus on French law principles and proceeded to a factual enquiry to determine whether the parties had actually consented to go to arbitration.

This very practical approach is consistent with French case law. This solution is inspired by the recognised desire of French courts to develop substantive rules for international arbitration that ensure that the outcome of a dispute does not depend on the particularities of a national law. This solution is also consistent with French case law on the extension of arbitration agreements to parties that are non-signatories but have participated in its negotiation and performance.

It is also interesting to note that, in order to determine whether GoP consented to the agreement, the French court considered the actions of GoP before the contract was signed. Such pre-contractual actions would not have any significance in a common law system.

The decision of the French court means that D is in the peculiar position of having an award enforceable in France but not in the UK. It remains to be seen which of the two decisions will be given precedence in any enforcement proceedings outside these countries. However, in light of the importance that the New York Convention affords the courts of the seat of the arbitration, there appears to be a legitimate argument that the position taken by the Paris Court of Appeal will prevail.

Gouvernement du Pakistan v. Société Dallah Real Estate & Tourism Holding Co, Cour d'appel de Paris, Pôle 1 – Ch. 1, n° 09/28533 (17 February 2011).