At first instance, Steel J held that arbitrators were not "employed" within the meaning of the EERBR 2003 and that, even if appointment of arbitrators did fall within the scope of the EERBR 2003, the requirement that the arbitrators be members of the Ismaili community was a genuine occupational requirement, which it was proportionate to apply (see Legal update, Requirement for arbitrators to be members of Ismaili community not unlawful).

The Court of Appeal overturned the judgment of Steel J, finding that the appointment of an arbitrator involved a contract for the provision of services, which constituted "a contract personally to do any work", thereby falling within the definition of employment. Therefore, the arbitration agreement was discriminatory and void, unless the requirement was a "genuine occupational requirement for the job". On this question, the Court of Appeal held that being a member of the Ismaili community was not a genuine occupational requirement for the job, because the arbitrators would determine the dispute in accordance with English law. If the clause had required the arbitrators to make their decision with regard to matters of justice and fairness ex aequo et bono, the clause may have benefited from the exception. Further, the Court of Appeal concluded that the offending term could not be severed from the rest of the arbitration clause and so the whole arbitration agreement was struck down as void (see Legal update, Arbitrators are employees for the purposes of religion and belief discrimination).

The decision of the Court of Appeal caused a considerable stir within the arbitration community, as its potential ramifications extended beyond arbitration agreements which sought to nominate arbitrators on the basis of their religion or belief. There was concern that arbitration agreements which required that arbitrators be or not be of a particular nationality would also be susceptible to challenge, as nationality is a "protected characteristic" for the purposes of domestic anti-discrimination legislation, in the same way as religion or belief. This is of increased relevance given the entry into force of the Equality Act 2010, which creates a single framework of employment equality legislation.

The rules of most arbitration institutions, including those of the London Court of International Arbitration (LCIA) and International Chamber of Commerce (who appeared as interveners before the Supreme Court) include provisions relating to the nationality of sole or presiding arbitrators. In the period between the decisions of the Court of Appeal and the Supreme Court, it, therefore, became common practice for parties entering into arbitration agreements which incorporate institutional rules, to disapply the rules relating to nationality of the arbitrators.

Lord Clarke held that the Court of Appeal was wrong to depart from Steel J's finding that arbitrators are not employees. He focused on the question whether the contract under which arbitrators are appointed provides for "employment under … a contract personally to do any work" (the relevant extract from section 83 of the Equality Act 2010). Lord Clarke noted the significance of the definition in referring, not simply to a contract to do work, but to "employment under" such a contract. He went on to hold that the role of an arbitrator is not naturally described as employment under a contract personally to do work, because his role is not naturally described as one of employment at all. Although there is some circularity in the definition of employment in the legislation, the words "employment under" remain of considerable significance.

The judgment identified a clear distinction in the case law of the European Court of Justice (ECJ) between those who are in substance employed and those who are "independent providers of services who are not in a relationship of subordination with the person who receives the services".

Having examined the relevant case law, Lord Clarke considered that the same distinction should be drawn for the purposes of the EERBR 2003 between those who are employed and those who are not notionally, but genuinely self-employed.

The Supreme Court rejected the Court of Appeal's analysis of Baroness Hale's speech in Percy v Board of National Mission of the Church of Scotland [2005] UKHL 73, finding that the essential questions are whether:

This, it was held, is what Baroness Hale meant when she referred to the essential difference between the employed and self-employed.

Lord Clarke also considered the line of domestic case law which says that the question is whether the dominant purpose of the contract is the execution of personal work or labour. He found that this line of cases did not focus on the fact that the employment must be employment under a contract of employment, a contract of apprenticeship or a contract personally to do work. The ECJ case law demonstrates that dominant purpose is not the test or, at any rate, not the sole test.

With regard to arbitrators, Lord Clarke found no basis on which the arbitrators could be found to have agreed to work under the direction of the parties. An arbitrator is, rather, in the category of an independent provider of services who is not in a relationship of subordination with the parties who receive his services. The dominant purpose of appointing an arbitrator is the impartial resolution of the dispute between the parties in accordance with the terms of the agreement and that, although the contract between the parties and the arbitrators would be a contract for the provision of personal services, they are not personal services under the direction of the parties. Moreover, Lord Clarke noted the various sections of the Arbitration Act 1996 (AA 1996) and the provisions of the EERBR 2003 which would be inconsistent with an employment relationship.

Having concluded that arbitrators are not employees, it was not necessary to consider the "genuine occupational requirement" issue, but the majority did consider it, obiter. Lord Mance preferred not to deal with the question, as it did not arise following the conclusion on the first issue.

The question was framed as whether, in the circumstances of the case, the requirement that the arbitrators should be respected members of the Ismaili community was not only genuine, but legitimate and justified. The majority rejected the argument that an English law dispute in London under English curial law does not require an Ismaili arbitrator, finding that this approach would reduce arbitration to no more than the application of a given national law to a dispute.

Referring to section 1 of the AA 1996, Lord Clarke emphasised, as one of the distinguishing features of arbitration, the breadth of discretion left to the parties and the arbitrator to structure the dispute resolution process, in particular, noting the arbitrators' role in:

It was held that the requirement of an Ismaili arbitrator could be regarded as a "genuine occupational requirement" on the basis that it was not only genuine, but both legitimate and justified.