Court of Appeal holds religious criteria for appointment of arbitrators unlawful

In Jivraj and Hashwani, a decision published yesterday, 22 June 2010, the English Court of Appeal has unanimously held that the Equality (Religion and Belief) Regulations 2003 (the "Regulations") rendered an arbitration agreement in a commercial contract void. This decision will restrict parties' ability to select characteristics of arbitrators in commercial agreements.

This is the first time that these Regulations (which give effect to EU law: Council Directive 2000/78 EC) have been considered in the context of arbitration. It will no doubt call into question numerous existing arbitration agreements and appointments, as well as affecting the drafting of arbitration clauses in the future. It even has the potential to affect the choice of England for arbitrations and to cause enforcement problems in jurisdictions where religious law is in place.

Facts

The parties entered into a joint venture agreement for investment in real estate projects worldwide. The arbitration agreement in this case stipulated that arbitrators were to be "respected members of the Ismaili community and holders of high office within the community". The Ismaili community was considered to be a religious group under the meaning of the Regulations. Further the chair of the tribunal was to be "the President of the HH Aga Khan National Council for the United Kingdom for the time being".

When the parties terminated their venture and attempts to divide up the assets had failed, Mr Hashwani formally notified Mr Jivraj of a £1.5 million claim and the appointment of Sir Anthony Colman as one of three arbitrators. Mr Jivraj applied to the Commercial Court for a declaration that the appointment was invalid as Sir Anthony was not a member of the Ismaili community. Subsequently Mr Hashwani made an application to court (under section 18 of the English Arbitration Act) to appoint Sir Anthony as a sole arbitrator. He did so primarily on the basis that the arbitration agreement was void under the Regulations.

What did the Court of Appeal decide?

Arbitrators are employees

At first instance, Steel J declared Sir Anthony's appointment invalid as it did not comply with the arbitration clause. He held that arbitrators were not "employees" for the purposes of the Regulations and therefore that the Regulations did not apply.

Ultimately, the Court of Appeal disagreed as to the nature of the arbitrators' employment. In the view of the higher court, arbitrators are employees for the purpose of the Regulations since:

1. the Regulations are "intended to apply to all forms of employment in the broadest sense" and, in so doing, form part of a broad policy objective to "foster conditions for a socially inclusive labour market". These goals should therefore take precedence over private choices by consumers as would normally dictate an agreement to arbitrate; and
2. the arbitrators' services arise out of a contract to provide services and to do work personally. In this way, their services are no different to a solicitor dealing with a piece of legal business.

Therefore, arbitrators could not escape this legislation. The Court of Appeal appears to have disregarded what have usually been regarded as arbitrators special characteristics - in particular their independence and autonomy.

The clause breached the anti-discrimination provisions in the Regulations

The arbitration clause breached the prohibition for an employer to discriminate when determining to whom he/she should offer employment (Regulation 6(1)(a)) or refuse to offer employment (Regulation 6(1)(c)).

Whilst a limited exception exists in Regulation 7, in the Court's view, the exception did not apply here. Regulation 7 provides that where a case genuinely requires a particular ethos or belief (and it is proportionate to apply that requirement in practice), a religious requirement may be justified.

In obiter statements, Moore-Bick (on behalf of the three judges) suggested that the exception may allow parties to prescribe characteristics where a tribunal is empowered to act ex aqueo et bono (i.e. according to principles of equity and fairness). If this had been the case, the parties may have been able to show that only an Ismaili could be expected to apply the moral principles recognised as applicable within that community. However, here the tribunal had been asked to apply English law, for which no particular religious requirements were necessary for the discharge of their functions. Scope exists, therefore, for particular religious/ethical/national tribunals to be selected but within narrow confines e.g. where the clause asks the arbitrators to apply specific religious law to govern the agreement.

The whole arbitration agreement was void

Since in this case, the choice of Ismaili arbitrators was considered to be an integral part of the agreement to arbitrate, both the judge at first instance and the higher court decided that the clause would stand and fall as a whole. The removal of that particular requirement would render the entire process fundamentally different to that which had been contemplated.

For the Court of Appeal, the arbitration clause within the joint venture agreement was held to be void in its entirety. Steel J's declaration that Sir Anthony should be appointed was set aside. Although the religious requirements were not to be upheld, nor could Sir Anthony's appointment be affirmed as the agreement to arbitrate no longer existed.

How should arbitration agreements be drafted and enforced now?

It has long been advised that care should be taken not to be overly prescriptive in the characteristics requested of arbitrators. Where insufficient individuals can be found to meet those criteria or the individual specified is unable to act, the clause risks being held to be 'pathological' and therefore void. This case goes further and introduces additional risks.

Following this decision, subject to any further appeal to the Supreme Court or reference to the European Court of Justice, any specifications of an ethnic, religious or national nature in an agreement governed by English law, could be in breach of the Regulations. Importantly also, this legislation has retroactive effect so agreements drafted prior to 2003 should be checked for compliance. The Regulations are very wide in their scope, aiming to put into effect the Member States' principle of equal treatment. It will therefore be difficult to escape their reach. Whilst they only cover religion and belief, there is pre-existing legislation related to discrimination on the basis of sex and disability and more recent legislation relating to age, which should be also borne in mind.

As regards existing arbitrations and arbitration agreements which specify arbitrators with religious or ethnic characteristics, consideration should be given, amongst other things, to the prospects of enforcement should such arbitrators be replaced: would States who adhere to religious law obstruct awards based on the exclusion of religiously "qualified" arbitrators?

Nurdin Jivraj v Sadruddin Hashwani, [2010] EWCA Civ 712