When silence is golden: the High Court confirms the primacy of the "Dallah principle" and allows a party who has taken no part in arbitral proceedings to be given a full opportunity to challenge the tribunal's jurisdiction at the enforcement of award stage

In The London Steam Ship Owners Mutual Insurance Association Ltd v. the Kingdom of Spain [2013] EWHC 2840 (Comm), the High Court concluded that the "Dallah principle", i.e. the principle that a person who denies being a party to an arbitration agreement has no obligation to participate in the arbitration or take any steps in the country of seat even when the arbitral tribunal has ruled positively on its own jurisdiction, is of fundamental importance and should not be easily circumscribed. The "Dallah principle" pronounced by the Supreme Court in Dallah Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46 (Dallah) was previously discussed here.

In its decision, the court also clarified the scope of Section 72 of the Arbitration Act 1996 (Act), which deals with the rights of a person who does not take part in arbitral proceedings.

This case provides a good example of the option available to a Respondent with good grounds for objecting to the tribunal's jurisdiction, and which prefers not to participate in the arbitration, to wait until the Claimant seeks to enforce the award, and only then raise its objection.

Background

A vessel that was insured by the Claimant, a P&I association (the Club), caused massive oil pollution damage in the territorial waters of the Kingdom of Spain (Spain). Criminal and civil proceedings were brought by Spain in the Spanish courts against various parties including the Club. The Club refused to participate in the Spanish proceedings and instead commenced arbitration, seated in London, against Spain. The Club relied on the arbitration agreement found in the contract of insurance. Although it was clear that Spain was not party to the contract of insurance, the Club asserted that the claims brought by Spain in the Spanish courts against it were in effect claims to enforce the contract of insurance, and therefore subject to the arbitration agreement. Spain declined to participate in the arbitration. The arbitrator found that it had jurisdiction to hear the Club's claims, and on 13 February 2013, issued an award in the Club's favour.

On 14 March 2013, about a month after the issuance of the award, the Club filed proceedings in England to enforce the award pursuant to Section 66(1) of the Act. About a month later, Spain filed its acknowledgement of service and indicated that it would be seeking a declaration on the arbitrator's lack of jurisdiction. However, it was not until 28 June 2013, more than four months after the issuance of the award, that Spain filed its challenge application and sought an extension of time.

The Club resisted Spain's application for an extension of time for various reasons, amongst them (i) that Spain had been aware for some time of the details of the Club's case in the arbitration, and the issues in dispute, and had no good reason for ignoring them until enforcement stage; and (ii) that Spain's challenge was filed out of time.

The primacy of the Dallah principle

The court referred to the decision by the Court of Appeal and the Supreme Court in Dallah and affirmed the principle that a party which disputed jurisdiction was entitled not to participate in arbitration proceedings if it took the view that the proceedings were invalid (the Dallah principle). This principle would still apply even though the tribunal may have ruled positively on its own jurisdiction. The court stated that the principle was "so fundamental that it should not be whittled down unless the interests of justice so require".

In doing so, the court rejected the Club's contention that Spain's inaction until the enforcement stage should count against it. It considered this limitation to be an impermissible restriction to the Dallah principle in the circumstances (although it acknowledged that there may be other situations where the Dallah principle may not carry as much weight).

The Club also made various submissions on the relationship between various provisions of the Act, such as:

1. Section 72(1), which allows "a person who takes no part in [arbitration] proceedings" (referred to by the court as an objector) to seek from the court a declaration, injunction or other appropriate relief on questions going towards the tribunal's jurisdiction, is directed to the interlocutory stage prior to the issuance of an award. Once an award is issued, Section 72(2) is the relevant provision for any challenge application.

2. Section 67, which provides for challenge of an award on the basis of the tribunal's lack of substantive jurisdiction by "a party to arbitral proceedings", is subject to various restrictions found in Sections 70 and 73, including compliance with certain time limits. In particular, Section 70(3) requires any challenge or appeal application to be brought within 28 days of the date of the award (which had been exceeded in Spain's case). The restrictions applicable to Section 67, including the requirement to comply with certain time limits, apply equally to both Sections 72(1) and 72(2).

Although it was not necessary for the court to deal with the foregoing arguments, it nonetheless held (obiter) that:

1. The Act draws a distinction between someone who participates in arbitration proceedings (even if only to contest jurisdiction) and someone who does not, i.e. an objector. With respect to the former, that party's ability to challenge an award will be subject to restrictions, such as time limits, prescribed in the Act or the arbitration agreement. In contrast, an objector is entitled to await an application to enforce the award before raising any objection to the tribunal's jurisdiction.

2. An objector who brings an action to challenge an award under Section 72(2) will be subject to the 28-day time limit prescribed by Section 70(3) of the Act. The fact that Section 72(2) expressly excludes Section 70(2)'s application but makes no reference to Section 70(3) suggests that the latter applies. As Section 72(2) effectively gives the objector the same rights granted to someone who participates in arbitration proceedings (i.e. a party to the arbitration proceedings), it makes sense for the objector to be subject to the same limitations imposed on a party to the proceedings (such as time limitation) unless otherwise excluded expressly.

3. The application of Section 72(1) is not limited to the position before an award is issued. Section 72(1) is a right that is available, unfettered, to someone who has taken no part in the proceedings. Since the remedies that may be granted under Section 72(1) are discretionary, any issue that would go towards the appropriateness of the remedy sought, such as delay, would be considered by the court in exercise of its discretion.

Significance of the decision

The decision emphasises the primacy that the English courts place on preserving a party's ability to challenge a tribunal's jurisdiction in circumstances where that party has chosen not to participate in the proceedings.

A Respondent who takes the view that the tribunal lacks jurisdiction may opt not to participate in the arbitration and wait until an award is enforced against it in the English courts before taking any step to challenge the tribunal's jurisdiction. This will save a Respondent the costs of participating in the arbitration (although of course this may lead to the non-participating party losing the arbitration, which will lead to the risk of having an award enforced against it should it fail in challenging the tribunal's jurisdiction). A Claimant who faces a silent Respondent should be prepared to deal with a challenge to the tribunal's jurisdiction at the point of enforcement and incur additional costs in defending the tribunal's jurisdiction as well as the award.

A Claimant faced with a silent Respondent may consider, in appropriate circumstances, taking the pro-active course of action of applying for a preliminary determination by the court on the tribunal's jurisdiction under Section 32 of the Act. If the conditions to make an application under Section 32 of the Act are fulfilled, obtaining a preliminary determination on the tribunal's jurisdiction from the court before proceeding to the merits of the case may help the Claimant in managing its costs. It may also increase the prospect of resisting any Section 72(1) application by the Respondent, as the latter's conduct in the Claimant's Section 32 application would be taken into account by the court in the exercise of its discretion.

For further information, please contact Craig Tevendale, Partner, Gitta Satryani, Senior Associate, or your usual Herbert Smith Freehills contact.