Hogan Lovells' Jerome Finnis (pictured) dissects a surprise decision by the Court of Appeal regarding the nationality of arbitrators, and why the Supreme Court reversed it

"Is my arbitration clause valid?" Following a surprise decision by the Court of Appeal in June 2010, this was the troubling question facing users of international arbitration clauses containing restrictions as to the nationality of arbitrators.

On appeal and following an unprecedented intervention from two of the world's leading arbitral institutions, the concerns of the international arbitration community have been laid to rest by one of the most important arbitration-related decisions reached by the Supreme Court since its establishment in October 2009.

jerome-finnis-hogan-lovellThe issue

One of the attractions of international arbitration is the ability for the parties to structure the process for resolving their dispute, including by specifying what kinds of individual will, or will not, be eligible for appointment as arbitrator.

International arbitration clauses commonly provide for the appointment of a sole or presiding arbitrator who does not share the nationality of any of the parties to the arbitration. Such a requirement is incorporated in commonly-adopted sets of arbitration rules.

For example, Article 6.1 of the London Court of International Arbitration (LCIA) arbitration rules provides: "Where the parties are of different nationalities, a sole arbitrator or chairman of the arbitral tribunal shall not have the same nationality as any party unless the parties who are not of the same nationality as the proposed appointee all agree in writing otherwise."

Including such a requirement in an arbitration agreement is generally considered advisable in order to avoid any risk that a sole or presiding arbitrator who shares the nationality of a party to the arbitration would be, or might be perceived to be, predisposed towards that party's arguments.

As a result of the Court of Appeal's decision in Jivraj v Hashwani [2010] EWCA Civ 712 that the relationship between the parties to an arbitration and their appointed arbitrator(s) is one of 'employment' as defined in UK employment equality/anti-discrimination legislation, it was uncertain whether arbitration agreements containing arbitrator nationality restrictions would be valid under English law.

The uncertainty has now been resolved by the Supreme Court's July 2011 decision in Jivraj v Hashwani [2011] UKSC 40. Overturning the decision of the Court of Appeal, the Supreme Court has unanimously ruled that, although there is a contract between the parties to an arbitration and their appointed arbitrator(s), that contract is not one of employment.

This means that arbitration clauses containing (whether on the face of the clause or through the incorporation of sets of arbitration rules such as those of the LCIA) restrictions as to the nationality of arbitrators will not be found to contravene UK employment equality legislation (specifically, the Equality Act 2010). There is therefore no need for companies to modify their standard arbitration clauses (or to seek to amend already-signed contracts) in order to remove restrictions of this kind.

Facts of the case

The case involved a joint venture dispute between two members of the Ismaili community (which comprises Shia Imami Ismaili Muslims). The arbitration clause in their 1981 joint venture agreement provided for ad hoc arbitration in London. The distinctive feature of the clause was its requirement that all three arbitrators should be "respected members of the Ismaili community and holders of high office within the community".

In July 2008, Hashwani wrote to Jivraj asserting a claim for approximately $4.5m (£2.9m) and giving notice that Hashwani had appointed Sir Anthony Colman (not a member of the Ismaili community) as arbitrator pursuant to the arbitration clause in the joint venture agreement. The letter added that Hashwani did not regard himself as bound by the provision that the arbitrators should be members of the Ismaili community on the basis that such a requirement "would now amount to religious discrimination" and would accordingly be void under 
UK legislation.

Seeking to uphold the contractual requirement that all three arbitrators should be members of the Ismaili community, Jivraj applied to the commercial court seeking a declaration that the appointment of Colman was invalid as contrary to the arbitration clause.

mind-clashHashwani countered with an application under the Arbitration Act 1996, seeking an order that Colman be appointed sole arbitrator pursuant to section 18(2). This application was made on the basis that the contractual requirement that the arbitrators be members of the Ismaili community, although valid when the joint venture agreement was signed in 1981, had subsequently been rendered unlawful and void by virtue of the enactment of the Employment Equality (Religion or Belief) Regulations 2003 (the Regulations).

The Regulations (which have now been restated in, and repealed by, the Equality Act 2010):

  • made it unlawful for an employer to discriminate, on grounds of religion or belief, in the arrangements the employer makes for the purpose of determining to whom the employer should offer employment; or to refuse to, or deliberately not, offer employment on grounds of religion or belief; and
  • provided that a term of a contract was void where it contravened the above prohibition.

Both parties' applications were heard by Mr Justice David Steel in the High Court. The judge granted Jivraj's application, upholding the validity of the contractual requirement that all three arbitrators should be members of the Ismaili community. The judge held that arbitrators are not 'employed' within the meaning of the Regulations, such that the Regulations did not apply to the appointment of arbitrators.

Court of Appeal

Hashwani appealed (successfully) to the Court of Appeal. Reversing the first instance decision, the unanimous judgment of the Court of Appeal was that:

  • since an arbitrator contracts to do work personally, the provision of the arbitrator's services fell within the Regulations' definition of employment;
  • accordingly, the party appointing an arbitrator or otherwise contracting to obtain the services of an arbitrator was an 'employer' within the meaning of the Regulations;
  • the arbitration agreement required both parties to refuse, or deliberately omit, to offer employment as arbitrator to any person who was not a member of the Ismaili community;
  • this requirement therefore contravened the Regulations;
  • as this requirement was an integral part of the arbitration agreement, it could not be 
severed from the rest of the arbitration agreement;
  • the entire arbitration agreement was therefore void.

As the Court of Appeal expressly recognised, its decision that the contractual relationship with an arbitrator was one of 'employment' as defined in the (now repealed) Regulations was potentially of wider significance. This is because, substantially, the same definition of 'employment' is used in the Equality Act 2010, which prohibits discrimination on grounds of nationality (among others) and which provides that a term of a contract is unenforceable where it contravenes such prohibitions.

Following the Court of Appeal's decision, it was therefore widely feared that arbitration agreements incorporating arbitrator nationality restrictions would be found to contravene the Regulations and/or the Equality Act 2010, that such restrictions would (as in Jivraj) be found not to be severable from the rest of the arbitration agreement and that entire arbitration agreements would be found to be void. Many companies took the precaution of amending their standard arbitration clauses to remove any arbitrator nationality restrictions.

Supreme Court

The Supreme Court granted permission to appeal. Such was the importance of the appeal, the International Chamber of Commerce and the LCIA intervened in order to explain the potential consequences if the Court of Appeal's decision were to be upheld – including the potential negative effects on London as a seat of arbitration.

Overturning the decision of the Court of Appeal, the Supreme Court held that the contractual relationship between parties to arbitral proceedings and arbitrators is not one of employment: "although [an arbitrator] renders personal services which he cannot delegate, he does not perform those services or earn his fees for and under the direction of the parties… He 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 arbitrator is in critical respects independent of the parties. His functions and duties require him to rise above the partisan interests of the parties and not to act in, or so as to further, the particular interests of either party. […] He is in no sense in a position of subordination to the parties; rather the contrary."

On this basis, the Supreme Court decided that the Regulations are not applicable to the selection, engagement or appointment of arbitrators and, accordingly, upheld the validity of the arbitration agreement between Jivraj and Hashwani.

The Supreme Court's decision upholds the general principle enshrined in the Arbitration Act 1996 that "parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest". Parties to arbitration agreements containing restrictions as to the nationality of arbitrators can rest assured that such agreements will not be invalidated by UK employment equality legislation.

Jerome Finnis is a senior associate in Hogan Lovells' international arbitration practice.