Our colleague, Ned Beale, based in our London office recently published an article in The Guardian about the aftermath of the case of Jivraj v Hashwani [2011] UKSC 40. The UK Supreme Court had overturned the decision of the English Court of Appeal. In so doing, they upheld a religiously discriminatory arbitration clause on the basis that arbitrators did not fall within the particular EU regulation (and implementing legislation in the UK) and further that the particular religious criterion was a “genuine occupational requirement“. Following the Supreme Court’s decision, an arbitrator was appointed. That should have been the end of the matter.

However, the arbitrator resigned and a complaint was made to the European Commission requesting that the issue be referred to the European Court of Justice (ECJ). A decision of the ECJ could have wider repercussions on the international arbitration community especially in Europe.

Background

Mr Jivraj and Mr Hashwani entered into a joint venture agreement (the “JVA“) on 29 January 1981. The JVA contained an arbitration clause (article 8) which provided that any dispute between the parties should be resolved by arbitration in London before three arbitrators, each of whom should be a respected member of the Ismaili community, of which parties were both members. The JVA was expressed to be governed by English law (see paragraph [2]).

The issue before the Supreme Court was whether the arbitration agreement became void with effect from 2 December 2003 pursuant to the Employment Equality (Religion or Belief) Regulations 2003 (SI 2003/1660) (the “Regulations“) on the basis that it constituted an unlawful arrangement to discriminate on grounds of religion when choosing between persons offering personal services (see paragraph [1]).

Years into the JVA, a dispute arose between the parties involving unpaid amounts and tax liabilities following their decision to part ways. Initially, all members of the conciliation panel set up to deal with the partitioning of the businesses as well as the subsequent sole arbitrator appointed to resolve the remaining issues between the parties, were all respected members of the Ismaili community. However, the arbitrator resigned in 1995, unable to resolve the outstanding issues between the parties.

These matters were never resolved. Subsequently on 31 July 2008, Mr Hashwani wrote to Mr Jivraj asserting a claim for US$4,403,817 in total and appointing Sir Anthony Colman as an arbitrator under article 8 of the JVA. The letter also stated that if Mr Jivraj failed to appoint an arbitrator within 7 days, steps would be taken to appoint Sir Anthony Colman as sole arbitrator.

Critically, the letter also added that Mr Hashwani did not regard himself as bound by the religious criterion of the arbitration agreement because such a requirement “would now amount to religious discrimination which would violate the Human Rights Act 1998 and therefore must be regarded as void” (see paragraph [4]).

As the Supreme Court noted, parties were in agreement that Sir Anthony Colman was not a member of the Ismaili community but, on the other hand, that he was a retired judge of the Commercial Court with substantial experience of the resolution of commercial disputes, both as a judge and as an arbitrator (see paragraphs [3] to [5]).

Proceedings below

The High Court decided that the arbitration clause should be upheld (see paragraph [14] of the Supreme Court judgment) on the basis that,

“…(i) …the term did not constitute unlawful discrimination on any of those bases and, specifically, that arbitrators were not “employed” within the meaning of the Regulations; (ii) that if, nonetheless, appointment of arbitrators fell within the scope of the Regulations, it was demonstrated that one of the more significant characteristics of the Ismaili sect was an enthusiasm for dispute resolution within the Ismaili community, that this was an “ethos based on religion” within the meaning of the Regulations and that the requirement for the arbitrators to be members of the Ismaili community constituted a genuine occupational requirement which it was proportionate to apply within regulation 7(3); and (iii) that, if that was also wrong, the requirement was not severable from the arbitration provision as a whole, so that the whole arbitration clause would be void…”

The Court of Appeal unanimously reversed that decision (see paragraph [16] of the Supreme Court decision).

“…It held that the appointment of an arbitrator involved a contract for the provision of services which constituted “a contract personally to do any work”, and therefore satisfied the definition of “employment” in regulation 2(3). It followed that the appointor was an “employer” within the meaning of regulation 6(1) and that the restriction of eligibility for appointment as an arbitrator to members of the Ismaili community constituted unlawful discrimination on religious grounds, both in making “arrangements … for the purpose of determining to whom he should offer employment” contrary to regulation 6(1)(a), and by “refusing to offer, or deliberately not offering” employment contrary to regulation 6(1)(c). The Court of Appeal further held that being a member of the Ismaili community was not “a genuine occupational requirement for the job” within the meaning of the exception in regulation 7(3).“

The Court of Appeal also decided that the impugned religious criteria could not be severed as it would have rendered the entire agreement substantially different from that originally intended by parties. Accordingly, the entire arbitration clause was void (see paragraph [17] of the Supreme Court decision).

Decision of the Supreme Court

The Supreme Court reversed the decision of the Court of Appeal on the employment issue and the genuine occupational requirement issue.

(a) The Employment Issue

On the employment issue, the Supreme Court considered that an arbitrator was not “employed” by the parties to an arbitration for the purposes of the Regulation. Lord Clark (with whom the rest of the law lords agreed on this point) held (at [40]) that,

“…it is in my opinion plain that the arbitrators’ role is not one of employment under a contract personally to do work. Although an arbitrator may be providing services for the purposes of VAT and he of course receives fees for his work, and although he 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 as contemplated in para 67 of Allonby. 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, as described in para 68”

See also Lord Mance’s separate agreement with Lord Clark at paragraph [77] and [78] on this point (“distinction between persons under the direction of another and arbitrators who perform an independent role, free of such control“) and his citation of the German Reichsgericht and Gary Born’s exposition of the general view of the nature of arbitral work (see International Commercial Arbitration (2009), Vol I, pp. 1608 – 1609).

(b) Falling within the exception of Genuine Occupational Requirement

The Supreme Court went on to consider the exception even though it had held that the Regulations did not apply. The operative exception is Regulation 7(3) which provides,

“This paragraph applies where an employer has an ethos based on religion or belief and, having regard to that ethos and to the nature of the employment or the context in which it is carried out—

(a) being of a particular religion or belief is a genuine occupational requirement for the job;

(b) it is proportionate to apply that requirement in the particular case; and

(c) either—

(i) the person to whom that requirement is applied does not meet it, or

(ii) the employer is not satisfied, and in all the circumstances it is reasonable for him not to be satisfied, that that person meets it.”

The question before the Supreme Court was therefore whether “having regard to the Ismaili ethos and to the nature of the employment or the context in which it is carried down, being of the Ismaili religion or belief [was] a genuine requirement for the job” (see paragraph [56]). In this respect, the test was “whether in all 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” (see paragraph [59]).

The Supreme Court disagreed that the requirement that the arbitrators be from the Ismaili community could not be objectively justified. The Supreme Court specifically rejected Mr Hashwani’s submission that “an English law dispute in London under English curial law does not require an Ismaili arbitrator“. They considered this as taking “a very narrow view of the function of arbitration proceedings. This characterisation reduced arbitration to no more than the application of a given national law to a dispute” (see paragraph [59]).

The Supreme Court identified (at paragraphs [61] and [62]) the distinguishing features of arbitration (in contrast to litigation) as being “the breadth of discretion left to the parties and the arbitrator to structure the process for resolution of the dispute” and that “the arbitrators have complete power over all procedural and evidential matters“.

The Supreme Court then highlighted the unique aspects of Ismaili community, including their constitution which provided for the setting up of National Conciliation and Arbitration Boards, to deal with all types of disputes and to “assist in the conciliation process between parties in differences or disputes arising from commercial, business and other civil liability matters, domestic and family matters, including those relating to matrimony, children of a marriage, matrimonial property, and testate and intestate succession” (see paragraphs [63] to [68]). Notably, the International Conciliation and Arbitration Board was an intervener in the case.

The Supreme Court was content to adopt the conclusion of the High Court that the requirement for an Ismaili arbitrator could be regarded as a genuine occupational requirement. The Supreme Court held that the test of “genuine occupational requirement” was not one of necessity, but whether the requirement was legitimate and justified. Accordingly, the Supreme Court disagreed with the Court of Appeal’s reasoning that membership of the Ismaili community was “clearly not necessary for the discharge of the arbitrator’s functions under an agreement of this kind” i.e. an agreement to interpret the JVA under English law as opposed to empowering the tribunal to act ex aequo et bono. In the latter situation, the Court of Appeal considered that “it might have been possible to show that only an Ismaili could be expected to apply the moral principles and understanding of justice and fairness that are generally recognised within that community as applicable between its members” (see paragraph [69])

For completeness, it is worth noting that Lord Mance mentioned in obiter that a decision of a religious organisation only to employ a lawyer of its own religion (to undertake English law work) was likely to fall afoul of the Equality Act.

Implications and Conclusions

As Ned’s article notes, Mr Hashwani takes the view that the issues in dispute simply require a suitably qualified lawyer (regardless of religion) and that his difficulties in finding an arbitrator from within the Ismaili community simply reinforces his point. His lawyer puts the point more starkly, “This is a commercial dispute which in reality only required an experienced lawyer – there was no question of religion. Hashwani was forced to seek to appoint a non-Ismaili arbitrator because, after 20 years of legal proceedings, that was the only way he could get justice“.

While the facts of this case might strike some as being narrowly confined to its unique set of facts and law, nevertheless, the fact that that LCIA and ICC appeared as interveners in this case is indicative of the wider implications of this case in the international arbitration community.

In particular, if the Supreme Court had adopted (and if moving forward, the ECJ chooses to adopt) the characterisation of an arbitrator as an employee of the parties to the arbitration contract, that has significant repercussions beyond the requirement of a “genuine occupation requirement” where religion is a discriminatory criterion. Under the UK Equality Act 2010 (and by extension the Regulations on which the act is based), an employer is barred from employing (or refusing to employ) an employee on the basis of his or her nationality. An arbitration clause which purports to exclude certain nationalities or only permit certain nationals to be the arbitrators would be void.

It is obvious why the intervening arbitral institutions are interested in the outcome of this case. The rules of the LCIA and the ICC provide that the arbitrator shall not be of the nationality of one of the parties involved in the arbitration. A ruling that an arbitrator is an employee would cast doubt on the enforceability of those rules.

By their very nature, all laws discriminate. The question is ultimately one of rational or permissible discrimination. In his Guardian article, Ned points out that it is easy to characterise the issues in polar opposites and this, we think, reflects the competing strands of public policy in this area,

“In finding that arbitrators are not protected by equality legislation the supreme court, in the second limb of its decision, distinguished between employment and self-employment and restricted the extent to which equality legislation protects the self-employed. The ECJ may well disagree. Should arbitrators, or indeed doctors, plumbers or anyone else who is self-employed, be protected from discrimination? Or, to reverse the question, should a person who privately instructs a solicitor, a dentist, or an electrician, have their personal choice subject to the full gamut of equality legislation?”

In any event, while a complaint has been made, there is no certainty that the matter will be taken up by the ECJ. The first hurdle would involve the European Commission taking the position that the UK had failed to comply with the Regulation and delivering a reasoned opinion on the matter (after giving the UK the opportunity to submit its observations). If the UK then refuses to comply with the opinion within the stipulated timeline, the European Commission may then bring the matter before the ECJ.

Parties should bear in mind that any decision of the ECJ is specifically only with respect to whether the UK has breached its treaty obligations. Even if the ECJ were to disagree with the Supreme Court’s decision, it may only require that the UK “take the necessary measure to comply with the judgment“. This is different from a situation in which the Supreme Court refers the legal issues to the ECJ for a final determination. The Supreme Court had declined to do so (see paragraph [73]).

To the extent that the ECJ might ultimately decide that the Supreme Court had decided wrongly, it would not have an effect on “discriminatory” arbitration clauses seated outside of Europe in any event. A somewhat similar parallel could be drawn to the so-called Italian Torpedo in which a party seeking to delay patent litigation or arbitration initiates proceedings in Italy. The idea behind that tactic is that once a court of a Member State is seized of a matter, courts of other Member States must stay proceedings relating to that matter before those courts (including arbitrations) until the initial court has determined the issue. The choice of Italy as the starting venue is deliberate given the Italian court’s reputation for lengthy process involved in taking proceedings to their finality and the fact that jurisdictional issues are only determined at the hearing on the merits.

Naturally, such tactics are of limited use where parties are not from the EU or where the arbitration is seated outside of the EU. It is thus fair to say that parties in this region or contemplating arbitration in this region might be interested in, but are unlikely to be adversely affected by, any developments concerning this case at the ECJ level.