In Svenska v the Government of Lithuania and others the Court of Appeal dismissed the Government of Lithuania's appeal from the decision of Justice Gloster, holding that it was subject to the jurisdiction of the court in proceedings to enforce an International Chamber of Commerce arbitration award against it.

Two aspects of the decision are of particular interest. First, the court held that by not challenging the tribunal's jurisdiction before the Danish courts with supervisory jurisdiction over the arbitral proceedings, the Lithuanian Government had lost the right to raise such challenges at the enforcement stage before the English courts. This raises important issues as to when a person who disputes that he is a party to an arbitration agreement can sit back and ignore the arbitral proceedings (or participate in them subject to a reservation) with the intention of subsequently challenging jurisdiction on enforcement.

To understand the dangers of not challenging the arbitrators' jurisdiction before the supervisory courts at the adjudicative stage, it is important to understand the court's reasoning in Svenska.

The stages in that reasoning were as follows. The Government had challenged the tribunal's jurisdiction before the tribunal itself. The tribunal, following a fully contested hearing, held that it did have jurisdiction over the dispute before it. The Government could have challenged that decision in the Danish courts but did not. Thereafter, the Government participated in the substantive proceedings under a reservation. The arbitrators found against the Government.

To prevent the Government from raising the issue of the arbitrators' jurisdiction in the enforcement proceedings (and in particular in order to prevent the state relying on state immunity), Svenska argued that the arbitrators' interim decision on jurisdiction gave rise to an issue estoppel that precluded the Government from arguing before the English courts that it was not a party to the arbitration agreement pursuant to which the arbitrators purported to act.

In order to succeed in that argument, however, it was necessary for the court first to recognise the interim award on jurisdiction. That being a New York Convention award, one of the grounds for refusing to recognise the interim award was that the defendant to the enforcement proceedings was not a party to the arbitration agreement under which the arbitrators purported to act when giving their interim award on jurisdiction.

Ordinarily, therefore, it will be open to a party who disputes the arbitrators' jurisdiction to raise that issue at the stage at which the court is asked to recognise the arbitrators' interim award on jurisdiction. If that party demonstrates at that stage that the arbitrators had no jurisdiction, the court may decline to recognise the interim award and therefore no issue estoppel can arise. The important word in that last sentence, however, is 'may'. The fact that the party against whom recognition or enforcement of an award is sought was not a party to the arbitration agreement pursuant to which the arbitrators purported to act only gives rise to a discretion not to recognise or enforce the award.

In Svenska, the court, in earlier part 24 proceedings before Nigel Teare QC (as he then was), accepted that even if the Government was not a party to the arbitration agreement in question it would nevertheless not exercise its discretion to refuse to recognise the award. Needless to say, such a finding is exceptional and arose in Svenska because of the Government's conduct following the interim award and final awards (not least passing a resolution determining that it was inexpedient to challenge the final award and that that fact should be communicated to Svenska).

Where, however, exceptional circumstances do exist and the court (while accepting that the tribunal may not have had jurisdiction) nevertheless recognises the tribunal's interim award deciding that it does have jurisdiction, that award may give rise to an issue estoppel. To do so, however, the award must satisfy the usual criteria for an issue estoppel, namely that it must follow a hearing on the merits and be final and binding under its applicable law, i.e. the law under which any challenge to the jurisdictional award could have been made.

In Svenska, the Court of Appeal accepted that, as a matter of Danish law, the arbitrators' jurisdictional award had become final and binding on the parties and therefore the Government was estopped from denying that it was a party to the arbitration agreement pursuant to which the arbitrators purported to act.

The second aspect of importance that arises from the Court of Appeal's decision relates to the scope of section nine of the State Immunity Act 1978 and, in particular, the requirement for there to be an agreement in writing to arbitrate for the exception to state immunity to apply. At first instance, Justice Gloster had accepted that, as a matter of construction, the arbitration clause in the joint venture agreement in issue was wide enough to encompass an agreement by the Government itself to arbitrate. This, Gloster held, was therefore an agreement by the state in writing to arbitrate which, under the 1978 Act, prevented the state from relying on immunity in proceedings relating to the arbitration, which included enforcement proceedings.

The Court of Appeal reached the same conclusion via a different route. Whether or not the parties had agreed to arbitrate their disputes, the Court of Appeal held, was an issue that had primarily to be determined under Lithuanian law. In sharp contrast to English law, Lithuanian law looks not for an objective construction of the parties' intention but to whether the parties actually (subjectively) had agreed to arbitrate and, in order to ascertain whether the parties had reached a mutual agreement, regard must be had to the pre-contractual negotiations between the parties and, in particular, to earlier drafts of the final agreement.

Applying that test, the Court of Appeal held not that the written arbitration agreement in the joint venture agreement was wide enough to encompass the Government but that the Government and Svenska had reached an agreement to arbitrate disputes under the agreement – although that agreement had not, in error, been recorded in the final agreement (the position was akin to one which, in English law, might give rise to an action for rectification). This raised the question as to whether that agreement was an agreement in writing to submit disputes to arbitration.

Ultimately, the Court of Appeal found it unnecessary to decide that issue because, as it had previously held, the arbitrators' decision that the Government was a party to the written arbitration agreement in the joint venture agreement gave rise to an issue estoppel that precluded the court, even if on the facts it thought the decision wrong, from going behind it. As the court was therefore bound to find that the Government was a party to an agreement in writing to arbitrate, it was not entitled to state immunity in proceedings relating to that arbitration.

The Court of Appeal's decision illustrates the potential for arbitrators' jurisdictional awards to give rise to issue estoppels that might then be used to preclude challenges to jurisdiction being raised at the enforcement stage. It also, however, illustrates that, because of the need for the court first to recognise the arbitrators' jurisdictional award, the circumstances where such arguments may successfully be run will be rare.