My suggestion is:

#Here:
dsh -w $1
#You are lets say on server1 and so it knows of $1 therefore substitutes

'mkcondition -c "/var space used" -s "Name == \"$2\"" -e "PercentTotUsed > 90" -d "An event will be generated when more than 90 percent" -E "PercentTotUsed < 85" -D "The event will be rearmed when the percent of the space used in the $2 directory falls below 85 percent." "$2 space 90% used"'
# Here you are on remote server $1... how does he know of $2 ? so I believe $2 is substituted to ""

Have you tried to export $1 $2 before dsh (thats 6 years now I havent touched dsh, was a time when I was responsible of a SP2...) but I may be saying a load of nonsense and should stay home (not well bu 2 collegues are of ill...)