Pakistan’s Case With Arbitrability

Pakistan’s Case With Arbitrability

Introduction

International Commercial Arbitration has evolved to be one of the most exclusive ways of dispute settlement outside of realm of national courts. The corporate interests like its efficiency as there is far better possibility of achieving a relatively economical solution and provides finality through a quick and less formal procedure. The parties are able to maintain confidentiality which is important especially when they wish to protect their trade secrets and commercial interests. These factors are essential when dealing with cross border transactions involving foreign investment where neutrality in terms of venue, the law and the arbitrators are considered prime by the parties in settling their disputes. The neutrality ensures that the arbitral tribunal deciding the matter at hand is detached from any direct national influence therefore giving loyalty primarily to the parties. Thus such mechanism provides a level playing field for both parties involved. While these are the capable qualities that arbitration offers it is however various other elements that make or break the entire arbitration such as how well is the arbitration agreement drafted, the experience and competence of arbitrators and how a judge of a national court perceives the entire process of arbitration.

Today the most important field of international arbitration is foreign investment. The use of arbitration for resolving foreign investment disputes provides a safe haven especially for foreign investors involved in global economic activity due to its trusted, credible and workable system in place. This ‘safe haven’ encompasses two main things which are essential if parties’ interests or expectations are to be preserved, the first is neutrality and the second is enforceability. These two points essentially curtail the grip of national courts.

What is arbitrable and who decides arbitrability?

Arbitrability is one of the main issues where contractual and jurisdictional nature of the international commercial arbitration meets head on. Normally under the party autonomy principle, a party can refer any dispute to arbitration and opt out of the recourse provided under the national courts.  However the question may arise regarding sensitive public policy issues such as issues regarding criminality or bribery which only the judicial authority is capable of dealing. Lew Mistelis and Kroll are of the view that the law governing the arbitrability of disputes may depend on where and at what stage of the proceedings the question arises.[1] A number of disputes, which are not arbitrable under the law of one country, are arbitrable in another country where the interests involved are considered less important. Even though arbitrability is required for validation of the arbitration agreement, it is mainly a question of jurisdiction. The arbitration tribunals determine the arbitrability of the disputeby relying on the provision of the place of arbitration. Fouchard Gaillard Goldman however areof the view that arbitration tribunals should determine arbitrability in accordance with “genuine international public policy”[2].

It is difficult to decide what can be arbitrable in relation to international transactions. Therefore it is important to adopt a clear balance between matters that can be left for exclusive jurisdiction of the national courts and those which promote trade and commerce through expeditious mode of dispute settlement. More recently it has been accepted that arbitral tribunals can resolve claims of corruption, bribery and related illegality mainly due to the doctrine of separability presumption.[3] There have many cases to this date that explain this point[4]. In Fiona Trust & Holding Corp v Privalov (2007 1 All E.R.) it was held by the courts that if the arbitrators can rule on whether a contract is void initially for illegality then there is no reason why they should not also decide on question of whether contract is procured by bribery. Arbitral tribunal frequently have entertained disputes tainted by illegality/corruption claims and made awards on merits either by upholding or rejecting such claims (ICC case No.6474, XXV Y.B. Comm.Arb.279 (2000) ).National courts have supported the notion that arbitral tribunal are equally qualified to consider and resolve claims of bribery, corruption and related illegality (JLM Indus v Stolt-Neilson SA, 387 F.3d 163,175 (2d Cir 2004), Republic of Philippines v Westinghouse Elec Corp 821 F. Supp. 292,298 (D.N.J. 1993).

Pakistan Experience

In Pakistan though there have been cases[5] where the clause in the arbitration agreement has been wide enough to allow the arbitrators to rule on its validity and retain their jurisdiction however international arbitration is considered more risky than advantageous due to interventionist approach of the local courts during the arbitral process and at the time of enforcement of awards. Such behavior shows that there is an inherent distrust amongst the courts of Pakistan in the international process of arbitration especially in the field of foreign investment which the courts see only as a vehicle solely for the benefit of the foreign party and one which will inevitably have a detrimental effect on the interests and expectation of the local party.[6] Therefore arbitration is a mechanism considered inferior to the court. Such attitude has led Pakistan to earn reputation as arbitration black spots.

In Pakistan it is established law that matters involving questions of criminality or public policy cannot be referred to arbitration (Ali Muhammad et al v Basheer Ahmad (1991 SCMR 1928); ManzoorHussain et al v Wali Muhammad et al (PLD 1965 SC 425). It is more controversial in matters fraud or corruption where arbitrators can render the contract void. There have been various local and international decisions to substantiate this[7].The Pakistani courts have had a keen interest in the arbitral process especially if the seat of arbitration has been in the Pakistan. This can be seen from cases such as Rupali Polyester Ltd v Bunni[8]where the Pakistani courts will adopt an interventionist approach and take over the role of the arbitrator if the parties have decided Pakistan as the law in the contract. Similarly the Indian Supreme Court’s comments in National Thermal Power Corp v Singer Co[9] and the Singapore Court of Appeal comments in PT Garuda Indonesia v Birgen Air[10]show that where the parties have decided on the seat of arbitration , then that law will apply where the seat has the closest territorial connection with. In such cases mostly the national Courts will intervene and conduct the proceedings. The most noteworthy decision that led Pakistan in earning an unstable reputation in the field of arbitration worldwide is of HUBCO Power Company v WAPDA (called the HUBCO) (PLD 2000SC 841) where the Supreme Court refused to enforce an arbitration agreement between HUBCO (subsidiary of Britain’s National Power set up with World Bank support) and the Pakistani government on allegations of corruption and illegality in the revised terms of the commercial contract.[11] The Supreme Court judges held that the case was primafacie one of corruption and thus would be dealt fairly judicially instead of referring it to arbitration. This decision negated and violated the basic premise on which international of arbitration rested which was doctrine of separability. Agreement amongst the parties to arbitrate is a separate contract therefore even if the main contract of investment is tainted by corruption the clause to refer matter to arbitration exists regardless. Furthermore according to the principles of severability of arbitration clause, the illegality only goes to the substance of the main contract and does not affect the arbitration clause.  The courts were adamant that since the contract documents were tainted by alleged criminality, therefore it felt under the domain of the national courts hence the dispute was rendered non-arbitrable and not referable to the arbitration.

Another major case adding on to the uncertain future of arbitration in Pakistan is the recent RekoDiq[12]case which is criticized to have ‘chilling affects’ on foreign investors investing in Pakistan. The Supreme Court in its short order dated 1-01-2013 held that the joint venture agreement signed in 1993 between the respondent company Tethyan Copper Company (TCC) and Government of Balochistan and the predecessors in interest of TCC was not valid as it was marred by “illegality”[13]. The billion dollar worth of investment by the foreign investing party exploring deposit of copper and gold was set aside by the court. This decision raises few important questions .What is the basis of such illegality? Who eventually determines the illegality? Should the courts interfere before even the arbitration is conducted[14]? andto what extent is the foreign contracting party required to carry out due diligence in meeting procedural standards of propriety laid down by mandatory laws and rules ?  This decision shows serious discrepancies on the part of the State party which allows us to question that to what extent is the foreign investor liable for the actions of the government which does not itself follow the correct protocols and procedures laid down? By rendering the entire contract illegal the Government through the national court has succeeded in utilizing one of the “extreme arbitration avoidance techniques”[15].The question that remains is whether the Supreme Court’s order was in line with not just the relevant international law but also with Pakistan’s contractual obligations to foreign investors under a bilateral investment treaty. Most BIT’s contain a international arbitration clause on part of each State. The recourse that a foreign investor has against the State is then only through ICSID (International Centre for Settlement of Investment Disputes). It is important to note that the courts of a country in such scenarios should only ensure that the deal- which is a high profile one with billions of dollars worth of investment goes through in a transparent manner as provided under the stipulated rules formed by the government. The courts should play a supervisory role rather than being interventionist by deciding on the terms and agreements provided in the deal.

From a jurisprudential aspect it is important to note that in Pakistan any commercial contract executed by a statutory or public body will have to satisfy certain procedural standards of propriety laid down by the mandatory laws and rules of the host country such as whether a competent authority has authorized the contract which contains approvals, signs as per the law and rules laid down etc. Such procedural steps are essential for contracting parties to abide by. This practice in turn upholds the public interest and allows the project to follow a pattern of transparency. The procedural safeguards checklist forms part of the pre-contractual due diligence which is essential to be carried out by any foreign investor before entering into a contract. However it is deemed appropriate to ask what is the extent of these procedural rules which a foreign investor has to comply with when entering into a contract with the State? To what extent is the foreign investor is meant to be aware of the amended rules or the procedural checklist or notification despite the due diligence carried out? How far should the foreign investor go in fulfilling all mandatory procedural requirements?[16]And if it fails will such procedural impropriety be enough to render the entire agreement void? Will contractual invalidity be considered so serious to make it fall outside the competence of the arbitrator/arbitral tribunal and inside the realm of public policy which can only be resolved judicially? It is important to note that due to wider acceptance of bilateral and multilateral investment treaties many developing countries have rejected matters regarding concession agreements and natural resources projects as non-arbitrable and have let arbitral tribunal consider such matters.

The Supreme Court verdict in certain cases whether it relates to RekoDiq or others is a sign of discouragement for foreign investors. Such decisions have not only created uncertainty for foreign investment in Pakistan but also upset the entire process of international commercial arbitration which was set in place to create an even level field for both the domestic and foreign investors alike. Following HUBCO and the RekoDiq it is inappropriate to submit a foreign investor to the national courts as it is unlikely that a foreign investor could obtain fair chance to present its case that no corruption was involved especially if the counter party is the State whose people in power may have changed.[17] The solution is not to declare out rightly that such dispute is non-arbitrable (due to substantive impropriety) but instead there is a need to allow the arbitration process to flow and if corruption is proven then it can dealt at pre-award stage[18].

It is now accepted in many jurisdictions such as in England appropriate that arbitral tribunal is to assume jurisdiction and determine whether or not there has been corruption that would render the contract illegal. This very approach upholds the sanctity of the arbitration agreement, the principle of competence-competence i.e. it is for the tribunal to rule on its own jurisdiction and the principle of severability. In England weight is given more to parties agreement to arbitrate whilst error on basis of fact that may render the contract illegal is overlooked. However where the illegality is such that it effects the arbitration clause and the main contract then arbitration tribunal is to decline jurisdiction (West Acre Investment Inc v Jugoimport-SPDR Ltd- 1998 2 Lloyds Rep 111, 129)[19]. Arbitration is meant to be a private agreement between two mutually consenting parties and the sole purpose is to deviate from national court rulings and complexities. The uncertainty in the arbitration arena will need to be curtailed. Decisions such as HUBCO and RekoDiq show that the national courts are not sufficiently neutral and that there is inherent prejudice and distrust amongst the Courts of safeguarding their national interest which inevitably would supersede the right of a foreign investor who is unaware of the entire process of laws in the country. In such circumstance how can any foreign investor then feel secure to invest?

The way forward

State courts are required to draw a line between arbitrable and non-arbitrable disputes by keeping two distinct policy objectives into account which are ensuring that the sensitive matters of public interest are debated and resolved before national courts and promoting arbitration as a efficiently vibrant system of dispute resolution for parties who freely choose to arbitrate rather than litigate their differences.

To enhance Pakistan image in the global arbitration arena serious steps need to be taken to overcome the wrong precedents set.  For free flowing capital investment, the foreign investor needs to have faith in the Pakistan legal system which is clearly not the case as discussed. The above discussed decisions highlight  one main important point and that is simply the fear amongst the investors that the arbitration agreements will not be respected thus the reality is that their capital will flow elsewhere to a much safer neutral destination where courts are not using a suffocated approach towards international commercial arbitration. Negation of the international arbitration only reflects a bias against foreign parties in favour of Pakistani parties especially the State who have routinely used local courts as a means to escape an internationally laid down process. This denial of the arbitration system ultimately is denial of justice as many commentators have noted. International capital requires compensation for increased risk[20]. The courts may feel that they have protected valuable national resources and responded to the public mood. In the long-run, the decisions may continue to haunt the nation and end up costing the country and its taxpayers far more.

Conclusion and Recommendation for the coming years

Only situation where arbitration clause or agreement should be interfered with is where there is credible evidence that counterparty procured the agreement to arbitrate by fraud or bribery. Otherwise all questions should be left to arbitration tribunal including question of what is arbitrable or not. The tribunal ought not to allow also itself also to be used by the parties involved to sanction conduct which is illegal and should address issues of corruption of its own motion if it has suspicion that parties are colliding in hiding the truth.

The Pakistani courts need to redefine the approach of its courts to international arbitration. There is a need for the reform of law especially in the field of arbitrable disputes. A criteria needs to be set that specifically defines the stage at which the courts could interfere in determining matters of public policy. Is it pre-enforcement of award stage or is it during arbitral process? The lack of guidelines for the private investors have led to decisions such as RekoDiq where the courts have declared illegality without giving detailed reasoning  to foreign investors of where they went wrong. There is a need for the reform of legal process which directly interferes with the arbitration process. Such legal mechanism need to be put in place that compliment and assist international commercial arbitration instead of hampering it.

One of the major needs is of sustained and continuous training of lawyers and arbitrators in order to improve the domestic arbitral process so that it can function as a separate, reliable, cost effective and efficient means of dispute settlement. This approach needs to go hand in hand with proper formation of a body of experts meant only for arbitration who are well equipped with all the technical, procedural and substantive irregularities so that the need of the Court does not arise once the parties decide to arbitrate. This is essential in order to instill confidence in the foreign investors as to make Pakistan a neutrally friendly venue for international arbitration.

Most importantly there is a need of changing judicial mindset towards the arbitral process. Pakistan is labeled to have a defensive and interventionist posture rather than just a supervisory one in the arbitration process.[21] There is a need to recognize the pitfalls created with involvement of courts and its drawbacks for the overall economy. With the investment climate already fragile there is a need of foreign investment. However the deep entrenched distrust is only creating more fear than anything positive. This mindset can only be evaded with more academics, lawyers and judges having a pro-arbitration stance and judging international arbitration as a neutral concept. There is a need of ‘letting go’ of deeply embedded suspicion about arbitration ruling against the government. It is here that the education and extensive training needs to be provided so that perceptions that arbitration only protects foreign interest can be diminished if not completely finished.

Furthermore the case of Pakistan more so can be improved if the neighboring countries follow a pro-arbitration stance and overall help in building a positive image of arbitration. The international law of arbitration is clear in setting guidelines however the key is the implementation amidst the political and emotive tactics deployed by parties involved which end up evading arbitral process under the garb of national interest.

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References:

[1]Mistelisand  Brekoulaias,Arbitrability International and  Comparative Perspectives ,Kluwer, 2009 , p.13 , Lew Mistellis Kroll. Comparative International Commercial Arbitration 2003. P.193

[2]FouchardGailard Goldman on International Commercial Arbitration (Kluwer Law International 1999), para 533. See also LewMistellis Kroll, 2003,para 9-35.

[3] Lew Mistellis Kroll. Comparative International Commercial Arbitration 2003. P.215

[4]Born, Gary.International Commercial Arbitration-Volume 1. 2009. p 807

[5]Hitachi v. Rupali (PLD 1998 SCMR 1681); SezaiTurkesFeyziAkkaya Construction Company Lahore v. Crescent Services ((1997 SCMR 1928); Port Qasim Authority v. Al-Ghurair Limited Karachi (PLD 1997 Kar 636); Lahore Stock Exchange Limited v. Fredrick J Whyte Group (PLD 1990 SC 48).

[6] Lew Mistellis Kroll. Comparative International Commercial Arbitration 2003. p.214

[7] Cases such as Hilmarton( ICC Case No. 5623)  and Westington(ICC Case No. 6401) show that arbitration is a one-stop shop giving priority to wishes of the party and avoiding taxing delays and heavy expenses of the courts.

[8][1995] 3 L.R.C. 617.

[9][1992] 2 Com. L.J. 256; [1992] INSC 146.

[10][2002] 1 S.L.R. 393 (CA); [2001] SGHC 262.

[11] Barrington, Louise. “HUBCO v. WAPDA: PAKISTAN TOP COURT REJECTS MODERN ARBITRATION”  11 Am. Rev. Int’l Arb. 385, 2000. p.2-8

[12]http://dawncompk.files.wordpress.com/2013/01/reko-diq-short-order1.pdf

[13]http://dawncompk.files.wordpress.com/2013/01/reko-diq-short-order1.pdf

[14]Born, Gary.International Commercial Arbitration-Volume 1. 2009. p 922

[15]Bandial, Justice Umar Atta ,”Limitation on Arbitrability of International Commercial Disputes Under Pakistani Law http://www.supremecourt.gov.pk/ijc/Articles/8/1.pdf p.4

[16][16]Bandial, Justice Umar Atta ,”Limitation on Arbitrability of International Commercial Disputes Under Pakistani Law http://www.supremecourt.gov.pk/ijc/Articles/8/1.pdf p.4

[17] , Lew Mistellis Kroll Comparative International Arbitration p.218

[18] See e.g Belgium Tribunal de Commerce, Brussels, 20 Septemeber 1999, Matermaco SA v PPM Cranes Inc et al , XXV YBCA 673 (2000) 675; Switzerland, Tribunal Federal, 28 April 1992, XVIII YBCA 143 (1993) 146, Lew Mistellis Kroll Comparative International Arbitration p.191

[19], Lew Mistellis Kroll Comparative International Arbitration p.217, see Soleimany v Soleimany (1998) 3 WLR 811 (CA)

[20] Barrington, Louise. “HUBCO v. WAPDA: PAKISTAN TOP COURT REJECTS MODERN ARBITRATION” 11 Am. Rev. Int’l Arb. 385, 2000. p.2-8

[21] Barrington, Louise. “HUBCO v. WAPDA: PAKISTAN TOP COURT REJECTS MODERN ARBITRATION” 11 Am. Rev. Int’l Arb. 385, 2000. p.2-8

 

Previously published in CLD JOURNAL vol 1 2015.

The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any organization with which she might be associated.

Naima Ahmed

The writer is a High Court Lawyer with experience in corporate and commercial law. She holds an LLB from University of London and a specialist LLM in Law, Governance and Development from SOAS- University of London. She has also taught various law subjects in colleges of Lahore.



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