Foreign Arbitration Laws – An Appellate Adventure of Pakistani Courts

Foreign Arbitration Laws – An Appellate Adventure of Pakistani Courts

Pakistan is an agro-economic country that benefits from the sale of grains, rice, cotton yield and textile to the foreign investors. These transactions are usually concluded on “one-page” purchase contracts (provided by the foreign investors) that set out standard terms which include product details, quality, quantity, price, delivery period and a foreign arbitration agreement. The legislature had attempted to safeguard the foreign arbitration agreements by adopting the Arbitration (Protocol and Convention) Act, 1937 which was aimed to ensure recognition and enforcement of the foreign arbitration agreements and foreign arbitral awards (the latter being in focus). However, the Pakistani courts construed the 1937 Act in a manner that allowed judicial intervention and, further, retained unwarranted discretion that had the capacity to defeat the purpose of the law.

In 1961, the Supreme Court of Pakistan its judgment of Messrs Yangtze (London) Limited versus Messrs Barlas Brothers (Karachi)[1] refused to enforce an award made by the London Court of Arbitration on the basis that such award was not a foreign award as there was no notification of the Pakistan government recognising England as a party to the Convention on the Execution of Foreign Arbitral Awards (2nd Schedule to the 1937 Act). The same principle was adopted by the Sindh High Court in its judgment of Continental Grains Co. versus Naz Brothers[2] which refused to enforce an award made in Geneva, Switzerland on the basis that the United States of America (domicile of one of the parties to the dispute) was not a party to the above Convention.

Likewise, the Pakistani courts have also refused the enforcement of foreign awards for the following reasons:

(i) the arbitration agreement is vague and uncertain or that the parties have failed to affix stamp duty on the foreign award under Pakistan laws[3]; and

(ii) the purchase contracts were unsigned and that the conduct of the parties does not establish a constructive contract[4].

However, in the year 1999, the Sindh High Court endeavoured to change the earlier precedents by strictly enforcing the foreign arbitral award passed by the Liverpool Cotton Association Limited in the judgment of A. Merdith Janes Co. Limited versus Crescent Board Limited[5] and held the following:

If Pakistan is to attain some respectability in the commercial world, it is necessary that transnational commercial agreements must be honoured and judicial process must not be used merely to delay the implementation of such agreements or judicial or quasi-judicial decision passed in disputes arising from such agreements.

Likewise, the court also enforced another foreign award issued by the Liverpool Cotton Association Limited in the judgment of Conticotton S.A. Co. versus Farooq Corporation[6] and held the following:

Increasingly, it is seen that the parties who are involved in Transnational or International Agreements agree to an arbitration clause at the time of entering into agreement but when as a result of that agreement an award is made against them they raise frivolous objections and deliberately refrain from seeking remedy of appeal available to them under the agreement or other rules and attempt to delay or avoid payment under the award by simply initiating proceedings in a Court in Pakistan relying on the delays inherent in our system. I do believe this is tantamount to abuse of the process of the Court as is a despicable practice which may lead Pakistan into becoming a pariah in the commercial world. In order to curb such tendency Courts ought not to entertain objections to a foreign Award i.e. executable in Pakistan unless these strictly lie within the four corners of section 7 of Arbitration (Protocol and Convention) Act, 1937 and such assessment should be made from the Award itself. The Award should thus, be interfered with only if the error in it is apparent on the face of the award. Courts ought not to set themselves up as an Appellate Court or to go behind the award to reappraise the evidence. Additionally the Court should decline to entertain the objections to Foreign Awards unless all remedies available under the Arbitration Agreement or Rules, by which the parties are bound, are exhausted.”

Consequently, the Pakistani courts changed their opinion, with the effect that foreign awards passed by various foreign arbitral tribunals got recognised and enforced by the Pakistani courts in a series of judgments[7].With this shift, the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Ordinance, 2005 (which was ultimately enacted as the “2011 Act”) was promulgated which adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“NY Convention”). The 2011 Act discounted the judicial discretion available to courts under the 1937 Act. Specifically, with respect to the recognition and enforcement of foreign arbitral awards, Section 6(1) of the 2011 Act stated that “Unless the Court pursuant to Section 7, refuses the application seeking recognition and enforcement of a foreign arbitral award, the Court shall recognise and enforce the award in the same manner as a judgment or order of a Court in Pakistan”. In other words, the recognition and enforcement of a foreign award was made simpler. Put simply, upon receipt of an “application” for recognition and enforcement, if the foreign award is not contrary to Article V of the NY Convention, it “shall” be enforced or else, rejected.

Unfortunately, the Pakistani courts remained astray and were unable to limit the judicial intervention. This, in turn, caused inordinate delays, thereby making the foreign awards redundant. To this end, the judgment in Taisei Corporation versus A.M. Construction Company (Private) Limited(Lahore High Court)[8] declared that the remedy under Section 14 of the Arbitration Act, 1940 was general in nature. In other words, a foreign award creditor could also seek to recognise and enforce a foreign award in terms of Section 14 of the 1940 Act. In principle, the 1940 Act applies to domestic awards and not foreign awards. This judgment has been challenged before the Supreme Court of Pakistan.

Likewise, the judgment in Rossmere International Limited versus Sea Lion International Shipping Inc.[9] did recognise a foreign award but refused to enforce it as the award debtor did not have any bank accounts in its territorial jurisdiction. Further, the court also held the following:

A suit for Recognition and Enforcement of a Foreign Arbitral Award is to be filed in a Court of any contracting country, in whose territorial jurisdiction, the asset/person against which/whom, the enforcement of the Foreign Arbitral Award is sought, is/are located. If the subject matter of the award is money, the application shall be filed in the Court within whose jurisdiction, the Bank Account of the defaulting party is located…” (emphasis added).

The dilemma of “suit” versus “application” in this field has haunted the Pakistani courts as the former indicates a retrial whereas the latter tilts towards a summary procedure. It was expected that the 2011 Act would address the issue but it did not outline a specific procedure for recognition and enforcement of the foreign arbitral awards, thus keeping the controversy alive which could defeat the purpose of the law. The federal government has also not framed any Rules under Section 9 of the 2011 Act.

With the enactment of the 2011 Act, numerous applications for the recognition and enforcement of foreign arbitral awards had been filed in various High Courts where the moot question was whether the said application would be treated as a “suit” or an “application”. In 2012, I also filed an application before the Lahore High Court on behalf of Louis Dreyfus SA Commodities[10] on the basis of a foreign award passed by the International Cotton Association against Acro Textile Limited. The above question of law remains undecided since 2012 with over forty (40) hearings. However, recently on 12 December 2017, the Lahore High Court in its judgment of Jess Smith and Sons Cotton LLC versus D.S. Industries[11] drastically held the following:

“6. The conjoint reading of Article IV and Article V of the Schedule to the Recognition and Enforcement (Arbitration Agreement and Foreign Arbitral Awards) Act, 2011 (that is, New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards), suggests that the Court may refuse recognition and enforcement of the foreign award on the following points:

(i) If the application for the recognition and enforcement of foreign award is not accompanied by:(a) the duly authenticated original award or duly certified copy thereof; and, (b) the original Arbitration Agreement or a duly certified copy thereof.

(ii) Article V uses the expression “may” in the context of refusing enforcement instead of the mandatory “shall” or “must”. In other words the legislature has left it to the discretion of the court to refuse enforcement of a foreign award, depending upon the facts and circumstances of a particular case.

(iii) The scope of inquiry before the Court before whom the application for enforcement of the foreign award is pending is circumscribed by the condition for refusal set out in clauses (a) to (e) of Article V. It is not open to a party seeking to resist a foreign award to assail the award on merits or because a mistake of fact or law has been committed by the Arbitral Tribunal. (iv) The legislative intent regarding enforcement of a foreign award is writ large, in that, the conditions for refusing enforcement are to be narrowly construed, and, as far as possible the court may exercise its discretion in favour of enforcement of the award as is clear from the use of the words “recognition and enforcement of the award may be refused, …….only if that party furnishes to the competent authority…… prove that ……”.

7. The above noted points usually involve investigation into the disputed questions but it is not in every case that the Court would be under obligation to frame issues, record evidence of the parties and follow the procedure prescribed for decision of the suit. In my view, the matter has been left to the satisfaction of the Court which has to regulate its proceedings and keeping in view the nature of the allegations in the pleadings, may adopt such mode for its disposal, as in consonance with justice, the circumstances of the case may require. It is thus within the competence of this Court to frame formal issues and record evidence if the facts of a particular case so demand. So far as the case on hands is concerned, inter alia, the questions whether the e-mails/ letters available on record constitute contract containing arbitration; whether Pakistan AXA International was duly authorized to act as an agent of the plaintiff; and, whether the arbitration proceedings were conducted in accordance with the rules of the International Cotton Association Limited, in my view, are the questions which cannot be decided without framing issues and allowing the parties to adduce evidence in support of their respective claims…In view of above, office is directed to fix this case on 12 .01.2018 for framing of issues.” (emphasis added).

With respect, this judgment has defeated the purpose of the 2011 Act and must be criticized on the basis of numerous settled principles of law, including the following:

  • The arbitrator is the sole and final judge of questions of law and fact (including quality of evidence)[12];
  • The court cannot review the award, nor entertain any question as to whether the arbitrators decided properly or not in point of law or otherwise[13];
  • It is not open to the court to re-examine and reappraise the evidence considered by the arbitrator to hold that the conclusion reached by the arbitrator is wrong[14];
  • The court does not sit in appeal over the award[15]; and
  • The adjudicatory process before the court, limited to the award, may be set aside and not made a ‘rule’ of the court if it is a nullity, or is prima facie illegal, or for any other reason not fit to be maintained or suffers from an invalidity which is self-evident or apparent on the face of the record.[16]

In effect, in the concerned matter, the court assumed jurisdiction as a court of appeal and incorrectly derived its powers under Section 107 of the Code of Civil Procedure, 1908 (CPC) which states the following:

“107. (1) Subject to such conditions and limitations as may be prescribed, an Appellate Court shall have power:

(a) to determine a case finally;

(b) to remand a case;

(c) to frame issues and refer them for trial;

(d) to take additional evidence or to require such evidence to be taken.

(2) Subject as aforesaid, the Appellate Court shall have the same powers and shall perform as nearly as may be the same duties as are conferred and imposed by this Code on Courts of original jurisdiction in’ respect of suits instituted therein.”

Thus, according to this, the court can lead a post-award trial of the issues that it will frame, whilst it is actually required to limit its evaluation of the foreign award in terms of the grounds mentioned in Article V of the NY Convention and accept or reject the award without venturing into further inquiry.

Most surprisingly, it is beyond legal comprehension as to how evidence would be considered on the issue of “whether the arbitration proceedings were conducted in accordance with the rules of the International Cotton Association Limited”. In order to prove this, the court is likely to summon the entire record available at the International Cotton Association. In fact, to put it in perspective, one may ask as to how the court will be able to summon documents from the International Cotton Association under the CPC. Similarly, the court would also need to summon the panel of arbitrators (for the recording of statements and cross-examination), which is beyond its powers as enumerated in Order XVI, Rule 19 of CPC.

Apart from creating an incorrect precedent, this will have far-reaching effects on Pakistan’s economy which is in dire need of foreign investments and business. The foreign investor will distrust a judicial system which denies a quick and, most importantly, efficacious remedy to it, thereby creating dis-“respectability in the commercial world”.

It is important that the Pakistani courts become conscious of their role in maintaining Pakistan’s business reliability in the international markets and shun any attempt that may undermine this public policy. It is time for the superior courts of Pakistan to balance and settle such legal controversies with clear directions and dire consequences of any deviation. I conclude this article by relying on the words of a great law lord:

“The Convention, and hence the Ordinance, can be said to have a “pro- enforcement” bias and a strong case can be made out that the grounds under Article V are to be applied restrictively and construed narrowly.[17]

———-

References:

[1] Reported as PLD 1961 Supreme Court 573

[2] Reported as 1982 CLC 301

[3] Jugotekstil Impex versus Shams Textile Mills Limited (judgment of the Single Bench is reported as 1986 CLC 879 and of the Divisional Bench is reported as 1990 MLD 857)

[4] Meredith Jones & Co Limited versus Quetta Textile Mills Limited (reported as 2002 CLD 1191)

[5] Reported as 1999 CLC 439

[6] Reported as 1999 CLC 1018

[7] Alfred C. Toepfer International Gmbh versus Pakistan Molasses Company (reported as 2003 CLD 1666); Quinn Corporation versus Cotton Export Corporation (reported as 2004 CLD 1040); Messrs Flame Maritime Limited versus Hasan Ali Rice Export (reported as 2006 CLD 697); Messrs Pacific Lloyds Limited versus Messrs Blessed Enterprises (reported as 2007 CLD 661); and Noble Charging INC. versus Awan Trading Company (Private) Limited (reported as PLD 2012 Sindh 14)

[8] Reported as PLD 2012 Lahore 455. 

[9] Reported in Pakistan’s legal reports as PLD 2017 Baluchistan 29. 

[10] Civil Original No. 649 of 2012

[11] http://sys.lhc.gov.pk/appjudgments/2017LHC4337.pdf;Civil Original No. 628 of 2014

[12] M/s Sudarshan ah 41 Trading Co. v. The Govt. of Kerala and Anr., (reported as A.I.R. 1989 S.C. 890)

[13] Judgment of the Supreme Court of Canada titled Anchor Marine Ins. Co. v. Corbett. (reported as (1882) 9 SCR 73)

[14] Puri Construction Private Limited vs Union of India (reported as AIR 1989 SC 777)

[15] President of the Islamic Republic of Pakistan versus Syed Tasneem Hussain Naqvi and others (reported as 2004 SCMR 590)

[16] A. Qutubuddin Khan Vs. CHEC Mill Wala Dredging Co. Private Limited (reported as 2014 SCMR 1268)

[17] Article by Chief Justice of Pakistan Mr. Justice Mian Saqib Nisar titled International Arbitration in the context of Globalization: A Pakistani Perspective (http://www.supremecourt.gov.pk/ijc/articles/8/2.pdf)

 

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 he might be associated.

Hassan Raza

The writer is an Advocate of the High Court and Senior Associate at Orr, Dignam & Co, representing the firm’s clients in Punjab, Islamabad and Khyber Pakhtunkhwa in commercial litigation and ADR in commercial disputes. He is also a Member of the Young International Arbitration Group (YIAG), the Young International Council for Commercial Arbitration (YICCA) and ASA Swiss Arbitration Association.



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