Foreign Arbitration Agreements – A Pakistani Perspective

Foreign Arbitration Agreements – A Pakistani Perspective

Recently, a fellow columnist authored an article[1] titled “Enforcement of Foreign Arbitral Awards In Pakistan” published on 15 December 2018, which sets out an opinion regarding Articles II and V of the New York Convention, 1958. In my opinion, the article requires more clarification given that in 2018, Pakistan’s superior judiciary steeply forwarded its understanding of the Convention and its respect for international arbitration.

On 15 September 2018, I authored “Enforcement of First Foreign Arbitral Award under New York Convention 1958[2] informing that the Lahore High Court, in the case of Louis Dreyfus Commodities S.A. versus Acro Textile Mills Limited (reported as PLD 2018 Lahore 597), had accepted my application for recognition and enforcement of a foreign arbitral award passed by the International Cotton Association and settled almost all legal controversies that materially deterred a Pakistani court from giving effect to an international arbitral award. In this context, and based on the reasons set out in my earlier article, I understand the opinion offered by the fellow columnist in the latter part of her article, with respect to Article V of the Convention, is no longer applicable and rather outdated.

Regarding the interpretation of Article II of the Convention, it is important to clarify the historical perspective of recognising a “foreign arbitration agreement” (as opposed to an award) and the legal principles that flow from it, such as ‘stay of proceedings’ or ‘taking steps in proceedings’.

To recap, the enactment of the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011[3] has upgraded Pakistan’s legislation, solidifying foreign investors’ choice of international arbitral forums (such as the United Nations Commission on International Trade Law-UNCITRAL, International Chamber of Commerce-ICC and the London Court of International Arbitration-LCIA). This is mainly because the discretion available to the Pakistan’s courts under the old law i.e. Section 3 of the Arbitration (Protocol and Convention) Act, 1937 is no longer offered in Section 4(2)[4] of the 2011 Act.

Historically, the Pakistani courts have intervened and disregarded foreign arbitration agreements for various reasons including the following:

  • forum non-convenience[5];
  • mandatory words such as “shall” are synonymous to “may[6]; and
  • preference to a domestic special law[7].

These grounds of rejection were also upheld by the Supreme Court of Pakistan in its judgment in Eckhartd & Company Marine Gmbh versus Muhammad Hanif[8], but one of the judges on the bench, namely Mr. Justice Ajmal Mian introduced a new precedent in the following words:

“I may observe that while dealing with an application under section 34 of the Arbitration Act in relation to a foreign Arbitration clause like the one in issue, the Court’s approach should be dynamic and it should bear in mind that unless there are some compelling reasons, such an Arbitration clause should be honoured as generally the other party to such an Arbitration clause is a foreign party. With the development and growth of International Trade and Commerce and due to modernization of Communication/Transport systems in the world, the contracts containing such an Arbitration clause are very common nowadays. The rule that the Court should not lightly release the parties from their bargain, that follows from the sanctity which the Court attaches to a contract, must be applied with more vigor to a contract containing a foreign Arbitration clause. We should not overlook the fact that any breach of a term of such a contract to which a foreign company or person is a party, will tarnish the image of Pakistan in the comity of nations. A ground which could be in contemplation of party at the time of entering into the contract as a prudent man of business, cannot furnish basis for refusal to stay the suit under section 34 of the Act. So the ground like, that it would be difficult to carry the voluminous evidence or numerous witnesses to a foreign country for Arbitration proceedings or that it would be too expensive or that the subject matter of the contract is in Pakistan or that the breach of the contract has taken place in Pakistan, in my view, cannot be a sound ground for refusal to stay a suit filed in Pakistan in breach of a foreign Arbitration clause contained in contract of the nature referred to hereinabove. In order to deprive a foreign party to have Arbitration in a foreign country in the manner provided for in the contract, the Court should come to the conclusion that the enforcement of such an Arbitration clause would be unconscionable or would amount to forcing the appellant to honour a different contract, which was not in contemplation of the parties and which could not have been in their contemplation as a prudent man of business.”

On the above basis, the 21st century dawned with better scope of recognition and enforcement of foreign arbitration agreements and Pakistani courts[9] relying on the above precedent, honoured the terms of the contract agreed between the parties.

Likewise, the legislature swiftly adapted the welcoming change in attitude which culminated in the promulgation of the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Ordinance, 2005, which was finally enacted as the 2011 Act.

With the change of law, in the year 2006 the Sindh High Court adjudicated its first case, Messrs Travel Automation (Private) Limited versus Abacus International (Private) Limited (reported as 2006 CLD 497) involving the recognition and enforcement of a foreign arbitration agreement and His Lordship, Justice Khilji Arif Hussain (later elevated as a Law-Lord of the Supreme Court of Pakistan) held the following:

After the enforcement of Ordinance XX of 2005 radical changes have been made in law and discretion of court which was available under section 34 of the Arbitration Act, 1940[10] apparently is no more available to court. The question on which earlier, while exercising discretion under section 34 of the Arbitration Act about convenience or inconvenience of the parties, availability of evidence on a place other than the place of arbitration, whether to stay proceedings or not, was within the discretion of the court. However, while dealing with the matter under section 4 of the Ordinance XX of 2005 court has no such discretion except where cases fall within exception categories mentioned in the section itself.

The Sindh High Court thus stayed the adjudication of the civil suit by adjudging that a superior court in Pakistan, while deciding an application for stay of proceedings under Article II of the Convention read with Section 4 of the 2011 Act, had ‘no discretion’ except to stay such civil suit and refer the matter to arbitration. The only exception is if the arbitration agreement was null, void, inoperative or incapable of being performed, which has been also now been interpreted by the Pakistani superior courts in a number of judgments (see below).

The Sindh High Court’s judgment thus became a test for recognition and enforcement of foreign arbitration agreements and has been consistently followed (and enhanced) in the following later judgments:

  • Far Eastern Impex (Private) Limited versus Quest International Nederland Bv., (reported as 2006 CLD 153) – the Sindh High Court, while materially differentiating between Section 4 of the 2011 Act (which adopts Article II of the Convention) and Section 34 of the Arbitration Act, 1940 held the following:

“Section 4 is mandatory in nature would be applicable to the present case, the cases cited by the learned counsel for plaintiff relating to the applicability and consequences of section 34 of the Act, 1940 would not be attracted to the present case. The discretion available to the Court under section 34 of the Arbitration Act shall not be available under Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Ordinance, 2007 being mandatory in nature, the foreign elements could not be considered nor the discretion vests with the Court to stay or, not to stay the proceedings in terms of the arbitration agreement. In this context reliance has been placed in the case of Messrs Travel Automation (Pvt.) Ltd. through Managing Director v. Abacus International (Pvt.) Ltd. through President and Chief Executive and 2 others 2006 CLD 497, the learned Single Judge relying on Article II of United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 arrived at the conclusion that under section 4 of the Ordinance XXII of 2004 the courts are no more left with the discretion for adjudging the convenience or inconvenience of the parties, availability of the evidence at a place other than the arbitration place and whether or not to stay the proceedings was no more within the discretion of the Court and the Arbitral Courts shall have exclusive jurisdiction to adjudicate or settle matter, the Court has to stay the proceedings unless it finds Arbitral agreement was null and void, inoperative or incapable of being performed…


So the only question left over for determination is whether the agency agreement is void agreement… From perusal of the record it appears that the plaintiff has also questioned the agency agreement, the arbitration clause is open to the effect that it has provided that the proceeding shall be initiated in English according to the rules of Conciliation and Arbitration of the International Chambers of Commerce. The Arbitration agreement is capable of performance, objection raised by the plaintiff, precondition for refusing the stay that the agency agreement and the clause contained about arbitration therein is null and void inoperative and incapable of performance is missing in the present case.”

This judgment is important because it reinforces that Pakistani courts are not left with any discretion under Section 4 of the 2011 Act, as was available earlier in Section 34 of the Arbitration Act, 1940. Furthermore, in the latter part of this judgment, the Sindh High Court adjudged as to whether the agreement was null, void, inoperative or incapable of being performed, which indeed a Pakistani Court can adjudge, before staying any proceedings under Section 4 of the 2011 Act, the Act which has created such statutory exceptions for staying of the proceedings.

  • In Cummins Sales and Service (Pakistan) Limited versus Cummins Middle East FZE (reported as 2013 CLD 291), a single judge of the Sindh High Court also differentiated between Section 34 of the Arbitration Act, 1940 and Section 4 of the 2011 Act (which adopts Article II of the Convention) and held the following:

“A perusal of sections 3 and 4 of the Arbitration Act, 1940 shows that where any party to arbitration agreement or any person claiming under him commenced any legal proceedings against any other party to the agreement or person claiming under him in respect of any matter agreed to be referred, any party to such legal proceedings may, on any time before filing a written statement or taking any other steps in the proceedings, can apply to the Court before which the proceedings are pending to stay the proceedings, and if the Court is satisfied that there is sufficient reason why the matter should not be referred to in accordance with arbitration agreement, may make an order staying the proceedings. The examination of section 34 of the Arbitration Act, 1940 further shows that it provides discretion to the Court to stay or not to stay legal proceedings pending before it in spite of the fact that there is arbitration clause in the agreement which is subject-matter of the proceedings pending before the Court, the Court on examination of the material satisfies itself that there was no satisfactory reason for referring the matter for arbitration and substantial miscarriage of justice would take place or inconvenience would be caused to the party, if stay was granted, can refuse to refer matter for arbitration in terms of arbitration clause agreed between the parties…


The examination of Ordinance XXXIII of 2009 dated 26-11-2009 and the Act, 2011 show that such discretion is not available with the Court. Subsection (1) of section 4 provided that a party to arbitration agreement against whom legal proceeding has been brought in respect of the matter which is covered by the arbitration agreement may, upon notice to other party to the proceedings, apply to the Court to stay proceedings insofar as its concerned matter. A comparison of subsection (1) of section 4 of the Act, 2011 with section 34 of Arbitration Act, 1940 shows that under section 34 of the Arbitration Act, 1940 when any party to arbitration agreement or any person claiming under him commenced any legal proceedings against any other party to the agreement in respect of the matter agreed to refer for arbitration, before filing of written statement or taking any other steps in the proceedings can apply to the Court, and if Court is satisfied that there is sufficient reason why matter should not be referred in accordance with arbitration agreement, may make order staying the proceedings. Whereas under subsection (1) of section 4 of Ordinance XXIII of 2009 or the Act, 2011, a party to arbitration agreement against whom a legal proceedings have been brought in respect of the matter which is covered by the arbitration agreement, upon notice to the other party to the proceedings can apply to the Court in which proceedings have been brought to stay the proceeding insofar as it concerned matter. Subsection (2) of section 4 of the Ordinance XXXIII of 2009 and the Act, 2011 has taken away discretion of the Court whether or not to stay the proceedings in terms of arbitration agreement, even on the ground that inconvenience etc. except where the arbitration agreement by itself is null and void, inoperative or incapable of being performed. Sub-article 3 to Article 2 to schedule of Ordinance XXXIII of 2009 and the Act, 2011 provides that the Court of a Contracting State, seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this Article shall; at the request of one of the parties, refer the parties to arbitration unless it finds that the said agreement is null and void, inoperative or incapable of being performed…In  view   of  above,   it   is   held   that   under  Ordinance XXXIII of 2009 or under the Act, 2011 the Court has no discretion but to stay the proceedings under arbitration agreement between the parties except where the arbitration agreement is null and void, inoperative and incapable of being performed.”

  • The above judgment was upheld by the Divisional Bench of Sindh High Court in a judgment reported as 2015 CLD. The Divisional Bench judgment, being the first DB judgment, is currently pending adjudication in the Supreme Court of Pakistan. In this case, it was further held that the use of the word “shall” in Section 4 of the 2011 Act is mandatory in nature and not directory. Moreover, the court also differentiated it from an earlier judgement in Transcomerz AG v. Kohinoor Trading (Pvt.) Limited (reported as 1988 CLC 1652), which had perceived that the word “shall” could be read as “may” and the discretion of the Court could not be taken away.
  • Finally, in Abid Associated Agencies International (Private) Limited versus AREVA (reported as 2015 MLD 1646), Justice Ather Minnallah of the Islamabad High Court (presently the Chief Justice of IHC), while relying on the established precedents (as above) under Section 4 of the 2011 Act and Article II of the Convention, rightly held that the superior courts in Pakistan do not have any discretion that was available under Section 34 of the Arbitration Act, 1940 and that the court has the power to decide whether an agreement is null, void, inoperative or incapable of being performed. In this case, I represented some of the respondents and was successful in seeking recognition and enforcement of a foreign arbitration agreement.

A bare perusal of the above adequately establishes that the fellow columnist in her article was mistaken in her belief that “nullity of the contract and incapability of its performance are to be determined by the arbitral tribunal and article V cannot be invoked in court proceedings before arbitral tribunal proceedings. Invalidity and nullity of the contract is to be invoked when enforcement of the award is sought by a court of the concerned country “after” the award has been made” and, further, that “Since there is no direct case-law on the stay of proceedings under the Recognition and Enforcement (Arbitration Agreement and Foreign Arbitral Awards) Act 2011, the courts of Pakistan tend to rely on case-law under the Arbitration Act 1940 for the purpose of interpretation of “stay of proceedings” and “stepping into proceedings”. According to an old Latin maxim, oportet esse ordinem judiciorum loqui, ‘judgments should speak’ and in this case, it is being done through articles authored by practising lawyers. I have no hesitation in claiming that the courts in Pakistan have indeed rightly settled the law under Article II of the Convention in respect of foreign arbitration agreements.

Moving forward, there are also several examples where the Pakistani courts have declined to recognise and enforce a foreign arbitration agreement on the pretext that it is inoperative and incapable of being performed:

  • In particular, in the case of Maulana Abdul Haque Baloch versus Government of Balochistan through Secretary Industries & Mineral Development (reported as PLD 2013 Supreme Court 641), the Supreme Court of Pakistan refused to recognise and enforce a foreign arbitration agreement and nullified the contract (as void) on the basis of Article XI (3) of the New York Convention 1958 and Article 34 of the UN Convention Against Corruption 2003.

  • Likewise, in Lakhra Power Generation Company Limited versus Karadeniz Powership Kaya Bey (reported as 2014 CLD 337), the Sindh High Court refused the recognition and enforcement of a foreign arbitration agreement on the basis that it was ‘incapable’ of being performed for, inter alia, the reason that one of the parties to the dispute had invoked dispute resolution at the International Centre for Settlement of Investment Disputes (ICSID) (which, under Article 26 of the ICSID Convention, is “to the exclusion of any other remedy”), instead of invoking its contractual remedy of international arbitration.

  • Similarly, in Global Quality Foods (Private) Limited versus Hardee’s Food Systems, Inc. (reported as PLD 2016 Sindh 169), the Sindh High Court refused to recognise and enforce a foreign arbitration agreement on the basis that the dispute between the parties was not “germane” to the agreement executed by the parties and “no purpose would be achieved to refer the parties to arbitration except a futile exercise without any corporal outcome”.

Thus, on balance, the Pakistani courts have maintained a pro-enforcement bias towards the recognition and enforcement of foreign arbitration agreements. Discretions and old principles (such as taking steps in the proceedings) are no longer relevant for the superior court while adjudging a matter under Article II of the Convention. If two parties (one being foreign) have expressly agreed to a foreign arbitration agreement/clause, then, subject to the applicability of statutory exceptions, in case of any civil dispute initiated in Pakistan a foreign party would be adequately protected by a Pakistani court by a stay of proceedings and a reference of the dispute to international arbitration under the Convention. Generally, in Pakistan, civil litigation is tedious and adjudication is expected to take longer. However, this is subdued in due course with the correct interpretation of law by the Pakistani courts (which equally matters), which is in line with international practices as well as the intent of the law and international conventions.

———-

References:

[1] http://courtingthelaw.com/2018/12/15/commentary/enforcement-of-foreign-arbitral-awards-in-pakistan/

[2] http://courtingthelaw.com/2018/09/07/commentary/enforcement-of-first-foreign-arbitral-award-under-new-york-convention-1958/

[3] First promulgated as an Ordinance in the year 2005.

[4] On an application under sub-section (1), the Court shall refer the parties to arbitration, unless it finds that the arbitration agreement is null and void, in operative or incapable of being performed” (emphasis added).

[5] Akbar Cotton Mills Limited versus M/s. Ves/Ojuanojo Objedinensije Tech/Amesh Export (reported in Pakistan legal reports as 1984 CLC 1605 (Single Bench) and 1987 MLD 600 (Divisional Bench))

[6] Transcomerz Ag versus Kohinoor Trading (Private) Limited (reported in Pakistan legal reports as 1988 CLC 1652)

[7] Pakistan Insurance Corporation, Karachi versus Kot Addu Power Company Limited (reported in Pakistan legal reports as 2002 MLD 829)

[8] Reported as PLD 1993 Supreme Court 42.

[9] Judgments include (1) Manzoor Textile Mills Limited versus Nichimen Corporation (reported in Pakistan Legal Report’s as 2000 MLD 641); (2) Lithuanian Airlines versus Bhoja Airlines (Private) Limited (reported in Pakistan legal reports as 2004 CLC 544); and (3) Metropolitan Steel Corporation Limited versus Macsteel International U.K. Limited (reported in Pakistan legal reports as 2006 CLD 1491)

[10] Pakistan’s local arbitration law.

 

The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any other 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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