Role of ADR in Attracting Foreign Direct Investment

Every country in the world relies on foreign investments to maximize its economic stability and improve the quality of its local marketplace. Foreign direct investment (FDI) plays a pivotal role in enhancing financial growth and economic prosperity, especially by targeting the industrial sectors of a country. When legal issues arise, alternative dispute resolution (ADR), which includes arbitration, has historically provided exceptional results because it focuses on the central issue faced by the parties instead of just their legal rights, promoting cooperation and maintaining amicable relationships.

The main convention governing arbitration in Pakistan is the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011. The 2011 Act enforces the New York Convention, which is known as the backbone of arbitration and has been ratified by Pakistan. The implementation of the 2011 Act in Pakistan was exemplified by the Lahore High Court’s judgment in Orient Power Company (Private) Limited v. Sui Northern Gas Pipelines Limited (2019 CLD 1082), which was subsequently upheld by the Supreme Court of Pakistan in 2021 SCMR 1728. The premise of this matter was whether arbitration proceedings would have to be carried out domestically if the parties had chosen Pakistani law as the governing law in an arbitration agreement, even if the subject matter of the dispute arose in a foreign jurisdiction. The Supreme Court in the aforementioned case ruled that if parties to an arbitration agreement agreed that disputes would be adjudicated before a foreign arbitral institution/forum, then regardless of whether the applicable law in the agreement was Pakistani law, the foreign arbitral forum would have authority and any award passed therein would have to be enforced in Pakistan. As a result, individuals or companies wishing to engage in cross-border contracts, where one party is in Pakistan, have the freedom to stipulate in their contracts that any dispute will be adjudicated by foreign arbitral forums instead of local courts.

A considerable example of this can be seen in China’s One Belt One Road (OBOR) initiative which is perhaps the poster child for foreign direct investment in Pakistan. If any disputes in this initiative arose at either the international or local level, without arbitration, they would have to be adjudicated by local courts through the standard procedure of filing cases. While this is not to say that the dispute would not competently be resolved by the local courts, there is a possibility that confidential and sensitive information pertaining to the initiative would have to be provided to the courts to make their decisions, and it is common knowledge that court documents and court proceedings are public information. Arbitration prevents this from happening and protects the parties’ interests by allowing confidential arbitration proceedings with non-disclosure requirements. Moreover, the confidentiality feature of arbitration helps foreign companies avoid reputational damage. As a result, not only would the parties’ dispute be resolved, sensitive data would also be prevented from being leaked to competing nations.

Additionally, court procedures in any country are rigid in terms of their procedure. Certain requirements are expected to be met by the parties, leaving them at the mercy of the courts. ADR proceedings can be tailored, tweaked, altered and amended according to the parties’ wishes and needs. Arbitration also provides the option to appoint arbitrators who are industry experts, maximizing the chances of a more credible solution to the dispute at hand, compared to judges of local courts. In Pakistan especially, there is a lack of technological advancement in court proceedings, so more often than not, parties are expected to be present in person before the relevant court of law (or through their authorized attorney). This is not only cumbersome for individuals based outside of Pakistan, it is also an unnecessarily costly procedure. Arbitration, however, allows for online dispute resolution conducted from each party’s place of preference, allowing parties the flexibility to arbitrate from anywhere the world. This ease of arbitration further promotes confidence in foreign investors, making Pakistan an attractive investment zone.

In addition to the above, the procedure of enforcing a foreign arbitral award in Pakistan is simple and straightforward. Once a foreign award is made, the 2011 Act states that a corresponding application must be made by the person seeking to enforce the award in the relevant court of law. Another key advantage of arbitration, which reassures investor confidence, is that the grounds of challenging the arbitration outcome are quite limited. This aspect of arbitration has been illustrated by the Supreme Court of Pakistan in the case titled Injum Aqeel v. Latif Muhammad in the following words:

“Arbitration is a forum selected by parties’ and is able to settle the legal and factual disputes between them, which opinion/decision should not be lightly interfered by the court while determining the objection thereto, until a clear and definite case within the purview of relevant legal provisions are demonstrated.”

This landmark decision underpins the significance of adhering to arbitration outcomes and emphasizes the requirement of substantial and well-founded grounds to challenge them.

Grounds to refuse such an application exist, but they too stem from Article 5 of the New York Convention. These grounds are very limited in nature, such that an award may be refused if:

(1) the parties to the agreement did not have the capacity to enter into the agreement in the first instance;
(2) a proper notice of the appointment of an arbitrator has not been given;
(3) the award is beyond the scope of the matters submitted to arbitration;
(4) the arbitral bench has not been constituted according to the parties’ agreement; or
(5) the arbitral award has been set aside.

Therefore, even if a party argues to set aside the arbitral award before a local court in Pakistan, there are limited grounds for doing so.

Furthermore, what is more appealing to foreign investors is the existence of a well-established, conceptual and robust framework that facilitates them to initiate arbitration proceedings against a party that breaches bilateral or multilateral investment agreements. The framework for arbitration proceedings typically includes forums like the International Center for the Settlement of Investment Disputes (ICSID) or the United Nations Commission on International Trade Law (UNCITRAL), providing the investing party a sense of security and impartiality. These internationally recognized institutions add another level of protection for investments by ensuring fair outcomes in dispute resolution.

It is pertinent to note that while arbitration does attract FDI in a country by instilling flexibility and freedom in dispute resolution mechanisms, it is not an unbridled power. The introduction of Investor-State Dispute Settlement (ISDS) in ADR has undoubtedly boosted the confidence of foreign investors in augmenting cross-border transactions. ISDS is a tool through which a host country may be sued and have arbitral proceedings initiated against it by a foreign country. ISDS provisions can be found in many bilateral and multilateral treaties signed between countries, facilitating FDI by providing substantial legal protection to investors. Generally, this tool falls within the domain of public international law (PIL) and is often synonymized as “diplomatic manipulation.” A notable case in the realm of enforcing ISDS mechanisms where a balance has been attained between the rights of the host state and its obligation to comply with international investment treaties is Methanex Corporation v. United States of America. In this case, Methanex claimed that California had harmed its investments and sued the United States government under Chapter 11 of the North American Free Trade Agreement (NAFTA). The International Arbitral Tribunal in the Methanex case highlighted how the rights of foreign-owned businesses in a host country could be negotiated on environmental grounds despite the inclusion of ISDS provisions in the agreement. To avoid such complications, many free trade agreements, like the Pacific Agreement on Closer Economic Relations (PACER Plus), do not involve the ISDS arbitration in the agreement.

Currently, over 2 million cases are pending in courts across Pakistan, which hinders the investment climate. Arbitration can play a crucial role in encouraging FDI in a country and its importance cannot be overstated. A notable case highlighting the challenges Pakistan faces in attracting FDI is the Reko Diq fiasco (Tethyan Copper Company Pty Limited v. Islamic Republic of Pakistan, ICSID Case No. ARB/12/1) between Australia and Pakistan. In this case, an ICSID tribunal had decided against Pakistan due to a lack of transparency and political instability among its institutions.

For Pakistan to become an attractive destination for FDI and gain investor confidence, it must foster a sense of trust and coordination among its administrative authorities. Additionally, conducting thorough risk assessments in cases of potential breaches of claimants’ rights would help create investor-friendly policies. This approach would not only attract foreign investment but also enhance Pakistan’s image in the global investment community. By addressing these issues, Pakistan can create a more favourable environment for foreign investors, thereby boosting its economic growth and stability.

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

Basmah Jawaid

Author: Basmah Jawaid

The writer is a law student at the University of Karachi and works as a research associate and legal web content writer for a full-service law firm. She has also worked as a policy research intern and part-time volunteer at various organizations.

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