• home
• about us
• subscribe
• contact
• our advertisers

The Arbitration Bill, 2009 (the Bill) was introduced into the Pakistan National Assembly on 24 April 2009 (1). In its preamble the Bill aspires to implement the UNCITRAL Model Law on International Commercial Arbitration (the Model Law) into Pakistan. The Bill, once promulgated into law, will constitute a further step forward in the efforts of the Government of Pakistan to build a framework for investor-friendly Dispute Resolution.

Although it purports to implement the Model law, the Bill is in fact a modified version of the Indian Arbitration Act 1996 (the Indian Act). Although it is still very much in draft form its initiation is a positive sign for international commercial arbitration in Pakistan. It is hoped that the Bill is passed through the National Assembly fairly quickly and that note is taken of the changes proposed in this paper. This author’s concerns, in particular, arise from the problems faced in India in respect of the implementation of the Indian Act.

The Bill is intended to supersede and build on the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Ordinance, 2007 (REAO) which implemented the United Nation’s Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (NY Convention) into Pakistani law (2). It is a holistic piece of legislation that covers the use of arbitration, conciliation and alternative dispute resolution within and outside Pakistan, including re-promulgating a domestic law implementing the International Convention on the Settlement of Investment Disputes (ICSID) between States and Nationals of Other States (the Washington Convention) (3). The Bill also proposes to establish an arbitration and conciliation centre in Pakistan.

This paper will analyse the pros and cons of the Bill for international arbitration in Pakistan and also seek to highlight some of the challenges for international investors that it may pose.

The good news:
The Bill builds on the progress made in the REAO in providing for NY Convention-compliant provisions and reproduces the REAO in its Part III. Consequently, the REAO's pro-enforcement provisions regarding arbitration agreements and awards are preserved by the Bill.

The REAO's failure in laying out a criterion for when an award can be characterised as domestic or foreign has been addressed in the Bill. The Bill moves towards a territorial approach on this issue and implements nearly identical grounds for challenging both types of awards (4). Accordingly, awards rendered within Pakistan are seen as domestic awards capable of being enforced or set-aside (as appropriate) by a Pakistani court while awards rendered outside Pakistan and in a state that is party to the NY Convention are enforceable in accordance with the terms of the NY Convention. Awards rendered in countries that are parties to the Geneva Protocol on Arbitration Clauses of 1923 and the Geneva Convention on the Execution of Foreign Arbitral Awards of 1927 (5) continue to be enforceable in Pakistan under the Arbitration (Protocol and Convention) Act 1937 (the APC Act).

It is important to note that, under the REAO, there was a residual risk that awards rendered in a NY Convention country that applied Pakistani substantive law might have been characterised as a domestic award and so be subject to the enforcement provisions of the Pakistan Arbitration Act 1940. This residual risk arose as a result of the reasoning of the Supreme Court of Pakistan in Hitachi Ltd v Rupali Polyester, (6) where the Supreme Court tacitly affirmed (while commenting that it seemed impractical) the theory of "concurrent jurisdiction" expounded by the Indian Supreme Court in National Thermal Power Corporation v The Singer Company (7). Both Singer and Hitachi were concerned with the interpretation of s.9(b) of the APC Act (the ‘savings clause’8) which made the substantive law applicable to an award a determining factor (9).

Since both the REAO and the Bill specifically omit the savings clause, a strong argument can be made that the legislature has consciously altered the criteria of character determination away from the choice of substantive law and towards a more territorial approach. This argument has also been used in India where the Indian Arbitration Act 1996 replaced a similar savings clause contained in the Indian Foreign Awards (Recognition and Enforcement) Act 1961 (FARE) . 
Accordingly, it is likely that all awards rendered outside Pakistan will be recognised and enforced pursuant to, as applicable, the NY Convention or the Geneva Convention (10,11).

International commercial arbitrations (12) taking place within Pakistan are also covered by the Bill. The Bill provides certain enabling provisions in respect of such arbitrations and gives supervisory powers over such arbitrations to Pakistani courts largely in accordance with the UNCITRAL Model law. Such provisions and powers include, amongst other things, giving the parties the power to obtain interim measures before or during arbitral proceedings (13); the Chief Justice of Pakistan having powers to appoint arbitrators 14); supervisory powers of Pakistani courts over the appointment and challenge of arbitrators (15); giving arbitral tribunals the power to rule on their own jurisdiction (16); rules governing the conduct of arbitrations (17); court assistance in taking evidence (18); powers to arbitrators to decide a case ex aequo et bono or as amiable compositeur if authorized by the parties (19); and  to apply the substantive law of any country chosen by the parties (20).

The bad news:
The Bill copies, without substantive change, the Indian Act. Accordingly, there is a danger that it will import the same problems that the international arbitration community has faced in India following a number of decisions of the Indian Supreme Court. The Indian courts have, as a result, been heavily criticised for their extra-territorial interpretation of the Indian Act.

Though Pakistani courts have shown a willingness to independently evaluate Indian precedents that are cited before them (21), Indian judgments, along with judgments from other common law countries, still have persuasive value in Pakistani proceedings. Accordingly, it would be useful if the legislators in Pakistan would review the consequences of some of the Indian cases and try to incorporate (into the Act when passed) potential solutions for dealing with the problems faced under the Indian Act.

If only:
Confusingly, Part II of the Pakistani Bill is a reproduction (with minor modifications) of Part I of the Indian Act. Both these Parts include provisions that apply to arbitrations taking place inside the respective country to which they apply (eg. the domestic courts' powers to order interim measures, to appoint arbitrators, set aside, etc).

The principle problem with the Bill arises in Section 2(2) which is substantially identical to Section 2(2) of the Indian Act. Section 2(2) of the Bill states that:

"This Part and Part IV shall apply where the place of arbitration or conciliation is in Pakistan"

Section 2(2) of the Indian Act states that:

"This Part shall apply where the place of arbitration is in India"

In Bhatia International v Bulk Trading S.A. and Another (22) and, more recently, Venture Global Engineering v Satyam Computer Services (23), the Indian Supreme Court has interpreted the wording of Section 2(2) of the Indian Act to mean that Part I of the Indian Act would apply to all arbitrations whether conducted within or outside India.

The Indian Supreme Court's reasoning has been predicated largely on the fact that the word "only" is absent after the word "shall" in the Section. (24) In interpreting the consequences of this omission, the Indian Supreme Court reasoned in Bhatia that the Section mandatorily applied Part I of the Indian Act to arbitrations taking place within India, but did not prohibit Part I from applying to arbitrations taking place outside India. Recognising that, as a general principle of Indian law, the jurisdiction of a court needs to be specifically excluded either by statute or by contract, the Indian Supreme Court reasoned that Part I would, therefore, apply to arbitrations conducted outside India unless the parties specifically agreed otherwise.

Consequently, the Indian Supreme Court in Bhatia allowed a party to obtain interim measures from an Indian court despite the arbitration taking place outside India and, more worryingly, in Venture Global it held that Indian courts can set aside foreign awards on the same grounds (e.g., patent illegality) as are applicable to domestic awards.

To avoid Pakistani courts reaching a similar conclusion, it would be sensible to insert the word "only" into section 2(2) of the Bill, after the word "shall".

Public policy:
Another problem arising out of the Indian Act comes from the reasoning of the Indian Supreme Court in ONGC v Saw Pipes Ltd (25) where an award rendered in India was not enforced on the grounds that it failed to correctly apply Indian substantive law. (26) The Indian Supreme Court predicated its decision on Section 34 of the Indian Act, which allows a court to refuse to enforce an award if such an award is contrary to the public policy of India. Section 34 of the Indian Act has been reproduced with slight modification as Section 34 of the Bill. Accordingly, the Pakistani courts could follow a similar line of reasoning in interpreting this phrase in the Pakistani context.
Pakistani courts have, in the past, largely tried to give a restrictive construction to the term "public policy" (27). Accordingly, the Pakistani courts will hopefully not try to use the vagueness of the term so as to imply a generalized supervisory interest in the application of Pakistani substantive law in arbitration proceedings involving foreign parties. Such a result would not be in line with the spirit of the NY Convention. (29)

The Bill does attempt to clarify the construction of the term public policy as applicable to arbitrations taking place within Pakistan, in the Explanation to sub-Section 34(2) of the Bill where public policy is to include: "an arbitral award the making of which was induced or affected by fraud, misrepresentation or corruption and in violation of confidentiality." These are broader grounds than that provided in the Explanation to Section 34(2) of the Indian Act. It is suggested that the inclusion of misrepresentation and violation of confidentiality in the Explanation are capable of immense interpretation and should be deleted, or more precisely framed.

Conclusion:
By clearly preventing the application of Part II of the Bill to arbitrations taking place outside of Pakistan, the Pakistani legislature is going to import the same problems faced by the international arbitral community in India. The application of Part I of the Indian Act to arbitrations taking place outside India has resulted not only in interim measures being ordered by Indian courts in respect of such arbitrations (30) but has also led to the Indian Supreme Court ruling that an award rendered outside India is capable of being set aside by Indian courts (31).

Additionally, the term "public policy" is a precarious and unpredictable term and the uncertainty that results from it is only further exacerbated by the definition that the Bill provides in its Explanation to Section 34(2).
These are problems that Pakistan should seek to avoid in introducing its new legislation on international commercial arbitration. It is hoped that these deficiencies in the Bill can be cured before the Bill becomes an Act of the Pakistan National Assembly.
The author is a Barrister and is currently based in London at the firm Michelmores LLP. He specializes in Arbitration, Banking and Insolvency and Restructuring. Comments may be directed to editors@counselpakistan.com.