International Arbitration in The Context Of Globalization A Pakistani Perspective

INTERNATIONAL ARBITRATION IN THE CONTEXT OF GLOBALIZATION: A PAKISTANI PERSPECTIVE <!--[if gte mso 10]> INTERNATIONAL ARBITRATION IN THE CONTEXT OF GLOBALIZATION: A PAKISTANI PERSPECTIVE By Mr. Justice Mian Saqib Nisar, Judge, Lahore High Court Arbitration, that is, the resolution of disputes by a forum settled upon by the mutual agreement of the parties to a dispute or otherwise agreeable to them, has an ancient lineage and rich heritage in the sub-continent in the shape of the panchayat system. Even after the advent of British rule, the panchayat system continued to flourish and it was observed in 1927 by the Bombay High Court that "to refer matters to a panch is one of the natural ways of deciding many a disputes in India."1 1. Chanbasappa Gurushantappa Hiremath v. Baslingayya Gokurnaya Hiremath AIR 1927 Bombay 565, 568-9. The form of arbitration more recognizable by modern eyes started in the sub-continent essentially with the Indian Arbitration Act, 1899. This was, however, a statute of limited scope, applicable only to the Presidency-towns of Madras, Bombay and Calcutta and such other towns in India as were notified for the purposes of the Act. In 1908, a new Code of Civil .Procedure, applicable to the whole of the British India, was enacted, and a provision was made for arbitration in its second schedule though only in respect of pending suits. Thus, it was, initially a piecemeal approach to making arbitration part of the corpus of laws. Recommendations and suggestions were made, most prominently by the Civil Justice Committee in 1925, to provide for a new and comprehensive Arbitration Act. However, it was not until 1940 that the appropriate Act was passed by the Indian Legislative Assembly. The Arbitration Act, 1940 remains in-force in Pakistan till today. It was in force in India till 1996. Although Pakistan and India were, prior to Independence in 1947, part of the British Empire, British India was nonetheless recognized as a distinct entity under the international law for certain purposes. In that capacity it was a signatory to the Geneva Protocol on Arbitration Clauses of 1923 and the Geneva Convention on the Execution of Foreign Awards of 1927. In 1937, an Act known as the Arbitration (Protocol and Convention) Act, 1937, was passed by the Indian legislature to give effect to the international arbitration agreements. Thus, three years before having a statute that comprehensively dealt with domestic arbitrations, British India had in place an Act dealing directly with international commercial arbitrations. The Act of 1937 continued to be in force in Pakistan after 1947. Although, Pakistan became a signatory to the New York Arbitration Convention of 1958 on December 30th of that year, it was not until July, 2005 that the Convention was made a part of the Pakistani; laws by the promulgation of an Ordinance to give effect to the same. Thus, the common law in respect of international arbitrations and foreign awards has developed in Pakistan almost exclusively with reference to the Act of 1937 and to a certain extent the Act of 1940, and it is only very recently that the courts have begun to deal with issues arising under the New York Convention. Pakistani courts have, by and large, supported the decision of parties to submit their dispute for resolution by a domestic forum of their own choice, especially the one having an international dimension. This approach is reflected in their reluctance to interfere with the arbitral process or to overturn or upset arbitration awards. The courts have sparingly exercised the statutory powers vested in them in this regard. The basic judicial approach has been to hold the parties to their bargain, and to enforce the arbitration agreement in letter and spirit to ensure the sanctity of the arbitral process. Thus, if a party to an arbitration agreement attempts to institute legal proceedings in a court of law, and the other side seeks a stay of proceedings on the ground that recourse should be made to arbitration, the courts have generally been quick to allow such an application. The desire to uphold the arbitration agreement, and force the parties to resolve their dispute through the domestic forum selected by them is all the more pronounced in the case of arbitration agreements where one of the parties is a foreign national or entity. The judicial attitude of Pakistani courts in this regard is aptly reflected in the concurring opinion of Mr. Justice Ajmal Mian (as he then was) in a decision of the Supreme Court of Pakistan in 1993. His observations may to be quoted as under:2 2. Eckhardt & Co. GmbH v. Muhammad Hanif PLD 1993 SC 42, 52 "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 System 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 contracts, 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 .if business, cannot furnish basis for refusal. to stay the sun 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 plaintiff 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." As noted above, most foreign awards that have come for enforcement before Pakistani courts have been filed under the Act of 1937. Such awards have almost always been upheld and the Courts have invariably rejected challenges and objections to their enforcement by the defendants. It is only in rare cases, where the objection is of such a nature that the defect is floating on the face of the award, that the Courts have upheld the objection and declined to enforce the award. This amply demonstrates that Pakistani courts are fully cognizant of, and sensitive to, the international dimension of contracts containing foreign arbitration clauses or in which the opposite party is a foreign entity. The courts have chosen not just to hold parties to their bargain (which may simply be regarded as an aspect of the law of contract) but have, in effect, taken a policy decision to uphold Pakistan's position in the comity of nations by Insisting on the due enforcement of foreign awards. Pakistani courts have thus moved in stride with the growing international consensus and this is all the more pertinent, given the fact that this has been done in the context of the Acts of 1937 and 1940 and not under the New York Convention, a point to which I shall return later: In the present context, an interesting case is the decision of the Supreme Court of Pakistan in the year 2000 in the case titled Hub Power Company Limited v. WAPDA.3 The Hub Power Company ("Hubco") was supplying electrical power to WAPDA, the public sector utility, under a power purchase agreement. The agreement had an arbitration clause providing for ICC arbitration at London. Dispute arose between the parties, and Hubco wished to refer the matter to arbitration. WAPDA opposed this move on the ground that the issues raised by it, which were serious allegations of corruption, fraud and mala fide, were not arbitrable. The matter was heard by a five member Bench of the Supreme Court, and by a bare majority, WAPDA's contention was upheld. However, the majority was careful to note expressly that the dispute raised was not commercial in nature. The matter primarily related to the very existence of a valid contract and not the dispute under such a contract. It was held that such matter, according to the public policy, required finding about the alleged criminality and was not referable to arbitration. A brief overview of the Act of 1937 indicates that Pakistani courts have not been lax in upholding and enforcing what have been regarded as Pakistan's international obligations in respect of arbitration agreements and foreign awards in terms of the principles enunciated by the superior Courts. However, the Geneva Convention and Protocol was superseded by New York Convention of 1958, which provided a better choice of forum for the enforcement of foreign awards. Indeed, Redfern & Hunter, regarded by many as the leading treatise on international commercial arbitration,4 describes the Geneva Convention and Protocol as merely the "first step on the road towards international recognition and enforcement of international arbitration agreements and awards"5 3. PLD 2000 SC 841 4. Redfern & Hunter, et. al., Law and practice of International Commercial Arbitration, 4th ed., 2004. 5. At para 1-146. 6. At para 1-147. See also, Russell on Arbitration, 24th ed., 2003, at para 1-037. The New York Convention, on the other hand, is described by the same authors as:-‑ "the most important international treaty relating to international commercial arbitration. Indeed, it may be regarded as a major factor in the development of arbitration as a means of resolving international trade disputes".' The learned authors, Redfern & Hunter, also describe the Convention as follows:-‑ "It has been described as `the most important pillar on which the edifice of international arbitration rests' and as a Convention which `perhaps could lay claim to be the most effective instance of international legislation in the entire history of commercial law."7 The New York Convention has been ratified by around 137 countries in the world, and as already noted, Pakistan itself became a signatory to the Convention as early as in 1958. India also became a signatory to the Convention in 1958 and passed the relevant legislation in 1961. All the countries which were signatory to the Geneva Protocol and Convention enforced through the Act of 1937 are also party to the New York Convention. For various reasons, the Convention could not be incorporated into Pakistan's municipal law for a long time, and this deficiency was being felt increasingly. It was not until 2005 that an Ordinance was finally promulgated to give effect to the Convention. Under our Constitution, an Ordinance has the same effect as an Act of the Parliament, but lapses after four months. An Act is yet to be passed by the Parliament to give a permanent legal effect to the Convention. So far, it appears to have been kept alive as part of the municipal law by means of successive Ordinances issued from time to time. The last such Ordinance as available to me was promulgated on 2nd June, 20078 and one hopes that the Parliament will take appropriate Legislative action in the matter, as soon as possible; otherwise, the constitutionality of the law may remain under a cloud. The first point to note about the Ordinance enforcing the New York Convention is that, subject to certain savings, it repeals the Act of 1937. The intent behind the repeal is clear. The New York Convention, and hence the Ordinance, makes any challenge to the enforcement of an international award even more difficult as compared to the Act of 1937. The repeal of the Act of 1937, therefore, removes the possibility of any overlap or duality since all foreign awards and international arbitration agreements are placed on the same footing, having been made the subject matter of the New York Convention.9 7. At para 10-23. 8. Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Ordinance, 2007, Ordinance No.XXV of 2007 reported at 2007 CLD (Federal Statutes) 538 = PLD 2008 Federal Statutes 251. 9. It may be noted that paragraph 2 of Article VII of the Convention also provides that the Geneva Convention and Protocol "shall cease to have effect between Contracting States on their becoming bound and to the extent they become bound" by the Convention. The Second important feature of the Ordinance is that it confers exclusive jurisdiction with regard to its subject-matter on the High Courts directly. In Pakistan, the High Courts, subject to a few exceptions, do not have the original civil jurisdiction. Legal proceedings, in general, commence in the civil courts subordinate to the High Courts. By directly conferring jurisdiction on the High Courts, in contrast to the Act of 1937, where jurisdiction was vested in the Civil Courts, the Ordinance has eliminated altogether one level of legal proceedings and is, therefore, likely to speed up the process of international arbitration and enforcement of foreign awards to a greater extent. Thirdly, the Ordinance also contains a highly unconventional provision in terms of section 8, whereby the New York Convention has been incorporated into the municipal law, being a Schedule to the Ordinance. Section 8 expressly provides that in the event of any inconsistency between the Convention on one hand and the Ordinance itself or any other law or any judgment of any court on the other, the Convention shall prevail to the extent of inconsistency. This is the most unusual provision. It is a well-established rule of the interpretation of statutes that in case of any conflict between the main part of a statute and any schedule thereto, the main provisions (i.e., the sections) should prevail. It is also well-settled that any conflict between any treaty provision and the municipal law should be resolved in favour of the latter. Section 8 of the Ordinance thus reverses both these rules to support the New York Convention. It will, therefore, be seen that an attempt has been made in promulgating the Ordinance to tilt the field in favour of the New York Convention and awards made thereunder. Original jurisdiction in civil matters is sparingly conferred upon the High Courts by the laws of Pakistan.10 It is hard to find any other treaty, convention or international obligation in respect of which such a jurisdiction has been conferred upon the High Courts in Pakistan. Furthermore, by reversing rules of interpretation, which most Pakistani lawyers would regard as bedrock principles in favour of the Convention; the Ordinance has placed the Convention on a footing well-above other international treaties and obligations. One is not likely to find any other law on the statute books in which a schedule is placed on a pedestal higher than the parent Act itself. While these provisions have yet to be judicially interpreted and applied, the legislative intent clearly points towards giving the Convention an unprecedented primacy with regard to its enforcement. 10. The ordinary original jurisdiction exercised by the High Court of Sindh is limited to the Civil Division of Karachi (i.e., it does not extend to the whole of the Province of Sindh) and is essentially an historical anomaly stemming from the Court's origins as the Chief Court of Sindh in pre-Independence days. Like the Act of 1937, the Ordinance concerns itself with legal proceedings brought in Pakistan, notwithstanding the existence of an international arbitration agreement, and the enforcement of foreign awards in Pakistan. However, there are significant differences in the language of the relevant provisions in both the statutes. With regard to the stay of legal proceedings, section 3 of the Act of 1937 contained certain procedural restrictions. In effect, the section required that an application seeking a stay of the proceedings had to be made before the filing of the written statement or the taking of any other steps in the legal proceedings, and if not so made, the application would not be maintainable and the legal proceedings would continue. This was a fairly technical requirement and had an equivalent provision in the Arbitration Act, 1940 around which a whole body of case-law has developed. As sometimes happens in such circumstances, the resultant position is neither wholly consistent nor satisfactory. This procedural restriction or requirement has been eliminated from the Ordinance11, and this is in line with paragraph 3 of Article II of the Convention. In principle, therefore, an application for the stay of proceedings can be made in a Convention case at any stage of the legal proceedings and while it is possible, for instance, that the courts may not allow such an application near the conclusion of the proceedings it is clear that the filing of this type of an application has been freed from the procedural restrictions and given a much more extended timeframe. 11. See section 4(1). Section 4(2) of the Ordinance provides that if an application for stay of legal proceedings is made, then unless the arbitration agreement is null and void, inoperative or incapable of being performed, the court shall refer the parties to arbitration, i.e. stay the legal proceedings. This provision was recently considered by the High Court of Sindh12 and the Court held that under the Ordinance, the court did not have any discretionary powers, but had to refer the matter to arbitration unless certain limited exceptions were applicable. In other words, the provision was held to be mandatory. 12. Travel Automation (Pvt.) Limited v. Abacus International (Pvt.) Limited and others 2006 CLD 497. Through the Ordinance, the enforcement of foreign awards has also been much simplified and the legal framework strengthened in favour of the award. The detailed provision in this regard is contained in section 7 of the Act of 1937. The equivalent provision under the Ordinance13 simply and succinctly states that the enforcement of foreign awards "shall not be refused except in accordance with Article V of the Convention". Article V contains specific grounds on the basis of which enforcement of an award may be refused. Since the Ordinance does not, unlike section 7(3) of the Act of 1937 confer any residuary discretion on the court to refuse enforcement, it follows that the grounds listed in Article V are exhaustive. Furthermore, Article V provides that the court "may" refuse enforcement if any of the grounds do exist. In other words, the court may nonetheless order enforcement of the award even if the party challenging the same is able to make out a case under Article V. Again, this is unlike the Act of 1937 where subsections (1) and (2) of section 7 were mandatory and non-compliance with the provisions thereof meant that the award would not be enforced. The court now has a discretion pointing in the opposite direction. 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. 14 13. See section 7. 14. Redfern & Hunter, op. cit., paras 10-34 and 10-35. A ground listed in Article V which entitles (but, as already noted, does not require) the court to refuse enforcement is if such enforcement would be contrary to the public policy of the country in which enforcement is sought. One may, perhaps in view of the majority judgment of the Supreme Court of Pakistan in the Hubco case, have apprehensions with regard to the enforcement of foreign awards under the Ordinance. However, I feel that such concerns would be exaggerated. The attitude of Pakistani Courts, in my view, would be in line with the approach taken by the Supreme Court in the above-noted Eckhardt case. The views expressed by Mr. Justice Ajmal Mian in that case in his concurring opinion have already been cited. Like the courts of most common law countries, the Courts of Pakistan also take a skeptical view of the "public policy" defence, and although it does succeed from time to time, both in Pakistan and other jurisdictions15, it cannot be regarded as a "back-door" through which the efficacy and application of the New York Convention could be undermined. I am confident that the Pakistani experience will be in line with the general international trends. 15. As an example from England in the specific context of Article V of the Convention, see Soleimany v. Soleimany [1999] 3 All E.R. 847, CA. No discussion on international commercial arbitrations in the Pakistani context can be complete without a reference to the well-known decision of the Supreme Court in the case titled Hitachi Limited and another v. Rupali Polyester and others.16 It was held in this case that as regards arbitration proceedings and matters relating thereto, the same would be governed by the law of the seat of arbitration. Moreover, the courts having nexus to the seat of arbitration would have territorial jurisdiction in such matters. Accordingly, Pakistani courts would not claim jurisdiction simply because the arbitration agreement was governed by the Pakistani law. However, insofar as the post-arbitration stage was concerned, the Supreme Court held that the interim award could be challenged before the Pakistani courts because the arbitration agreement and main contract were governed by the laws of Pakistan and the transaction had its closest connection with this country. The court has, therefore, taken a view which is intermediary between the "seat" theory and the view taken by the Indian Supreme Court, and it remains to be seen whether this view will be affirmed if the court has any occasion to re-visit the issues involved in some future case. Besides, if a new and comprehensive Arbitration Act is enacted by the Parliament in Pakistan to replace the Act of 1940, a different approach then may also be taken more in line with the "seat" theory, as has been done in other common law jurisdictions such as England and India. 16. 1998 SCMR 1618 Pakistan and the courts of this country have come a long way since the days of the enactments in 1937 and 1940. The Ordinance enforcing the New York Convention marks a major and welcome addition to the development of international commercial arbitration and enforcement of foreign awards in Pakistan. In one sense, however, it is not a fundamental shift in the law. The reason is that the judicial principles and attitudes in this country have already evolved to a great extent in line with international developments. In an important anti meaningful sense, therefore, the courts had already- marched far in advance of the Act of 1937. One can say that the legislature, somewhat belatedly, is now catching up with the courts. Pakistan is, therefore, well-placed to meet the modern day challenges and requirements of dispute resolution in the context of international commercial law.