Review of The New Arbitration Bill

REVIEW OF THE NEW ARBITRATION BILL REVIEW OF THE NEW ARBITRATION BILL By Wasif Majeed Advocate High Court, Lahore A new arbitration and conciliation law for Pakistan is in the offing. The proposed bill (available on the Ministry of Law, Pakistan, website www.molaw, gov.pk) proposes to bring under one roof the major arbitration related laws that are presently in force in Pakistan including the law on arbitration, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Washington Convention on the Settlement of Investment Disputes, 1965. The two novelties in the Draft Arbitration Bill are the provisions dealing with conciliation and the establishment of an Arbitration and Conciliation Center. The Draft Arbitration Bill has apparently been based on the United Nations' Commission on International Trade Law's ("UNCITRAL") Model Law on International Commercial Arbitration and Conciliation, as adopted in 1985 and 2002 respectively, as well as Model Arbitration and Conciliation Rules, as adopted in 1976 and 1980 respectively. However, a reconnaissance of the Draft Arbitration Bill reveals that it is largely based on the Indian Arbitration and Conciliation Act, 1999, with the exception of provisions dealing with the ICSID Convention and the Arbitration and Conciliation Center. Further, various changes were made to the Model Law on International Commercial Arbitration by the UNCITRAL in 2006, however, Draft Arbitration Bill disregards the adopted changes. The changes were adopted by the UNCITRAL at its thirty-ninth session in 2006. The following observations/suggestions vis-a-vis the Draft Arbitration Bill are worth-considering: Section 2(1) (i) of the Draft Arbitration Bill provides the definition of "international commercial arbitration". The said definition provides in relevant part that international commercial arbitration includes an arbitration relating to certain disputes [Emphasis added]. The use of the term 'certain' gives an impression of restricting the scope of disputes that may be subject of an international commercial arbitration. This coupled with the qualification that only those commercial disputes shall be resolved through international commercial arbitration which are considered as commercial under the law in force in Pakistan will further restrict the scope of disputes that can be resolved through international commercial arbitration1. It is suggested that the term 'certain' in the definition in section 2(1) (i) should either be deleted or it should be replaced with some other appropriate word such as 'any'. It may be noted that the comparative section 2(1) (1)' in the Indian Arbitration and Conciliation Act, 1996 (hereinafter "Indian Act") does not include the word 'certain' while defining the term "international commercial arbitration". Section 2(1) (k) defines the term 'party'. There is abundant case-law in arbitration practice worldwide which hovers around the issue whether a person is a party to the arbitration agreement or not. The issue frequently comes up in cases where arbitration agreement has been signed by, for instance, a parent company, whereas, the performance under the contract has to be carried out by one of its subsidiary or a special purpose vehicle. In case a claim is brought against a subsidiary company in arbitration, the issue whether such subsidiary company is a party to the arbitration agreement springs up before the Tribunal. The case-law has laid down various doctrines such as incorporation by reference, alter ego etc. to answer the question whether a person is a party to the arbitration agreement, or not. It has been observed that by providing the definition of the term 'party' in section 2(1) (k), the scope of the, persons that may bring or participate in arbitration proceeding will be considerably curtailed as according to the said definition only party to an arbitration agreement comes _within the purview of the Arbitration Bill. It is therefore suggested that the definition of the term 'party' may either be omitted or rephrased to include the successors/assignees/ nominees of a person who is a party to the arbitration agreement. Section 3 deals with the service of written communications. It has been observed that section 3 is somewhat oblique when it comes to service of notice upon a body corporate/company. Even if it is assumed for the sake of argument that the term 'place of business' can cater to the circumstances where service is to be effected on a body corporate/company, it is unclear whether the term 'place of business' would refer to the registered address of a company or the address of its place of business. It may be noted that proper service of a notice/written communication is considered as one of the fundamental principles of procedural fairness. Improper service has far reaching consequences including the setting aside of an award. It is therefore suggested that section 3 should be rephrased to include a specific provision for the service of notice on a body corporate/company. Reference in this regard may kindly be made to section 76(4) (b)2 of the English Arbitration Act, 1996 (hereinafter "English Act") that deals with the service of notice on a body corporate. Section 4 deals with the waiver of the right to object to any omission by the other party. Waiver under section 4 will come into operation where a party who knows [Emphasis added] of the omission as provided therein proceeds with- the arbitration without stating his objections. By corollary, a party who does not know would not be deemed to have waived his right to object. Knowledge of a person refers to his subjective intention that cannot be judged by someone else. By providing the standard of knowledge, section 4 will give the recalcitrant party an opportunity to delay or even frustrate the arbitration proceedings by arguing that he had no knowledge of the omission. It is suggested that the words 'who knows' in section 4 should be deleted. Reference can be made to the language of section 73 (1)3 of the English Act. It may kindly be noted that section 7 of the UNCITRAL Model Law 1985 has been amended by UNCITRAL. The changes to UNCITRAL Model Law have been adopted by the UNCITRAL at its thirty-ninth session in 2006. It is suggested that section 7 in the Arbitration Bill should be amended to bring it at par with the revised section 7 of the UNCITRAL Model Law. One of the striking subsections in section 7 is the deeming subsection (5), which by its terms incorporates arbitration agreement in every commercial contract. It is a novel thing that is not present in any legal system in the world. This subsection per se will be unable to withstand the legal challenge as it is contrary to whole concept and ideology of arbitration. Arbitration is a consensual process that comes into play with the agreement of the parties. There can be no arbitration when there is no agreement between the parties. Subsection (5) is inimical to this basis consensual ideology of arbitration. It is suggested that subsection (5) should be omitted altogether. Section 8 deals with the power of the court to refer the parties to arbitration where the matter in issue before the court is subject to an arbitration agreement between the parties. The following observations vis-a-vis section 8 merit consideration: Section 8 proceeds on the assumption that there are only two parties to the dispute before the court. Section 8 is silent as to the situation where a plaintiff has brought an action against more than one defendant, and there is an arbitration agreement between the plaintiff and only one defendant. The law is silent as to whether suit will continue to the extent of the rest of the defendants. Section 8(7) cannot be a solution to this argument as section 8(7) caters to a situation where the parties to the suit had no prior agreement between them to refer their future disputes to arbitration but they had reached an agreement during the course of suit proceedings. It is suggested that section 8 should be appropriately rephrased to cater to this situation. The operation of section 8(2) in certain circumstances can cause hardship to a party that is seeking the referral of the dispute to arbitration. The circumstances may include the situation where the party seeking referral is not in possession of the original agreement which may be in the possession of the other party. In such a situation, it would not be possible for that party to certify any copy of the arbitration agreement. Even otherwise, section 8(2) is oblique to the extent that it provides for reliance on a certified copy but does not specify the person/authority that has to certify the agreement. Whether certification by the party itself would suffice? It is suggested that section 8(2) should be rephrased so as to state that the application should be accompanied by the original arbitration agreement or a certified copy thereof, or the reason for the omission in the absence of such original or certified copy. Section 8(7) can lead to a possible whirlpool of issues before a court. This can be enumerated by an example: a suit has been instituted by an employer against a contractor, sub-contractor and the supplier. It is in the interest of the parties that the matter between them is resolved before a single forum. The sub-contractor and the supplier have a dispute which is remotely related with the overall dispute between the employer, the contractor, sub-contractor and the supplier but it is in the interest of the parties that it should be resolved along with the overall dispute between the parties. However, the sub-contractor and the supplier resolve the settle that dispute through arbitration. They apply to the court for referral of their dispute to arbitration. The employer (plaintiff) opposes the application. If the court accepts the application, the sub-contractor and the supplier will no longer participate in the court proceedings, which will put the employer (plaintiff) in an awkward position who wanted the dispute between all the parties to be settled in one set of proceedings. Section 8(7) can further complicate the situation where a party has raised a dispute which it wants to be resolved by the court. That particular dispute has also been raised by certain other parties. Those certain other parties decide for the referral of that particular dispute to arbitration but not the first party. If the court refers the dispute to arbitration, it would be contrary to the consent of the first party that is inimical to the basic consensual ideology of arbitration. Therefore, reference to arbitration during court proceedings is best suited where all the parties agree for the referral of the dispute to arbitration. In view of the foregoing, it is observed that section 8(7) will be unable to withstand legal challenge. Hence, it is suggested that section 8(7) should be omitted in its entirety. Section 10 deals with the number of arbitrators. It has been observed that the said section is silent as regards the consequences of an agreement between the parties to appoint even number of arbitrators. Whether arbitration agreement will become invalid or unenforceable on account of provision for an even number of arbitrators? It may be noted that the policy of law is to uphold arbitration in such circumstances. it is suggested that section 10 should be rephrased and a further proviso be added to its subsection (1) to the effect that whether parties have agreed on an even number of arbitrators, such even number of arbitrators shall appoint a presiding arbitrator in accordance with the provisions of this Part. Reference may be made to section 15(2)44 of the English Act. Section 11 deals with the procedure for the appointment of arbitrator(s). Section 11 proceeds on the premise that there are only two parties to arbitration. Presently the frequency of contracts involving more than two parties is increasing with every passing day e.g. syndicated finance agreement. It has been observed that section 11 is insufficient as regards the protection of the freedom of the parties to choose an arbitrator of their choice in a situation where there are more than two parties. For instance, a claimant, who has initiated arbitration against more than one respondent, may have the arbitrator of his choice. The respondents may not have the identity of interest and one of the respondents wants his arbitrator to be on panel, whereas, the other respondent wants his arbitrator to be on the panel. This controversy has been subject of the famous Dutco Cases in France, where, the award was set aside by the Court de cassation in the situation as described herein. Accordingly, it is suggested that an express provision should be included that provides for a solution in a situation where there are more than two parties in an arbitration. Section 17 deals with the power of an arbitral tribunal to grant interim measures. It may be noted that revised UNCITRAL Model Law provides a complete new Chapter IV-A which deals with the grant interim measures of protection. It is suggested that section 17 in the Arbitration Bill should be replaced with the new Chapter IV-A as provided in the revised UNCITRAL Model Law. Section 25 deals with the default by a party to the arbitration proceedings. Section 25(a) is silent as regards the issues such as whether the termination of proceedings on account of default on the part of the claimant would constitute res judicata as between the parties and despite default on the part of the claimant the respondent wants to proceed with the arbitration to have a resolution of the dispute. It is suggested that section 25(a) should be appropriately rephrased so as to cater to the afore-referred issues. Section 31 deals with the form and contents of an award. It has been observed that subsections (6) and (7) of section 31 provides for the grant of interest. It may be noted that charging of interest is prohibited in accordance with the laws of Pakistan. Accordingly, an award granting interest on money may be challenged on the ground of its being contrary to the public policy of Pakistan, which may result in the setting aside of an award. It is suggested that section 31(6) and (7) should be appropriately amended. Section 34 deals with the setting aside of an award. It has been observed that section 34 is silent as regards the issue whether the right of a party to seek the setting aside of an award under section 34 is subject to the provisions of section 4 of Arbitration Bill. It may be noted that right to challenge an award under section 686 of the English Act is subject to the provisions of section 737 that provides for the waiver of the right to object. It is, therefore, suggested section 34 of the Arbitration Bill should be appropriately amended as to provide clarity as regards the rights to seek the setting aside of an award. It has further been observed that section 34(1) read with section 35(2) of the Arbitration Bill leads to an inconsistency. Section 34(1) provides that recourse to the court under subsections (2) and (3) shall be available to party unless the matter is referred by a Court to arbitration. Apparently, section 34 is inapplicable to awards where the reference to arbitration was made by the court. However, section 35(2) that deals with pronouncement of judgment on an award expressly refers to challenge of an award under section 34. This is inconsistent with the language of section 34(1). It is, therefore, suggested that the phrase 'unless the matter is referred by a court for arbitration' in section 34(1) should be omitted so as to remove the inconsistency. The definition of a "foreign arbitral award" in section 45(d) refers to the term 'made' that may at occasions lead to a dispute as to whether it would refer to the State where the award was signed by the arbitrator(s) or from where it was dispatched. To avoid any such dispute and to promote certainty, it is suggested that a proviso may be added to the definition in section 45(d) to the effect that 'an award may be treated as made at the seat of arbitration, regardless of where it was signed, dispatched or delivered to any of the parties'. It is high time that the statutory arbitration regime in Pakistan should be overhauled as the current regime has failed to achieve the craved purpose of providing expeditious dispute resolution mechanism-courtesy excessive court intervention. The Draft Arbitration Bill is a commendable effort aimed at consolidating the major laws governing arbitration. It will also strengthen arbitration as an institution as it seeks to strike a balance between the right of the parties to control the arbitration proceedings and the extent of the court's power to supervise such proceedings. Once enacted, the new law will accelerate adoption of arbitration as a dispute resolution mechanism. However, care is needed during the enactment process to ensure that the oddities of the outgoing regime do not creep into the new dispensation: 1. Section 2: Definition:-‑ i. 'international commercial arbitration' means an arbitration relating to disputes arising 'out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at , least one of the parties is:‑ ii. an individual who is a national of, or habitually resident in, any country other than India; or iii. a body corporate which is incorporated in any country other than India; or pro a company or an association or a body of individuals whose central management and control is exercised in any country other than India; or iv. the Government of a foreign country; 2 Section 76 (4)... (b) where the addressee is a body corporate, to the body's registered or principal office, 3 73: Loss of right to object (1) If a party to arbitral proceedings takes part, or continues to take part, in the proceedings without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this part, any objection... 4 15: the arbitral tribunals: (2) Unless otherwise agreed by the parties, an agreement that the number of arbitrators shall be two or any other even number shall be understood as requiring the appointment of an additional arbitrator as chairman of the tribunal:-‑ 5. Cour de cassation, 7 January 1992, Siemens AG and BKMI Industrienlagen GmbH v. Dutco Construction Company (Dubai), Rev Arb 470 (1992). 6 "68: Challenging the award: serious irregularity: (1)... A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3)" 7 "73: Loss of right to object: i. If a party to arbitral proceedings takes part, or continues to take part. in the proceedings without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this part, any objection--....".