The Counsel

Dispute Resolution
by Dr. Shahid Jamil
Associate, Michelmores LLP, UK

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.

1 A copy of the Bill is available at:
http://www.na.gov.pk/govt_bills/arbitration_act2009_270409.pdf (accessed on 13 July 2009).

2 For a detailed analysis of the REAO, see Shahid Jamil, Pakistan’s Implementation of the New York Convention (2008) 74 Arbitration 170-180.

3 Pakistan originally implemented the Washington Convention into its domestic law by promulgating the Arbitration (International Investment Disputes) Ordinance 2006. For an analysis of Pakistan's implementation of the Washington Convention, see Shahid Jamil, Pakistan and ICSID: A Step in the Right Direction (2007) 73 Arbitration 228-230.

4 In respect of foreign awards, section 50 of the Bill states that:
"The recognition and enforcement of a foreign arbitral award shall not be refused except in accordance with Article V of the [NY] Convention."
In respect of domestic awards, section 34(2) of the Bill lays down the following grounds for set aside:
"(a)  the party making the application furnishes proof that —
(i) a party to the arbitration agreement was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part;or
(b)  the Court finds that —
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of Pakistan.
Explanation. — Without prejudice to the generality of expression public policy it also includes an arbitral award the making of which was induced or affected by fraud, misrepresentation or corruption and in violation of confidentiality."

5 92 League of Nations Treaty Ser. 2302

6 Hitachi Ltd v Rupali Polyester (1998 SCMR 1618).

7 National Thermal Power Corporation v The Singer Company, 80 AIR SC 998 (1993).

8 APC Act s.9(b) is a Savings clause that states:  “Nothing in this Act shall…. (b) apply to any award made on an arbitration agreement governed by the law of Pakistan.”

9 For a detailed analysis of these cases and their applicability under Pakistani law see supra fn.3.

10 Compare the APC Act s.9(b) in fn. 8; s.9(b) of India's FARE was a savings clause identical to s. 9(b) of the Pakistan APC Act: “Nothing in this Act shall…. (b) apply to any award made on an arbitration agreement governed by the law of India.”

11 In Centrotrade Minerals and Metals Inc v. Hindustan Copper Ltd, 2006(11) SCC 245, the Supreme Court of India held that an award from international commercial arbitration conducted in any NY Convention country would be a foreign award irrespective of the proper law governing the arbitration agreement. This case is also important as the Indian Supreme Court held that the phrase "or under the law of which that award was made" used in Article V(1)(e) of the NY Convention refers to the law of the country in which the arbitration had its seat rather than the country whose law governs the substantive contract. Additionally, Vikramjit Sen J. in Bharti Televentures Ltd v DSS Enterprises Private Ltd CS(OS) No1769/2003 decided on August 17 2005, 2001 (3) RAJ 433 (Del) has stated in para [19] that “The deliberate decision not to incorporate s.9(b) of FARE assumes great significances, and leads inexorably to the conclusion that the factum of Indian laws in the 1996 Arbitration regime, especially Part II thereof, venue/territoriality is all important.”

12 Section 2(1)(i) of the Bill defines international commercial arbitration as:
""international commercial arbitration” means an arbitration relating to certain disputes arising out of legal relationship, whether contractual or not, considered as commercial under the law in force in Pakistan where at least one of the parties is —
(i) an individual who is a national of any country, or habitually resident in another country other than Pakistan; or
(ii) a body corporate which is incorporated outside Pakistan in any other country; or
(iii) a company or an association of persons or a body of individuals whose principal office or central management and control is exercised from outside Pakistan in any country other; or
(iv) the Government of a foreign country;"

13 Section 9 of the Bill.

14 Section 11 of the Bill.

15 Sections 11 to 15 of the Bill.

16 Chapter IV of Part II of the Bill.

17 Chapter V of Part II of the Bill.

18 Section 27 of the Bill.

19 Section 28 of the Bill.

20 Section 28 of the Bill.

21 For a good example of this, see Hitachi Ltd v Rupali Polyester (1998 SCMR 1618) where the Pakistani Supreme Court refused to follow the Indian Supreme Court's theory of concurrent jurisdiction set out in National Thermal Power Corporation v The Singer Company.

22 Bhatia International v Bulk Trading S.A. and Another (2002) 4 SCC 105)

23 Venture Global Engineering v Satyam Computer Services (2008(1) ARBLR1 37 (SC))

24 Bhatia International v Bulk Trading S.A. and Another, at paragraphs [21] and [27] the Indian Supreme Court made reference to the fact that Article 1(2) of UNCITRAL Model Law, on which Section 2(2) of the Indian Act is based, uses the word "only" and that this word was specifically omitted by the Indian legislature in drafting that Section.

25 ONGC v Saw Pipes Ltd  2003 SOL Case No175.

26 In ONGC v Saw Pipes Ltd  2003 SOL Case No175, the arbitrators had determined that a claim for liquidated damages under Indian law required the proof of some loss contrary to Sections 73 and 74 of the Indian Contract Act. The Indian Supreme Court reasoned that since the arbitrators had failed to consider these sections, they had misapplied Indian substantive law. The court felt that the phrase public policy of India meant that an award could be set aside if it contained an illegality. This is a very wide interpretation of that phrase and has been criticised heavily in international commercial arbitration circles.

27 In Manzoor Hussain v Wali Muhammad, PLD 1965 SC 425, the Pakistan Supreme Court in deciding whether a contract was contrary to public policy under section 23 of the Pakistan Contract Act 1872 stated that this section has to be construed strictly and that the court should not invent new categories or heads of public policy. Cf. Ali Muhammad v Bashir Ahmad, 1991 SCMR 1928 where the Pakistan Supreme Court affirmed the setting aside of an arbitration award because that award purported to decide a criminal matter and the arbitrability of such a matter would be against public policy. Also see The Hub Power Company Ltd v Wapda (PLD 2000 Supreme Court 841), where the Supreme Court of Pakistan refused to enforce an arbitral agreement between Hubco (a subsidiary of Britain’s National Power set up with World Bank support) and the Pakistani government on the grounds that the underlying agreement had been procured as a result of fraud and corruption. Also see Grosvenor Casino Limited v Abdul Malik Badruddin (PLD 1998 Karachi 104) where Bhagwandas J refused to execute a judgment of the United Kingdom High Court of Justice Queen's Bench Division on the grounds that the judgment decided a matter in respect of gambling debts and that such contracts for wagering were void under Pakistani law and were also repugnant to principles of Shariah; and as such were contrary to the public policy of Pakistan.

28 See International Standard Electric Corp. v Bridas Sociedad Anonima Petrolera 1990, 745 F. Supp. 172 (S.D.N.Y.) where the US District Court of the Southern District of New York held: “Finally we should observe that the core of petitioner’s argument, that a generalized supervisory interest of a state in the application of its domestic substantive law (in most arbitrations the law of contract) in a foreign proceeding, is wholly out of step with the universal concept of arbitration in all nations. The whole point of arbitration is that the merits of the dispute will not be reviewed in the courts, wherever they be located. Indeed, this principle is so deeply imbedded in American, and specifically, federal jurisprudence, that no further elaboration of the case law is necessary. That this was the animating principle of the Convention, that the Courts should review arbitrations for procedural regularity but resist inquiry into the substantive merits of awards, is clear from the notes on this subject by the Secretary-General of the United Nations.”

29 Bhatia International v Bulk Trading S.A. and Another

30 Venture Global Engineering v Satyam Computer Services