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

Incoterms are a set of standard terms used in contracts for international sales and utilized to determine the obligations of the parties. They describe delivery, risk and costs involved in the delivery of goods from sellers to buyers. These ‘rules’ were created in the framework of the International Chamber of Commerce (ICC) in Paris, France and are recognized worldwide. Judge Sidney Stein of the US District Court for the Southern District of New York, in his order dated 26 March 2002, in the case of St. Paul Guardian Insurance Co. as subrogees of Shared Imaging Inc. v. Neuromed Medical Systems & Support, held that “Incoterms formed usages widely known and used in international trade by which the parties were bound” and that “In a contract governed by CISG, the use of the term CIF without specific reference to the Incoterms was sufficient to validly incorporate the term CIF as defined by the Incoterms into the contract.”

In 1921, the ICC came up with the idea of publishing and establishing a set of internationally recognized commercial terms to be used in international transactions. In 1936, the first set of “International Commercial Terms” was published (more commonly known by its abbreviation as ‘Incoterms’) and remained in use for almost 20 years. The official title of the Incoterms was “International Rules for the Interpretation of Trade Terms”. Periodical updates were made to keep up pace with changes in international trade and it was seen that Incoterms were being used for domestic trade as well.

The current version of Incoterms, i.e. Incoterms 2010 that was published and came into effect on 1 January 2011, which has reduced the number of rules from 13 to 11. The new version takes into account the continued spread of customs-free zones, the increased use of electronic communications in business transactions, heightened concerns about security in the movement of goods and changes in transport practices.¹

The main features of Incoterms 2010 areis that two new Incoterm rules – Delivered at Terminal (DAT) and Delivered at Place (DAP) – have replaced the Incoterms 2000 rules DAF, DES, DEQ, and DDU. Under both the new rules, delivery occurs at a named destination: in DAT, at the buyer’s disposal unloaded from the arriving vehicle (as under the formal DEQ rule); in DAP, likewise at the buyer’s disposal but ready for unloading (as under the former DAF, DES and DDU rules). The new rules make the Incoterms 2000 rules DES and DEQ superfluous. The named terminal in DAT may well be in a port and DAT can therefore safely be used in cases where the Incoterms 2000 rule DEQ once was. Likewise, the arriving vehicle under DAP may well be a ship and the named place of destination may well be a port.: Cconsequently, DAP can safely be used in cases where the Incoterms 2000 rule DES once was. These new rules, like their predecessors, are ‘delivered’, with the seller bearing all the costs (other than those related to import clearance, where applicable) and risks involved in bringing the goods to the named place of destination.

Incoterms 2010 rules have also omitted references to “the ship’s rail” as the imaginary line in which is effected the delivery of goods, andbeing replaced it by the words “on board”. Incoterms 2010 is also the first version of the Incoterms rules to make all references to buyers and sellers gender-neutral. It is pertinent to note that although these rules have become effective as of 1 January 2011 and the ICC is encouraging all concerned to adopt the Incoterms 2010 rules, parties are free to choose to continue transacting and contracting on the basis of the Incoterms 2000 rules.

On 28 April 2011, the National Assembly enacted the Arbitration (International Investment Disputes) Act, which gives effect to the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). The legislation was first promulgated by presidential ordinance in November 2006, but lapsed. Under the Constitution of Pakistan, presidential ordinances have a limited life of four months unless they are earlier repealed or enacted into a statute. A new presidential ordinance was promulgated in March 2007 followed by another in July 2007, but the state of emergency was thereafter declared in Pakistan, which gave it permanent life. The permanent life however was cut short by a judgment of the Supreme Court which declared the emergency as illegal. This resulted in the promulgation of another presidential ordinance in November 2009 followed by another in April 2010. The current Act is the result of a government sponsored bill introduced in Parliament in 2010.

The purpose of the Act is to implement the ICSID Convention, with an aim to bringing transparency in the settlement of investment disputes. The Act attaches the ICSID Convention as a schedule. However, the issue that remains to be addressed is that the implementation of the ICSID Convention itself will not be sufficient for Pakistani Courtscourts to compel parties to an ICSID arbitration and this could create problems at the time of the recognition and enforcement of any consequent ICSID award.

The Act specifically regulates the recognition and enforcement of ICSID arbitral awards and does not contain any provisions that would seek to compel parties to proceed to ICSID to settle their disputes. The primary reason for this is that the ICSID Convention does not itself seek to compel governments to proceed to arbitration at ICSID. Instead, the consent to ICSID arbitration by a government (the equivalent of an arbitration agreement) is usually contained in most BITs and some multilateral investment treaties (most notably NAFTA). Since Pakistan was one of the original signatories to the Washington Convention, an ICSID arbitration clause is contained in most of the BITs that Pakistan has signed. However, following SGS case², it would appear that in Pakistan, BITs would also need to be implemented into legislation in order for an ICSID “arbitration agreement” to be enforcableed by Pakistan Courts. This is a major problem that the Act does not address.

By way of an example, let us consider the hypothetical scenario where the SGS case had not been settled; the ICSID Tribunal had rendered an award against Pakistan; and the Act was in place at the time the award was brought to be enforced. Under s.4 of the Act the domestic Courts of Pakistan would treat it on a par with a judgment of a High Court of Pakistan.³ In such a situation the High Court would have problems in deciding whether to follow the Supreme Court judgment or the award. Section 5 states:

“Sections 3 (Registration of Awards) and 4 (Effect of Registration) shall bind the Government but not so as to make an award enforceable against the Government in a manner in which a judgment would not be enforceable against the Government.”⁴

In plain language therefore, an ICSID award would be enforceable to the same extent as a judgment of a High Court of Pakistan.

However, Art.189 of the Constitution makes it clear that: “Any decision of the Supreme Court shall, to the extent that it decides a question of law or is based upon or enunciates a principle of law, be binding on all other Courts of Pakistan.”

When Section 5 is read in the light of Art.189, it is obvious that a judgment of a High Court (and therefore an ICSID award) would not be binding on the Pakistan Government in the presence of a judgment from the Supreme Court that invalidates the entire proceedings before ICSID. It would be a logical step for a Pakistani Court court to rule that, where the Supreme Court has refused to compel the Government to proceed to arbitration,⁵ any resulting award arising from such an invalid forum would also be null and void. Therefore, in SGS, if a final award had been rendered by ICSID, a Pakistani Courtcourt could have used such an argument to refuse to enforce that ICSID award. Consequently, unless Pakistan BITs are also promulgated into domestic legislation, all the Government would have to do would be to appeal a request for ICSID arbitration up to the Supreme Court⁶ and any consequent ICSID award would become practically non-enforceable in the domestic courts of Pakistan.

In light of the above, the Act does not provide for foolproof execution of ICSID awards in Pakistan. Execution of awards is subject to the review of the High Court and binding judgments of the Supreme Court and, if the award has been rendered against the Government, it can only be enforced if it were enforceable in the same circumstances if it were a judgment. It should be remembered that High Court decisions can be appealed, although the grounds of appeal may be limited. If the enabling law within Pakistan is not able to support the enforcement of an ICSID decision, this may damage Pakistan’s image to an inestimable degree.

It has recently been reported in the press (Dawn 17th October 2011) that the Kuwaiti based Agility Logistics has filed a reference with the ICSID Tribunal in Washington against the Customs Authorities of Pakistan.

On 10 June 1958, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention, was adopted by the United Nations. On 15 July 2011, Presidential assent was given to the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011 giving effect to the New York Convention, to which Pakistan was a signatory.

The 2011 Act recognizes Pakistan’s international legal obligations as laid down by the New York Convention and stresses the compliance of the legislation with the New York Convention’s provisions.⁷ The 2011 Act replaces the Arbitration (Protocol and Convention) Act 1937 (APC Act) which previously applied the Geneva Protocol on Arbitration Clauses of 1923 and the Geneva Convention on the Execution of Foreign Arbitral Awards of 1927⁸ (Geneva Convention) to the enforcement of foreign arbitral awards in Pakistan. The APC Act caused all arbitration awards rendered in a non-Geneva Convention territory to be unenforceable in Pakistan.

The 2011 Act recognizes the importance of the enforcement of arbitration agreements as laid down in Article II(3) of the New York Convention.⁹ This is a welcome reform as, even though the APC Act s.3 provides for the enforcement of arbitration agreements,¹⁰ Pakistan’s case law had begun to deviate substantially from the APC’s specific statutory direction. Instead, Pakistani Courts were exercising excessive judicial activism to secure a protectionist bias in favour of the Pakistani litigant.

Dealing with this lack of certainty (which was a major cause offor concern for foreign investors) the 2011 Act s.4(2) has created a presumption (in line with Article II(3) of the NY Convention) that an arbitration agreement is enforceable unless it is “null and void, inoperative or incapable of being performed”. Hearteningly, Khilji Arif Hussain J. of the High Court of Sindh in Travel Automation (Pvt) Ltd v Abacus International (Pvt) Ltd has ruled that s.4(2) has taken away the discretion of the Pakistani Courts in enforcing arbitration agreements even on the ground of inconvenience except where the arbitration agreement is itself null and void, inoperative or incapable of being performed. Accordingly, the 2011 Act has brought certainty inon the enforcement of arbitration agreements by Pakistani courts.

Following the Travel Automation case, the Sindh High Court has gone even further in Metropolitan Steel Corporation Limited v MacSteel International UK Limited 2006 CLD 1491 by ruling that, in compliance with Article II(2) of the New York Convention, an exchange of electronic correspondences coupled with the conduct of the parties could lead to the formation of an arbitration agreement in writing that was enforceable.

The Act, which extends to the whole of Pakistan, requires the Courts ofin Pakistan to give retrospective effect to private agreements to arbitrate, and to recognize and enforce arbitration awards made in other contracting states, and applies to arbitration agreements made on or after 14 July 2005.

Under the 2011 Act, foreign arbitral awards are recognized and enforced in the same manner as a judgment or an order of the Courts ofin Pakistan, except where Article V of the New York Convention applies. Article V provides that the recognition and enforcement of a foreign arbitral award may be refused at the request of a party against whom it is invoked, only if they furnish proof to the effect that the:

i. Parties to the agreement, under the law applicable to them, are under some incapacity; or the agreement is not valid under the law to which the parties have subjected it, or under the law of the country where the award was made; or

ii. The Party against whom it is invoked was not given proper notice of appointment of arbitrator or of the proceedings, or was otherwise unable to present their case; or

iii. The Award deals with a matter not contemplated within the terms of the submission to arbitration or contains decisions beyond the scope of the submission to arbitration; or

iv. The Composition or the arbitral authority / tribunal or the arbitral procedure followed was not in accordance with the agreement of the parties, or not in accordance with the law of the country where the arbitration took place; or

v. The Award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which the award was made.

Pakistan was one of the first signatories of the New York Convention in 1958 but did not ratify it until 2005. A temporary ordinance was promulgated that year to give effect to the Convention and was periodically renewed by presidential ordinances. However, following the declaration of emergency and the ensuing restoration of the deposed judiciary, the legislation expired last year in August 2010, leaving the fate of the law in limbo. This Parliamentary enactment puts an end to much uncertainty surrounding the enforcement of foreign arbitral agreements and awards in Pakistan and ensures that the legal system in Pakistan is at least at par with similar enforcement regimes in the international comity of nations.

^1.Mr. Raja Gupta, ICC Chairman in Foreword to the Incoterms 2010

^2. In Societe Generale de Surveillance S.A. v Pakistan 2002 SCMR 1694 the Supreme Court of Pakistan denied the enforceability of an ICSID arbitration clause contained in a Pak–Swiss BIT since, first, both the ICSID Washington Convention 1965 and the Pak–Swiss BIT had not been implemented into Pakistan domestic legislation, and secondly, since the Supreme Court controversially held that the provision of pre-shipment inspection services offered by SGS to the Pakistani government did not fall under the definition of “investment” as contained in the Pak–Swiss BIT. The ICSID Tribunal however, in its Decision on Jurisdiction of August 6, 2003 in ICSID Case No.ARB/01/13, available at www.worldbank.org, disregarded the decision of the Pakistan Supreme Court in finding that the Tribunal did indeed have competence to hear the case.

^3. “4. Effect of registration. Subject to the provisions of this Ordinance, an award registered under section 3 shall, as respects the pecuniary obligations which it imposes, be of the same force and effect for the purposes of execution as if it had been a judgment of the High Court given when the award was rendered pursuant to the Convention and entered on the date of registration under this Ordinance, and, so far as it relates to such pecuniary obligations: (a) proceedings may be taken on the award; (b) the sum for which the award is registered shall carry interest; and (c) the High Court shall have the same control over the execution of the award, as if the award had been a judgment of the High Court.”

^4. s.5 has presumably been drafted to track Art.54 of the Washington Convention which states: “Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State. A Contracting State with a federal constitution may enforce such an award in or through its federal courts and may provide that such courts shall treat the award as if it were a final judgment of the courts of a constituent state.” Since the judgment of a High Court of a province of Pakistan is the equivalent of “a final judgment of the courts of a constituent state”; s.4(c) seems to follow the requirements of Art.54 of the Convention.

^5. Interestingly, the Pakistan Supreme Court in SGS did not merely refuse to enforce the ICSID arbitration agreement contained in the Pak–Swiss BIT on the ground that the Pak–Swiss BIT had not been implemented into domestic legislation, but took a more overreaching step by affirming the decision taken by the Lahore High Court in holding that the Pakistan Government’s very consent to ICSID arbitration did not exist. The Lahore High Court in SGS v Pakistan, 2002 CLD 790, held that: “The lack of the consent of the respondent [Pakistan] is apparent and the same will take the dispute out of the purview of ICSID. I do not agree with the learned counsel for the appellant that the consent in BIT [sic] is an offer which has been accepted by the appellant.”

^6. A possibility that is all the more likely given that most Pakistani negotiations on BITs usually involve an insistence by Pakistani negotiators on the requirement to exhaust local remedies (see “SGS Plea to be Fought before International Body”, Dawn newspaper, September 21, 2002; Ihtasham ul Haque, “Investment Treaty with Finland in Final Stages”, Dawn, February 27, 2005; and Ihtasham ul Haque, “Pakistan, US Make Progress on Treaty: Bilateral Investment”, Dawn, March 5, 2005, all at www.dawn.com).

^7. This is seen in the second recital to the REAO: “Whereas it is expedient to provide for the recognition and enforcement of arbitration agreements and foreign arbitral awards pursuant to the said Convention and for matters connected therewith;” as well in s.8: “Inconsistency. In the event of any inconsistency between this Ordinance, any other law, or any judgment of any court and the Convention, the Convention shall prevail to the extent of the inconsistency.”

^8. 92 League of Nations Treaty Ser. 2302

^9. REAO s.4 provides: “4. Enforcement of arbitration agreements, (1) A party to an arbitration agreement against whom legal proceedings have been brought in respect of a matter which is covered by the arbitration agreement may, upon notice to the other parties to the proceedings, apply to the court in which the proceedings have been brought to stay the proceedings in so far as they concern that matter. (2) On an application under subsection (1), the court shall refer the parties to arbitration, unless it finds that the arbitration agreement is null and void, inoperative or incapable of being performed.” Furthermore, the jurisdiction of a court to stay proceedings has been laid down in s.3(2) which states:

^10. APC Act s.3 states: “3. Stay of proceedings in respect of matters to be referred to arbitration —Notwithstanding anything contained in the Arbitration Act, 1940 or in the Code of Civil Procedure, 1908, if any party to a submission made in pursuance of an agreement to which the Protocol set forth in the First Schedule as modified by the reservation subject to which it was signed by India applies, or any person claiming through or under him, commences any legal proceedings in any Court against any other party to the submission or any person claiming through or under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time after appearance and before filing a written statement or taking other steps in the proceedings, apply to the Court to stay the proceedings: and the Court, unless satisfied that the agreement or arbitration has become inoperative, cannot proceed, or that there is not in fact any dispute between the parties with regard to the matter agreed to be referred, shall make an order staying the proceedings.”

^11. Travel Automation (Pvt) Ltd v Abacus International (Pvt) Ltd (2006 CLD 497).