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ARBITRATION GENESIS

I. No one knows exactly when arbitration came into existence, but what many people do not know is that it was long before the twentieth century . King Solomon was an arbitrator. Philip the Second, the father of Alexander the Great, used arbitration as a means to settle territorial disputes arising from a peace treaty he had negotiated with the southern states of Greece as far back as 337 B.C. Arbitration was one of the preferred methods of settling disputes in ancient Rome and was also the common method of settling commercial disputes in the Middle Ages. Long before the white man ever arrived in what is now the United States of America, early Native American tribes used arbitration as not only a means of resolving disputes within the tribe but also between different tribes.

Civil and Commercial arbitration can be traced back to ancient times. Commercial arbitration agreements took place between ancient Phoenician and Greek traders. In the sixth century B.C., Peisistratus of Athens appointed arbitrators to settle civil disputes along countryside. The origins of maritime arbitration can be traced as far back as the voyages of ships owned by ancient Phoenicians carrying the cargoes of Greek traders. Ever since, arbitration has played a significant role in waterborne commerce.

In England, arbitration is older than the common law system, which the United States later inherited. In fact, England used arbitration as a common mode of commercial dispute resolution as far back as 1224. Attitudes of English law towards arbitration have been fluctuating from stiff opposition to moderate welcome. The common law courts looked jealously at agreements to submit disputes to extra-judicial determination. The realities of business in due course succeeded in bringing about a change in judicial attitude.

George Washington, first president of the United States of America , had an arbitration clause in his will that basically stated that if any dispute should arise over the wording of the document, a panel of three arbitrators would be called to render a final and binding decision to resolve the dispute. George Washington stated that he considered any arbitration decisions, reached to in accordance of his will, conclusive as any decision of the Supreme Court of the United States.

II. In many societies, in the absence of State law, customary laws enforced by councils of elders and notables, governed aspects of individual behaviour and social interaction. Unwritten, it represented the day to day practice of the people concerned and settlement of disputes by elders/notables. In some African tribes, customary laws applied to succession, traditional title, office of the tribal chief, village headmen, inheritance, liability for debts, rights of widows. All the disputes relating to these were resolved by way of negotiations and conciliations through tribal chief or village headman.

III. In the Indo-Pak Subcontinent, alternate dispute resolution (ADR) has existed in the form of the centuries old “PUNCHAIAT” or “JIRGA” system in rural areas, wherein all disputes were brought before a committee of (respectable and honorable) elders, whose decision was accepted by the parties, and no party could afford to disagree with the decision for fear of social rejection by the Society. The institution, which voluntarily performed this function, was normally the council of the influential people of the locality. Though this informal activity of dispute resolution has been going on throughout Pakistan side by side with the formal administration of justice through courts, the number of jirga and punchaiaat systems is greatest in the provinces of NWFP and Balochistan. In this context, there is one region called the Federally Administered Tribal Areas(FATA), bordering Afghanistan, in whose unprotected areas the principles of restorative justice are exclusively applied and the traditional conflict resolution apparatus, called jirga, is fully operational, because the English common law based on criminal justice system existing in the rest of the country, is not in vogue there. Almost all the fundamental precepts of restorative justice are the underlying principles of this customary law enforcing jirga. Whenever an offence takes place or a dispute arises, the local elders, who command influence and credibility, gather and enter into intensive negotiations with the parties for amicable resolution of the conflicts. The focus is mostly on repairing the damage done and restoring relationships, personal and communal, to their original state as far as possible. The beauty of the system is that all the affected parties, i.e. the offender, the victim and the local community, are deeply involved in the process and efforts are made to resolve the conflict to the satisfaction of all concerned. They deal with a range of issues including conflicting claims to land and water, inheritance, alleged breaches of the 'honor' code and intra-tribal or inter-tribal killings. Many sardars or lower tribal leaders hold regular 'adjudication' days which are widely known and attended by people with a variety of complaints. Sardars have no formal training in 'adjudication'. They tell Amnesty International that they had learned how to conduct jirgas from their forefathers. One sardar said, '' It's all in my head, there is no need to codify it ... I have my own intelligence to tell me what is just''. Others have claimed that while not codified, the principles of tribal justice are well defined.

ADR in the 21st Century means finding domestically and internationally a quicker, inexpensive and more effective system alternative to litigation which is time consuming and expensive. Concerned about the efficiency of national court system in cross border disputes, foreign investors normally prefer mediation or arbitration as the preferred mode of dispute resolution. Dispute settlement through Arbitration/ADR is not only domestic but also an increasingly growing international phenomenon in the context of cross border transaction.

Globally the most frequent ADR service prevalent has been mediation, a process wherein an impartial third party (a mediator) assists disputants in finding a mutually acceptable solution to the conflict. It is both voluntary and confidential. Today, trained mediators and experienced attorneys provide confidential mediation services to parties in formal proceedings. These services may be provided before or after the commencement of litigation. Mediation has a number of advantages over litigation, as it is typically quicker and less expensive. Through mediation, parties can eliminate the uncertainty of an adjudicating authority and its decision and can control the outcome of the dispute to be mutually acceptable to the parties.

COURTS ESTABLISHMENT

IV. Romans appear to be the first to appoint magistrates and establish courts. In later years particularly in England, the Clergy mostly acted as lawyers before the King’s Court and it was in the year 1292 that King Edward-I established the INNS when the lawyers replaced the clergy. Since then and with the Dutch, Portuguese, Spanish and the British domination with their vast empires, it appears that the courts and the legal profession sprang up all over and the alternative dispute system (took the back seat).

Pakistan already has certain legislation in the field of Family Laws relating to marital dispute where dispute must first be attempted to be resolved through mediation and conciliation and only upon failure of conciliation can parties go to courts. Similarly, under the Industrial Employment laws, a union cannot resort to strike unless the dispute relating to terms and conditions of service has first been negotiated between the parties and upon failure of negotiation has been referred to a conciliator. Only then can a union resort to have the dispute settled through court.

(i) After the passage of several centuries, the litigants, the courts burdened with huge backlog and fresh institutions and the lawyers frustrated with delays are seeking arbitration/ADR as a speedy, inexpensive and effective dispute resolution method. Pakistan in the wake of globalization and current liberalization of international trade and investment is adapting Arbitration/ADR as an alternate remedy in its legislation.

(ii) In order to resolve taxation dispute, the Pakistani Government in the year 2004 amended the Income Tax Ordinance, the Customs Act and the Sales Tax (VAT) Act, providing for alternate dispute resolution in cases where the assessee disputes the levy and collection of taxes. The assessee can make an application to the Central Board of Revenue which will constitute a Committee consisting of an officer of the tax officials, two persons from a notified panel of Chartered/Cost Accountant, Advocates and a reputable tax payer. The Committee after examining the dispute shall make recommendations in respect of resolution of the dispute and the Central Board of Revenue on the basis of recommendations of the Committee shall pass appropriate orders. In case the assessee is not satisfied with the decision of the Committee/Central Board of Revenue, he can file an appeal or reference with the Tribunal or court.

(iii) Similarly, under the Customs Act, through Finance Act, 2004, Section 195-C provides for alternate dispute resolution and states that if an aggrieved person, in relation to liability of customs duty, its refund or rebate, penalty or fine, confiscation of goods etc, makes an application for appointment of a committee for resolution of the dispute, the Central Board of Revenue shall appoint a committee consisting of an officer of custom and one or two persons from a notified panel of chartered/costs accountants/advocates for resolution of the dispute.

GRIEVANCE ARBITRATION

V. In the United States, prior to 1930, arbitration was a preventive strike tool used mostly in negotiation. Due to rapid industrialization and unionization in the United States after 1930 and due to the passage of the National Labor Relations Act in 1935, the use of arbitration (mostly interest arbitration) really started to grow in America. Grievance arbitration became the preferred method of dispute resolution in the United States sometime around 1945 due to World War II. Because of the great World War, President Franklin Roosevelt and his War Labor Board were cognizant of the fact that during this war the interruption of steel production and other war materials could not be tolerated by work stoppages taking place prior to interest arbitration hearings. Therefore, Roosevelt’s War Labor Board insisted that labor and management place grievance-arbitration clauses into collective bargaining agreements as a final and binding last step of the grievance procedure to meet the wartime production needs of the country.

Today, one of the most popular arbitration organizations in the world is the American Arbitration Association (AAA). AAA arbitration has over 800 employees in 35 offices worldwide and represents over 8,000 arbitrators and mediators worldwide. Last year AAA arbitration administered 230,255 cases and has administered over 2 million cases in the last 75 years.

VI. In India the history of statute relating to arbitration begins with the regulations under the East India Company made for the Presidency of Bengal, Madras and Bombay.

These regulations were later expanded in the Civil Procedure Act of 1859.  In 1940, an Arbitration Act was passed for the whole of British India.  On 26.01.1950 the Act was extended to the whole of India with few exceptions.  Thereafter, Arbitration and Conciliation Ordinance 1996 (Act 8 of 1996) replaced the 1940 Act and now Arbitration and Conciliation Act, 1996 governs India. Pakistan is still governed by the Pakistan Arbitration Act, 1940.

(i) The Arbitration Act, 1940 provides for arbitration in the presence of arbitration agreement between the parties. There are three classes of arbitration. Firstly, without intervention of the court (Sections 8-9).Secondly, arbitration with the intervention of the court where either party to arbitration may make an application to the court for appointment of an Arbitrator (Section 8 & 20). Thirdly, In a pending suit, the parties apply to the court to refer the suit to arbitration and the court shall appoint an Arbitrator (Section 21-23).

The Arbitrators are required to give the award within four months which period can be extended by the court upon plausible reason given by the Arbitrator and the parties. The Arbitrator is not bound by the rules of evidence or the procedural code and has the power to summon the witnesses, record evidence but while giving an award must give reasons for the same, as required under Section 24-A of the General Clauses Act.

(ii) Foreign arbitration, foreign award and enforcement of foreign awards was provided for in the Arbitration (Protocol & Convention) Act, 1937 based on the Hague Convention, which under section 3 excluded application of the Pakistan Arbitration Act, 1940 and the Pakistan Civil Procedure Code. Section 4(2) provided for foreign award to be enforceable under the Act, 1937 and to be treated as binding for all purposes on the parties as between whom it was made. Section 7 provided for conditions for enforcement of foreign award, which must have been made in pursuance of an agreement, made by the tribunal provided for in the agreement in conformity with the laws governing arbitration procedure, becoming final in the country it was made, in respect of a matter which may lawfully be referred to arbitration under Pakistani law and its enforcement must not be contrary to public policy or the laws of Pakistan. However, section 7(2) provides that a foreign award shall not be enforceable if it has been annulled in the country it was made or the party against whom it is sought to enforce the award was not given notice of arbitration proceedings or was under some legal incapacity or the award does not deal with all the questions referred or contains decisions beyond the scope of the agreement for arbitration. The Arbitration (Protocol & Convention) Act, 1937 has now been repealed under Section 10 of the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral) Awards Act, 2011. However, all foreign awards made before 14th July 2005 shall be enforced in accordance with the provisions of 1937 Act.

(iii) Pakistan has entered into Bilateral Investment Treaties with 36 countries which include dispute settlement mechanism between the host country and foreign investor, failing this through mutual consultations, after which the investor can refer the dispute to a competent court of the respective country or an ad-hoc arbitration panel established under rules of the UN Commission on International Trade Law (UNCITRAL) or to the Court of Arbitration of Paris International Chamber of Commerce (ICC). These mechanisms provide transparent, inexpensive, speedy and accessible dispute resolution to foreign investors. The International Center for the Settlement of Investment Disputes (ICSID) also provides facilities for conciliation and arbitration of investment disputes between contracting states and nationals of other states under the Convention for the Settlement of Investment Disputes and Pakistan is a member of the Center. Recently, on 28th April 2011 the Arbitration (International Investment Disputes) Act, 2011 was promulgated implementing the ICSID Convention or the Washington Convention on Settlement of Investment Disputes between States and Nationals of Other States.

(iv) In the year 2005 Pakistani Government ratified and the New York Convention Arbitration through legislation known as “Recognition and enforcement (Arbitration Agreements and Foreign Arbitral) Awards Ordinance, 2005”, conferring jurisdiction to the High Court which shall recognize and enforce the foreign arbitral award in the same manner as a judgment or order of the court in Pakistan. This Ordinance has now been replaced by Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral) Awards Act, 2011 and contains similar provisions as in the Ordinance of 2005. Further the recognition of a foreign arbitral award shall not be refused except in accordance with Article V of the Convention. However, this Act shall not apply to foreign arbitral awards made before 14th July 2005.

(v) Whilst under the Act of 1937 , which is still effective for Awards made before the commencement date of the new 2010 Act, discretion vested in the court to refer the dispute to arbitration OR to stay the proceedings or not, under the Ordinance, 2005 ( now Act of 2010) no such discretion vests and the court shall refer the dispute to arbitration in accordance with section 4 of the Ordinance ( same provision in the Act of 2010) and stay the proceedings in a case wherein arbitration agreement between the parties is governed by the provisions of Ordinance, 2005 ( the 2010 Act) and the Convention. In a recent case decided by the Karachi High Court reported in 2006 CLD 497 it has been held, provision of section 4(2) of the Ordinance, 2005 has taken away any discretion of the court whether or not to stay proceedings in terms of arbitration agreement on any ground including the ground of inconvenience, except where the arbitration agreement itself is null and void, inoperative or incapable of being performed.

VII. Litigation certainly has disadvantages. Some of the criticisms of court adjudication are:

1. It is becoming more expensive and time consuming. The Judges, with unending cause lists involving multiple jurisdictions (Constitutional, Criminal, Commercial and Civil), are unable to attend to finer issues involved in commercial litigation.

1. Judges often lack expertise in the area of commercial disputes, resulting in wrong decisions and consequential appeals to higher forums.

2. Courts mostly act as courts of law and not equity.

3. Court decisions not acceptable to either party may result in disturbance of commercial relationship.

4. Court adjudication result in win or lose scenarios and not a mutually acceptable decision.

5. Pleadings and documents filed in courts become public documents and copies thereof are available to anyone which may serve to the disadvantage of parties.

Some advantages of litigation are:-

1. Adjudication through court is based on law, rules and regulations provided for, which results in consistent decisions based on law and precedents.

2. Parties are bound by the decision of the court, which can be enforced.

3. Court decisions are appealable and errors can be corrected, reviewed or reversed by the appellate courts.

4. As against litigation, Arbitrations/ADRs have several advantages:-

6. Parties can decide to choose a Mediator or an Arbitrator qualified and experienced in the area of dispute.

7. The Mediator or Arbitrator is not bound by the technicalities of law, rules of evidence or procedure and, therefore, free to resolve the dispute without constraints, resulting in quick resolution of the dispute.The Mediator or Arbitrator is not a court of law and their decisions can be based on equity. Although arbitration awards can be challenged, the present courts trend is not to disturb Arbitrator’s findings of fact. Award can only be challenged on questions of law, saving parties from protracted litigation in appeals.

8. In Arbitration/ADR, confidentiality of pleadings and documents can be maintained.

9. Decisions by Mediator or Arbitrator may not disturb the parties’ commercial relationship.

However, there are some drawbacks. In many Asian countries, settlement of international commercial disputes and enforcement of arbitrator’s award remains a cause of grave concern for foreign investors, which is attributable to a number of factors

a) The Tendency of local courts to jealously guard their jurisdiction and local protectionism. In this context, in the case of IPP there are instances of local project participants and the government having employed local court orders as a means of delaying and even halting completely international arbitration proceedings. There were allegations of absence of transparency in awarding contracts or through corruption and, therefore their being invalid/unenforceable, as in the case of Hubco Project in Pakistan and Enron Project in India.

b) The inability of local courts to appreciate the method of international private dispute settlement and related Rules and Conventions.

c) Another pertinent issue that haunts arbitration in South East Asia is that despite recent moves towards modernization of arbitration law, in many countries there is little expertise available in arbitration or ADR, either at the Bench or the Bar.

CONCLUSION

Based on the drawbacks of court litigation and the advantages of Arbitration/ADR in Asian countries with the (i) ratification and enforcement of New York Convention, (ii) improvement of arbitration laws, (iii) increased expertise in the field of Arbitration/ADR amongst the Bench and the Bar, (iv) establishment of arbitration centers for training programs to update the Judges, lawyers and arbitrators in the field of arbitration and ADR, there can be no doubt that in Asia, arbitration/ADR will be the preferred mode of resolution of commercial disputes domestically as well as for cross border disputes as against litigation, particularly in the wake of current liberalization of international trade and investment in the globalized world.

In this respect, setting up of the Pakistan Center for Dispute Resolution is a dire need of the country. Leaving aside the western countries, many small countries in Asia and Middle East have set up dispute resolution centers such as

1. Singapore International Arbitration Center;

2. Dubai Arbitration Center;

3. Cairo Center for International Arbitration;

4. Beijing Conciliation Center;

5. Hong Kong International Arbitration Center;

6. Vietnam International Arbitration Center;

7. Lebanese Arbitration Center;

8. UAE Commercial Conciliation & Arbitration Center.

The Setting up of a Pakistan Center for Dispute Resolution and its effective, efficient and expedient settlement of disputes will undoubtedly also reduce the pressure of work load on courts and is therefore a very bright prospect.