Domestic arbitral proceedings
The Arbitration Act, 1940 (Arbitration Act) governs and regulates the arbitration proceedings conducted in Pakistan and the enforcement of the domestic arbitral awards.
Subject to certain provisions of the Arbitration Act, the parties are free to adopt procedures of their choice for the conduct of arbitration proceedings. There are no notable national arbitral institutions, hence there are no rules relating to the conduct of any domestic institutional arbitrations. The Pakistani High Courts have formulated certain rules, mainly in the context of the Arbitration Act.
If the parties to an arbitration agreement cannot agree upon the appointment of an arbitrator within the prescribed time limit, either of them may approach a civil court which will then make the necessary appointment. Similarly, if an arbitrator or umpire fails to proceed with arbitration after a request by either party, a new appointment may be made with the intervention of the court. At the request of either party, a court may remove an arbitrator who unreasonably delays the arbitral process. The court may also remove an arbitrator who has committed misconduct (personal or relating to the proceedings). In such cases the court has the authority to fill such vacancy.
An arbitrator may refer questions of law, or the draft award, to the court. The tribunal is not bound by the court’s advice in relation to questions of law; however, it is bound by the court’s review of the draft award. The parties may, in their arbitration agreement, exclude the right of the tribunal to refer the draft award to the court for its review. The court may, upon request of either party, modify or review an award where it appears that a part of the award is upon a matter not referred to arbitration, or where the award is imperfect in form or contains an obvious error. The court may itself remit an award where the award has left undetermined any matters that were referred to arbitration, or where it has determined any matters not referred to arbitration, or where the award is so indefinite as to be incapable of execution. The court may also remit an award that does not give reasons in sufficient details.
Under the Arbitration Act, the court will, on application of the arbitrator, summon the parties and witnesses to appear before the arbitrator. If the parties or witnesses fail to appear before the arbitrator and produce evidence, the arbitrator may make an award on the basis of whatever evidence is before him or her. The recalcitrant party will be subject to the same sanctions as are available in court proceedings, including the issue of a warrant of arrest requiring the party to appear and produce documents. The courts may order the preservation, interim custody or sale of any goods that form part of the subject matter of the arbitration. The courts may also order the detention, preservation or inspection of any property or thing that forms part of the subject matter of the arbitration.
The award given by an arbitrator or umpire is final and cannot be appealed on a point of law. However, appeals are permissible where there has been any procedural irregularity.
The Arbitration Act provides that if the court sees no cause to remit or set aside the award, after the expiration of the time allowed for either party to apply for the arbitral award to be set aside, the court will proceed to pronounce judgment and issue a decree. Such a decree may only be appealed if it is in excess of, or not in accordance with, the arbitral award. The decree passed by the court may be executed by a party in whose favour it is passed by filing an execution application before a civil court of competent jurisdiction in the manner laid down in the Code of Civil Procedure, 1908.
Where a party to an arbitration agreement governed by the Arbitration Act commences legal proceedings against another party to such arbitration agreement in respect of any matter agreed to be referred to arbitration, the Arbitration Act entitles such other party to apply to the judicial authority before which the proceedings are pending to stay the legal proceedings. However, such application has to be made before filing a reply or taking any other steps in such legal proceedings. The judicial authority is not bound to order stay of legal proceedings in every case and may proceed with the legal proceedings notwithstanding the arbitration agreement. In this case, further arbitration proceedings will become invalid if prior notice of the commencement of legal proceedings was given to the arbitrator.
The New York Convention regime
Pakistan is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the New York Convention). Pakistan signed the New York Convention on 30 December 1958 and ratified it with significant delay on 14 July 2005.
Initially, the New York Convention was implemented in the country through successive ad hoc presidential decrees, called ordinances. The last of such ordinances expired on 17 August 2010. On 15 July 2011, a permanent legislation (ie, the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011 (the NYC Act)) was enacted by parliament to fully implement in Pakistan the New York Convention.
The NYC Act applies to international arbitration agreements made at any time, and to foreign arbitral awards made on or after 14 July 2005. A local court has recently held that if a foreign arbitral award, otherwise covered by the New York Convention, is made pursuant to an arbitration agreement governed by Pakistani law, it would be treated as a domestic award and the provisions of the Arbitration Act would apply to such foreign arbitral award. This matter is now before the Supreme Court in appeal and it is likely that the court would overrule this decision.
The NYC Act obliges a local court seized of a matter covered under an international arbitration agreement to stay the judicial proceedings pending before it upon an application made by a party to such agreement, and to direct the parties to refer the matter to arbitration unless the court finds that the arbitration agreement is void, inoperative or incapable of being performed.
A High Court has exclusive jurisdiction to deal with all matters related to the NYC Act. A High Court is the second highest court of the country and the grant of exclusive jurisdiction to such a court reflects Pakistan’s commitment to the regime established pursuant to the New York Convention. Section 6 of the NYC Act obliges a High Court, upon an application filed by a party in whose favour a foreign arbitral award is issued, to recognise and enforce the foreign arbitral award in Pakistan in the same manner as a judgment or an order of a Pakistani court. A foreign arbitral award enforceable under the NYC Act is treated as binding for all purposes on persons as between whom it was made. The court is entitled to refuse recognition and enforcement of a foreign arbitral award only on grounds mentioned in section 7 of the NYC Act which are the same as laid down in article 5 of the New York Convention. However, as mentioned above, one Pakistani High Court has now held that the a foreign arbitral award made pursuant to an arbitration agreement governed by Pakistani law would be treated as a domestic award to which the NYC Act will not apply. The court held that, since the NYC Act did not specifically repeal the Arbitration Act, enforcement of such arbitral awards may be refused on any of the grounds laid down in the Arbitration Act. This judgment has indeed produced significant confusion on this particular issue and until such time that the Supreme Court gives its authoritative finding, ambiguity on this issue will continue.
Prior to the enactment of legislation that enforced the New York Convention in Pakistan, the enforcement of international arbitration agreements was within a local court’s discretion. The case law which developed in Pakistan on this issue generally favoured enforcement of international arbitration agreements; however, in some instances the local courts refused to enforce international arbitration agreements. Local courts generally considered the following factors for deciding whether or not to enforce international arbitration clauses of international agreements: the place where the disputed transaction was to be carried out; the place where relevant evidence was readily available; the balance of convenience; and the financial burden on the parties if they were referred to international arbitration.
The above position has significantly changed following the enactment of the NYC Act, which requires a local court seized of a matter covered under an arbitration clause to which the New York Convention applies to stay the local judicial proceedings and direct the parties to refer the matter to arbitration. The only ground upon which the local court is entitled to refuse stay of legal proceedings is where the arbitration agreement is null and void, inoperative or incapable of being performed. Clearly, the discretion which was allowed to the local courts in the old regime has now been severely curtailed.
The New York Convention has been enforced in Pakistan since 2005. The NYC Act provides an expeditious procedure for the enforcement of foreign arbitral awards covered under the New York Convention. As discussed above, local High Courts have exclusive jurisdiction in relation to all matters arising out of the New York Convention. Pursuant to the NYC Act these courts are not required to strictly follow the archaic and cumbersome procedures laid down in the civil procedure code in relation to the proceedings instituted under the NYC Act.
Despite the fact that the procedure for the enforcement of foreign arbitral awards has been streamlined in the NYC Act local courts seem to be lagging behind in its enforcement. There have been instances in which local courts have applied certain stringent requirements of the civil procedure code in enforcement proceedings, such as, for instance, framing of issues and calling the parties to produce their oral and documentary evidence. While under the NYC Act the enforcement proceedings are supposed to be summary in nature in practice such proceedings have remained pending for several years in local courts. The federal government’s failure to issue the required rules under section 9 of the NYC Act, which lay down the procedure to be applied by local courts for handling these matters, is one reason for the delays in the enforcement of foreign arbitral awards. There also appear to be capacity issues among local courts, which frequently treat enforcement proceedings in the same manner as they treat ordinary civil proceedings.
Recently, superior courts of Pakistan have started to proactively exercise their constitutional power of judicial review even in matters covered by international arbitration agreements. The courts generally exercise these powers in the public interest, mainly to protect the public exchequer either suo moto or on the basis of petitions filed by third party pro bono publicos. It is observed that interested parties often approach local courts through fictitious pro bono publicos to wriggle out of their international arbitration agreements. Frequently, the government and government-owned entities use alleged corruption in the formation of contracts and their own non-adherence to internal governmental procedures as a basic for convincing a local court to declare void an international contract.
Pakistan is also a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965 (the Washington Convention). Pakistan had signed the Washington Convention on 6 July 1965 and ratified it on 15 September 1966. However, as per the requirements of Pakistani law, no legislation was enacted until the promulgation of Arbitration (International Investment Disputes) Ordinance, 2007 to incorporate the Washington Convention into the municipal laws of Pakistan.
Like the New York Convention, the Washington Convention too was initially implemented in Pakistan through successive ad hoc Ordinances until 28 April 2011, when a permanent legislation to implement the Washington Convention was passed by the Parliament called the Arbitration (International Investment Disputes) Act, 2011 (the AIID Act).
Section 3 of the AIID Act entitles a person seeking recognition and enforcement of an arbitral award issued by the International Centre for Settlement of Investment Disputes (ICSID) to have the arbitral award registered in a local High Court subject to proof of any matters that may be prescribed.
An arbitral award registered under section 3 of the AIID Act is treated as a judgment of a local High Court to be executed by the High Court in the same manner as its own judgments. However, enforcement of an award against the government may be refused by the court on the grounds on which a local court judgment may not be enforced against it.
The AIID Act specifically debars the local courts from applying the provisions of the Arbitration Act to proceedings instituted under the Washington Convention. There is, however, no provision in the AIID Act prohibiting local courts from taking cognisance of matters or disputes which are covered under the Washington Convention. Similarly, the AIID Act does not contain any provision obliging the local courts to stay the legal proceedings instituted before them in respect of matters covered under the Washington Convention.
The AIID Act empowers the federal government to make rules regarding registration of arbitral awards issued pursuant to the Washington Convention and the standards of proof thereunder. No rules have so far been framed by the federal government in this regard. Needless to say, ambiguity surrounds this whole issue as the government has so far not shown any inclination of issuing any such rules.
The AIID Act does not contain any provisions regarding judicial assistance by the local courts for evidence-gathering during arbitration proceedings conducted by ICSID. Similarly, there is no provision in the AIID Act empowering the local courts to order the preservation, interim custody or sale of any goods that form part of the subject matter of an ICSID arbitration or to order the detention, preservation or inspection of any property or thing that forms part of the subject matter of an ICSID arbitration.
The case law developed in Pakistan earlier on dealing with international arbitration agreements providing for ICSID arbitration and enforcement of foreign arbitral awards issued under the Washington Convention seems to have now become redundant on account of the new legal regime now in place in the country. No worthwhile case law has so far developed under the AIID Act since it is a brand new piece of legislation. However, certain high-profile arbitration proceedings involving federal and provincial governments and foreign investors are currently pending before ICSID and ICC tribunals. When matters arising out of these arbitration proceedings would come before local courts the position of local courts on the AIID Act and the Washington Convention would be clarified.
Other foreign arbitral awards
Certain foreign arbitral awards may be enforceable in Pakistan under the Arbitration (Protocol and Convention) Act, 1937. A foreign arbitral award that is not covered under any of the aforementioned legalisations may still be enforceable in Pakistan through ordinary civil courts, which can treat a foreign arbitral award as merely a cause of action.
One important issue is whether or not a recourse may be made to the provisions of section 41 of the Arbitration Act for obtaining an injunction in aid of actual or intended arbitration proceedings before an ICSID or an ICC tribunal. Section 41 of the Arbitration Act grants certain specific powers to a civil court in relation to arbitration proceedings. These powers include matters such as preservation, interim custody, sale of any goods which are subject matter of the reference, interim injunction, appointment of a receiver, etc.
A party to arbitration proceedings may approach the competent court for the granting of an interim injunction under section 41 of the Arbitration Act against any other party to such arbitration proceedings. An important question, which largely remains unanswered in Pakistan, is whether or not a local court may be approached under section 41 of the Arbitration Act for the granting of an interim injunction in aid of arbitration proceedings being conducted outside of Pakistan.
Section 47 of the Arbitration Act states that the provisions of the Arbitration Act apply to all arbitrations and to all proceedings thereunder, save those otherwise provided by any law that is currently in force. Section 7 of the AIID Act states that the provisions of the Arbitration Act shall not apply to proceedings pending pursuant to the Washington Convention. In view of this provision, it appears that a recourse may not be made to section 41 of the Arbitration Act for the grant of an interim injunction in aid of arbitration proceedings pending pursuant to the ICSID Convention.
There appears to be no provision in the AIID Act which may empower a local court to issue an interim injunction in aid of arbitration proceedings before an ICSID tribunal. Furthermore, the AIID Act does not contain an express provision obligating the local courts to implement any interim decision of an ICSID tribunal issued under article 47 of the ICSID Convention regarding provisional measures to preserve the respective rights of the parties.
It is important to note that no provision of the NYC Act specifically ousts the applicability of the Arbitration Act to matters governed by the NYC Act. While the provisions of the Arbitration Act, to the extent of inconsistency, do not apply to matters governed by the NYC Act, it appears that the provisions of the Arbitration Act may continue to apply insofar as they are not in conflict with the NYC Act. This may include a recourse to section 41 of the Arbitration Act for the grant of an interim injunction in aid of the arbitration proceedings before an ICC or any other tribunal excluding an ICSID tribunal. No case law has so far developed to clarify this issue. Such application of the Arbitration Act to matters related to international arbitration proceedings would be unusual as the Arbitration Act was not intended to deal with matters related to foreign arbitration agreements and proceedings.
It is to be further noted that this is an extremely sensitive area of Pakistani law, as the Arbitration Act has a notorious reputation for stifling arbitration proceedings. For instance, section 34 of the Arbitration Act is frequently used to stay arbitration proceedings in cases in which the parties have valid arbitration agreements. The issue of making any recourse to the Arbitration Act is fraught with difficulty, as once it is admitted that there is an application of the Arbitration Act to an agreement containing a foreign arbitration clause, it would then be difficult to stop the court from applying those provisions of the Arbitration Act to international arbitration agreements for which this law is dreaded. A local court has already taken this path and held that since the NYC Act did not expressly repeal the Arbitration Act, the remedies available to a party under the Arbitration Act 1940 remain available.
The author would like to thank Saqib Majeed, an associate in the firm, for his invaluable assistance in the writing of this article.