An Overview of the Arbitration Act 1940

Arbitration in Pakistan is primarily governed by two legislations: the Arbitration Act 1940[1] and the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011[2], which ratified the New York Convention 1958. As a result of its statutory foundations, Arbitration is one of more common forms of Alternative Dispute Resolution practiced in Pakistan.

Arbitration can be defined as a “bilateral arrangement for investigation and determination of a dispute between parties by one or more persons chosen by them.”[3] An agreement to arbitrate has to be in writing, and can be set out in a separate agreement or in clause within a contract. This was explained in Crescent Steel and Allied Products Limited V Sui Northern Gas Pipeline Limited[4]. An arbitration clause should set out the parties’ mutual consent, number of arbitrators, their appointment details, seat of arbitration, the finality of the award, and the language.

Implied provisions of the Arbitration Act 1940

The 1940 Act does not, however, set out a clear set of requirements for an arbitration agreement to be valid. Instead, there are certain standardized elements which are implied in an arbitration agreement by virtue of Section 3 and the First Schedule of the Arbitration Act. An agreement which is contrary to such implied conditions would be void, unless the parties are otherwise expressly permitted to contract out of such conditions.

Some of the implied conditions in the First Schedule are as follows:

  • Rule 3: the arbitrators shall make their award in 4 months.
  • Rule 5: the umpire shall make his award within 2 months.
  • Rule 6: power of the tribunal to call for evidence and witness.
  • Rule 7: the award shall be final and binding.
  • Rule 8: arbitrators have the discretion to award costs.

Arbitration and Jurisdiction

In the event that a dispute arises between parties, and one party is not willing to arbitrate and files a civil suit, the other party may apply to the court under Section 34 for a stay of the proceedings (provided an arbitration agreement exists). However, such an objection must be raised at the first opportunity and before submitting a responsive pleading in the civil suit.[5]

There does, however, exist a fine exception to this law, which was witnessed in Habib Rafiq (Pvt) Limited v GOP[6], where the government had blacklisted Habib Rafiq, who had then taken the matter to the High Court under its writ jurisdiction. The GOP invoked the arbitration clause under Section 34, however, the High Court held that the issue of blacklisting did not have anything to do with the agreement between the parties. The issue at hand was an administrative abuse matter where the government had misused its authority and, therefore, the arbitration agreement was not relevant and writ jurisdiction was assumed. This makes it clear that the court will only exercise its jurisdiction under Section 34 if the matters before it ought to be resolved through arbitration, further to the parties’ agreement.

Seat of arbitration

The seat or legal place of arbitration is pivotal in determining the governing law of the arbitration. Guidance can be taken from cases such as Societe Generale De Surveillances S.A V Pakistan through Secretary, Ministry of Finance[7] and Messrs Hasan Ali Rice Export Co. v. Flame Maritime Ltd. and another,[8] where it held that the seat of arbitration determines the governing law of the arbitration proceedings irrespective of the parties’ nationality.

Arbitration without the court’s intervention

This is arbitration in its true sense, i.e., where the parties are willing to arbitrate without any need for the court’s intervention. Courts, however, retain certain residual powers which allow them to intervene in limited situations. Examples of such powers include the powers under Section 8 (the power to appoint an arbitrator) and Section 11 (the power to remove an arbitrator).

Arbitration with the court’s intervention

A party willing to arbitrate may give notice to the other party for arbitration. If there is no response received by the notifying party, then the same can file a Section 20, asking the court to compel the parties to arbitrate.

In 2014 CLC 466, Mengal J in the Islamabad High Court stated that Section 20 has no time frame which demands response by the other party. It only states that an ‘opportunity’ be given to respond with sufficient cause for the matter to go to arbitration. If the party tries to delay, then the court can refer to arbitration. There is, however, a bar to its application. If the matter is already before the courts, then there can be no Section 20 application. Therefore, this is only applicable where no arbitration or court proceedings are already in process.

Duties of Arbitrators

Although the 1940 sets out the duties of an arbitrator in a limited fashion, guidance can be taken from the judgments of Pakistani courts. For instance, Syed Fakir Shah V Haji Inayatullah Khan[9] lays down the principle that arbitrators are required to uphold natural justice as they assume adjudicatory powers. Further, 2008 CLC 798 states that strict compliance with the Civil Procedure Code and law of evidence is not necessary, as arbitration is not a court proceeding. 2000 MLD 272 provides that arbitrators are required to settle disputes amicably and should look to avoid all “technicalities of procedural law.” However, matters that do not fall within the ambit of the parties’ arbitration agreement are within the court’s jurisdiction under Section 41. Cases such as 2003 YLR 1696 and 2001 YLR 758 clarify that, in such matters, the courts may use the procedural rules applicable to court proceedings but the same are not necessary to be applied to matters which are subject to arbitration.

Challenges and correction to the award

In 2014 CLD 824, the Supreme Court stated that powers to make an award are “judicial in nature, not ministerial.” Therefore, even if there are no objections raised by parties, an award may be set aside if there is a nullity or prima facie illegality.

Further, if there are minor issues in the award then courts can modify it. However, courts usually try to sustain it as was evident in the case of 2014 CLD 824, where a three-member bench stated that the courts should operate in a manner so as to favour the award. Having said that, it is the duty of the judge not to make awards a rule of court in a mechanical fashion. They are required to consider any objections that are or are likely to be raised to the award. In the same case, the Supreme Court stated that the court should not act as a “post office”. The position has now been made clear by the Supreme Court in the Gerry’s International (Private) Limited vs. Aeroflot Russian International Airlines[10] case.

This may have certain practical implications for parties because the finality of an arbitral award may be compromised if the courts adopt a pro-intervention approach, and can also lead to substantial delays.

Res Judicata

This principle applies to arbitration proceedings. It essentially means that parties should not be permitted to have a second go at adjudicating disputes which have been settled through arbitration or litigation already.[11] Further, in BNP (Pvt.) Limited vs. Collier International Pakistan (Pvt.) Limited[12], the Islamabad High Court held that, even if a contract is terminated, the arbitration clause will survive in the event of any frustration, repudiation, cancellation or expiration because it is only when such events occur, that parties invoke the arbitration clause.

References

  1. Arbitration Act 1940.
  2. Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011.
  3. Hasan Bakhsh V Sultan 2016 MLD 1157 (LHC).
  4. 2013 MLD 1499 (SHC).
  5. Infospan Private Limited V Messrs Telecom Foundation and another 2017 CLC 131; and Muhammad Farooq V Nazir Ahmad and others PLD 2006 196.
  6. 2014 LHC 2109.
  7. 2002 SCMR 1694.
  8. 2004 CLD 334.
  9. 2013 MLD 689.
  10. 2018 SCMR 662.
  11. 2017 CLC 466.
  12. 2016 CLC 1772.

Author:

Shanzeh Junnaid

The author is a third year law student with a keen interest in arbitration and litigation.