Pakistan Arbitration Law: Ripe for Reform
Pakistan Arbitration Law: Ripe for Reform-The British relinquished their control of the Indian subcontinent in 1947, but they left behind an administrative, social and legal framework that has religiously been retained in Pakistan. This is particularly evident in Pakistan’s legal regime; 73 years on, a myriad of laws from the pre-independence era (albeit in their somewhat amended shape) form the basis of its justice system.
A prime example is the Arbitration Act, 1940 (“the Arbitration Act”), which is modelled on the pre-partition English Arbitration Act of 1934. Ironically, while the English have moved on to update their arbitration regime, Pakistan is still following their colonial legacy. The Arbitration Act is outdated and must be revised to bring Pakistani arbitration law at par with international best practices. Inspiration can be drawn from India, Pakistan’s subcontinental compatriot, who has significantly reformed its arbitration regime by abandoning the archaic law of 1940.
This article will identify some aspects of the Arbitration Act, and the Pakistani arbitration regime in general, which can be modernised to elevate the Pakistani arbitration practice. This article will examine the genesis and significance of arbitration in today’s world, and also discuss the features of the Arbitration Act that are ripe for reform.
A. WHAT IS ARBITRATION?
Arbitration is a private dispute resolution process, whereby parties refer disputes to one or several individuals for a final and binding determination. It has evolved as the primary alternative to litigation, mainly because it affords the parties a confidential forum, the flexibility to select neutral arbitrators and adopt procedures which suit their needs. In complex commercial cases, parties have the comfort of nominating arbitrators who have expertise in the relevant field. Its confidential nature ensures that a party’s commercial reputation is not compromised by ongoing contentious proceedings.
Other primary characteristics, which make arbitration an attractive option, are that it is a relatively swifter process and it results in a binding award – which can be challenged in limited circumstances only. With the advent of the New York Convention, 1958 (“the NY Convention”) – to which 163 countries are now signatories – the process of enforcing an arbitral award in foreign countries has been streamlined.
(i) Domestic and international arbitration
It is pertinent to distinguish between domestic and international arbitration. A domestic arbitration is self-explanatory: an arbitration that is wholly local in nature, i.e., the parties’ domicile, the substantive law of the underlying contract, the performance of the parties’ obligations, and the procedural and governing laws of the arbitration are in, or of, the same jurisdiction.
On the other hand, international arbitration can involve multiple jurisdictions, either substantively or procedurally. It can involve cross-border commercial activities, parties which are domiciled in multiple countries, or a seat of arbitration which is different from the substantive law of the underlying contract. The meaning and scope of an international arbitration varies from jurisdiction to jurisdiction. For example, the UNCITRAL Model Law on International Commercial Arbitration, 1985 (“the Model Law”) defines an international arbitration as follows:
“An arbitration is international if:
(a) the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different States; or
(b) one of the following places is situated outside the State in which the parties have their places of business:
(i) the place of arbitration if determined in, or pursuant to, the arbitration agreement;
(ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject-matter of the dispute is most closely connected; or
(c) the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.”
Countries which have tailored their national domestic laws on the basis of the Model Law have incorporated similar language to define international arbitration: for example, see Article 4 of Law No. 2 of 2017 of the State of Qatar (“the Qatari Arbitration Law”).
While the arbitral process substantively remains the same, the domestic or international nature of an arbitration may affect enforcement of arbitral awards. However, in international arbitration, and domestic arbitration involving parties with assets in multiple countries, parties can have the assurance that a favourable award is likely to be enforced in a foreign jurisdiction, further to the NY Convention.
(ii) Institutional and ad hoc arbitration
Arbitration can be institutional or ad hoc. Parties are free to refer the administration of an arbitration to an arbitral institution, such as the International Chamber of Commerce (“the ICC”), the London Court of International Arbitration (“the LCIA”) and the Qatar International Centre for Conciliation and Arbitration (“QICCA”). The institution administers the arbitration, and its arbitral rules govern the conduct of arbitration.
On the other hand, an ad hoc arbitration does not involve an institution. Rather, the parties retain the flexibility to manage administrative matters and designate procedural rules. Reference to an institution does not, however, affect the domestic or international nature of an arbitration. It is entirely proper for a domestic arbitration to be administered by an arbitral institution which is based outside its jurisdiction. As it will be seen later, understanding the distinction between ad hoc and institutional arbitration is important in the context of Pakistani law, particularly because the latter is not a concept which is expressly covered in the Arbitration Act.
(iii) Seat of arbitration
Further, the seat or place of arbitration is a crucial concept. It is one of the deciding factors of the domestic or international nature of an arbitration. The law of the seat provides the curial law of the arbitration and determines the courts which would have supervisory jurisdiction. Gary Born in his seminal text, International Commercial Arbitration (2014), explains that the seat of arbitration, amongst other things, determines “(a) the national arbitration legislation applicable to the arbitration; (b) the law applicable to the “external” relationship between the arbitration and national law and courts (including annulment of awards and selection and removal of arbitrators); (c) the law applicable to the “internal” procedures of the arbitration (including requirements for equality of treatment and due process); and (d) the law presumptively applicable to the substantive validity of the arbitration agreement”.
B. THE PAKISTANI ARBITRATION REGIME
Pakistan’s arbitration regime is primarily governed by two statutes: (i) the Arbitration Act; and (ii) the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011 (“the 2011 Act”). A draft legislation, Arbitration and Conciliation Act, 2015 (which adopted many features of the Model Law), was presented in the Senate in 2016; however, it appears that the legislation was not pursued any further.
While the 2011 Act is relevant to the ratification of the NY Convention into Pakistani law and can form the basis of a separate article on its own, this article focuses on the Arbitration Act and proceedings conducted thereunder.
At the outset, a plain reading of the Arbitration Act would highlight one if its most hotly-debated features: the scope of judicial intervention in arbitral proceedings. While judicial oversight is necessary for arbitration to succeed as an alternative to litigation, an expansive scope, or excessive judicial intervention, could potentially render arbitrations nugatory. Arbitration is aimed to provide an alternative, quick, flexible, and binding dispute resolution mechanism, and should not be condensed to a supplementary layer of litigation. International practitioners and academics advocate for minimal judicial supervision and intervention, and for “a supportive approach by local courts to requests by arbitrators for judicial assistance in aid of the arbitration”.
The succeeding paragraphs of this article set out an overview of some important principles that are either (i) concepts which should be introduced; or (ii) existing principles which must be revised, such that the Arbitration Act can be modernised in keeping with international standards and practices.
This is a well-established principle in international arbitration, which means that an arbitral tribunal is competent to rule on its competence/jurisdiction. Generally, a party that fails to raise a jurisdictional challenge before the tribunal is precluded from raising the same objection before a court.
For example, Article 30 of the Arbitration Act 1996 of England (“the English Arbitration Act”) grants a tribunal the authority to rule on its substantive jurisdiction. Article 31 of the same prescribes the period within which a party must raise its jurisdictional challenge, as follows: “an objection that the arbitral tribunal lacks substantive jurisdiction at the outset of the proceedings must be raised by a party not later than the time he takes the first step in the proceedings to contest the merits of any matter in relation to which he challenges the tribunal’s jurisdiction.”
While Section 67 of the English Arbitration Act allows a party to challenge an arbitral award for lack of substantive jurisdiction, a party may lose its right to challenge an award on that basis if such an objection has not been raised before the tribunal. There is an exception to that rule: at the time that a party took part in the arbitral proceedings, it did not know and could not with reasonable diligence have discovered the grounds for the objection.
This principle is also contained in the Model Law: a jurisdictional challenge must be raised before the tribunal prior to the submission of the statement of defence, unless otherwise permitted by the tribunal. Likewise, a party who fails to object to the tribunal’s jurisdiction within the prescribed time period is deemed to have waived its right to object.
However, in Pakistan, while a tribunal’s right to determine its jurisdiction is recognised, the doctrine of Kompetenz-Kompetenz has developed somewhat differently. In the Karachi Dock case, the Honourable Supreme Court explained that a tribunal’s decision on its jurisdiction is open to review by the courts, and that the Pakistani legal regime does not wholly recognise a waiver of this right (as observed in other jurisdictions). Particularly, where a tribunal’s appointment is made in contravention of the Arbitration Act, the waiver principle has no application in Pakistan.
Indeed, while the courts should retain the authority to entertain challenges to awards on the basis of a tribunal’s manifest lack of jurisdiction, or where it has been constituted in violation of the parties’ agreement and/or the applicable rules or the law, the Arbitration Act must be reformed to (a) expressly include the doctrine of Kompetenz-Kompetenz; and (b) introduce the principle of waiver of the right to object, so as to (i) give procedural certainty to parties; and (ii) limit the intervention of the courts in circumstances where a party has failed to act diligently and challenge the tribunal’s jurisdiction when it ought to have done so.
(ii) Flexibility to adopt institutional rules
In order to reform the culture of arbitration in Pakistan, it is important to understand the intricacies of commercial arbitration, particularly the difference between international and domestic arbitration, and institutional and ad hoc arbitration, as explained above.
Domestic arbitration in Pakistan is largely ad hoc. A standard arbitration clause would refer disputes to arbitration under the Arbitration Act, and it is a rare occurrence to find a reference to an arbitral institution in a wholly domestic arbitration agreement. However, to modernise the practice, the Arbitration Act should expressly permit parties to adopt institutional rules and conduct institutional arbitration.
In general, awareness must be raised in respect of institutional arbitration and advantages of the same over ad hoc arbitration. Pinsent Masons, a leading international law firm, has articulately summarised some of the benefits of institutional arbitration, as follows: (i) Institutions provide pre-established procedural rules which ensure the arbitration is commenced and conducted in a timely manner; (ii) Administrative assistance is provided through the institution’s secretariat and/or court; (iii) Most institutions have an esteemed panel of certified and experienced arbitrators; (iv) Institutional rules assist in encouraging non-responsive parties to participate in the arbitration; and (v) Institutions offer “an established format with a proven record”.
While an arbitral reference to an institution will not affect the domestic nature of an arbitration (in circumstances where the parties are domiciled in Pakistan, the substantive law is Pakistani law, and the contracts are performed in Pakistan), it would allow parties to opt for rules which offer a quick and robust procedure for the conduct of arbitration. From the perspective of legislative reform, the Arbitration Act should expressly give preference to the competence of an arbitral institution, in circumstances where parties opt for institutional arbitration instead of ad hoc.
An example of such a measure could be the power to appoint an arbitrator, a power that has traditionally been vested in the courts. Under Section 8 of the Arbitration Act, the court has the authority to appoint an arbitrator where the parties fail to do so. While the court’s power would stand true for ad hoc arbitration, the power to appoint an arbitrator in institutional arbitration should vest with the court or secretariat of the relevant arbitral institution.
Article 11(3)(b) of the Model Law provides that “in an arbitration with a sole arbitrator, if the parties are unable to agree on the arbitrator, he shall be appointed, upon request of a party, by the court or other authority specified in article 6”.
Article 6 in turn permits States to specify the authority which would be competent to deal with such matters: “The functions referred to in articles 11(3), 11(4), 13(3), 14, 16(3) and 34(2) shall be performed by … [Each State enacting this model law specifies the court, courts or, where referred to therein, other authority competent to perform these functions]”.
An illustration of the implementation of Articles 6 and 13 of the Mode Law can be found in the Qatari Arbitration Law. Article 6 thereof provides that “The Other Authority or the Competent Court, if the Parties fail to agree on such Authority, shall perform the functions referred to in Articles 11(5) and (6), 13(1) and (2), 14(1), and 16(3) of this Law”. Further, Article 11(5)(a) provides that “if the Arbitral Tribunal is to comprise one arbitrator, and the Parties do not agree on the arbitrator within thirty days of the date of the written notification from the Claimant to the other Parties that they must do so, any Party may request such an appointment to be made by the Other Authority or the Competent Court, as the case may be.”
Reading Articles 6 and 11 together, it can be seen that the caveat “if the parties fail to agree on such Authority” in Article 6 and the phrase “by the Other Authority or the Competent Court, as the case may be” in Article 11 cover scenarios where parties have not agreed to an institutional arbitration. In other words, the court will only have jurisdiction to appoint an arbitrator where parties have not agreed an arbitral institution or another appointing authority.
This approach is consistent with the rules of leading arbitral institutions. For example, Article 12(3) of the Arbitration Rules of the ICC (“the ICC Rules”) states that “Where the parties have agreed that the dispute shall be resolved by a sole arbitrator, they may, by agreement, nominate the sole arbitrator for confirmation. If the parties fail to nominate a sole arbitrator within 30 days from the date when the claimant’s Request for Arbitration has been received by the other party, or within such additional time as may be allowed by the Secretariat, the sole arbitrator shall be appointed by the [ICC] Court.” The body authorised to appoint an arbitrator is the International Court of Arbitration of the ICC, and not the national courts of the seat.
Another example is the power of the courts to grant an extension to tribunals for the issuance of an award. The default period is four months under Paragraph 3 of the First Schedule of the Arbitration Act, subject to extensions from the court. In institutional arbitration, such a power must vest with the arbitral institution, while courts should retain the power in respect of ad hoc arbitration.
Therefore, with the introduction of such reforms, the following objectives can be achieved: (i) encourage institutional arbitration in Pakistan; (ii) ensure that the legal regime is consistent with international standards; (iii) avoid potential discrepancies between local law and institutional rules; (iv) increase the efficacy of the arbitration regime; and (v) promote certainty of arbitral procedures and practice in Pakistan.
(iii) Reconciling Sections 20 and 34 of the Arbitration Act
Section 20 of the Arbitration Act relates to commencing arbitration ‘with the intervention of a court’, whereas Section 34 deals with a court’s power to stay court proceedings if an arbitration agreement exists between the parties.
The effect of Section 20 is to compel parties to arbitrate, in circumstances where a respondent party is not willing to participate in arbitral proceedings or is otherwise unresponsive. The court has the power to ‘make an order of reference to the arbitrator’ under Section 20. On the other hand, Section 34 empowers a court to stay legal proceedings if the parties have an arbitration agreement. Section 34, as a matter of plain reading, does not empower a court to refer the parties to arbitration. This can lead to significant delays, and below is an illustration to explain this point:
Despite being a party to an arbitration agreement, if a party files a court case against its counterparty, the same can be resisted on the basis of a Section 34 application. As a result, the court can stay the proceedings. However, since the court does not have the power under Section 34 to refer the parties to arbitration, a Section 20 application might be necessitated to compel the unresponsive party to arbitrate.
The author suggests a two-pronged approach to deal with this issue, which may be considered radical by some.
First, Section 20 of the Act and the concept of arbitration ‘with the intervention of a court’ should be reviewed. Arbitration is a consensual process, and the parties’ written agreement is the bedrock on which it is based. In circumstances where a respondent (who is a party to an arbitration agreement) fails to agree to arbitrate a dispute, or participate in an arbitration, the claimant should not be compelled to approach the courts for a Section 20 application and incur further costs and delays. Instead, the repercussion for failing to honour an arbitration agreement should be borne by the defaulting respondent: the tribunal should proceed with the arbitration in the respondent’s absence, provided it has been duly notified of the proceedings. In this way, months or even years of delay, which are caused by contesting the Section 20 application, can be avoided.
Second, in circumstances where a party files a court case even though an arbitration agreement exists between the parties, the power of the court to stay proceedings under Section 34 should be expanded to include the power to refer the parties to arbitration. In this way, the court’s authority to stay the proceedings and refer the parties to arbitration will be consolidated into a single provision, without the need for any further reference to Section 20. In turn, this will also reduce the parties’ burden and costs of unnecessary motions in the court.
(iv) Judicial intervention post-award
The power to correct and modify clerical and other errors should be vested only in the arbitral tribunal in institutional and ad hoc arbitration alike. This is consistent with international best practices and standards. The court’s remit should focus on substantive issues which would affect the enforcement of the award. In this way, potential costs and delays of Section 15 applications (modification of award by the court) can be avoided.
As to a court’s power to entertain challenges and appeals to awards, the law in Pakistan is well-settled and clearly spelt out in Gerry’s International (Private) Limited vs. Aeroflot Russian International Airlines. In that case, the Honourable Supreme Court laid out numerous factors that a court must consider, including that “while making an award rule of the Court, in case parties have not filed objections, the Court is not supposed to act in a mechanical manner, like a post office but must subject the award to its judicial scrutiny”. It further held that the “Court does not sit in appeal over the award and should not try to fish or dig out the latent errors in the proceedings or the award…”, and that the “Court can set aside the award if there is any error, factual or legal, which floats on the surface of the award or the record”.
In other words, while the courts in Pakistan retain the power to scrutinise, remit and set aside an award, that power is to be exercised in accordance with the principles that the Honourable Supreme Court has comprehensively laid out in the Gerry’s International case. This approach is consistent with the English Arbitration Act, which grants the English courts the authority to vary, remit and set aside awards, within the limited grounds set out in Sections 66 to 71 thereof. However, the English courts review such challenges from the perspective of minimal judicial intervention. This was recently held by the English High Court in OHL Internacional & Anor vs Qatar Foundation. It held that the English courts do not approach arbitral awards “with a meticulous legal eye endeavouring to pick holes, inconsistencies and faults”. The grounds for challenge under the English Arbitration Act are “not to be used simply because one of the parties is dissatisfied with the result, but rather as a longstop in extreme cases where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected”.
In addition to the restraint that the English judiciary exercises towards arbitral awards, the overriding objective in the Civil Procedural Rules mandates that the courts deal with cases justly and at proportionate cost. In other words, cases are handled in an efficient manner, without unnecessary costs and delays to the parties.
Other jurisdictions, particularly those which have adopted the Model Law, prescribe that the parties’ exclusive recourse against an arbitral award is to file an application to set aside the same. This approach is followed by the Qatari Arbitration Law, which prescribes a 30-day period after the award for filing an annulment application. Such an approach, in the author’s view, is more suited for a civil law system, in which the doctrine of stare decisis is not fundamental.
It is encouraging to see that Pakistani law on judicial intervention post-award is well-settled as a result of the Gerry’s International case, and therefore there is no apparent need to alter the law in this respect (other than vis-à-vis correction/modification of awards, as explained above). However, it must be ensured that courts deal with such matters in a quick and efficient manner. Otherwise, excessive delays due to court proceedings would remain a risk for parties who wish to obtain a speedy resolution of disputes.
(v) Other matters
In order to streamline the arbitral process, particularly in respect of ad hoc arbitration, the Arbitration Act should set out a default arbitral procedure. Such a procedure will be applicable in the absence of the parties’ agreement. For example, see Articles 22, 23, 24 and 26 of the Model Law, which prescribe the default position as to the language of arbitration, statements of claim and defence, and hearings and experts.
Further, an arbitral tribunal must be empowered to grant interim measures, and the legislation must set out the grounds on which such an interim measure can be granted (see Article 17 of the Model Law). The law should also set out the enforcement procedure for a procedural order (i.e., the most common form in which a tribunal grants an interim measure). A court’s power to grant interim measures can be limited to the period prior to the constitution of the tribunal; and after the constitution of the tribunal, it can be limited to circumstances where the tribunal is incapable to act at the time. This would ensure that parties are able to seek interim measures from an arbitral tribunal, without having to face unnecessary delays in courts.
Pakistan is a jurisdiction which is ripe for arbitration. Although some practitioners may argue that the Pakistani arbitration law is entirely well-settled, the Arbitration Act is still not the default choice of law for Pakistani entities and in contracts governed by Pakistani substantive law. This is because many features of the law are outdated, while certain other significant concepts and practices, such as the Kompetenz-Kompetenz principle and express permission to opt for institutional arbitration, need to be introduced. Above all, the extent of judicial intervention is a discouraging factor, whereby arbitration is perceived as a secondary or additional layer of litigation. As a result, parties tend to avoid arbitration altogether by simply resorting to the courts in the first instance.
It is vital for Pakistan to project and develop itself as an arbitration-friendly jurisdiction, such that it is able to attract foreign investment and also provide a reliable dispute resolution forum to its local businesses and individuals. However, to achieve this, an overhaul is required in the legal and cultural mindset.
For example, law students, whether in local institutions or those completing external programmes, must be taught alternative dispute resolution as a mandatory module. Likewise, legislative reforms will show Pakistan’s commitment towards promoting arbitration and encourage international practitioners to consider Pakistan a serious arbitration jurisdiction in the region.
Further, arbitral institutions must be developed and encouraged to operate in Pakistan. This would not only include promoting local organisations, such as the Centre for International Investment and Commercial Arbitration (CIICA), but also procuring international organisations, e.g., the ICC, the LCIA and QICCA, to promote and expand their services to Pakistan. Lastly, campaigns, events and seminars (or webinars in the COVID-19 climate) must be organised to increase the business and legal community’s awareness and understanding of alternative dispute resolution mechanisms, including commercial arbitration.
- Please see the NY Convention’s website for further information: http://www.newyorkconvention.org/countries.
- Seat of arbitration is explained later in the article.
- Gary Born, International Commercial Arbitration (2nd edition, Kluwer Law International 2014).
- Section 73, the English Arbitration Act.
- Article 16, the Model Law.
- Karachi Dock Labour Board vs Messrs Quality Builders Ltd. PLD  SC 121.
- Please see: https://www.pinsentmasons.com/out-law/guides/institutional-vs-ad-hoc-arbitration.
- For example, see Section 8 of the Arbitration Act, which explains the authority of the court to appoint an arbitrator.
- This position has been upheld in PLD 1962 Lahore 95.
- 2018 SCMR 662.
-  EWHC 2539 (Comm).
- Lawrence Collins LJ in Bandwidth Shipping Corporation v. Intaari  EWCA Civ. 998 cited in  EWHC 2539 (Comm).
- Rule 1.1, Civil Procedure Rules.
- Article 34, Model Law.
The author is an arbitration lawyer based in Doha, Qatar.