International arbitration in Pakistan was long governed by two acts: The Arbitration Act 1940(AA) and the Arbitration (Protocol and Convention) Act, 1937(APC).
When enforcing foreign arbitration agreements and foreign arbitral awards that met certain criteria, Pakistani Courts applied the APC, otherwise they applied the AA. The Courts, however, failed to apply criteria consistently. Furthermore, disputing parties often tried to enforce their foreign awards under the AA, instead of under the APC.
The distinction between the AA and the APC is important because, unlike the APC, the AA provides Pakistani Courts with more discretion to refuse the stay of Court proceedings, to refuse enforcement and to restrain parties from resolving their disputes through international arbitration. This therefore creates unhelpful ambiguity as to the regime regarding enforcement of international arbitration in Pakistan.
Implementation of the New York Convention
Pakistan has a dualist legal system. This system requires domestic legislation to implement international treaties and conventions to which Pakistan is a party.
As a result, the rules applicable to international arbitration in Pakistan were not in accordance with its international commitments. This was rectified by the following two acts:
- The Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011 (the “REFA Act”), which transposed the New York Convention[1].
- The Arbitration (International Investment Disputes) Act 2011(AIDA), which transposed the ICSID Convention[2].
The next sections will analyse the REFA Act and its significance.
The REFA Act – Enforcement of Arbitration Agreements in Pakistan
The REFA Act has brought more certainty to parties wishing to enforce their international arbitration agreements in Pakistan. It has accomplished this through Section 4(2), which has inserted the wording of the New York Convention Article II(3).
This Section instructs Pakistani Courts to refer disputes to arbitration in the presence of an arbitration agreement. The only exception is when the Court finds that the agreement is null and void, inoperative or incapable of being performed.
Fortunately, this provision has already been interpreted as removing the Court’s discretion in enforcing foreign arbitration agreements, including its discretion to refuse agreements based on the argument that arbitration would be highly inconvenient[3].
Unfortunately, some Pakistani Courts had taken this approach in the past[4], undermining the viability of arbitration. While this approach was indeed criticised and partially corrected by the Supreme Court[5], by not being very specific, the ambiguity was never fully removed. Consequently, the REFA has already proven very useful in regards to removing this ambiguity.
The REFA Act – Enforcement of Arbitration Awards in Pakistan
Regarding the enforcement of foreign arbitral awards, REFA Section 7 fully transposes Article V of the New York Convention into Pakistani domestic law.
The enforcement of established foreign arbitral awards is therefore in theory straightforward. It is the definition of “Foreign Arbitral Awards”, found in Section 2(e) of the REFA Act that creates complications regarding enforcement. The definition is: “[A] foreign arbitral award made in a [New York Convention] Contracting State as may be notified the Federal Government, in the official Gazette.” The applicability of the REFA Act therefore requires a notification from the State in which the arbitration took place, which is not always a simple matter to obtain.
Furthermore, even if such a notification is provided, Pakistani Courts have classified arbitration awards where the governing law of the main agreement was Pakistani law as domestic arbitration awards[6]. To make matters worse, in 2012, the Lahore High Court considered an arbitral award issued by the ICC between a Japanese and a Pakistani corporation as a domestic arbitration award because the law governing the arbitration agreement was Pakistani law[7]. The Court relied on previous case law. Specifically, it determined the previous case as a binding precedent. The previous case was pre-REFA, however, and it should therefore have been inapplicable.
Concluding Remarks
The REFA Act was a step in the right direction. It did not, however, address the main problem regarding international arbitration in Pakistan, which is that Pakistani Courts appear to have inconsistently applied provisions and in some cases appear to have applied the wrong provisions. Unfortunately, the few cases that are available suggest that this problem persists.
There is little parties can do today to mitigate the reluctance of the Pakistani Court system to enforce foreign arbitral awards. International arbitration in Pakistan is simply not as straightforward as in many other jurisdictions. Parties can learn from previous cases and structure their arbitration clauses accordingly. For parties engaged in cross-border transactions, however, it is advisable to avoid having Pakistani law as the law governing the arbitration agreement, if they plan to enforce an arbitration award in Pakistan.
[1] Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the “New York Convention”)
[2] Convention on the Settlement of Investment Disputes between States and Nationals of Other States(1966)
[3] Travel Automation (Pvt.) Ltd. v. Abacus International (Pvt.) Ltd. (2006 CLD Karachi 497); Far Eastern Impex (Pvt.) Ltd. v. Quest International Nederland BV and Others (2009 CLD Karachi 153).
[4] Messrs Mercantile Fire & General Insurance Co. Pakistan Ltd. v. Messrs Arcepey Shipping Co. USA (1978 PLD Karachi 273); Eckhardt & Com Marine GMBH, West Germany v. Mohammad Hanif (1986 PLD Karachi 138),
[5] Eckhardt & Com Marine GMBH, West Germany v Mohammad Hanif (1993 PLD Supreme
Court 42).
[6] Hitachi v. Rupali Polyester (1998 SCMR 1618).
[7] Taisei Corporation versus A.M. Construction Company (Private) Limited, PLD 2012 Lahore 455
