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SAZH-TAF Report on FDI

Legal - Dispute Resolution

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Various members of our Round Table (ICSID Members, Barristers in the UK, law firms in Pakistan, members of the International Law Association, former company secretaries and legal heads of the biggest companies in Pakistan, such as ICI, HBL, etc. and various others from the private and government sectors) opined the weakening Rule of Law and Enforcement of Contracts as the reality of Pakistan. They shared various stories of delays in litigation, and delays in justice – regrettably including the arbitration proceedings.


The latter was specifically unfortunate as, ironically, it was once considered a solution, yet due to the languishing plan of reforming the Arbitration Act, 1940, and lack of judicial training in that respect, arbitration has slowly become its own problem within the system. Our members shared that referrals to arbitration in Pakistan are now considered another wedge in our justice and Rule of Law system, citing that it had formulated a single trial, into three or more distinct trials.


For example, first would be the referral to the arbitration itself, which would require an injunction on any proceedings in court. Once this was resolved, second, would be the problem with appointment of arbitrators, which under the Act, must be done by the civil court if the parties do not agree on an arbitrator themselves. The trial for that may again prolong for many years. Subsequently if the arbitration does proceed, then due to the tactics and habits of the legal counsels, there would be attempts to delay the same as well. Even though the Act requires disposal of case within four to six months, the arbitration proceedings would linger for years. Fourth, is the conversion of the arbitration award into a decree of the court, this being an essential preamble to enforcement. Once more, due to the deficiencies in the Act, deviant lawyers are equipped with the tools to delay and frustrate such proceedings, leading to years of delay or even the non-enforcement of the arbitration award. This is a process that again spans the entire length of the litigation chain, from the civil courts all the way to the Supreme Courts. Finally, once an award has been converted into a decree of the court, and is ripe for enforcement, once again that is an entire trial on its own, which can span years. In essence, even if we give a very generous timeframe of one year (in a legal landscape where trials span at least five years) to each of these trials required in arbitration, we are seeing five years for each span of the process, not including the appeals allowed in each step.


This dismal state of affairs shared by our members seems to be specific to ad-hoc arbitrations. The obvious solution to this would be to do away with ad-hoc arbitration and promote institutional arbitrations. However, unfortunately, the past decade has seen numerous arbitration centers come and go, such as National Center for Dispute Resolution (NCDR), Center for International Investment and Commercial Arbitration (CIICA), International Arbitration Center Pakistan (IACP), International Centre For Appropriate Dispute Resolution And Prevention (ICADRP), and various others. Yet none were able to command any hold on the arbitration market. The speculative reasons are the inter-competition of the legal market. As the lawyers themselves feel no ownership with such Centers, then referring their clients to these Centers, run by law firms mostly- would be a conflict of competitive interests. Pakistan lacks the comity and collaborative spirit in the legal sphere that may exist in other nations where such institutional arbitration centers have thrived.


Thus, as per our experts, the conversation revolves around, firstly, the amendment of the Arbitration Act, 1940 to bring it in conformance with the UNCITRAL Model laws. Secondly, until such an amendment takes place, strengthening and simplifying ad-hoc arbitrations by introducing a set of Model Arbitration Rules that could govern such ad-hoc arbitrations to neutralize the issues highlighted above. It was realized and accepted by the members of the Round Table that the draft for such rules could be built around the UNICTRAL Model Rules for Arbitration, and a consultative session could be initiated with all the stakeholders to share consensus and ownership for such Rules. Thirdly, in support of the Act itself, the High Court is empowered to create rules. This could be used as another avenue of short-term reform by which arbitration cases could be better managed by judges who would be compelled under rules to act in a particular fashion, and reduce discretion exploited by various legal counsel. Such rules could pertain to appointment of arbitrators, manner in which awards are to be enforced, and various other interim procedures that the civil court could follow. Fourthly, the civil court judges could be trained by experts in domestic and international arbitration.


Another important development in the past decade has been the gradual introduction of mediation into the legal sphere. Various bodies such as the Pakistan Mediator’s Association, The ADR Initiative, the Chartered Institute of Arbitrators, and various others have introduced accredited mediation courses in Pakistan. The Asia Foundation also initiated a Rule of Law project to introduce court-annexed mediations in Punjab. Nearly each province has also introduced their ADR Act to promote mediation and refer litigation cases in courts to mediation. The gradual uptake of mediation in Pakistan may turn out to be the solution to a lot of issues stated above, yet time will tell as the market is too young and insufficient data exists to justify a conclusion in this regard.


Our Expert from The ADR Initiative, which hosts a Roster created for Mediators in Pakistan shared that there is an emergent need to integrate dispute resolution with technology, in particular, artificial intelligence. Throughout the world, it is understood that a vast layer of underserved populations, can be facilitated by introducing technology into dispute resolution. He recommended that the tech sector in Pakistan be engaged for this purpose, as the next generations may perceive the existing structure as archaic and not designed for their needs or purposes. He pointed out the unavailability of online dispute resolution in Pakistan during COVID, and the fact that no public organization moved to fill that gap, when courts were closed, yet disputes escalated exponentially. Modernizing dispute resolution is imperative for the present and the future. Thus, the dispute resolution sector must familiarize with modern tools and skills. As a private endeavor, he recommended that any company who was able to move on this could be the next Uber of dispute resolution.


Hence bearing in mind the above, there is no denying that alternative dispute resolution (ADR) would be instrumental in promoting FDI in Pakistan. It is a familiar process and a tool for international investors (which they expect from jurisdictions that they invest in), and it standardizes the process throughout the world because most countries have implemented a version of the UNCITRAL Model Law on Arbitration and Mediation. However, unfortunately, that has not been the case, creating another substantial barrier for the investor.


It is crucial to see that in the absence of an effective dispute resolution, what guarantee does the investor have. From the government’s perspective, FDI is important in Pakistan; but it is not possible without a robust DR mechanism. At no point in the near future, would the local courts of Pakistan become an attractive option for foreign investors. It was shared with us by one of our members who run an international organization, that most investors are oblivious to the fact that Pakistan is a signatory of the New York Convention and has an enforcement mechanism for international arbitration awards in place. It was news to them that Pakistan had ratified the New York Convention and under the Recognition and Enforcement of Foreign Arbitral Awards, 2011 (Act, 2011), international arbitration awards are enforceable.


Our members from the top law firms shared that they had been regularly enforcing such international awards, and as the Act, 2011 gave this jurisdiction to the High Courts (under S. 3 read with S.2), this process did not suffer from the same complaints and delays as seen in domestic courts. The High Courts have been fairly consistent in enforcing awards under the New York Convention, which is a welcome precedent and development for the perception of Pakistan.


A barrister and international arbitrator from the UK shared that there are lot of reasons people come to the UK jurisdiction for Arbitration and dispute resolution. The key reason being the comparatively little to no delay in proceedings. He said investors or commercial parties want interim relief and they get that interim relief on a fairly broad basis quickly and at the end of the matter, things are decided on merit. In the UK, there is only a 0.1% chance that an arbitrator’s award would be set aside, in all other cases, their awards are enforced, which inevitably builds commercial confidence. Pakistan still has a long way to go before it can build such confidence, yet it is feasible to show a genuine attempt at creating an environment where contract enforcement and dispute resolution are conducted in the ambit of familiarity that investors are comfortable with, which would go a long way.


Thus, as per our UK expert and local legal experts, it is little surprise that no investor agrees to the domestic dispute resolution system of Pakistan due to the problems in the litigation and ADR procedure. Our experts in the power sector shared that they tried considerably to standardize dispute resolution clauses that would be governed by the law of Pakistan and dispute resolution with Pakistan as the seat in the PPA and related contracts, yet the sponsors of power projects, adamantly, refuse.


Another area of dispute resolution, which Pakistan is woefully ill-equipped for, in both human resource and infrastructure is Investor-State Arbitration. This is an area that is governed by Bilateral Investment Treaties (BITs), which hold that disputes between investors and states shall be resolved by the International Centre for Settlement of Investment Disputes (ICSID). According to an expert who is a member of ICSID, unless we give the investors an effective dispute resolution, big investments would never come to Pakistan. The question arises as to how practical and accessible it is for regular investors to go to ICSID for the settlement of their disputes. According to our expert, there is a huge misconception concerning ICSID, in that only developed states and big investors go to ICSID. In reality, it is mostly utilized by the smaller, more average investors. Large investors like Shell, Enron, etc. are so influential that they can negotiate any clause they want directly with the Government of Pakistan. They can easily persuade the Government to include dispute resolution clauses of their choice in the contracts. Thus, the maximum benefit availed from ICSID is by small or average investors who have less bargaining power than big investors but have a common dispute resolution mechanism within BITs that they are familiar with and equipped to exercise. Unfortunately, few in Pakistan are equipped both in the legal and business sphere, to understand and leverage such mechanisms, in the way seasoned investors from sophisticated markets have shown themselves to be. This gap has led to embarrassing faux pas, such as the disastrous judgment on Reko Diq, which contravened international conventions and commitments made by Pakistan to the world at large, purely due to a lack of knowledge on the subject. As a consequence, investor confidence in Pakistan took another nosedive.


However, this state of affairs is not without hope. As mentioned there has been significant work done by the private sector, and from our conversations with our members in the government, the public sector is anxious to improve this situation. Thus, bringing these organizations and individuals together has and will continue to play a significant part in the improvement of the Rule of Law. It seems clear that ADR is the key to this problem, and further consultations on the matter, and implementations of our suggested solutions could greatly move the inertia in a positive direction.

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