PAKISTAN'SCASEWITHARBITRABILITY

By
NaimaAhmed,
AdvocateHighCourt,Lahore

Introduction

InternationalCommercialArbitrationhasevolvedtobeoneofthemostexclusivewaysof
disputesettlementoutsideofrealmofnationalcourts.Thecorporateinterestslikeitsefficiencyasthere
isfarbetterpossibilityofachievingarelativelyeconomicalsolutionandprovidesfinalitythrougha
quickandlessformalprocedure.Thepartiesareabletomaintainconfidentialitywhichisimportant
especiallywhentheywishtoprotecttheirtradesecretsandcommercialinterests.Thesefactorsare
essentialwhendealingwithcrossbordertransactionsinvolvingforeigninvestmentwhereneutralityin
termsofvenue,thelawandthearbitratorsareconsideredprimebythepartiesinsettlingtheirdisputes.
Theneutralityensuresthatthearbitraltribunaldecidingthematterathandisdetachedfromanydirect
nationalinfluencethereforegivingloyaltyprimarilytotheparties.Thussuchmechanismprovidesa
levelplayingfieldforbothpartiesinvolved.Whilethesearethecapablequalitiesthatarbitrationoffers
itishowevervariousotherelementsthatmakeorbreaktheentirearbitrationsuchashowwellisthe
arbitrationagreement drafted,theexperienceandcompetenceofarbitratorsandhowajudgeofa
nationalcourtperceivestheentireprocessofarbitration.

Todaythemostimportantfieldofinternationalarbitrationisforeigninvestment.Theuseof
arbitration for resolving foreign investment disputes provides a safe haven especially for foreign
investorsinvolvedinglobaleconomicactivityduetoitstrusted,credibleandworkablesysteminplace.
This'safehaven'encompassestwomainthingswhichareessentialifparties'interestsorexpectations
aretobepreserved,thefirstisneutralityandthesecondisenforceability.Thesetwopointsessentially
curtailthegripofnationalcourts.

Whatisarbitrableandwhodecidesarbitrability?

Arbitrability is one of the main issues where contractual and jurisdictional nature of the
internationalcommercialarbitrationmeetsheadon.Normallyunderthepartyautonomyprinciple,a
partycanreferanydisputetoarbitrationandoptoutoftherecourseprovidedunderthenationalcourts.
However the question may arise regarding sensitive public policy issues such as issues regarding
criminalityorbriberywhichonlythejudicialauthorityiscapableofdealing.LewMistelisandKroll
areoftheviewthatthelawgoverningthearbitrabilityofdisputesmaydependonwhereandatwhat
stageoftheproceedingsthequestionarises. 1Anumberofdisputeswhicharenotarbitrableunderthe
lawofonecountryarearbitrableinanothercountrywheretheinterestsinvolvedareconsideredless

important.Eventhougharbitrabilityisrequiredforvalidationofthearbitrationagreement,itismainly
aquestionofjurisdiction.Thearbitrationtribunalsdeterminethearbitrabilityofthedisputebyrelying
ontheprovisionoftheplaceofarbitration.FouchardGaillardGoldmanhoweverareoftheviewthat
arbitrationtribunalsshoulddeterminearbitrabilityinaccordancewith"genuineinternationalpublic
policy".2

It is difficult to decide what can be arbitrable in relation to international transactions.

Therefore it is important to adopt a clear balance between matters that can be left for exclusive
jurisdictionofthenationalcourtsandthosewhichpromotetradeandcommercethroughexpeditious
modeofdisputesettlement.Morerecentlyithasbeenacceptedthatarbitraltribunalscanresolveclaims
ofcorruption,briberyandrelatedillegalitymainlyduetothedoctrineofseparabilitypresumption. 3
Therehavemanycasestothisdatethatexplainthispoint4.InFionaTrustandHoldingCorpv.Privalov
(20071AllE.R.)itwasheldbythecourtsthatifthearbitratorscanruleonwhetheracontractisvoid
initiallyforillegalitythenthereisnoreasonwhytheyshouldnotalsodecideonquestionofwhether
contract is procured by bribery. Arbitral tribunal frequently have entertained disputes tainted by
illegality/corruptionclaimsandmadeawardsonmeritseitherbyupholdingorrejectingsuchclaims
(ICCcaseNo.6474,XXVY.B.Comm.Arb.279(2000)).Nationalcourtshavesupportedthenotionthat
arbitraltribunalareequallyqualifiedtoconsiderandresolveclaimsofbribery,corruptionandrelated
illegality(JLMIndusv.StoltNeilsonSA,387F.3d163,175(2dCir2004),RepublicofPhilippinesv.
WestinghouseElecCorp821F.Supp.292,298(D.N.J.1993).

PakistanExperience

InPakistanthoughtherehavebeencases 5wheretheclauseinthearbitrationagreementhas
beenwideenoughtoallowthearbitratorstoruleonitsvalidityandretaintheirjurisdictionhowever
internationalarbitrationisconsideredmoreriskythanadvantageousduetointerventionistapproachof
thelocalcourtsduringthearbitralprocessandatthetimeofenforcementofawards.Suchbehaviour
showsthatthereisaninherentdistrustamongsttheCourtsofPakistanintheinternationalprocessof
arbitrationespeciallyinthefieldofforeigninvestmentwhichthecourtsseeonlyasavehiclesolelyfor
thebenefitoftheforeignpartyandonewhichwillinevitablyhaveadetrimentaleffectontheinterests
andexpectationofthelocalparty.6 Thereforearbitrationisamechanismconsideredinferiortothe
court.SuchattitudehasledPakistantoearnreputationasarbitrationblackspots.

In Pakistan it isestablished law that matters involving questionsof criminality orpublic

policycannotbereferredtoarbitration(AliMuhammadetalv.BasheerAhmad(1991SCMR1928);
ManzoorHussainetal v.WaliMuhammadetal (PLD1965SC425).Itismorecontroversialin
mattersoffraudorcorruptionwherearbitratorscanrenderthecontractvoid.Therehavebeenvarious
localandinternationaldecisionstosubstantiatethis. 7ThePakistanicourtshavehadakeeninterestin
thearbitralprocessespeciallyiftheseatofarbitrationhasbeeninthePakistan.Thiscanbeseenfrom
casessuchasRupaliPolyesterLtd.v.Bunni8wherethePakistanicourtswilladoptaninterventionist
approachandtakeovertheroleofthearbitratorifthepartieshavedecidedPakistanasthelawinthe
contract.SimilarlytheIndianSupremeCourt'scommentsinNationalThermalPowerCorpv.Singer
Co.9andtheSingaporeCourtofAppealcommentsinPTGarudaIndonesiav.BirgenAir 10showthat
wherethepartieshavedecidedontheseatofarbitration,thenthatlawwillapplywheretheseathasthe
closestterritorialconnectionwith.InsuchcasesmostlythenationalCourtswillinterveneandconduct
theproceedings.ThemostnoteworthydecisionthatledPakistaninearninganunstablereputationin
thefieldofarbitrationworldwideisofHUBCOPowerCompanyv.WAPDA(calledtheHUBCO)
(PLD2000SC841)wheretheSupremeCourtrefusedtoenforceanarbitrationagreementbetween

Hubco(subsidiaryofBritain'sNationalPowersetupwithWorldBanksupport)andthePakistani
government on allegations of corruption and illegality in the revised terms of the commercial
contract.11 TheSupremeCourtjudgesheldthatthecasewasprimafacieoneofcorruptionandthus
wouldbedealtfairlyjudiciallyinsteadofreferringittoarbitration.Thisdecisionnegatedandviolated
the basic premise on which international arbitration rested which was doctrine of separability.
Agreementamongstthepartiestoarbitrateisaseparatecontractthereforeevenifthemaincontractof
investment is tainted by corruption the clause to refer matter to arbitration exists regardless.
Furthermoreaccordingtotheprinciplesofseverabilityofarbitrationclause,theillegalityonlygoesto
thesubstanceofthemaincontractanddoesnotaffectthearbitrationclause.Thecourtswereadamant
thatsincethecontractdocumentsweretaintedbyallegedcriminality,thereforeitfellunderthedomain
ofthenationalcourtshencethedisputewasrenderednonarbitrableandnotreferabletothearbitration.

AnothermajorcaseaddingontotheuncertainfutureofarbitrationinPakistanistherecent
RekoDiq12casewhichiscriticizedtohave'chillingaffects'onforeigninvestorsinvestinginPakistan.
TheSupremeCourtinitsshortorderdated112013heldthatthejointventureagreementsignedin
1993 between the respondent company Tethyan Copper Company (TCC) and Government of
BalochistanandthepredecessorsininterestofTCCwasnotvalidasitwasmarredby"illegality". 13
Thebilliondollarworthofinvestmentbytheforeigninvestingpartyexploringdepositofcopperand
goldwassetasidebythecourt.Thisdecisionraisesfewimportantquestions.Whatisthebasisofsuch
illegality? Who eventually determines the illegality? Should the courts interfere before even the
arbitrationisconducted14?andtowhatextentistheforeigncontractingpartyrequiredtocarryoutdue
diligenceinmeetingproceduralstandardsofproprietylaiddownbymandatorylawsandrules?This
decisionshowsseriousdiscrepanciesonthepartoftheStatepartywhichallowsustoquestionthatto
whatextentistheforeigninvestorliablefortheactionsoftheGovernmentwhichdoesnotitselffollow
the correct protocols and procedures laid down? By rendering the entire contract illegal the
Government through the national court has succeeded in utilizing one of the "extreme arbitration
avoidancetechniques".15ThequestionthatremainsiswhethertheSupremeCourt'sorderwasinline
withnotjusttherelevantinternationallawbutalsowithPakistan'scontractualobligationstoforeign
investorsunderabilateralinvestmenttreaty.MostBIT'scontainainternationalarbitrationclauseon
partofeachState.TherecoursethataforeigninvestorhasagainsttheStateisthenonlythroughICSID.
Itisimportanttonotethatthecourtsofacountryinsuchscenariosshouldonlyensurethatthedeal
whichisahighprofileonewithbillionsofdollarsworthofinvestmentgoesthroughinatransparent
mannerasprovidedunderthestipulatedrulesformedbythegovernment.Thecourtsshouldplaya
supervisoryroleratherthanbeinginterventionistbydecidingonthetermsandagreementsprovidedin
thedeal.

FromajurisprudentialaspectitisimportanttonotethatinPakistananycommercialcontract
executedbyastatutoryorpublicbodywillhavetosatisfycertainproceduralstandardsofproprietylaid
downbythemandatorylawsandrulesofthehostcountrysuchaswhetheracompetentauthorityhas
authorizedthecontractwhichcontainsapprovals,signsasperthelawandruleslaiddownetc.Such
proceduralstepsareessentialforcontractingpartiestoabideby.Thispracticeinturnupholdsthe
publicinterestandallowstheprojecttofollowapatternoftransparency.Theproceduralsafeguards
checklistformspartoftheprecontractualduediligencewhichisessentialtobecarriedoutbyany
foreigninvestorbeforeenteringintoacontract.Howeveritisdeemedappropriatetoaskwhatisthe
extentoftheseproceduralruleswhichaforeigninvestorhastocomplywithwhenenteringintoa
contractwiththeState?Towhatextentistheforeigninvestorismeanttobeawareoftheamended
rulesortheproceduralchecklistornotificationdespitetheduediligencecarriedout?Howfarshould
theforeigninvestorgoinfulfillingallmandatoryproceduralrequirements? 16Andifitfailswillsuch
proceduralimproprietybeenoughtorendertheentireagreementvoid?Willcontractualinvaliditybe
consideredsoserioustomakeitfalloutsidethecompetenceofthearbitrator/arbitraltribunalandinside
therealmofpublicpolicywhichcanonlyberesolvedjudicially?Itisimportanttonotethatdueto
wider acceptance of bilateral and multilateral investment treaties many developing countries have
rejectedmattersregardingconcessionagreementsandnaturalresourcesprojectsasnonarbitrableand

haveletarbitraltribunalconsidersuchmatters.

TheSupremeCourtverdictincertaincaseswhetheritrelatestoRekoDiqorothersisasignof
discouragement forforeigninvestors.Suchdecisionshavenotonlycreateduncertaintyforforeign
investmentinPakistanbutalsoupsettheentireprocessofinternationalcommercialarbitrationwhich
was set in place to create an even level field for both the domestic and foreign investors alike.
FollowingHUBCOandtheRekoDiqitisinappropriatetosubmitaforeigninvestortothenational
courtsas itisunlikelythat aforeigninvestorcouldobtainfairchancetopresentitscasethat no
corruptionwasinvolvedespeciallyifthecounterpartyistheStatewhosepeopleinpowermayhave
changed.17 The solution is not to declare outrightly that such dispute is nonarbitrable (due to
substantiveimpropriety)butinsteadthereisaneedtoallowthearbitrationprocesstoflowandif
corruptionisproventhenitcandealtatpreawardstage.18

ItisnowacceptedinmanyjurisdictionssuchasinEnglandappropriatethatarbitraltribunalis
toassumejurisdictionanddeterminewhetherornottherehasbeencorruptionthatwouldrenderthe
contractillegal.Thisveryapproachupholdsthesanctityofthearbitrationagreement,theprincipleof
competencecompetencei.e.itisforthetribunaltoruleonitsownjurisdictionandtheprincipleof
severability.InEnglandweightisgivenmoretopartiesagreementtoarbitratewhilsterroronbasisof
factthatmayrenderthecontractillegalisoverlooked.Howeverwheretheillegalityissuchthatit
effectsthearbitrationclauseandthemaincontractthenarbitrationtribunalistodeclinejurisdiction
(WestAcreInvestmentInc.v.JugoimportSPDRLtd.19982LloydsRep111,129). 19 Arbitrationis
meanttobeaprivateagreementbetweentwomutuallyconsentingpartiesandthesolepurposeisto
deviatefromnationalcourtrulingsandcomplexities.Theuncertaintyinthearbitrationarenawillneed
to be curtailed. Decisions such as HUBCO and RekoDiq show that the national courts are not
sufficientlyneutralandthatthereisinherentprejudiceanddistrustamongsttheCourtsofsafeguarding
theirnationalinterestwhichinevitablywouldsupersedetherightofaforeigninvestorwhoisunaware
oftheentireprocessoflawsinthecountry.Insuchcircumstancehowcananyforeigninvestorthen
feelsecuretoinvest?

Thewayforward

Statecourtsarerequiredtodrawalinebetweenarbitrableandnonarbitrabledisputesby
keepingtwodistinctpolicyobjectivesintoaccountwhichareensuringthatthesensitivemattersof
publicinterestaredebatedandresolvedbeforenationalcourtsandpromotingarbitrationasaefficiently
vibrantsystemofdisputeresolutionforpartieswhofreelychoosetoarbitrateratherthanlitigatetheir
differences.ToenhancePakistanimageintheglobalarbitrationarenaseriousstepsneedtobetakento
overcomethewrongprecedentsset.Forfreeflowingcapitalinvestment,theforeigninvestorneedsto
havefaithinthePakistanlegalsystemwhichisclearlynotthecaseasdiscussed.Theabovediscussed
decisionshighlightonemainimportantpointandthatissimplythefearamongsttheinvestorsthatthe
arbitrationagreementswillnotberespectedthustherealityisthattheircapitalwillflowelsewheretoa
muchsaferneutraldestinationwherecourtsarenotusingasuffocatedapproachtowardsinternational
commercialarbitration.Negationoftheinternationalarbitrationonlyreflectsabiasagainstforeign
partiesinfavourofPakistanipartiesespeciallytheStatewhohaveroutinelyusedlocalcourtsasa
meanstoescapeaninternationallylaiddownprocess.Thisdenialofthearbitrationsystemultimatelyis
denialofjusticeasmanycommentatorshavenoted.Internationalcapitalrequirescompensationfor
increased risk.20 The courts may feel that they have protected valuable national resources and
respondedtothepublicmood.Inthelongrun,thedecisionsmaycontinuetohauntthenationandend
upcostingthecountryanditstaxpayersfarmore.


ConclusionandRecommendationforthecomingyears

Onlysituationwherearbitrationclauseoragreementshouldbeinterferedwithiswherethere
is credible evidence that counterparty procured the agreement to arbitrate by fraud or bribery.
Otherwiseallquestionsshouldbelefttoarbitrationtribunalincludingquestionofwhatisarbitrableor
not.Thetribunaloughtnottoallowalsoitselfalsotobeusedbythepartiesinvolvedtosanction
conductwhichisillegalandshouldaddressissuesofcorruptionofitsownmotionifithassuspicion
thatpartiesarecollidinginhidingthetruth.

ThePakistanicourtsneedtoredefinetheapproachofitsCourtstointernationalarbitration.
Thereisaneedofreformoflawespeciallyinthefieldofarbitrabledisputes.Acriterianeedstobeset
thatspecificallydefinesthestageatwhichthecourtscouldinterfereindeterminingmattersofpublic
policy.Isitpreenforcementofawardstageorisitduringarbitralprocess?Thelackofguidelinesfor
theprivateinvestorshaveledtodecisionssuchasRekoDiqwherethecourtshavedeclaredillegality
withoutgivingdetailedreasoningtoforeigninvestorsofwheretheywentwrong.Thereisaneedof
reformoflegalprocesswhichdirectlyinterfereswiththearbitrationprocess.Suchlegalmechanism
needtobeputinplacethat compliment andassistinternational commercial arbitrationinsteadof
hamperingit.

Oneofthemajorneedsisofsustainedandcontinuoustrainingoflawyersandarbitratorsin
ordertoimprove the domesticarbitral processsothat it can functionasa separate, reliable, cost
effectiveandefficientmeansofdisputesettlement.Thisapproachneedstogohandinhandwithproper
formationofabodyofexpertsmeantonlyforarbitrationwhoarewellequippedwithallthetechnical,
proceduralandsubstantiveirregularitiessothattheneedoftheCourtdoesnotariseoncetheparties
decidetoarbitrate.Thisisessentialinordertoinstillconfidenceintheforeigninvestorsastomake
Pakistananeutrallyfriendlyvenueforinternationalarbitration.

Mostimportantlythereisaneedofchangingjudicialmindsettowardsthearbitralprocess.
Pakistanislabeledtohaveadefensiveandinterventionistpostureratherthanjustasupervisoryonein
thearbitrationprocess.21Thereisaneedtorecognizethepitfallscreatedwithinvolvanceofcourtsand
itsdrawbacksfortheoveralleconomy.Withtheinvestmentclimatealreadyfragilethereisaneedof
foreigninvestment.Howeverthedeepentrencheddistrustisonlycreatingmorefearthananything
positive.Thismindsetcanonlybeevadedwithmoreacademics,lawyersandjudgeshavingapro
arbitrationstanceandjudginginternationalarbitrationasaneutralconcept.Thereisaneedof'letting
go'ofdeeplyembeddedsuspicionaboutarbitrationrulingagainsttheGovernment.Itisherethatthe
educationandextensivetrainingneedstobeprovidedsothatperceptionsthatarbitrationonlyprotects
foreigninterestcanbediminishedifnotcompletelyfinished.

FurthermorethecaseofPakistanmoresocanbeimprovediftheneighboringcountriesfollow
aproarbitrationstanceandoverallhelpinbuildingapositiveimageofarbitration.Theinternational
lawofarbitrationisclearinsettingguidelineshoweverthekeyistheimplementationamidstthe
politicalandemotivetacticsdeployedbypartiesinvolvedwhichendupevadingarbitralprocessunder
thegarbofnationalinterest.