Enhancing enforcement of international arbitration agreements and foreign arbitral awards in Pakistan: a positive shift

Saqib Majeed
Partner, Majeed & Partners, Advocates & Counsellors at Law, Pakistan
smajeed@mplaw.com.pk

Introduction

Arbitration has emerged as a vital component of international trade, serving as the preferred method for resolving commercial disputes that arise between parties from different jurisdictions. In today’s interconnected global economy, where trade and investment transcend national boundaries, the significance of arbitration as an alternative dispute resolution mechanism cannot be overstated.

The efficient enforcement of international arbitration agreements and foreign arbitral awards holds paramount importance in international trade. It is essential to ensure that parties can obtain a meaningful remedy for their claims and effectively resolve their disputes. Efficient enforcement not only promotes trust and confidence among parties, it also facilitates seamless cross-border business transactions. Moreover, it contributes to the harmonisation of international legal standards, fostering a stable and predictable environment for international trade.

International conventions, such as the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘New York Convention’), provide a robust framework for the reciprocal enforcement of international arbitration agreements and foreign arbitral awards among signatory states. This framework streamlines the enforcement process, ensuring that the outcomes of arbitration proceedings hold weight and are enforceable globally.

Countries that prioritise and streamline the enforcement process demonstrate their commitment to establishing a fair and efficient dispute resolution system. By doing so, they create an environment that encourages sustained international trade and supports economic growth.

Legal framework for international arbitration enforcement in Pakistan

The legal framework governing the enforcement of international arbitration agreements and foreign arbitral awards in Pakistan has evolved over time. Initially, the enforcement was regulated by the 1923 Geneva Protocol on Arbitration Clauses and the 1927 Geneva Convention on the Execution of Foreign Arbitral Awards. These international treaties were incorporated into Pakistani law through the enactment of the Arbitration (Protocol and Convention) Act of 1937.

While Pakistan became a signatory to the New York Convention at an early stage, it took until 2005 for the country to enact domestic legislation to implement the provisions of the Convention. During the interim period from 2005 to 2011, the New York Convention was implemented in Pakistan through temporary presidential decrees known as ordinances. Subsequently, the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act of 2011 (the ‘NYC Act’) was passed on 19 July 2011, providing a permanent legislative framework for the implementation of the New York Convention in Pakistan.

Likewise, Pakistan signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ‘ICSID Convention’) on 6 July 1965. However, it was not until 30 April 2011, that Pakistan enacted the Arbitration (International Investment Disputes) Act 2011, to implement the ICSID Convention.

Historical concerns and inconsistencies in enforcement

Since its independence in 1947, the legal framework in Pakistan has always allowed for the enforcement of international arbitration agreements and foreign arbitral awards. However, the effectiveness of Pakistani courts in enforcing these agreements and awards has been a topic of debate and concern over time.

There have been instances where Pakistani courts have demonstrated inconsistencies in their interpretation and application of laws pertaining to the enforcement of international arbitration agreements and foreign arbitral awards. Historically, Pakistani courts have possessed discretionary power in determining the enforcement of such agreements and awards. For example:

• in Messrs Eckhardt & Co, Marine GmbH v Muhammad Hanif (PLD 1993 Supreme Court 42), the Supreme Court of Pakistan refused to stay legal proceedings commenced in Pakistan in violation of an international arbitration agreement on the grounds that ‘it would be inconvenient to the parties to go to London with evidence for the resolution of dispute by way of arbitration as provided in the contract’;
• again, in M/s Uzin Export & Import Enterprises for Foreign Trade v M/s M Iftikhar & Company Limited (1993 SCMR 866), the Supreme Court of Pakistan refused to enforce an agreement providing for the settlement of disputes through arbitration in Paris on the grounds that such recourse ‘would be inconvenient to the parties and also would prove to be expensive’;
• in Hub Power Company Limited v Pakistan WAPDA through Chairman and others (PLD 2000 Supreme Court 841), the Supreme Court of Pakistan upheld an order passed by the High Court restraining the party from pursuing international arbitration in respect of a dispute involving allegations of corruption on the grounds that ‘matters, which require finding about alleged criminality, are not referable to arbitration’; and
• in Societe Generale De Surveillance SA v Pakistan through Secretary, Ministry of Finance Revenue Division, Islamabad (2002 SCMR 1694), the Supreme Court of Pakistan restrained a party to an international investment dispute from pursuing an ICSID arbitration against the government, holding that such a party had waived its right to ICSID arbitration.

Considering the inclination of Pakistani courts towards favouring court proceedings over arbitration, it has been a common approach for local parties involved in cross-border disputes to initiate legal proceedings in domestic courts in direct violation of international arbitration agreements. This tactic often includes seeking anti-arbitration injunctions as part of their strategy.

Shift towards alignment with international standards

Since the implementation of the New York Convention, there has been a significant shift in the approach of Pakistani courts towards international arbitration. A careful analysis of the judgments issued by Pakistani courts after the implementation of the New York Convention reveals a clear policy of endorsing and adopting international jurisprudence regarding the interpretation of the Convention. It demonstrates the willingness of Pakistani courts to align themselves with the prevailing international standards and principles regarding the enforcement of international arbitration agreements and foreign arbitral awards.

An early example of this shift was seen in the case of Metropolitan Steel Corporation Ltd v Macsteel International UK Ltd (PLD 2006 Karachi 664), where the defendant sought a stay of legal proceedings that were initiated in contravention of an international arbitration agreement covered by the New York Convention. In this case, the Sindh High Court determined that it had no discretion and was legally obligated to grant a stay of the legal proceedings that violated the arbitration agreement. Since then, Pakistani courts have consistently upheld this position.

Most importantly, Pakistani courts have recognised and endorsed the pro-enforcement bias of the New York Convention towards the enforcement of foreign arbitral awards. The courts have refused to deny enforcement of foreign arbitral awards on any grounds other than those mentioned in Article V of the New York Convention. There is also a judicial consensus that the expression ‘public policy’ occurring in Article V(2)(b) of the New York Convention should be narrowly interpreted.

In Abdullah v Messrs CNAN Group SPA (PLD 2014 Sindh 349), the Sindh High Court dismissed a lawsuit challenging the validity of a foreign arbitral award under Article V(1)(a) of the New York Convention. The court held in line with international jurisprudence that Article V(1) of the New York Convention ‘operates as a shield and cannot be used as a sword.’

In Orient Power Company (Private) Limited v Sui Northern Gas Pipelines Limited (2019 CLD 1082), the Lahore High Court held that an arbitral award outside Pakistan in respect of an agreement governed by Pakistani law would be deemed a foreign arbitral award, and its validity cannot be challenged on any grounds other than those mentioned in Article V of the New York Convention. The court furthermore held that ‘the public policy exception should not become a back door to review the merits of a foreign arbitral award or to create grounds which are not available under Article V of the Convention.’

This judgment of the Lahore High Court was unsuccessfully challenged before the Supreme Court of Pakistan. In its judgment reported as Orient Power Company (Private) Limited v Sui Northern Gas Pipelines Limited (2021 SCMR 1728), the Supreme Court observed that ‘Pakistan is one of the countries that have yet to develop jurisprudence on international commercial arbitration, and we must be cautious and ought to adopt standards of practice in line with the international community.’ The Supreme Court also observed that ‘most courts worldwide have favored a restrictive approach to public policy in international commercial arbitration.’

The Lahore High Court’s recent judgment in POSCO International Corporation v Rikans International (2023 CLD 189) also highlights the Pakistani courts’ pro-enforcement bias towards foreign arbitral awards. In this case, a foreign arbitral award was made during the pendency of a lawsuit before a local court in which the court had issued an interim injunction directing the claimant not to proceed with the arbitration. When this foreign arbitral award was brought to Pakistan for enforcement, it was argued that its enforcement would be contrary to the public policy of Pakistan. The Lahore High Court rejected this argument and enforced the foreign arbitral award. The Lahore High Court observed that ‘[a]n arbitration agreement [...] creates the negative undertaking for the parties which obligates them not to bring any claims falling within the arbitration agreement’s scope in a forum other than arbitration’ and that ‘[i]t is in my opinion a public policy of Pakistan law that parties do not breach the negative undertaking imposed by an arbitration agreement.’ The Lahore High Court thus ruled that the lawsuit before the local court was instituted by the respondent in violation of the international arbitration agreement.

Concluding remarks

The enforcement of international arbitration agreements and foreign arbitral awards in Pakistan has undergone a notable transformation in recent years. Despite historical concerns and inconsistencies that cast doubt on the effectiveness of the process, significant advancements have been made through the implementation of the New York Convention and subsequent legislative developments. These measures have laid the foundation for a more robust and consistent approach.

Pakistani courts have also shown a commendable willingness to embrace international jurisprudence and adopt a pro-enforcement bias in relation to foreign arbitral awards. This growing alignment with global standards, coupled with the evolving legal framework, has played a pivotal role in establishing a favourable environment for international arbitration.

However, despite considerable progress in strengthening the legal framework and refining court practices, concerns remain regarding the duration of the enforcement process. To address this issue, it is imperative to streamline enforcement procedures, expedite the recognition and enforcement of arbitral awards and minimise unnecessary delays within the court system.

By focusing on resolving the issue of time and taking proactive steps to expedite the enforcement process, Pakistan can further solidify its reputation as an arbitration-friendly jurisdiction. This, in turn, will enhance its appeal to international businesses, stimulate economic growth and improve its position as a preferred destination for cross-border trade and investment.