The dispute resolution provision contained in a Bilateral Investment Treaty (BITs) that commonly provides for investor-State dispute resolution in a foreign arbitral forum is perhaps the single most influential reason and incentive for States to negotiate BITs with other States. This is because foreign arbitral forums are perceived to be transparent, neutral, independent, and cost effective mechanisms for settlement of those disputes that commonly are between one State and the investors of another State, in which case, the national/local courts just may have an ‘inherent national prejudice’.
Nevertheless, for foreign arbitration ‘to exist and succeed there must be a regulatory framework which controls its legal status and effectiveness within the national legal environment in order to inter alia, give effect to the agreement to arbitrate as well as to the finality and enforceability of the foreign arbitral award’. Since an award is only as good as its enforcement, unless the investor is able have his rights enforced through the local courts of a State against that very State, the entire regime of arbitration stands to lose its appeal.
Essentially however, it is the duty of the States to ratify their treaties and to pass enabling legislation so as to adopt, ratify or otherwise give effect to their international obligations under those treaties within their domestic law.
In Pakistan therefore, the recognition and enforcement of foreign arbitral awards was initially governed by The Arbitration (Protocol and Convention) Act of 1937 in order to give effect to the Protocol on Arbitration Clauses and the Convention on the Execution of Foreign Arbitral Awards (Geneva Convention) 1927. This Act was however expressly repealed by the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011, which gives effect to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) 1958.
Section 4 of the 2011 Act allows a party to an arbitration agreement to bring a claim to stay the legal proceedings in the local court if any have been initiated against it in a matter that is covered by the arbitration agreement. The court is obligated to refer parties to the arbitration agreement upon receipt of a stay application by a party under this Section, unless it finds the arbitration agreement to be otherwise null and void, in-operative or incapable of being performed altogether.
Additionally, Section 6 of the said Act further directs the courts to recognize and enforce the foreign award as if it was a judgment or order of a court in Pakistan, reflecting thereby that the status of the foreign award would be held to be just as good as the status of a judgment or order of a local court, in that, the party seeking enforcement of the award (usually the investor) need not spend time or money in ensuring that the local court adopts/makes the award a ‘rule of court’ before actually enforcing it, which would be the case had it not been for Section 6 of this Act.
Thus, this Act makes the recognition and enforcement of foreign arbitral awards in Pakistan relatively easier than it ever was before. What however qualifies as a ‘foreign arbitral award’ remains an anomaly and which we shall now consider.
A ‘foreign arbitral award’ may be determined through a variety of criteria, including most commonly through the seat of arbitration and the governing law clause in the arbitration agreement which indicates which law will be the governing law for the purposes of that arbitration agreement.
Under Section 9 (b) of the initial 1937 Act (now repealed) however, all awards under the arbitration agreements in which the governing law was to be the Pakistani law were held to be domestic i.e. local awards and NOT foreign arbitral awards irrespective of the seat of arbitration as evidenced by the case of Hitachi ltd v Rupali Polyester (1998, SCMR 1618).
Thus, even if an arbitration took place outside Pakistan, in a foreign arbitral forum, the award in such a case was not considered to be a ‘foreign arbitral award’ and hence, its status was equal to that of domestic arbitrations that was and are still governed by the Arbitration Act of 1940. In such a scenario the local courts had greater control over the recognition and execution of the award as per the normal code of procedure for domestic arbitrations in Pakistan. This could entail delays as it was not mandatory for the courts in that scenario to stay legal proceedings or enforce the award as if it were its own order or judgment.
In 2011 however, the Parliament being mindful of this issue, repealed the 1937 Act and deliberately omitted this restrictive legal interpretation of a foreign award in the new 2011 Act. In fact, the 2011 Act clearly states under Section 2 (e) that a ‘foreign arbitral award’ means a foreign arbitral award made in the Contracting State and such other State as may be notified by the Federal Government in the official Gazzette. Hence, as the law stands, there is nothing in Pakistani legislation anymore that states that an award made under Pakistani law is not to be considered a foreign award.
This indicates the willingness of the Pakistani legislature to adopt the ‘seat of arbitration’ criteria as opposed to the ‘governing law’ criteria in order to determine the nature of the award. Furthermore, it would not be out of place to mention that along with the adoption of the New York Convention, the Pakistani legislature has also contemporaneously enacted the Arbitration (International Investments Disputes) Act 2011 in order to implement the International Convention on the Settlement of Investment Disputes (ICSID Convention) 1965. Pakistani law has therefore come a long way in terms of recognition and enforcement of foreign arbitral awards and its Parliament has shown its sincerity and commitment towards positive international growth and development.
*Nida Mahmood, LL.B (Hons), LL.M – Law & Development, UK, Investment Law Consultant at Shafiq Sons Law Associates, Lahore, Pakistan.