Frequent delays in court cases and the complicated nature of disputes force commercial parties to find alternative means of dispute resolution.

Arbitration is a popular mode of commercial dispute resolution worldwide; yet it remains an unattractive substitute for litigation in Pakistan, primarily owing to inconsistent or ambiguous laws.

In case of arbitration, parties while signing a contract agree that any dispute relating to the contract would be referred to arbitrators who shall decide the matter in accordance with laws of a particular country (called governing law) at a designated place (called seat of arbitration). The decision of arbitrators (called arbitration award) is usually binding on the parties. In legal language, a contractual clause providing for arbitration is called an arbitration agreement.

Commercial arbitration remains an unattractive substitute for litigation in Pakistan, primarily owing to inconsistent or ambiguous laws

In Pakistan, arbitrations and awards can be categorised in two types, domestic and foreign. The law tells us that a domestic arbitration and award is regulated by rules set out in the Arbitration Act, 1940 (the 1940 Act) and foreign arbitration agreements and awards are enforceable under the provisions of Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011 (the 2011 Act).

The looming uncertainty on what constitutes a domestic or foreign award, however, is one of the biggest problems in commercial arbitrations in Pakistan. It is clear that any arbitration taking place in Pakistan where all parties originate from Pakistan and the underlying contract is governed by Pakistani law is a domestic arbitration. Nonetheless, the law is unclear where either governing law or seat of arbitration is a foreign country.

The 2011 Act, applicable to foreign arbitration agreements and awards is an adaptation of the New York Convention, 1958 (the NY Convention). Pakistan is a signatory of the NY Convention and has made the NY Convention law of the country through the 2011 Act. Prior to the 2011 Act, the governing law was Arbitration (Protocol and Convention) Act, 1937 (the 1937 Act). The 2011 Act has repealed the 1937 Act.

While interpreting the 1937 Act, the Supreme Court of Pakistan recognised only those awards as foreign awards where the contract between parties is governed by foreign law and at the same time the seat of arbitration is also a foreign country, every other award was declared a domestic award.

However, the intent of the New York Convention and the 2011 Act negate this proposition. The NY Convention is applicable to a wider range of arbitration awards. In particular, the purpose of the NY Convention was to accord the same treatment and status to all arbitral awards which are made in a country, signatory to the NY Convention.

The benefit of this approach is to bring global certainty to commercial dispute resolution and enforcement of foreign awards. When multinational parties select a seat of arbitration which is a country signatory to the NY Convention, they acknowledge that in case of dispute an arbitration award would be enforceable in all countries signatory to the NY Convention.

For example, the United Kingdom ratified the NY Convention. The Arbitration Act, 1996 as enforced in the UK, defines ‘New York Convention award’ as an award made, in pursuance of an arbitration agreement, in the territory of a state (other than the United Kingdom) which is a party to the New York Convention which means that all awards where the seat of arbitration is a foreign country signatory to the New York Convention are treated as foreign arbitral or convention awards in the UK.

Unlike the law of UK and many other countries, the 2011 Act of Pakistan fails to define what it means by a NY Convention Award or an award ‘made’ in a signatory contracting state. Judicial precedents in Pakistan, instead of resolving, have only added to the controversy.

At present, the Sindh High Court has recognised an award as convention award or foreign award if the seat of arbitration was in a country signatory to the NY Convention.

However, the Lahore High Court upheld the interpretation of 1937 Act i.e. a foreign award must be governed by foreign law regardless of the seat of arbitration, nature of dispute or parties.

The matter of interpretation of foreign arbitral award is pending before the Supreme Court of Pakistan for final resolution.

The distinction between domestic and foreign awards is relevant for commercial parties for several reasons.

Firstly, the enforcement of a foreign arbitration award is easier and less cumbersome compared to the enforcement of a domestic arbitration award.

A foreign award can be directly filed in a High Court for enforcement, whereas a domestic arbitration award is first filed in a civil court for making it rule of the court. The difference of filing forum presages the number of years it would take to finally dispose of the case i.e. superior the filing forum for the award, sooner the matter would attain finality.

Since a domestic arbitration award has to be filed at a lower forum it potentially allows the losing party to contest the award on more judicial forums and hence drag the matter for years. In contrast, a foreign award can only be challenged before the High Court or the Supreme Court.

To encourage uniformity in the treatment of commercial arbitration awards the principle of pecuniary jurisdiction of the court should be applicable for enforcement of domestic awards. This would allow an award beyond a certain monetary limit to be directly filed by the parties or arbitrator in the High Court.

Secondly, the recognition and enforcement of foreign award under NY Convention can only be refused on limited grounds of a procedural nature compared to a domestic arbitration award which is susceptible to challenge on a wide range of technical and legal objections.

Thirdly, no stamp duty is payable on enforcement of foreign arbitral award whereas a stamp duty of three per cent of the amount of award is payable on a domestic award. The stamp fee alone discourages parties from filing a domestic award in court. The stamp fee is payable by the party filing the award in court regardless of whether it seeks to set it aside or make it enforceable. As a matter of policy, no stamp fee should be payable on a domestic award as well.

The legal costs should remain consistent between different modes of alternate dispute resolution and at least more advantageous than litigation costs.

In comparison, in an ordinary commercial dispute/ suit before a Pakistani court for resolution (not involving arbitration) no such stamp fee is payable. The court may grant damages or other monetary relief to a party but nothing is payable by the winning or losing party to the public exchequer on the amount decreed in a suit.

Nonetheless, even if the stamp remains payable on a domestic award, the law must settle the fact that the stamp duty on the value of the award would only be payable by the winning party when the award is made rule of court and no further challenge lies to the award.

Commercial dispute resolution demands cost effectiveness, time efficiency and legal certainty. Fortunately, the plight of commercial arbitrations can be relieved by amendment in the relevant laws. It is time that Pakistan aligns its law of arbitration with international developments in the area to bring uniformity and certainty in dispute resolution.

— The writer is a lawyer.
fnazir@llm15.law.harvard.edu

Published in Dawn, The Business and Finance Weekly, June 12th, 2017