How to take arbitration forward in Pakistan

“When a party who loses an arbitration award assume a never-say-die attitude and drags the dispute through the court system without an objectively reasonable belief it will prevail, the promise of arbitration is broken.” — 10^th Circuit Court in Lewis v. Circuit City, Stores, Inc. reported at 500 F.3d 1140, 1153 (10^th Cir. 2007)

Ideally, arbitration should be followed in its true essence which means that arbitrators should decide the dispute without the need for the matter to be taken to the court. This would ensure that the advantages of arbitration are availed by the parties such as faster resolution of disputes and confidentiality of the proceedings.

Unfortunately, in practice, majority of the arbitration proceedings are ultimately taken to the court at various stages of arbitration. Thus, arbitration has become a first step to litigation instead of a separate dispute-resolution mechanism altogether.

There are a range of tactics employed to get a ‘second bite at the apple’ by the defendant. One of the most common ones is to challenge arbitration at the commencement stage which means that only one party participates in the arbitration while the other party takes the matter to the court. Such lack of participation is sometimes justified owing to the lack of jurisdiction of the arbitrator.

However, majority of times, the defendant deliberately avoids participation for a plenty of reasons. Other tactics used by the defendant are to challenge the authority of the arbitrators and to request for their replacement.

Further, the defendant often challenges resort to arbitration by the claimant through raising objections to the award in the court. The law on arbitration provides various grounds under which the award can be challenged but often the defendants try to stretch the scope of such grounds in order to avoid compliance of the arbitral award. The aim in almost all the tactics is to undermine the arbitration process by taking the matter to the court.

Lack of participation results in a number of issues — both for the arbitrator and the claimant. One of them is that it exposes the award passed by the arbitrator to be challenged before the courts of Pakistan. This results in unnecessary delays given the backlog of cases in courts and such delays are further prolonged by the defendant not even participating in the court proceedings and taking numerous adjournments. Moreover, the burden of proving the claim by the claimant is much higher in the absence of the defendant because the claimant is unaware of the potential arguments that might have been taken by the defendant upon participation in the arbitration proceedings.

Given all the above issues, serious and effective steps need to be taken in order to make arbitration successful in Pakistan and to attract foreign investors. Currently, there is only one international arbitration centre in Pakistan namely Centre for International Investment and Commercial Arbitration (CIICA), which offers comprehensive services on arbitration. In order to curtail the practice of defendants taking the matter to court, there needs to be vigorous implementation of the arbitration laws and rules.

The Supreme Court in the Lahore Development Authority case reported at 1983 Supreme Court Monthly Review 718 observed that “despite the declared policy of the Government for ensuring speedy and inexpensive justice, we find, all too frequently, that even Government Departments and statutory bodies indulging in wasteful and unnecessary litigation... It is, therefore, a matter of some regret that when an award is given by the Arbitrators, who are persons of their own choice and the award made in a proceeding conducted in a forum desired by them but which is not wholly in accord with their point of view, the Department of Government concerned instead of accepting the said award with good grace rushes to the Court with frivolous objections to prevent it from becoming the Rule of the Court”. This case highlights that despite the parties’ own choice of arbitration as the dispute resolution mechanism, the defendants deliberately engage in tactics and reject the award.

The way forward in Pakistan is for the courts to strictly limit the scope of challenge to arbitration proceedings especially on frivolous grounds. This would ensure that the practice of defendants to participate in court proceedings despite a clear clause of arbitration in the contracts is sanctioned by the courts in the form of directing the defendants to participate in arbitration or by declaring the arbitral award as final.

Further, there is a need for the laws on arbitration to be revised and made more coherent. The ambiguity in the application of the laws leads to the parties making an already complex area of field even more perplexing for the judges. For example, the provisions of Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011 (the 2011 Act) are not comprehensive enough to cover all aspects of arbitration. This leads to considerable uncertainty for the parties regarding the possible remedies they can avail under the 2011 Act. Judicial precedents are limited on the scope of the 2011 Act and the way forward is for amendments to the 2011 Act to fill in the lacuna. For example, Justice Shafi in a judgment reported at 2017 Civil Law Cases (CLC) Note 157 Sindh, held that “the Arbitration Act, 1940 is not applicable to an agreement involving foreign arbitration or recognition and enforcement as a foreign arbitral award.” While the distinction drawn by Justice Shafi between the 2011 Act and the 1940 Act is correct, it begs the question of what remedy is available for the party challenging the arbitration agreement at the pre-arbitration stage under the 2011 Act. This is because Section 33 of the 1940 allows the party desirous of challenging the existence or validity of an arbitration to file an application to the court. However, no such remedy is available under the 2011 Act.

In order to make Pakistan attractive for arbitration and for foreign investors to choose arbitration centers such as CIICA in Lahore, it is utmost important for arbitration to be cost-effective, timely and certain. Hopefully, with the help of courts setting a strict criterion for the parties to respect their arbitration agreement and through amendment to the arbitration laws, Pakistan should be able to align itself with the international standards of arbitration.

Published in The Express Tribune, March 30^th, 2019.

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