Memorandum on Pakistan NY Convention Implementing Legislation

MEMORANDUM ON IMPLEMENTING LEGISLATION FOR THE UNITED NATIONS CONVENTION ON THE RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRAL AWARDS (NEW YORK CONVENTION OF 1958)

Shahid Irfan Jamil

Introduction:

The main purpose behind the drafting of The New York Convention on Arbitral Awards (NY Convention) has been to encourage the recognition and enforcement of commercial arbitration agreements and awards arising out of international contracts and to substantially unify the standards under which this is done. The Convention’s facilitative role is reflected in proactive provisions which compel parties to arbitration as well as enforce arbitral awards in an orderly and effective manner.

The underlying policy considerations of the NY Convention will have a major impact on the arbitration law relating to the enforcement of foreign awards in Pakistan which is currently anachronistic and in need of reform. The purpose of this paper is to delineate some of the issues that are likely to be faced and changes that the law needs once the NY Convention is ratified. This paper will first analyse the law currently applicable to foreign awards in Pakistan and highlight its shortcomings. Next, the changes that the NY Convention will bring in will be analysed. Finally, a short analysis will be made regarding the advantages of the NY Convention’s ratification.

The Law Applicable in Pakistan Today (Geneva Convention):

The enforcement and recognition of arbitral awards currently being applied in Pakistan is embodied in the Arbitration (Protocol and Convention) Act of 1937 (the 1937 Act) which was implemented pursuant to the Geneva Protocol on Arbitration Clauses of 1923 and the Geneva Convention on the Execution of Foreign Arbitral Awards of 1927 (the Geneva Convention). The parties to the said convention are few and the concepts embodied in the Convention are not as facilitative of the recognition and enforcement of arbitral awards as would be ideal.

1. Scope of the Convention:

The first issue concerning the 1937 Act concerns its scope in enforcing arbitral awards rendered in countries not party to the Geneva Convention. The jurisdiction of the 1937 Act, according to §2 (b) and (c), only extends to awards made:

“…between such persons of whom one is the subject to the jurisdiction of some one of such Powers as the Central Government being satisfied that reciprocal provisions have been made, may by notification in the official Gazette, declare to be parties to the Convention…and of whom the other is subject to the jurisdiction of some other of the Power aforesaid; and….

… in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made, may, by like notification, declare to be territories to which the said Convention applies”

The problem with this provision rests on two factors. Firstly, interpreting the phrase “subject to the jurisdiction of” has been found to cause many difficulties in being far too restrictive and territorial in its application. Secondly, a practical problem occurs where a sizeable number of nations cannot enforce awards within Pakistan either because they have not become parties to the Geneva Convention or they have not been declared by the Central Government to be parties to which the 1937 Act would apply. Numerous awards rendered in the major trading nations of the world, including the US, have not been enforced within Pakistan due to this jurisdictional problem. (Yangtze (London) Ltd. v. Barlas Bros (Karachi) (PLD 1961 SC 573) and Continental Grains Co. v. Naz Bros (1982 CLC 2301) where the courts refused to enforce arbitral awards rendered in countries that had not been expressly declared by the Central Government to be parties falling under the 1937 Act).

A related issue is that the 1937 Act applies only to ‘foreign awards.’ This is a definitional problem concerning the scope of the Act that is restrictive of the types of awards the Geneva Convention is given effect to within Pakistan. This point will be further discussed when dealing with the impact of the NY Convention.

2. Enforcing Arbitration Agreements:

Another issue in relation to the 1937 Act is that there is no specific provision that deals with the enforcement of arbitral agreements. Although the Geneva Protocol did make provisions for the enforcement of arbitration agreements, this provision was merely left in the First Schedule of the Act rather than being made a substantive provision in the main Act. In addition Article 3 of the Protocol which provides for compelling parties to arbitration does not precisely enunciate the circumstances under which the courts could refuse to compel the parties to arbitration. This has led to problems of interpretation in the Pakistani courts leading to cases such as HUBCO v. WAPDA (PLD 2000 SC 841). Such problems will be dealt with further when dealing with the NY Convention.

3. Effect of Grounds for Enforcement:

The grounds for enforcement of the award in the Geneva Convention have not proved to be very efficient in encouraging the enforcement of arbitral awards. An illustration of this is that the burden of proof in the Geneva Convention on the issue of the validity of an award is placed on the party seeking to enforce the award. This results in the creation of procedural burdens on the winning party to arbitration and thus hinders the efficiency of the arbitral process.

In addition, the inefficiency is compounded by the fact that the grounds on which a party can seek to resist the enforcement of an award are also exceedingly cumbersome and not clearly defined. For example, the requirement in Article 1 (d) of the Geneva Convention that an award become “final in the country in which it has been made” has proven to be conceptually problematic in other jurisdictions and results in delays or obstructions to the award merely on the ground that the losing party to the arbitration can simply institute proceedings against the award in another state. Such a state of affairs is unsatisfactory in light of policies geared towards facilitating arbitration and increasing the efficiency of the arbitral process.

4. Powers of the Courts of the Country of Enforcement:

The powers of the courts in relation to enforcing arbitration agreements and awards are not adequately distributed under the Geneva Convention. The first example of this is seen in the mandatory provisions of Article 2 of the Geneva Convention which lays down grounds for the refusal of enforcement by the Courts and then says that if those grounds are satisfied “recognition and enforcement of the award shall be refused” [emphasis added]. This leaves very little scope for the courts to be able to exercise their own discretion in allowing the enforcement of an award. At present, if even one of the grounds for resisting recognition is proved, the courts will be bound to refuse enforcement of the award.

In addition, on the issue of enforcing agreements to arbitrate the courts are required by Article 4 of the Protocol on Arbitration Clauses to refer the parties to arbitration without any clear criteria as to when this should be denied thus forcing the Pakistani courts to develop their own criteria which may or may not be conducive to an arbitration friendly policy. Such mandatory provisions bind the courts far too restrictively and resultantly cause the enforceability of arbitral awards to be less effective.

The New York Convention:

Pakistan is the only country in the world that has signed the Convention but has as yet not managed to ratify it. New ratifications are coming in even now. Brazil acceded on September 7th 2002 and Jamaica acceded on October 8th, 2002; being the two most recent countries to have ratified the Convention in the last six weeks. The effect of not having ratified this Convention has been to hinder efforts to increase investment within the country and has sent signals of isolationism and parochialism to the international community. In addition, Pakistan has also lost out due to Article XIV of the NY Convention which states:

“A Contracting State shall not be entitled to avail itself of the present Convention against other Contracting States except to the extent that it itself is bound to apply the Convention.”

This creates a problem not only for foreign investors within Pakistan, but also for Pakistani parties that have successfully had an arbitration award rendered within Pakistan in their favour from being able to enforce that award in another party’s state under the NY Convention. Even Pakistani parties that have won arbitration awards will have trouble relying on those awards as a defence to any future proceedings that a foreign party may bring into a Pakistani court, if their awards are not recognized. The NY Convention is therefore a two-way street, to which the paths of both parties – domestic and foreign – are blocked in relation to safeguarding their investments within Pakistan: if investors cannot use the Convention to enforce awards in Pakistan, Pakistanis cannot use it to enforce Pakistani awards against foreign investors or as a defence to an action brought against them by foreign investors.

The NY Convention is a successor to the Geneva Convention and deals with the problems delineated in the first section in a more effective and more arbitration friendly manner:

1. Scope of the Convention:

a. Parties to the Convention:

Firstly, the NY Convention applies to all awards “made in the territory of a State other than the State where the recognition and enforcement of such awards are sought…” Article I (1) of the NY Convention. As such the requirement of the Geneva Convention for parties to be “subject to the jurisdiction of” a Contracting State is removed and a more expansive provision that allows any arbitral award made outside the enforcing country to be recognised is brought in.

In addition there are more nations that are parties to the NY Convention than the Geneva Convention. In fact nearly all of the Geneva Convention states have also ratified the NY Convention. Therefore the potential scope of application of the NY Convention to international arbitral awards is much wider than that which exists under the Geneva Convention.

b. Problem of interpretation- US v. India:

Secondly, the second sentence of Article I (1) states that “[the Convention] shall also apply to arbitral awards not considered as domestic awards” in the enforcing State. This is an issue that goes right to the heart of a problem faced by certain jurisdictions in trying to define differences between foreign awards and domestic awards. The 1937 Act poses just such a problem in that it applies the Geneva Convention only to “foreign awards.” Section 2 Arbitration (Protocol and Convention) Act of 1937. The provisions of the NY Convention are clearly meant to apply to awards that are not only “foreign” in the sense that they have been made in a state other than the enforcing state, but also to awards that have an international element. This is reflected in the US legislation where 9 U.S.C. §202 states:

“[a]n agreement or award arising out of such a relationship which is entirely between citizens of the United States shall be deemed not to fall under the Convention unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states.”

Such an interpretation of a non-domestic award expands the scope of the NY Convention to a large number of awards that are sought to be enforced in the US.

Conversely, the definition of a foreign award under Pakistani legislation and case law is restrictive and will have to be adapted to meet the definition expounded above. The legislation in Pakistan, under §9 of the Act of 1937 states that:

“Nothing in this Act shall….

(b) apply to any award made on an arbitration agreement governed by the law of Pakistan.”

The courts of Pakistan in Hitachi Ltd. v. Rupali Polyester (1998 SCMR 1618) has applied §9 to arbitration awards rendered in a foreign country but governed by Pakistani substantive law. This has had the effect of raising a barrier of high risk for both domestic and foreign investment, and harms Pakistan’s commercial and trade opportunities.

The problems with this legal interpretation was also found in India where an identical provision existed in §9 of the Indian Foreign Awards Act 1961 (‘Savings Clause’). Which states that:

“Nothing in this Act shall….

(b) apply to any award made on an arbitration agreement governed by the law of Pakistan.”

The problems in this clause were recognised by the Indian legislature which repealed the §9 Savings Clause through a new arbitration act in 1996.

The faults of the Savings Clause were seen in the interpretation of the term ‘foreign award’ in India. Through the Savings Clause, and converse to the American interpretation, the types of awards to which the NY Convention applied in India had been very narrowly construed. In National Thermal Power Corporation v. The Singer Company 80 AIR SC 998 (1993) the Supreme Court of India held, in paragraph 26, that under an arbitration agreement governed by Indian substantive law,

“the courts of the country whose substantive laws govern the arbitration agreement are the competent courts in respect of all matters arising under the arbitration agreement, and the jurisdiction exercised by the courts of the seat of arbitration is merely concurrent and not exclusive and strictly limited to matters of procedure. All other matters in respect of the arbitration agreement fall within the exclusive competence of the courts of the country whose laws govern the arbitration agreement.”

The decision of the Indian Supreme Court in the Singer case had been severely criticized as being contrary to the spirit of the NY Convention. The provisions of the NY Convention, especially Article I (1), applies to arbitrations conducted in one country but applying the substantive laws of another country. The courts of the country, whose substantive laws apply to the arbitration agreement, are not meant to have an appellate status in these matters. However this is precisely the effect that the Singer decision along with the Indian Savings Clause had on any arbitration award rendered under Indian substantive law.

A consequence of this decision was that foreign investors in India would always try to avoid Indian law from applying to the substance of their agreement. If this interpretation is brought into Pakistan, once the NY Convention is in place, the same result would follow. Pakistani businessmen will always find foreign investors trying to choose their own laws to govern their agreements; since they do not wish the arbitral awards to be subject to an appellate jurisdiction of Pakistani courts. This will result in Pakistani parties to arbitration not only having to go to the expense of having to conduct arbitrations in other countries, but also having to engage specialist lawyers in other legal systems to represent them. They will be faced with having to deal with legal systems that are highly unfamiliar to them and may not be as favourable.

The Hitachi judgment used the legal analysis propounded in Singer as well as some English cases that had either been decided before England ratified the NY Convention, or did not specifically deal with the NY Convention’s applicability. The faults in this analysis were recognised. This can be seen from the fact that both India and England promulgated new arbitration acts in 1996 and the Indian legislature, although not expressly repealing Singer, has nonetheless repealed the §9 Savings Clause, thus removing the basis of the Singer decision.

The conclusion on this point is therefore clear – that we should learn from India’s mistakes and implement the NY Convention in its spirit as well as form. This will benefit both foreign and domestic investors as it will provide a degree of certainty within the law that is conducive to commerce within Pakistan.

2. Enforcing Arbitration Agreements:

The NY Convention enunciates the criteria under which a valid arbitration agreement ought to be enforced and the parties be compelled to arbitration. Article II (3) states:

“The court of a Contracting State, when seized of an action in a manner in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.” [emphasis added]

This is a lot clearer than the Geneva Convention which merely compelled the courts to refer parties to arbitration whenever an agreement was held to be “valid in virtue of [Article I] and capable of being carried into effect”. Article 4 Protocol on Arbitral Clauses. In this sense, the NY Convention realises the need for an enunciation of the restrictions on the type of agreements that the courts are bound to enforce.

The efficacy of the arbitration process in addition is still dependant on the attitude of the courts of the parties involved. The enforcement of arbitration agreements is a point that is still under the power of the enforcing court that employs the concepts of separability and the arbitrability of disputes to determine the validity of an arbitration agreement.

An illustration of this point exists in the Pakistani case law in the HUBCO v. WAPDA case mentioned above. In that case, the Supreme Court of Pakistan held an arbitration agreement to be invalid due to the commission of corrupt practices by the parties in procuring amendments to their contract. As such, the validity of the arbitration agreement was nullified when the court stated,

“The disputes between the parties are not commercial disputes arising from an undisputed legally valid contract…for…on account of these criminal acts, disputed documents did not bring into existence any legally binding contract between the parties, therefore, the dispute primarily relates to very existence of a valid contract and not a dispute under such a contract.”

Under this analysis the court felt that the contract “was void under s. 23 of the Contract Act and not voidable simpliciter” and thus held the arbitration agreement to be void as well. This is the major point to note in this case. Although the court felt that recognising issues of fraud and criminality as being arbitrable would be contrary to public policy, the validity of the arbitration agreement is a concept that would be logically prior to considerations of arbitrability. Thus, since the validity of the arbitration agreement was not recognised, the clause was unenforceable even before such issues could be deemed non-arbitrable.

3. Effects on Grounds for Enforcement:

The NY Convention’s pro-arbitration stance is brought out in the manner in which it has shifted the burden of proof upon the party resisting the enforcement of the award. This is done in Article V (1) which states:

“Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that …” [emphasis added]

This clearly places the burden of proof on the party resisting the award and facilitates its enforcement.

Secondly, the grounds for refusing enforcement are clearer and more precise in the NY Convention. For example, unlike the Geneva Convention, which required that an award be ‘final’ before it could be enforced, the NY Convention, in Article V(1)(e), allows the refusal of an award where it “has not yet become binding on the parties.” This provision is an example of the reversal of the burden of proof enunciated earlier, and it also lays out a more precise ground for refusal of an award.

In addition, the NY Convention also strikes a more balanced difference between the grounds of enforcement available to the party against whom the award is being invoked, and the grounds of enforcement which the courts are supposed to consider on their own cognisance. Under Article V(2) (a) and (b), the courts are meant to consider the issues of arbitrability and whether “recognition of the award would be contrary to public policy”. The other grounds for refusal have to be raised by the parties themselves. This makes the picture a lot clearer for the courts.

4. Powers of the Courts of the Country of Enforcement:

The powers of the courts to facilitate arbitration have been expanded greatly by the NY Convention. In Article V of the Convention (reproduced above) the word ‘may’ is used in relation to whether courts should refuse to enforce an award. This gives the courts the discretion to recognise and enforce an award even if the grounds for refusal have been proven.

In addition, as mentioned earlier, the grounds for enforcing an arbitration agreement are more precisely laid out in the NY Convention and give the courts more well-defined situations in which to recognise an agreement to arbitrate.

Conclusion:

After this legal analysis it can be seen that the provisions of the NY Convention are more arbitration-friendly in the way they are structured. The Convention is a subtle document with many policy considerations and economic benefits calculated to enhance the efficiency of the arbitral process. From compelling parties to arbitration to the actual recognition and enforcement of arbitral awards, the NY Convention is more enabling than its predecessor in the manner in which it allocates the burdens of proof and the relative jurisdictions of an enforcing court. It also seeks to balance the amount of control the courts have over the arbitral process with the principle of party autonomy.

All in all the advantages of the NY Convention are numerous. Apart from sending out the right signals to the international community, the Convention also protects Pakistani investors in allowing them a quick process whereby they are able to use the awards they win as a defence to any future claims. In this respect the ‘one-stop shop’ effect of the arbitration award is strengthened and helps facilitate the smooth running of commercial life within Pakistan.

This memorandum was a report prepared by the author for his work on the Pakistan Ministry of Commerce Working Committee on the Reform of Arbitration Laws which was working on the drafting of implementing legislation for the New York Convention on the Recognition and Enforcement of Arbitral Awards 1958. The Convention has still to be ratified by the Pakistani government.