Alternate Dispute Resolution Method in Pakistan

The relevant laws (or particular provisions) dealing with the ADR are summarized as under:

·          The Arbitration Act, 1940.

·         Articles 153–154 of the Constitution of Pakistan, 1973 (Council of Common Interest)

·         Article 156 of the Constitution of Pakistan, 1973 (National Economic Council)

·         Article 160 of the Constitution of Pakistan, 1973 (National Finance Commission)

·         Article 184 of the Constitution of Pakistan, 1973 (Original Jurisdiction when federal or provincial governments are at dispute with one another)

·         Sections 102–106 of the Local Government Ordinance, 2001.

·         Sections 10 and 12 of the Family Courts Act, 1964.

Arbitration in Pakistan:

Although no explicit mention of ADR is mentioned in the Constitution of Pakistan, a reference to commercial and financial activities can be pinpointed in the Constitution.

Pakistan has also signed and ratified the New York Convention. The New York Convention is also known as the New York Convention of 1958 and the Convention for the Recognition and Enforcement of Foreign Arbitral Awards. UNCITRAL is a Commission of the UN established by the General Assembly on 17 December 1966 by Resolution 2205 (XXI). Thus, although the New York Convention was adopted in 1958, the Commission’s essential mandate is to promote the Convention further. Furthermore, UNCITRAL serves as the International Trade Law Branch of the Office of Legal Affairs of the UN. Hence, UNCITRAL, under the umbrella of the UN, is the biggest organizational body to prepare rules relating to ADR, namely arbitration and conciliation.

Arbitration in Pakistan is still largely governed by the 1940 Act which was enacted by the British for the undivided Indian colony. Though Pakistan has signed the NYC, the enforceability of foreign arbitral awards is unclear as the NYC has not been implemented. The first attempt to implement the NYC was made in 2005, when the new Arbitration Act was passed as an Ordinance (along with an Ordinance to implement the ICSID Convention in 2006, which is now the Investment Disputes Act) almost 50 years after they signed on the NYC.

Pakistan Engineering Council Islamabad:

PEC Rules of Conciliation and Arbitration is one such document prepared by a team of experts comprising Employers, Constructors and Consultants and Legal Advisors in line with the advice by Planning Commission, Govt. of Pakistan. It is expected that use of this document will provide an equitable and just basis for settlement of disputes pertaining to construction and consultancy contracts expeditiously.

The Rules specified in the this document shall be applicable for all construction  and engineering services (consultancy) contracts to be executed in Pakistan irrespective of their source of financing and/or nationality of the constructors/consultants (engineering service providers).

Any dispute, controversy or claim arising out of or relating to a Contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in  accordance with the PEC rules of Arbitration in-force.

This indicates that there are a number of institutions which are working as an institution for conciliation. And this gives a reference that as contrary to Indian laws, in Pakistan, there is a specific requirement that parties referring to conciliation and the institution will be mentioned in the contract.

Recent Initiatives regarding ADR in Pakistan:

·         Code of Civil Procedure (CPC) which is the primary procedural law for civil matters in Pakistan, has been amended (under AJP) for providing enabling mechanism for Court Annexed ADR in Pakistan (Section 89-A).

·         Small Claims and Minor Offences Ordinance 2002 has been promulgated for providing exclusive forum (at the district level) for facilitating the resolution of smaller disputes. This law also provides ADR mechanism for facilitating the resolution and settlement of disputes within the framework of the formal court system. This could be transformed into an excellent forum for addressing disputes in the emerging justice sector in Pakistan;

·         Under the Access to Justice Program, the review of Arbitration Act represents a significant policy action. This review needs to be undertaken and capacity building initiatives put in place to promote effective arbitration regime in Pakistan.

·         A new local government system has been introduced in Pakistan, establishing elected local governments at the level of Union Council, Tehsil (Sub District Level) and the District level. The institution of Musalihat Anjuman (literally meaning conciliation forums) has been provided at the level of Union Councils for dispute resolution through ADR (including conciliation, mediation and arbitration). The finalization of the rules of Business for these bodies is essential to popularize the use of ADR.

In WAPDA v. Kot Addu Power Company[1] – Provisions of section 290 of the Companies Ordinance, 1984 vested statutory jurisdiction in High Court to take certain measures described there and ordered to resolve dispute inter-se shareholders or directors of a company – High Court dismissed the petition made under section 3 of the Arbitration (Protocol & Convention) Act, 1937 for reference of the dispute under the Act of 1937.

Pakistan has entered into Bilateral Investment Treaties with 36 countries which include dispute settlement mechanism between the host country and foreign investor, failing this through mutual consultations, where after the investor can refer the dispute to a competent court of the respective country or an ad-hoc arbitration panel established under rules of the UN Commission on International Trade Law (UNCITRAL) or to the Court of Arbitration of Paris International Chamber of Commerce (ICC). These mechanisms provide transparent, inexpensive, speedy and accessible dispute resolution to foreign investors. The International Center for the Settlement of Investment Disputes (ICSID) also provides facilities for conciliation and arbitration of investment disputes between contracting states and nationals of other states under the Convention for the Settlement of Investment Disputes and Pakistan is a member of the Center.

The Conciliation Courts (West Pakistan Amendment) Ordinance, 1966:

An Ordinance further to amend the Conciliation Courts Ordinance, 1961, in its application to the Province of West Pakistan.“(2-A)   Cases relating to matters falling under Section A of Part I and Section A of Part II of the Schedule, against any Government servant, shall be excluded from conciliation except where a certificate is granted by Government or an officer authorised by Government in that behalf to the effect that the Government servant had not acted in the discharge of his official duties”.

Alternative Dispute Resolution mechanisms and Arbitration provide alternate to litigation by avoiding lengthy and costly proceedings. They are best suited for commercial disputes as the relationship between the parties is expected not to suffer after exhausting such methods and the parties are more likely to settle their differences in a relaxed and friendly manner. In Pakistan, a more frequent use of such methods poses numerous problems which can be overcome by a collective effort by the Government, Judiciary and the Bar Councils.

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[1] 2002 MLD 829

Every Clause For Finality Of Decision Isn’t The Arbitration Clause, There Is No Format For Arbitration, Intention Of Parties Is Important

The Recent decision on the matter of State of Orrisa and Others v Bhagyadhar Dash (4th July, 2011, SC Decision) brings an interesting compilation of the arbitration clause identification in the judgment. The division bench took notice of various prior cases to set the test for the determination of arbitration clause. While going through various decisions, the bench wrote comprehensive judgment and gave opinion on different matter.

Essentials of Arbitration Agreement.

Taking the reference from KK Modi Case, and then Bihar State mineral Corporation v Encon Builders (2003 7SCC 418), court stated following four categories.

(i) There must be a present or a future difference in connection with

Some contemplated affair;

(ii) There must be the intention of the parties to settle such difference

By a private tribunal;

(iii) The parties must agree in writing to be bound by the decision of

Such tribunal; and

(iv)The parties must be ad idem.

The Court also took the principles laid down in Jagdish Chandar v Ram Chandar, which broadly can be stated this

1. The intention of parties to go into the arbitration is to be gathred from the terms of the agreement. A mere possibility doesn’t constitute the arbitration clause or agreement. There should be firm determination.

2. Attributes of arbitration are important, it might not necessarily be using terms connected with arbitration like arbitration per se or arbitral tribunal. The attributes are that the agreement should be in writing, it should have the agreement between parties to go to a private tribunal for adjudication, the private tribunal should be empowered to adjudicate in impartial manner, following natural justice and there should be binding effect as agreed by the parties.

3. Any settlement which excludes any of the attributes of arbitration can’t be called as arbitration. The court however didn’t state the case if the clause states it to be arbitration agreement but it specifically excluded any of the attributes (say hearing) from the process. It is submitted that from the quasi judicial nature of arbitration, such clause might be held to be void. However, it again has to be gathered from the terms and this intention of parties.

4. The contingency on the clause for arbitration would not make it an arbitration clause unless the clause is further approved by the parties.

Test for the Arbitration Agreement:

In KK Modi, it is enunciated, that for the arbitration agreement, emphasis is on

1. The existence of dispute not avoidance of dispute.

2. The judicial action of tribunal in which the dispute is referred.

3. The decision should bind the parties.

In three bench decision of State of Orissa v Damodar Das(1996 (2) SCC 216), Court stated

It would, thereby, be clear that this Court laid down as a rule that the arbitration Agreement must expressly or by implication be spelt out that there is an agreement to refer any dispute or difference for an arbitration and the clause in the contract must contain such an agreement. We are in respectful agreement with the above ratio. It is obvious that for resolution of any dispute or difference arising between two parties to a contract, the agreement must provide expressly or by necessary implication, a reference to an arbitrator named therein or otherwise of any dispute or difference and in its absence it is difficult to spell out existence of such an agreement for reference to an arbitration to resolve the dispute or difference contracted between the parties.

In this decision, Court had to consider the construction of clause

“that if the contractor disputes the rate fixed by the Engineer-in-Charge, the decision of the Superintending Engineer in regard to rate for such non-scheduled item shall be final”

Court going through all the above decisions held that though the clause passes the test laid down from prior decisions, the intention of parties can be gathered from the fact that the government deleted the arbitration clause from the agreement and amended the standard form of agreement. Court held that the clause only provided the limited sphere of determination of the rates to avoid the dispute. There is no reference to the tribunal in regard to dispute between parties, the clause is rather unilateral where contractor disputes the rate and then it shall be finalized by the Superintendent Engineer.

When can an Arbitration clause in the contract be Invoked

            Nathani Steels Ltd. Vs. Associated Constructions,  1995(Supp) 3 SCC 324


Fact of the Case:

The facts giving rise to this appeal reveal that on 5.9.1989 respondent submitted a tender for the construction of sheds in the appellant’s factory which came to be accepted and a contract came to be executed. Under the terms of the contract executed on 22.9.1989 the work had to be completed by 5.6.1990. The work was not in fact completed on or before the due date. The contract contained the arbitration clause. The dispute which arose on account of the non-completion of the contract was settled by and between the parties and the settlement was reduced to writing as found in the documents submitted as exhibits. By this document the disputes and differences were amicably settled by and between the parties in the presence of the architect on terms and conditions set out in the clauses 1 to 8 thereof. The documents bear the signature between the parties. The respondent, although voluntarily entered into the said settlement, he later realized that there was a calculation mistake in regard to the amount in question on his part and thereupon invoked the arbitration clause. The appellant in High Court however contended that in view of the dispute disputes and differences in connection with the contract having been finally and amicably settled by and between the parties, it was not open to the respondent to unilaterally brush aside the settlement and invoke the arbitration clause as if the dispute survives without having the settlement set aside on the ground of mistake as permissible by law.

Held:

Once the dispute by and between the parties under a contract arising and that is amicably settled by way of a final settlement unless that settlement is set aside in proper proceedings, it cannot lie in the mouth of one of the parties to the settlement to spurn it on the ground that it was a mistake and proceed to invoke the Arbitration

clause. If it is permitted the sanctity of contract the settlement would be wholly lost and one party can take the benefit under the settlement .In the circumstances, since the dispute or difference was finally settled and payments were made as per the settlement it was not open to the respondent to treat the settlement as non est and proceed to invoke the Arbitration clause. So the High Court was wrong in its view therefore the Supreme Court allowed the appeal and set aside the impugned order of the High Court and holds that the respondent cannot invoke the Arbitration clause in relation to the dispute difference settled under the terms of the settlement.

Analysis:

Once the dispute is amicably settled between the parties finally, arbitration clause should be invoked by a party to resolve the same on ground of mistake in the settlement unless the settlement is first set aside in proper proceedings. If the settlement is unilateral and the other party has not given any receipt of settlement, the arbitration clause can be invoked as supreme observed in P.K. Ramaiah and Co v. Chairman & Managing Director, National Thermal Power Corporation.

Arbitrator must cite the reason of the award while passing Judgment

                              Secretary, Irrigation Department, Government of Orissa & ors Vs.  G. C. Roy, AIR 1992 SC 732

                                                                                                                      

Facts: Appellant and Respondent entered into an agreement for construction works. Clause 23 of the contract states that all questions and disputes (before and after work completion) shall be referred to the sole arbitrator. The work was completed. Respondents claim was not entertained by the Government.  The Arbitrator held that the respondent was entitled to certain amount of money and in addition he was entitled to receive interest. 

Issues: (1) the Award was vitiated as it contained no reasons; and (2) the Arbitrator had no jurisdiction to award pendente lite interest.
 

Reversed Previous Land Mark Judgment:

This judgment by the Honorable Supreme Court has reversed the land mark case on this, where in it was stated that the powers of the Arbitrator to award interest for the period the dispute remained pending before him pendente lite. Since, the Court held that the Arbitrator had no jurisdiction or authority to award interest pendente lite, Bench held that neither the Interest Act 1839 nor the Interest Act 1978 conferred power on the Arbitrator for awarding interest pendente lite. Arbitrator cannot award interest during the pendency of the Suit.

The principle is that a person who has been deprived of the use of money should be compensated in that behalf. In short it is based upon the principle of compensation or restitution, as it may be called (Interest Pendente Lite).

Arguments Advanced: Shri Soli Sorabji submitted that there is no good reason why the arbitrator should be held to have no power to award interest pendente lite. Arbitrator is an alternative forum for resolution of disputes. The idea is to avoid going to Court. If so, the arbitrator must be held to possess all the powers as are necessary to do complete and full justice between the parties. If the arbitrator is held to have no power to award interest pendente lite, the party claiming such interest would still be required to go to the civil Court for such interest even though he may have obtained satisfaction in respect of his other claims from the arbitrator. Such a course is neither consistent with the concept of arbitration nor is conducive to the rule of avoidance of multiplicity of proceedings. After all, interest is nothing but another name for compensation for deprivation. Stated: it must be held that though Section 34, C.P.C. does not apply to arbitrators, its principle does.

According to opposite learned Counsel, a reading of Sections 3, 17 and 41 of the Arbitration Act goes to establish that arbitrator is denied such a power.

In the present case, interest on the amount of the award from the date of the award till the date of the decree granted. The reason is that it is an implied term of the reference that the arbitrator will decide the dispute according to existing law and give such relief with regard to interest as a court could give if it decided the dispute. 

Held: For Issue 1, The Constitution Bench held that an award is not liable to be set aside merely on the ground of absence of reasons. Court held that when agreement provides a clause that arbitrator will give reasons for award then he is bound to give reasons for his decisions. Else not. But as of 2011, this law is not applicable because of the reason that, this is based upon Arbitration Act 1940, while 1996 Act has made it mandatory for arbitrator to cite reasons for the award, unless and until it is agreed by both the parties.

For Issue 2, in the absence of agreement to the contrary, the Arbitrator has jurisdiction to award interest pendente lite. Where agreement between parties does not prohibit grant of interest and where party claims interest along with or without claim for principal amount and that dispute is referred to arbitrator, he shall power to award interest pendnte lite - he has discretion to decide such matter subject to conditions of agreement.

Analysis:

Generally, the question of award of interest by the Arbitrator may arise in respect of three different periods, namely; (i) for the period commencing from the date of dispute till the date the Arbitrator enters upon the reference; (ii) for the period commencing from the date of the Arbitrator's entering upon reference till the date of making the award; and (iii) for the period commencing from the date of making of the award till the date the award is made the rule of the court or till the date of realisation, whichever is earlier.

This is for the reason that in such a case it must be presumed that interest was an implied term of the agreement between the parties and therefore when the parties refer all their disputes-or refer the dispute as to interest as such-to the arbitrator, he shall have the power to award interest. This does not mean that in every case the arbitrator should necessarily award interest pendente lite. It is a matter within his discretion to be exercised in the light of all the facts and circumstances of the case, keeping the ends of justice in view.