THE AUTHOR:
Ammad Manzur, Advocate of the High Courts of Pakistan
Introduction
Pakistan’s arbitration legal regime places much emphasis on the location of the seat of arbitration for determining which set of rules is to apply to a given dispute. Given the significance which has been attached to the seat of the arbitration, one would imagine that clear criteria for its determination would be provided. Unfortunately, this is not so, which can have damaging consequences for parties who have not set out their intended seat of arbitration in a manner which corresponds with the applicable law.
Location of the Seat and the Applicable Law
The arbitration regime consists of two statutes, namely, the Arbitration Act, 1940 (the “1940 Act”) and the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011 (the “2011 Act”), with the latter having been enacted to bring into force the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (the “NYC”). Following the Supreme Court of Pakistan’s (“SC”) judgment in Taisei v AM Construction, it is now settled that the 1940 Act is to apply to all Pakistan-seated arbitrations while the 2011 Act will apply to those seated abroad – a matter which was subject to much controversy due to conflicting judgments in the High Courts below.
The Taisei judgment, however, has given rise to a new significant issue. Parties to Pakistan-seated arbitrations that have a foreign nexus (e.g., the parties are resident outside Pakistan) cannot avail themselves of the protections that are provided under the NYC – since the 2011 Act’s scope of application has been restricted to foreign-seated arbitrations alone. Hence, such parties will be subject to the provisions of the 1940 Act, where courts are free to review arbitral awards.
That said, the Arbitration Law Review Committee (“ALRC”) of Pakistan’s Law and Justice Commission has prepared a draft Arbitration Act, 2024 (the “Draft Act”) which shall replace the 1940 Act. The Draft Act seeks to thoroughly overhaul Pakistan’s regime on domestic-seated arbitrations in line with the UNCITRAL (United Nations Commission On International Trade Law) Model Law on International Commercial Arbitration (2006) (the “ML”). Crucially, similar to Article 1 (3) of the ML, the Draft Act includes within its scope of application Pakistan-seated arbitrations with a foreign nexus, labelling them “international commercial arbitration”. Such arbitrations are afforded the same protections as those provided under the NYC; thus, rectifying the aforenoted issues which persist under the 1940 Act.
A Unique Concept of the “Seat of the Arbitration”
The 2011 Act is a scant legislation, with only two pages of substantive provisions. The rest of the legislation consists of a Schedule to which the NYC is appended. Unsurprisingly, therefore, it contains no provision for determining the seat of the arbitration.
On the other hand, the Draft Act is quite comprehensive, with two provisions on the “seat of the arbitration” alone. Therefore, to resolve disputes regarding the seat —and, by extension, determine whether the arbitration is subject to the 2011 Act or the Draft Act— it would be necessary to refer to the latter.
However, the proposed law provides for a unique concept of the seat of the arbitration. Not only is this concept at odds with the vast majority of arbitration rules of prominent arbitral institutions – it also diverges from the interpretation under the ML, which the Draft Act seeks to adopt and refers to in five of its seven preambulatory clauses.
First Impressions
At first blush, the definition of the term “seat of the arbitration”, provided in Section 2 (1) (m) of the Draft Act, does not seem to pose any problems. The term has been described as the juridical seat of the arbitration designated by the parties to the arbitration agreement. Failing such designation, it is either the seat designated by:
- The arbitral institution or other body who has been empowered by the parties to do so; or, in the absence of such power,
- The arbitral tribunal, following a determination to be made in accordance with Section 22 of the Draft Act.
Further, the proposed law, in line with its pro-arbitration scheme, comes to the aid of less-experienced parties who fail to specify a seat of arbitration rather than penalizing them. In an effort to promote party autonomy, which is one of the stated policy objectives of the Draft Act, the term “agreement” has been given a wider meaning. Pursuant to Section 3 (8) of the Draft Act, an agreement also includes the arbitration rules which have been chosen by the parties. This ensures that the parties are subjected to the curial law of the default seat, which the arbitral institution considers to be the best suited. For instance, under the LCIA (London Court of International Arbitration) Arbitration Rules 2020, in the absence of agreement, the default seat is London.
Arbitral tribunals have also been empowered under Section 22 (2) of the Draft Act to determine the appropriate seat of arbitration, if it has not been designated by either the parties or the arbitral institution under the aforesaid deeming mechanism.
A Closer Look
However, on closer inspection, a curious provision appears to be out of place with the otherwise pro-arbitration scheme of the proposed law. The provision in question is Section 22 (4) of the Draft Act, which explicitly provides that the place of arbitration is not necessarily the seat of the arbitration. This marks a significant departure from the general understanding developed thus far around the concept of the seat of arbitration, because of which the term is often used interchangeably with the place of arbitration. More importantly, the ML, which the Draft Act seeks to implement, uses the nomenclature of “place of arbitration” rather than seat. While jurisdictions that have adopted the ML do not also use its exact terminology, the Draft Act’s (artificial) distinction between the place and seat of arbitration is a first.
As detailed below, the aforesaid Section 22 (4) throws the question of seat designation into a realm of uncertainty.
The Creeping in of Capricious Judicial Determination
A particularly unhelpful feature of the Draft Act is the absence of any preparatory report, detailing why certain provisions that deviate from both the ML and international practices have nevertheless been adopted. Typically, most law commissions from around the world prepare detailed reports for even minor amendments to their arbitration legislations which act as an aid for interpretation.
Given that the bald provisions of the Draft Act alone are available, the potential implications of its unusual Section 22 (4) may only be examined through the lens of those jurisdictions from which its draftsmen drew inspiration.
The Indian Experience
India was one of the key jurisdictions that influenced the ALRC, owing to the two countries’ shared legal history. Under the Arbitration and Conciliation Act, 1996 (the “IAA”), due to a (much milder) ambiguity created from the use of the term “place” rather than “seat” of arbitration, the Indian Supreme Court (“ISC”) has had to grapple with the issue on a number of occasions.
For instance, in Mankastu Impex v Airvisual Ltd, the parties had only stipulated the place of arbitration, namely, Hong Kong; rather than the seat. It was held that the two terms are not interchangeable. The court reasoned that in order for a designated place of arbitration to be treated as the seat, the court would also have to consider “other clauses in the agreement and the conduct of the parties”. Thus, only after the court found another provision in the arbitration agreement stating that all disputes were to be administered in Hong Kong, did it hold the said place of arbitration to also be its seat.
However, what happens if there is no other supporting provision in the arbitration agreement? A recent ISC judgment, Arif Azim Company v. Micromax Informatics, suggests that the seat of arbitration in such an instance would have to be determined pursuant to the capricious closest-connection test. Under the closest-connection test, the seat of the arbitration is determined in accordance with a number of “abstract connecting factors” of the arbitration with the underlying contract, including the contract’s governing law, the contract’s place of performance and the parties’ place of business or residence. Crucially, the ISC emphasized that the “formulaic and unpredictable” closest-connection test only has a limited application under the IAA.
The Ghost of Hitachi v Rupali
Prior to the coming into force of the NYC in Pakistan, foreign arbitral awards were governed by the Arbitration (Protocol and Convention) Act, 1937 (the “1937 Act”), through which the Geneva Convention on the Execution of Foreign Arbitral Awards had been ratified. Section 9 (b) of the 1937 Act provided that the said law would not apply to arbitration agreements governed by Pakistan law.
Due to the ouster in the 1937 Act, the SC in Hitachi v Rupali held awards rendered by a foreign-seated arbitral tribunal as domestic, since the parties’ arbitration agreement was contained in a contract governed by Pakistan law. Therefore, the arbitration agreement’s applicable law was also held to be Pakistan law, making the awards subject to the 1940 Act.
Subsequently, the Lahore High Court also held a foreign-seated award to be subject to the 1940 Act. Quoting from Hitachi, the court reasoned that because the underlying contract was governed by Pakistan law, the award in question was also domestic. However, the SC in Taisei v AMC above set aside this judgment in appeal. The SC held that because the 1937 Act has now been repealed by the 2011 Act, there was no basis for an enquiry regarding the applicable law of the underlying arbitration agreement for the purpose of treating an otherwise foreign arbitral award as a domestic one. It was stressed in Taisei v AMC that the SC did not propound a principle of general application in Hitachi; instead, it was limited to an interpretation of the 1937 Act alone.
Nevertheless, there is a danger that courts may use the Hitachi precedent to treat a foreign award as domestic on a new ground: seat determination. In an instance where only the place of arbitration is provided, Pakistani courts may invoke Section 22 (4) of the Draft Act for determining the seat of arbitration by employing the closest-connection test, as contemplated under the ISC judgment of Arif Azim. Notably, in Hitachi this very test was pressed into service to hold that Pakistani courts had the “closest connections/nexus with the dispute”. A list of connecting factors was given, including the location of the dispute and project; and the Pakistani place of business and residence of just one of the parties.
A Word of Caution
The dangers that this judicial determination of the seat pose are glaring, as illustrated by this short example:
Let’s say there are two parties to an arbitration agreement who lack a foreign nexus – and thus cannot avail the protections given to international commercial arbitrations under the Draft Act. They may seek to sidestep the domestic arbitration regime by opting for a foreign seat of arbitration to avail the NYC’s protections. However, if they unwittingly choose a model arbitration clause — which is often recommended by most arbitral institutions — that provides for the place of arbitration, they might discover that they are nevertheless seated in Pakistan due to their (very) close connections with the jurisdiction. Consequently, the parties’ arbitration would be open to the very same challenges which they were seeking to avoid by choosing a foreign place of arbitration. For instance, as a result of their arbitration being treated as a domestic one, an award could be set aside on a ground not contemplated under the NYC, namely, patent illegality (Section 39 (4) of the Draft Act).
Therefore, parties must carefully set out their intended seat of arbitration in a manner that fully corresponds to the criteria set out under the Draft Act, leaving no room for judicial manoeuvring.
Conclusion
It is unfortunate that Pakistan’s arbitration regime lacks clear criteria for seat determination. Unsurprisingly, parties to the arbitration bear the brunt of this ambiguity, unable to even rely on model clauses that most arbitral institutions recommend. It is hoped that the Parliament will thoroughly consider this issue prior to promulgating the Draft Act.
ABOUT THE AUTHOR
Ammad Manzur is an Advocate of the High Courts of Pakistan, with a wide-ranging experience in both contentious and non-contentious commercial law. He has a keen interest in international arbitration and has represented clients in cross-border disputes before international arbitral tribunals as well as in associated litigation before courts. His qualifications include an LL.M in International Commercial Law from the Brunel University London.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
