In the landmark case of Eckhardt, the (late) Justice Ajmal Mian cautioned that "...while dealing with an application ... in relation to a foreign arbitration clause like the one in issue, the court's approach should be dynamic and it should bear in mind that unless there are some compelling reasons, such an arbitration clause should be honoured as generally the other party to such an arbitration clause is a foreign party. With the development and growth of international trade and commerce and due to modernization of communication/transport systems in the world, the contracts containing such an arbitration clause are very common nowadays. The rule that the court should not lightly release the parties from their bargain, that follows from the sanctity which the Court attaches to contracts, must be applied with more vigour to a contract containing a foreign arbitration clause. We should not overlook the fact that any breach of a term of such a contract to which a foreign company or person is a party, will tarnish the image of Pakistan in the comity of nations."
Based on Section 4 (1) and (2) of the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011 ("the Act 2011"), a court will enforce an Arbitration Agreement, "unless it finds that the arbitration agreement is null and void, inoperative or incapable of being performed". In terms of the above quotation of the late Justice Ajmal Mian in the Eckhardt's case, a clear direction for respecting foreign arbitration agreements was given, even before the 1948 New York Convention was signed by Pakistan and its statutory enforcement was effected through the 2011 Act. The latter Act has further recognized the importance of respecting foreign arbitration agreements as an incidence of foreign investment in Pakistan, where typically a foreign investor will seek a neutral forum to resolve its bilateral disputes with its counterparty.
In the above background, this Article evaluates recent key developments in Arbitrations involving Pakistan on an international scale.
The particular focus is on two key cases, namely, Karkey Karadeniz Elektrik Uretim AS ("Karkey") v. The Islamic Republic of Pakistan ("Karkey Case") and Tethyan Copper Company Pty Limited v. Islamic Republic of Pakistan ("Reko Diq Case"). In the earlier Pakistan proceedings relating to Karkey and the other Rental Power Projects ("RPPs"), the Supreme Court of Pakistan ruled in March 2011, that Karkey's contract:
"...besides suffering from other irregularities, violated the principle of transparency and fair and open competition, therefore, the same are declared to be non-transparent, illegal and void ab initio. Consequently, the contracts of RPPs are ordered to be rescinded forthwith and all the persons responsible for the same are liable to be dealt with for civil and criminal action in accordance with law.... "
Karkey was ordered to repay the advance deposit and the four ships belonging it were arrested.
Karkey subsequently filed proceedings in the International Centre for Settlement of Investment Dispute (ICSID) against the Islamic Republic of Pakistan on 8th February 2013. In the said case, on 22nd August 2017, ICSID rendered its award reported to be approximately in the sum of US$800 million in favour of Karkey. Karkey in a statement discussing the said award stated that "Pakistan's internal political and administrative uncertainties and conflicts have resulted in great harm to international investors, including Karkey. Karkey believes that such adverse impact will be minimized if Pakistan honours its international law commitment and ensures due, faithful and timely compliance with the ICSID-World Bank Tribunal's Award of 22 August 2017."
In the Reko Diq Case, initially, the Balochistan Development Authority (BDA) on the approval of the Government of Balochistan (GoB), entered into Chaghai Hills Exploration Joint Venture Agreement dated 29th July 1993 (CHEJVA) with BHP Minerals International Exploration Inc. The CHEJVA contained an ICSID arbitration clause.
The essence of the above contracts was challenged in the Supreme Court of Pakistan on the grounds, inter alia, that the contracts were granted without a proper due diligence by the GOB/BDA and was detrimental to the people of Balochistan. Whilst hearing the matter in the Supreme Court, various submissions were made by the Counsel for the Respondents that, inter alia, the ICSID arbitration clause should be respected for resolving the disputes between the parties.
In addition to the above, it was submitted to the court not to give a finding that the international arbitration clause was illegal and unconstitutional and that the ICSID and ICC arbitration should not have taken place or that the award if any
given by the arbitrators will be null and void. The court was requested "...not to give such a finding and suggested that proper course for the court would be to stay its hands off and wait for the outcome of those proceedings being carried out..." under the 2011 Act and before the ICSID. It was further submitted that "... Arbitration Treaties are binding upon the Government of Pakistan. According to the Learned Counsel that would be the best, clearest, fairest and most transparent approach, which would restore the confidence of foreign investors in Pakistan as a safe environment for their investments and there would be no conceivable allegations that the agreement was struck down after the discovery had been made... (it was) urged that Pakistan should stand up for its commitments under the bilateral treaty read with ICSID clause, which the state of Pakistani has accepted voluntarily and freely, and that this court should not put its prestige on the line... ."
However, it was to no avail. The Supreme Court in considering the issues, declared:
"...As all the key provisions of CHEJVA were made subject to a reliance on relaxations that were illegal and void ab initio, the illegality of the agreement seeps to its root. As such, no operative part of the agreement survives to be independently enforceable and the principle of severability cannot be applied to save any part thereof. The agreement is, therefore, void and unenforceable in its entirety under the law..."
The intent here in rendering the agreement (CHEJVA) unenforceable was to also render the arbitration agreement between the parties unenforceable. The petitioners had expressed a concern that if the agreement is not rendered void, the respondents will seek relief in an international arbitration to the prejudice of the petitioners and the country.
In the above background, in the Reko Diq case, the joint venture company, TCC claimed a huge amount of damages reported to be approximately in the sum of US$ 11.5 billion from the GoP in the Arbitration before the ICSID under various contracts/leases pertaining to the conducting of exploration and development of mineral deposits of copper and gold in the agreed exploration area, in District Chaghai of the province of Balochistan, Pakistan. Thus an exposure of GoP for such a large amount was created, which was avoidable.
Based on the foregoing, one can better appreciate the recent events and record of Pakistan's performance in the international arbitrations, which have not been remarkable. Pakistan has been subjected to an adverse arbitral award in Karkey case and has an exposure to a further adverse arbitral award in Reko Diq case involving large sums of money. Both the above international arbitrations emanated as a result of the Supreme Court's decisions against the contractual arrangements entered into by the Pakistan government-owned entities (GOEs), with the concerned parties.
Whilst the decisions of the apex Court of Pakistan, in such matters of setting aside the underlying contracts (in Reko Diq case even after a long period of close to two decades of the contracts existence), were taken for protecting the national resources of Pakistan from the corrupt or the alleged corrupt practices at the time of the signing of the contract, the irony is that in effect Pakistan's resources lost out in much greater proportions by the above adverse arbitral awards made or threatened to be made against the GOEs by the aggrieved foreign parties.
There is a view that the Pakistani courts in their decision-making in relation to such international transactions, must tread more carefully and should draw a clear distinction between the acts and omissions of the GOEs and that of the foreign companies doing business in Pakistan, so as not to result in the fallout of any such Court decision adversely affecting a foreign investor's legal rights, unless a foreign investor is clearly seen to have acted in collusion with the GOEs in acts of wrongdoing, or is otherwise involved in culpable acts.
In the Karkey case, the Supreme Court noted that, "Every action taken by the government must be in public interest and its action would be liable to be invalidated on the touchstone of reasonableness and public interest and if it fails to satisfy either test, it would be unconstitutional and invalid." However, it needs to be appreciated that wherever any GOE has fallen short of the above test laid by the Supreme Court and as a consequence the underlying agreement is rescinded, there will be a claim from the foreign counterparty in an arbitration, which if successful would result in GOE/Pakistan paying large sums of money under adverse arbitral awards, to the detriment of the people of Pakistan.
It has to be seen how the courts, in the case of any violation of the above test, established by the Supreme Court, would ensure that the same does not adversely affect the innocent foreign party. This would be particularly necessary, where there is no evidence of its involvement in any wrongdoing. The cases of Karkey and Reko Diq are examples of the damage that the country has suffered. In Reko Diq case at the hearing, it was recognized by the petitioners that the concerned foreign entities were entitled to negotiate the best possible deal for themselves and no wrongdoing was alleged against them. The thrust of the petitioners' case was that the personnel representing GOEs were incompetent and couldn't protect Pakistan's interests in the transaction and hence the concluded transaction needed to be reopened.
In a nutshell, the decisions of our courts in setting aside the underlying agreements on the ground of irregularities or alleged corruption of the GOEs, maybe much applauded in our local media, but clearly being detrimental to foreign investors who are not involved in any such wrongdoings, will not meet the required test in an international arbitration and will not give and indeed has not given Pakistan much satisfaction in international arbitrations. In recent print media, the underlying argument put forward has been that Pakistan lacks the pertinent experts in Pakistan to handle international arbitration and international contract writing. Whilst the same may be true to an extent, amongst the various other factors that play a vital role in international arbitrations, the approach adopted by our courts in treating agreements containing international arbitration clauses appears to be the most fundamental determining factor for avoiding Pakistan's predicaments today in the international arbitral field.
(The writer is an advocate of the Supreme Court and Co-Chair Arbitration & ADR Commission of ICC Pakistan)
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