DEVELOPING ARBITRATION IN PAKISTAN – FROM AD HOC TO INSTITUTIONAL ARBITRATION
- By Farhan Shafi & Sajid Suleman
Keywords: Ad-hoc arbitration, Institutional arbitration, UNCITRAL Model Rules
The concept of arbitration in Pakistan predates the country itself. The colonial-era Arbitration Act 1940 (“Arbitration Act”) governs domestic arbitration in Pakistan and was last amended in 1981.
Yet, until recently, arbitration in Pakistan struggled to gain momentum. Many big-ticket commercial agreements, especially those involving foreign investors, tend to include provisions for international arbitration seated outside Pakistan. While for domestic commercial agreements, litigation in the courts remains the preferred forum for dispute settlement.
Some cite problems with the Arbitration Act for the lack of impetus in domestic commercial arbitration, but we believe that another critical reason is the prevalence of ad-hoc arbitrations. In this article, we analyse the most-pressing ad-hoc arbitration issues in Pakistan and assess whether arbitral institutions are the answer. There has been a recent increase in the establishment of arbitral institutions in Pakistan, such as the Center for International Investment and Commercial Arbitration (“CIICA”), which has seen a correlating increase in events, awareness and discussion of arbitration in Pakistan.
Appointment of arbitrators
A core issue plaguing ad-hoc arbitration is the delay in constitution of the arbitral tribunal. Significant delays can be incurred in situations where (i) a sole arbitrator must be appointed, (ii) the parties or arbitrators must appoint an umpire or additional arbitrator, (iii) arbitrators must be appointed by consent of parties, and (iv) a vacancy in the arbitral tribunal must be supplied.
In the absence of a contrary agreement, parties must approach the courts for making these appointments. This erodes the quickness and efficiency for which arbitration is renowned and, in the absence of a specialised arbitration court, there can be considerable delay before the arbitral tribunal is appointed. Furthermore, in the absence of a model clause, many arbitration clauses tend to stay silent on numbers of arbitrators, and due to implied terms in the Arbitration Act, the standard reference is to a sole arbitrator. This increases court involvement as most parties are unable to agree on an arbitrator.
However, if parties agree to arbitrate under an arbitral institution, institutional rules apply which, in Pakistan, can see greater advantages in terms of efficiency. For example, under Article 12 (3) of the ICC Arbitration Rules 2021, if parties cannot agree on a sole arbitrator within 30 days of the other party receiving a request for arbitration, ICC makes the appointment . Similarly, under Rule 11.2 of the SIAC Rules 2016, if three arbitrators are to be appointed and a party fails to nominate an arbitrator within 14 days after receipt of the other party’s nomination, SIAC makes the appointment. As such, in institutional arbitration the constitution of the arbitral tribunal can be done in an expeditious manner without involving a court.
Ad-hoc arbitrations also tend to have limited options when appointing arbitrators, with choices limited to individuals suggested by parties or those who the judge might know. Arbitral institutions with a panel of arbitrators can ensure that the arbitral tribunal is well suited to handle the dispute. It can lead to more diverse arbitral tribunals with a mix of retired judges, lawyers and experts.
Arbitral institutions also have an ethical code of conduct which must be followed by arbitrators, and thus fills the gap in the Arbitration Act which does not impose any duties upon the arbitrators. This helps to strengthen the impartiality and independence of the arbitral tribunal, and in turn gives parties greater confidence in using arbitration as a method of dispute resolution.
Challenge and removal of arbitrators
Under the Arbitration Act, unless a contrary intention exists, courts retain the exclusive authority to remove an arbitrator on grounds of misconduct. This necessitates involving courts in order to challenge and remove arbitrators which leads to significant delays. Institutional arbitration again has an advantage as it can provide the parties with an efficient procedure to challenge or remove arbitrators and replace them without approaching courts. These institutions may also frame stricter requirements for arbitrators beyond the jurisprudence developed by courts which can benefit parties.
Many ad-hoc arbitrations also tend to involve retired superior court judges as arbitrators. Bearing in mind the deference shown to senior judges in Pakistan, courts may be reluctant to remove an arbitrator who is a former senior judge. This creates a potential conflict of interest. Arbitral institutions can avoid such conflicts and can take decisions without any external pressure.
Conduct of arbitration
Arbitration normally provides a flexible procedure tailored towards the particular dispute. This flexibility is lost in most ad-hoc arbitrations in Pakistan which are governed under a 1940 law. While the arbitral tribunal retains the ability to adopt procedure as it sees fit, many tribunals tend to use a one-size-fits-all approach. This results in tribunals adopting a similar procedure to courts without fully utilising the benefits that flexible arbitral rules can provide.
Institutional arbitration, however, can help provide an efficient procedure tailored to the dispute. Flexibility is seen in the utilisation of virtual hearings, e-documentation, emergency arbitrator, expedited procedures for disputes below a certain amount, and separate small claims and intermediate claims procedure (such as provided by LMAA [i]). Institutional rules can also be simplified where needed, and an efficient timetable with a documents-only arbitration is an option for the parties. In Pakistan, at present, the Arbitration Act does not recognise expedited documents-only arbitrations. It remains to be seen if there will be a shift to recognise expedited arbitrations.
For disputing parties in Pakistan, there are obvious cost saving advantages of institutional arbitration over traditional litigation or ad hoc arbitration. There is the added certainty from clearly documented institutional rules and practice directions.
Arbitral institutions also tend to use the latest technology in dispute resolution and incorporate them in hearings much before most ad-hoc arbitral tribunals. For example, the DIFC-LCIA Arbitration Centre provides the parties with an online filing system. Such systems may not be novel elsewhere, but in Pakistan they have the potential to revolutionise arbitration culture.
Knowledge and publicity
Ad-hoc arbitrations lack publicity and knowledge-sharing which leads to arbitration being considered archaic and secretive. This deters practitioners and parties from using arbitration as the preferred means to resolve disputes. Arbitration is thus viewed as only suitable for large high value international matters.
Arbitral institutions tend to publish model clauses, rules detailing entire procedure, practice notes, checklists, guidelines to arbitrators and parties, evidentiary rules, schedule of fees, and model terms of reference. These institutions also take steps to promote arbitration through various conferences and webinars. Such knowledge sharing and publicity can greatly enhances the standing of arbitration in Pakistan.
Ad hoc arbitrations have the perceived cost saving advantage on account of the absence of administrative or filing expenses. The challenge for arbitral institutions is to convince parties that this may be a false economy. Many ad-hoc arbitrations are subject to extensive proceedings in national courts, slow disorganised processes, and delays in rendering of award which can take many years before a dispute is finally resolved. Many arbitral institutions however boast a median duration between of 11.7 to 16 months.[ii] Expedited arbitrations have even brought this number down to 3 to 6 months.[iii] Despite the apparent increase in fixed costs, a quicker resolution of dispute without involving national courts extensively may mean lower overall legal costs.
The launch of CIICA has helped make administrative and filing costs affordable for Pakistani businesses. Taking the example of $100,000 as amount in dispute, in administrative and filing costs, ICC charges $10,765, SIAC charges $5,156, while CIICA charges only $2,250 – making it one of the most affordable institutions globally.
It is to be noted that the launch of further arbitration institutions in Pakistan could result in greater competitive pricing, and institutions may also consider other creative pricing models such as charging a fixed rate per service, as opposed to a flat fee.
In conclusion, developing a culture of institutional arbitration in Pakistan will help alleviate many concerns which have kept lawyers from utilising this efficient dispute resolution method. This cannot be a standalone effort but must be done in conjunction with other critical reforms such as a new arbitration law in line with UNCITRAL Model Rules and training the judiciary to promote arbitration by limiting the national courts involvement.
We focused in this article on how institutional arbitration can solve certain challenges posed by ad-hoc arbitration under the Arbitration Law. We intend to write a Part 2 on both the challenges for arbitral institutions in Pakistan and analyse why the institutional arbitration culture hasn’t grown at a similar pace to neighbouring jurisdictions such as Hong Kong, the Middle East and Singapore.
Sajid Suleman is a barrister in London specialising in international arbitration and an Ambassador of Arbitrator Intelligence. Farhan Shafi is an arbitration practitioner in Oman at Mohammed Al Ruqaishi Law.
Preferred Citation – Farhan Shafi & Sajid Suleman, ‘Developing Arbitration in Pakistan – From Ad Hoc to Institutional Arbitration (ICAR, 30 January 2021) <insert accessed link here>.
[i] (i) Small claims: https://lmaa.london/wp-content/uploads/2020/11/SCP-2017-Clean.pdf and (ii) Intermediate claims: https://lmaa.london/wp-content/uploads/2020/11/ICP-2017-Clean.pdf
The views and opinions expressed in the article are those of the author(s) solely and do not reflect the official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.