A time worn tactic used by parties to delay foreign arbitration proceedings and resist enforcement of a foreign arbitral award is to initiate litigation in the courts of their jurisdiction. In COS 53422 of 2020 (POSCO International Corporation v Rikans International & Other), the Lahore High Court (the LHC) had occasion to examine whether such litigation enables a party to successfully resist the enforcement of a foreign award. The clear implications from the well-reasoned judgment handed down late last month is that the pendency of court proceedings in Pakistan does not provide a party with a defence against enforcement. Unless such party is restrained from participating in arbitration by an injunction granted by a Court, a party that wilfully chooses not to participate will do so at its peril. Further, a party will not be able to resist enforcement of a foreign award on the ground that there was no order in the litigation proceedings referring the parties to arbitration.
Relevant law
The Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011 (the Act) incorporates into Pakistan law the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention). The Act entitles a party to a foreign arbitration agreement to apply for a stay of Court proceedings brought by the other party on a dispute that is required to be resolved by arbitration. Further, the Act entitles a party to apply for enforcement of a foreign arbitration award against persons in Pakistan. Under the Act, such enforcement can be opposed only on the basis of a narrow range of grounds set out in Article V of the Convention.
The application before the LHC in COS 53422 of 2020
These proceedings were an application under section 6 of the Act by POSCO, a Korean company, seeking recognition and enforcement against Rikans, a Pakistani partnership firm, of an arbitration award made in Singapore under the rules of the Singapore International Arbitration Centre (SIAC). Prior to the commencement of arbitration, Rikans had brought litigation in the Civil Court in Lahore in relation to the same contract that was the subject of the dispute in arbitration.
The incapacity defence under Article V(1)(a)
Rikans contended that the pendency of the suit before the Civil Court incapacitated it from defending POSCO’s claim in arbitration. The LHC rejected this argument, holding that incapacity under Art V(1)(a) refers only to a party’s incapacity to enter into an arbitration agreement and not to any incapacity that arises subsequently in the performance of the arbitration agreement. In reaching this conclusion, the LHC relied on the recent judgment of the Supreme Court in Orient Power Company (Private) Limited through Authorised Officer v Sui Northern Gas Pipelines Ltd through Managing Director 2021 SCMR 1728.
Rikans’ alleged inability to present its case before the Arbitral Tribunal under Article V(1)(b)
Rikans argued that it was unable to present its case before the Arbitral Tribunal due to the pendency of the litigation before the Lahore Civil Court. The LHC rejected this argument for two main reasons. Firstly, the LHC held that a party’s inability to present its case must arise from circumstances beyond its control, rather than the party wilfully choosing not to participate in arbitration. Secondly, the LHC held that the inability defence must be construed with reference to the specific circumstances mentioned in Art V(1)(b) (i.e. not being given notice of arbitration proceedings or of the appointment of the arbitrator) which relate to requirements of fairness and due process. The LHC found that Rikans’ rights in this regard had not been violated in the arbitration proceedings.
The public policy defence
According to Rikans, before continuing with arbitration proceedings, POSCO ought to have awaited the outcome of its application under section 4 of the Act for stay of Rikans’ suit before the Civil Court. Rikans argued that by reason of POSCO failing to do so, and continuing with arbitration in the absence of an order by the Lahore Civil Court referring the parties to arbitration, the award fell afoul of Pakistan law and its recognition and enforcement would be against the public policy of Pakistan.
Rikans urged the LHC to follow the approach of the Indian Supreme Court in Renusagar Power Company v General Electric Company 1994 SCC Supl, in which public policy was interpreted widely, as (i) the fundamental policy of Indian law; (ii) the interest of India and (iii) justice and morality. The LHC characterised the criteria formulated in Renusagar as vague, subjective, and in case of morality, as being outside the mandate of Courts of law to enforce. It observed that interpreting the public policy defence in Article V(2)(b) in this manner rendered it wide enough to encompass all the separate defences in Article V of the Convention. The LHC concluded that the Pakistani Supreme Court’s judgment in Orient Power (referenced above) had taken a “much narrower view of the term ‘public policy’ and for good reason.” In Orient Power, the Supreme Court had held that the pro – enforcement bias inherent in the Convention must itself be taken to be the policy of Pakistan as a member state of the Convention. It also cautioned that a wide interpretation of public policy defence would allow this ground to become a back door for enforcing courts to review the merits of a foreign award. Further developing the principles laid down in Orient Power, the LHC confined public policy to what is expressed in Pakistan’s Constitution and its statutes enacted by the legislatures. Thus, recognition and enforcement of a foreign award may be refused on grounds of public policy only if the award offended a constitutional mandate or any provision of Pakistani law. As such the LHC rejected the defence.
Conclusion
The judgment in POSCO seeks to lay to rest the notion that the existence of multiple proceedings on a dispute covered by an arbitration agreement or the prospect of conflicting decisions of the arbitral tribunal and the courts in Pakistan will allow a party to resist the enforcement of a foreign arbitral award in Pakistan. An important consideration underpinning the decision was the preservation of the trust of parties to international commercial contracts which the LHC observed would be irretrievably shaken if Pakistani courts adopted an anti-enforcement policy by giving an expansive interpretation to public policy. By limiting the scope of public policy to Pakistan’s Constitution and statutes, the judgment further reaffirms the judicial consensus in Pakistan on upholding the pro enforcement bias inherent in the Convention.
Note: This article is not intended to provide legal advice and no legal or business decision should be based on its content. It is intended to provide information of general interest about current legal issues.
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