Category Archives: Insight article

We are pleased to have contributed the Pakistan chapter of Lexology’s Dispute Resolution Guide, an overview of civil litigation and arbitration in Pakistan, covering the structure of the court system and key issues in civil proceedings including enforcement of foreign judgments and arbitration.

We authored the Pakistan chapter of the Telecoms, Media & Technology Guide published by Chambers and Partners. The chapter presents an overview of media, telecoms, data protection, encryption, artificial intelligence and blockchain regulation.

It also covers the role of key regulators, viz., the Pakistan Telecommunication Authority and PEMRA, as well as the regulation of posts on social media platforms.

On 16 June 2022, the President of Pakistan was reported to have approved the instrument of accession to the 1961 Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents (the Apostille Convention). Pakistan is now all set to deposit its instrument of accession to the Hague Conference on Private International Law (HCCH) and begin reform of its document authentication process in line with international practices.

Background, simplified legalisation procedure and its benefits

Legalisation is when a document issued in one country (originating country) is rendered suitable for use in another country (receiving country). In the case of public documents issued by authorities in Pakistan, the current regime for legalisation consists of at least two steps: (1) the document is verified by the Ministry of Foreign Affairs of Pakistan, after which such document is affixed with a sticker/stamp signifying that the official authority in Pakistan has duly issued it and (2) such document is thereafter legalised by the Embassy or Consulate of the foreign country in Pakistan by affixing a sticker/stamp. The reverse of this process is required to be undertaken where a public document issued by an authority of a foreign country is required to be made suitable for use in Pakistan.

Accession to the Apostille Convention will bring Pakistan one step closer to replacing the current, relatively cumbersome requirements with a simplified, one-step process whereby a document will be recognised as being duly legalised in the receiving country if it is affixed with an apostille by a designated authority of the originating country. In the example used above, a public document issued by an authority in Pakistan will be suitable for use in a foreign country which is a party to the Apostille Convention if such document is affixed with an apostille by the designated authority in Pakistan. Similarly, a public document issued by an authority in a foreign country which is a party to the Apostille Convention will be suitable for use in Pakistan if such document is affixed with an apostille by the designated authority in that foreign country. An apostille is a form of authentication certificate. A total of 122 countries are party to the Apostille Convention at present.

The Apostille Convention allows for reduced administrative formalities for individuals and businesses that need to produce public documents abroad during their cross-border movements and activities. The process under the Apostille Convention minimizes red tape, costs and delays, facilitating foreign investment and international trade. At the same time, the Apostille Convention maintains the integrity of the authentication. The Apostille Convention is the most widely used Hague Convention, and millions of Apostilles are issued annually worldwide. 

Salient features of the Apostille Convention

a.      Public documents

The Apostille Convention applies only to “public documents”. Article 1 of the Apostille Convention provides a non-exhaustive definition of public documents, and the law of the originating country also determines the scope of this term. Such documents may typically relate to birth, marriage, death, education, certificates issued by regulatory authorities, intellectual property registration certificates, judicial documents, official certificates which are placed on documents signed by persons in their private capacity (e.g. company resolutions, powers of attorney) and other notarial authentications of signatures etc. 

b.      Competent authority

Each country that is a party to the Apostille Convention must designate one or more authorities which may issue an apostille. Before affixing the apostille, such authority is required to satisfy itself of the signature’s authenticity, the capacity in which the person signing the document has acted and, where appropriate, the identity of the seal or stamp it bears. It is also required to maintain a record of the apostilles issued by it, which can be verified upon request.

c.      Electronic record and issuance

The Apostille Convention provides a register or card index of apostilles issued in the originating country to allow for verification by the receiving country. This register may also be in the form of an e-register, allowing the receiving country to verify an apostille online without contacting the competent authority of the originating country. Around 49 countries have set up an e-register to verify Apostilles issued by them. In addition, some of these countries have also implemented the electronic apostille program (e-App) under the Apostille Convention, which enables apostilles to be issued electronically.

Next steps for Pakistan

For the Apostille Convention to take effect on the legal landscape in Pakistan, Pakistan will be required to introduce new legislation and amend its existing legislation to revise provisions inconsistent with the Apostille Convention. Legislation requiring amendment includes the Qanun-e-Shahadat Order 1984 and Notaries Ordinance 1961. In addition, new legislation may be required to establish or designate one or more competent authorities for the purposes of the Apostille Convention. According to reports, the Ministry of Foreign Affairs shall be designated as a competent authority under the Apostille Convention. If Pakistan chooses to do so, new legislation will also be required to implement the e-Register and the e-APP program under the Apostille Convention.

Note: This article does not 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.

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.

On 25 March 2022, the Securities and Exchange Commission of Pakistan (SECP) published draft amendments (P2P Amendments) to the Non-Banking Finance Companies and Notified Entities Regulations, 2008 (NBFC Regulations, 2008) for the purpose of seeking comments from the public.

On the promulgation of the P2P Amendments, lending non-bank finance companies in Pakistan will be allowed to provide peer-to-peer lending services through an online platform, where lenders and borrowers are aggregated (P2P Services). This will be yet another significant development in country’s fast-evolving fintech regulatory landscape.

Eligibility to provide P2P Services

Under the P2P Amendments, lending non-banking finance companies (i.e., companies that hold a NBFC license issued by the SECP for lending business) interested in entering this business will be required to increase their equity by PKR 20 million (above the minimum equity requirements under their lending license) and make an application to the SECP to obtain permission to begin operations.

Scope of P2P Services

The P2P Amendments envisage that a service provider will coordinate the entire transaction of lending and borrowing. This will begin by carrying out a credit assessment and risk profile of its eligible participants, disclosing such assessments to lenders, determining the price of loans, and after participants agree to the terms of a loan, facilitating disbursements, collecting repayments, and in case of default, recovering the loans. An important aspect of the service providers role is to maintain up-to-date credit information about its borrowers in order that it can make effective risk assessments, and to enhance data protection, the P2P Amendments require all data to be stored and processed on hardware situated in Pakistan (unless otherwise permitted). In addition to this intermediary role, the service provider is also required to have ‘skin in the game’ by contributing at least 15% of each loan that is disbursed on its platform.

Eligible lenders, borrowers and prudential requirements

All loans will have short-term tenors (up to 12-months) and will be unsecured. These loans are ideal for the working capital needs of businesses, although there is no restriction on the purpose for which loans can be extended. Eligible lenders must have a net-worth of at least PKR 15 million, and eligible borrowers must have a business history of at least 1 year. Financial institutions, public listed companies and their subsidiaries, and investment funds are all excluded from borrowing on such platforms. The aggregate amount a borrower can borrow from all P2P Service Providers is PKR 1 million, a single lender’s exposure to the same borrower cannot exceed PKR 500,000, and the maximum limit that a single lender can advance is PKR 1 million in the case of an individual, provident/gratuity fund, charitable institution or Section 42 Company, and PKR 10 million in all other cases.

Proposed operational safeguards include the use of two escrow accounts: one for disbursements and the other for collections. Only banks with at least an ‘A’ credit rating can act as trustees of these accounts. Further, no withdrawals are permitted other than for P2P lending, and all participant funds must be clearly identifiable. The P2P service provider is also required to ensure that no international funds are received through its platform.

Win-Win for all

The P2P Amendments will be a win-win for all stakeholders. Existing lending NBFCs can explore the development of a new product (there are potential synergies between lending NBFCs and e-commerce market players), lenders can benefit from a new avenue of investment, and SMEs can tap into credit which may have been denied to them by traditional avenues of financing.

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.

The Income Tax Ordinance, 2001 (the Ordinance) requires taxpayers to self-assess their income and assets and report them to the Federal Board of Revenue by way of a tax return. Such return is treated as an assessment order under the Ordinance.

Proceedings under the Ordinance can be commenced by the income tax department in a number of ways including by issuing notices under: section 120(3) where the return is incomplete; section 121(1) where a taxpayer has not filed a return; section 122(5) where the Commissioner is satisfied,  on the basis of audit or definite information, that the assessment order requires to be amended; section 122(5A) where the assessment order requires to be amended because it is erroneous insofar as it is prejudicial to the interests of revenue and under section 161(1), where a person fails to deduct tax required to be withheld or fails to deposit tax withheld.

While sections 120, 121 and 122 prescribe time limits for issuance of notices, there is no such stipulation in section 161 of the Ordinance. By way of context, section 174(3) of the Income Tax Ordinance, 2001 (the Ordinance) to retain specified records, documents and accounts relating to a tax year for a period of 6 years after the end of such tax year, except where proceedings in respect of that tax year are already pending. In a recent judgment (in Civil Petition No. 1691-L of 2018) authored by Mr. Justice Mansoor Ali Shah, a three member bench of the Supreme Court applied this time limit to notices issued by the tax department under section 161 of the Ordinance and to notices under other provisions which do not prescribe a time limit. The time limit applies where such notices cannot be responded by the addressee without reference to the records required to be maintained under section 174 of the Ordinance.

The subject of the case before the Supreme Court was a notice issued in 2017 seeking to recover tax required to be withheld by the taxpayer in 2007 and 2009 under section 161(1A) of the Ordinance and requiring the taxpayer to furnish statements of withholding tax under section 165(2B) of the Ordinance and reconciliation under rule 44(4) of the Income Tax Rules, 2002. In a challenge by the taxpayer, the Lahore High Court set aside the notice on the ground that the tax department could not have required the taxpayer to furnish records relating to tax years 2007 and 2009 after the passage of 6 years from the end of those tax years. The judgment of the Lahore High Court was challenged in the Supreme Court by the tax department. The Supreme Court dismissed such challenge and upheld the judgment of the Lahore High Court.

The significant conclusions in the judgment of the Supreme Court are as follows:

(1)          The time limit under section 174(3) of the Ordinance applied to any notice to which a taxpayer could not reply without referring to the records that the Ordinance required taxpayers to maintain. This time limit applied even where the provision of the Ordinance under which such notice is issued does not prescribe any time limit. The Court clarified that the time limit did not apply to proceedings relating to periods for which the records are already in the possession of the tax department.

(2)          The 6 year time limit under section 174(3) of the Ordinance was in the nature of a statutory protection afforded to taxpayers and could not be extended by the tax department to the taxpayers’ detriment. The Supreme Court disapproved of the High Court judgment in Habib Bank Limited v Federation of Pakistan (2013 PTD 1659) which held that the tax department could extend the time limit if it was able to justify the delay in initiating proceedings against a taxpayer.

(3)          The time limit under section 174(4) could not be extended under section 214A of the Ordinance, which empowers the Federal Board of Revenue (or a Commissioner duly authorised) to extend time limits for actions that are required by the Ordinance to be undertaken within a stipulated period.

Underpinning the conclusions in the judgment was the Supreme Court’s characterisation of the Ordinance as being “largely structured around time-framed provisions in order to make the taxing mechanism certain and transparent and the tax administration and tax governance smarter and efficient.”

By holding that time limit under section 174(3) of the Ordinance operates as a substantive defence against notices issued after its expiry, and not merely as a provision delineating the duration of the record maintenance obligation under the Ordinance, the judgment has resolved much of the ambiguity surrounding the time limit applicable to notices issued under provisions of the Ordinance which do not prescribe any time limit. Further, given the Supreme Court’s pronouncement that such time limit cannot be extended, taxpayers will be assured that they cannot be confronted with notices which require them to refer to records older than those that they are required to maintain under the Ordinance.

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.