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May 3, 2017

Arbitration: a lost cause?


May 3, 2017

It is common cause between lawyers, judges and most of Pakistan that our legal system is broken. And yet nothing ever happens to change that fact. Why is this so? I recently had occasion to examine this issue at a recent conference held at LUMS titled somewhat provocatively, “Arbitration in Pakistan: A lost cause?”

Speaker after speaker made uncontroversial points: the 1940 Arbitration Act is a useless, obsolete statute and needs to be replaced; our courts need to stop seeing arbitration as a bumptious rival and instead encourage the development of alternate dispute resolution strategies; the development of arbitration in Pakistan requires not just a new law but arbitral institutions along the lines of the London Court of International Arbitration (LCIA) and the Singapore International Arbitration Center (SIAC).

If I may be forgiven for regurgitating my talk at the conference, I made basically two points. The first point was that Pakistan is not going to be a hot destination on the international arbitration roadmap for a long time to come: in simple terms, we are not a big enough market for anybody to care. And yes, CPEC is bringing in a lot of money to Pakistan but that deal flow is all emanating from one source. We need to worry first about fixing the domestic arbitration ecosystem and then worry about the international arbitration scene.

The second point though was, I think, more interesting. My question was to ask why nobody cares about commercial arbitration in Pakistan.

To elaborate, commercial arbitration is essentially a service for businessmen, the idea being to provide swift, speedy and private resolution of disputes to people who know the value of a dollar (or a rupee, as the case may be). That is why commercial arbitration practices are not just associated with the great commercial centres of the world (London, Paris, Hong Kong) but are actually driven by the chambers of commerce of those locations. Dubai’s domestic arbitration center, for example, is based in and hosted by the Dubai Chamber of Commerce. Similarly, the ICC rules used in international commercial arbitration are the rules of the “International Chamber of Commerce.” But if you talk to local businessmen about arbitration, their view – to the extent they have one – is that arbitration is a waste of time and not their headache.

Here is the conundrum: in the formal sense, commercial contracts are often unenforceable in Pakistan. If you lend money to somebody in Pakistan, you can forget about getting it back. The situation is slightly better if you’re a bank, but not much. And if somebody reneges on a commercial contract and you want damages, you’re out of luck.

Before I proceed, let me reiterate the words “in the formal sense.” It is certainly possible to recover money from recalcitrant debtors through “alternative” means. Indeed, many political parties (not to mention groups like the TTP) make a side living by settling legal disputes in an ad hoc manner. There are also institutions like the Faisalabad yarn market which enforce contracts through the power of social disapproval and blacklisting of defaulters. But what I am talking about is “formal” adjudication by a court. And in that formal sense, going to court is quite often a waste of time.

So, here’s the question: why don’t Pakistani businessmen care about this? Why are they not screaming about the fact that many of their contracts are not worth the paper they’re written on? Self-evidently, our business leaders are neither dumb nor ignorant? Why don’t they care then?

Let me present two answers, the first is practical and the second is historical.

At the practical level, the short answer is that arbitration doesn’t free you from our dysfunctional judicial system: at best, it speeds up the process of getting a decree. Unfortunately, as observed by the Privy Council back in 1872, the problems of a litigant in India begin when he has a decree. Going through the added hassle and expense of commercial arbitration only to find yourself back at the start line in a civil court is therefore like taking the motorway for ten minutes before being forced to get out of your car and hike up a hill. Or as one of my clients put it to me, “why should I go to arbitration if I’m going to wind up before a civil judge anyways? Why add one round of litigation?”

The historical argument is more intriguing. To begin with, the apathy is neither constant nor universal. The Karachi Cotton Association, for example, had a set of arbitration rules which remained widely used till the middle of the 1980s. More generally, chambers of commerce are not silent bodies. Instead, elections to the various chambers of commerce are heavily contested affairs in which local businesses are deeply invested.

One hypothesis is that this strangely silent business class is a consequence of our misadventures with nationalisation. Think of it this way: ZAB’s actions wiped out not just the famous 22 families but most large scale private enterprise in Pakistan. The enterprises that were left were not just smaller but they were also less sophisticated. Above all, what these enterprises understood in the very marrow of their bones was that it was not a good idea to become too publicly visible, because as noted by a traveler to the court of the Emperor Jahangir, “There are very many private men in cities and towns . . . that are very rich: but it is not safe for them that are so, so to appear, lest that they should be used as fill’d sponges.”

And so our business communities survived their pruning, both recent and old, by turning inwards and by avoiding the state. The average trader therefore regards the instrumentalities of the state with fear and loathing. It is standard practice for columnists and pundits to bemoan Pakistan’s pitifully small number of tax payers. It is not standard practice for people to ask why this mistrust runs so deep and what can be done to overcome it.

Let me try and pull together the skeins of my various arguments. Commercial arbitration has never properly taken off in Pakistan because it requires a certain degree of formal interaction between the business sector and the state. In order for that formal interaction to take place, the business community itself has to be both organised and confident enough of its place in the political structure and to be willing to negotiate with the state in order to protect its interests. At the same time, the various institutions of the state also have to be willing to delegate responsibility on to the business community and trust the business community with some degree of power.

For the last few decades, both aspects have been missing. The business community had withdrawn itself from formal politics and the state itself had become grossly overgrown. At the same time, there are encouraging signs on both fronts. For example, the business community seems to have enough confidence in the rule of law to get involved in politics (witness, for example, the rise of Jahangir Tareen and his bankrolling of the PTI). And at least the Lahore High Court level, there is a new group of commercially saving jurists pushing hard to develop alternate dispute resolution strategies, particularly arbitration. Let’s see now what the future brings.

The writer is an advocate of the Supreme Court of Pakistan.

Twitter: @laalshah