On averting international arbitration disasters

February 14, 2021

Facing more than 35 investment dispute claims, the government has failed to deploy a substantial strategy

On averting international arbitration disasters

Pakistan’s performance at international investment dispute resolution forums in the recent years has been quite abysmal. Misplaced priorities, lack of interest and espousing short-term objectives at the cost of national and public interests have immensely damaged the country. Over the past few years, the government has faced over 35 investment dispute claims from foreign investors at various international arbitral forums. There is a disconcerting realisation that even if only half of these claims are decided against Pakistan, it would cost millions of dollars to the national exchequer in the form of compensation and legal fees.

However, these issues can be managed and remedied, provided they are handled professionally and competently by government-backed legal and technical experts having the requisite qualifications and experience.

Therefore, the government should set up a committee of experts with a mandate to reach out and win back the investors who have pulled out of Pakistan on account of bureaucratic red tape and cultural resistance. It is important to renegotiate with the estranged investors who once developed and maintained infrastructure and services in the country; promoted human capital development; addressed inefficiencies in the labour market; and supported small and medium-sized enterprises through supply and demand-side measures.

Procedural relief in banking and regulatory regimes, and arranging road shows and seminars to attract investments prove helpful only to an extent. These work well in the long run only if the foreign investors’ perception of the host country remains optimistic. The government should understand the importance of developing an empathetic relationship with the turned-away investors.

Consequently, the government must place itself in their position, invest time and energy in understanding their perspectives, offer tailored solutions to their claims, renegotiate new investment terms and do whatever it takes to make bold decisions and work up solutions that are fit for local purpose and have a shared stake in the outcomes.

The government needs to make considerable efforts and run an aggressive campaign to lure old investors into the market again. It must throw off the past and choose a new beginning with them.

In this regard, the government needs to make a clear, comprehensive and pro-active policy to facilitate foreign investment in the country and prevent disputes with foreign investors from arising in the first place. Where disputes have already arisen and reached the International Centre for Settlement of Investment Disputes (ICSID) or other international arbitration forums, the mechanism should be flexible enough to resolve them through out-of-court settlement channels. Additionally, the government also needs to build capacities to resolve such disputes locally.

It is proposed, therefore, that the government adopt the following three-pronged strategy at the Federal Board of Investment (BOI), as the primary investment facilitation agency, to facilitate foreign investments and ensure dispute prevention mechanisms:

First of all, the government should create an independent dispute resolution forum for foreign investors. Investment treaty arbitration can be costly for developing countries like Pakistan, who have far better uses for public funds. They can also be unbearable for many foreign investors whose rights were, at times, egregiously violated, but who cannot pay to seek redress. In such cases, it is advisable to consider settling the dispute out of court.

In out-of-court settlements, the parties agree to effectively halt the lawsuit or any future arbitral proceedings, in exchange for reaching a settlement that substitutes the claim.

This mechanism saves the parties stress, time and legal costs and protects them from uncertain verdicts. Studies have found that such mechanisms have worked favourably for developing countries, as international arbitrations tend to favour investors.

Therefore, the government, after consulting with the Supreme Court and in accordance with the Alternative Dispute Resolution Act, 2017 should constitute a government-backed, but fully autonomous and neutral commercial dispute resolution forum. It should comprise retired judges of the superior judiciary, practicing lawyers with over ten years of experience, retired senior civil servants, chartered accountants, financial experts, and other reputable persons with requisite skills and knowledge.

On averting international arbitration disasters

The forum should be established at the Board of Investment (BOI) and adopt international best practices in addressing investor-state dispute claims. It should primarily be tasked with the following functions:

• aim at settling investment-related disputes domestically before approaching international dispute resolution agencies;

• reaching out to aggrieved investors who have already approached international arbitral forums and offer them an out-of-court settlement or renegotiation option against their contractual claims; and

• create an investor complaints cell with a supervisory role to address complaints against government departments.

Such a dispute resolution forum will be more attractive to foreign investors than any other institution because it will be neutral, autonomous and independent.

On averting international arbitration disasters

Procedural relief in banking and regulatory regimes, and arranging road shows and seminars for attracting investments prove helpful only to an extent. They work well only if the foreign investors’ perception of the host country remains optimistic. The government should understand the importance of developing an empathetic relationship with turned-away investors.

To ensure smooth long-term functioning of the forum, it would be necessary and desirable to indemnify the forum members from the jurisdiction of National Accountability Bureau (NAB) and the Federal Investigation Agency (FIA). Currently, the spectre of a NAB or FIA investigation would prevent any action by functionaries that could potentially save the country billions of dollars.

The government must understand that a secure working environment is paramount for effective and efficient performance. The culture of fear from state institutions has caused irreparable damage to good governance as people have grown wary of giving creative opinions in financial matters. The more secure the work environment, the more productive it is. Therefore, the government should ensure political ownership of such mechanisms to avert a large number of penalties.

Secondly, the government should establish a pool of experts in investment law and arbitration. Despite repeated failures and significant loss to national reputation, Pakistan has yet to develop a specialised pool of experts having a sound understanding of the technicalities involved in negotiating international investment agreements and a high degree of competence over the jurisprudence of international investment law and arbitration.

This could be achieved if a pool consisting comprising legal, financial and technical experts is formed under the BOI’s supervision with a clear directive to vet and review Pakistan’s international investment agreements in the light of past arbitral decisions. For this, the pool should adopt a case-by-case analysis of important arbitral decisions and factual circumstances behind those cases in which the particular issue was raised and provided an arbitral dictum about investment clauses.

Secondly, the panel should have the sole authority when selecting a potential arbitrator in a particular case that is filed before the ICSID or any other international investment forum. In doing so, it must consider a variety of factors including:

• the proposed arbitrator’s experience in arbitration cases;

• past decisions and awards issued and authored by the arbitrator; and

• views of other counsel who have appeared before the arbitrator under consideration.;

It should also conduct pre-appointment interviews with a potential arbitrator.

This approach would not only pave the way towards standardising Pakistan’s approach to international contracts and improve the choice of arbitral frameworks but also signal Pakistan’s seriousness in protecting foreign investments in the country.

Thirdly, the government should implement a transparent framework for foreign investment management. Lack of transparency in foreign investment management often jeopardises foreign direct investment in a country. It causes security concerns, trust deficit and public order apprehensions between contracting parties and opens avenues for investor-state disputes. The government should set up an independent regulatory body at the BOI with a mandate to ensure financial transparency in foreign-invested projects. The regulatory body should comprise civil society, government officials and the private sector. It should put in place a strict pre-screening mechanism for incoming investors and oblige them to disclose their corporate structures, feasibility reports of project financing for potential investments and existing or planned operations in other countries before formal agreements are signed, or legally binding commitments are made. These steps would ensure financial and administrative transparency in the system and solidify Pakistan’s reputation as a responsible member of the global community. These would also diminish the likelihood of dodgy transactions or false commitments and ensure constant oversight by the civil society on the contractual agreements involving billions of dollars.

If Pakistan wishes to boost foreign investment, it should understand how international arbitrations are to be averted. It should envisage an ambitious reform agenda to strengthen its position as a safe and attractive investment destination seeking economic as well as non-economic development. In doing so, it should set up a mechanism for safeguarding foreign investors’ rights, improve the legal understanding and significance of international legal commitments within the framework of international law and resolve possible irritants for both the government and foreign investors that may cause future disputes.

The writer has LLM degrees from King’s College, London, and Nottingham Law School, UK. He can be reached at j.durrani@hotmail.com

On averting international arbitration disasters