Arbitration/ADR Versus Litigation
By: Surridge & Beecheno
Provided by World Services GroupArbitration/ADR Versus Litigation
Published September 4, 2006 - PakistanAlternative Dispute Resolution is not a new concept, as is generally understood. Dispute Resolution in one form or the other is as old as civilization itself. In ancient Greece, the Greek legal culture dispute resolution had its roots almost 3000 years ago, when perhaps the 1st alternative dispute resolution was addressed in ancient Greece. The system was one of dispute settlement through mediation or arbitration and justice was based on retaliation/reciprocity.
In many societies, in the absence of State laws, customary laws enforced by council of elders and notables, governed aspects of individual behaviour and social interaction. Unwritten, it represented day to day practice of the people concerned and settlement of disputes by elders/notables. In some African tribes, customary laws applied to succession to traditional title, office of the tribal chief, village headman, inheritance, liability for the debt, rights of widow, all the disputes relating to these were resolved by way of negotiations, conciliations through tribal chief or village headman.
Globally the most frequent ADR service prevalent has been mediation, a process wherein impartial third party (a mediator) assists disputants in finding a mutually acceptable solution to the conflict. It is both voluntary and confidential. Today trained mediators and experienced attorneys provide confidential mediation services to parties in formal proceedings. These services may be provided before or after the commencement of litigation. Mediation has a number of advantages over litigation, as it is typically quicker and less expensive. Through mediation parties can eliminate uncertainty of an adjudicating authority and decision and can control the outcome of the dispute mutually acceptable to the parties.
Pakistan already has certain legislation in the field of Family Laws relating to marital dispute where dispute must first be attempted to be resolved through mediation and conciliation and only upon failure of conciliation parties can go to courts. Similarly, under the Industrial Employment laws a union cannot resort to strike unless the dispute relating to terms and conditions of service has first been negotiated between the parties and upon failure of negotiation has been referred to a conciliator, whereafter only a union can resort to have the dispute settled through court.
In the Indo-Pak Subcontinent ADR is centuries old called the “PUNCHAIAT” or “JIRGA” system in rural areas wherein all disputes were brought before a committee of (respectable and honorable) elders, whose decision was accepted by the parties, and no party could afford to disagree with the decision because of social rejection by the Society. The institution, which voluntarily performed this function, is normally the council of the influential people of the locality. In some areas, it is panchayat, and in others it is known as jirga. Though this informal activity of justice dispute resolution has been going on throughout Pakistan side by side with the formal administration of justice through courts, yet the volume of jirga and punchayat system is bigger in the provinces of NWFP and Balochistan. In this context, there is one region called the FATA (Federally Administered Tribal Areas) bordering Afghanistan in whose unprotected areas the principles of restorative justice are exclusively applied and the traditional conflict resolution apparatus, called jirga, is fully operational, because the English common law based criminal justice system existing in the rest of the country is not in vogue there. Almost all the fundamental precepts of restorative justice are the underlying principles of this customary law enforcing jirga. Whenever an offence takes place or a dispute arises, the local elders, who command influence and credibility, gather and enter into intensive negotiations with the parties for amicable resolution of the conflicts. The focus is mostly on repairing the damage done and restoring relationships, personal and communal, to their original state as far as possible. The beauty of the system is that all the affected parties, i.e. the offender, the victim and the local community, are deeply involved in the process and efforts are made to resolve the conflict to the satisfaction of all concerned. They deal with a range of issues, including conflicting claims to land and water, inheritance, alleged breaches of the 'honor' code and intra-tribal or inter-tribal killings. Many sardars or lower tribal leaders hold regular 'adjudication' days which are widely known and attended by people with a variety of complaints. Sardars have no formal training in 'adjudication'; sardars have told Amnesty International that they had learned how to conduct jirgas from their forefathers; one sardar said, '' It's all in my head, there is no need to codify it ... I have my own intelligence to tell me what is just''. Others have claimed that while not codified, the principles of tribal justice are well defined.
ADR in the 21st Century means finding domestically and internationally a quicker, inexpensive and more effective system alternate to litigation being time consuming and expensive. Concerned about efficiency of national court system in cross border disputes, foreign investor normally prefer mediation or arbitration as preferred dispute resolution. Dispute settlement through Arbitration/ADR is not only domestic but also an increasingly growing international phenomena in the context of cross border transaction.
ARBITRATION GENESIS
No one knows exactly when arbitration got started but it was long before the twentieth century as many wrongly believe. King Solomon was an arbitrator. Philip the Second, the father of Alexander the Great, used arbitration as a means to settle territorial disputes arriving from a peace treaty he had negotiated with the southern states of Greece as far back as 337 B.C. In ancient Rome arbitration was one of the preferred methods of settling disputes and was the preferred method of settling commercial disputes in the Middle Ages. Long before the white man ever arrived in what is now the United States early Native American tribes used arbitration as not only a means to resolve disputes within the tribe but also as a means to resolve disputes between different tribes. Civil and Commercial arbitrations can be traced back to ancient times. Commercial arbitration agreements took place between ancient Phoenician and Greek traders. In the sixth century B.C., Peisistratus of Athens appointed arbitrators to settle civil disputes along countryside. The origins of maritime arbitration can be traced as far back as the voyages of ships owned by ancient Phoenicians carrying the cargoes of Greek traders. Ever since, arbitration has played a significant role in waterborne commerce. In England, arbitration is older than the common law system, which United States later inherited. In fact, England used arbitration as a common means of commercial dispute resolution as far back as 1224. Attitude of English law towards arbitration has been fluctuating from stiff opposition to moderate welcome. The common law courts looked jealously at agreements to submit disputes to extra-judicial determination. The realities of business in due course brought about a change in judicial attitude. George Washington, US’s first president, had an arbitration clause in his will that basically stated that if any dispute should arise over the wording of the document that a panel of three arbitrators would be implemented to render a final and binding decision to resolve the dispute. George Washington stated that he considered any arbitration decisions rendered from his will to be as final and binding as is any decision of the Supreme Court of the United States.
Courts Establishment
Romans appear to be the first to appoint magistrates and establish courts. In later years particularly in England, the Clergy mostly acted as lawyers before the King’s Court and it was in the year 1292 King Edward-I established the INNS when the lawyers replaced the clergy. Since then and with the Dutch, Portuguese, Spanish and the British domination with their vast empires, it appears the courts and the legal profession sprang up all over and the alternative dispute system (took the back seat).
After passage of several centuries, the litigants, the courts burdened with huge backlog and fresh institutions, the lawyers frustrated with delays are seeking arbitration/ADR as a speedy, inexpensive and effective dispute resolution method. Pakistan in the wake of globalization and current liberalization of international trade and investment is adapting Arbitration/ADR as an alternate remedy.
In order to resolve taxation dispute the Pakistan Government in the year 2004 amended the Income Tax Ordinance, the Customs Act and the Sales Tax (VAT) Act, providing for an alternate dispute resolution in cases where the assessee disputes the levy and collection of taxes. The assessee can make an application to the Central Board of Revenue which will constitute a Committee consisting of an officer of the tax officials, two persons from a notified panel of Chartered/Cost Accountant, Advocates and a reputable tax payer. The Committee after examining the dispute shall make recommendations in respect of resolution of the dispute and the Central Board of Revenue on the basis of recommendations of the Committee pass appropriate orders. In case the assessee is not satisfied with the decision of the Committee/Central Board of Revenue he can file an appeal or reference with the Tribunal or court.
GRIEVANCE ARBITRATION
In the United States, prior to 1930, arbitration was a preventive strike tool used mostly in negotiation. Due to rapid industrialization and unionization in the United States after 1930 and due to the passage of the National Labor Relations Act in 1935 arbitration use (mostly interest arbitration) really started to grow in America. Grievance arbitration became the preferred method of dispute resolution in the United States sometime around 1945 due to World War II. Because of the great World War, President Franklin Roosevelt and his War Labor Board were cognizant of the fact that during this war the interruption of steel production and other war materials could not be tolerated by work stoppages taking place prior to interest arbitration hearings. Therefore, Roosevelt’s War Labor Board insisted that labor and management place grievance-arbitration clauses into collective bargaining agreements as a final and binding last step of the grievance procedure to meet the wartime production needs of the country.
Today, one of the most popular arbitration organizations in the world is the American Arbitration Association (AAA). AAA arbitration has over 800 employees in 35 offices worldwide and represents over 8,000 arbitrators and mediators worldwide. Last year AAA arbitration administered 230,255 cases and has administered over 2 million cases in the last 75 years.
In India the history of statute relating to arbitration begins with the regulations under the East India Company made for the Presidency of Bengal, Madras and Bombay. These regulations were later expanded in the Civil Procedure Act of 1859. In 1940, an Arbitration Act was passed for the whole of British India. On 26.01.1950 the Act was extended to the whole of India with few exceptions. Arbitration and Conciliation Ordinance 1996 (Act 8 of 1996) replaced the 1940 Act and now Arbitration and Conciliation Act, 1996 governs the area. Pakistan is still governed by the Pakistan Arbitration Act, 1940.
The Arbitration Act, 1940 provide for arbitration in the presence of arbitration agreement between the parties. There are three classes of arbitration. Firstly without intervention of the court (Sections 8-9). Secondly arbitration with the intervention of the court where either party to an arbitration may make an application to the court for appointment of an Arbitrator. Thirdly arbitration in a pending suit, the parties apply the court to refer to suit to the arbitration and the court shall appoint an Arbitrator Section 21-23).
The Arbitrators are required to give award within four months which period can be extended by the court upon plausible reason given by the Arbitrator and the parties. The Arbitrator is not bound by the rules or evidence or the procedural code, has the power to summon the witnesses, record evidence but while giving an award must give reasons for the same, as required under Section 24-A of the General Clauses Act.
Arbitration has also been provided in number of Pakistan laws, such as Societies Act, Companies Ordinance, 1984 (Section 283)
Foreign arbitration, foreign award and enforcement of foreign award was provided in the Arbitration (Protocol & Convention) Act based on the Hague Convention, which under section 3 excluded application of the Pakistan Arbitration Act, 1940 and the Pakistan Civil Procedure Code. Section 4(2) provided for foreign award to be enforceable under the Act, 1937 and shall be treated as binding for all purposes on the parties as between whom it was made. Section 7 provided for conditions for enforcement of foreign award, which must have been made in pursuance of an agreement, made by the tribunal provided for in the agreement, has been made in conformity with the laws governing arbitration procedure, became final in the country it was made, is in respect of a matter which may lawfully be referred to arbitration under Pakistan law and its enforcement must not be contrary to public policy or the laws of Pakistan. However, section 7(2) provides, when a foreign award shall not be enforceable, if it has been annulled in the country it was made or the party against whom it is sought to enforce the award was not given notice of arbitration proceedings or was under some legal incapacity or award does not deal with all the questions referred or contains decisions beyond the scope of the agreement for arbitration.
Provisions of the Act of 1937 relating to enforcement of foreign arbitral awards came up for consideration and decision by the Pakistan courts, which held:-
Requirements to be met and fulfilled by person seeking enforcement of a foreign award, as laid down in Rule 297 of the Sindh Chief Court Rules, if deficient in any material particular, application for enforcement be returned for removing deficiency within time allowed by the court [2002 CLD 1121];
No notification declaring USA to be a party to the Convention set forth in 2nd Schedule to the Act, 1937 shown to have been issued – award on dispute arising out of Treaty of 1959 between person domiciled in Pakistan and person domiciled in USA cannot be termed as foreign award and cannot be enforced. [1982 CLC 2302];
Necessary notification, as required under section 2(b) and (c) of Act, 1937 not having been issued by the Federal Government in respect of China, award could not be treated as foreign award. [2005 CLD 1577];
Requirement that there should be an agreement in writing, except by both the parties – such acceptance can be in writing or oral – agreement containing terms can be in form of a document signed by the parties or signed by one and acceptable by others either by signing the agreement or showing acceptance by conduct. [2002 CLD 1191];
Award made in England against a party residing in Pakistan, held good be a foreign award enforceable in Pakistan. Such award was ordered to be filed in High Court and judgement and decree passed in accordance therewith. [1987 CLC 83];
Case of IPP (WAPDA v. Kot Addu Power Company) – Provisions of section 290 of the Companies Ordinance, 1984 vested statutory jurisdiction in High Court to take certain measures described there and ordered to resolve dispute inter-se shareholders or directors of a company – High Court dismissed the petition made under section 3 of the Arbitration (Protocol & Convention) Act, 1937 for reference of the dispute under the Act of 1937. [2002 MLD 829];
Foreign award enforcement – applicability of Arbitration Act, 1940 excluded in respect of foreign awards under the Act of 1937. [1987 CLC 1299];
Enforcement of foreign award – plaintiff had not filed authenticated copy of the award, held section 8 provided for producing either original award or its authenticated copy. Original award having been produced, condition fulfilled, award enforceable. [2006 CLD 153];
Defendant contended arbitrator had no jurisdiction, award was contrary to law and public policy in Pakistan and arbitrator guilty of misconduct. No material in that respect produced by the party and the objection that award was contrary to law and public policy not established. Objections had no merit and the award was enforced. [2006 CLD 153];
Court, while considering the enforcement of a foreign award, merely acts as an executing court and while doing so it cannot go behind the award and sit as an appellate court and make reappraisal of evidence. [2006 CLD 153];
Pakistan has entered into Bilateral Investment Treaties with 36 countries which include dispute settlement mechanism between the host country and foreign investor, failing this through mutual consultations, where after the investor can refer the dispute to a competent court of the respective country or an ad-hoc arbitration panel established under rules of the UN Commission on International Trade Law (UNCITRAL) or to the Court of Arbitration of Paris International Chamber of Commerce (ICC). These mechanisms provides transparent, inexpensive, speedy and accessible dispute resolution to foreign investors. The International Center for the Settlement of Investment Disputes (ICSID) also provides facilities for conciliation and arbitration of investment disputes between contracting states and nationals of other states under the Convention for the Settlement of Investment Disputes and Pakistan is a member of the Center.
In the year 2005 Pakistan Government ratified and the New York Convention Arbitration through legislation known as “Recognition and enforcement (Arbitration Agreements and Foreign Arbitral) Awards Ordinance, 2005”, conferring jurisdiction in the High Court which shall recognize and enforce the foreign arbitral award in the same manner as a judgment or order of the court in Pakistan. Further the recognition of a foreign arbitral award shall not be refused except in accordance with Article V of the Convention.
Whilst under the Act of 1937 discretion vested in the court to refer the dispute to arbitration OR to stay the proceedings or not, under the Ordinance, 2005 no such discretion vests and the court shall refer the dispute to arbitration in accordance with section 4 of the Ordinance and stay the proceedings in a case wherein arbitration agreement between the parties is governed by the provisions of Ordinance, 2005 and the Convention. In a recent case decided by the Karachi High Court reported in 2006 CLD 497 it has been held, provision of section 4(2) of the Ordinance, 2005 has taken away any discretion of the court whether or not to stay proceedings in terms of arbitration agreement on any ground including the ground of inconvenience, except where the arbitration agreement itself is null and void, inoperative or incapable of being performed.
Disadvantages of Litigation
Litigation certainly has disadvantages. Some of the criticisms of court adjudication are:
It is becoming more expensive and time consuming; Judges with unending cause list involving multiple jurisdictions (Constitutional, Commercial, Civil) are unable to attend to finer issues involved in commercial litigation; Judges often lack expertise in the area of commercial disputes, resulting in wrong decisions and consequential appeals to higher forums; Courts mostly act as courts of law and not equity; Court decisions not acceptable to either party, result in disturbance of commercial relationship; Court adjudication results in win-lose scenario and not a mutually acceptable decision; Pleadings and documents filed in courts become public documents and copies thereof are available to anyone, to the disadvantage of parties.
Advantages of Litigation
Some advantages of litigation are:-
Adjudication through court is based on law, rules and regulations provided for, resulting in consistent decisions based on law and precedents; Parties are bound by the decision of the court, which can be enforced; Court decisions are appeal-able and errors can be corrected, reviewed or reversed by the appellate courts.
Advantages of Arbitration/ADR
As against litigation, Arbitrations/ADRs have several advantages:-
Parties can decide to choose a Mediator or an Arbitrator qualified and experienced in the area of dispute; Mediator or Arbitrator is not bound by the technicalities of law, rules of evidence or procedure and, therefore, free to resolve the dispute without constraints, resulting in quick resolution of the dispute; Mediator or Arbitrator is not a court of law and their decisions can be based on equity; Although arbitration awards can be challenged but presently courts trend is not to disturb Arbitrator’s findings of fact. Award can only be challenged on questions of law, saving parties from protracted litigation in appeals; In Arbitration/ADR confidentiality of pleadings and documents can be maintained; Decision by Mediator or Arbitrator may not disturb parties commercial relationship.
Drawbacks of Arbitration/ADR
However, there are some drawbacks. In many Asian countries, settlement of international commercial disputes and enforcement of arbitrator’s award remains a cause of grave concern for foreign investors, which is attributable to number of factors:-
Tendency of the local court to jealously guard its jurisdiction and local protectionism. In this context in the case of IPP instances are of local project participants and the government having employed local court orders as means of delaying and even halting completely international arbitration proceedings. There were allegations of absence of transparency in awarding contracts or through corruption and, therefore, invalid/unenforceable, as in the case of Hubco Project in Pakistan and Enron Project in India; Inability of the local courts to appreciate the method of international private dispute settlement and related Rules and Conventions; Another pertinent issue that haunts arbitration in South East Asia is despite recent move towards modernization of arbitration law, in many countries there is little expertise available in arbitration or ADR either at the Bench or the Bar.
CONCLUSION
Based on the drawbacks of court litigation and the advantages of Arbitration/ADR, Asian countries by ratifying and enforcing the New York Convention, improving the arbitration laws, bringing about expertise in the field of Arbitration/ADR amongst the Bench and the Bar, establishing arbitration centers for training programs to update the Judges, lawyers and arbitrators, there can be no doubt that in Asia, arbitration/ADR will be preferred mode of resolution of commercial disputes domestically as well as cross border disputes as against litigation, particularly in the wake of current liberalization of international trade and investment in the globalized world.
