By: Abhay Raj and Astha Bhattacharya
Over the latter half of the 20th century, the Islamic Republic of Pakistan (hereinafter ‘Pakistan’) demonstrated a strong reflection on the map of international investment arbitration. Beginning with the signing of the first-ever bilateral investment treaty (hereinafter ‘BIT’) between Pakistan and Germany in 1959, what followed was a string of BITs signed by this third-world country within the initial few decades (1959-1982). In comparison, developed countries like the United States of America (hereinafter ‘US’) and Russia were still trying to set their foot in the global scenario of arbitration. However, with Pakistan’s engagement in several noteworthy international arbitration cases, such as Tethyan Copper Company Pty Ltd (hereinafter ‘Tethyan’) and SGS Société Générale de Surveillance S.A. (hereinafter ‘SGS’), things changed quite significantly. As such, these cases were met with much resentment considering they made the country vulnerable to (a) mounting litigation – as at least six high stakes disputes are pending, including Tethyan; (b) disrepute – Pakistan losing its reputation as an investor-friendly destination; and (c) financial exposure – high legal costs incurred during proceedings.
Overall, the outcomes have resulted in a paradigm shift in Pakistan’s investment arbitration landscape. This can be clearly articulated from Pakistan’s indication of officially deciding to terminate 23 of its existing 48 BITs. In this post, the authors analyse the investment arbitration regime of Pakistan and its decision to cease international investment agreements (hereinafter ‘IIAs’) to encompass Pakistan’s future in investment arbitration.
WHERE DOES THE CESSATION STEM FROM?
The cessation partially stems from multiple arbitration cases where Pakistan has been an unsuccessful party. Some attribute this failure to Pakistan’s lack of understanding of these cases, whereas others attribute it to the incapable officials negotiating the IIAs, and the poor choice of lawyers representing them in the arbitral tribunals. Furthermore, as sentiment would indicate, Pakistan is of the view that the dispute resolution methods are not in alignment with the country’s national interest, as they are presumed to be exploitative and lopsided. Eventually, this cumulated in the nation viewing international arbitration as being unfair and biased for dispute resolution. Interestingly, the cumulative of most of the cases, when viewed through the prism of the BIT programme, shows the loggerheads between Pakistan’s judiciary and the International Centre for Settlement of Investment Disputes (hereinafter ‘ICSID’). The SGS case, being the prime example, demonstrates the subject of ICSID setting aside the Supreme Court’s judgment. Back in 2002, Pakistan’s Supreme Court restrained SGS from progressing with the ICSID arbitration. In its observations, the Court said that the Switzerland-Pakistan BIT, 1995, was not in line with the country’s municipal law and, thus, cannot be implemented. Notwithstanding the domestic law, the ICSID tribunal proceeded ahead with the matter and asserted that it had jurisdiction concerning the case.
Things started going further down the spiral with the outcome of the Tethyan case. The ICSID tribunal ordered Pakistan to pay a massive compensation of $5.8 billion to the Australian mining company, Tethyan Copper. Notably, the payment of the aforesaid compensation would have resulted in a deficit of 2 per cent in the country’s GDP.
The award also depicts the diplomatic handicapped status of Pakistan in consideration of the BITs. For instance, the provisions entailed in BITs have a broad scope leaving it at the convenience of the arbitral tribunal to decide the dispute, thereby making space for unpredictable and divergent results against Pakistan. In the notable cases of Bayindir and Impreglio S.p.A., the tribunal showcased the possibility of invocation of an actionable claim against the host state by any method enforcing contractual performance. Whereas, Agility for Public Warehousing Company K.S.C. sheds light upon the jurisdiction being upheld against the state via the instance of an expired performance contract of an off-shore company. The exorbitant and laissez-faire explanations of the BIT clauses have tapered possibilities of amicable settlements of these disputes. In this respect, it can be deduced that the factors including, inter alia, (i) Pakistan being an unsuccessful party in arbitration cases; (ii) the contentious relationship between the ICSID and Pakistan’s Supreme Court; (iii) the sky-high costs awarded to the investors; and (iv) the broadly worded clauses, serve as a line in the sand for Pakistan in deciding to terminate its BITs.
RIGHT QUERIES, AMBIGUOUS SOLUTIONS, AND PROBLEMATIC DIAGNOSIS
Much ink has already been spilt on Pakistan’s arbitration regime, and the decision to terminate BITs acts as a catalyst in deep-rooting the discussion about the future of investment arbitration in the nation. Even though Pakistan within its sovereignty took the right step to review its existing BITs, the decision to terminate BITs serves as an attempt to evade responsibilities as enshrined under international law, for instance, protecting foreign investment. To bemoan, the cancellation of BITs will leave the investors to accept whatever conduct is dished out by Pakistan to them, after the end of sunset clauses.
Pakistan’s approach to the decision to terminate BITs can be shrouded in a two-fold problematic crux: firstly, there has been a lack of transparency; secondly, vulnerability to regulatory abuse and detrimental impact on foreign direct investment (hereinafter ‘FDI’) inflow.
The lack of transparency can be further attributed to three main deductions:
- Pakistan has still not publicly disclosed the countries with which it wishes to terminate its BITs, leaving the prospective foreign investors sceptic about the country’s IIAs;
- many of the awards are not available in the public domain, albeit it is the taxpayers’ money through which these foreign investors are compensated, or at least the award’s legal reasoning should be made public by the Centre per the Arbitration Rule 48(4);
- there has been a mishandling of the 2013 Model BIT, as it is neither available publicly nor its information (concerning methods and measures adopted) is available for public discretion.
These deductions would ultimately allow the academicians to develop and understand Pakistan’s arbitration regime better.
Furthermore, along the lines of previous studies, it can be stated that FDI inflow is directly proportional to the existence of BITs. The lack of BITs would create a lacuna for the protection of foreign investors under international law, rendering them vulnerable to regulatory abuse. Until and unless new BITs with those respective states do not come into force along with the investor’s trust, it may negatively impact the FDI inflow.
WHAT WOULD PAKISTAN’S FUTURE ENCOMPASS AND POSSIBLE RECOMMENDATIONS
Despite there being a frequent recourse to international investment arbitration between the host state and investors, the future of investment transactions in Pakistan could be envisioned through the following suggestions:
The five pillars, namely, authority, procedures, counsel, funds, and coordination, are the core facets of proper dispute management. Suggestions encompassing these pillars are – (a) creation of a high-level committee that would have the authority over investors’ claims and would review the reforms in the arbitration mechanism, as was observed to be a success in the Indian arbitration regime; (b) inducting a nodal agency apart from the Board of Investment (hereinafter ‘BOI’) for efficient and effective handling of the investor-states claims or designation of BOI as a representative in every BIT; (c) the country should have a panel of arbitrators having expertise in the investment arbitration, leading in counterbalancing the BITs interpretation; (d) Pakistan can rely upon creation of investor-state arbitration fund, as such was created by US (International Litigation Fund) for covering the costs of disputes, ultimately assisting in the speedy disposal of cases; and (e) establishment of an internal and external coordination group that will ensure proper representation of state’s concerns and proper negotiation of BITs, respectively.
Traditional Rules of Diplomatic Protection
The government should establish compulsory mediation, negotiation, conciliation, and ombudspersons provisions pursuant to signing any new BIT. This will ensure a cost-effective measure, strengthen the relationship with the foreign investor, preserve confidentiality, and minimise investor-state disputes, as observed in the India-Brazil BIT, 2020.
Focus on State-State Arbitration:
With its prime issue of unpredictability and divergent results in ICSID arbitration, Pakistan is attempting to terminate its BITs. However, to mitigate the same, if the country wishes to minimise the investor-state dispute, then the nation can focus on state-state arbitration by renegotiating and adding such arbitration clauses. This indeed provides greater control over the arbitration proceedings. The state-state arbitration was proved as a success, in Italian Republic v. Republic of Cuba where Italy brought arbitration proceedings against Cuba by invoking the Italy-Cuba BIT, 1993.
This article has mapped Pakistan’s journey in the investment arbitration regime from advocating, promoting, and endorsing to regulating and constraining its purview. Despite the overwhelming interface on a global level between regulation and investment protection, Pakistan never actually critically reviewed its BIT programme. Although overdue for a long time, the attempt to review and revisit its programme is accepted with certain limitations by the authors. We opine that Pakistan’s BIT programme should now undergo a systemic shift on the assumption that these treaties have resulted in the denunciation of Pakistan under the programme. With that, it will be interesting to note what Pakistan holds for the future of arbitration in the nation.
(Abhay and Astha are law undergraduates at Jindal Global Law School, Sonepat, and National Law University, Odisha, respectively. The author(s) may be contacted via email at firstname.lastname@example.org and/ or email@example.com)
Cite as: Abhay Raj and Astha Bhattacharya, ‘Pakistan and Investment Arbitration: Are they Closer to a Line in the Sand?’ (The RMLNLU Law Review Blog, 15 June 2022) <https://rmlnlulawreview.com/2022/06/15/pakistan-arbitration/> date of access