Tuesday, February 16, 2016
We have been asked to opine on whether there are reciprocal enforcement agreements between Pakistan and England under Pakistani law; and how difficult enforcement of a monetary/costs judgment in Pakistan is in light of the processes that need to be undertaken. The background, briefly, is that our partner law firm in United Kingdom is acting for a defendant in a litigation and intends to apply for an order for security against costs presumably under 25.13 of the Rules and Practice directions of the Civil Procedure Rules in the United Kingdom.
Under Pakistani law, Section 44-A of the Code of Civil Procedure 1908 (the “CPC”) caters specifically to the question of judgments passed by “superior courts” in reciprocating states and especially the United Kingdom (which reciprocates through Foreign Judgments Reciprocal Enforcement Act 1933). Section 44-A of the CPC however is subject to Section 13 of the CPC which sets out the broad exceptions to such enforcement. This makes the execution process cumbersome and time consuming. Case law also has ousted the operation of Order XXI Rule 23-A of the CPC which provided for decretal amount to be deposited as security for filing of objections against such execution. It may also be stated that Pakistan is not a signatory to any of the conventions specifically mentioned under 25.13 of the Civil Procedure Rules, Rules and Practice Directions in the United Kingdom.
At the outset it must be stated the aforesaid Section 44-A of the CPC defines “Superior Court” in reference to United Kingdom as “High Court in England, Court of Sessions in Scotland, High Court in Northern Ireland, the Court of Chancery of County Palatine of Lancaster and the Court of Chancery of County Palatine of Durham.” Therefore if the litigation referred to the question pertains to a lower court in England, there is no reciprocal enforcement. This memorandum assumes that the said litigation is taking place in the High Court of England or the Courts of Chancery as aforesaid (the question refers to England and not United Kingdom).
Section 44-A of the CPC has been described as a self-contained and independent provision with the Honourable Sindh High Court in the case of Abdul Malik Badruddin v. Grosvenor Casino Limited PLD 1993 Karachi 449 (hereinafter the “Grosvenor Case”) stating that the procedure of the execution is contained in sub-sections (2) and (3) of the said provision. Therefore in Grosvenor Case, the Honourable Sindh High Court ruled that provision of Order XXI Rule 23-A does not apply to foreign judgments. Order XXI Rule 23-A provides for the deposit of decretal amount in the event that a judgment debtor seeks to file objections against execution of a decree. By ousting the operation of this rule in foreign judgments, the door has been flung open for a judgment debtor to file objections without having to deposit a judgment amount as security. The judgment in the Grosvenor Case also held that a foreign judgment or decree does not operate proprio vigore in Pakistan and is therefore not capable of automatic execution. This means that at some point the local “District Court” (which is held to be a court of original civil jurisdiction) may look at the merits of the judgment.
The objections that have specifically been allowed by Section 44-A of the CPC are exception or objections contained in Section 13 (a) through (f) of the CPC. The first objection is that a judgment has not been pronounced by a court of competent jurisdiction. The second objection is that the judgment has not been passed on merits. The second objection gives the executing court the power to determine the facts leading to the foreign judgment de novo. The third objection is that the judgment was based on an incorrect view of international law or a refusal to recognize Pakistan’s law in cases in which such law was applicable. Here again, a question of law is to be determined by the executing court. The fourth objection is that judgment was obtained as a result of proceedings that were contrary to principles of natural justice. The fifth objection is that the judgment was obtained through fraud and the final objection is that the judgment sustains a claim that breaches a Pakistani law. All of these objections require judicial application of mind and require the court to call evidence and try the matter anew. Given that Order XXI Rule 23-A does not apply, it becomes extremely easy for a judgment debtor to indefinitely delay and even frustrate the foreign judgment or in this case the UK judgment. Subsection 3 of Section 44-A of the CPC states clearly that the executing court may refuse execution if it is satisfied that any of the exceptions or objections contained in Section 13 of the CPC apply. The execution is also subject to appeal and as a whole the process may take up to two years or more to complete, which may be an additional consideration given that the issue at hand pertains to a judgment on costs.
It may additionally be stated that under subsection 2 of 25.13 of the Civil Procedure Rules of United Kingdom, an order for security for costs may be made “if the resident out of the jurisdiction; but not resident in a Brussels Contracting State, a State bound by the Lugano Convention, a State bound by the 2005 Hague Convention or a Regulation State, as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982”. Pakistan is not a signatory or a contracting to any of the aforesaid conventions.
In view of the foregoing it is clear that despite a reciprocal enforcement provision under Section 44-A of CPC, the enforcement of a monetary or a costs judgment in Pakistan is difficult, time consuming and cumbersome. The execution is to be carried on the original civil side and will be subject to further delays due to appeals. Additionally Pakistan is not a signatory to the Hague Convention on Choice of Courts, 2005 and is not a regulation state as defined by applicable law in the United Kingdom. It is, therefore, recommended that an application for security under Rule 25.13 as aforesaid may kindly be made in the said litigation to best secure the interests of the client.
Question Presented: The client is a UAE based company (“Our Client”) which entered into a contract with Messrs. AB Associates (“AB Associates”), a Pakistan based company, for preparation of a master plan as part of an overall consultancy assignment (“Assignment”). The purpose of the Assignment is to assist the land development authority in Sialkot (“SDA”). Our Client has fulfilled its contractual obligations and has invoiced AB Associates accordingly in addition to sending them multiple reminders through emails and phone calls. Our Client has also sent a legal notice to which AB Associates responded by saying that they entered into an arbitration proceeding against SDA and will pay Our Client once SDA pays them. Nothing in the agreement between Our Client and AB Associates stipulates that Our Client’s remuneration is contingent upon payment from SDA or any third party. Our Client and AB Associates also agreed that governing law and construction of the agreement will be in accordance with UAE Law and that in the event that a dispute cannot be resolved through negotiation, courts at Dubai will have the jurisdiction to settle the same. The question in a nutshell before us is whether or not Pakistani courts will consider the governing law clause in the agreement null and void.
Short Answer: Pakistani courts will not declare the governing law clause null and void but will instead give it effect as an arbitration clause. The Pakistani courts will treat any judgment by the courts in Dubai as a foreign arbitral award and as such this judgment would be enforceable through the courts in Pakistan.
Discussion: Pakistani law of contract is the Contract Act of 1872 (the “Contract Act”), which will be the curial law in the event that such an issue is brought before a Pakistani court at any time. The Contract Act essentially codifies the English law of contract. There is an explicit recognition of the principles most germane to the idea of the “freedom of contract”. Case law in Pakistan has recognized this freedom of contract in numerous pronouncements and this is considered, therefore, a trite legal position. The parties in this instance, i.e. Our Client and AB Associates, chose of their own volition the law of UAE to govern the contract. This is permissible under choice of laws principles which are implied in English law of contract (the principles of which have been codified in the Contract Act). Halsbury’s Laws of England state that “where parties expressly stipulate that the contract shall be governed by a particular law, that law will be the proper law of the contract provided the selection is bona fide and there is no objection on ground of public policy and, apparently, even where the law has no real connection with the contract.”
Similarly the parties chose courts at Dubai for referral of disputes that they are unable to resolve through mutual negotiation. It must also be noted that there is no specific reference to arbitration. There is also the ancillary issue of whether or not the contract was performed in Pakistan. It is important to deal with this canard at the outset. The contract was most likely performed both in Pakistan and the UAE but this is of no consequence to the question before us as becomes clear from aforementioned Halsbury quote. Similarly the idea of balance of convenience has no application in the instant issue because both parties entered into the agreement willingly.
Section 28 of the Contract Act in my view provides us ample guidance on issues of jurisdiction and governing law. Section 28 states:
“Agreement in restraint of legal proceedings void. Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in ordinary tribunals or which limits the time within which he may thus enforce his rights, is void to that extent.
Exception 1. Saving of contract to refer to arbitration dispute that may arise- This section shall not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. When such contract has been made, a suit may be brought for its specific performance, and if a suit, other than for such specific performance, or for recovery of the amount so awarded, is brought by one party to such contract against any other subject which they have so agreed to refer, the existence of such contract shall be a bar to the suit.
Exception 2. Saving of contract to refer questions that have already arisen- Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration.”
Examining the operation of Section 28 (and its exceptions) of the Contract Act, the Supreme Court of Pakistan held in the case of M A Chowdhury v. Mitsui OSK Lines Limited, PLD 1970 SC 373 that in order to preserve “the sanctity of contracts it ought also be held that such foreign jurisdiction clauses, even when they purport to give jurisdiction to a Court in a foreign country, are really in the nature of arbitration clauses which come within the exceptions to Section 28 and therefore should be dealt with in the same manner as other arbitration clauses”. It was further held that the party which seeks to invoke the foreign jurisdiction clause should ordinarily satisfy the court that it is just and equitable to bind the parties to their bargain i.e. in this case their decision to choose court at Dubai in UAE for dispute resolution. Another case that may be referred to, strictly as persuasive precedent, is Swedish East Asia Company Ltd v. B.P. Herman and Mohatta (India) AIR 1962 Cal 601 where the Calcutta High Court stayed a suit in India where Swedish law was designated as the governing law and Swedish courts were designated as the chosen forum for dispute resolution.
It may be noted here that the assumption is that no exclusive jurisdiction is vested in courts at Dubai. Section 28 supra therefore recognizes the basic principle that parties to a lis cannot confer jurisdiction on a court that does not possess any and cannot divest jurisdiction from a court that does. However when read in light of the aforesaid MA Chowdhury Case, it becomes abundantly clear that even exclusive jurisdiction may be conferred on a jurisdiction in the nature of an arbitration agreement. Therefore it follows that a Pakistani court would likely respect the contractual term and accept the laws of UAE as the governing law of the agreement.
Pakistani courts will get involved in the enforcement of the judgment which will be treated as an arbitral award. Pakistan promulgated “The Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Ordinance in 2005 (which was re-promulgated in 2007), thereby putting in force the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Therefore, a Pakistani court is bound to enforce the judgment of the courts at Dubai as if it were a judgment of a court in Pakistan.
Conclusion: The governing law clause of the agreement between Our Client and AB Associates is not likely to be declared null and void by Pakistani courts.
Valuation approaches are the basic methodology of evaluating a target business for acquisition. The four basic approaches to valuation are as under:
1. Asset based approach
2. Balance sheet or income based approach
3. Market value based approach
4. Comparable transaction approach.
1. Asset based approach: Essentially this approach considers the fair value of a company’s (or firm’s) assets minus the liabilities that have accrued. This approach commonly uses either the asset accumulation method or the capitalized excess earnings method. The first method establishes the fair market value of tangible and intangible assets (including intellectual property rights, key customer contracts and strategic partnerships) and subtracts from this value, the value of recorded and contingent liabilities (including legal court cases, tax exposure and environmental compliance costs). The resulting value is the value of the business. The second method uses net tangible value of assets and adds them up with excess earnings and good will.
i. The key advantage of this approach is that there is easily available data on assets. The valuation therefore can be pretty straightforward.
ii. This approach is most useful when evaluating businesses which have large tangible investments in land, property and machinery etc.
iii. It allows for adjustments in fair market value- either up and down.
iv. It is particularly helpful when there is only a brief record of a company’s or firm’s earnings.
i. It may understate the value of intangibles like intellectual property or business good will.
ii. It does not track the future of earnings either up or down.
iii. A balance sheet can be misleading in terms of exhibiting all assets.
2. Balance Sheet or Income based approach: This method attempts to put a value on the target business by analysing its ability to generate the requisite economic benefits for its owners. It takes estimated future earnings of an equity interest and quantifies its net present value. It looks at the target company’s net cash flow and capitalizes, multiplies or discounts the same. The most famous method deployed by this approach is the Discounted Cash Flow Method. This method establishes a discount rate i.e. a rate of return which would make an acquisition economically beneficial. Another method deployed by this approach is the Capitalization of Earnings Method which takes a target’s discretionary cash flow and divides it by the capitalization rate i.e. the rate of risk associated with the said benefit. Capitalization rate is arrived at by subtracting long term growth rate in business earnings from the discount rate. A third method is the Multiple Method and uses seller’s discretionary cash flow. Here seller’s discretionary cash flow is multiplied with a composite valuation multiple based on industry/business comparison.
i. The biggest advantage is that it is a widely recognized and credible method of valuation.
ii. It is useful in analysing companies at various stages and of various natures and is based on in certain cases a comparison.
iii. It comes to a valuation even without there being a market.
i. It relies on projections which are largely hypothetical and based on predictions.
ii. Too many variables are in play when determining a composite multiple or a discount rate.
3. Market value based approach: This approach looks current market price per share of a company if it is publicly traded or if an IPO is filed. This price is then multiplied with the number of shares outstanding. The actual price paid by the buyer in this case turns out to be higher because the buyer usually has to account for a premium. Another variant of this approach is to look at historic similar sales.
i. It is reasonably straightforward in terms of calculation.
ii. It is based on real data i.e. share price.
iii. It is not based on hypotheticals.
iv. It can help the target establish a substantial market value.
i. It is usually only beneficial when the target is publicly traded.
ii. It is usually not a good indicator when the target’s stock is thinly traded.
iii. It may overstate the value of the stock.
4. Comparable transaction approach: Comparable transaction approach compares previous transactions of companies which are similarly placed in the market i.e. the valuators look at similar acquisitions of companies with similar industry, earnings and business models. Under this approach, the revenue multiple or EBIDTA multiple is utilized. EBIDTA is Earnings before Interest, Taxes, Depreciation and Amortization. The buyer usually organizes a multiples table which lists a selection of previous valuations in the said industry. These are usually similar or comparable companies with similar market capitalization. This table is then used to arrive at a value that the buyer will be willing to pay for the target.
i. This approach deploys simple straight forward calculations based on real public data and empirical evidence.
ii. It does not depend on subjective data or future forecasts.
i. It is not always easy to determine what companies are comparable.
ii. It is extremely hard to obtain data of transactions with respect to private companies.
iii. Requires considerable adjustment of prices etc when considering comparable data over a longer period of time.
iv. It is not flexible.
v. It does not take into account – on its own – other factors such as future benefits etc.
vi. Finally the veracity of the data is always a question mark.
It is important to note that these approaches are seldom used as stand-alone but rather a hybrid approach is adopted in valuation. Of the above, the income approach especially vis a vis Discounted Cash Flow Method is used in conjunction with comparable transaction approach, especially the use of EBIDTA multiple as well as the revenue multiple often together to determine the business health of the target.
The three broad categories of mergers and acquisitions are:
1. Horizontal merger/acquisition
2. Vertical merger/acquisition
3. Conglomerate merger/acquisition
1. Horizontal merger/acquisition:
This happens between two companies or businesses placed in the same market and providing the same products or services. An example of a horizontal merger/acquisition is the Mobilink-Warid merger/acquisition. The motives of companies entering into a horizontal integration are any or all of the following:
a. Economies of scale: By joining together and forming a bigger company gives the new entity or the expanded entity greater economies of scale. These are the cost advantages that companies obtain due to size, output, or scale of operations such as production etc.
b. Synergies: By combining sales channels for example, companies can increase their outreach and become a larger player.
c. Market share and growth: Horizontal mergers are one way of improving market share. Similarly the businesses merging may conclude that together they can grow better and because of a better market share will be in a stronger position to influence the market.
d. Eliminating redundancies: Two companies would have two finance departments, two legal departments, two procurement departments etc. Mergers and acquisitions can help eliminate redundancies. Obviously this is bad news for the employees but overall by eliminating redundancies, companies become more profitable.
e. Filling the product range/product line: In some cases an acquisition of this kind can help fill a product range. So for example in Mobilink-Warid merger/acquisition, the attraction for Mobilink is the 4G LTE spectrum which it does not have on its own. Mobilink would be able to provide 4G LTE services to its users ultimately without having paid excessive amounts for 4G unlike ZONG for example which has paid a large amount for its 4G spectrum.
2. Vertical merger/acquisition:
Vertical mergers/acquisitions happen between two companies which – while in the same industry- are in a buyer-seller relationship. Backward vertical integration would be a company merging with or acquiring its supplier. Forward vertical integration would be a company taking over a retailer, wholesaler or distributor. The main reason for a vertical integration is to ensure either that the supply lines are reliable, or to ensure greater control over distribution networks and sales channels. A famous example of this kind of merger is the one that occurred between Time Warner and AOL in 2000. Time Warner creates content and AOL was the largest internet dissemination portal at the time. Eliminating redundancies also occurs to a certain extent in this kind of merger. Similarly it may be useful in order to deploy certain capacities which previously were not available. This is what happened with British Petroleum’s 2003 acquisition of Russian TNK company which had oil reserves but little refining ability or retail marketing for the western market. BP took over TNK and it was a win win for both sides because BP got access to oil reserves which it could then utilize in its refineries and sell through its sales channels.
3. Conglomerate merger/acquisition:
The conglomerate merger/acquisition usually happens between two unrelated companies. A great example of this kind of merger was Phillip Morris’ 1985 acquisition of General Foods i.e. a tobacco giant taking over a diversified food company. Another example was the 1959 acquisition of Avis, Sheraton Group and Continental Baking Company by International Telephone and Telegraph Corporation – which were completely unrelated. The reasons for this sort of merger/acquisition are as under:
a. Breaking through cyclical and seasonal demand: By far the greatest reason for a buyer acquiring an unrelated business is diversification, especially when its own product is of a cyclical or seasonal nature. By breaking into a new market, it ensures that it is constrained by a particular season or a particular kind of demand.
b. Regulatory pressures: Regulatory pressures in one industry might force a buyer to look for alternatives in a market or industry that is not as heavily regulated. This is a very common reason for conglomerate merger/acquisition.
A slight variation on this kind of merger is a concentric or congeneric merger. In this case the two companies are in the same industry but serve different subsets or markets within it. A merger between a WLL broadband company with a cellular mobile company would be an example of this congeneric or concentric merger. Similarly one may argue that Microsoft’s acquisition of Nokia (to enter into the smart phone market) was this kind of acquisition though it has turned out to be a colossal failure.
c. Product line extension/market extension: Extension of product line or market extension – as mentioned above- may be the rationale for a congeneric or concentric merger. Here too a product line hole may be filled by acquiring a company that has the requisite product or intellectual property. Google and Yahoo’s acquisitions of online app companies are great examples of such mergers/acquisitions. Proctor and Gamble’s 2005 acquisition of Gillette for men care products was done to fill a hole in its product line.