Tuesday, February 16, 2016

Enforcement of foreign decrees Part 1

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.”[1]

 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.”[2]

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[3] 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[4] 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.

[1] Halsbury's Laws of England (Lord Simond's Edn.), (3rd Edn.), Vol. 7
[2] Mahmood, M,  Contract Act of 1872, Commentary, 4th Edition published by Al Qanoon Publishers
[3] PLD 1970 SC 373
[4] http://indiankanoon.org/doc/882120/ accessed on 6 January 2016

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