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.
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