The Arbitration Act of 1940 is the only legislation that applies to domestic arbitrations in Pakistan. Construction works are regulated by the general and particular conditions of Fédération Internationale Des Ingénieurs-Conseils (from French, the International Federation of Consulting Engineers) more commonly known as the FIDIC construction contract. In Pakistan the oft used version is the 1987 amended upto 1992 edition (also known as the Red Book) for Government funded projects, whereas the preferred version for international funding institution (such as Asian Development Bank and World Bank) is the 2010 Multi Development Bank Harmonized edition (also known as the Pink Book). The Pakistan Engineering Council (PEC) has further given sanctity to the 1987 Red Book by modifying and adopting the particular conditions specifically for Pakistan and publishing the same as the PEC Standard Forms of Civil Works Contract 11 July 2007. Currently the PEC is in the process of upgrading the same by modifying the 2017 Red Book. Furthermore, the FIDIC regime in Pakistan is also endorsed by the Constructors Association of Pakistan, whose members undertake 85% of the Infrastructure Development Projects in Pakistan.
The disputes in construction of infrastructure projects under FIDIC regimes are decided through dispute resolution mechanism where the ultimate, and arguably, the most cardinal stage is the arbitration. Arbitration is one of the most significant methods of alternate methods of dispute resolution around the world which has also found traction during the last two decades in Pakistan. Additionally, with the advent of the global Belt Road Initiative of which Pakistan partakes through the China Pakistan Economic Corridor, specialized principles and concepts of the construction dispute resolution regime have already been entrenched in the legal jurisprudence of the country. Advancements in the construction sector can be seen with the number of specialized professionals both with a legal as well as Engineering background who act as counsels as well as arbitrators. Some of these legal practitioners have been elevated to the highest judicial offices during the last decade, thereby resulting in a more organized development of the construction contract principles in Pakistan.
2. Dispute Resolution Mechanism Under Different FIDIC Contracts
All popular FIDIC Standard Conditions provide for alternate methods of dispute resolution that provide different stages and mechanisms for effective and expeditious resolution of disputes through experts in the construction sector. A number of different dispute resolution clauses from different FIDIC Standard Conditions are mentioned below to discuss the dispute resolution mechanism in different FIDIC Standard Conditions of contracts for construction projects:
- The fourth edition of FIDIC Standard Conditions of contracts was first published in 1987 and was subsequently amended in 1988 and 1992 and it provides for a dispute resolution mechanism in clause 67 of the FIDIC Standard Conditions. Pursuant to clause 67, any dispute between the parties pertaining to the agreement must be referred in the first place to the supervisory individual called the 'Engineer', for his 'Determination'. Thereafter, the dissatisfied party places the matter before the Engineer for his 'Decision'. The Engineer is bound to make his Decision in 84 days of the receipt of reference. If either the Employer or the Contractor is dissatisfied with the Decision of the Engineer, or in case of the Engineer's failure to make his Decision in the given time, the dissatisfied party gives a notice of intention to commence arbitration to the other party.
- The FIDIC Standard Conditions also prescribe a specific method for the number of arbitrators and their appointment, but that is more often than not substituted through the Particular Conditions of contract, which impose an obligation on the parties to resort to the methods provided in the Arbitration Act of 1940 (the applicable law on arbitration in Pakistan).
- As a result of severe criticism from industry stakeholders, FIDIC modified the dispute resolution mechanism partially by taking away Decision making powers of the Engineer and handing it over to a substitute body known as Dispute Adjudication Board (DAB), also referred to as the Dispute Board, the Dispute Review Expert, and the Dispute Avoidance and Adjudication Board. In the 1999 FIDIC Standard Conditions (Red Book) the matter in dispute, after being Determined by the Engineer, or even otherwise, would be referred to the DAB for its Decision. The DAB can be constituted with either a sole member or 3 members agreed upon by both parties, wherein the third member would act as a referee or umpire. Clause 20.6 then suggests that if the dispute is not settled through the Decision of the DAB, the dissatisfied party is entitled to issue a notice for commencement of arbitration proceedings.
- Similarly, the Pink Book provides that if there is a dispute of any kind between the parties to the agreement, it may be referred to the Engineer for his Determination and thereafter the matter can be agitated by the dissatisfied party before the "Dispute Board", jointly appointed by both parties, and the two appointed nominee members of the Dispute Board shall appoint a third member by mutual understating, for their Decision in place of the Engineer. The party dissatisfied with the Decision of the Dispute Board can refer the matter for award of the arbitration tribunal or if the Dispute Board has failed to tender its Decision in a timely manner.
- In FIDIC Standard Conditions of Contract, 2017 (Red Book) the authority of the dispute adjudication/avoidance board ("DAAB") has been increased considerably with the hope of increasing the chances of dispute resolution even before resorting to arbitration at the DAAB stage. The dispute boards replaced the authority of the Engineer to make a Decision because it was considered impractical to expect the Engineer to give a Determination for which he requires the approval of the employer and thereafter give a different Decision as an independent adjudicator.
- The parties can agree on a mechanism for appointment of the dispute boards and the process can be detailed as per their own understanding.
- It is crucial to point out that the disputes rarely get settled before resorting to the arbitration because in Pakistan the Engineer and dispute boards are rarely appointed in an independent manner in line with the spirit of the FIDIC Standard Conditions. The government departments that end up being Employers to the Contract are often made a party to the FIDIC agreements and they impose their preferred Engineers as the Engineer and as members of the dispute boards. As a result, these stages lose all credibility and the constructors simply proceed to fulfill these formalities before taking the disputes before an independent arbitration tribunal because only then can the constructors resort to the support of the courts to ensure appointment of independent arbitrator(s) for the arbitration tribunal.
3. Process for Appointment of Arbitration Tribunal
The arbitration tribunal can be appointed either by consent of both the parties, in which case the party dissatisfied with the Decision of the Engineer or the dispute board sends a notice to commence arbitration along with the a list of arbitrators for the other side to agree on. In case the parties fail to agree upon the name(s) for the arbitration tribunal, as is stated in the arbitration agreement, the matter for appointment of arbitration tribunal is brought before the courts through an application under the Arbitration Act of 1940. If the presiding judge is satisfied that there is a valid arbitration agreement between the parties and the matter in dispute does fall under the arbitration agreement the courts refer the disputes for adjudication to an arbitration tribunal appointed with the involvement of the courts. All the other questions regarding limitation for making the claim and merits of the dispute fall in the discretion of the arbitration tribunal.
As the spirit of arbitration revolves around resolution of disputes by a tribunal of the parties' own choice, the courts in Pakistan also prefer to refer the matter to the arbitrators of parties' choice, and it is only in situations where the parties fail to agree on the name(s) of arbitrator(s) that the courts provide names of members of the arbitration tribunal. The Arbitration Act of 1940 leaves a number of issues to the discretion of the parties in compliance with the arbitration agreement and one of the crucial issues is the number of arbitrators. In situations where the arbitration agreement is silent on the number of arbitrators, the Arbitration Act of 1940 suggests that the matter shall be referred to a sole arbitrator.
The Arbitration Act of 1940 provides that if the parties have chosen an odd number of arbitrators, for instance three, then one arbitrator would be recommended by each side and the third would be the referee or the umpire who would come into play if the two arbitrators fail to reach a consensus for the arbitration award. In such a scenario the award given by the umpire would be the final adjudication of the dispute between the parties. The parties can also agree to have all three as arbitrators and in that case the award of majority would be final.
The mode of appointment to the arbitration tribunal is crucial for a number of other reasons as well. The legislature and the judiciary have laid down the law to the effect that a stamp duty, which at present is 3% of the awarded amount, would be imposed on the awarded quantum if the parties have chosen the arbitration tribunal by themselves without resort to, or intervention of, the courts. This is a heavy tax duty and the parties prefer to have the arbitration tribunal appointed by the courts because such mechanism of appointment of arbitration tribunal does not attract any stamp duty.
Another important issue is that where the parties chose the arbitration tribunal themselves, without involvement of courts, they then have a lot of discretion in negotiating arbitrator(s) fee. On the other hand, if the arbitration tribunal is appointed by the courts then the courts may also fix the fee of the arbitrator(s), but this is not a hard and fast rule.
Another matter that is pertinent to the appointment of the arbitration tribunal, is the qualifications of the arbitrator(s) to be appointed. The construction sector and its disputes are often quite complex and the disputes generally require adjudication by an expert Engineer. The courts are aware of this fact and give due consideration to this. This is so the contesting parties generally propose names of either (1) expert engineers with experience in the construction sector, and/or (2) senior lawyers or retired judges who have a command over the contracts and law of the construction sector, with past experience in the same. Certain matters are very complex and require the expertise of an engineer with construction background. Such matters are best decided by an expert engineer, while others are simple contractual disputes that are better decided by a retired judge or a senior advocate with construction law background.
4. Proceedings Before an Arbitration Tribunal
Appointment of Arbitrator(s): The Arbitration Act 1940 allows a certain degree of discretion to the parties in respect of the procedures to be followed for conducting the arbitration proceedings. This is quite clearly in line with the spirit of arbitration, because informality has always been considered a major benefit for parties opting resolution of matters through arbitration as opposed to courts. The procedures to be followed depend greatly on the choice of the arbitrator(s) as the proceedings tend to become more formal when presided over by a retired judge, because he has acquired the habit of conducting proceedings with routine formality of the courts and proceedings before senior lawyers.
Arbitration tribunals constituted of expert engineer tend to be more informal as they are not familiar with the ethics and formalities of the courts. These proceedings also allow significant freedom to the counsels, if any, to conduct the proceedings according to their desires and the arbitration tribunal plays a less interventionist role.
Substantive proceedings before the arbitration tribunals also vary significantly depending upon the choice of arbitrator(s) for the arbitration tribunal.
Statement of Claim: The first step after appointment of an arbitration tribunal is the submission of a statement of claim by the claimant. However, in situations where a reference is made by the court, the plaint along with the annexed documents can constitute the claim, though this is not a strict principle and the parties can still file a claim afresh. The claimant is at liberty to agitate a number of disputes falling in the ambit of an arbitration agreement through a single arbitration claim, or he can do the same by filing different arbitration claims for each dispute.
Parties generally wish to file separate claims for each separate dispute for the purposes of getting separate arbitration awards. The problem with filing one claim for a number of disputes is that the arbitration tribunal may decide a certain dispute in favor of the claimant while he may reject the claim for other disputes. If there is a single arbitration award the parties find it difficult to support or object to the award because it is not possible to support the award to the extent of the disputes decided in favor of a party, while objecting to it to the extent of disputes that have been decided against it. As the main basis for setting aside an arbitration award is misconduct of the arbitration tribunal it would be impractical to state that the arbitration tribunal misconducted itself in reaching its conclusion for the disputes that have been decided against a party while accepting the proceedings as proper for the disputes that have been decided in its favor. While if there are separate awards, the parties can conveniently support the awards decided in their favor while objecting to the awards decided against it through separate proceedings in the courts.
Reply to Claim: The respondent then files their reply to the statement of claim, wherein they entail their version of the dispute and give a para-wise reply to the statement of claim. After this, both parties produce their respective evidence to support the position taken in their submissions.
Evidence: The Arbitrator(s), with or without the assistance of both parties, will then proceed to identify crucial facts in dispute which form the crux of the dispute, and frame issues for the parties to lead evidence on. The mode adopted for evidence depends on the preference of the parties and the arbitrator(s). In some instances, parties produce their witness whose statement is recorded along with documentary evidence, while the other side is entitled to cross examine. In other instances, there are also those disputes where bringing witnesses is not felt necessary, and the requirement is dispensed with. In such cases, the parties accept the documents filed along with the statement of claim and reply. Generally, arbitration tribunals allow parties to agree on a mode for conducting evidence and proceeds as per their preference.
Final Arguments: Evidence is followed by the final arguments by the parties and is quite similar to proceedings in court wherein the parties are given time to conclude their oral submissions. Parties are also entitled, and are in fact encouraged, to file written arguments to support their versions of the dispute and enable the arbitration tribunal to reach its award with the help of written submissions.
Final arguments are followed by an award by the arbitration tribunal which is the final decisive adjudication of the dispute on merits between the parties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.