Pakistan and the impact of international arbitration

In order to attract investors, Pakistan should adopt strategies to limit exposure to international arbitration.


January 20, 2022

ISLAMABAD – With reports about a Turkish company moving to the International Center for the Settlement of Investment Disputes (ICSID) against Pakistan, its struggle before international courts and tribunals appears to be far from over. Keeping in view the fact that awards in Reko Diq, Karkey, and Broadsheet have collectively totaled more than $ 6 billion, the impact of another unfavourable award on the country’s already precarious economy is a source of immense disconcert. Our repeated failures before international courts and tribunals have often prompted questions about how Pakistan may change its fortune before international courts and tribunals. Nonetheless, critics of the international arbitration regime argue that given arbitral institutions were created to protect the investors’ interests, states are at a significant disadvantage in these proceedings and that Pakistan’s performance before such fora is but inevitable. These critiques have particularly gained traction over the preceding decade with Latin American countries, including Bolivia, Ecuador, and Venezuela withdrawing from the International Centre for Settlement of Investment Disputes (ICSID) Convention. Similarly, since 2011 Australia too has expressed reservations about the inclusion of dispute settlement provisions in bilateral and regional trade agreements. Can Pakistan, therefore, resolve these disputes before investors resort to arbitration?

Given the critiques of the international investment arbitration regime and the impact of an unfavourable award, a number of states have recently adopted a variety of strategies ranging from dispute prevention policies to mediation and conciliation to limit their exposure to international arbitration.

Dispute prevention policies attempt to prevent conflicts between investors and states from escalating into formal investment disputes. The purpose of such policies is to timely alert government authorities as to the existence of emerging conflicts with investors. Such policies could include the assignment of a lead agency that serves as a one stop shop with the task of establishing a communication channel between investors and government agency concerned; identification of sensitive sectors (sectors where disputes are most likely to arise) and the provision of ‘investment aftercare’ to support investors in these sectors; and establishing an early grievance detection mechanism that allows the government to conduct early settlement discussions with affected investors. Recently, Egypt has attempted to incorporate these policies by amending its Arbitration Law. Keeping in view the fact that the country has had at least 14 investment claims against it since the Arab Spring of 2011, the Amendment intends to reduce Egypt’s exposure to international arbitration.

Dispute prevention policies, therefore, allow states to avoid the risk of an unfavorable award which may also embolden other investors to challenge the same or similar measures. Moreover, protracted arbitrations between the state and investors affect the state’s credibility as a safe destination for investments, thus, hurting its ability to attract foreign investment. Effective dispute prevention policies are, therefore, critical towards precluding conflicts and investor grievances from escalating into disputes.

For such policies to bear fruit, however, coordination between the federal and provincial governments is imperative because there may be instances where investors’ grievances relate to both. While political polarisation often obviates the possibility of the federal and provincial governments working in concert, the recent functioning of the National Command and Operation Centre (NCOC) to arrest the spread of Covid-19 embodies the benefits of the federal and provincial governments work together while respecting each other’s spheres and the Constitutional mandates around provincial autonomy.

Another strategy that states may employ to avoid protracted arbitrations is the use of conciliation and mediation. Juxtaposed with dispute prevention policies which attempt to avoid the escalation of conflicts into formal, arbitrable disputes, mediation assists in the settlement of conflicts that have already escalated into disputes. An overwhelming majority of international investment agreements envisage a ‘cooling off’ period between the submission of a claim and the commencement of an arbitration during which the investor is obliged to abstain from initiating arbitration. The purpose of the ‘cooling off’ period is to afford the disputing parties an opportunity to attempt the amicable resolution of these disputes through means including consultation, negotiations, mediation, and conciliation. Nonetheless, data from leading arbitral institutions suggests that this first tier of resolution is seldom used. Given that investment agreements merely provide a generic instruction to the parties to attempt to resolve their disputes ‘amicably’ during the cooling-off period without elucidating the manner and procedure through which the settlement may take place, resolution during the ‘cooling off’ period is rarely explored.

Given that both conciliation and mediation may be difficult in the absence of an investment treaty expressly providing for them, Pakistan ought to consider incorporating a detailed conciliation or mediation clause in its Bilateral Investment Treaties (BITs) so as to remain open to the possibility of settling investor claims without resorting to arbitration. This approach could shed light on, among other things, the manner in which a party may initiate the mediation and conciliation process and whether parties would be allowed to invoke other forms of dispute resolution while they attempt to conciliate or mediate their disputes, and the time frame to address disputes via conciliation or mediation before resorting to other means.

As Pakistan attempts to revive its economy in the wake of another IMF package, it is imperative that the government creates an environment that is conducive to foreign investments. Critical for the realisation of this dream is a robust mechanism whereby investors’ grievances are addressed before they culminate into disputes and in the event where such conflicts do escalate into arbitrable disputes, to resolve them through mediation and conciliation. Without such measures in place, the goal of attracting investors and avoiding exposure to international disputes shall continue to elude us.

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