SGS v Pakistan (Disqualification of Arbitrator)

CourtSupreme Court (Pakistan)
Date03 July 2002
Supreme Court of Pakistan (Appellate Jurisdiction)

(Sheikh, Farooq and Dogar JJ)

Socit Gnrale de Surveillance SA
Pakistan, through Secretary, Ministry of Finance
Pakistan, Through Secretary, Ministry of Finance
Socit Gnrale de Surveillance SA1

Economics, trade and finance Investment protection Bilateral investment treaty Effect in national law of party Provision for ICSID arbitration Relationship to arbitration provision in contract Whether one prevailing over the other Role of national courts Whether national court can stay proceedings before ICSID tribunal

Relationship of international law and municipal law Treaties Pakistan Bilateral investment treaty Whether part of the law of Pakistan Whether capable of creating rights under the law of Pakistan Role of the courts of Pakistan The law of Pakistan

Summary: The facts: Socit Gnrale de Surveillance SA (SGS), a Swiss incorporated company, signed a Pre-Shipment Inspection (PSI) Agreement with the Islamic Republic of Pakistan in September 1994, which entered into force on 1 January 1995. The PSI Agreement provided for the pre-shipment inspection of all consignments to be imported into Pakistan on the basis of which the custom duties were to be charged and recovered from the importers. Its dispute settlement clause provided that [a]ny dispute, controversy, or claim arising out of, or relating to this Agreement, or breach, termination or invalidity thereof, shall be settled by arbitration, in accordance with the Arbitration Act of [Pakistan]. The Agreement was terminated by Pakistan on 12 December 1996 with effect from 11 March 1997.

A bilateral investment treaty (BIT) between the Swiss Confederation and Pakistan was signed on 11 July 1995 and entered into force in 1996, providing

for ICSID (International Centre for the Settlement of Investment Disputes) dispute settlement in respect of all investments made after September 1954. Neither the 1965 ICSID Convention (which Pakistan ratified on 15 September 1966) nor the BIT had been implemented into Pakistani law

After settlement negotiations failed, SGS initiated a commercial claim in the Swiss courts in January 1998, seeking relief for Pakistan's alleged unlawful termination. The claim was unsuccessful before all levels of the Swiss courts, with the Federal Tribunal denying SGS's final appeal in November 2000 on grounds of sovereign immunity. Shortly before the Swiss Federal Tribunal's decision, on 11 September 2000, Pakistan applied to the Court of the Senior Civil Judge, Islamabad, pursuant to Section 20 of the Arbitration Act 1940 for an order that the dispute be referred to an arbitrator appointed by the court. SGS appeared in those proceedings in April 2001 by filing preliminary objections to the PSI Agreement arbitration and a without-prejudice counterclaim against Pakistan.

By letter dated 10 October 2001, SGS formally informed Pakistan of a dispute under the BIT and consented to the submission of the dispute to ICSID.2 Two days later, SGS dispatched a Request for Arbitration to ICSID, which was formally registered on 12 November 2001. On 4 January 2002, SGS applied under Section 41 of the Pakistani Arbitration Act seeking a stay of proceedings due to the initiation of ICSID arbitration. The Senior Civil Judge rejected the stay, and the Lahore High Court dismissed an appeal on 14 February 2002. SGS appealed further to the Supreme Court, and Pakistan lodged its own appeal requesting a restraining order against SGS. On 15 March 2002, the Supreme Court ordered both arbitration proceedings to be stayed until the disposal of the appeals. The principal contentions on appeal were whether the PSI arbitration agreement was binding upon the parties notwithstanding the entry into force of the BIT, whether SGS was an investor under the BIT, and whether SGS had waived its right to ICSID arbitration.

Order (15 March 2002)

Held: To avoid a conflict between the decisions of the two arbitration forums (the trial court and the ICSID tribunal), the Court ordered both arbitration proceedings to be stayed and restrained the parties from proceeding further until the determination of the appeals by the Supreme Court of Pakistan.

Judgment (3 July 2002)

Held: The Court dismissed the stay application and restrained SGS from pursuing or participating in the ICSID arbitration.

(1) A treaty that had not been incorporated into Pakistani law by legislation could not be relied upon to confer rights on individuals or to deprive them of rights. The BIT could not therefore be enforced as law in Pakistan in order

to claim that the alleged choice given to SGS under the Treaty to approach ICSID for arbitration had preference over the existing lawful contract between the parties inclusive of the arbitration clause, which was valid and binding on them (paras. 18 28)

(2) The scope and nature of the definition of investment in the BIT had to be construed strictly, carefully keeping in view the purpose for which it was concluded. The major part of the PSI Agreement was given effect outside Pakistan, at the stage of shipment of the goods from foreign countries, and the authority to inspect goods within Pakistan was given only to a local subsidiary. Considering the nature of these functions in juxtaposition with the meaning of the word investment, it was clear that the PSI Agreement was not an agreement of the kind and nature relating to any investment and therefore was not covered by the BIT or ICSID Convention in any event. A claim to money (Article 1(2)(c) of the BIT) had to be of the species of assets earnable by an investor from the investment and could not be the investment itself. There was no laying out of money by SGS for acquisition of any species of property, and therefore no right in SGS was created to invoke the BIT provisions for ICSID arbitration (paras. 29 39).

(3) Since SGS had chosen to institute proceedings before the Swiss courts and its consent to ICSID arbitration was given only after it had filed a substantive reply to the PSI Agreement arbitration, not only had SGS waived the right (if any) to opt for ICSID arbitration but also the principle of estoppel by conduct had been engaged. In addition, SGS did not approach ICSID with clean hands and was guilty of deliberate concealment and suppression of material facts in not disclosing to ICSID that it had previously commenced substantive proceedings in Switzerland (paras. 4060).

The following is the text of the judgment of the Court, delivered by Sheikh J:


1. By this consolidated judgment, we propose to decide Civil Appeals Nos 459 and 460 of 2002, involving identical questions of law and facts.

2. These two appeals by leave of the court are directed against the judgment dated 14 February 2002 of the Lahore High Court, Rawalpindi Bench, Rawalpindi whereby appeal filed by the appellant (Civil Appeal No. 459 of 2002) against the order dated 7 February 2002 of the trial court has been dismissed and the request of the appellant Pakistan through Secretary, Ministry of Finance, Islamabad in the connected Appeal No 460 of 2002 to restrain the SGS to pursue the remedy through arbitration of International Centre for Settlement of Investment Disputes (ICSID) has been dismissed.

3. The facts of the case are that SGS, hereinafter called the appellant, entered into an agreement on 29 September 1994 with the Federation of Pakistan, hereinafter called the respondent, by which the services of the appellant were hired for preshipment inspection of all consignments to be imported into Pakistan on the basis of which the custom duty, etc., and other Government dues as prescribed under the relevant Statutes were to be charged and recovered from the importers. This contract was terminated by the respondent on 12 December 1996 which was accepted by the appellant on 23 December 1997 with the reservation of its legal right. This agreement contained an arbitration Clause which is Clause 11.1. It reads as under:

4. The appellant, however, filed a case against the respondent in the Court of first instance in Geneva for the recovery of an amount of US $8,368,430.49 with interest thereon and the balance due on SGS invoices. In the petition filed before the said Court, it was alleged that the appellant did not expect fair trial from the Courts in Pakistan to justify its act of not invoking the arbitration Clause, for settlement of dispute by Courts in Pakistan. The said Court decided the case against the appellant on the ground that arbitration Clause was reasonable, fair trial was possible in Pakistan. The claim of sovereign immunity of Pakistan was also upheld. The appeal filed by the appellant before the Swiss Court of Justice against the said judgment was dismissed through judgment dated 23 June 2000.

5. The respondent on 7 September 2000 filed an application under section 20 of the Arbitration Act 1940 for filing of the agreement in the Court and appointment of an arbitrator as per Arbitration Clause No 11.1 of the said Agreement. The appellant filed an appeal before the Swiss Supreme Court which too was dismissed on 23 November 2000.

6. The appellant contested the said application by filing detailed reply on 7 April 2001. After filing this reply, on 10 October 2001, the appellant filed consent to ICSID Arbitration which was followed by a formal request for arbitration dated 12 October 2001 which was registered on 12 November 2001. Apart from preliminary and other legal objections, the appellant also raised counter claim of more or less the amounts which were claimed in the case filed before the Swiss Court of first instance. No plea was raised that the dispute between the parties by force of Bilateral Investment Treaty dated 11 July 1995 or the Convention of Washington dated 18 March 1965 could exclusively or at the option of the appellant be resolved through arbitration of ICSID. It was long after the dismissal of the appeal of the appellant by the Swiss Supreme Court on 23 November 2000...

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