Dispute settlement mechanisms: BoI asked to show ‘flexibility’

Business Recorder | 29 November 2023

Dispute settlement mechanisms: BoI asked to show ‘flexibility’

by Mushtaq Ghumman

ISLAMABAD: The Federal Cabinet has directed Board of Investment (BoI) to show flexibility in adopting an international dispute settlement mechanism in case international investors do not agree on domestic arbitration, well informed sources told Business Recorder.

These directions were issued after threadbare discussion with GCC countries including Saudi Arabia and Qatar which are insisting on the option of international arbitration in a template of Bilateral Investment Treaty (BIT).

Sharing the details, sources said, BoI informed the Cabinet on November 15, 2023 that the Federal Minister for BoI was mandated to initiate negotiations on BIT with the Kingdom of Saudi Arabia (KSA) in March 2023, as the signing of BIT between the two countries was a significant component of the economic pillar under the framework of Saudi-Pakistan Supreme Coordination Council (SPSCC).

The Secretary BoI stated that owing to Pakistan’s previous bitter experiences in international arbitration and to minimise future risks for Pakistan in cases of dispute pertaining to foreign investment, BoI, with the assistance from Law & Justice Division and International Disputes Unit, Office of the Attorney General for Pakistan, had developed the Pakistan Model BIT template as a guiding text for all future BIT negotiations.

It was noted that the said template was also approved by the Federal Cabinet in its meeting held on July 27, 2021. Secretary BoI stated that the model BIT Template was shared with the KSA counterparts at the beginning of the negotiations and in return, the KSA negotiating team shared their Guidance Model on BITs.

However, during the preliminary round of negotiations on May 10, 2023 both sides agreed to develop a merged draft out of the two model draft documents.

BoI further noted that the Ministry of Commerce was engaged with KSA to finalise the Free Trade Agreement (FTA) with the GCC and one of its requirements was to annex the Pak-KSA BIT with FTA. Pakistan’s Ambassador to Saudi Arabia had recommended that BoI should send its negotiating team for BIT alongside Ministry of Commerce team to KSA.

BoI stated that during the course of formal negotiations on September 26-28, 2023, the GCC team shared the interest of the State of Qatar to also become part of the Pak-KSA BIT under the umbrella of Pak-GCC FTA negotiations.

The request of the State of Qatar was shared with BoI by the Ministry of Commerce through diplomatic channels on October 2, 2023.

It was contended that at the end of the three days of negotiations, differences remained between the two sides on some of the clauses of the draft BIT, as KSA and the State of Qatar continued to insist on the inclusion of their version of these clauses, which were in substantial deviation from Pakistan’s Model BIT template.

The deviations noted were: (i) definition of investment to cover indirect forms of investments; (ii) definition of investors should not be restricted to domiciled investors only; (iii) Article on the Scope of the Agreement shall be included; (iv) Article 6, 2(a) Denial of Justice in criminal, civil and administrative proceedings must be open for investors to choose any forum of dispute settlement; (v) Article on Principles of Subrogation shall be included; (vi) Investors must be allowed the freedom of choice to access either domestic dispute settlement forums or any of the international dispute settlement forums, including ICSID; and (vii) Article on Compensation of Losses shall be included; and (viii) final provisions : BIT for an indefinite period (exclude sunset clause and survival clause.)

BoI informed that the final draft sent by KSA and the State of Qatar was circulated amongst all relevant ministries/ departments, along with a comparison matrix on key divergences between Pakistan’s Model BIT template, to ascertain their views/ comments.

BoI shared the comments received from the stakeholders with the Cabinet, which are summarised as follows: (i) Office of the Attorney General for Pakistan agreed in principle to the text, subject to the approval of the Federal Cabinet; (ii) National Security Division suggested incorporating additional expression in the Article on Scope in order to exclude existing disputes.

A graduated approach in investor-state dispute settlement (ISDS) would also be preferred. Any BIT in perpetuity may not serve its purpose in the long run; (iii) Private Power & Infrastructure Board (PPIB), while agreeing in principle, suggested incorporating appropriate qualifiers as well as a few amendments in the language of the paragraph on ‘Denial of Justice’ and in the case of inclusion of ICSID as an arbitration forum; (iv) Ministry of Foreign Affairs suggested introducing some threshold of shareholding for indirect investment, defining a timeframe for domestic legal remedies, and reconsidering the option of multiple international arbitration forums including ICSID, as it may pose unforeseen challenges; and (v) Ministry of Finance suggested extensive protection for the State of Pakistan on existing disputes and in the case of subrogation.