News Letter January 2014


Address:
H. No. 64, Main Nazimuddin Road,
F-8/4, Islamabad, Pakistan

Telephone:
(92-51) 8438140-2

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(92-51) 8316140

Email:
aqlaal@aqlaal.com


Mediation – The attractive alternative to litigation

Mediation offers an attractive alternative to litigation for parties who genuinely desire a settlement of their dispute without time-consuming and expensive litigation in courts.  Mediation is a recent phenomenon when compared with litigation and arbitration.  Its uptake in Pakistan hasn’t quite happened yet, primarily because of a relative lack of awareness of its mechanics and benefits.

Mediation is structured settlement.  The parties select a mediator and provide brief case summaries to the mediator.  On the day of mediation, the mediator conducts joint and private meetings with the parties.  The mediator is skilled to nudge the parties towards a workable solution.  While the parties are generally focussed on “what they want”, the mediator enables the parties to move towards “what will satisfy both”; positions give way to interests.  The day concludes with a settlement agreement if the mediation is successful; if not, the parties are usually much closer to a solution and can continue to work towards an out-of-court settlement.

Mediation can be employed in almost all areas where disputes may arise, but it is practised the most in commercial, family, workplace and community disputes.

 Mediation is a “without prejudice” process.  The parties remain free to pursue action in courts or arbitrations if mediation does not lead to a settlement.  All mediations are highly confidential – the proceedings and discussions at mediations cannot be used in court.  The confidential nature of mediation creates an environment conducive to settlement, where the parties feel encouraged to exchange valuable information with the mediator to enabe the mediator to nudge the parties towards a settlement.

Mediation is ‘by consent’ of the parties.  Pakistan law does not enable the courts to compel the parties to mediate.  In some jurisdictions, Courts car order parties to mediate or the Courts can award costs against a party that unreasonably refuses to mediate.  The absence of enabling powers in our procedural laws for the courts to require the parties to seriously consider to mediate can best be explained by the relative lack of awareness of the process of mediation and the advantages it can bring.  This lack of awareness is unfortunate, as can be gauged by the following statistics put forth by the Centre for Effective Dispute Resolution (CEDR) of UK in their Mediation Audit Report of 2012:

  • The total value of cases mediated (i.e. the amount at issue) can be significantly influenced by the impact of mega-cases. If, however, the effect of such cases is excluded, the value of cases mediated each year is approximately £7.5 billion (2010: £5.1 billion).
  • Since 1990, effectively the launch point of civil and commercial mediation in England & Wales, the total value of mediated cases is approaching £50 billion.
  • By achieving earlier resolution of cases that would otherwise have proceeded through litigation, the commercial mediation profession this year will save business around £2 billion a year in wasted management time, damaged relationships, lost productivity and legal fees.
  • Since 1990, mediation has contributed savings of £12.5 billion.

Contrary to general misunderstanding, the parties’ lawyers have a key role to play in mediation; right from the point of advising clients to consider mediation, from preparing case summaries to the day of mediation where the lawyers are generally present in the mediation proceedings to advise their clients on the implications of various settlement options as they unfold during the day.

Statistics generally show that the settlement rate of mediations in a single day of mediation is about 70% – a very high percentage by any reckoning.  The costs of mediation (mediators’ and lawyers’ fee, venue costs) are modest when compared to the costs of a long-haul fight in courts, the wasted management time and damaged commercial or other relationships litigation can cause.

 The International Finance Corporation, the private sector arm of the World Bank, has set up mediation centres in Karachi and Lahore in collaboration with CEDR.  These mediation centres are at their nascent stage, but there are a few incidents of successful mediations.  The time is now ripe for a concerted campaign by the legal community to consider seriously mediation as an alternative to litigation, and for the courts to recognise its utility in freeing up the clogged rosters of our courts, apart from the immense benefits it can accrue in the form of unlocking of economic value in cases which remain tied-up in court for years and the benefits it can bring to disputants in the form of quick resolution of their disputes.

(Ejaz Ishaq Khan, Partner, is an accredited mediator from CEDR). 

Special Economic Zones

Special Economic Zones are demarcated geographic areas contained within a country’s national boundaries where the rules of business are different from those that prevail in the national territory. These differential rules principally deal with investment conditions, international trade and customs, taxation, and the regulatory environment; whereby the zone is given a business environment that is intended to be more liberal from a policy perspective and more effective from an administrative perspective than that of the national territory.[1] 

Over the years, several Special Economic Zones have been developed around the world as a successful means of attracting foreign as well local investment and as an essential tool allowing countries to specialize in their areas of expertise and broaden their export market. Suzhou Industrial Park, a joint venture between China and Singapore, is one of the most successful Special Economic Zones, attracting US$ 17 billion in FDI and supporting more than 500,000 jobs[2]. Other examples include Export Processing Zones and Free Trade Zones in Honduras, Bangladesh, Haiti and Chinese zones set up in Africa.

Recently, law on Special Economic Zones (SEZs) was also formulated in Pakistan in the form of the Special Economic Zones Act, 2012 followed by the Special Economic Zones Rules, 2013. The SEZ law allows Federal and Provincial Government to set up SEZs either entirely on their own or through collaboration with private parties or exclusively through the private parties. The application process for SEZ establishment entails submission of application, through Provincial SEZ Authorities in the case of provinces and Board of Investment in the case of ICT, to the Board of Approvals, a body established under the Special Economic Zones Act, 2012 responsible for approving Zone Applications. The Board of Approvals as well Provincial bodies for all Provinces, as required to be set up under the SEZ Act, 2012, are already in place. The aforementioned laws also allow existing economic zones to move to this new SEZ regime subject however to the terms and conditions laid out therein.

As per the prevalent SEZ law in the country, all SEZs are extraterritorial entities deemed to be outside the customs territory of Pakistan. Several tax incentives are extended to the Zone Developers, responsible for the development of their respective SEZ, as well as selected Zone Enterprises, which have been admitted in to the SEZ by the Zone Developer to carry out the permitted business activity in the SEZ. These incentives include, in the case of Zone Developers, one time exemption from all custom duties and taxes for all capital goods imported in to Pakistan for the development, operation and maintenance of SEZ as well as exemption from all taxes on income accruable in relation to the development and operation of the SEZ entity for a period of ten years. Similar onetime tax exemptions on capital equipment imported for installation and exemptions on income tax for a ten year period are also available for Zone Enterprises.

The success of SEZs around the globe brings some hope for private investors as well as for the economy of the country. From study of SEZs and their economic impact, whereas it can be deduced that there is chance of success, the impact of SEZs in Pakistan and its future is yet to be seen. Much will depend on the approach taken by the regulatory bodies, private investors as well as the political and security concerns faced by the country.

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[1] Farole 2011, Page 23

[2] Special Economic Zones: Progress, Emerging Challenges and Future Directions by Thomas Farole. Gokhan Akinci, The World Bank Publications

(Rida Jamal, Associate, is currently working on a World Bank sponsored assignment relating to the SEZ Zone Application process in Pakistan.)

Offshore Financial Centers: Friend or Foe ? 

Described by proponents as the ‘the plumbing that connects the global financial system’[1], offshore financial centers (OFCs) have in recent times garnered a reputation that belies their benefits. More commonly known as ‘tax havens’, the vast majority of these centers provide much more than simply tax neutrality, not only in terms of ease of incorporation and relative anonymity but also robust legal systems that are well equipped for dispute resolution.

Of these OFCs, the jurisdictions that stand out are the Cayman Islands, the British Virgin Islands (BVI) and Jersey. A brief comparison from an investor’s perspective is provided below.

To begin with common features, the legal and court systems of all three jurisdictions follow the common-law system with local commercial courts and the Privy Council as final arbiter. All three provide exemption from corporate income taxes, capital gains taxes as well as branch rate and branch remittance taxes. There are also no exchange control or currency restrictions.

The differences lie within the requirements for incorporation. The Cayman Islands regime allows for same day incorporation, without any consents being required from the government. Filing requirements are restricted to the basic, and records are not open for public inspection. For BVI however, the company proposing to be registered must appoint a “registered agent” as only a registered agent may make an application for the incorporation of a BVI company. The agent must also have obtained the approval of the BVI Financial Services Commission to provide registered agent services. Similarly for Jersey, pre-incorporation consent is required from the Jersey Financial Services Commission.

The filing and account requirements for all three jurisdictions are of a minimal standard, and provide for a certain level of confidentiality, with records not open for public inspection. In light however of recent transparency concerns, KYC procedures across the world have undergone enhancement, with OFCs the subject of particular scrutiny. This has translated therefore into relatively stricter procedures, with details of ultimate beneficial ownership required to be provided for due diligence purposes, on however a confidential basis.

With regards to activity, BVI continues to dominate offshore new company registration by volume and has consistently maintained a six-fold lead ahead of its nearest comparator, the Cayman Islands according to Appleby’s ‘On the Register’ Report for 2013. The Cayman Islands however have been the top destination for M&A activity in 2013.

In terms of reputation however, Jersey has maintained its top ranking amongst offshore jurisdictions in the latest Global Financial Centres Index (GFCI) and is the only offshore location to feature in the top 30 International Finance Centres (IFCs) around the world. Jersey continues to be ranked at 28 in the Index which is led by London and New York, retaining the same ranking it had in the previous edition of the Index, ahead of close competitors Guernsey (ranked 36), Cayman Islands (39) and the Isle of Man (41).

Apart from the three above, OFCs, in continuing to tread the fine line between requisite confidentiality and absolute anonymity, have seen a recent rise in popularity in Asia, with Hong Kong and Singapore emerging as popular jurisdictions. Whether and to what extent South Asia follows suit will be a topic of great interest in coming times.

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[1] ‘The good, the bad and the Ugland’-The Economist- Feb 16-22, 2013.

 Sonia Ahmad (Associate) has recently been involved in a research assignment relating to offshore incorporation.

Legal Updates: The Supreme Court on the Petroleum Policy 2012

On 27.12.2013 the Supreme Court passed judgment on an application for redressal of grievance against ENI Gas Field Jamshoro, in C.P No.46 of 2013.

Background

The case pertains to the contractual, legal, environmental and social mandate/obligations of Companies which are engaged in the exploration and extraction of oil and gas.

More than 25 Companies domestic and international, other than (OGDCL) are engaged in exploration and mining of oil and gas in various districts covering in excess of 30% of the land area of Pakistan. The activities of these Companies inevitably have a disruptive effect on the population residing in the areas where they operate.

The matter was highlighted in an event organized by the Tando Adam Bar Association (District Sanghra) where the Chief Justice was invited. Mr. Abdul Hakeem Khoso Advocate, President of the Tando Adam Bar Association in his speech said “Our district [Sanghar] has a number of oil and gas field and the oil exploring  companies are acting in violation of law and the terms and condition of the [petroleum concession] agreement which they executed with the Government of Pakistan whereby they are bound to control environmental pollution, provide jobs and gas facility to the local people and spend specified amounts on the local infrastructure such as roads, school, hospital and the betterment of local people”

Ministry of Petroleum and Natural Resources through the Director General Petroleum Concessions (DG PC) regulates and oversees the grant of permits, licenses and leases for exploration, development and production, to E&P Companies.

According to the DG PC, the royalty payable by these companies is more than Rs. 160 billion in respect of crude oil and more than Rs. 293 billion in respect of gas.

Contracts

A Petroleum Concession Agreement is entered into between an E&P company and the Government. Through the President of Pakistan, PCA grants an E&P company the license to explore and extract oil gas and hydrocarbons. PCA agreement contains clauses which ensure the development, capacity building and environmental protection of the area from which Company extracts oil and gas.

Order

The Petroleum Policy, 2012 prescribes a different percentage for each use:  10% of onshore royalty is to be used “in the district where oil and gas is produced for infrastructure development”. Onshore production bonuses are to be used for “social welfare projects in and around the respective contract areas”. 75% of the marine research and costal area development fee is to be utilized for costal area development. Employment if for Pakistani nationals and training includes internships/scholarships and training of local inhabitants. Unlike onshore production bonuses, production bonuses from offshore areas are not specifically required to be spent on the social welfare of local inhabitants.

The schemes are prepared by the E&P company in consultation with the local administration, endorsed by the concerned MNA, executed by the E&P company in coordination with the DCO, and monitored by the DCO who issues a completion certificate to the E&P company. E&P companies are also required to submit annual certificate from their statutory auditors.It transpired during the case that either these process are not in existent on ground or are undertaken without due care. Petroleum Policy 2012 authorises the DC PC, to take enforcement action. In 2009 Petroleum Marine Development Committee was created which is mandated to approve the projects and periodically review the implementation of projects.

The Honorable Court considered aspects of the utilization of these available funds such can be streamlined and optimized, thereby ensuring that transparency and public access to these funds, guaranteed to them under Article 9 and 14 of the Constitution and the Principles of Policy enunciated in Chapter 2 of the Part II of the Constitution. The Court directed DG PC and the relevant Provincial Government to ensure collection and monitoring of obligation of E&P Companies, inconsistent with Article 19A of the Constitution (right to information). The Provincial and Local Government shall review the existing Policy, guidelines may be framed so that social welfare obligations can be monitored and the funds can be examined in open and transparent manner. Once every sixth months, the DCO shall effect the publication of a notice online and in widely ranged newspapers announcing a public hearing. A list of all such schemes shall be included in the public notice along with their location, budget and current status. Notice shall be also send to all district level trade organisations, chambers of commerce, bar associations and prominent organisations and social welfare organisations and provisional ombudsman also on the website of the district government. Report of the completed schemes shall be sent to the federal and Provincial Ombudsman and Human Rights cell of this Court.

The DG PC shall prepare the comprehensive account of the amounts as well as a half-yearly report. Estimated figures for royalties to each district shall be made within 45 days and shall be submitted in the Court. The Ministry of Petroleum and Natural Resources shall ensure implementation of the Prime Minister’s directive and provide gas to all surrounding villages falling within the radius of 5km of all gas fields.

Mehraj Tareen (Associate)

 

 


 






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