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International arbitration 'can help grow the Afghan economy'

ANALYSIS: International arbitration is an attractive alternative to Afghan court proceedings for resolving disputes, particularly between foreign and Afghan companies, and this has the potential to play a vital role in generating greater foreign investment in Afghanistan.11 Oct 2018

As the Afghan economy grows and there is greater domestic and foreign investment in the country, the need for an effective dispute resolution mechanism becomes increasingly important. International arbitration can offer a more acceptable method for the resolution of disputes for stakeholders. Although the World Bank forecasts that the Afghan economy would grow modestly in 2018 and beyond, it is clear that the country has far greater potential and may offer ample opportunities for foreign and domestic investors in a broad range of nascent and undeveloped sectors: particularly mining, energy, infrastructure, telecommunications and agriculture.

A major obstacle to greater foreign and domestic investment in Afghanistan remains what foreign and domestic investors perceive to be a lack of effective dispute resolution mechanisms. The Afghan courts are viewed as being poorly equipped; lacking specialist legal expertise in the sectors already mentioned; and to involve opaque and lengthy procedures. Despite the current problems associated with litigation in the Afghan courts, Afghanistan has a rich history of using alternative methods dispute resolution, such as a 'jirga' and 'Shura', which have been used for hundreds of years to resolve a broad range of disputes, including those which have national significance.

The recognition and development of international arbitration by the Afghan government

The Afghan government has taken steps toward the recognition and development of arbitration as an alternative method of dispute resolution, particularly as this would be welcomed by foreign investors who are more familiar with arbitration.

In 2004 Afghanistan signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This means that Afghan courts are legally expected to recognise and enforce foreign arbitration awards of other signatory states, unless it is contrary to the laws and public policies of Afghanistan.

Afghanistan enacted its own commercial arbitration law in 2007. That law explicitly said that it was enacted "to facilitate and encourage prompt, fair, and neutral resolution of commercial and economic disputes through arbitration".

The Commercial Arbitration Law of 2007 enables parties to select the venue, language, rules and applicable law of the arbitration, as well as to choose whether or not to appoint experts.

The Private Investment Law of 2005 (PIL), which aims to promote, support and protect foreign and domestic investments, states that foreign investors are to be granted equal national treatment and not subjected to any discriminatory government action. The PIL also says that parties to a dispute may decide on the arbitration procedure; the physical venue of arbitration; the seat and legal location of the arbitration; and the governing law of the dispute. However, Afghan law will automatically apply if a dispute arises between a foreign investor and an "administration or organisation of the state". The interpretation of an "administration or organisation of the state" is unclear but similar provisions are not uncommon in other regional jurisdictions including the Middle East.

In September 2017, the International Chamber of Commerce (ICC) was inaugurated in Kabul. This is a significant step in the development of arbitration as a viable alternative to Afghan court proceedings and the ICC Rules are well known to legal practitioners.

The ICC is actively involved in the promotion of arbitration in the country. The ICC offers training sessions to students and legal practitioners and raises awareness of arbitration through conferences and think tanks such as the ICC Young Arbitrators Forum and the Mining Think Tank of Afghanistan.

Afghanistan is a party to the Energy Charter Treaty, which aims to ensure the protection of foreign energy investments based on the principle of non-discrimination to nationals and legal entities of other signatory states. The Energy Charter Treaty has a self-contained dispute settlement mechanism which uses international arbitration to settle investment disputes between an investor of a contracting state and a contracting state and for a state-to-state dispute concerning the interpretation of the provisions of the Energy Charter Treaty.

Afghanistan is a party to the ICSID Convention, or Washington Convention, which established the International Centre for Settlement of Investment Disputes (Centre) to resolve investment disputes between an investor of a contracting state and a contracting state. The Centre provides a specialised dispute resolution forum and does not, in itself, provide an independent basis for initiating arbitration on any dispute arising from an investment. The parties must consent in writing to the jurisdiction of the Centre to resolve the dispute. The consent may be given in a clause included in an investment agreement; an investment promotion legislation; a bilateral-investment treaty; or another treaty. The ICSID Convention, itself, does not provide any substantive protections for foreign investors.

Benefits of international arbitration

International arbitration has some clear benefits that make it suitable for disputes in Afghanistan.

International arbitration allays foreign investors' fears that Afghan courts may be biased against them. It gives parties the freedom to select appropriate arbitrators from any jurisdiction. It is also possible for the parties to appoint several arbitrators, such as each party appointing an arbitrator, who would then jointly select a third arbitrator to be the chairman, which would result in the arbitration award being viewed more legitimate by the parties. The dispute resolution clause included in a contract can take a variety of different forms depending on its suitability to the specific circumstances of the relationship between the parties.

International arbitration can be conducted in the language of choice of the parties. Afghan court proceedings are conducted in Dari and Pashto. International arbitration would overcome any language barriers in this regard and allow the parties the freedom to select the language of the proceedings.

Parties can choose the physical venue of the arbitration. This means that parties would be able to conduct their arbitration in a forum such as the Dubai International Financial Centre in the United Arab Emirates, which is viewed as a safe and convenient jurisdiction for the resolution of disputes. This is particularly the case given that it is common for foreign and domestic investors and state officials to conduct meetings and negotiations in the UAE.

Another benefit of international arbitration is confidentiality, a significant issue for foreign and investors, particularly those operating in certain industries such as in the mining and military sectors where the confidentiality of information and trade secrets plays an important role in the protection of investments.

International arbitration enables parties to select expert arbitrators who have specific subject matter knowledge. This enables the parties to instruct expert arbitrators in specialist fields, such as mining and the military, to assist in the resolution of a dispute.

Despite the attraction of arbitration in Afghanistan, there may be practical issues and drawbacks to using international arbitration to resolve disputes in the country. For example, enforcing an arbitral award through the Afghan courts may prove to be a difficult process and it is also possible that enforcement would not be successful where the other party or assets are located in an insecure region of Afghanistan which is outside the reach of the central government and courts, or where the dispute is against a powerful individual with political, legal or financial leverage on the institutions of the state. That said, an internationally enforceable arbitral award may have other wide-ranging benefits, including enforcement in a variety of jurisdictions which have signed up to the New York Convention.

There is no doubt that international arbitration would provide foreign and domestic investors with significant and wide-ranging advantages and could play a vital role in attracting and maintaining greater investment in the country. However, a major obstacle to the success of arbitration remains its use by investors, the Afghan state and Afghan-based businesses. Nonetheless, international arbitration is ripe for resolving disputes in Afghanistan as an alternative to Afghan court proceedings.

Afghanistan's economy, undeniably, stands to benefit significantly from the expansion of arbitration as a method for resolving disputes. Foreign investors would consider legal certainty and an effective dispute resolution mechanism as a significant factor in deciding whether to invest in the country.

Damian Crosse and Tamim Momeni are litigation and arbitration experts at Pinsent Masons, the law firm behind Out-Law.com