Reflecting on the Permanent Court of Arbitration’s Award on the Competence of the Court in the Indus Waters Treaty Arbitration (Pakistan v. India)

Part – I

I. Introduction

On July 6 2023, the arbitration tribunal constituted under the Permanent Court of Arbitration (“PCA”) rendered its Award on the Competence of the Court (“Award”) in an arbitration initiated by the Islamic Republic of Pakistan against the Republic of India under Article IX and Annexure G of the Indus Waters Treaty (“IWT”), as part of a preliminary phase of the arbitration proceedings. In these proceedings, Pakistan had requested the PCA to address the interpretation and application of the IWT to specific design elements of the run-of-river hydro-electric projects that India is permitted by the IWT to construct on the tributaries of the Indus, Jhelum, and Chenab, before those rivers flow into Pakistan. In the Award, the PCA rejected each of the objections raised by India (by way of correspondence to the World Bank) and determined that the PCA is competent to consider and resolve the disputes outlined in Pakistan’s Request for Arbitration.

While raising objections to the competence of the PCA via the World Bank, India argued [1] the Court was illegally constituted; [2] a “dispute” which can be taken to the PCA has not arisen; [3] the procedural requirements of Articles IX(3), (4), and (5) of the IWT had not been satisfied; [4] the tribunal has not complied with the procedural requirements of Annexure G of the IWT while constituting the arbitral tribunal; [5] Article IX(6) of the IWT lays down pre-requisites before the initiation of the arbitration which has not been followed; and [6] the formation of the Court was not “necessary”. This piece disagrees with the Award and argues that Article IX of the IWT constitutes a multi-tiered arbitration clause and builds on objections [2], [4], and [5] raised by India.

II. Facts Surrounding the Case

With a Request for Arbitration from August 19, 2016, Pakistan asked the PCA to start the current arbitration process. Then, on October 4, 2016, India asked the World Bank to appoint a neutral expert (a highly qualified engineer) under Article IX and Annexure F of the IWT to answer some questions about design and operation that were almost the same as some of the questions Pakistan asked in its Request for Arbitration.  The IWT gives the World Bank a unique but primarily executive role. In December 2016, the World Bank chose to “pause” the process of selecting the Chairman of the Court of Arbitration and the Neutral Expert to prevent parallel proceedings. This “pause” ended in 2022, and the Chairperson of the arbitral tribunal and the Neutral Expert were then appointed.

III. Dispute Resolution under the IWT in the Past

A. Baghlihar Dam Project

Pakistan opposed this proposal in 1992 after seeing its designs. In 2004, the PIC declared this case unresolvable. After two rounds of discussions, governmental negotiations and diplomatic bilateral talks failed, and in 2005, a neutral expert was brought in to pursue the dispute. In 2007, the neutral expert reached a verdict after two more years and the issue was resolved.

B. Kishanganga Dam Project

In the case of the Kishanganga Dam, Pakistan objected to this project in 1998. In 2010, Pakistan determined that the PIC had been unsuccessful in resolving tensions over this project. Since Pakistan and India (partially) agreed that the dispute did not involve technical issues (per Article IX, the issue is referred to a neutral expert if it involved technical issues), it was directly referred to arbitration at the PCA. The PCA gave its final Award and resolved the dispute in 2013.

IV. Qualifying as a Multi-Tiered Arbitration Clause

A. Doctrine

Multi-tiered conflict resolution rules combine alternate dispute resolution (“ADR”) and arbitration procedures and set up a series of steps to settle a disagreement. These steps are usually conciliation, mediation, an expert’s decision, and then arbitration. By putting a “multi-tiered dispute resolution” language in their Treaty, the parties agree to settle any possible disagreements through these steps first, with the goal that arbitration procedures will only be started if the other steps fail. This framework entails a sequential progression of distinct stages, each characterized by specific procedures such as negotiation, mediation, or conciliation, followed by expert determination, and ultimately, if deemed essential, arbitration. When formulating such provisions, the parties aim to progress to the subsequent stage if their disagreement remains unresolved through the method outlined in the preceding stage (p. 446). Hence, arbitration represents the final recourse, to be pursued solely when the dispute cannot be effectively resolved through preliminary ADR measures.

Commentators have argued that in cases where parties have entered into a binding multi-tiered dispute resolution clause, it is anticipated that a tribunal presented with a dispute prior to the completion of preliminary measures, such as negotiation or mediation, would decline to adjudicate the matter. Hence, in the event that the involved parties have reached a consensus on a legally binding and unambiguous multi-tiered mechanism for resolving disputes, wherein the procedural stages are clearly delineated, and there exists no uncertainty regarding the parties’ intentions, an arbitration tribunal ought to deem a request for arbitration as impermissible. The proponents of this perspective additionally contend that the enforcement of agreements to engage in negotiation or mediation is imperative for ADR. This is because the primary objective of ADR is to foster cooperation between parties rather than fostering opposition, achieved through the utilization of procedures specifically designed to facilitate compromise. In relation to the matter of expert determination, which is recognized as a conclusive process, the agreements to refer the dispute to experts prior to arbitration are regarded as enforceable.

B. Case Law

Due to the lack of PCA jurisprudence concerning multi-tiered arbitration clauses, this piece has analyzed case law from International Chamber of Commerce (“ICC”) arbitral tribunals to showcase jurisprudence for the same in international arbitration. Further, this piece acknowledges that there exists no doctrine of stare decisis in arbitration, however awards or decisions by other arbitral tribunals are illustrative of the implications of a standard form of treaty wording.

Arbitrators have determined that in cases where the language of the dispute resolution clause allows for the voluntary use of ADR, a party has the right to initiate arbitration proceedings at any time it deems necessary. The utilization of the term “may” (not mandatory) in the arbitration clause of ICC Case 10256, and the inclusion of the term ‘however’ (not mandatory) in the arbitration clause of ICC Case 4229, unequivocally indicate the intention of the involved parties to not having any binding requirement to participate in conciliation before the initiation of arbitration proceedings. The presence of ambiguous language in contractual clauses has also resulted in arbitral tribunals determining that the involved parties did not intend to be compelled into reaching a mutually agreeable settlement. Conversely, when a term denoting a sense of duty is employed in conjunction with amicable methods of resolving conflicts, arbitrators have determined that this renders the stipulation legally obligatory for the involved parties. This concept is exemplified in ICC Case 9984, wherein the utilization of the term “shall” (mandatory) necessitates that the involved parties initially endeavor to attain a mutually agreeable resolution. In instances where the arbitrators deemed the amicable dispute resolution provisions to be obligatory, they conducted a factual examination prior to assuming jurisdiction in order to ascertain whether sufficient endeavors had been undertaken to amicably resolve the dispute.

Ahan Gadkari is a Final Year BA LLB Candidate at Jindal Global Law School.

Read more on this topic in the Asian Journal of International Law.