Foreign direct investment (FDI) is a key driver for the economic development of an emerging country like Bangladesh. There are several methods to inject FDI into a country, but the most popular structure is either through cross-border joint ventures or through the direct acquisition of shares in local companies.
FDI in Bangladesh is attractive due to the country’s economic growth and the existing investment climate. Bangladesh also offers strong domestic laws that are in favor of foreign investors.
For this guide for Japanese investors, the author highlights some areas of dispute resolution that are essential for foreign investors to keep in mind and negotiate with their local counterparts when considering investing in Bangladesh.
Section 4 of the Foreign Private Investment (Promotion and Protection) Act 1980 states that the government shall accord fair and equitable treatment to foreign private investment, which shall be afforded protection and security total in Bangladesh.
However, this protection may not extend to the private level and regulate the relationships of commercial parties involved in FDI. Therefore, it may be fair and reasonable for foreign investors to be concerned about their investments – and whether their investments will receive adequate legal and fair protection.
A critical concern for foreign investors is to determine an appropriate dispute resolution mechanism between the parties. In many joint ventures and acquisitions, a significant part of the negotiations is devoted to the dispute resolution clause. Indeed, the dispute resolution mechanism will ultimately regulate the relationship between the parties involved in the FDI, and their rights, responsibilities and obligations will directly depend on such a clause.
Securing an appropriate dispute resolution tool is essential so that the parties involved can benefit from a quick and efficient legal process. If a dispute arises in connection with joint ventures or acquisitions, it shall be resolved by litigation or arbitration.
Disputes in Bangladesh are fraught with delays and as a result, foreign investors generally tend to prefer arbitration as the preferred method of resolving cross-border business disputes. The arbitration procedure is flexible and allows the parties autonomy in resolving their disputes while keeping the conflict confidential.
RIGHT OF ARBITRATION
Arbitrations in Bangladesh are governed by the Arbitration Act 2001, which is largely based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law of 1985 on International Commercial Arbitration. The sections of the law on the definition of arbitration agreements, number of arbitrators, party autonomy, etc., are similar, often verbatim, to the model law.
However, the law did not adopt all the provisions of the model law. In addition, it should be noted that Bangladesh is a party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).
Inspired by both the New York Convention and the Model Law, the Arbitration Act introduced the mechanism for recognition and enforcement of foreign arbitral awards. Accordingly, a foreign arbitral award means an award made under an arbitration agreement in any country other than Bangladesh.
Section 45 of the Act makes a foreign arbitral award binding on all parties to the arbitration agreement. Such an award can be enforced by local courts in Bangladesh as if it were an order of a local court. However, such enforcement is subject to the exceptions provided in Article 46, where legislators have limited the grounds on which the local court may refuse enforcement of a foreign arbitral award.
The grounds provided for in Article 46 include, among others: the incapacity of the parties to the arbitration agreement; nullity of the arbitration agreement under the law to which the parties have subjected it; the subject matter of the dispute cannot be settled by arbitration under the laws of Bangladesh; and the recognition and enforcement of the foreign arbitral award is contrary to the public policy of Bangladesh.
While the above-mentioned grounds are provided to check for improper arbitral awards, they also provide wide leeway for Bangladeshi courts to fetter the enforcement of foreign arbitral awards by interpreting them too broadly.
Although the idea behind arbitration is to avoid recourse to local courts, such clauses are not meant to replace the role of the courts in their entirety. The need for judicial intervention becomes crucial when a matter is urgent and requires immediate attention. For example, court intervention is imperative where a party refuses to comply with any order of the arbitral tribunal, or where either party is in need of immediate relief, and there is no no arbitral tribunal yet in place.
Such judicial intervention generally occurs under Section 7A of the Act, which provides that the courts of Bangladesh may take such interim protective measures as may seem reasonable or appropriate before or during the continuation of the arbitral proceedings, or until the enforcement of any domestic or foreign arbitration award.
In this regard, it is essential to note that Article 3 embodies a restrictive “territorial principle”, according to which only arbitration considered to take place in Bangladesh falls within the scope of the law. This means that if the seat of arbitration is in the territory of Bangladesh, the law will apply. The parties will not be able to avail themselves of the interim remedies provided for in Article 7A if the arbitration proceedings do not take place in Bangladesh.
But section 3 of the law has caused considerable confusion in the local arbitration scene. In the case of HRC Shipping v MVX-Press Manaslu and Others, the High Court Division of the Supreme Court of Bangladesh opted for a broad interpretation of the term “place … in Bangladesh” under Article 3. It held that the law was drafted, in spirit of establishing a uniform legal framework, for the fair and efficient resolution of disputes arising from international commercial arbitration, as set out in the Model Law.
On the other hand, in a subsequent judgment delivered in STX Corporation v Meghna Group of Industriesanother bench in the High Court Division adopted a literal interpretation of Article 3(1).
In support of such an interpretation, the chamber of the tribunal de grande instance cites the case of Unicol Bangladesh v Maxwellwhere the Supreme Court Appeals Division held that Article 3(1) is of limited application with respect to arbitration taking place in Bangladesh.
Thus, it can be seen that the Bangladeshi courts have come to conflicting decisions on the determination of the scope of the law, namely Section 3. The decision in the STX Corporation case confirmed that the Bangladeshi courts are not in able to issue interim measures, even to support the arbitration proceedings, if the arbitration does not take place in the country. On the contrary, the HRC Shipping case previously took a more liberal view of Article 3 and held that it would apply even when the place of arbitration is outside of Bangladesh.
These conflicting views and interpretations have caused considerable uncertainty and anxiety among foreign investors involved in cross-border arbitration proceedings with Bangladeshi companies, as it is unclear what assistance Bangladeshi courts might provide in such proceedings.
The question of the scope of the law arose again in the fairly recent 2019 case of SSouthern Solar Power and Others v Bangladesh Power Development Board and Otherswhere the High Court division set the current and latest trend.
In the Southern Solar case, in stark contrast to the views expressed in the STX Corporation case, the High Court division reverted to the position taken in the HRC Shipping case – holding that it has jurisdiction to consider a claim under Section 7A, even with respect to arbitration taking place outside of Bangladesh.
The High Court division said the wording of section 3 did not seek to oust its jurisdiction over foreign seated arbitrations. Absent any use of prohibition language, the relevant provisions of law may apply.
The comments made in the Southern Solar case appear to be a bold and fearless step from the more conservative and restrictive view taken in the STX Corporation case.
Foreign investors and the international community can therefore take great comfort from the Southern Solar decision. In line with this case, it is expected that the legislature may also take steps to amend the arbitration law to remove any existing uncertainty.
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