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The document discusses the importance of upholding the sanctity of contracts. It begins with defining sanctity of contract as parties honoring their obligations under a valid contract. It then discusses how courts play a key role in ensuring sanctity of contracts. The document also discusses how globalization has increased the need to respect transnational contracts to facilitate international trade and foreign investment. It provides examples of how upholding contracts is important for Pakistan's economy through increased trade and foreign direct investment.
Originalbeschreibung:
A Project of Business Law Describing the Importance of Contract in Business Transactions....
The document discusses the importance of upholding the sanctity of contracts. It begins with defining sanctity of contract as parties honoring their obligations under a valid contract. It then discusses how courts play a key role in ensuring sanctity of contracts. The document also discusses how globalization has increased the need to respect transnational contracts to facilitate international trade and foreign investment. It provides examples of how upholding contracts is important for Pakistan's economy through increased trade and foreign direct investment.
The document discusses the importance of upholding the sanctity of contracts. It begins with defining sanctity of contract as parties honoring their obligations under a valid contract. It then discusses how courts play a key role in ensuring sanctity of contracts. The document also discusses how globalization has increased the need to respect transnational contracts to facilitate international trade and foreign investment. It provides examples of how upholding contracts is important for Pakistan's economy through increased trade and foreign direct investment.
Sanctity of Contract ...........................................................................................................................2
Background .......................................................................................................................................2 Conceptual Contours of Contracts ......................................................................................................2 Manifestations of Sanctity of Contracts ..............................................................................................3 Trade ......................................................................................................................................................... 3 Foreign Investments ................................................................................................................................. 5 Importance of FDI for Infrastructure Development ............................................................................. 6 Common Challenges to Sanctity of Contract .......................................................................................6 Structural Weaknesses of Systems ........................................................................................................... 6 Delay in Disposal of Cases ......................................................................................................................... 6 Nationalism ............................................................................................................................................... 7 Contracts Made by Previous Regimes ...................................................................................................... 8 Onerous Contracts .................................................................................................................................... 8 Public Policy - A Common Source of Challenges to Sanctity of Contracts ................................................ 8 English Courts Views on Public Policy .................................................................................................. 8 Indian Courts Views on Public Policy ................................................................................................... 9 Public Policy in Pakistan ........................................................................................................................ 9 Contemporary Judicial Approaches to Issue of Sanctity of Contracts .................................................. 10 English Courts.......................................................................................................................................... 10 Indian Courts ........................................................................................................................................... 10 Case Laws Relevant to Sanctity of Contract ....................................................................................... 11 HUBCO VS WAPDA (PLD 2000, SC 841) ................................................................................................... 11 Consequences of Illegal Decisions Regarding Sanctity of Contract ...................................................... 16 Suggestions and Recommendations.................................................................................................. 17
Sanctity of Contract Sanctity of contract refers to the principle that the parties to a contract, having duly entered into it, must honor their obligations under it. The sanctity of contract means giving recognition to the contractual framework with appropriate legislation. For example, the procurement of public services is governed by various tendering acts / procurement laws. These laws provided sanctity to contract. Hence, sanctity of Contract is a general idea that once parties duly enter into a contract, they must honor their obligations under that contract. Background The concept of contractual sanctity of contracts has been always important in any society where commercial activities play a significant role in the lives of the people. In ensuring sanctity of contracts, Courts of Law play a critical role. As the Supreme Court of India aptly observes: The basic duty of the court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts which forms the basis of society. The need for ensuring, that contracts are fully respected and all institutions concerned with contractual matters efficiently and effectively contribute to the compliance process, has acquired added importance today. This is due to the special characteristic of the contemporary era which profoundly affects every institution in the society where ever in the world. Law is no longer regarded as an autonomous territory unaffected by the wind of change that is blowing in the world. It is not simply feasible to have a notion of self- contained legal and judicial system. Modern world is greatly influenced by the phenomenon of Globalization which has affected all spheres of life. It has increased interdependence and integration among economies by reducing trade barriers, cost of transportation, ensuring faster communication of ideas and rising capital flows. The globalization of law is based on the globalization of business and trade. Conceptual Contours of Contracts The foundation of the market economy is certain central concepts including legal acceptance of property and system of economic exchanges. The latter cannot efficiently function until contracts could be freely made and effectively enforced. A contract has been defined as an agreement giving rise to obligations which are enforced or recognized by law. The sanctity of contracts is ensured by the instrument of law which means ultimately by judicial or arbitral agencies. The concept of contract has been duly enshrined in Pakistans law i.e. the Contract Act 1872 which provides, among others, rules governing commercial and investment transactions.
Certain issues peculiar to transnational contracts relate to evidence and procedure in case of foreign contracts. In Pakistan, the tradition of the common law system has been followed which has adopted the principle of lex fori (i.e. the law of the forum or of the jurisdiction where the case is pending). The lex fori thus determines and governs how far the foreign law is to be recognized in litigation before Pakistani Courts. The principle is that: the foreign law will apply so far it is not inconsistent with the law of the place where the action is brought: the contract made in a foreign country must be valid according to the law of that country and must satisfy all the formal requirements of that law. A contract which is unlawful by the law prevalent in the country where action is brought but valid where it is made and where it is to be performed will not be treated as invalid by Courts unless it is penalized or prohibited by Statute or contemplates some gross violation of the moral law which the law of no country would sanction. Manifestations of Sanctity of Contracts Manifestations regarding sanctity of contracts are confined to two major facets of international commercial transactions: Trade Foreign Investments Trade The term international trade or transnational trade conventionally refers to exchange of goods and services across international borders. The importance of trade has become all the more important with the integration of economies of developing countries with the world trading system. It has immensely contributed to the development of nations by significantly increasing their gross domestic product (GDP). In case of Pakistan, greater integration with the world economy is reflected by the trade openness indicator, i.e. the trade to GDP ratio. This has increased from 25.8% of GDP in 1999-2000 to 36% of GDP in 2007-2008. If services trade is included, the increase is higher at 42% of GDP in 2007-2008 from 28% of GDP in 1999-2000 reflecting greater degree of openness. Trade among the nations is seen as an important contributor to economic growth, peace and better standard of living. As no country is now an island unto itself it cannot maintain an acceptable standard of living without an increasing volume of trade. In order to fully meet the requirements of Pakistans growing population, there is no option but to import goods and services from abroad in progressively increasingly quantities. To pay for these imports Pakistan has to export goods/services or borrow in foreign exchange. Judged in the proper perspective the contribution of international trade to the welfare of people is an undeniable reality. Changes that took place in the foreign trade of Pakistan and which also attest to its growing importance are set out in table given below:
Exports from and Imports to Pakistan Year (US $ Million)
Exports Imports Total 1980-1981 2,958 5,409 8,367 1990-2000 8,569 10,309 18,878 2000-2001 9,202 10,729 19,931 2007-2008 19,052 39,966 59,018 Sources: Federal Bureau of Statistics, Finance Division
Pakistan has never been an autarky (self-sufficient), cut off form the world but its trade structure has undergone a change with the passage of time. It is no longer an exporter of primary commodities. Its industries both import substituting and export promoting require imported inputs in substantial quantities, hence creditability of Pakistan, as an importer having a reliable and developed system of courts that protects sanctity of contract is important. Lack of credibility would add to transaction costs such as costs of L/Cs and financing. Besides this, a country with a flawed legal system adds to the risk premium and foreign traders would tend to charge higher profits from their Pakistani counterparts. In short, the cost of sourcing imports would be much higher if we fail to ensure the sanctity of foreign purchase contracts. The sanctity of contract is of even greater importance in case of our exports - i.e. foreign sale contracts as our lapses in this regard, will result in the loss of export markets. In sum, international trade flourishes only when, there is a legal system ensuring sanctity of contracts because the legal framework which affects the rights and the obligations of the parties needs to be clear and predictable. Lack of legal certainty about the enforcement of contract thus acts as a barrier to trade. Among other things parties to the contract would like to be sure about the nature and the extent of the obligations they undertake and the remedies available to them should they breach the contractual terms. Given the plurality of legal systems and the variation in liability schemes, harmonization through strong court system is the best option in the context of international commercial transactions.
Foreign Investments Investments in a country, to a large extent, determine the rate of economic growth. Investments, in turn are, a function of savings. The contribution of national savings to the domestic investment is indirectly the mirror image of foreign savings required to meet the total investment demand of a country. In other words the requirement for foreign savings needed to fill up the saving- investment gap can be gauged from the current account deficit in the balance of payments. In Pakistans case national savings at 13.5% of GDP in 2007-08 is the lowest ever level since 1999- 2000 and has financed 61.5% only of fixed investment in 2007-08 leaving a balance of 48.5% for financing by foreign savings. This reveals the extent of a huge gap, dependant on financing from foreign sources. Foreign financing sources include foreign direct investment (FDI) that has emerged as an important source of private external flows for Pakistan just as the case in many other developing countries. Understandably, countries prefer to bridge their widening savings-investment gaps through this non-debt creating inflows. During the last two decades developing countries including Pakistan, have therefore, liberalized their FDI regimes and pursued investment-friendly economic and other national policies to attract investment to maximize the benefits of foreign presence in the host economy. Thus given the proven positive contribution of FDI to higher economic growth the case for sustaining and increasing it has been established. It would be instructive to glance at the figures of foreign investment inflows set forth below: Foreign Investment Inflows in Pakistan (US $ Million) Year Greenfield Investment Privatization Proceeds Total FDI Private Portfolio Investment 2001-02 357 128 485 -10 2005-06 1,981 1,540 3,521.00 351 2006-07 4,873.20 266 5,139.60 1,820 2007-08 5,019.60 133.2 5,152.80 19.3 Source - Board of Investment Pakistan The overall foreign investment during the first ten months (July-April) of the fiscal year 2008- 09 declined by 42.7 percent and stood at $ 2.2 billion compared to $3.9 billion in the correspond period of 2007-08 year. Pakistan needs far greater capital inflows than what it has been getting. It still lags well behind investment destinations in the developing world mainly on account of deficiencies in its investment environment. Its private foreign direct investment levels represent about 1% of GDP, which is quite low relative to the developing world average of 3.7% of GDP. Furthermore, while the business policy environment. Importance of FDI for Infrastructure Development Development and proper maintenance of public infrastructure is indeed a key to sustainable economic growth and development. The infrastructure-economic growth nexus indicates a clear need for increased efforts by developing countries to ensure improved access and quality of services. With a multiplying population and a rapidly industrializing economy, Pakistan faces a colossal challenge in this regard. However there is acute shortage of resources at the disposal of both federal and provincial governments. Limited fiscal space and gaps in public sector capacity to undertake infrastructure projects plainly call for private sector collaboration, with the government to fill up these critical deficiencies. It has become indeed imperative to find innovative methods to bridge this gap. One such method is that of Public-Private Partnership (PPP). This term describes a range of possible relationships among public and private entities in the context of infrastructure and other services. PPP initiatives are being taken in Pakistan by the federal, provincial and city governments to attract private participation in infrastructure projects. Common Challenges to Sanctity of Contract Structural Weaknesses of Systems Experience world over has revealed that a multitude of factors have a bearing on the sanctity of transnational contracts. These tend to result in deviations or incline parties to deviate from the contractual terms and conditions despite the fact that those were agreed consciously and solemnly. Challenges to the sanctity of contracts emanate from various sources including business practices, standard of business ethics, political systems, legislature, governmental authorities and judicial institution. Besides the above factors, special problem arise in cases involving issues of choice of law, choice of forum, plea of forum non-convenience, public policy and the prevalent judicial thinking in respect of foreign jurisdiction particularly arbitrability of international commercial disputes. Delay in Disposal of Cases Delay in administration of justice definitely contributes to ineffective enforcement of contracts. The problem of delay is neither new nor unique. Even the most highly developed countries with advanced legal systems suffer from this problem. If securing re-dressal of ones contractual grievances is extremely difficult in practice, the purpose of putting any provision to safeguard ones interest in a legal document is assuredly defeated. As the old dictum goes Justice delayed is justice denied. The sanctity of contracts, needless to emphasize, in such a situation does not really exist. The views and findings of experts on law and economics in developing countries are worth repeating here:
The belief is growing that the judicial sector in developing countries is ill-prepared to foster private sector development within a market system. Research has revealed that in several developing countries a large number of court users are not much inclined to bring commercial disputes to courts. The enhancement of the capability of the courts to satisfy the peoples demands for justice particularly in such cases a challenging and important aspect of judicial reform in developing countries. There is a clear nexus between the level and the pace of foreign investments and the quality of judicial system. Chief Justice Iftikhar Muhammad Chaudhry highlighted this fact as a far back as 2005: Existence of courts and their independent functioning not only gives a sense of security to citizens but also provides protection to foreign investors. Recent National Judicial Policy has given priority to cases closely related to economic development and good governance including disputes pertaining to trade, commerce and investment. Nationalism Nationalistic sentiments in host countries can create at times problems with foreign investments. This can be particularly so when the host economy is experiencing economic or political stress. Prosperous foreign investors in such a situation are perceived to be exercising excessive control over the economy. Repatriation of profits contractually agreed, can become easy targets of xenophobic nationalism. As pointed out by respected scholars of international trade law: Foreign investors become ready targets for opportunistic politicians who may see advantage in such a situation to bring about a change of government. It is also easy to deliver the promise of taking over or divesting ownership of established foreign-owned plants. It is a popular measure which would cause immediate appeasement of nationalistic forces. The Pyramid Arbitration Case from Egypt illustrates the manner in which nationalistic feelings may engineer a foreign investment dispute. The government of President Sadat relaxed rules on the admission of foreign investments in Egypt. One foreign enterprise via Southern Properties Private Limited (SPP) entered into an agreement with the Egyptian Government Tourist Corporation to build a tourist complex near the pyramids. The company had commenced building when an outcry arose about the building of such a project so close to a historical monument. The matter was raised in Parliament frequently. After the assassination of President Sadat, the incoming government found it prudent to stop the construction of the complex. The dispute resulted in protracted arbitration proceedings before several tribunals. The arbitration gave rise to litigation concerning the enforcement of awards in several states. The confidence of foreign investors as a consequence suffered considerably and took many years to gather momentum again. Contracts Made by Previous Regimes Threat to sanctity of contracts also arises frequently when there are unstable regimes (this problem has been arising only in developing countries). At times when the change of a regime takes place the incoming government may wish to change the contracts made with foreign investors by the previous governments. This often happens, particularly, where allegations of corruption were leveled in the making of the contracts or where the legitimacy of the previous government had been doubted by the incoming government. The moral is that a foreign investor making an investment under a contract with an unrepresentative regime does so at its own peril because the new government may claim a right to rescind such contracts. Likewise, contracts made with military regimes are also suffused with risks as the incoming democratic regime may declare that it is not bound by them. In Pakistan after the ouster of a government that had entered into contracts in PPP format, with Independent Power Producers (IPPs) the incoming government started a review of those contracts, generating a lot of uncertainty in energy sector and creating an unenviable situation from the perspective of sanctity of contracts. Onerous Contracts Challenges to contractual sanctity also arise if these contracts are inherently of onerous-nature. In such cases performance may become onerous due to subsequent developments. In such circumstances, governments of host countries may seek to reduce the loss if the contract is implemented as originally agreed. The host countries tend to use legislative instruments to interfere with the contract. A good illustration would be the case of Settebello Ltd. v. Banco Totta Acores, [1985]1 WLR 1406, where a state-owned shipyard in Portugal had contracted to build an oil tanker. There were penalty provisions in the agreement for the late performance. Being behind schedule it was in the danger of having to make large payments for its default. The Portuguese government intervened through legislation and altered the penalty provisions of the contract. The other party found that it could not have any remedies against this change both within and outside Portugal. The sanctity of the contract was violated with impurity which saved the shipyard from penalty payments but it affected the credibility of the government of Portugal in the eyes of foreign investors. Public Policy - A Common Source of Challenges to Sanctity of Contracts Courts all over the world in some cases have been letting parties to escape from the contractual obligations on the ground that the agreements made by them (through freely and willingly) were unlawful being opposed to public policy. The implication of the concept in its broadest sense is that considerations of public interest may require the courts to depart from their primary function and refuse to enforce a contract. English Courts Views on Public Policy In the English law a contract is struck down if a court holds it to be opposed to the public policy. However, in this regard, there are fairly well established parameters. For example a contract of marriage brokerage, the creation of perpetuity, a contract in restraint of trade, a gaming or wagering, or assisting of the enemies, are all unlawful on the ground of public policy. Courts are required to rely on the well settled heads of public policy and to apply those to varying situations. If a contract fits into one or the other of these pigeon-holes, it may be declared void. The court is, however, allowed to mould the well-settled categories of public policy to suit new conditions of changing world. Yet the principle of public policy rendering a contract void holds ground if parameter of rules is fully respected and strictly construed. But as observed by Lord ATKIN, The doctrine should only be invoked in clear cases in which the harm to the public is substantially incontestable and does not depend upon the idiosyncratic inference of a few judicial minds. Indian Courts Views on Public Policy The Indian Courts mostly adopted the English view. An important case is that of Gheru Lal vs. Mahado Das, (1959) 2SCA369, where the court held: Public Policy or the policy of the law is an elusive concept. It has been described as an untrustworthy guide of, variable quality and an untruly horse. The doctrine of public policy embraces not only harmful cases but also harmful tendencies. Public Policy in Pakistan The provision of law adopting the principle of public policy in Pakistan is enshrined in section 23 of the Pakistani Contract Act 1872 which provides: The consideration or object of an agreement is lawful, unless it is forbidden by law; or the Court regards it as immoral, or opposed to public policy. In interpreting the term public policy Pakistani courts have been also, by and large following English courts. In Manzoor Hussain and Others vs. Wali Muhammad and Abdul Shakur, PLD 1965 SC 425, the Supreme Court observed: It is now well-settled that the provisions of section 23 of the Contract Act have to be construed strictly and the Courts should not invent new categories or new heads of public policy in order to invalidate a contract.
In the case of the Lloyds Bank Ltd. Karachi, PLD 1969 SC 301, the Supreme Court observed that the duty of the Court is to explain and not to expand public policy and the doctrine of public policy should be invoked only in clear cases, in which the harm to the public is substantial and does not depend upon the idiosyncratic inferences of a few judicial minds.
Contemporary Judicial Approaches to Issue of Sanctity of Contracts English Courts The approach of English law had been moulded to a considerable extent by its largely laissez faire attitude to contracts in the domestic law. The 19th century position can be summed up by quoting Jessel MR in Printing and Numerical Registering Co. v Sampson, (1875) LR19 Eq 462, p465, If there is one thing more than another which public policy requires, it is that men of full age and competent understanding shall have the outmost liberty in contracting, and that their contracts, when entered into freely and voluntarily, shall be held sacred and shall be enforced by courts of justice. One of the land mark cases making a point of departure was that of Atlantic Star, [1974] AC 436. The facts of the case were as follows: the Atlantic Star, a Dutch Container Vessel, was involved in a collision in Belgian internal waters in which two barges were sunk. In consequence, several actions were begun in Belgium. An owner of a Dutch barge began Admiralty proceedings in rem in England. The owner of the Atlantic Star applied to have the proceedings stayed. The majority in the House of Lords felt that it should be acknowledged that an equivalent level of justice might be obtainable in other jurisdictions. Lord Reid observed It was time to develop the common law and render it less reminiscent of the good old days, the passing of which many may regret, when the inhabitants of this island felt an innate superiority over those unfortunate enough to belong to other races. Indian Courts The Supreme Court of India held that the parties may, by agreement, select one of the two competent Courts for the disposal of their disputes. Parties to a contract can choose between one of several Courts having concurrent jurisdiction. A term in a contract between A and B living in places at C and D respectively that all suits arising out of it should be filed only in Court at D is not illegal. Where a clause in a contract stated that any legal action arising out of the contract would be taken at C Court, though normally Courts at C and D would both have jurisdiction, the effect of the agreement is to prevent the parties absolutely from filing the suit in Court at D. where the parties to a contract agreed to submit the dispute arising from it to a particular jurisdiction which would otherwise also be a proper jurisdiction under the law, their agreement to the extent they agreed not to submit to other jurisdiction cannot be said to be void as being against public policy
Case Laws Relevant to Sanctity of Contract HUBCO VS WAPDA (PLD 2000, SC 841) In 1985, the Government of Pakistan (GOP) invited the private sector to develop thermal power plants to generate and supply electricity to the Water and Power Development Authority (WAPDA), the state-owned power utility. While preliminary studies began on the Hub Power Project in 1987, the project reached financial close only in January 1995. It eventually involved a group of foreign sponsors from five different countries; the World Bank, both as a lender and a guarantor. It was completed slightly under budget and on time with net capacity of 1200 MW. The project was owned by a public company incorporated in Pakistan whose shares were listed on the stock exchanges in Pakistan. The GOP provided Hubco a sovereign guarantee of the financial obligations of certain of the state entities involved, including WAPDAs, as the power purchaser, under a 30-year power purchase agreement (PPA). Once the plant began supplying energy, WAPDA found that it had to pay, on the nail, monthly capacity payments because of the arrangements under the PPA, payments that it could not sustain without itself collapsing, not least because of its own inability to recover its bills from government, industry and private consumers and its own huge transmission and distribution losses. Moreover, massive devaluation of the Pakistan Rupee: under the PPA, WAPDA was obligated to pay for power in Rupees and must index certain elements of the capacity payments for dollar devaluation to ensure the investors a real dollar IRR of 18%. Payments to Hubco (and other IPPs as they came on line) flourished until they constituted a dangerously high proportion of WAPDAs revenues. In 1996 Benazir government was dismissed under the allegations of corruptions and incoming Nawaz Sharifs regime started an accountability campaign against it. Hubco and other power projects being the largest investment portfolios came under the investigation. On 18 April 1998, the Nawaz Sharif Government promulgated the Eradication of Corrupt Business Practices Ordinance. This Ordinance was targeted only at the power sector. It required a sworn statement from the chief executive of any company which had entered into a power sector contract with any government entities that neither the Company nor its directors, officers or sponsors had committed any corrupt business practice in obtaining such contract. If, on investigation by a person appointed by the Government, the declaration was found to be false, the Government was empowered to declare such a contract void without any adjudication by an impartial tribunal. Hubco and the other IPPs filed the required declarations on time. On 8 May 1998 a constitutional petition was filed in the Lahore High Court (LHC) against the Company. The Petitioner, Mr. Qureshi, challenged the decision of the GOP and WAPDA to enter into the PPA with Hubco on the grounds that the tariff was discriminatory in favour of the Company. The petition also accused the GOP, WAPDA of acting in bad faith and of having fixed a tariff, which was unjustifiable. At the request of Mr. Qureshi, the LHC issued interim orders on 11 May 1998 which prohibited the Company from making any repatriation of funds outside Pakistan. The Accountability Bureau also wrote to the State Bank of the same day, shortly after the order was made, quoting the order and directing the State Bank to ensure its compliance by all banks and financial institutions. It also separately required the Company to disclose immediately the balances in all its bank accounts. The very next day the Accountability Bureau, claiming to investigate the truth of the Companys declaration under the Eradication of Corrupt Business Practices Ordinance, demanded that all the major documents of the Company be produced before the Bureau in Islamabad.
A week later, Mr. Qureshi was back in the LHC, requesting that the capacity purchase price (CPP) paid by WAPDA be reduced to Rs. 845 million per month on the basis of a comparison with another allegedly similar power project. The court did not grant the relief sought but instead passed a more draconian order: that a unitary tariff of Rs. 1.50 per unit be paid by WAPDA to the Company. The Company applied to vacate these orders but was unable to obtain a suitably early date for hearing. Meanwhile WAPDA filed its response, in which the amendments to the PPA, which had occurred during Benazirs government, were attacked for having been obtained fraudulently; it was alleged that the persons who agreed the final tariff with Hubco were forced by higher officials. A week later, Mr Qureshi was back in the LHC, requesting that the CPP paid by WAPDA be reduced to Rs. 845 million per month on the basis of a comparison with another allegedly similar power project. The court did not grant the relief sought but instead passed a more draconian order: that a unitary tariff of Rs. 1.50 per unit be paid by WAPDA to the Company. The Company applied to vacate these orders but was unable to obtain a suitably early date for hearing. Meanwhile WAPDA filed its response, in which the amendments to the PPA, which had occurred during Benazirs government, were attacked for having been obtained fraudulently; it was alleged that the persons who agreed the final tariff with Hubco were coerced by higher officials. It was also stated that the WAPDA official signing the second amendment agreement had no authority to do so. This laid the ground for the dispute between Hubco and WAPDA. The Company appealed directly to the Supreme Court of Pakistan (SCP). The SCP amended the high courts orders so as to grant no more than what Mr. Qureshi had in fact sought. WAPDA was therefore directed not to pay more than Rs. 845 million per month for the capacity charge plus energy charges and Hubco was restrained from distributing its profits. In the event this provided the Company sufficient funds to continue running the company and not to default on payments to its lenders but there was not enough to pay the shareholders any more dividends. In the course of the hearings, the SCP had expressed the view that the matter should be resolved through negotiations. Meetings were therefore held from 11 June 1998 with the Accountability Bureau and WAPDA to resolve the dispute. At one of those hearings, the court required WAPDA to take a clear stand; in response, WAPDA filed a statement that Amendment No. 2 to the PPA was illegal and void and that it was not bound by it. Shortly thereafter, the Attorney General also informed the court of GOPs decision not to hold any further negotiations with the Company. The Company was left with no option but to seek a resolution of the dispute through the dispute resolution process provided in the PPA. Accordingly, on 9 July 1998, the Company filed a request for ICC arbitration in London seeking a declaration that Amendment No. 2 to the PPA is valid and that WAPDA is bound by its terms. At the beginning of June 1998 the provincial Government of Baluchistan also took a number of actions against Hubco, including the issue of notices alleging legal violations in relation to the property registration and acquisition of the plant site and environmental violations. In August 1998, a foreign national and a former consultant to the Project, was detained against his will for almost a month and questioned intensively by the Accountability Bureau. During this time the Tax Authorities also raised various tax demands against the Company and sought to freeze the Companys bank accounts. On 3 September 1998, WAPDA filed two criminal complaints against company. The first alleged fraud and criminal conspiracy among them to cause wrongful loss to WAPDA and GOP and corresponding wrongful gain to the Company while the second (made only against the chief executive and finance director of Hubco) alleged meter tampering and theft of electricity. Meanwhile Hubco remained blissfully unaware of the existence of these complaints and its directors, acting in the belief that GOP and WAPDA also wanted a reasonable commercial settlement, continued to discuss the tariff and related matters with WAPDA during the period between June and September 1998. A written offer to reduce the tariff was made on 9 September 1998. On 6 October 1998 a meeting was held with the authorities to discuss the Companys offer. A team of senior board members led by the Companys Chairman flew to Islamabad to attend the meeting. Without any substantive discussions on the Companys offer, it was rejected out of hand. On 8 October, the Company was informed that the GOP wished to exercise its right to an audit under the Implementation Agreement (IA) and a leading firm of chartered accountants was appointed for the task. On 11 October, the then Prime Minister, Nawaz Sharif, in a speech on prime-time national television directly accused the Company of perpetrating a massive fraud on the country to the tune of some ten billion rupees. At the same time he announced a cut in electricity consumer prices. The same day a letter from WAPDA was delivered to the Company, whereby WAPDA alleged that all the agreements amending the PPA were void ab initio because they were said to have been procured by unlawful means. In addition, WAPDA claimed repayment of sixteen billion rupees allegedly overpaid by it. The Company refuted these allegations and also added these issues to the pending ICC arbitration.
In the light of these developments the Companys apprehension that WAPDA would seek to frustrate the arbitration proceedings by having the dispute adjudicated in the municipal courts appeared to be close to realization. In November 1998 the Company, therefore, filed a suit in the SHC requesting the court to direct WAPDA to proceed to ICC arbitration and to restrain WAPDA from seeking to have the dispute resolved through any proceedings except ICC arbitration. The next four months saw much interlocutory and procedural wrangling, including an appeal by WAPDA to an appellate bench of the high court, which ordered a hearing of all the pending applications. On 16 January 1999, WAPDA also filed a suit against the Company and others in the court of the Senior Civil Judge at Lahore claiming, inter alia, rescission of the agreements amending the PPA, the recovery of seventeen billion rupees, alleged to have been overpaid to the Company, un-quantified damages and other consequential relief. As had already been anticipated, the court was also requested to restrain the Company from proceeding with the ICC arbitration in London and from seeking the recovery of any moneys under the standby letter of credit given by WAPDA to secure its payment obligations under the PPA. The same day an order was passed ex parte restraining Hubco from proceeding with the arbitration and from recovering from the letter of credit. A full hearing was held over several weeks before a single judge of the SHC, and an order was passed on 22 March 1999 whereby, inter alia, the Company was permitted to continue with the arbitration.
As usually happens in these cases, both WAPDA and the Company appealed this order, albeit on different grounds. The Appellate Bench immediately suspended the single judges order, including the direction to proceed to arbitration, at WAPDA's behest. In addition to suspending the order, the Appellate Bench went further and also restrained the Company from proceeding with the arbitration. The Company applied to vacate this order. After extensive hearings, concluding in June 1999, judgment was reserved. Almost two months later the court passed a short order declining to lift the injunction against proceeding with arbitration and stated that it would determine the application along with the WAPDA's appeal. 1999 CLC Karachi 1320 Following the repudiation of the amending agreements, the Company had issued notices to WAPDA under the PPA contending that this was a fundamental breach WAPDA of the PPA which entitled it to exercise its contractual remedy of termination. Corresponding notices were also issued in respect of the Implementation Agreement (IA) to GOP and to Pakistan State Oils, the state-owned fuel supplier, under the Fuel Supply Agreement, as required by the contracts. These notices could have led to the termination of the PPA and, as a consequence, the IA, which would have entitled the Company (and, through the Company, the shareholders of the Company) to compensation as set out in the IA. WAPDA therefore moved the SHC to suspend the preliminary termination notices (PTNs) but its request was refused. When WAPDA persisted in not paying the amounts due under the PPA up to the limit set by the SCPs order (Rs. 845 million), the Company called the GOPs sovereign guarantee on 23 September 1999 in respect of the unpaid sums. The call was met by silence. The Company petitioned the SCP in early September 1999 for leave to appeal against the SHCs order of August 1999 refusing to lift the restraint on the Company proceeding with the arbitration. At about the same time, WAPDA, having failed to obtain relief in the SHC in respect of the PTNs, also filed its own petition to the SCP and applied to have the PTNs, as well as the Companys call on the sovereign guarantee suspended. By an order passed ex parte in chambers by a single judge, further action on the PTNs as well as the call on the guarantee was stayed. A five-member bench of the SCP heard the Companys appeal on various dates over a period of three months between 15 February and 15 May 2000 and on 14 June 2000, by a majority of 3 to 2, dismissed the Company's appeal. The Company was restrained from invoking the arbitration clause in the PPA for the purpose of resolving its tariff disputes with WAPDA through the agreed forum of ICC arbitration. WAPDAs appeal was allowed. The minority allowed the appeal and ordered the arbitration to proceed. The majority found that prima facie the facts alleged by WAPDA rose issues of criminality which public policy required be tried by the domestic courts and not by international arbitrators. Hubcos case was that no matter what the facts, even if there was prima facie evidence of criminal conduct, the requirements of public policy were fully satisfied by the prosecution of the wrongdoers in the pending criminal proceedings and that under English law (the governing law of the contract) and, for that matter, under Pakistan law, the arbitrators were the sole judge of their own competence; that fraud and corruption in the procurement of the amending agreements did not prevent arbitration on the issue as to the effect of those matters on the validity of those amendments. Fortunately for Hubco, as the PPA itself was signed during Nawaz Sharifs first term, WAPDA had been compelled not to disown it or the arbitration clause embedded in it but this pivotal fact, unfortunately, made no difference to the outcome. The majority judgment is a mere six pages long and concentrates on reciting the so-called facts alleged by WAPDA which they found to be the basis for invoking public policy to defeat Hubcos right to arbitration. It contains not a single reference to any case, whether cited for Hubco or WAPDA. By contrast, the minority judgment extends to 62 pages, is fully reasoned and cites a raft of case law.
The judgment in HUBCOs case further aggravated the situation. This case greatly damaged the confidence of investors. As a consequence there occurred a drought in the IPP investments, with disastrous impact on the national economy of Pakistan. For several years afterwards, the IPP program remained stagnant. On the other hand no investment in the public sector was made in keeping with the pro-private sector policy of the government. IPP projects were revived only as a huge power shortage hit the country in 2006-07. As a result, after an interval of several years implementation agreements have been signed with IPPs (both incumbents and new players) to contract about 2,500 MW of capacity by 2009-2010 under second generation PPAs (those signed under Power Policy 2002). Out of these, a majority of IPPs have already achieved financial close. A synoptic view as to the status of IPPs is presented in the table below: Status of IPPs Status Years of Commissioning Number of IPPs Commissioned 1997-2001 15 Commissioned 2002-2007 0 Commissioned 2007-2008 1 Expected 2009-2010 21* Source: Private Power and Infrastructure Board, available at:http://ppib.gov.pk/CommissionedIPPs.htm Consequences of Illegal Decisions Regarding Sanctity of Contract Sanctity of contract is essential to maintain in order to provide assurance to foreign investors about the safety of their investments. Failure to maintain the sanctity of law can pose many challenges to a country, some of which are given below: Foreign investors would be reluctant to make investments in the country Infrastructure of the country could not be developed without foreign investments Economic growth of the country will be halted resulting in economic instability The level of unemployment will increase in the country The standard of living of people of the country will fall down The reputation of the country will be destroyed among the comity of nations Credibility of the state will be on stake if the sanctity of contract is violated
Suggestions and Recommendations Following suggestions should be followed to improve the sanctity of contract in the country: A proper framework should be evolved to ensure the sanctity of contract Local courts should be indifferent regarding the decisions of foreign investment cases Arbitration law in the country should be improved Awareness about the advantages of arbitration should be created among the people of Pakistan ECKHARDT & Co, Marine vs. Muhammad Hanif PLD 1993 SC 42