Orient v SNGPL – Enforcement of Foreign Commercial Arbitral Award in Pakistan

Orient Power Co Ltd v. Sui Northern Gas Pipelines Ltd – Enforcement of Foreign Commercial Award in Pakistan: Encouraging Trend of Enforcement, Discouraging Arbitral Practice(s)

Orient Power Co. Ltd. v. Sui Northern Gas Pipelines Ltd.[1]:

The parties entered into a Gas Supply Agreement (GSA) which contained a take-or-pay clause as well as a payment agreement, according to which SNGPL was to supply a stipulated quantity of gas to Orient. In return, a payment of money was to be made by Orient to SNGPL. Certain disputes arose between the parties which caused them to invoke the arbitration clause. A request for arbitration was filed before the London Court of International Arbitration (LCIA) by SNGPL. Accordingly, an arbitrator was appointed and terms of reference (TORs) for the arbitration proceedings were settled. As per the parties’ agreement, the seat of arbitration was London and the procedure of arbitration was to be governed by the LCIA Arbitration Rules 1998. The applicable substantive law according to which the GSA was to be interpreted and construed was identified to be the law of Pakistan, as stipulated under the governing law clause in the GSA:

Section 21.2 Governing Law

The terms of this agreement shall be governed by and interpreted and construed in accordance with the laws of Pakistan.

Thereafter, the proceedings commenced and the parties presented their respective versions before the arbitrator. One of the disputes between the parties was whether Orient was liable to pay an amount of PKR 603,202,083 to SNGPL under the take-or-pay clause or did the said clause levy no such obligation upon Orient. Since the take-or-pay clause constituted a part of the GSA, the arbitrator resorted to the law of Pakistan as per the parties’ agreement for the interpretation of the take-or-pay clause. The arbitrator’s findings revealed that he could not find any law in Pakistan which would have helped him interpret the take-or-pay clause. Thus, the arbitrator shifted his recourse to international cases for the interpretation that he sought and consequently decided against Orient, obligating it to pay PKR 603,202,083 to SNGPL. While deviating from Pakistani law, the arbitrator in his award remarked that there was a shortcoming in Pakistani law as it did not address the manner in which the take-or-pay clause should have been interpreted. He observed this in the following manner:

“…I have considered the authorities cited by both counsel on the reception and application of foreign authorities in determining the interpretation and validity of Take or Pay Clauses and am satisfied that as there is a lacunae in Pakistani law with regard to its interpretation and validity, these foreign authorities would although not binding, be of persuasive authority. I am not prohibited by Pakistani law from considering them, indeed, should do so.”

[Emphasis added]

After the award was rendered, it was brought before the Lahore High Court by the award-holder for its enforcement under section 6 of the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011.[2] The Single Judge of the Lahore High Court recognized the award, allowed the enforcement application and ordered for its execution in the same manner as a judgment and decree of the same court.[3] An intra-court appeal against the said order of the Single Judge was filed before the Division Bench of the High Court[4] wherein the award-debtor challenged the vires of the order passed by the Single Judge and further resisted the enforcement of award on the ground that the arbitrator had misapplied the law and surpassed the applicable law while interpreting the take-or-pay clause embedded within the GSA. The award-debtor argued that the take-or-pay clause was, in essence, a penalty clause which, if enforced, would cause unjust enrichment to the award-holder, an aspect which was against the public policy of Pakistan, therefore the clause should not be valid. The award-debtor further argued before the court that the applicable law for the interpretation and construction of GSA was the law of Pakistan which, if had been applied by the arbitrator, would have led to a different outcome of the arbitration due to the relevance of section 74 of the Contract Act 1872.[5] Since the arbitrator had failed to apply the law of Pakistan and had instead applied international cases for the construction of the take-or-pay clause, the consequential award was a result of misapplication of the law and thus could not be enforced. The court, after hearing the award-debtor’s argument, comprehended the issues in the following manner:

“The Appellant … has raised two issues before us with respect to the second claim. First being whether take or pay clause is governed by the law of damages under section 74 of the Contract Act and second, whether the award of Rs. 603,202,083/- is against the public policy of Pakistan.”

Before addressing the above two issues, the court went through case-law of different jurisdictions regarding the validity of the take-or-pay clause as well as the public policy exception given under Article V(2)(b) of the United Nations Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention 1958). After taking persuasive value from foreign case-law (which also found its way into the final judgment of the court), the arguments of the award-debtor were declined in the following manner:

“We also find that take or pay clause is not a penalty clause; that payments of Rs. 603,202,083/- are due to the Respondent for gas actually consumed under the GSA; that the take or pay clause does not offend Section 74 of the Contract Act nor has a case of unjust enrichment been made out. Consequently no ground is made out under Article V(2)(b) of the Convention calling for interference in the Award.”

Whether or not the award of PKR 603,202,083 on the basis of the take-or-pay clause goes against the law of Pakistan is of secondary interest to the students of international arbitration. The preliminary questions relevant to the law and practice of international arbitration include the following:

• First, whether an arbitrator can discretionarily drift from the parties’ chosen law and apply a different law for deciding a dispute. If not, what can be its affect on the enforcement of a consequential award?
• Second, whether passing remarks against the substantive law of any country is a desirable practice in the international arbitration regime. In this case, the arbitrator in his award expressly declared the applicable law (law of Pakistan) to be a deficient one for the interpretation of the take-or-pay clause and circumvented its application in favour of international cases, whereas the parties’ choice of law for the interpretation and construction of GSA had been the law of Pakistan.

The terms of reference reveal that an explicit source of the arbitrator’s authority with regard to the application of law during the proceedings had been the LCIA Rules which stipulated the following under Rule 22.3:

22.3. The Arbitral Tribunal shall decide the parties’ dispute in accordance with the law(s) or rules of law chosen by the parties as applicable on the merits of their dispute. If and to the extent that the Arbitral Tribunal determines that the parties have made no such choice, the Arbitral Tribunal shall apply the law(s) or rules of law which it considers appropriate.

[Emphasis added]

According to the above, the arbitrator was bound to apply the parties’ chosen law to resolve the merits of their dispute and could only apply a different law where no such choice had been made. The arbitrator had applied a law other than the one agreed upon by the parties.

The honourable Lahore High Court throughout its judgment has not discussed the vires of the surpass made by the arbitrator while applying a law other than the one agreed upon by the parties. However, with regard to the remarks made by the arbitrator about Pakistani law, Justice Shahid Jamil Khan in a concurring note disagreed with the findings of the arbitrator who had observed in the award that there was a ‘lacuna in Pakistani law’ concerning the concept of take-or-pay clause. His lordship held that in doing so the arbitrator had ignored the words and spirit of the New York Convention.

In Dallah v. Pakistan,[6] the English Supreme Court had refused to enforce an award rendered by the ICC Tribunal in Paris on the ground that the tribunal, in absence of express choice of law by the parties, had determined the validity of the arbitration agreement on the basis of transnational general principles and usages and not the law pertaining to the seat of arbitration i.e. French law, which was the parties’ implied choice as they had picked Paris as the seat of arbitration. Enforcement of the award was refused despite the expert evidence before the English court endorsing the view that the French law recognized the applicability of transnational principles to determine the existence, validity and effectiveness of an international arbitration agreement. The enforcement action brought before the court had still been declined due to the tribunal’s departure from the parties’ implied choice of law.

In Orient v SNGPL, the Lahore High Court, on an identical issue, seemed to have taken a stance different than that of the English Supreme Court in the Dallah case.

On a separate note, the remarks regarding Pakistani law passed by the arbitrator in the award emphatically refresh the memories of three inhospitable awards rendered in the middle of the twentieth century, wherein unfriendly words had been used by the arbitrators for the law(s) of Arab countries. The disregard shown for laws in the three awards had generated resentment within the Arab ruling class towards international arbitration. The first in the queue was the award passed in Sheikh Abu Dhabi v. Petroleum Development Ltd,[7] delivered in 1951 by Lord Asquith of Bishopstone. After stating in the award that if any national legal system were to be applicable it had to be of Abu Dhabi, he held the following:

“But no such law can reasonably be said to exist. The Sheikh administers a purely discretionary justice with the assistance of Koran, and it would be fanciful to suggest that in this primitive region there is any settled body of legal principles applicable to the construction of modern commercial instruments.”

Following the above, Sir Alfred Buckwill delivered another award in Ruler of Qatar v. International Marine Oil Co. Limited.[8] Excluding the applicability of Qatari law and taking support of the earlier award rendered in the Sheikh Abu Dhabi case, he observed the following:

“This is a cogent reason for saying that such law does not contain a body of legal principles applicable to a modern commercial contract.”

The third award was the one rendered in Aramco v. Government of Saudi Arabia,[9] passed by an arbitral tribunal chaired by Georges Sauser-Hall. The tribunal refused to apply Muslim law because the tribunal was not in a position to interpret the rules of fiqh and Hanbali lslamic law applicable in Saudi Arabia. The tribunal observed that Hanbali law contained ‘no precise rules about mining concessions and a fortiori about oil concessions’.

The above three awards had dreadful effects on the development of international arbitration in the Arab world as they created a feeling of distrust among the Arab legal community towards international arbitration. Moreover, after the Aramco award was passed, the Saudi government through a ministerial decree promptly restrained all public corporations in the state from submitting to any foreign law, foreign court, or foreign arbitration.[10] Even though the sentiment against international arbitration has faded over time, it has carved a message that hostility towards the laws or legal systems of developing countries can create barriers between legal cultures of the developing and developed states.

Pakistan, at this stage, has a lot of potential for future economic development, where local as well as foreign parties are likely to be relevant stakeholders in due course of time. It is obvious that the parties coming from foreign countries will want to rely on international arbitration as a means of dispute settlement for it is the most developed and sophisticated mode of resolving cross-border disputes. If its image is already tarnished before the legal community of Pakistan, foreign parties will very likely come across difficulties in negotiating dispute resolution clauses with Pakistani parties. As international arbitration continues to develop in Pakistan, it should be portrayed as a more reliable, neutral and equitable mode of dispute resolution instead of one that is hostile and disrespectful. Additionally, domestic laws of countries should at least be addressed with more grace and honour. In the words of Professor Pierre Mayer,

“…an arbitrator should consider that it is his duty, not a legal one but a professional one, to comply with the law, and even to approach the law with respect. This is precisely what parties providing for arbitration, and individual national states, expect of him.”[11]

As far as the concurrent enforcement orders of both the benches of the honourable Lahore High Court are concerned, they appear to be in line with the pro-enforcement policy of the New York Convention which encourages enforcement and discourages the lack of enforcement of foreign awards.

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References

[1] Orient Power Co. Ltd. v. Sui Northern Gas Pipelines Ltd., 2019 CLD 1082

[2] The Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011 (XVII of 2011) of Pakistan

[3] SNGPL v. Orient Power Co. Ltd., C.O.S. No. 16/2017 – Final order of the Single Bench dated April 04 2018

[4] Orient Power Co. Ltd. v. SNGPL, ICA No. 210640/2018

[5] The Contract Act, 1872 (IX of 1872) of Pakistan

[6] Dallah v. Pakistan, [2010] UKSC 46

[7] Sheikh Abu Dhabi v. Petroleum Development Ltd., [1952] ICLQ 247

[8] Ruler of Qatar v. International Marine Oil Co. Ltd., [1953] Int’l Law Rep., vol 20. p 534

[9] Aramco v. Government of Saudi Arabia, (1963) 27 Int’l Law Rep. 117

[10] Council of Ministers, Decree No 58 of 17.1.1383

[11] Pierre Mayer, International Arbitrator’s Duty to Apply the Law in Julian D M Lew and Loukas A Mistelis (eds.) Arbitration Insights: Twenty Years of the Annual Lectures of the School of International Arbitration (Kluwer Law International 2007) 289-305

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