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Table of Contents

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