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Petitioner: KARACHI WATER AND SEWERAGE BOARD through Authorised Representative VS Respondent: Messrs KARACHI ELECTRIC SUPPLY CORPORATION and 3 others
Court Name: Sindh High Court Judge(s): Munib Akhtar Title:KARACHI WATER AND SEWERAGE BOARD through Authorised Representative
vs Messrs KARACHI ELECTRIC SUPPLY CORPORATION and 3 others Case No.:Suit No,1263 of 2011 and C.M. As. Nos.10555,. 10556 of 2011, 2737 of 2012 C.M. As. Nos.10555,. 10556 of 2011 M. As. Nos.10555,. 10556 of 2011 Date of Judgment:2012-04-25 Reported As: 2012 CLD 1225 Result: Application accepted Judgment ORDER ' MUNIB AKHTAR, J.---This suit, at least insofar as Karachiites are concerned, is a clash of giants. The protagonists are Karachi's water utility ("KWSB"), a statutory body in the public sector, and the city's electricity utility, now in private hands ("KESC"). KWSB and KESC are respectively the plaintiff and the defendant No, 1. Squashed between the disputants, and suffering like the proverbial grass beneath fighting elephants, are the hapless people of Karachi. Perhaps fittingly then, and this will be appreciated by those acquainted with the law of contract, the principal legal issue involved is also of great importance. The question is this: can the doctrine of privity of contract in relation to third party benefits be modified, and if so, ought this to be done, and if so, in what manner and to what extent? Privity of contract has been regarded as one the pillars of the law of contract. However, this is no longer true in a great many jurisdictions, including the original home of the common law itself and to a greater or lesser degree the question just formulated has been answered in the affirmative. Should the law of Pakistan also move in the same direction? 2. First however, the facts. Learned counsel for KWSB submitted that the present suit had been necessitated on account of the disconnection of electricity supply by KESC to KWSB in respect of certain facilities, which according to him was entirely unlawful. Stating his case, learned counsel drew attention to the privatization of KESC in 2005. The shares were acquired by certain private investors by means of a share purchase agreement dated 14-11-2005. On the same date, an Implementation Agreement was also entered into between KESC and the Government (technically, the President) of Pakistan ("GOP", the defendant No, 2). This agreement was amended on 13-4-2009
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by an amendment agreement. Referring to various provisions including, in particular, the definition clauses of the three agreements, learned counsel submitted (and this is not in dispute) that the Implementation Agreement was in force at all material times and will continue to remain so till 13- 4-2016. 3. Essentially, the entire case put forward by learned counsel rests on Article II of the Implementation Agreement. This Article needs to be examined in full, but because of its length, has been placed in an annex to this decision. The key provision is Article 2.1, which for convenience is reproduced below:-- "2.1 The parties recognize that the Company has Strategic Customers who, in view of the security considerations, must be supplied electrical power by the Company at all times without interruption in accordance with the requirements of the Strategic Customers from time to time. The Company undertakes not to disrupt, discontinue or reduce the supply of electrical power to the Strategic Customers at any time whatsoever. The Company shall ensure that all equipment (including metering systems) which is required to deliver and record the delivery of electrical power to Strategic Customer shall, at all times, remain in working order so as to accurately and completely deliver and record the delivery of electrical power to Strategic Customers. In the event of any disruption, discontinuance or reduction of the supply of electrical power to any Strategic Customer(s) the Company shall: (a) not later than the next Business Day, as its own cost, take all measures to restore the supply of electrical power to the Strategic Customer(s) in question in accordance with the normal requirements of such Strategic Customer(s); (b) not later than the next Business Day notify GOP and the affected Strategic Customer(s) in writing of the occurrence of any disruption, discontinuance or reduction in the supply of electrical power of the Strategic Customer(s) in question, the reasons therefor and the measures being taken by the Company to ensure the immediate resumption of electrical power to the Strategic Customer(s) in question together with a forecast of the time required to ensure such resumption; and (c) not later than the next Business Day notify GOP and the affected Strategic Customer of the resumption of the supply of electrical power to the Strategic Customer(s) in question in accordance with the usual requirements of such Strategic Customer(s)." It is not in dispute that KWSB is a Strategic Customer within the meaning, and for the purposes. Of the Implementation Agreement. (Any capitalized terms used herein, but not defined, have the same meaning as in the Implementation Agreement.) 4. Learned counsel submitted that on a bare reading of Article 2.1, KESC was prohibited from disrupting, discontinuing or reducing the supply of electricity to KWSB, and it could not resile from this fundamental obligation. The attempts by KESC to do so were therefore entirely unlawful and KWSB was entitled, inter alia, to suitable injunctive relief, both interim and final. The reason given by KESC for disconnecting electricity (or threatening to do so) was that KWSB owned around Rs,17 Billion to the former. Learned counsel took issue with this amount. It may be noted that while KESC supplies electricity to KWSB, the latter supplies water to the former. Learned counsel placed on record a statement that purported to show KWSB's payment position vis-a-vis KESC. As per this statement, rather than KESC being a creditor, an amount of around Rs, 8.5 Billion was payable or refundable by it. But this was very much a subsidiary submission of secondary importance, and no further attention shall be paid to it. The primary submission. Even as regards to payments, was centered on Article II of the Implementation Agreement. Learned counsel read through the entire Article and submitted that it contained a detailed and exhaustive mechanism whereby, if there was any default by a Strategic Customer in making payment to KESC, it was GOP which was to
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make the payment. An elaborate mechanism was provided in this regard to which learned counsel referred. He relied in particular on Article 2.9, which is reproduced below for rendy reference: "2.9. The Parties agree that the compensation methodology set out in this Article II represents the full and final amount payable by the Strategic Customer to the Company in the manner and method set out herein and the Company: (a) agrees that any amount received as compensation under this Article II (whether by way of an Accepted Claim or as the result of a determination by the Expert) shall stand adjusted against amounts due to the Company from Defaulting Strategic Customer; (b) agrees that no interest, profits or mark up shall be payable on any amount due to the Company from a Defaulting Strategic, Customer; (c) hereby waives to the fullest extent permitted by the Laws of Pakistan any further or additional claims it may have against the Defaulting Strategic Customers in respect of any amounts due to it in addition to the amounts set out herein; and (d) agrees that the amount of compensation set forth in this Article II is reasonable." Learned counsel submitted that this provision was clear on the face of it. He further submitted that the Implementation Agreement also contained its own mechanism for dispute resolution, including reference to an Expert and arbitration (Article VI). Thus, his case was that Article II was a complete code for regulating the manner in which amounts due and payable by Strategic Customers were to be dealt with, and it was KESC's absolute obligation not to disrupt or disconnect supply of electricity. If at all KESC had any grievance with regard to any non-payment, its sole recourse was to GOP and not against KWSB and certainly not by way of disconnection of electricity supply. KWSB was entitled to interim injunctive relief against KESC, and this was the relief sought by C.M.As. Nos.10555 of 2011 and 10556 of 2011, which are two of the applications being decided today. On 27- 2-2012, when these applications came up for hearing, I had made an interim arrangement. I had granted an interim injunction to KWSB but subject, inter alia, to its depositing a sum of Rs,1 Billion with the Nazir of the Court, and giving a guarantee to his satisfaction in the further sum of Rs,4 Billion within a period of 21 days. Admittedly, KWSB has not complied with this order. The third application, also filed by KWSB, is C.M.A. 2737 of 2012 which seeks recall and vacation of the interim arrangement. Learned counsel submitted that because KESC was absolutely barred from disconnecting electricity supply to Strategic Customers by reason of Article II, KWSB was entitled to interim relief without being put to terms, whether in the manner as directed in the order of 27-2- 2012 or otherwise. 5. One question that arose in respect of the case put forward as above was whether KWSB itself could at all invoke and rely on the provisions of the Implementation Agreement since it was not party to this agreement. In other words, there is no privity of contract between it and KESC. To this question, which was put by me to learned counsel, three answers were given. Firstly, it was contended that precisely because KWSB was a beneficiary in terms of Article II, it could invoke the Implementation Agreement. Secondly, relying on Leigh and Sullivan v. Aliakmon Shipping Co. Ltd. (The Aliakmon) [1986] 2 All ER 145; [1985] UKHL 10, learned counsel submitted that KESC had a duty of care in tort towards KWSB and since it was in breach thereof, the latter had a cause of action to maintain the present suit. Thirdly, learned counsel submitted that on account the provisions of Article II, KWSB could, and should, be regarded as itself being a party to the Implementation Agreement. For reasons that will presently become clear, it will not be necessary for me to consider the second and third grounds taken by learned counsel, *hich in any case I have found to be less than satisfactory. Insofar as the first ground is concerned, it begs the very question that, in my view, lies at the heart of the present dispute, and which was posed at the outset. If the answer to that question is in the negative (i,e,, that the doctrine of privity of contract in relation to third party benefits cannot or ought not to be modified) then the case put forward by learned counsel must
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necessarily fail. Even if this question is answered in the affirmative, the extent to which the doctrine is to be modified, and whether KWSB's case comes within it as so modified, will remain to be seen. 6. Learned counsel for KESC strongly opposed the case put forward by learned counsel for KWSB. He submitted that it was undeniable that a huge sum, running into tens of billions of Rupees, was payable by KWSB to KESC. He submitted that there had been periodic reconciliations of accounts between the parties (the most recent of which took matters up to January 2012). Which had been accepted by both sides, save and except in relation to certain amounts that were relatively insignificant. Thus. KWSB's liability was determined, settled and admitted. Learned counsel emphasized that the primary obligation and liability to make payment of the outstanding amount was KWSB's, which it could neither deny nor escape. Learned counsel further submitted that when the plaint was read as a whole, the main case made out by KWSB was not against KESC, but rather the defendants Nos. 2 and 3 (GOP and the Government of Sindh), on account of non-payment of amounts payable to KWSB. All of this was the result of the problem of 'circular debt' that currently bedeviled the economy. However, that did not absolve KWSB of its legal liability towards KESC. Furthermore, KESC was fully entitled to take recourse to its legal remedies on account of the nonpayment, including disconnection of electricity supply. However, even in this regard, the only grievance made out in the plaint/applications was in relation to a few identified residences, which hardly amounted to any case at all. Learned counsel emphasized that despite the fact that such a huge amount was due and payable KESC did not disconnect electricity to the pumping stations and installations and other facilities operated by KWSB. However, it was Accepted that on 6 -10-2011 and 6-1-2012, "final disconnection notices" were served on KWSB under section 24(1) of the Electricity Act, 1910 on account of the around Rs,15.5 Billion that was 'then outstanding. ' Subsequently, another such notice was served on or about 16-2-2012. Claiming an amount of around Rs,16.6 Billion (which was by then the outstanding claim), and threatening disconnection as before. In this notice. KWSB was asked to make payment of at least Rs,1 Billion but, learned counsel submitted even this small portion of the outstanding amount was not paid. However, even then no disconnection actually took place. 7. Learned counsel submitted that admittedly. KWSB had been unable to comply with the interim arrangement made on 27-2-2012. No appeal had been preferred against this order, and the 21 days stipulated therein had also expired. He submitted that the interim arrangement had attained finality, and KWSB was not entitled to any injunctive relief in any manner. It was only after the expiry of the 21 days that KESC had disconnected power supply to KWSB's head office, and this was the only facility to which electricity was not being supplied. Learned counsel submitted that KESC had accepted the interim arrangement, but. KWSB had failed to comply with its terms. 8. As regards Article II of the Implementation Agreement. Learned counsel submitted that in fact KESC had invoked the payment mechanism provided therein on account of KWSB's failure to make payments, and sent the notices thereby required to GOP. It had meticulously complied with the procedural requirements of Article II. However, not only did GOP fail to make payment, it did not even bother replying to the notices. KESC had not taken any further steps in terms of the Implementation Agreement to obtain payment from GOP. However, learned counsel emphasized, the primary responsibility and legal liability remained that of KWSB. Learned counsel also submitted that the doctrine of privity of contract was well established and since KWSB was a stranger to the Implementation Agreement, it could not in any case invoke or rely on the same. Learned counsel contended that KESC could not be made to suffer doubly, i,e,, not receive any payment either from GOP or KWSB and yet be required to continue supplying power to the latter. He submitted that KW SB's case was entirely without merit and there were no equities in its favour. It had failed to establish any of the ingredients for interim relief and therefore all of its applications merited dismissal.
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9. Learned AAG, appearing for the defendant No,3 ("GOS") without admitting any liability supported the case put forward by KWSB. He submitted that water was one of the necessities of life, and shutting down KWSB, which would result from the disconnection of electricity supply, would deprive the people of Karachi of this vital resource. Learned counsel submitted that, like other necessities of life, supply of water was a State responsibility and therefore in a sense KWSB acted as the alter ego of GOP in this regard. It was precisely in recognition of this that Article II had been made part of the Implementation Agreement. He submitted that KESC was bound by the agreement in its entirety and could not pick and choose, i,e,, enforce those provisions which suited it and seek to evade those which did not. He further submitted that water charges were nominal (in the sense of being less than the operating cost of KWSB) and had risen only incrementally in recent years. In contrast, electricity charges had increased manifold. The public interest, which was paramount, required that KESC remain bound by and act in accordance with its obligations under Article II. Learned AAG also referred to Article 38 of the Constitution to emphasize the duties of the State in this regard. He referred to the calamitous results for Karachi if its water supply were to be shut down or held hostage to the threat of a shutdown on account of KESC's refusing the supply electricity. 10. Learned counsel for KWSB, exercising his right of reply, referred to one Pakistani and a number of Indian decisions, which I will consider later, to contend that it was well settled that there was a general exception to the doctrine of privity in favour of beneficiaries under contracts. In the alternative, he contended that KWSB's case came within the other well recognized exceptions to the doctrine. Learned counsel for KESC, replying to the submissions by learned AAG, pointed out that GOS had not filed any counter affidavit. He took issue with the factual assertions made by learned AAG. And again pointed out that the primary relief sought by KWSB was against GOS and GOP. Given the importance of the legal issue involved, I permitted learned counsel to also reply to the case-law cited by learned counsel for KWSB. Learned counsel relied on certain Indian decisions, considered below, to contend that it was well settled that the privity of contract was the established doctrine. 11. I have heard learned counsel as above, examined the record with their assistance and considered the case-law reliedupon, Before proceeding further, one procedural point requires consideration. Now, the fact is that the case put forward by learned counsel for KWSB on the basis of Article II of the Implementation Agreement finds no mention in the plaint. In other words, the case as argued goes beyond the case as pleaded. Quite properly, learned counsel for KESC took the objection that this was impermissible. However, equally properly, he accepted the 1i-imitations of a procedural objection of this nature at this stage of the proceedings. In my view, the procedural objection ought not to stand in the way of a determination on the merits. It is to be kept in mind that KESC is party to the Implementation Agreement and therefore reliance on this agreement cannot take it by surprise. Indeed, both parties to this agreement are defendants in the suit. In my order dated 27-2-2012 (referred to above), I had specifically directed that a copy of the Implementation Agreement be placed on the record, and had also, inter alia, directed that the Court be assisted on the following question: "In so far as this Implementation Agreement is concerned, learned counsel for parties, in particular learned counsel for plaintiff. May assist the Court as to whether, if the Federation has assumed certain obligations in terms of the said agreement. That as a matter of law absolves the plaintiff from its obligations towards the defendant No, 1 in respect of the electrical power being consumed by the plaintiff." In my view, this question essentially expresses the basis on which learned counsel for KWSB argued the matter, and as to which therefore learned counsel for KESC had appropriate notice. Accordingly, in the present facts and circumstances, the procedural objection cannot be sustained.
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12. I turn therefore to a consideration of the fundamental legal issue that requires consideration and for convenience state it once again: can the doctrine of privity of contract in relation to third party benefits be modified, and if so. Ought this to be done, and if so, in what manner and to what extent? The general rule is stated as follows in Chitty on Contracts, 30th (2008) ed., para 18-001:-- "Under the common law doctrine of privity of contract, the general rule is that contracts cannot be enforced either by or against third parties." In Mastersons v. Ebrahirn Enterprises and another 1988 CLC 1381, a learned single Judge of this Court stated the principle in the same terms as follows-- "A contract cannot (as a general rule) confer rights or impose obligations arising under it on any person except party to it.' In certain cases, however. Third parties are entitled to sue in their own right." (pg. 1388) ' As noted by the learned single Judge, there are certain exceptions. Some of which are judicially evolved while others are statutory in nature. Two of the established and recognized exceptions are where the contract creates a trust or quasi-trust in favour of the third party or a case involving a family arrangement. 13. The general rule has not been immune from, criticism. Thus, the following appears in Chitty on Contracts immediately after the sentence reproduced above:-\ "The second limb of the rule (under which the contract cannot impose liabilities on anyone except a party to it) is generally regarded as just and sensible. But the first limb (under which a contract cannot confer rights on anyone except a party to it) has been the subject of much criticism, culminating in a Report, issued by the Law Commission in 1996.. On Privity of Contract: Contracts for the Benefit of Third Parties. The recommendations of this Report have (where legislation for this purpose was necessary) been implemented by the Contracts (Rights of Third Parties) Act, 1999." (op. Cit.) ' I am here concerned only with the first limb of the rule, since the third party {KWSB) invokes and claims the benefit conferred upon it as a Strategic Customer by Article II of the Implementation Agreement. The first limb of the rule is herein after referred to as the "no-benefit rule" (or sometimes, simply as the "rule"). In order to,properly assess the present state of the no-benefit rule, it will be necessary to examine how it has been dealt with in different common law jurisdictions. (It may be noted that the right as may be acquired by a third party in respect of or under a contract between others is also known by the Latin phrase jus quaesitum tertto. I mention this because this phrase is used in some of the cases considered below.) 14. I begin the survey from the original home of the common law. It appears that initially, English law was uncertain on the point with some decisions permitting third parties to claim contractual benefits and others refusing to recognize any such possibility. The common law is regarded as having been settled in favour of the no-benefit rule by Tweddle v. Atkinson (1861) 1 B&S 393; 121 ER 762. The rule was subsequently confirmed by the House of Lords in Dunlop Pneumatic Tyre Company Ltd. v. Selfridge and Company Ltd. [19151 AC 847: [1915] UKHL 1 (a decision referred-to by learned counsel for KESC), where it was observed as follows:-- ... In the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract." (per Viscount Haldane, LC; pg. 853) ' Although the no-benefit rule thus received, fairly early on, the highest judicial imprimatur. It was nonetheless subjected to strong criticism. As early as 1937, the Revision Committee (chaired by the Master of the Rolls) noted, in its Sixth Interim Report (Cmd 5449), that English law was almost alone in its rigid adherence to the rule and essentially recommended its abrogation subject to certain safeguards. Even on the judicial side, the no- benefit rule came under criticism, especially from
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Lord Denning. In. e.g., Drive Yourself Hire Co. (London) Ltd. v. Strutt [1953] 2 All ER 1475, he observed (as Denning, LJ) as follows: "It is often said to be a fundamental principle of our law that only a person who is a party to a contract can sue on it. I wish to assert, as distinctly as I can, that the common law in its original setting knew no such principle. Indeed, it said quite the contrary. For the 200 years before 1861 it was settled law that, if a promise in a simple contract was made expressly for the benefit of a third person in such circumstances that it was intended to be enforceable by him, then the common law would enforce the promise at his instance. Although he was not a party to the contract." (pg. 1482) ' Nonetheless, the no-benefit rule was reaffirmed by the House of Lords in such decisions as Midland Silicones Ltd. v Scruttons Ltd. (19621 1 All ER 1; 119611 UKHL 4 (Lord Denning dissenting) and Beswick v Beswick 119671 2 An ER 1197: 119671 UKHL 2, the latter decision -being regarded as the leading modern authority in English law. 15. Notwithstanding the foregoing decisions, judicial criticism of the no-benefit rule continued apace. In Darlington Borough…
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