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Petitioner: Orient Power Company (Private) Limited through Authorized Officer VS Respondent: Sui JUDGMENT
Court Name: Supreme Court of Pakistan Judge(s): Sajjad Ali Shah, Mushir Alam, Qazi Faez Isa Title:Orient Power Company (Private) Limited through Authorized Officer vs Sui
JUDGMENT
Reported As: 2021 PCTLR 1314, 2021 SCMR 1728, 2021 CLD 1069, 2022 PSC 1 Result: Appeal dismissed Judgment JUDGMENT MUSHIR ALAM, J.---The Appellant, through. Civil Appeal No. 1547 of 2019 arising out of CPLA No.3027/2019, has challenged the legality of the order passed by the Learned Division Bench of the Lahore High Court' in I.C.A. No. 210640/2018 in C.O.S. No.16/2017. Leave to Appeal was granted on 12.09.19 to consider the points raised by both the Parties in this case. I. FACTS: 1. The Appellant, Orient Power Company (Private) Limited2 is a private limited company incorporated under the laws of Pakistan, whereas the Respondent, Sui Northern Gas Pipelines Limited3 is a public limited company incorporated under the Companies Ordinance, 1984. SNGPL is the sole authorized and licensed distributor of Natural Gas in the provinces of Punjab and Khyber Pakhtunkhwa. 2. The Appellant constructed and operate d a power generation facility' of approximately 212.7 Megawatts (MW). In this regard, the Appellant entered into a Power Purchase Agreement' on 08.11.2008 with National Transmission and Dispatcher Company Limited6 for a term of thirty (30) years. The PPA governs the terms of the sale and purchase of Energy and Capacity to the Power Purchaser . 3. The Appellant also entered into an Implementation Agreement with the President of the Islamic Republic of Pakistan through Private {{FOOT NOTE}} 1 Herein referred to as the "impugned judgment" Hereinafter referred to as the "Petitioner" 3 Herein referred to as SNGPL 4 Herein referred to as the "Complex" 5 Herein referred to as the "PP A"
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6 Herein referred to as the "Power Purchaser" {{FOOT NOTE}} Power and Infrastructure Board which establishes the framework under which the Complex is to be set up. 4. For the purposes of running the Complex, the Appellant required Natural Gas as a primary fuel, and for this purpose, Appellant entered into a Gas Supply Agreement' with the Respondent. The Parties signed the GSA on 18.10.06 which contained a "Take or Pay Clause8". Furthermore, the GSA's purchase and supply arrangement were such that it was divided into two time periods: the first being the "Firm Delivery Period", where the Respondent was required to deliver and sell to the Appellant all of the Complex's requirements for Gas, up to the daily contract quantity , and the second being the "As-A vailable Period" which comprised of the three months excluded during the Firm Delivery Period where the Respondent would provide Gas on 'As Available' basis. 5. During the Firm Delivery Period, the terms of the GSA stated that the Appellant had a gas entitlement of 38 MMCFD (million metric standard cubic feet per day). 6. Differences arose between the parties with respect to the Commissioning Period Start Date,' during which the Complex would be tested, and the subsequent Commercial Operating Date,' being the date when the Complex was to start its commercial operations, and the Appellant's obligation to take or pay gas under clause 3.6 of the GSA during the CPSD and COD. 7. It was seen vide letter dated 01.07.09 that the parties agreed to appoint Mr. Khalid S. Ibrahim as the Expert" under clause 18.2(g) of the GSA to resolve the dispute. The Expert heard the matter and issued his Determination' on 19.12.09, holding that some amounts are due from the Appellant to the Respondents in terms of the Take-or- Pay Clause calculated on the basis of the declared CPSD" and COD." The Appellant was directed to make payment in fifteen days. {{FOOT NOTE}} 7 Herein referred to as the "GSA" 8 Take-or-pay clause are common in the energy sector Contracts and, in particular , for gas sales agreements whereby the buyer agrees to either: (1) take, and pay the contract price for, a minimum contract quantity of gas each contracted period (the TOP Quantity); or (2) pay the applicable contract price for such TOP Quantity if it is not taken during the applicable period see Amoco v Teesside Gas 2001 UKHL 18) =[2001]1 All ER (Comm) 865 9 Herein referred to as "CPSD" 10 Herein referred to as "COD" 11 Herein referred to as the "Expert" 12 Herein referred to as the "Expert Determination" 13 Dated 30 September 2008 14 Dated 1 April 2009 {{FOOT NOTE}} 8. On the basis of the Expert Determination, the Parties, on 11.01.10, executed the "Payment Agreement" which required the Appellant to make payment in three installments. Under the Payment Agreement, it was agreed that the Respondent would be entitled to a late payment surcharge at "Delayed Payment Rate ," which would be paid until full payment is made. 9. For the period of 28.02.201 1 till 10.05.201 1, the Respondent did not supply , and also curtailed supply of gas to the Petitioner , contrary to the terms of the GSA. This was done through various letters written by the Respondent, whereby it purported to declare Force Majeure on account of certain alleged terrorist and sabotage activities. The Appellant was unable to operate the Complex on gas during this period and as a result, payment under the head of "Capacity Price" to be made by the Power Purchaser to Appellant under the Power Purchase Agreement with National Transmission and Dispatch Company Limited (the "Power Purchaser ") were withheld and disallowed up to an amount of Rs. 201,998,444/-. 10. The Appellant filed a Request for Arbitration (the "Earlier Arbitration ") due to the accrual of such losses. The Parties received the final award of this arbitration on 09.03.16, wherein it was held that Respondent's claim of
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Force Majeure events could not be classified as such and, that Respondent was in breach of the GSA during those periods and that Appellant was entitled to compensation for the loss suf fered. 11. Furthermore, under the Payment Agre ement dated 11.01.10, the Appellant made all of the requisite payments to the Respondent except that of Rs. 104,133,296/-; which the Respondent claimed as late payment surcharge. 12. Simultaneously , another dispute arose between the Parties, with respect to six invoices issued by the Respondent from May to October 2011 under the GSA, which the Appellant contended was not due, as the Appellant had paid the full amount for the months in which it was not able to take up the Gas. 13. The Parties decided to refer these disputes to Justice Khalil-Ur-Rehman Ramday ("Justice Ramday") as per Section 18.2 of the GSA. However , it must be noted that the dispute pertaining to the late payment surcharge under the Payment Agreement was not referred to Justice Ramday for determination," who declared in his Determination dated 1 1.06.14 that the Respondent was not entitled to retain the entire amount {{FOOT NOTE}} 15 April to November 2009, March to April 2010 and March 201 1 16 As enumerated in Paragraph 8 {{FOOT NOTE}} of money paid under Clause 3.6(a) of the GSA for which the gas was not taken, but may still be entitled to reasonable compensation under section 74 of the Contract Act, 1872. 14. The Respondent referred the disputes relating to the unpaid invoices along with the dispute relating to late payment surcharge under the Payment Agreement to arbitration pursuant to section 18.3 of the GSA, which provided for arbitration to be conducted in London under the rules of the London Court of International Arbitration (the "LCIA ") on 12.06.14. During the proceedings, the Parties submitted Expert Opinions by Mr. Makhdoom Ali Khan and Chief Justice (R) Tassaduq Jillani. 15. The Respondent, in the arbitration, claimed, inter alia: (i) A declaration that the Appellant illegally , and in breach of the GSA withheld a total amount of Rs. 603,202,083 from the bills raised by the Respondent pertaining to the months of May to October 201 1; (ii) Late payment surcharge on unpaid amounts under the GSA calculated until 31 May 2014 in the amount of Rs. 485,678,790; (iii) Continuing late payment surcharge on outstanding amounts to be calculated from 31 May 2014 in accordance with the terms of the GSA; and (iv) Interest on any award from the date of award to the date of payment; 16. The Appellant advanced an objection to the jurisdiction of the Arbitral Tribunal and, defended the claim on the grounds inter alia-: (i) Declaration that the Respondent cannot raise any issues regarding the Payment Agreement in these proceedings. Any issue with the Payment Agreement can only be settled as per laws of Pakistan and in a court of competent jurisdiction. Payment Agreement is a standalone agreement and the Appellant has not violated Payment Agreement; (ii) Declaration that the Appellant is entitled to retain the disputed amounts from the bills of the Respondent and therefore can retain the Make Up Gas amount; (iii) Declaration that Respondent cannot forfeit the Make Up Gas Amount under GSA or Pakistan law; (iv) Order Respondent that it either provides the Make Up Gas against the Make Up Gas Amount (i.e. Rs 603,202,083/-) or refunds the same; (v) Declaration that the Make Up Gas is available even after the expiry of the one Contract Year on "as available" basis; (vi) Declaration that any valid Force Majeure claims by the Respondent extends the period for Make Up Gas on a day to day basis including the obligation to supply gas for extended period; (vii) Declaration that the claims made by the Respondent through various letters/notices claiming existence of Force Majeure during the period from 28 February 2011 to 10 May 2011 were illegal, invalid, inapplicable and contrary to the facts and the law and Respondent is entitled to withheld capacity .15
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17. The Sole Arbitrator issued the Partial Award dated 27.02.17 and Final Award on 13.06.17 in the Arbitration wherein: (i) Arbitrator dismissed the claim of the Appellant that it did not have jurisdiction over the Payment Agreement; (ii) Respondent's claim for Rs. 104, 133,296/- was allowed; (iii) Respondent's claim under the six invoices for Rs. 603,202,083/- was stated to be the amount due under the invoices; (iv) Sole Arbitrator directed Appellant to pay Respondent simple interest at the rate of 6% per annum on Rs. 603,202,083/- from 31 October 2011 to the date of the Award and simple interest at the rate of 6% per annum on all sums payable pursuant to the Award from the date of the Award to the date of payment; and (v) Respondent was liable to pay Rs. 98,452,322 in respect of the Earlier Arbitration. 18. Subsequent to the issuance of the Award, the Respondent filed C, O. S. No. 16/2017 before the Learned High Court at Lahore, and on 04.04.18, the suit as allowed and it was held that the Award shall be recognized and enforced as a judgment and decree of the court under section 6 of the Foreign Awards (Recognition and Enforcement) of Foreign Arbitral Awards 201 1 (the "Foreign Arbitration Act"). 19. Consequently , the Appellant filed I.C.A. No. 210640/2018, impugning the judgment of the Learned Single Judge. The same was dismissed by the Learned Division Bench of the Learned High Court, at Lahore, inter alia, for the reasons: (i) High Court has exclusive jurisdiction to recognize add enforce foreign arbitral awards which means it has exclusive jurisdiction to recognize and enforce the Award; (ii) The dispute resolution mechanism under the GSA was applicable to the Payment Agreement and that the Sole Arbitrator was well within his jurisdiction to make determination in terms thereof; (iii) Public policy exception should not be used as a back door to review the merits of a foreign arbitral award or to create grounds which are not available under Article V of the Convention as this would negate the obligation to recognize and enforce foreign arbitral awards; and (iv) The Take or pay clauses in the GSA, being a common provision in commercial contracts, especially gas purchase agreements is valid and enforceable and cannot be considered as a penalty provision. The terms of the GSA were negotiated and agreed to between the parties. The Appellant has subsequently appealed to this Court, wherein, leave to appeal was granted on 12.09.19 to consider the points raised by both the Parties in this case. II. Arguments of the Parties 20. Counsel for the Appellant argues that pursuant to the laws of Pakistan, there must be a specific arbitration clause in the Payment Agreement in order for the matter to be referred to arbitration. The first claim in the arbitration, with respect to non-payment of Rs. 104,133,296/- was under the Payment Agreement , which did not contain an arbitration clause and virtue of accepting the claim, the sole arbitrator exceeded its jurisdiction. Learned counsel for the Appellant further argued that since the Payment Agreement did not contain a valid arbitration agreement, this was against Article V(1)(a) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the "New York Convention") which has been incorporated into the law of Pakistan via its implementing statute, the 'Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011 (the "Foreign Arbitration Act).Appellant also argued that the Payment Agreement does not make any express or specific reference to the arbitration clause in the GSA. 21. Learned counsel for the Respondent counters the argument of Appellant by relying on Clause 18.3 of the GSA that provided for all matters 'arising out of or in connection with the GSA to be referred to arbitration'. He contends that it cannot plausibly be argued that amounts due under the Payment Agreement are not "arising out of or in connection with" the GSA. The Respondent further submits that this is a question of contractual interpretation (i.e. interpretation of the scope of the arbitration agreement in the GSA), absent a completely perverse finding by the sole arbitrator and the division bench, this Hon'ble Court ought not interfere in these findings and that the findings of the two fora gave effect sensibly to the commercial terms agreed in the GSA and are therefore, subject to arbitration.
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22. The Appellant maintains that the Impugned Judgment has wrongfully held that section 74 of the Contract Act is not attracted in the "so called" take or pay clauses, set out in section 3.6(a) of the GSA. Appellant argues that its conduct of not taking the Gas during the relevant period amounted to a breach under section 3.6(a). The Appellant further holds that non- performance of the take or pay provisions would amount to breach under the laws of Pakistan, consequently this would be a situation governed by section 74 of the Contract Act, and that the Take or Pay provisions cannot be allowed to operate outside the sphere of the laws of Pakistan. 23. Counsel for Appellant also holds that the Award rendered by the sole arbitrator was patently illegal since it was contrary to section 74 of the Contract Act, 1872 (the "Contract Act"), which essentially states that a party should not be allowed to recover more than it has actually suffered. Appellant alleges that the Respondent had not suffered an actual loss of more than Rs. 356,104,346.25/- and that by awarding more than the actual loss suffered amounts to unjust enrichment/double recovery since the amount of Gas not taken by the Appellant was sold to third parties, unjustly enriching the Respondent. The protection against unjust enrichment, according to the Petitioner , is a fundamental aspect of the public policy of Pakistan and Section 6 of the Foreign Arbitration Act read with Article V(2) (b) of the New York Convention. 24. Respondent counters that the judgment of Learned High Court has made sound formulation on public policy , and that under the New York Convention, public policy should be construed narrowly and should only be used as a ground to refuse enforcement where the award is on the face of it in clear violation of fundamental notions of morality or justice of the enforcing State. Respondent further contends that the Appellant's disagreement is not with public policy but rather with the quantum of the award. 25. The above arguments of the learned counsel for the Parties have been considered with due care and attention, and the available record has been perused at length. Owing to the various issues that arise in this case, each will, be dealt separately . III. Issue No 1: Incorporation of arbitration clause from the Main Contract 26. In today's commercial reality , it is not unusual for parties to have a network of inter-connected, inter-dependent, or multi-contracts , which form an "indivisible whole contract ". Therefore, when disputes arise, a party who intends to initiate arbitration will potentially wish to do so under several of these inter-connected, inter-dependent or multi- contracts connected inter-se. 27. Bernard Hanotiau, one of the revered authorities on arbitration, in his book titled 'Complex Arbitrations: Multi- party , Multi-contract, Multi-issue - A comparative Study' aptly explains that "in a situation involving a series of agreem ents between the same parties, the main problem is determining whether these contracts constitute an indivisible whole (ensemble contractuel unique). The solution will rest on an interpretation of the will of the parties. '. "17 28. The main consideration for the instant case, therefore, is whether the GSA and the Payment Agreement are comprised of inter connected or inter-dep endent contracts to be treated as "indivisible whole contract" or whether they are separate and independent from each other . 29. The Learned bench of the High Court has rightfully concluded that the terms of the Payment Agreement establish that the parties intended to remain within the confines of the GSA as the purpose of the Payment Agreement was to give effect to the Expert's Determination." The Expert Determ ination itself was a result of a dispute arising out of the obligations of the GSA. 30. Furthermore, the intention of the Parties to give effect to the obligations under GSA is evident by the Recitals to the Payment A Agreement, which make explicit mention of the GSA and the dispute arising under it. Moreover , Clause 1 of the Payment Agreement states explicitly that the definitions set forth in the GSA will carry the same meanings under the Payment Agreement, and Clause 4 states that after resolution of the issues under the Payment Agreement, the provisions of the GSA shall apply and prevail. Therefore, this is illustrative of the intention of the parties to, not only be bound by the GSA, but also to remain within its confines. This continuous reference to the GSA means that the Payment Agreement was ultimately guided by, and defendant on the GSA for its existence. It was, undoubtedly in our minds, a "part of {{FOOT NOTE}}
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17 'Chapter 3: The Possibility of Bringing Together in One Single Proceeding all the Parties Who Have Participated in the Performance of One Economic Transaction Through Interrelated Contracts', in Bernard Hanotiau, Complex Arbitrations: Multi-party , Multi-contract, Multi-issue -- A comparative Study (Second Edition), International Arbitration Law Library , Volume 14 Kluwer Law International 2020) pp. 197 - 310 18 Paragraph 17 of the impugned judgment {{FOOT NOTE}} an indivisible whole" and the transaction thus must be looked at in its entirety . 31. Philippe Leboulanger , another revered authority on international commercial arbitration, urges us to take into account the commercial realities of the operation: "It is important to take into account the commercial reality of the operation, because sometimes the parties' reciprocal synallagmatic obligations arise not from a single contract, but from different contracts. It should be checked whether the obligations undertaken under the different agreements are reciprocal, having a common origin, identical sources and an operational unit. When the agreements make up one single business transaction, the interplay between the undertaking cannot be ignored, as there exists within the contractual context a kind of freedom of circulation of obligations and interrelated debts. Whenever obligations were undertaken for the accomplishment of a single goal and are economically interdependent, the different disputes should be appreciated on an overall basis. Agreements may be considered to be interrelated when they were concluded on the same date, for the same duration, for the same purpose. Another indication of the interrelation between contracts is the presence of a general--or a master , a cover , a basic or a head-- agreement outlining the obligations undertaken by the parties, obligations which are usually discussed in more detail in the ancillary agreements. General agreements often contain a preamble describing the transaction and the interrelation between the different agreements. In this case, the interdependence between a general agreement and its ancillary agreements is evident, especially when the general agreement expressly refers to each one of the ancillary agreements and each one of the ancillary agreements expressly refers to the general agreement and to the other ancillary agreements. Interrelation also exists in the context of framework and application agreements. " {{FOOT NOTE}} 19 Synallagmatic Contractin civil law. A bilateral or reciprocal contract, in which the parties expressly enter into mutual engagements, each binding himself to the other . Poth.Obl. No. 9. Such are the contracts of sale, hiring, etc. See State ex rel. Waterman v. J. S. Waterman and Co., 178 La. 340, 151 So. 422, 426. Black law Dictionary 4th Edition) 20 Philippe Leboulanger 'Multi-Contract Arbitration' (1996) 13 (4) J In't Arb 43, 47 {{FOOT NOTE}} 32. It is therefore, certain that the obligations undertaken under the Payment Agreement were for the accomplishment of a single goal i.e. the fulfillment of the terms of the GSA, both the contracts were economically interdependent and had a common origin. 33. The Appellant further argues that the arbitration clause in the GSA did not cover the Payment Agreement, and thus the Sole Arbitrator exceeded his jurisdiction by deciding the issues arising out of the Payment Agreement. The arbitration clause in Clause 18.3 in the GSA C covers disputes, disagreements or default of the seller and buyer "in connection with or arising out of" this Agreement. The dispute under the Payment Agreement was inarguably a dispute connected to the GSA, and also arose out of the obligations under the GSA. 34. Furthermore, we are guided by the following case law and authorities on this matter . In the case of Fiona Trust and Holding Corporation v. Privalov , the U.K House of Lords, held that the proper approach is for courts to give effect to the commercial purpose of the arbitration clause and that parties, as rational businessmen, were likely to have their disputes arising out of their relationship by the same forum i.e. the arbitral tribunal in this case wherein it is stated that: "7...parties, as rational businessmen, were likely to have intended that only some of the questions arising out of their relationship were to be submitted to arbitration and others were to be decided by national courts. Could they19 20 21
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have intended that the question of whether the contract was repudiated should be decided by arbitration but the question of whether it was induced by misrepresentation should be decided by a court? If, as appears to be generally accepted, there is no rational basis upon which businessmen would be likely to wish to have questions of the validity or enforceability of the contract decided by one tribunal and questions about its performance decided by another , one would need to find very clear language before deciding that they must have had such an intention. 8. A proper approach to construction therefore requires the court to give effect, so far as the language used by the parties will permit, to the commercial purpose of the arbitration clause..." 35. Since the decision rendered in Fiona Trust (supra ) several cases have since been decided, fine tuning the rationale laid down therein, and courts have considered whether the presumption also applies in a multi-contract scenario, where contracts contain dif ferent, potentially {{FOOT NOTE}} 21 [2007] UKHL 40 {{FOOT NOTE}} inconsistent arbitration agreements. In some of the cases, the presumption has been applied to discover the real intention of the parties, insomuch as that the arbitration clause in one agreement also envisages a dispute under another agreement. Recently , an English Court in multi-contract conflicts expanded the "centre of gravity " approach, and held that a carefully and commercially minded construction of the agreement at hand is required, and the Court of Appeal in the case of AmT rust Europe Ltd…
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