Business Law

FINAL PROJECT
Group Members
Ali Imran Tariq

Ejaz Ahmed

Haroon Idrees

Muneer Hussain

Rizwan Zafar

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L1S11BBAM

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L1S11BBAM2003

Sanctity of Contract
Table of Contents
Sanctity of Contract
Background
Manifestations of Sanctity of Contract
Trade
Foreign Investments
Common Challenges to Sanctity of Contract
Structural Weaknesses of System
Delays in Disposal of Cases
Nationalism
Onerous Contracts
Contracts of previous Regimes
Public Policy etc.

Table of Contents
Contemporary Approaches Regarding Sanctity of Contract
English Courts
Indian Courts

Relevant Case Laws
Hubco Vs. Wapda

Consequences of Violating Sanctity of Contract
Suggestions and Recommendations

What is 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.


Background
SC is important in a commercially vibrant society

Court of Law is critical to ensure SC

Globalization and Interdependence of Economies

As Indian Supreme Court 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.


Manifestations of Sanctity of Contract
Manifestations of sanctity of contracts are confined to two aspects of
International Commercial Transactions:
Trade
Foreign Investmetns
Trade
It refers to exchange of goods or services across international borders

Significant influence on Gross Domestic Product (GDP)

In Pakistan: Trade openness is represented thorough Trade to GDP Ratio

Trade to GDP Ratio:
In 1999-2000: 25.8%
In 2007-2008: 36%

Exports from and Imports to Pakistan
Pakistan: Not Self-
Sufficient

Being Importer: Credibility
of Pakistan matters

Lack of Credibility: Adds
Transaction Cost

SC is important in both
imports and exports
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
Foreign Investment
Investments Determine the Rate of Growth in a Country

National Savings influence the Level of Investment

National Savings of Pakistan:
In 2007-2008: 13.5% (Lowest Ever Level Since 2000)

Foreign Direct Investments (FDI): Non-Debt Investment to bridge gap
between saving-investment

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
Common Challenges to Sanctity of Contract
Structural Weaknesses of Systems
Structural weaknesses incline partners to deviate from
agreed contract

Challenges to SC emanate from various source:
Business Practices
Standards of Business Ethics
Political System
Legislature
Governmental Authority
Judicial Institutions etc.

Delays in Disposal of Cases
Justice delayed is justice denied

Exists in all forms of systems either traditional or modern

Existence of courts and their independent functioning not only gives a
sense of security to citizens but also provides protection to foreign
investors.
(Justice Iftikhar Muhammad Chaudary)

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.

Nationalism

Nationalistic Sentiments can create problems for Foreign Investors
Perceive Excessive Control of Foreign Investors over Economy

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.

Pyramid Arbitration Case of Egypt

(ICC Case No. 4131)
Onerous Contracts

Challenges to SC due to inherently Onerous nature of contracts

Performance suffers due to subsequent developments

Use of legislative instruments to interfere contract

Settebello Ltd. v. Banco Totta Acores, [1985]1 WLR 1406


Public Policy
Voidance of contracts being opposed to public policy

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
A contract is struck down if a court holds it to be opposed to the public policy
E.g. contracts in restraint of trade
Assisting of Enemies
Gambling and wagering etc.

Indian Courts Views on Public Policy

GheruLal vs. MahadoDas, (1959) 2SCA369, court observed:
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

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.



Contemporary Approaches
English Courts
Its largely laissez faire attitude to contracts in the domestic law
Liberty in contracts
Atlantic Star Case: , [1974] AC 436
Indian Courts
Select one of the two competent Courts
For disposal of their disputes
Not specifically necessarily applied to only one court
Not void( if filed in other court )


Relevant Case Law
HUBCO VS. WAPDA
(PLD 2000, SC 841)


GOP invited the private sector to develop thermal power plants to generate electricity for
WAPDA.

Group of foreign sponsors from five different countries were ready to invest.

GOP provided HUBCO a sovereign guarantee of the financial obligations under a 30-year
Power Purchase Agreement.

WAPDA later found that it had to pay on the nail, monthly capacity payments under PPA.

Payments to HUBCO flourished until they constituted a dangerous proportion of
WAPDAS Revenue.


BENAZIRS government was dismissed and NAWAZ SHARIFS regime started an
accountability campaign.

Mr. Qureshi challenged the decision of GOP and WAPDA.

Petition include that Tariff was discriminatory in favor of the company.

LHC issued interim orders which prohibited the Company from making any
repatriation of funds outside Pakistan.

Company was ordered to disclose immediately the balances in all its bank accounts.



Mr. Qureshi requested 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.

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 later appealed directly to the Supreme Court of Pakistan.

Supreme Court expressed the view that the matter should be resolved through
negotiations.




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.

WAPDA filed two criminal complaints against company.

Govt. of Baluchistan also notices alleging legal violations in relation to the property
registration and acquisition of the plant site and environmental violations.

WAPDA alleged that all the agreements amending the PPA were void ab initio

WAPDA claimed repayment of sixteen billion rupees allegedly overpaid by it.


Dismissed the Company's appeal.

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.

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.

Status of IPPs after the Decision of Court

Status Years of Commissioning Number of IPPs
Commissioned
1997-2001 15
Commissioned
2002-2007 0
Commissioned
2007-2008 1
Expected
2009-2010 21*
Consequences of Illegitimate Decisions
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
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

Thank You.