JURISPRUDENCE OF SANCTITY OF
CONTRACTS IN
INAAMUL HAQUE* & NAEEM ULLAH KHAN**
I. INTRODUCTION
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[1]”.
It has been, in this context pointed out that this aspect of the work of the
courts has much to do with the economic prosperity of the nations:
Contract law and the courts
help people to cooperate by enforcing, interpreting, and regulating promises.
By enforcing promises, the courts enable people to make credible commitments to
cooperate with each other. By enforcing promises optimally, the courts create
incentives for efficient cooperation.[2]
II. BACKGROUND
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.
The national and global context very
much influences the domains of law and judiciary. In turn legal and judicial
systems influence the world external to them. Every nation in order to survive
and provide its people with a decent standard of living must successfully
traverse path of development. Legal
development, it would be pertinent to note, forms integral part of larger
development process. As Amartya Sen
perceptively points out “the notion of development cannot be conceptually
de-linked from legal and judicial arrangements.[3]”
Hence it is inescapable that we in the first place apprise ourselves of the
background and context of the world in which we live, do our business, run our
institutions and administer justice. This is not necessary for understanding
the proper significance of the subject only (which we propose to study) but
also for the prosperity of our country. Hence the need for
studying the subject of this paper from a contextual perspective.
III. PRINCIPAL CONTEXTUAL PARAMETER
– PHENOMENON OF GLOBALIZATION
The principal contextual parameter
of the contemporary world is globalization which is really the defining
attribute of our times. It refers to multidimensional processes that “create,
multiply, stretch and intensify world interdependencies and exchanges.[4]”
Simply put, globalization is the process of increasing integration among
societies and economies. Centripetal impulses have received strong impetus
from, inter alia, reduced costs of transport,
lower trade barriers, faster communication of ideas, rising capital flows, and
intensifying pressure for migration[5].
As a matter of fact a highly interdependent world is no longer an elegant
phrase but has become a reality. A
Canadian statesman put it very well: “As sovereign nations in our modern world,
we are not merely independent but also interdependent”[6].
Whether it is economy, politics,
legislature, executive, judiciary or other walks of life, globalization touches
all areas. It indeed creates parameters for action and determines the context
within which both developed and developing countries must function in the world
at this point in time. The legal and judicial institutions are also fully
amenable to the impact of this phenomenon like any other societal activity: The
globalization of law is based on the globalization of business and trade. The
increase in the volume of international law, the use of comparative analysis,
the creation of inter-governmental legal institutions, and the development of
private international law, are unprecedented in modern history. The emergence
of these factors may be attributed to the growing interdependence of the states
in the economic, political and social spheres[7]…..
Economic globalization has increased the volume of global litigation, the
degree of deference to foreign courts, judicial dialogue, and detailed
treatments of foreign materials.[8]
Globalization, however, is a complex
phenomenon. It is simultaneously praised and denounced. There is, nevertheless,
agreement on one point that globalization is a powerful and mighty force. The
option today, therefore, for developing countries including
IV. 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 can
not efficiently function until contracts could be freely made and effectively
enforced.[10]
A contract has been defined by Trietel 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.
Similar is the definition by Pollack “Every agreement and promise enforceable
at law is a contract[11]”.
The concept of contract set out above has been duly enshrined in
Certain issues peculiar to transnational contracts relate
to evidence and procedure in case of foreign contracts. In
V. MAJOR MANIFESTATIONS OF GLOBALIZATION
1. Trade
The term
international trade or transnational trade (hereinafter called “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)[14].
It has indeed served as a platform for "globalization"[15]:
In case of
Changes that took place in the foreign trade of
Table 1 - Exports from and Imports to
|
Year |
(
|
||
|
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: FBS & EA Wing, Finance Division
Trade among the nations is seen as
an important contributor to economic growth, peace and better standard of
living.[17]
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
A policy of production for the sake of
production or of employment for the sake of employment ignores the fundamental
reason for economic activity, which in ultimate analysis is the well being of a
nation’s people[18]? All
the stake holders would gain if the flow of trade is smooth and expanding. Any
factor, like for example sanctity of contracts that is necessary for unimpeded
and increasing trade flows should be, therefore, promoted.
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”.[19]
2. Foreign Investments / Foreign Private Capital Flows
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
Foreign
financing sources include foreign direct investment (FDI) that has emerged as
an important source of private external flows for
It would be instructive to glance at
the figures of foreign investment inflows set forth below:
Table 2
-Foreign Investment Inflows in
|
|||||||||||||||||||||||||
Source - Board of
Investment |
|||||||||||||||||||||||||
|
Note:
|
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[23].
3. Special Importance of Investment in
Infrastructure
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,
VI. COMMON CHALLENGES TO SANCTITY OF CONTRACTS
– FACTORS RESUSLTING IN DEVIATIONS FROM THE SANCTITY OF CONTRACTS
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
form 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 (including the fact of
congestion in courts).
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 redressal of
one’s contractual grievances is extremely difficult in practice, the purpose of
putting any provision to safeguard one’s 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
rally 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 people’s demands for justice particularly in such cases a
challenging and important aspect of judicial reform in developing countries.[26]
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.[27]
Serious
efforts are being made to strengthen the judicial system in
The policy is an attempt to streamline the judicial
system in the country and make it responsive to the present-day requirements of
society. The objective is to clear the huge backlog that has accumulated over
the years at all level of judicial hierarchy…….[28]. The thrust of the policy is to consolidate
and strengthen the independence of judiciary, thereby enabling the judicial
organ to exercise institutional and administrative independence and judges to
have decisional independence to decide cases fairly and impartially.[29]
The policy has further provided that:
Certain categories of cases, having close nexus with
economic development and good governance, have been prioritized including
disputes pertaining to trade, commerce and investment.[30]
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 milieu are
perceived to be exercising excessive control over the economy. Repatriation of
profits – contractually agreed, can become easy targets of xenophobic
nationalism.[31] 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.[32]
The Pyramid
Arbitration Case from
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.[34] 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:
The extent to which democracy and self-determination
are normative factors affecting even the exercise of power of governments in
the conclusion of contracts is yet to be worked out in international law…. But,
as far as risk analysis is concerned, the entry of foreign investment on the
basis of contracts made with unrepresentative governments or through corruption
increases the risk to the foreign investment…. The foreign investor who deals
with unrepresentative governments increases the risks to his investments
considerably[35].
In
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,
where a state-owned shipyard in
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[37].
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.[38]
Courts are required to rely on the well settled heads of public policy and to
apply those to varying situations.[39]
If a contract fits into one or the other of these pigeon-holes, it may be
declared void.[40]
The court is, however, allowed to mould the well-settled categories of public
policy to suit new conditions of changing world.[41]
But can a court invent a new head or category of public policy? According to
Lord Halsbury the categories of public policy are
closed[42]
“I deny”, he said, “that any court can invent a new public policy”:
From
time to time judges of the highest reputation have uttered warning notes as to
the danger of permitting judicial tribunals to roam
unchecked in this field.[43]
A judge criticizing public policy in an early case said, it is a very unruly
horse and once you get astride it you never know where it will carry you.[44]
Another opinion in a similar vein may be cited. “Public Policy is a vague
and unsatisfactory term.”[45]
The remarks of Parker J in the case of Egerton vs. Brownlow are also worth referring to:
Certain contracts have been
held void at common law on this ground --- a branch of the law however which
certainly should not be extended, as judges are more to be trusted as
interpreters of the law than as expounders of what is called public policy.”[46]
Another judge observed that “Public policy is always an unsafe and treacherous
ground for legal decisions, and in the present case it would not be easy to say
on which side the balance of convenience would incline.[47]
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.[48]”
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,[49]
where the court held:
Public Policy or the policy
of the law is an illusive 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.[50]
Highlighting the fact that public policy principles are derived form
precedents, the following observations were regarded persuasive:
These
principles have been crystallized under different heads and though it is
permissible for courts to expound and apply them to different situations. It
should only be invoked in clear and incontestable cases of harm to the public
through heads are not closed and though theoretically it may be permissible to
evolve a new head under exceptional circumstances of a changing world, it is
advisable in the interest of stability of society not to make any attempt to
discover new heads in these days”[51].
In another case an
The twin touchstones of public
policy are advancement of the public good and prevention of public mischief and
these questions have to be decided by judges not as men of legal learning but
as experienced and enlightened members of the community representing the
highest common factor of public sentiment and intelligence.[52]
The Policy of Law / Public
Policy in
The provision
of law adopting the principle of public policy in
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[53],
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,[54]
the Supreme Court observed that the
duty of the Court is to expound 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.
In
case of Sultan Textile Mills Karachi Ltd. vs. Muhammad Yousaf
Shamsi,[55]
the court noted that the problem of illegality at common law on the ground of
public policy is the discovery of injuriousness to society. This concept has
elasticity as well as impreciseness. The court referred to well known treaties
on contract law which highlighted:
The crux of the matter being
injuriousness to society. It
should be found as a fact to exist in each case. Referring to the judgments of
Sir Lawrence Jenkins, C.J. and Justice Batty it was stated that the courts
declined in Govind Subrao
v. F.S. Facheco and others (1), to hold a transaction
as illegal in spite of the fact that it conditionally prohibited subletting of
a license on the ground that it was not shown to be illegal at its
inception.
Secondly, even though the contract is one which, prima
facie, falls under one of the recognized heads of public policy, it will not be
held illegal unless its harmful qualities are indisputable…. Doctrine as Lord Atkin observed…..In popular language….The contact should be
given the benefit of the doubt.
HUBCO’s CASE
The issue of
Public Policy again came up in the well known case of the Hub Power Company
(HUBCO) vs. WAPDA case[56]. The Supreme Court by a majority held that in
view of the fact, that the allegations of corruption leveled by the WAPDA,
supported by circumstances, provided prima facie basis for further probe into
the matter judicially, the case was not referable to arbitration. Such matters,
the court held, according to the public policy required judicial findings about
the alleged criminality. It thus arrived at the findings that the disputes
between the parties were not commercial disputes, arising from an undisputed
legally valid contract, or relatable to such a contract. On account of the
alleged criminal acts there did not come into existence any legally binding
contract between the parties. The dispute primarily related to the very
existence of a valid contract and not a dispute under such a contract. Hence, the Supreme Court upheld the
injunction granted by the High Court of Sindh against
proceeding with arbitration before the International Chamber of Commerce.
The minority
view was that: the Power Purchasing Agreement (PPA) was valid and the
arbitration agreement contained in it is certainly not contrary to public
policy. A subsequent amendment which, it is alleged, was procured by fraud,
cannot, on any analysis taint the PPA itself. In short, it is totally unclear
how a valid contract can itself become contrary to public policy because of an
allegation that a later amendment was the product of an illegal act.
While referring
to the public policy the dissenting judges quoted with approval various
judgments of both the English and Pakistani courts[57]
and observed that consideration of public policy can never be exhaustively
defined, but they should be approached with extreme caution.
The crux of
these judgments referred to by the dissenting judges was that the courts should
be cautious before striking down contracts in the name of public policy.
ECKHARDT’s CASE
Another
important case is that of ECKHARDT & Co, Marine vs. Muhammad Hanif[58],
where the petition for stay of a suit as contemplated under Section 34 the
Arbitration Act was dismissed by the lower courts. The Supreme Court
unanimously dismissed the appeal on the ground that exercise of discretion by
the lower courts could not be said to be perverse, arbitrary or capricious.
Further, it was held that in the circumstance of the case, taking of evidence
to
Mr. Justice Ajmal Mian while agreeing with
the conclusion of other judges thought it fit to add his remarks which are
indeed insightful:
Section 34 of the Arbitration while dealing with an
application in relation to a foreign arbitration clause the Court’s approach
should be dynamic. With the development
and growth of International Trade and Commerce and due to modernization of
communication transport system in the world, the contracts containing such an
arbitration clause are very common now a day. The rule that the Court should
not lightly release the parties from their bargains that follows form the
sanctity which the Court attaches to contracts must be applied with more vigor
to the contract containing a foreign arbitration clause. We should not over look the fact that any
breach of a terms of such a contract to which a foreign company or person is a
party, will tarnish the image of
The principles
of law which has been expounded by Mr. Justice Ajmal Mian are worth following in the present day world. His observations show the sensitivity to the
reality of the globalized world where sanctity of
contracts has come to assume a new importance. It is respectfully submitted
that a judgment on these lines instead of based on the technical considerations
as to exercise of discretion by subordinate courts and (effectively influenced
by) the doctrine of forum non-convenience, would have been more appropriate in
the larger interest of the country. One would also respectfully submit that
perhaps Mr. Justice Ajmal Mian
could have clearly dissented from the judgement
instead of upholding the decision of the lower court.
VII. CONTEMPORARY JUDICIAL APPROACHES TO ISSUE
OF SANCTITY OF CONTRACTS
English Courts
The approach of English law had been moulded to
a considerable extent by it’s largely laissez faire attitude to contracts in
the domestic law. The 19th century position[59] can be summed up by quoting Jessel MR in Printing and Numerical Registering Co. v Sampson:[60]
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.[61]
Thus the juristic model
of contracts in the domestic context was that of an agreement freely negotiated
between economic equals and the underlying the concept was that agreements must
be honored. However, noticeable changes took place in the 20th
century because of palpable imbalances in bargaining power in areas such as
housing[62]
employment[63]
and consumer contracts[64]
that warranted correction by the state. Though, the business contracts
are not closely regulated and autonomy of parties has remained the rule.
For a long time,
however, the English Courts were not inclined to trust the foreign dispute
resolution forums. As an eminent scholar puts it:
There can be little doubt that in
the nineteenth century, there was an assumption that the justice available in
the King’s courts was superior to that in the less fortunate lands”. Indeed,
sometimes judges were not slow to say so, for example, Shadwell VC observed
that “I consider that in the contemplation of the court of Chancery every
foreign court is an inferior court[65].
One of the
land mark cases making a point of departure was that of Atlantic Star. 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
The U.S
Courts’ attitude towards the foreign jurisdiction was initially unfavorable and
the choice of forum in favor of foreign jurisdictions was not generally found acceptable[67].
This perspective underwent a qualitative change when the US Supreme Court
honored the forum selection clause in M/S Bremen vs. Zapata Off-Shore Company’s
case[68].
The Court held that the Court of Appeal had given too little weight to the
choice of the forum clause (in this case, the courts of
The Supreme Court took note of the fact that overseas
commercial activities by the American enterprises had greatly expanded. The
barrier of distance that once tended to confine a business concern to a modest
territory no longer does so…. The expansion of American business and industry
will hardly be encouraged if, notwithstanding solemn contracts, we insist on
the parochial concept that all disputes must be resolved under our laws and in
our courts….We cannot have trade and commerce in world market and international
water exclusively on our terms, governed by our laws and resolved in our
courts….The argument that such clauses are improper because they tend to “oust”
a court of jurisdiction is hardly more than a vestigial fiction. It appears to
a rest at core on historical judicial resistance to any attempt to reduce the
power and business of a particular court.…. When businesses once essentially
local now operate in world markets, it reflects something of a provincial
attitude regarding the fairness of other tribunals. The threshold question [in regard to issue of
ouster of jurisdiction] is whether that the court should have exercised its
jurisdiction to do more than give effect to the legitimate expectations of the
parties manifested in their freely negotiated agreements, by specifically
enforcing the forum clause. There are compelling reasons why a freely
negotiated private international agreement, unaffected by fraud, undue
influence, or overweening bargaining power, such as that involved here, should
be given full effect.[69]
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.[70]
Parties to a contract can choose between one of several Courts having
concurrent jurisdiction.[71] 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.[72]
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.[73]
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[74].
VIII.
SANCTITY OF CONTRACTS IN
While dealing
with the subject of sanctity of contracts, it would be helpful if the type of
contacts that generated problems relating to contractual sanctity in
The concept of
sanctity of contracts under the Public-Private Partnership (PPP) arrangements,
including cases of Independent Power Producers (IPPs),
given their inherent long term nature, has acquired a special
significance. There would be little
chance of attracting private sector to enter into PPP arrangements unless there
is a certainty about honouring of contractual
commitments by parties (particularly by the public sector partners). Contracts
are long term in nature. On such time horizons many changes take place. PPP
contracts can work out only if contracts are dynamically and imaginatively
conceived and are insulated from challenges arising from time to time to their
sanctity.
In
Case of Highway: There is
also another PPP case relating to a highway project is highly illustrative of
problems faced by the private partners: A headline, some time ago appeared in a
national daily “Bad contract challenging assembly writ.”[75]
This was about a PPP contract under which Lahore Faisalabad
Expressway had been constructed. The matter came under strong criticism in the
Punjab Legislative Assembly. The
contract was concluded between the Punjab Government on one hand and private
sector parties and Frontier Works Organization (FWO) on the other hand in 2003
for building this first ever PPP Highway in the country on the BOT (build,
operate and transfer) basis. A privilege motion was tabled in the Assembly,
questioning the “Constitutional status” of the contract. The offending clause in the contract
reportedly provided that “Punjab Government undertakes not to take any action,
administrative or legislative, affecting terms of the contract”[76].
The mover questioned the constitutional status of the clause. In his view,
thousand of users of the highway were being over charged for use of the highway
and he informed that a House Committee had already pointed out loopholes in the
contract which empowered the private partners to raise toll tax annually and
transfer the maintenance cost of the road to the Provincial Government. The
ouster of powers of the Assembly was not correct. However, action leading to
re-fixing toll rates by any authority would damage the contract. Hopefully the state authorities will resolve
the matter. The matter is still pending before the Privilege Committee of
Punjab Assembly and consequential uncertainty is proving discouraging to new
investment under PPP mode.
Case of IPPs: One important sector in which PPP projects have become
popular is that of energy. In this sector public-private partnership has
assumed the form and nomenclature of the Independent Power Producers (IPPs). An IPP is “an entity, which is not a public utility,
but which owns facilities to generate electric power for sale to utilities and
end users”.[77]
In
In February, 1997, the Muslim League (N)
won the elections and formed the government which in 1998 started
investigations into IPP contracts signed under the previous regime. These
investigations had serious repercussions on IPP mode of energy generation. The
judgment in HUBCO’s case further aggravated the
situation.[78] 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
Table 3 – Status of IPPs
|
Status |
Years of
Commissioning |
Number of IPPs |
|
Commissioned |
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
* Including rental plants.
IX. APPROACH
OF PAKISTANI COURTS TO SANCTITY OF CONTRACTS
Mr. Justice Umar Ata Bandial has made a
perceptive analysis regarding limitations on arbitrability
of international disputes under the Pakistani Law:
“For a
long time international commercial arbitration was treated with apprehension in
One wishes
that the state of affairs depicted above is now really prevalent and judicial
resistance has become a “history”. This,
in view of the authors is, more of a wish than a reality on ground. Only
dissenting judgments in Hubco and Eckhardt
cases recognized the manifest need of respecting the agreements of parties to
refer disputes to the foreign arbitration. The “visionary call”, (as Justice Bandial rightly calls it) by Mr. Justice Ajmal Mian has not been
effectively heeded to.
It seams that paradigm shift in the world
economy bringing in its wake, the evident importance of foreign investments and
trade has not been fully registered. It was very much possible in Hubco case for the majority of the Court to adopt a
different view of public policy and the issue of criminality. The minority
opinion was backed by cogent reasons. Similarly the majority could have
embraced the more forward looking and appropriate view of Mr. Justice Amjad Mian in Eckhardt
case. Decisions of the majority in both Hubco and Eckhardt cases may be unexceptional in the sense that they
are consistent with a certain strand of the existing principles of domestic law
and private international law as adopted in
X. CONCLUSIONS
Globalization
is fact of life. The process of
integration has to be, therefore, addressed in a dynamic manner keeping with
the spirit of time. Attitudes and perspectives which proved useful in earlier
times and the way the challenges of life were met,
will have to undergo change if one desires to survive in the new world. Any
nation that fails to live by new rules of existence is liable to pay the
penalty of being marginalized. Such an outcome would have patently adverse
implications for the welfare of the people.
They will remain struck in narrow grooves while other nations will keep
on marching on the road to progress in a globalized
world.
Countries can
reap the benefits of globalization, if among other things, they recognize the
importance of the sanctity of commercial and investment contracts, made between
them and their citizens on one hand and foreign countries and foreign
nationals/entities on the other.
Judicial institutions like
other organs of states will have to keep in step with the dynamics of emerging
realities. Our judiciary is extremely
enlightened and capable to realize the validity of this proposition. However, at times other factors can become
barriers to change. As it has been pointed out by the Chief Justice Mr.
Muhammad Iftikhar Chaudhry
in his address to
In
Hopefully, the judiciary of
* Inaamul Haque
LL.M (Harvard), Distinguished Scholar/
Former
Executive Director World Bank, Advocate High Court.
** Naeem Ullah Khan LL.M (
This article
contains personal views of authors and do not necessarily reflect those of any
Organization, where they are serving.
[1] Subba
Rao (J) in Gherulal vs Mahadeodas AIR 1959 SC 781,
(1959) 2 SCA 342
[2] R. Cooter
and T. Ulem, Law and Economics at 222 (2000)
[3] A. Sen, What is the
Role of Legal And Judicial Reform in the Development
Process? Paper read at The World Bank Legal Conference,
5 World Bank Group, Globalization, Growth and
Poverty, 2000
4 Adapted from M. Steger “Globalization – A very, Building
An Inclusion World Economy I (2002)
6 S. Harper, Joint Press
Availability at Fairmont Le Chateau Montebello,
Also see J.
Paul, The Myth of Economic Interdependence, Waseda
Proceedings of Comparative Law, at 294, Vol.11 (2008)
[7] J. Reitz, The
Convergence Theory and Political Economy as a Barrier to Globalization, 2001.
Also see Law
& Globalization available at http:/www.google.com last visited
[8] Id
[9] See I.Haque & R.Burdessu,
[10] A. Sen, Supra note 3.
[11] K. Cheema, Business
Law, at 1 (2009)
[14] Gross Domestic Product means that total market value of all final goods
and services produced in a country in a given year, equal to total consumer,
investment and government spending, plus
the value of exports,
minus the value of imports. Available at http://www.investorwords.com/2153/GDP.html
last visited on
[15] Globalization is the
defining attribute of our times. Societies and economies are becoming
increasingly integrated. Centripetal impulses have received string impetus
from, inter alia, “reduced costs of transport, lower
trade barriers, faster communication of ideas, rising capital flows, and
intensifying pressure for migration.” The resulting integration is a highly
complex process, affecting almost all aspects of our everyday lives. A highly
interdependent world is no longer an elegant phrase but has become a reality.
[16] Government
of
http://www.finance.gov.pk/finance_economic_survey.aspx
visited on August 16, 2009.
[17] I. Carr “International
Trade Law” at 1xxxvii (2005)
[18] M. Pryles,
etal “International Trade Law” at 10 (1996)
[19]
[20] Economic Survey of
Pakistan, 2008-09 supra note 16.
[21] Id at 12-13.
[22] Board of Investment,
available at http://www.pakboi.gov.pk/forign-invest.htm last
visited on
[23] Economic Survey of
Pakistan 2008-09 supra note 16 at 15-16.
[24]
[25] Pakistan
Infrastructure Investment Conference, Concept Note, at 1, para
1,
[26] E. Buscaglia and
[27] Foreign Investment and Rule of Law, Business
Recorder,
[28] See National Judicial Policy at 7 (2009)
available at http://www.google.com.pk last visited on
[29] See Supra note 23, at 9
[30] Sec Supra note 23, at 10
[31] R. H Folsom et al
“International Business Transactions” 906-907 (1999)
[32] Id
[33]
[34] R. H Folsom et al, supra
note 29, at 908.
[35]
[36] R. H Folsom et al, supra
note 29, at 908-909.
[37] See generally Lord Wright, LEGAL ESSAYS AND ADDRESSES; Winfield Public
Policy in the English Com noun law, 42Har LR76-102 (1928).
[38] See Lord Wright in Fender vs. St John Mildmay,
AC1, at 38 (1938)
[39] Earl of Halsbury LC in Jason vs. Driefontein consolidated mines Ltd (1902) AC484.
[40] See Subba Rao J(as he than was) in Gherulal vs. Mahadeodas; (1959) 2SCA369.
[41] Ashquith J views in Monkland vs. Jack Barclay Ltd.
(1951) All ER 714,723.
[42] Lord Wright views in fender vs. John Mildmay,(1938)
AC 1 723
[43] See Parke B views in Egerton vs. Brownlow, (1853 )4HLC1 123:10 ER 359, 408
[44] Lord Atkin views in Fender vs. john Mildmay,( 1938) AC1
[45] Borrough J views in
[46] Parke B. views in Egerton
vs. Brownlow (1853) 4HLC 1,123.
[47] Lord Davy views in Janson vs. Driefontein Consolidated Mines, (1902) AC 484, 500.
[48] In Fender vs. St. John Mildmay, (1938) AC1
[49] AIR 1959 SC 781 : (1959)
2 SCA 342, 370
[50] Dr. A. Singh, Law of
Contract, at 214 (….).
[51] Cave J Mirams, Re
(1891) 1 QB 594,595 JESSEL MR IN printing and numerical registering Ca v.
Sampson (1875) LR 19 Eq 462,465.
[52] Ratanchand Hirachand
vs. Askar Nawaz Jung, AIR
1976 AP 112.
[53] Manzoor Hussain
and Others vs. Wali Muhammad and Abdul Shakur, PLD 1965 SC 425.
[54] PLD 1969 SC 301
[55] PLD 1972
[56] HUBCO vs. WAPDA, PLD
2000, SC 841
[57]
[58] PLD 1993 SC 42
[59] For the relationship between 19th century political philosophy and the
law of contract, see Atiyah,
The rise and fall of freedom of contract (1979)
[60] J. Brien,
Smith’s Conflict of Laws, at 307
(1999).
[61]
Printing and Numerical Registering Co. v Sampson (1875) LR19 Eq 462, p465. George Jessel
had himself served as a liberal MP and solicitor General in the first
administration of WE
[62] See the housing of the working classes act 1890, leading to the increase
of rent and Mortgage interest (War Restrictions) Act 1915 and the volume of
legislation that subsequently followed, culminating in the rent act 1977.
[63] See the workmen’s compensation Acts 1897, 1906; Coal Mines Regulation Act
1908; trade boards Act 1909;however, the subject was only to expand in the
post-war period, with the contracts of Employments Act 1963 and the Redundancy
Payments Act 1965.
[64] Although the courts had tried to restrict the scope of exclusion clauses
priors to 1945, the central division between consumer contracts and commercial
contracts was given effect to in the Supply of Goods (Implied Terms) Act 1973.
[65] Bent vs. Young (1838) 9 Sim
180, at 191.
[66] Smith’s Conflict of
Laws, supra note 57 at 201.
[67] Carbon Black Export Inc.
vs. The Monrosa
[68] 407
[69] See also C. Hotchkiss, “International Law For Business” at 153-154 (1994).
[70] Shree Subhalaxmi Fabrics (P) Ltd. vs. Chand
Mal Baradia, (2005) 10 SCC 704; Continental Drug Co,
Ltd. vs. Chemolds and Industries Ltd. AIR 1955 Cal
161 (DB); Ram Bahadur Thakur
and Co.vs.Devidayal (Sales) Ltd, AIR 1954 Bom 176 (DB); Hoosen Kasam Dada (India) Ltd. vs. Motilal
Padampat Sugar Mills Co. Ltd, AIR 1954 Mad 845 (DB);
National Petroleum Co. vs. F.X. Rebello, AIR 1935
Nag48; Kidri Prasad vs.K.R.
Khosala, AIR 1923 Lah 425 : 75 IC 590; Jagan Nath vs. Burma Oil Co., AIR 1929 Lah
605 :0119 IC 481.
[71] Patel Roadways pvt. Ltd. Vs. Bada India
Ltd,. AIR 1982
[72] P.C. Markanda, The Law of Contract Act Vol. I at 602-603 (2008)
[73] Cittaranjan Guha vs. Parul Rani Nanda, AIR 1946
[74] P.C. Markanda, supra
note, 72 at 603.
[75] “Bad Contract
Challenging Assembly Writ” Dawn Newspaper,
[76]
[77] Independent Power Producers (IPP) Rating Methodology, at
[78] A. Siddiqui,
IPPs: The Real Issues, The
[79]
[80]
See U. Bandial (Justice) “Limitations on Arbitrability of International Commercial Dispute under
Pakistani Law paper presented on the occasion of 59th Anniversary of the
Establishment of Supreme Court.
[81]
Chief Justice Iftikhar Chaudhry’s
Speech at