Determination in first arbitration award: SHPL: CPPA-G/ NTDC advised to fulfil payment commitment

ISLAMABAD: The Attorney General Office has advised CPPA-G/NTDC to honour payment of amounts to Star Hydro Power Limited (SHPL) that were determined in the First Arbitration Award if there are no compelling reasons in refusing to do so, well informed sources told Business Recorder.

Sharing the details, sources said, Attorney General Office, in a letter cited references of correspondence of PPIB, Ministry of Energy (Power Division) dated December 2023 conveying the decision of the meeting of the SIFC (Working Group) held to request the views of Attorney General for Pakistan for an opinion on the prospects of success in two international arbitral proceedings related to disputes between Star Hydropower Limited, NTDC and CPPA-G to which the Federation is not a party, and suggestions on the way forward.

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According to the AG Office, the facts of the conduct of the proceedings and involvement of the Multilateral Investment Guarantee Agency (MIGA) as conveyed by PPIB and the Ministry of Energy (Power Division) correspondences are understood as follows: (i) Power Division and NTDC/ PPIB/ CPPA-G have engaged a panel of lawyers since the inception of the First Arbitration Proceedings, Lahore Enforcement Proceeding and Second Arbitration Proceedings;(ii) The Federation/ GoP is not a party to the First Arbitration Proceedings, Lahore Enforcement Proceedings and Second Arbitration Proceedings but consequential proceedings arising from non-payment of arbitral awards against NTDC/ PPIB/ CPPA-G will result in further litigation invoking sovereign guarantees against the Federation/ GoP; (iii) consequential to the First Arbitration Award, SHPL have initiated arbitral proceedings invoking sovereign guarantee against the Federation and;(iv) final hearing in the Second Arbitration Proceedings has recently concluded and an London Court of International Arbitration Award will likely be issued by November 2024. Such an award may be challenged by either party in the UK High Court. In the event SHPL obtains a favourable award in the Second Arbitration Proceedings and NTDC/ CPPA-G refuse to honour it, SHPL will likely proceed with arbitral proceedings against the Federation/ GoP for inter-alia breach of sovereign guarantees provided to SHPL.

AG Office argued that due to current position, it is not appropriate for it to comment on prospects of success in matters which are sub-judice, pending arbitral/ judicial determinations in which submission of respective legal arguments/ defences have already been advanced and to which the Federation is not a party.

Accordingly, the Ministry of Energy (Power Division) and NTDC PPIB, may, if it wishes, first obtain a detailed opinion from the panel of lawyers engaged at substantial public expense and who have, upon instructions and policy decisions, already submitted elaborate legal arguments/ defences in proceedings involving case papers spanning thousands of pages inclusive of expert and witness evidence on technical matters.

In this regard and in relation to the First Arbitration Proceedings and Lahore Enforcement Proceedings, NTDC/ PPIB may also clarify and consider the following: (i) Are there compelling reasons for not honouring the amounts determined in the First Arbitration Award thereby risking not only invocation of sovereign guarantees but possible financial reputational repercussions for the Federation under the MIGA Convention? and;(ii) Which public policy and compelling reason arguments are NTDC/ PPIB relying on to prevent recognition of the Award in Pakistan under Article V (2a) and (2b) of the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards Act) 2011.

Furthermore, it may also kindly be noted that consequential to the First Arbitration Award, on August 30, 2022, SHPL initiated proceedings against the Federation/GoP at the LCIA for inter alia breach of the Sovereign Guarantee and payment of amounts determined in the First Arbitration Award. On August 12, 2023, the arbitral tribunal in phase 1 of the First Sovereign Guarantee Arbitration issued a preliminary award in favour of SHPL, whereby it was decided inter alia that the determinations in the First Arbitration Award are binding against the Federation/ GoP for the purposes of the SHPL’s claim in the Sovereign Guarantee Arbitration.

Final hearings in the remaining phase 2 of the First Sovereign Guarantee Arbitration are due to take place in February 2024 and an award is likely to be issued by November 2024. Such an award would be the first LCIA involving the Federation as a party and under which SHPL may subsequently be entitled to compensation by MIGA under the MIGA Guarantee.

In relation to the involvement of MIGA, the following observations may also be noted: (i) AG Office is not privy to the MIGA guarantees; ( ii) MIGA is a member of the World Bank Group and provides political risk insurance’ guarantees for investment projects in developing countries. Pakistan is a signatory to the MIGA convention; (iii) MIGA’s guarantee programs have proven beneficial to investors in emerging markets.

These guarantees provide a security for investors, mitigating risks and encouraging foreign direct investment in countries that may otherwise be considered too risky; (iii) on December 23, 2011, the Finance Secretary in accordance with the Guidelines on Approval of MIGA Guarantees signed by the GoP on January 211990 (“Consent Letter”), provided approval to MIGA to provide a guarantee to the sponsors in relation to projects exceeding $50 million; (iv) As per Article 15 of the MIGA Convention, MIGA “shall not conclude any contract of guarantee before the host government has approved the issuance of the guarantee by MIGA against the risks designated for cover.” Accordingly, and as per the Consent Letter, it is assumed that the GoP has approved the MIGA guarantee; (vi) the right of subrogation under the MIGA Convention provides that if MIGA pays or agrees to pay a claim, it assumes the rights of the indemnified investor. In this regard, Article 18 of the MIGA Convention provides: “Subrogation (a) Upon paying or agreeing to pay compensation to a holder of a guarantee, the Agency shall be subrogated to such rights or claims related to guaranteed investment as the holder of a guarantee may have had against the host country and other obligors. The contract of guarantee shall provide the terms and conditions of such subrogation; (vii) as provided in Annex II of the MIGA Convention, in the event that settlement negotiations between MIGA and the host country fail, either party will have access to international arbitration unless both agree to resort first to conciliation, MIGA may also agree on alternative dispute settlement MIGA procedures; (viii) As provided in Article 58 of the MIGA Convention, a dispute between MIGA and the holder of the MIGA guarantee shall be submitted to arbitration as per the provisions specified in the MIGA guarantee; (ix) Political risk insurance such as provided by MIGA and investment treaty arbitration are both methods of alleged risk mitigation that may be pursued by the sponsors/ investors. The sponsors/ investors would normally pick the method that is more suitable to the specific investment, taking into consideration the merits and costs of each method, the length of the processes and the scope of risks covered; x) In 2001 after a pause of four years, MIGA resumed political risk insurance for foreign direct investments in Indonesia following Indonesia’s agreement to reimburse MIGA for a $ 15 million insurance claim paid on a cancelled power project. This is the only recorded claim against MIGA under the MIGA Guarantee.

Final hearings have now concluded and an award in the Second Arbitration Proceedings is expected by November 2024. Therefore, NTDC may consider the matter once determinations have been made in a binding arbitral award and before invocation of a sovereign guarantee.

Copyright Business Recorder, 2024