This third article in a three-part series, prepared in collaboration with Penningtons Manches Cooper, focuses on the enforcement of foreign arbitral awards in Pakistan and the scope of the public policy exception. It traces the evolution of Pakistan’s arbitration framework following the enactment of the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011, examines the Supreme Court’s landmark clarification in Taisei Corporation vs. A.M. Construction Company, and highlights how recent jurisprudence has aligned Pakistan with international enforcement standards under the New York Convention. Against the backdrop of ongoing disputes in the energy sector and the termination of Power Purchase Agreements, the article also considers the implications for investors, particularly the role of Bilateral Investment Treaties in safeguarding cross-border energy investments.
Pakistan became a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) in 2005, committing itself to recognizing and enforcing foreign arbitral awards in accordance with international standards. However, enforcement required domestic legislation, as the Arbitration (Protocol and Convention) Act, 1937, which was previously in force, did not align with the Convention’s requirements. To address this gap, Pakistan enacted the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011 (the “2011 Act”), which provides the necessary legal framework for enforcing foreign arbitral awards. The 2011 Act designates the High Courts as the exclusive forums for enforcement, preventing lower civil courts from interfering in the process. Moreover, it explicitly restricts the grounds for refusing enforcement to those specified in Article V of the New York Convention, ensuring that Pakistani courts follow international arbitration norms.
Despite the enactment of the 2011 Act, Pakistan’s legal landscape remained plagued by inconsistencies, as many litigants continued to challenge foreign arbitral awards under the Arbitration Act, 1940 (the “1940 Act”), which applies only to domestic arbitrations. The 1940 Act allows broader judicial intervention, including challenges under Sections 30 and 33, which permit a court to set aside an arbitral award on grounds of error of law or fact – a standard inconsistent with the New York Convention. The misapplication of the 1940 Act by lower courts led to prolonged litigation, conflicting rulings, and uncertainty regarding the enforcement of foreign arbitral awards in Pakistan. In many cases, parties would challenge foreign awards in civil courts under the 1940 Act, even though the 2011 Act mandated that such challenges be heard only by the High Courts. It did not help that in an earlier decision titled Hitachi vs. Rupali, reported as 1998 SCMR 1618, the Supreme Court held that, in the absence of an express agreement to the contrary, an arbitration agreement embedded in a contract governed by Pakistani law was itself subject to Pakistani law. The Court concluded that, since the arbitration agreement was governed by Pakistani law, the 1940 Act applied, giving Pakistani courts “concurrent jurisdiction” over the arbitration proceedings and awards. This interpretation blurred the distinction between domestic and foreign awards, allowing civil courts to entertain challenges that, under the 2011 Act, fell within the exclusive jurisdiction of the High Courts. As a result, enforcement proceedings were delayed, and Pakistan’s obligations under the New York Convention were undermined by excessive judicial interference.
The Supreme Court of Pakistan addressed these inconsistencies in its landmark ruling in Taisei Corporation vs. A.M. Construction Company. The Court firmly held that foreign arbitral awards fall exclusively under the 2011 Act, thereby overruling the wrongful application of the 1940 Act by lower courts. It clarified that the seat of arbitration (not the governing law of the contract) determines whether an award is foreign, aligning Pakistan’s jurisprudence with international best practice. Additionally, the Court emphasized that only the High Courts have jurisdiction over foreign arbitral awards, preventing civil courts from interfering in enforcement proceedings.
The Taisei ruling represents a significant shift in Pakistan’s arbitration jurisprudence, removing the loopholes that previously allowed parties to delay enforcement. With the Supreme Court’s clarification, Pakistan now has a clear and consistent framework for enforcing foreign arbitral awards, aligning itself with global arbitration-friendly jurisdictions.
It is worth noting that under Article V(2)(b) of the New York Convention, public policy is one of the limited grounds on which a court may refuse to enforce a foreign arbitral award. However, this exception is narrowly construed and applies only when enforcement would violate the fundamental principles of morality and justice in the enforcing state. Courts worldwide, including in Pakistan, have emphasized that public policy cannot be used as a pretext for reviewing the merits of an arbitral award, ensuring that the pro-enforcement bias of the Convention remains intact. This consideration is especially relevant in Pakistan’s energy sector, where the premature termination of contractual arrangements could expose the Government to significant legal and financial risks, as explored in our previous article here.
Consequences of termination of Power Purchase Agreements (PPAs)
As outlined in our previous article, the Government of Pakistan has recently announced the premature termination of PPAs with five independent power producers (“IPPs”), a move driven by soaring energy prices, which are amongst the highest in the region. With many households transitioning to solar energy, demand for grid-based energy has plummeted, resulting in a supply glut. Should the Government of Pakistan choose this course of action, the termination of PPAs with IPPs is likely to trigger legal disputes, with affected investors pursuing remedies through arbitration and enforcing sovereign guarantees.
Several PPAs include dispute resolution clauses under the International Centre for Settlement of Investment Disputes (“ICSID“) or other international arbitration forums, where IPPs may claim compensation for lost revenues and damages. Given past precedents, such as the Reko Diq case, adverse arbitration awards could impose substantial financial liabilities on the Government of Pakistan, including penalties, legal costs, and interest payments. Additionally, many of these projects were backed by sovereign guarantees, obligating the government to cover unpaid capacity charges. If the government fails to honour these commitments, investors may invoke these guarantees, potentially leading to enforcement actions against Pakistan’s offshore assets.
This could further weaken Pakistan’s fiscal position, limit access to international financing, and increase borrowing costs. The perception that Pakistan does not uphold its contractual obligations may also deter future investment in energy and infrastructure, particularly from foreign lenders and development finance institutions that prioritize regulatory stability.
In light of these potential financial and reputational risks, it becomes imperative for foreign investors to adopt strategies that mitigate exposure and safeguard their interests in Pakistan’s energy sector. One of the most effective mechanisms for achieving this is through the strategic use of Bilateral Investment Treaties (“BITs“), which offer critical protections against regulatory uncertainty and adverse state actions.
Protecting foreign investments in Pakistan’s energy sector: the role of BITs and structuring FDI for maximum protection
For foreign investors in Pakistan’s energy sector, BITs provide crucial protections against regulatory uncertainty, expropriation, and breaches of contractual commitments, including disputes over Take-or-Pay clauses in PPAs. With the recognition of Take-or-Pay clauses as enforceable under Pakistani law (see our article here), and the recently established pro-enforcement stance of Pakistan’s superior courts towards foreign arbitral awards in cases such as Taisei Corporation vs. A.M. Construction Company, the legal landscape for energy investments has improved significantly. However, BITs continue to offer an additional layer of security by guaranteeing fair and equitable treatment, protection against expropriation, full protection and security, free transfer of funds, and most importantly, access to international arbitration under ICSID or UNCITRAL rules. These protections ensure that foreign investors have recourse beyond domestic courts and can safeguard their rights in the event of regulatory changes, contract disputes, or other state actions that could impact their investments.
In fact, potential claims under BITs cannot be ruled out even in those cases where the Government of Pakistan has successfully settled or revised PPAs with IPPs. This is based on the principle set by the ICSID tribunal in CMS v. Argentina holding that a shareholder has “a separate cause of action under the Treaty in connection with the protected investments, which can be asserted independently from the rights of [the company]”. Similarly, another ICSID tribunal in Sempra v. Argentina recognized that the “procedural independence” exists between an investor and the local company.
To avail these benefits, investors must ensure their investment qualifies for protection under a BIT between Pakistan and a favorable jurisdiction. One key strategy is to incorporate the investment vehicle in a country that has a strong BIT with Pakistan. This ensures that in case of a dispute, the investor can seek recourse under the treaty’s provisions rather than relying solely on Pakistan’s local legal system. Investors should also structure their transactions to clearly qualify as a protected investment under the relevant BIT, ensuring that contractual rights, equity stakes, and energy projects fall within the treaty’s scope.
This article was co-authored by Kamran Rehman and Richard Raban-Williams of Penningtons Manches Cooper.
