Govt want SOEs disputes resolved through local arbitration

The government is pushing for state-owned enterprises (SOEs) to resolve their disputes through local arbitration rather than international arbitration. These SOEs will be required to incorporate local arbitration clauses in their agreements, except when dealing with international entities.

According to a senior official from the Ministry of Law and Justice, amendments to the State-Owned Enterprises (government and operations) Act, of 2023, will mandate local arbitration for domestic SOEs. International arbitration will only be allowed in agreements with foreign entities, subject to prior government approval.

Previously, the Special Investment Facilitation Council (SIFC) had urged the law ministry to restrict public sector entities from resorting to international arbitration for dispute resolution.

An example of this issue is a dispute worth Rs14 billion between Sui Northern Gas Pipelines Limited (SNGPL) and the National Power Parks Management Company (NPPMC). In August of this year, SNGPL notified NPPMCL of its intention to pursue international arbitration to recover the outstanding amount of Rs14.6 billion related to “take or pay” invoices for 2020 and 2021. This prompted the attention of SIFC, which then prompted the ministry to amend the SOE Act to prevent both entities from going to international arbitration.

The law ministry has now outlined instructions for SNGPL, NPPMCPL, and Quaid-e-Azam Thermal Power Limited (QATAPL) to enter into a one-time arbitration agreement for local arbitration, by the Arbitration Act of 1940, as permitted under Section 17(1) of the State-Owned Enterprises (government and operations) Act, 2023.

Currently, these entities have the option of international arbitration as a dispute resolution forum in their agreements. However, because all three entities are state-owned, the federal government wishes to avoid paying penalties in foreign currencies and is emphasizing the use of local arbitration for SOE dispute resolution.

In a previous instance in 2021, SNGPL had lost claims amounting to Rs19 billion against NPPMCL in two arbitrations before the London Court of International Arbitrations (LCIA).

NPPMCL owns and operates two 1,200 MW RLNG-based power plants in Punjab and procures RLNG for power generation from SNGPL. The disputes arose in May 2018 when SNGPL raised “take or pay” invoices against NPPMCL, seeking to recover Rs10.37 billion from the gas supply deposit held by NPPMCL under their gas supply agreements. NPPMCL contested these claims, leading to the disputes being submitted to the LCIA for resolution. The LCIA arbitrator’s recent decision found SNGPL’s evidence to be self-serving and directed SNGPL to pay Rs15.3 billion, including interest, to NPPMCL. The counterclaims raised by SNGPL were also dismissed.