CA-2025-000131 - [2025] EWCA Civ 928

The essential facts

The Power Purchase Agreement

NTDCL is a state entity incorporated in Pakistan and is the centralised electricity purchaser and the operator of the electricity network of that country. SHPL is a special purpose vehicle incorporated in Pakistan in the business of power production. It is ultimately owned by companies incorporated in South Korea.

On 8 March 2012 NTDCL and SHPL entered a Power Purchase Agreement (“the PPA”) pursuant to which SHPL agreed to construct, operate and maintain a 147 MW hydro-electric power generation complex (“the Plant”) located at Patrind in Azad Jammu and Kashmir (“the AJK”). In exchange, NTDCL agreed to purchase from SHPL electricity generated at the Plant for a period of 30 years from the commercial operation date (“the COD”) of the Plant. The PPA specified a Reference Tariff of 7.0496 PKR/kWh (8.2937 US Cents/kWh) for the electricity to be supplied by SHPL, based on an assumed total cost of the project of US$362,392,000 (the Reference Project Cost). Schedule 1 of the PPA contains detailed provisions for adjusting the Reference Tariff, including provision in Annex V to that Schedule for adjusting, as at the COD, the cost of civil works due to cost escalation during the construction period.

Article 18 of the PPA deals with the resolution of disputes between the parties. Article 18.3 provides that any dispute that has not been resolved by discussion or by expert determination under 18.1 or 18.2:

…shall be settled in accordance with the rules of the London Court of International Arbitration, as in effect on the date of this Agreement (the “Rules”), by one (1) arbitrator appointed in accordance with the Rules. The arbitration proceedings shall be conducted, and the award shall be rendered, in the English language.”

Article 18.3(b) provides for UNCITRAL arbitration instead of LCIA arbitration in certain circumstances which did not arise in the present case. Article 18.3(c) provides for the seat of the arbitration as follows:

“The arbitration shall be conducted in Lahore, Pakistan; provided, however, that if the amount in Dispute is greater than five million Dollars ($5,000,000) or the amount of such Dispute together with the amount of all previous Disputes submitted for arbitration pursuant to this Section 18.3 exceeds seven million Dollars ($7,000,000) or any issue in Dispute is (i) the legality, validity or enforceability of this Agreement or any material provision hereof, or (ii) the termination of this Agreement, then either Party may, unless otherwise agreed by the Parties, require that the arbitration be conducted in London, in which case the arbitration shall be conducted in London. Except as awarded by the arbitrator and except as hereinafter provided, each Party shall be responsible for its own costs incurred by it in connection with an arbitration hereunder. Notwithstanding the foregoing, either Party may require that arbitration of any Dispute be conducted in London (or such other location outside Pakistan agreed to by the Parties), in which case the arbitration shall be conducted in London (or such other location outside Pakistan agreed by the parties); provided, however that if the dispute is not of a type that could have been conducted in London (or such other location outside Pakistan agreed by the Parties) in accordance with the provisions of the foregoing sentence, the Party requiring that arbitration be conducted in London (or such other location outside Pakistan agreed by the Parties) shall pay all costs of arbitration as and when incurred by the other Party (including out of pocket costs but excluding any award made by the arbitrator) in excess of the costs that would have been otherwise incurred by such other Party had the arbitration been conducted in Lahore, Pakistan…”

By Article 19.7, the PPA is to be governed by and construed in accordance with the laws of Pakistan.

The dispute referred to arbitration

8 November 2017 was declared to be the COD. On 9 August 2018 SHPL sought an adjustment of the Project Cost (an increase to US$420,128,000) and the tariff (an increase to 11.600 PKR/kWh or 11.0586 US Cents/kWh) as at the COD in accordance with Schedule 1 to the PPA, reflecting various changes to the design of the project over the course of its construction and development.

However, although the PPA provides for determination of the applicable tariff as between SHPL and NTDCL, it is common ground that, as a matter of the law of Pakistan, determination of tariffs for electricity is the exclusive statutory responsibility of the National Electric Power Regulatory Authority (“NEPRA”). In 2008 NEPRA had issued a Mechanism for determination of Tariff for Hydropower Projects. NTDCL forwarded SHPL’s request to NEPRA. On 29 July 2020 NEPRA issued a decision reducing the Project Cost at the COD to US$326,261,000 and the final tariff at the COD to 8.3924 PKR/kWh or 8.3170 US Cents/kWh.

On 31 March 2021 SHPL issued a notice of dispute to NTDCL under Article 18.1 of the PPA, stating that it was entitled to the higher tariff of 11.6600 PKR /kWh under the PPA. Having received no response, on 31 August 2021 SHPL filed a Request for Arbitration under Article 18.3 of the PPA, commencing an arbitration under the rules of the London Court of International Arbitration (“LCIA”) with its seat in London. The London seat was confirmed by NTDCL in its Response to the Request for Arbitration. On 13 June 2022 the LCIA Court appointed Laurent Gouiffès as sole arbitrator (“the Arbitrator”).

The substantive relief claimed by SHPL in the arbitration was for (i) a declaration that pursuant to Schedule 1 of the PPA the Adjusted Project Cost at COD is US$394,561,183; (ii) a declaration that SHPL is entitled pursuant to that Schedule to a COD Tariff of 10.6736 PKR/kWh and (iii) an order that NTDCL pay the balance of the COD Tariff to the extent not compensated by the tariff paid by NTDCL from 8 November 2017 to the date of the Award.

NTDCL’s contention was, essentially, that NEPRA has exclusive authority to determine the tariff as a matter of the law of Pakistan and NEPRA had duly exercised that power, taking into account SHPL’s contentions. SHPL’s claim was, it submitted, an impermissible attempt to circumvent the regulatory position. The arbitrator had no jurisdiction to determine a different tariff to that determined by NEPRA and such a claim was inadmissible. In any event, NTDCL argued that SHPL’s claimed costs were unreasonably inflated.

The Award

In the Award, issued on 7 May 2024, the Arbitrator decided at [474] that the correct interpretation and application of Schedule 1 the PPA produced a total Project Cost at COD of US$378,312,000 and a COD Tariff of 10.3632 PKR/kWh.

As for the role of NEPRA, and his own jurisdiction, the Arbitrator pointed out at [148] that in 2012 NEPRA had approved the PPA, the adjustment provisions in Schedule 1 and the arbitration provisions in Article 18.3. He went on to state as follows:

“148….On a purely contractual level, there is no barrier to an arbitral tribunal opining on provisions set out in a commercial contract which contains an arbitration clause, and issuing decisions as to the interpretation and application of that contract. As set out above, the PPA contains a broad arbitration clause at Section 18.3, which refers any dispute “arising out of or in connection with” the PPA to resolution by arbitration.

It is not in dispute that NEPRA’s decision at COD provides that [SHPL] is “allowed to charge […] tariff of Rupees 8.3924/kWh”, and that this was published in the Gazette on 2 August 2021. However, the fact that this tariff was published in the Gazette does not necessarily mean that it arose from a correct application of the contract. The question before the Sole Arbitrator is one of contractual interpretation, and he is not prevented by public policy from opining on whether this published tariff arose from a correct interpretation of the PPA or not.

In any event, notwithstanding [NTDCL’s] public-facing role, it is still a commercial entity which has voluntarily entered into a commercial contract and cannot escape the implications of the terms it has agreed to. If that means that money is owed to [SHPL], then that sum is due as a matter of contract….. There is, in any event, no legal or regulatory barrier to an order that [SHPL] is entitled to what it calls the “balance” for the past, if it is determined that anything is due as a matter of contract.

…..

With respect to [SHPL’s] requested relief for the past, however, a declaration as to the theoretical consequences of the application of the PPA would serve a practical purpose. If it is established that the application of the PPA would, in theory, result in a different tariff than that arrived at by NEPRA, it is within the powers of the Sole Arbitrator to order payment of the delta between the amount which should have been paid and what has actually been paid to date, since that is a purely contractual matter and there is nothing in Pakistani law which would prevent such an order. The fact that such an order may have indirect implications for consumers is, as stated above, a natural and unavoidable consequence of [NTDCL’s] role, common to all entities that are funded by the public, and is not a good enough reason not to hold the Parties to the contractual terms they agreed to.”

The Arbitrator returned to the question of the interrelationship between the role of NEPRA and the contractual provisions of the PPA later in the Award, recognising that it was for NEPRA to determine the actual tariff to be paid as a matter of the law of Pakistan, but that could be proven to be contractually wrong and so declared by the Arbitrator, such that the difference would be payable to SHPL as a matter of contract:

The Sole Arbitrator agrees with [NTDCL] that NEPRA’s determination of 29 July 2020 is now part of Pakistani law, and that this is a reality regardless of whether any such determination was required by the PPA or by law. The fact that NEPRA may have incorrectly applied the contract is one thing: the fact remains that this tariff, even if can be proven to be contractually wrong, has been published in the Gazette. Accordingly, any declaration from the Sole Arbitrator on the tariff resulting from a correct application of Schedule 1 could not replace the tariff set by NEPRA’s going forward. The most that such a declaration could achieve with respect to the current and future tariff would be to identify a misalignment between the law and the contract on the basis of which the Parties can work together with the relevant authorities to remedy the misalignment going forward.

With respect to the past, however, a declaration as to the consequences of the application of the PPA would serve a practical purpose for [SHPL], as it would give rise to a contractual claim for the delta between the amount which should have been paid and what has actually been paid to date. Notwithstanding [NTDCL’s] public-facing role, it is still a commercial entity which has voluntarily entered into a commercial contract and cannot escape the implications of the terms it has agreed to. If that means that money is owed to [SHPL], then that sum is due as a matter of contract.…

….

Unlike determining the tariff, then, there is no legal or regulatory barrier to an order that [SHPL] is entitled to what it calls the “balance” for the past, if it is determined that anything is due as a matter of contract.”

The dispositive section of the Award accordingly provided as follows:

For the reasons set out above, the Sole Arbitrator: