By blessing shady deals, arbitration courts legalising international loot

LAHORE: Do the courts of law have the power to intervene and quash agreements the government has signed to award contracts that belie business sense, deny level-playing field to other stakeholders, and look like outright favours to the blue-eyed parties?

The international arbitration courts emphasise the sanctity of contracts and penalise countries like Pakistan even if its courts call those contracts illegal.

These courts are in fact legalising the loot. Look at the 18 percent guaranteed rate of return on investments to the independent power producers (IPPs). You will not find any business anywhere in the world that guarantees such plump profits to any enterprise for a period of over two decades. These contracts were written against the law but clauses incorporated in them shielded the illegality from the law.

Pakistani economy has been crippled by profane contracts like those signed with IPPs like the Karkey Karadeniz Elektrik Uretim, Turkish power company, and with the miners like Tethyan Copper Company for mining metals in Reko Diq. The ardour to consecrate these agreements without digging deeper to find out the ulterior motives behind them has only hollowed the country’s economy out.

The international arbitration courts should understand the position of Pakistani government that is bound to obey the orders of the domestic courts. International courts should have examined the reasons given by top Pakistani courts in declaring these contracts illegal instead of penalising the country. These courts should not protect immoral and commercially unviable agreements.

It is common in our culture to honor our commitments. It is considered immoral to back out of a contract even though it may not have been formalised through documentation. But a business cannot sign a formal agreement with a smuggler pledging to buy and pay any quantity of smuggled goods he brings in. This contract would be quashed by all courts in the world as it involves huge tax evasion.

Moreover it is against the interests of public at large. As this naked illegality cannot be condoned so should be the contracts that are against public interest at large.

Both local and international courts should adhere to the normal business principles. The agreements signed on behalf of a government should go through court scrutiny because the individual that signs the agreement on behalf of the government does not lose anything individually. In fact in lopsided agreements of this type the one authorised to sign might be a beneficiary of the loot. There is a concept of collateral in business contracts. If initial beneficiary of contract defaults the other party has the right to liquidate that collateral. In case if a government pledges something for a service it cannot mortgage the entire country. National assembly should ratify these contracts or they cannot be challenged in international or national courts.

Some argue that in democratic setups at least the elected government should have the right to sign investment-related agreements. But how can they justify the agreement that a government, elected for five years, has no moral authority to guarantee at a hefty rate of return on investment for a period of 20 years. The international courts should take notice of this overstepping of the mandate by the signing authority and declare everything over and above the terms of that government as illegal.

Ricardo Hausmann, a former minister of planning of Venezuela, in a recently published piece titled ‘Should Profane Contracts Be Sanctified?’ said: “That is why fiscal discipline is one of civilisation’s hardest and most remarkable accomplishments”. “To achieve it, democracies tend to impose limits on public debt and require legislative consent in order to authorize government debt and other contracts.”

This raises the question of whether contracts that violate these rules should be treated as sacrosanct or repudiated for their profane origin, Hausmann says and adds that that issue is now being litigated in the context of Puerto Rico’s recent debt default, because the island’s government borrowed beyond its legal limits.

Hausmann further argues that legislative approval is often cumbersome, which is why many countries exempt state-owned enterprises from this requirement, trusting that these companies’ governance structures – their boards of directors and shareholders’ meetings – will act in the best interest of the organisation and put effective brakes on irresponsible borrowing.

“But governments, corrupt politicians, and crony capitalists often use these entities as loopholes to circumvent public debt limits,” he said. The governments in Pakistan are also violating the fiscal discipline imposed on it by the legislature.

Duke University’s Mitu Gulati and Ugo Panizza of the Graduate argue that contracts are regarded as “a law between the parties,” and are protected and sanctified by the courts, but they can be written in order to violate the law, and to shield the crime itself from the law. According to Hausmann, such profanity does not deserve and should not receive the judicial blessing that contracting parties seek.