Power Purchase Agreements: Contractual rights vs. regulatory regimes

In Star Hydro Power Ltd v National Transmission and Despatch Company Ltd [2025] EWCA Civ 928 the Court of Appeal dealt with an arbitration award that will be of significant interest to generators and offtakers of international Power Purchase Agreements (“PPA”). The Court of Appeal upheld an award that decided that a PPA, with an arbitration clause, permitted the parties to agree payments in excess of those imposed by local mandatory regulatory requirements, which was a state-determined tariff.

Facts

Star Hydro Power Limited (“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.

National Transmission and Despatch Company Limited (“NTDCL”) is a state-owned entity incorporated in Pakistan and is the centralised electricity purchaser and is the operator of the electricity network of that country.

SHPL and NTDCL entered into a PPA, pursuant to which SHPL agreed to construct, operate and maintain a 147 MW hydro-electric power generation complex located in Azad Jammu and Kashmir with NTDCL purchasing the electricity generated for a period of 30 years from the plant’s commercial operation date (“COD”). The dispute between SHPL and NTDCL concerned the correct tariff to be applied for the electricity supplied by SHPL. The PPA specified a Reference Tariff based on an assumed total cost of the project, but it also included detailed provisions for adjusting the tariff at COD to reflect actual costs, including cost escalation during construction. SHPL sought an upward adjustment of the project cost, and consequently, the tariff, arguing the adjustment was to reflect various changes to the design of the project over the course of its construction and development. However, under the laws of Pakistan, the determination of tariffs for electricity is the exclusive statutory responsibility of the National Electric Power Regulatory Authority (“NEPRA”). NTDCL forwarded SHPL’s requested adjustment to NEPRA, who in turn issued a decision setting a lower project cost and tariff than SHPL claimed was due pursuant to the PPA.

SHPL contended that, as a matter of contract, it was entitled to a higher tariff based on the PPA’s tariff adjustment mechanism, while NTDCL maintained that only the tariff determined by NEPRA could apply.

The relevant dispute resolution clause in the PPA, Article 18.3, provided that unresolved disputes would be settled by arbitration under the rules of the London Court of International Arbitration seated in London.  The PPA was expressly governed by the laws of Pakistan.

For completeness, this Law-Now is based on the published judgment. Consequently, we are unable to comment on the specifics of the PPA between SHPL and NTDCL such as whether there were any express limitations of liability within the contract.

The Award

The arbitrator issued a final award on 7 May 2024 (the “Award”). The key findings were as follows:

1. As a matter of contract, “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”, despite NEPRA having statutory authority to set tariffs under the laws of Pakistan.
2. The arbitrator noted that NEPRA had approved both the PPA and its arbitration provisions, and that the PPA contained a broad arbitration clause governing disputes “arising out of or in connection with” the PPA.
3. While recognising that NEPRA’s published tariff was binding as a matter of the laws of Pakistan, the arbitrator concluded that this did not prevent a contractual claim for the difference between the tariff set by NEPRA and the tariff calculated under the PPA. The arbitrator stated that “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”.
4. The arbitrator also considered the question of the interrelationship between the role of NEPRA and the contractual provisions of the PPA, recognising that it was for NEPRA to determine the actual tariff to be paid as a matter of the laws 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.
5. In this respect:
   • Regarding the past, 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. 
   • However, 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.
6. The dispositive section of the award ordered NTDCL to pay SHPL the difference between the amounts paid and those due under the contractually determined tariff, together with interest and costs.

The Lahore Proceedings

On 7 August 2024, the Lahore High Court granted an interim injunction order suspending SHPL’s demand for payment for the ‘balance’ of the sums due when applying the higher tariff.

Commercial Court Proceedings

SHPL applied to the English Commercial Court for an anti-suit injunction to restrain NTDCL from pursuing the Lahore proceedings. The Commercial Court dismissed SHPL’s application, holding:

1. Although England and Wales was the supervisory jurisdiction in relation to the arbitration between NDTCL and SHPL and the Award, NTDCL was entitled to apply in Pakistan under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) for the partial recognition and enforcement of the Award and/or pre-emptively to assert that parts of the Award were not recognisable or enforceable in that jurisdiction.
2. The Lahore proceedings, although framed as a challenge to the Award, were not fundamentally improper, as they could be characterised as an application for partial recognition and enforcement.
3. The courts of England and Wales should not intervene, as comity demands that the English court assumes that the Pakistani court will abide by their international obligations and will determine NTDCL’s application there on its merits in accordance with the New York Convention.

Court of Appeal Decision

The Court of Appeal (Phillips LJ, with whom Peter Jackson LJ and Andrews LJ agreed) allowed SHPL’s appeal and granted the anti-suit injunction restraining NTDCL from continuing the Lahore proceedings. The key findings were as follows:

1. The supervisory jurisdiction: The choice of London as the seat of arbitration constitutes an agreement to the “curial law” of the arbitration and was analogous to an exclusive jurisdiction clause in favour of the English courts for any challenges to the award. Any challenges to the Award must be brought in the courts of the seat - here, England and Wales. The Court of Appeal rejected the notion that the English courts have no “policing” role if a party seeks to challenge the award in a foreign court under the guise of the New York Convention, emphasising that the English courts are entitled, and indeed bound, to enforce the exclusivity of their supervisory jurisdiction.
2. Enforcing the exclusivity of the supervisory jurisdiction: As recently affirmed by the Supreme Court in UniCredit Bank GmbH v RusChemAlliance LLC [2024] UKSC 30, [2024] 3WLR 3 659, the Court of Appeal confirmed that it is well established that where court proceedings are brought in breach of an agreement to arbitrate the court will generally grant an anti-suit injunction to prevent any further breach unless there are strong reasons not to do so.
3. Challenges to an award under the New York Convention: The Court of Appeal undertook a detailed analysis of the New York Convention, interpreting it in accordance with the Vienna Convention on the Law of Treaties. The Court of Appeal found that the New York Convention provides “a shield against applications for the recognition and/or enforcement of an award, not a sword by which the award may be attacked pre-emptively”. Further, that certain defences are available only in response to an application for recognition or enforcement of an award, not as a basis for pre-emptive challenges. The New York Convention does not permit a party to seek a declaration of non-enforceability in advance of any enforcement attempt.
4. Partial recognition and enforcement of an Award: The Court of Appeal accepted that the New York Convention and the Act permit partial recognition and enforcement of an award, provided the part to be enforced can be ascertained from the face of the award and judgment can be given in the same terms. However, the Court of Appeal found that NTDCL’s Lahore proceedings, although framed as seeking partial recognition and enforcement, were in substance “a full-throated challenge to the Award and its effect”. Specifically, to the arbitrator’s finding that NTDCL was contractually liable to pay more than the NEPRA-determined tariff. The Court of Appeal rejected the argument that the Lahore proceedings were a legitimate application for partial recognition and enforcement, finding instead that they were a pre-emptive challenge to the Award, brought in breach of the arbitration agreement and the exclusive jurisdiction of the English courts.

Comment

Arbitrator’s Award

The Award underscores the inherent risk in PPAs that contractual provisions that are valid and enforceable as a matter of pure contract law (and under the law of the seat of arbitration) may nonetheless be rendered unlawful or unenforceable in the local jurisdiction if they conflict with mandatory regulatory requirements. In this case, the arbitrator’s Award was enforceable as between the parties, but its practical implementation in Pakistan was challenged on the basis of local law and public policy. To mitigate these risks, PPA drafters may wish to consider the following strategies and take aways:

1. Choice of law: Where possible, consider selecting a governing law that is neutral and outside the host jurisdiction. If the governing law is that of the host state (here, Pakistan), the contract will be construed and interpreted in accordance with that law, which impact the interpretation, continued validity or enforceability of contractual terms. If it is possible to choose a neutral law, outside of the host jurisdiction, it can provide a degree of insulation from local regulatory interference and may ensure that contractual rights are interpreted and enforced according to the parties’ intentions, rather than being overridden by local requirements.
2. International arbitration: The choice of international arbitration in a foreign seat will often provide a useful tool for enforcing contractual rights. Depending upon the conflict of laws provisions in the governing law and seat, international arbitration will enhance the prospect that the contractual intention will be protected from state interference. However, practical enforcement in the local jurisdiction may still be subject to public policy defences. 
3. Express provisions: Whilst not commonly seen in PPAs, this decision indicates that it may be useful to consider drafting explicit provisions acknowledging the supremacy of local regulatory determinations for certain aspects (e.g., tariff setting), while also providing for separate contractual entitlements (such as compensation or indemnity) in the event that the regulatory outcome diverges from the contractual bargain.
4. Warranties and representations: Draft representations, warranties and undertakings that the relevant contractual obligations: (i) constitute legal, valid, binding and enforceable obligations; (ii) contained no provision which is contrary to local law or which would not be upheld by the local courts; and (iii) that the foregoing will remain true, accurate and in force throughout the term of the contract, such that any breach will sound in damages in the same sum as the loss (see for example, commentary on PT Transportasi Gas Indonesia v Conocophillips (Grissik) Ltd & Anor [2016] EWHC 2834 (Comm) in the 2017 Edition of the CMS Annual Review of developments in English oil and gas law, page 48)
5. Change of law and adaptation clauses: Include robust change of law clauses and mechanisms for adapting the contract if the contract is impacted by changes in local law or regulation.
6. Know the regulatory environment: Undertake proper due diligence on local regulatory powers and draft the PPA accordingly.

Court of Appeal

The Court of Appeal’s decision reaffirms the primacy of the courts of the seat of arbitration in supervising and entertaining challenges to arbitral awards. The judgment provides a clear and robust statement that the New York Convention does not permit pre-emptive challenges to awards in foreign courts; rather, it only allows a party to resist enforcement when and if the award creditor seeks recognition or enforcement in that jurisdiction.

The decision also underscores the English courts’ willingness to grant anti-suit injunctions to protect the integrity of the arbitral process and the parties’ agreement as to the seat. The Court of Appeal was not persuaded by attempts to re-characterise a challenge as an application for partial recognition or enforcement, and instead, looked to the substance rather than the form of the foreign proceedings. For PPA drafters, this means that the choice of seat is not merely procedural but is central to the integrity and enforceability of the parties’ contractual bargain.