- Supreme Court of Pakistan
- Maulana Abdul Haque Baloch et al. v. Government of Balochistan
JOINT VENTURE AGREEMENT FOR THE EXPLOITATION AND MINING OF MINERALS - BETWEEN GOVERNMENT OF A PAKISTANI PROVINCE (BALOCHISTAN), A UNITED STATES MINING COMPANY AND AN AUSTRALIAN MINING COMPANY - REFERENCE TO UNIDROIT PRINCIPLES TO INTERPRET AND SUPPLEMENT APPLICABLE DOMESTIC LAW (PAKISTANI LAW)
AGREEMENT DECLARED VOID BECAUSE FOREIGN COMPANIES HAVE TAKEN UNFAIR ADVANTAGE OF IMPROVIDENCE AND INEXPERIENCE OF GOVERNMENT OF BALOCHISTAN IN MINING SECTOR - REFERENCE TO ARTICLE 3.2.7 ("GROSS DISPARITY") OF UNIDROIT PRINCIPLES
"In July 1993 a Pakistani State-owned company entered into a Joint Venture Agreement with a United States mining company for the exploration and mining of minerals, specifically, copper and gold in the Reko Diq area. The agreement included a provision stating that the applicable law would be Pakistani law, including principles of international law, and that arbitration would resolve any disputes arising between the parties.
In April 2006, the Government of Balochistan, the United States mining company and an Australian mining company entered into a novation agreement, that substituted the US company with the Australian company as a party to the joint venture agreement and provided that the Australian company assumed the US company’ rights and responsibilities under the joint venture agreement.
Subsequently, numerous third parties challenged the legality of the agreement before the High Court of Balochistan, arguing that the contract was executed contrary to the provisions of relevant Pakistani statutes, that the parties failed to properly register the agreement and that the Government of Balochistan improperly relaxed local legislation to execute the agreement and its Addendum.
The High Court dismissed the claim and found the agreement to be legal and valid. The third parties appealed the decision before the Supreme Court.
The Australian mining company defended the validity of the joint venture agreement by arguing that the challengers’ purported grievances were with the US mining company, the original signatory to the agreement in 1993. Moreover, the validity of the joint venture agreement had no impact on the validity of the subsequent novation agreement, since the intent and effect of the novation agreement was to effectively terminate and replace the original joint venture agreement.
Soon after arguing its case before the Supreme Court, the Australian mining company filed for two arbitration proceedings against the Government of Pakistan, one before the International Chamber of Commerce (“ICC”) pursuant to the original joint venture agreement and the other before to the International Centre for Settlement of Investment Disputes (“ICSID”) pursuant to the Australia-Pakistan bilateral investment treaty (“BIT”). The foreign company sought monetary damages after the Government of Balochistan declared their claims to develop the area in dispute invalid and refused to grant a mining lease. By denying the mining lease, the Government of Balochistan terminated the company’ ability to explore and prospect the land, effectively preventing further development and profitability.
The Supreme Court issued its ruling, holding that the joint venture agreement was void on a number of public policy grounds. In particular, the Court affirmed that the agreement was void in part based on evidence of corruption by foreign companies in making and executing it. Moreover, the court stated that because the joint venture agreement was void, all of the subsequent agreements were void, including the novation agreement. Ultimately, the court determined that the joint venture agreement and all subsequent transfers of interests were “illegal transactions entered into by concerned parties at their sole risk and cost.” According to the Court, the foreign companies by means of the joint venture exploration agreement and other related agreements preyed upon the huge gaps in understanding on the part of the Government of Balochistan of large scale mineral extraction and were in a distinct position to manipulate and dominate the will of the Government. In so doing, the Court recalled Article 3.2.7 of the UNIDROIT Principles 2010 (Gross disparity), which affirms that a contract which has been conceived by a party seeking to take unfair advantage of the other party's dependence, economic distress or its improvidence, ignorance, inexperience and lack of bargaining skill cannot be enforced.
In voiding the joint venture agreement, the Supreme Court also held that the arbitration clauses in the original contract and subsequent agreements were void, and since the contract expressly stated that Pakistani law was the applicable law, the Court determined that Pakistani courts, rather than international arbitral tribunals, were the appropriate forum for deciding the contract’s legality."