NHA v. Lilley International: Sanctity of Pre-Arbitral Steps

This post discusses the decision handed down by a Divisional Bench of the Islamabad High Court in National Highway Authority through Director (Legal) v. Lilley International (Private) Limited and Another [2020 CLC 608]. The ruling is significant in two aspects: (i) it is a further illustration of the pro-enforcement approach of the courts towards arbitral awards; and (ii) it preserves the sanctity of the pre-arbitral steps in construction contracts.

Brief background

The case involves a contract (“the Contract”) for rehabilitation works of the N5 highway (the Hyderabad-Hala Section of 48 km) between the National Highway Authority (“the NHA”) and Lilley International (Private) Limited (“Lilley”). The original completion date of the works was 11 October 2006 (“the Original Completion Date”), which was later extended by 110 days to 29 January 2007 (“the Revised Completion Date”) by the Engineer.

Pursuant to the Contract, Lilley was entitled to receive an early completion bonus up to a maximum of 5% of the contract price. On 2 June 2008, the Engineer recommended to the NHA to pay a sum of PKR 36,328,932 to Lilley (“the Original Bonus”) for completing the works 188 days prior to the Revised Completion Date. Although the NHA accepted this recommendation in principle, no payments were made further to the same.

Consistent with the general standard in construction agreements, the Contract prescribed a multi-tier dispute resolution mechanism: (i) determination by a Dispute Review Expert (“DRE”), followed by (ii) arbitration further to the Arbitration Act 1940 (“the Act”).

Accordingly, Lilley approached the DRE to seek payment of the Original Bonus. This was endorsed by the DRE (“the DRE Decision”). However, prior to the DRE Decision, the Engineer revised its determination of the early completion bonus from PKR 36,328,932 to PKR 15,072,642 (“the Revised Bonus”) on the basis that the works were completed 78 days prior to the Original Completion Date, and not 188 days from the Revised Completion Date. In essence, the Engineer reverted its previous decision to grant an extension of time of 110 days to Lilley. The NHA did not challenge the Revised Bonus before the DRE.

However, the NHA did challenge the DRE Decision in arbitration proceedings. On 8 September 2017, the arbitrator rendered a final award in Lilley’s favour, directing payment of the Revised Bonus by the NHA to Lilley.

Thereafter, Lilley sought to enforce the award in the Civil Court, further to Sections 14 and 17 of the Act. Simultaneously, the NHA challenged the award on the basis of Sections 30 and 33 of the Act. The Civil Court set aside the challenge, and made the award a Rule of Court by passing a decree in terms thereof. The NHA appealed the Civil Court’s decision in the Islamabad High Court on several grounds, including Lilley’ entitlementment to the extension of time and early completion bonus, the DRE Decision, and the arbitrator’s findings on merits.

Section 30 of the Act

This provision sets outs the grounds for setting aside an arbitral award. These are: (a) an arbitrator or umpire has misconducted himself or the proceedings; (b) an award has been made after the issue of an order by the court superseding the arbitration or after arbitration proceedings have become invalid under section 35; (c) an award has been improperly procured or is otherwise invalid.

Since the grounds are broadly worded, the scope thereof is determined by the courts in light of judicial precedents and legal principles. In this case, the Islamabad High Court also provided its views on the scope of Section 30 of the Act, which is discussed below.

The Decision

The Islamabad High Court’s decision is important for reasons: (i) pro-enforcement approach towards arbitral awards; and (ii) sanctity of contractually agreed dispute resolution procedures.

As to the former, the Court held that “it is well settled that objections to an award, and more so an appeal against an order to make an award a Rule of Court, cannot be heard like an appeal from an award.” In other words, it is not for the court to interfere in the reasoning and merits of an award, in circumstances where a different conclusion on facts could possibly be drawn. Relying on decisions of the Supreme Court in (i) Federation of Pakistan v. Joint Venture Kocks K.G./RIST [PLD 2011 SC 506]; (ii) Joint Venture KG/RIST v. Federation of Pakistan [PLD 1996 SC 108]; and (iii) Ashfaq Ali Qureshi v. Municipal Corporation, Multan [1984 SCMR 597], the Court held that it had no reason to scrutinise the award in the absence of an obvious error of law or fact (which cannot be ignored and, if left outstanding, will cause grave injustice or violate the law) or the arbitrator’s misconduct.

As regards the sanctity of the dispute resolution mechanism, the Islamabad High Court held that, since the NHA did not challenge the Engineer’s determination of the Revised Bonus, whether before the Engineer or the DRE, it could not dispute its contents at the appellate stage. The Court held that “[t]he [NHA] could have challenged the Engineer’s said determination under clause-67.1 of the contract, but it did not do so. Having not challenged the said determination, it is our view that the appellant is estopped from objecting to the award.” [emphasis added]

Therefore, it can be inferred from this decision that the Court upheld the sanctity of the pre-arbitral steps prescribed in Clause 67.1 of the Contract, and the importance of satisfying the same. Accordingly, if a party does not follow the prescribed pre-arbitral steps, it will likely be estopped from challenging the award later in court proceedings.

Conclusion

The Islamabad High Court’s decision further validates the narrow scope of judicial intervention and the pro-enforcement approach of the courts. Relying on guidance provided by the Supreme Court, the Islamabad High Court has provided more clarity on the extent and conditions in which the courts are minded to intervene to set aside an award, further to Section 30 of the Act.

Likewise, the Islamabad High Court’s decision is likely to have a position impact on the construction industry. Multi-layered dispute resolution mechanisms are commonplace in construction contracts, and the extent to which the same must be followed is often questioned. This decision will, however, provide clarity and confidence to parties that the courts are minded to strictly enforce contractual dispute resolution mechanisms. A party that does not satisfy the pre-arbitral steps may be estopped from challenging an award, particularly if it is unable to satisfy the court that there is an obvious error of law or fact which would prejudice it or that the arbitrator has misconducted himself or the proceedings.

References

Author:

Ahmed Durrani

Ahmed Durrani

The author is an arbitraion lawyer based in Doha, Qatar.