A Turkish company, Karkey, entered into an agreement with the Federal Government of Pakistan to make available, for a period of 60 months, 231.8 MW of power (in terms as specified) on a rental basis. The rental power was to be made available by utilising Karkey's 'equipment', and the second recital to the contract made reference to 'Reciprocating Generation Sets and Balance of Plant on barge mounted powerships'. The plaintiff arrested Karkey's power ships under the Admiralty Jurisdiction of High Courts Ordinance 1980 (Ordinance). Karkey sought to have the arrests set aside or in the alternative applied for a stay of admiralty proceedings under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 (ICSID Convention), with the consequence that the plaintiff's claim would be referred to ICSID arbitration before the London Court of International Arbitration (LCIA).

The plaintiff argued that the admiralty jurisdiction of the Court had been rightly invoked. It submitted that the matter came within the scope of s 3(2)(h) read with s 4(4) of the Ordinance. In particular, its case was that the contract was an agreement relating to the use or hire of the defendant vessels and the plaintiff's claim was one arising out of this agreement. Counsel for Karkey argued that s 3(2)(h) had no application in the present case. He referred to the first recital to the contract, which stated that the plaintiff, as buyer of the rental services, wished to 'rent 231.8 MW net ... of power for a period of 60 months', to contend that this particularised and specified that what was being rented. Counsel drew a distinction between the defendant vessels as ships and the power plants installed on them. His case was that what had been rented was the electric power as specified. For this purpose it was the power plants that were relevant and not the ships as such. The latter had nothing to do with the contract. At best and at most, the ships served as floating platforms for the power plants. Section 3(2)(h) was concerned with ships as such. Until and unless the agreement was for the use or hire of a ship as such, this provision had no application.

Held: Judgment for the plaintiff. Power ships to remain under arrest until security is provided.

It is incorrect to characterise the contract as one for the 'rent' of '231.8 MW net ... of power for a period of 60 months', as submitted by counsel for Karkey. Electric power is not rented: it is consumed. At the end of the rental period, the power as such cannot be returned by the lessor or taken away by the lessee. Thus, the contract could not have been for the rental of power per se. The contract contemplated that as long as Karkey was ready and able to deliver power to the plaintiff it had to be paid, irrespective of whether delivery of power was actually taken or even sought. It is therefore clear that what was rented under the contract was not the power as such, but rather the capacity to produce or generate the power at the contracted level and under the specified conditions. Normally, it could be said that the capacity to generate electric power is a matter different from the thing (equipment, plant, etc) that produces or generates that power. That is not so in the rather peculiar case of a power ship. A power ship is, quite literally, a special purpose vehicle (SPV). It has only one purpose and serves one function alone: to deliver electric power at its port of call. When the contract is read as a whole, and the (admitted) circumstances in which it came to be executed are kept in mind, there can be hardly any doubt that the commercial purpose was for Karkey to make the power ships available for the generation of electric power, for said power to be supplied to the grid through the plaintiff's network. The contract was therefore for the 'use' or 'hire' of the power ships, and this was so within the meaning of s 3(2)(h) of the Ordinance.

Counsel for Karkey also submitted that the in rem jurisdiction under the Ordinance could not or ought not to be exercised because of the arbitration agreement between the parties. This raises an important question: if there is an arbitration agreement between the plaintiff and the person liable in personam (whether or not a defendant), can the in rem jurisdiction be exercised to arrest a ship in respect of which such an action would otherwise lie in admiralty jurisdiction? This question has been considered in different jurisdictions. It suffices to refer to only one such decision, that of JS Ocean Liner LLC v MV Golden Progress AIR 2007 NOC 1376 (Bom). Two questions were considered by the Full Bench of the Bombay High Court, one of which was 'whether a suit only for arresting a ship by way of obtaining the security in the pending arbitration can be maintained or proceeded with?' After considering a number of authorities, both English and Indian, and referring to the Indian legislation and to art 7 of the Arrest Convention 1999, the Full Bench answered the question in the affirmative. It follows that if the arbitration agreement in this case had been capable of being performed and Karkey's application for a stay of proceedings had been successful, the Court would still have had the discretionary jurisdiction to order the arrest of the defendant vessels or the providing of security for their conditional release. For the record, the Court would have exercised this discretion in favour of ordering the arrest of the defendant vessels subject to Karkey providing a bank guarantee, and subject to the further condition that if the plaintiff did not initiate arbitration proceedings within a stipulated period and pursue the same diligently or abandoned the same, then the order of arrest and/or providing of security (as applicable at the relevant time) would stand recalled and vacated.