Public Contracts & International Arbitration: A Lesson from Mistakes

Bangladesh recently faced a staggering penalty of USD 20 million (equivalent to Tk 2.45 billion), directly attributable to the negligence of the state-run Bangladesh Power Development Board (PDB). This hefty sum, which is 333 times the initial cost PDB chose not to pay, serves as a stark lesson on the critical importance of engaging with international arbitration processes, especially concerning public contracts.

The issue originated from two contracts signed in October 1997 Government and Smith Cogeneration (Bangladesh) Private Limited, a US-based firm, to establish a 100 MW private power plant in Haripur. Commercial operation was slated for August 1998, with penalties for delays. However, the company failed to construct the plant, leading the government to cancel both the Power Purchase Agreement (PPA) and land lease in February 1999, also confiscating a USD 1.5 million performance guarantee.

The Crucial Mistake: Abandoning Arbitration

In 2000, Smith Cogeneration initiated arbitration proceedings against PDB at the International Chamber of Commerce (ICC) Arbitration Tribunal regarding the contract cancellation and forfeiture of the guarantee. While PDB initially nominated an arbitrator, the ICC tribunal required an initial advance fee of USD 950,000, to be equally shared, meaning PDB’s portion was only USD 60,000. Based on advice from its legal panel, who argued that Bangladesh’s arbitration law (enacted in 2001) would not apply to prior ICC rulings, the PDB board decided not to pay this modest fee and chose not to become a party to the case.

The Far-Reaching Consequences of Absence

This decision proved catastrophic:

• A One-Sided Verdict and Escalating Debt: Due to PDB’s non-participation, the ICC delivered a one-sided verdict on October 30, 2003, directing PDB to pay USD 13.06 million with 4 percent annual interest to Smith Cogeneration.
• International Legal Battle: To enforce this judgment, Smith Cogeneration filed six lawsuits in various international courts, including US District Courts, the Supreme Court of New York, and courts in Scotland and Switzerland. The District Court of Columbia ruled in favor of Smith Cogeneration in 2007, eventually issuing a final revised ruling for PDB to pay USD 31.71 million by May 2024.
• Diplomatic and Personal Fallout: The dispute escalated dramatically in October 2024 when Smith Cogeneration filed another case in a US District Court, leading to arrest warrants being issued against Bangladesh’s Finance Adviser and Bangladesh Bank Governor while they were attending IMF and World Bank meetings in Washington, DC. Although they had diplomatic immunity, they were forced to seek refuge at the Bangladeshi ambassador’s residence to avoid complications, highlighting how such legal negligence can impact high-ranking officials and international relations.
• Reputational Damage and Lack of Accountability: Transparency International Bangladesh (TIB) noted that Bangladesh likely could have won the case had it joined the arbitration, as the US company failed to meet its deadlines. Instead, the country ended up paying a massive fine and suffered significant reputational damage. Despite a Finance Division letter instructing the Power Division to identify those responsible, no one has yet been held accountable in the settlement proposal.

The Final Blow and Lessons Learned

After intense negotiations, including initial offers from Bangladesh rejected by the company, a final settlement of USD 20 million was reached and approved by the Chief Adviser and Finance Adviser. PDB ultimately paid the Tk 2.45 billion from its own funds on May 23, 2025. Additionally, Bangladesh paid its US legal firm, Foley Hoag LLP, USD 396,000 in legal fees.

This incident serves as a crucial case study for public contracts: failing to participate in international arbitration, even over a seemingly small initial cost, can lead to exponentially larger financial penalties, complex and prolonged international litigation, severe reputational damage for the nation, and even personal legal complications for government officials. It underscores the imperative for government agencies to prioritize legal engagement and adhere to international dispute resolution mechanisms to protect national interests in public contracts.

For Detail: Bangladesh pays Tk 2.45 billion penalty due to PDB’s mistake