Suit No.1134 of 2011
For hearing of main application.
M/s.Sadat Business Group Ltd …………….Plaintiff
Federation of Pakistan
& another ….………Defendants
Date of hearing 15.03.2013 & 05.04.2013
Mr.Faisal Kamal, Advocate for the Plaintiff.
Mr.Malik Mohammad Riaz, Advocate for the defendant No.2.
None present for defendant No.1
Muhammad Ali Mazhar, J: The plaintiff has brought this suit under Section 20 of the Arbitration Act, 1940 for the appointment of Arbitrator in terms of Clause 27 of the agreement dated 7.4.2010.
2. The brief facts of the case are that the plaintiff is a business group based in Dubai and other countries and engaged in the supply of commodities. They are working through their legal agent M/s.M.M.Ellahi Traders in Pakistan. The defendant No.2 executed a contract with the plaintiff for supply of 50,000 M.T. white sugar. In terms of contract the plaintiff submitted a performance guarantee in the sum of US$ 598,000/- to the defendant No.2 against which the defendant No.2 in terms of contract was bound to open letter of credit within five working days which they failed to do and they took two weeks’ time to open the letter of credit, which was contrary to the terms of contract. The date of shipment was agreed on 18.7.2010 but due to heavy rainfall in Santos, Brazil Port the shipment was delayed. The defendant appointed pre-shipment inspection agency NMCI for Lab sampling vessel inspection and loading. The agency submitted its report by confirming availability of stock on the port of Brazil. The defendant No.2 was confirmed through supplier about the shipment and the only reason of delay was non-compliance of banking instruction which was the responsibility of the defendant No.2 but without realizing their own fault the defendant No.2 cancelled the agreement without invoking clause 27 of the contract which envisages the arbitration proceedings. It is further stated that the plaintiff time and again approached the defendant No.2 to restore the contract but to no avail. Even the plaintiff was willing to supply the consignment to defendant No.2 on the committed price. It was further stated that the plaintiff filed constitutional petition in this court and got the interim orders but keeping in view the remedy available under Clause 27 of the contract, the petition was withdrawn with the willingness to invoke the arbitration proceedings.
3. The defendant No.2 filed its written statement in which the execution of contract was not denied but it was stated that the entire quantity of 50,000 M.T. sugar was to be shipped in Pakistan within six weeks from the date of opening of letter of credit on 15.6.2010. In the written statement the defendant No.2 has also given required date of shipments from 6.7.2010 to 29.6.2010. So far as the inspection by NMCI Pakistan (TCP’s nominated PSI) the said company informed the defendant No.2 that the plaintiff did not offer any stock of sugar for inspection. It was further stated that the plaintiff failed to nominate the name of particular vessel. It was further contended that since the plaintiff failed to fulfill the contractual obligation, therefore, the defendant No.2 cancelled the contract vide letter No.31.7.2010 and forfeited the amount of performance guarantee.
4. Learned counsel for the plaintiff argued that if contents of the plaint and the written statement filed by defendant No.2 are placed in juxtaposition. It is clear beyond any shadow of doubt that a triable dispute is emerging which should have been resolved by invoking Clause 27 of the contract which pertains to the arbitration proceedings. On the contrary, despite clear condition the defendant No.2 cancelled the contract unilaterally so that they may easily forfeit the performance guarantee. Learned counsel further argued that it is well settled legal position that despite cancellation/termination of contract the arbitration clause survives which is always enforceable separately even in the circumstances the agreement is terminated/rescinded or is no longer existed. Learned counsel argued that it is yet to be seen whether the plaintiff has complied with the terms and conditions of the contract in letter and spirit or the defendant No.2 has committed default or became instrumental of delay by not complying with their own responsibilities arising from contract which can only be decided if arbitration proceedings are commenced. He further argued that the plaintiff has not committed any breach of contract and always shown willingness to fulfill its contractual obligation but the defendant No.2 unlawfully forfeited the amount of performance guarantee, which aspect is also to be seen by the Arbitrator. In support of his arguments he has relied upon following case law:-
(1) AIR (33) 1946 Lahore 116 (Firm Karam Narain v. Volkart Bros.). It was held that the contract is not put out of existence though all further performance of the obligation undertaken by each party in favour of the other may cease. It survives for the purpose of measuring the claims arising out of the breach, and the arbitration clause survives for determining the mode of their settlement.
(2) 1983 CLC 2745 (Pakistan Burmah Shell Ltd. v. Tahir Ali). It is by now well-settled that once it is found that there was a contract, then although the contract might have come to an end by reason of frustration or rescission of breach of condition or by being provided for fraud or misrepresentation or coercion, the arbitration clause already survived. If any precedents are needed reference can be made to Radhakishan Chawla Ltd. v. General Construction Co. and Pan-Islamic Steamship Company Ltd. v. Messrs General Imports and Exports Ltd. In the last named case reliance is placed on an earlier decision of this court in Hoosen Brothers Ltd. v. Pakistan Textile Mills Ltd. Reliance was also placed upon the opinion of Viscount Simon L.C. in Hayman versus Drawins Ltd. which is a House of Lords case wherein inter alia, it was observed at page 367 of the report that “I do not agree that an arbitration clause expressed in such terms as above ceases to have any possible application merely because the contract has “come to an end.” as, for example, by frustration.
(3) 1997 SCMR 1928 (Sezai Turkes Feyzi Akkaya Contraction Company, Lahore v. M/s.Crescent Services Lahore). It was held that if the dispute between the parties is covered by the arbitration clause and even if it be assumed that the original contract stood novated or modified by defendants’ this would not lead to the abrogation of the arbitration clause which contained very broad and wide terms that the disputes between the parties were essentially connected with the original agreement. Hence, on the alleged modification or novation of the contract, the arbitration clause would survive. The cases where despite the frustration of the contract or the repudiation of the contract the arbitration clause was held to survive and apply, noted in this case were Hayman and another v. Darwins Limited (1942 A.C. 356) and Firm Karam Narain Daultat Ram and another v. Messrs. Volkart Bros. and another (AIR 1946 Lahore 116) in which it was held that arbitration clause in a contract can be regarded as a thing apart from the main conditions of a contract and in other words, the arbitration clause is severable from the remaining contract and would survive frustration of the contract itself.
(4) PLD 2000 S.C. 841 (The Hub Power Company Ltd. v. Pakistan WAPDA). It was held that the allegations of invalidity even serious allegations of its being ab initio void are perfectly capable of being referred to arbitration. The doctrine of separability increases the scope of all arbitration clauses.
5. Conversely, learned counsel for the defendant No.2 argued that despite opening of letter of credit the plaintiff failed to supply the consignment within six weeks while the letter of credit was opened on 15.6.2010. Despite extension the plaintiff also failed to tender any stock for inspection purposes. Learned counsel further argued that this suit is not maintainable as after the cancellation of contract there is no question to appoint any arbitrator to resolve the dispute. At present no agreement is in existence due to breach committed by the plaintiff. The defendant No.2 suffered heave financial loss on account of higher price difference on purchase of sugar from other parties. It was further argued that the plaintiff has no locus standi to file the case nor any right to ask for the appointment of arbitrator as the plaintiff is limited company incorporated in Dubai and authority letter is invalid as the same has been signed by unauthorized person. Learned counsel argued that the suit is barred by Section 230 of Contract Act and also relied upon Section 2(h) of the Contract Act and argued that since there is no agreement enforceable by law hence, there is no contract. He further argued that there is no arbitration agreement enforceable in terms of Section 2(a) of the Arbitration Act. In support of his arguments he relied upon the following case law:-
(1) 1984 CLC Lahore 3347 (Manzoor Construction Co. Ltd. v. University of Engineering & Technology, Texila). According to section 20(1), Arbitration Act, 1940 before a person can make an application under that provision for a prayer that an agreement be filed in the court, following conditions have to be satisfied: (i) That there is an agreement between the parties containing arbitration clause. (ii) That the agreement had been entered into before institution of the suit with respect to the subject-matter of the agreement. (iii) That a difference has arisen between the parties to which the agreement applies. (iv) That the court to which application is made has jurisdiction in the matter to which the agreement relates. If any one of these conditions is absent, no one can file an application under that section.
(2) AIR 1974 Supreme Court 1579 ( Jaikishan Dass Mull v. Luchhiminarain Kanoria & Co. ) When a contract is invalid, every part of it, including the clause as to arbitration contained therein must also be invalid. AIR 1962 SC 1810 and AIR 1963 S.C. 90.
(3) AIR 1962 Supreme Court 1810 (Khardah Company Ltd., v. Raymon & Co (India) Private Ltd.). A dispute that the contract of which the arbitration clause forms an integral part is illegal and void is not one which the arbitrators are competent to decide under the arbitration clause although it is of sufficient amplitude to take in a dispute as to the validity of the agreement, and in consequence a party to the contract is entitled to maintain an application under section 33 for a declaration that the contract is illegal and that in consequence the proceedings taken thereunder before the arbitrators and the award in which they resulted were all void.
(4) AIR 1981 Calcutta 202 (Das Consultants Pvt. Ltd. v. National Mineral Development Corporation Ltd). It is not necessary that the arbitration agreement should be signed. All that is necessary is that there should be an agreement for arbitration reduced to writing. This is clear from Section 2(a). Therefore what is necessary is to have a written agreement to submit present or future difference to arbitration whether the arbitrator is named or not.
(5) 1986 CLC 2630 (Muhammad Azam Muhammad Fazil & Co. v. M/s. Trading Corporation of Pakistan). Existence of a difference of dispute is an essential condition for making a reference to arbitrator and to maintain application under Section 20 of the Arbitration Act.
(6) PLD 1954 Sindh 56 (M/s.Friends Trading Co. v. M/s.Muhammad Usman-Moula Bux). An existing dispute is an essential condition for reference to an arbitration. This condition is as essential as a cause of action in a civil suit.
(7) 2002 YLR 2238 (Malik Muhammad Mumtaz v. Malik Abdul Rauf). Section 20 Arbitration proceedings. Pre-requisites. Existence of a substantial dispute is condition precedent for any valid arbitration proceedings.
(8) PLD 1990 SC 48 [Lahore Stock Exchange Limited v. Fredrick J. Whyte Group (Pakistan) Ltd]. Leave to appeal was granted to consider whether there was a valid agreement existing between the parties and that the nature of the dispute between them was such which could not be decided by the arbitrator but only by the Court of law and if the Court was to arrive at the conclusion that there existed a valid agreement between the parties, only then in case of a dispute the matter could be referred to the arbitrator under the arbitration clause contained in the agreement.
6. Heard the arguments. Learned counsel for the plaintiff argued that due to heavy rainfall in Santos, Brazil, the shipment was delayed and another cause of delay was the non-compliance of banking requirements/instructions which was the responsibility of the defendant No.2 but without realizing their own fault they have cancelled the contract without invoking the arbitration clause. It was further argued that the plaintiff time and again approached the defendant No.2 for restoration of contract and they were willing to supply the consignment. On the contrary, counsel for the defendant shifted the entire blame on the plaintiff that the plaintiff did not offer any stock of sugar for inspection and they also failed to nominate the name of vessel. Despite extension the shipment was not made hence, the defendant rightly cancelled the contract and forfeited the amount of performance guarantee.
7. Clause 27 of the agreement referred to by both the parties is related to arbitration which is reproduced as under :-
“Any dispute or difference arising out of contract which cannot be amicably settled between the parties, shall be finally settled under the provisions of the Arbitration Act 1940 (Act No. X of 1940) and rules made there under as amended from time to time. The venue of arbitration shall be Karachi, Pakistan”.
8. It would not be out of place to refer to Clause No.24 of the same agreement pertains to the force majeure, which is reproduced as under :-
24. Force Majeure:-
“Should any of the force majeure circumstances, namely Acts of Allah, natural calamity, fire, government restrictions, strikes or lock-outs by workmen, war, military operations of any nature and blockades preventing the Seller/Buyer from wholly or partially carrying out his contractual obligations, the period stipulated for the performance of the contract shall be extended for as long as these circumstances prevail, provided that, in the event of these circumstances continuing for more than three months, either party shall have the right to refuse to fulfill its contractual obligations without title to indemnification of any losses it may thereby sustain. The party unable to carry out its contractual obligations shall immediately advise the other party of the commencement and the termination of the circumstances preventing the performance of the contract. A certificate issued by the respective Chamber of Commerce in the Seller or the Buyer country shall be sufficient proof of the existence and duration of such circumstances”.
9. The Black’s Law Dictionary (Sixth Edition) defines the term Force Majeure as under:-
“In the law of insurance, superior or irresistible force. Such clause is common in construction contracts to protect the parties in the event that a part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care. An oil and gas lease clause that provides that the lessee will not be held to have beached the lease terms while the lessee is prevented by force majeure (literally, “superior force”) from performing. Typically, such clauses specifically indicate problems beyond the reasonable control of the lessee that will excuse performance. See also Act of God; Vis Major.”
Mr.Justice M.L.Singhal in his book “Supreme Court on Words and Phrases” (Vinod Publications Ltd), quoted the case of Lebeaupin versus Crispin, 1920-2 KB-714 in which McCardie J. had given an account of what is meant by “force majeure” in the following words:
“With reference to its history. The expression “force majeure” is not a mere French version of the Latin expression “vis major”. It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in “force majeure”. Judges have agreed that strikes, breakdown of machinery, which, though normally not included in “vis major” are included in “force majeure”. Where reference is made to “force majeure”, the intention is to save the performing party from the consequences of anything over which he has no control. This is the widest meaning that can be given to “force majeure”, and even if this be the meaning, it is obvious that the condition about “force majeure” in the agreement was not vague. The use of the word “usual” makes all the difference, and the meaning of the condition may be made certain by evidence about a force majeure clause, which was contemplation of parties.
10. After examining the pleadings and considering the cut and thrust of arguments it is manifestly clear that a dispute does exist between the parties which should have been determined in accordance with the Clause 27 of the agreement but the defendant without recourse to the arbitration proceedings unilaterally cancelled the agreement.
11. At this juncture, I would like to quote my own judgment reported in 2013 CLD 681 (M/s.Global Energy & Commodity Exchange Group Italy SPA (GECX Group) v. Trading Corporation of Pakistan) (same defendant), in which it was held as under :-
“That allegations and counter allegations leveled by parties against each other as to which party committed default and became instrumental in breach of contractual obligations; required evidence. In the present case, there existed certain differences between the parties relating to the terms and conditions of the Letter of Credit and the modalities of shipment and such differences were required to be resolved through arbitration and in presence of an arbitration clause in the agreement, it would be just and proper to appoint arbitrator to the dispute. Existence of a difference or dispute was an essential condition that constitutes a cause of action for an application under Section 20 of the Arbitration Act, 1940. Dispute implied an assertion of a right by one party and repudiation thereof by another. Scope and power conferred on the Court under Section 20 of the Arbitration Act, 1940 was merely limited to determination of the factum of a real dispute and no more; it is not for the Court to go into the questions pertaining to the disputes raised or suggest the manner of decision thereof, which would amount to usurping the jurisdiction of the arbitrator. If the court passed an order or reference of the matter to arbitrators, it amounted to acceptance of application and no formal order of filing of arbitration agreement was necessary for the court while passing such an order it would be deemed to have taken the agreement on the file.”
12. The first and foremost argument raised by the counsel for the defendant No.2 is that after cancellation of contract by the defendant No.2 there is no question of appointment of any arbitrator as the contract is no longer in existence. The defendant No.2 has also attached a decision passed by its Director (Commercial) in which it was held that the plaintiff has committed various breaches. It is further shown in the decision that Show Cause Notice was issued which was not replied by the plaintiff but the plaintiff filed the constitutional petition in this court and obtained ad-interim stay which was ultimately withdrawn. The agreement was cancelled on 31.7.2010 and performance guarantee was forfeited and on 19.1.2011 the defendant’s General Manager (Imports) also issued a circular that the plaintiff has been black listed by T.C.P. vide decision dated 13.1.2011 issued by the competent authority on account of their default and failure to perform the contract/award. It was further stated in the circular that the plaintiff will not be eligible in any tender floated by T.C.P. or to engage by T.C.P. in any business activity in future. Learned counsel for the defendant did not argue that there was no dispute between the parties but his main focus was on that no agreement is in force, so in such circumstances no arbitrator can be appointed. I do not find any strength nor persuaded with the arguments that in case a contract is terminated the arbitration clause does not survive. The termination/cancellation may occur due to breach in the contractual obligations by any of the parties to the contract which in fact leads towards a dispute and in order to resolve the dispute between the parties and even for the determination of their rights and liabilities and even a wrongful termination can also be made the subject matter of arbitration proceedings otherwise, the whole purpose and Scheme of incorporating an arbitration clause in the contract will become redundant and superfluous and it would be very easy for any party to terminate and or frustrate the contract out rightly in order to avoid arbitration proceedings and claims if any. The cancellation of contract or invoking arbitration proceedings both are two distinct situations, the termination clause cannot be given overriding effect on arbitration proceedings or the provision made for arbitration in the contract.
13. Learned counsel for the plaintiff relied upon the different precedents and what is deducible therefrom is that the arbitration clause survives for the purpose of measuring the claims arising out of breach and determine the mode of their settlement. The contract might have come to end by reason of frustration/rescission or breach of condition but the arbitration clause survives. If a dispute between the parties is covered by arbitration clause and even if the original contract stood novated or modified this would not lead to the abrogation of arbitration clause. In the case of Hub Power Company (supra) the hon’ble Supreme Court quoted the following excerpt from Russell on Arbitration:-
“The doctrine of separability greatly increases the scope of all arbitration clauses. The doctrine of separability establishes that an arbitration agreement has a separate life from the contract for which it provides the means of resolving disputes. This enables the arbitration agreement to survive breach of the contract of which it is a clause. The validity of the main contract can then be determined by using the arbitration clause. Earlier case law showed that the public policy requirement that a contract which is void should not be enforced was superseded by the overriding need to give effect to the parties’ wishes to have their disputes resolved by arbitration. The parties were presumed to have wanted their dispute resolved by one tribunal, arbitration, and, in the light of that presumption of ‘one-stop adjudication’, the Court strove to give effect to the arbitration agreement and to allow the arbitration tribunal to investigate whether the contract ever existed.”
In the judgment of Hub Power Company Ltd., the hon’ble Supreme Court also referred to the case of Hitachi v. Rupali (PLD 1998 SCMR 1618), in which it was held that while the law of an arbitration agreement usually followed the proper law of the main contract, an arbitration agreement was separable from the main contract between the parties and arbitration agreement may have a different law which may be provided within the arbitration agreement.
14. I would also like to quote the following excerpt from Corpus Juris Secundum, Volume-6, 2004, Chapter Arbitration (Page-76-77):-
Separability of arbitration provision
“Agreements for arbitration contained in a contract are treated as separable parts of the contract, so that the illegality of another part of the contract does not nullify an agreement to arbitrate. An arbitration clause itself may be severable, so that the presence of an invalid provision in an arbitration clause does not invalidate the entire clause, especially where the arbitration clause contains a severability provision. The parties intent is the primary factor used to determine whether an invalid provision of an arbitration agreement may be severed and replaced with a more equitable one, so that the remainder of the arbitration clause remains viable. A provision may also be considered severable from an otherwise valid arbitration agreement, if there is no indication that the provision at issue was drafted in bad faith. However, an arbitration agreement is unenforceable if unconscionability permeates the entire agreement, such as due to the arbitration provision’s lack of mutuality, so that the unconscionable taint could not be removed from it. Courts have the obligation to decide whether a party’s arbitrable and nonarbitrable claims are severable, and should apply a case by case test to determine the severability of claims.”
15. Learned counsel for the defendant relied upon various case laws. In the case of Manzoor Construction Co. Ltd. the learned court only discussed the condition in which the arbitrator can be appointed under Section 20 of the Arbitration Act and in my view all conditions are fulfilled in this case. In the case of Khardah Company Ltd. the controversy was altogether different in which the court held that a dispute that the contract of which arbitration clause forms an integral part is illegal is not one which the arbitrators are competent to decide. In the present case the validity of the agreement is not under challenge. The case of Das Consultants Pvt. Ltd. is neither here nor there but the only issue was that the arbitration agreement should be in writing, while in the case of Muhammad Azam Fazil, Friends Trading Company and Malik Muhammad Mumtaz (supra), the only point decided was that for appointment of arbitrator under Section 20, the existence of substantial dispute is condition precedent. In the case in hand the contract was entered into for the supply of sugar which could not be shipped by the plaintiff and there are various allegations and counter allegations due to which the shipment could not be materialized and the contract was frustrated without realizing or deciding the core issue between the parties, that which party became the instrumental for frustration of contract which could only be adjudicated through the arbitration. Once the arbitrator is appointed through the mechanism and procedure proposed in the agreement itself, it is for the arbitrator to fix the responsibility that who have committed the breach. The purpose of reproducing force majeure clause is to show that the parties were fully cognizant to the force of circumstances and in the same perspective the plaintiff has raised the plea that the initial delay in the shipment was occurred due to heavy rainfall which was beyond their control. All these aspects are required to be considered by the arbitrator and naturally if the breach on the part of plaintiff is proved beyond any shadow of doubt then the action of forfeiting the performance guarantee would be lawful and justified. In the last case of Lahore Stock Exchange (supra), relied upon by the counsel for the defendant, the leave was granted to consider whether there was a valid agreement or not facts of which are distinguishable here.
16. Learned counsel for the defendant also raised objection that the plaintiff is based in UAE and their local agent is not authorized to file present suit. The proper resolution is already attached with the plaint in which the local agent M/s.M.M.Ellahi Traders through their General Manager Dr.Ajmal Jawed is authorized to file the case in the courts of Pakistan. Even in the decision passed by defendant on 13.1.2011 the plaintiff had been arrayed through its local agent M/s.M.M.Ellahi Traders. So the arguments of learned counsel in this regard is misconceived.
17. Learned counsel then referred to clause (a) of Section 2 of the Arbitration Act, which is a definition of arbitration agreement but it has no relevancy or germane. Here an agreement in writing in which arbitration clause was agreed to submit present or future differences is an admitted fact. Learned counsel also referred to clause (h) of Section 2 of Contract Act, which has again no relevancy as it only provides that an agreement means an agreement enforceable by law is contract. There is no dispute between the parties that the contract entered into between the parties was not enforceable by law. He then referred to Section 230 of the Contract Act which provides that in the absence of any contract to that effect, an agent cannot personally enforce the contract entered into by him on behalf of its principal nor he is personally bound by them. Again the argument of the learned counsel is neither here nor there. The present suit has not been filed by the agent on behalf of the principal, on the contrary, the principal has authorized the agent by its resolution to institute legal proceedings against the defendants.
18. As a result of above discussion, I feel no hesitation in my mind that despite cancellation/termination of contract the provision of arbitration survives and agreement for arbitration contained in the contract is a separable part of contract, therefore, it would be fair and square to appoint arbitrator in this case. Consequently, Justice (retired) Mr. Ali Aslam Jafferi is appointed Arbitrator to resolve and arbitrate the dispute between the plaintiff and defendant No.2. The suit is disposed of accordingly.