IN THE HIGH COURT OF SINDH AT KARACHI

SUIT NO.406 OF 2005

Plaintiff : Franklin Credit & Ivestiment Co, Ltd. (FCIC),

through: Mr. Mohsin Shahwani, Advocate.

Defendant No.1 : Export Processing Zones Authority,

through: Mr. Danish Ghazi, Advocate.

Defendant No.2 : Bank Al-Habib Limited,

through Mr. Ghulam Murtaza, Advocate.

Date of hearing : 05.03.2015.

Date of announcement: 02.04.2015.

O R D E R

SALAHUDDIN PANHWAR, J. Through instant application i.e. CMA No. 8169 of 2004 the defendant No.1 prayed that:

“…to stay the instant proceedings and may graciously refer the matter to Arbitration in terms of Section 24 of the Export Processing Zones Authority Ordinance No.IV of 1980 and General Agreement dated 1.2.1990’.

2. To explain the back-ground of filing of instant application, it is necessary to unfold that the plaintiff M/s Franklin Credit & Investment Company ltd. (FCIC) filed instant suit for ‘Declaration & Injunction’ against the defendant Nos.1 (Export Processing Zones Authority) and defendant No.2 (Bank Al-Habib Ltd.) for following relief (s):-

a) declare that the cancellation of lease by the Defendant No.1 is illegal and without authority, consequently, declare that the lease in respect of property Nos.W/1 and W/2 in favour of the Plaintiff is valid and subsisting;

b) grant injunction against the Defendants, their Servant (s), Agent (s), Person (s) acting for and on behalf of the Defendants from granting executing lease in favour of Defendant No.2 and / or any other third party;

IN THE ALTERNATIVE

if the lease has been granted to declare that the lease granted is unlawful, without authority and of no legal effect, wherefore restrain the Defendant No.2 to proceed to carry out any changes alternation or take possession of the suit property’

c) declare that the Defendants have unlawfully taken over possession of the property bearing No.W/1 and W/2;

d) direct the Defendants to deliver the vacant and peaceful possession of the premises bearing No.W/1 and W/2 to the Plaintiffs;

e) grant costs of the suit;

f) grant such other / further / additional decree or decrees, order or orders, relief or reliefs, direction or directions, that this Hon’ble Court may be pleased to deem fit and proper in the facts and circumstances of the case.

The above reliefs were with reference to the pleading that plaintiffs are non-banking financial institution duly incorporated under the laws of United Kingdom having a Memorandum & article of Association and a certificate of incorporation issued by the companies House Cardiff United Kingdom and permission was accorded to operate its branch / liaison office in the Export Processing Zone Karachi in the year 1990. On 16.6.1989 an application to EPZA was made for setting up a liaison office for undertaking business of banking e.t.c which request was approved by defendant No.1; plaintiffs was requested to deposit US$11,600/- for acquiring land for 400 Sq. meters. In pursuance thereof plaintiffs deposited amount with defendant No.1; a site plan was issued on 18.02.1989 for plots of land bearing No.W1 and W2 measuring 400 Sq. meters. Accordingly, on 01.02.1990 a General Agreement was executed between the defendant No.1 and plaintiffs. Under correspondence and documentations; plaintiffs constructed building on allotted land and started its operation in terms of approval granted to it by defendant.

3. It is further pleaded that on 16.8.2004 when Mr. M.A. Akhtar, an authorized representative of plaintiffs for the liaison office at the KEPZ, reached at liaison office where one Mr. Junaid, introducing himself as a Security Chief of the defendants, intruded and forcibly occupied liaison office where, per claim of plaintiffs, all its computer, files & records, book of accounts and other items were lying. The defendants published a Public Notice in the Daily Dawn and Daily Jang dated 08.10.2004 informing therein that they had cancelled the allotment of land to the plaintiffs although per clause 91 on page 2 of the general agreement it was mandatory for the KEPZ to refer any dispute for arbitration. Plaintiffs pleaded that there are reliable information that the defendants by ulterior motives are trying to take over the land, building and assets of the plaintiffs for selling the same to the defendant No.2 who have been granted license to operate in KEPZA.

4. Against such application of the defendant No.1, the defendant No.2 filed the objections wherein insisting that defendant No.2 is not party to lease/license agreement dated 01.2.1990 executed between the plaintiff and defendant No.2 as such contents of the said lease / license agreement is not binding on the defendant No.2. Defendant No.1 from its conduct and attitude took steps into the proceedings hence the instant application is not sustainable. Defendant No.2 is a bonafide purchaser of the premises for valuable consideration without any claim or objection on part of the plaintiff and operating its business in premises in question, so prayed for dismissal thereof.

5. The learned counsel for the defendant No.1 has argued that plaintiff entered into General Agreement dated 01.2.1990 and Lease/ License Agreement dated 01.2.1990 with defendant No.1 inter-alia which specifically contains that any dispute between the parties shall be referred to Arbitration in terms of Section 24 of the Export Processing Zones Authority’s Ordinance No.IV of 1980. Plaintiff never fulfilled its contractual obligations and violated various terms of the agreement, in particular, not carrying out the sanctioned business activities from the premises in question. Defendant No.1 made innumerable but unsuccessful attempts to settle outstanding issues, in particular, non payment of Annual Ground Rent, other dues e.t.c and various notices were served upon plaintiff but plaintiff deliberately avoided and filed the suit malafide. It was argued that since the mandatory condition of referring any dispute for arbitration hence it would meet the ends of justice to allow the application.

6. The counsel for the defendant No.2, while reiterating the counter-affidavit, filed against instant application, prayed for dismissal of the instant application, on the plea that agreement nowhere reflects, arbitration clause, written statement has been filed hence it is settled law that if steps have been taken in proceeding, matter could not be referred for arbitration, hence application is not maintainable. In support of his contentions he relied upon 2009 CLC 676, 2012 CLD 267 and 1987 CLC 2205.

7. The counsel for the plaintiff argued that application under section 34 of arbitration act is maintainable, by referring the matter to arbitration, whole issue would be resolved; lease in favour of defendant 2 is completely illegal and ab intio void.

8. I have heard the respective sides and have gone through the available material.

9. The peculiar facts of the instant case have made me to first refer the provision of Section 34 of the Arbitration Act, 1940 before proceeding further onto merits of the case. The provision reads as under:-

‘Power to stay legal proceedings where there is an arbitration agreement.—Where any party to an arbitration agreement or any person claiming under him commences any legal proceedings against any other party to the agreement or any person claiming under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time before filing a written statement or taking any other steps in the proceedings, apply to the judicial authority before which the proceedings are pending to stay the proceedings, and if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement and that the applicant was, at the time when the proceedings were commenced, and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration, such authority may make an order staying the proceedings’

(underlining has been supplied for emphasis).

10. The plain language of the above provision makes it quite clear that to bring this proviso into play, one has to establish first that:

i) legal proceedings have been initiated by any of the parties to arbitration agreement or person claiming under such a party;

ii) the proceedings should be against the other party to agreement or person claiming under him;

iii) should be in respect of matter agreed to be referred;

Establishing above, the party, seeking application should also show that:

i) it was ready for arbitration at the time of commencement of proceedings;

ii) still ready proper conduct of the arbitration,

Now, let’s examine the instant case on above criteria. Since, it is a matter of record that instant proceedings have been initiated by the plaintiff who is one of the parties to agreement hence condition (i) seems to be existing. The record, however, shows that legal proceedings have not been issued against the other party to the agreement i.e defendant No.1 but also against the defendant No.2 who is undisputedly not a party to such arbitration agreement.

11. Let me add here that importance of condition (i) and (ii) can well be gathered from condition (iii) which prima facie insists application of this provision only where legal proceedings are in respect of ‘matter agreed to be referred’.

12. I can safely say that confining application of this provision with such phrase is nothing but to restrict the consents of two parties to those rights and obligations which, undeniably, can only bind them and the persons claiming under them alone. Since, it is a matter of record that the defendant No.2 is holding possession over the suit property under an independent title and has never been a party to the agreement, arrived between the plaintiff and defendant No.1 hence prima facie the condition (ii) seems to be not existing, as it should.

13. Be as it may, let’s see whether the condition (iii) is prima facie existing or otherwise? To examine this properly, it would be proper to refer Section 24 of the Ordinance IV of 1980 which the parties to agreement (plaintiff and defendant No.1) agreed for arbitration. The same is reproduced hereunder:-

‘Disputes to be referred to arbitration.—(1) Any dispute relating to the interpretation of the provisions of any agreement made under any scheme prepared under section 10 between the Authority and an investor or the rights of the parties to such agreement or any rights conferred or any liability imposed by this Ordinance shall be referred for arbitration to an arbitrator appointed by the parties.’

The above appears to be having two folds. First one is speaking about dispute relating to the interpretation of the provisions, which, prima facie is not involved in the instant matter. The second fold speaks about rights of the parties to such agreement or any rights conferred or any liability imposed by the Ordinance. I have no hesitation to say that all rights and obligations of the parties to an agreement arise from the agreement itself but this alone shall not bring every case within four corners of Section 34 of the Arbitration Act, 1940 because the application of this provision has been confined to:

‘legal proceedings initiated in respect of matter agreed to be referred’

14. The plaintiff initiated this legal proceedings for number of reliefs, including one of declaration and cancellation of lease in favour of the defendant No.2 which dispute was never agreed to be referred nor the parties to agreement (plaintiff and defendant No.1) at that time were competent or legally justified to keep such authority with them or to get a matter referred for arbitration at their choice when the title, status and rights of third (defendant No.2) would , in any case of arbitration, are likely to be prejudiced.

15. It would be pertinent to refer case of ‘Shah Muhammad v. Export Processing Zones Authority (2011 YLR 2413 (Karachi) ) wherein it is held that:

“This means that there should not only be, a dispute between the parties, but it should be of such a nature, which is covered under the arbitration clause. Unless this is shown, the suit cannot be stayed and matter cannot be referred to arbitration. It is not sufficient that controversy has arisen between the parties to arbitration, but it is necessary that the controversy should be of such a nature, which is covered by a situation which provides for referral of the matter to arbitration. The applicant of section 34 of the Arbitration Act, 1940 must satisfy the court that the controversy is of the nature which has arisen out of the provisions of the arbitration clause”.

Although, the above legal position, has resulted in safe conclusion that instant application is liable to be failed. However, I would like to refer the second part of the requirement of Section 34 of the Arbitration Act, 1940. The defendant No.1 did move application on first occasion before filing of the written statement but has failed to show that how it (defendant No.2) is ‘still ready proper conduct of the arbitration’ when undeniably the rights, title and interests of defendant No.2 have involved in the matter just because of independent lease by defendant No.1 against consideration; delivery of possession and functioning of the business of defendant No.1 in such premises which status, even, stood stamped from order of this court passed on injunction application.

16. Thus, in view of above discussion, the instant application, being devoid of substance, is hereby dismissed. However, the plaintiff and defendant No.1 can competently settle their disputes out of the court and even can competently seek a decree on such terms which legally shall have no bearing upon rights of the defendant No.2. The defendant No.2 is directly to file the written statement without any further delay.

J U D G E

Sajid