STATE BANK OF PAKISTAN, KARACHI0 Versus MESSRS NAQSON
The first defendant is a firm and the other defendants are the partners of this firm. On 2nd September 1965, the first defendant had entered into a written contract with the plaintiff for the construction of 8 bungalows for the plaintiff's officers in K. D. A. Scheme No. 1, Karachi (I shall refer to this contract as the said contract). Under the said contract the defendant No. 1 had to complete the construction of the 8 bungalows within 9 months of the plaintiff's works order which was issued by it on 6‑9‑1965. Unfortunately, there were disputes between the plain tiff and the defendants about the execution of this contract, and the plaintiff was not satisfied with the manner in which the defendant was constructing the said bungalows, therefore there was corres pondence between the parties, and by its notice dated the 16th September 1969, the plaintiff had informed the first defendant that it had "abandoned the work" and that it had committed breach of contract for which it was liable to pay damages to the plaintiff, therefore by this notice the plaintiff had called upon the first defendant to pay it a sum of Rs. 5,58,619.22. The defendant by its reply dated the 20‑9‑1969, repudiated the allegation in the plaintiff's notice and observed that it would prefer the matter to take its own legal course. It is only material to state here that thereafter on 3‑10‑1969, the plaintiff filed this suit for the recovery of Rs. 5,58,609.22 as damages from the defendants for breach of contract and for a permanent injunction to restrain the defendants from interfering with the construction of the said bungalows. As the said contract contained various provisions for arbitration, the plaintiff has stated in its plaint that it did not wish to resort to arbitration and that it desired that its claims should be adjudicated by this Court. On the other hand, the defendants prefer to invoke the arbitration clause contained in clause 28 of the said contract, therefore, when they were served with the summons of this suit, they immediately filed an application for stay of the suit under section 34 of the Arbitration Act, 1940. This application was heard by' me in November, but I was requested by the learned counsel not to pronounce judgment as they were trying to settle the dispute. As I have now been informed that the dispute cannot be settled I shall now pronounce this order.
2. I have pointed out that the said contract contained various provisions for arbitration. But Mr. Tyabji, relied ‑ only on clause 28 of the said contract. This clause states:‑
28. All questions and disputes between the parties to the contract, other than those in which the decision certificate and/or opinion of any person is expressed by the contract to be final and conclusive, shall be referred to an arbitrator, to be appointed by the Chief Accountant of the State Bank o f Pakistan whose award shall be final, conclusive and binding on the parties. Unless the State Bank otherwise agrees, such reference shall not take place until after completion or abandon ment of works.
I have to observe here that there are several clauses in the said contract under which disputes between the plaintiff and the defendant have to be referred to the plaintiff's Director of Engineering whose decision is declared to be final. Such of these clauses as are relevant to this suit are clearly in the nature of arbitration clauses, at least according to the view taken by the Courts in Karachi in Sakhi Muhammad Hyder v. Tharomal (A I R 1941 Sind 202) and Mackenzia Ltd. v. Sulleman & Co. (A I R 1933 Sind 75). I shall refer to these clauses as the other clauses and, as an agreement has to be read as a whole, it is clear that a dispute which falls under any of the other clauses cannot be referred to the arbitration of an arbitrator to be appointed by the plaintiff's Chief Accountant under clause 28.
3. As Mr. Tyabji relies on clause 28, in order to obtain a stay he has to show that the plaintiff's claims in the suit do not fall under the other clauses, and this question has to be decided, at this stage, according to the particulars given by the plaintiff of its claim m the plaint. These particulars are contained in para. 18 which states as follows:‑
18. That the plaintiff submits that by reason of the breaches of the contract committed by the defendants it has suffered loss and damages and is entitled to the following amounts
Rs.
(a) Compensation for delay, 10 % on
Rs. 11,65,142.52 1,16,514.25
(b) Fine for non‑submission of fort‑ nightly labour reports. 95 defaults at Rs. 50 per default 4,750.00
(c) Replacement/repairs of unsound and imperfect works 1,16,514.25
(d) Recovery of advance paid for material at site 9,232.26
(e) Recovery of cost of Bank's material issued to the contractor, 8,821.67
(f) loss of accommodation for 8
Principal Officers and the Deputy
Governor 1,95,625.00
(g) Extra amount spent on supervision and overheads of technical staff 64,212.50
(h) loss due to increase in Prices on balance . work at 15 % of contract price 42,949.29
Rs. 5,58,619.22
4. I shall now examine the items claimed by the plaintiff and it will be (convenient to consider first the first three claims in para. 18 because it is common ground between the parties that they fall under the other clauses. However, Mr. Tyabji submitted that the other clauses were in the nature of penalty clauses and as penalties were void under section 74 of the Contract Act, learned counsel submitted that the other clauses were void and could not restrict the scope of arbitration contained in, clause 28.
5. I shall therefore examine the clauses relevent to these three claims in the light of learned counsel's submission. The first claim is for compensation for delay and, it falls under clause 2 of the said contract. This clause states that the defendant shall carry out the contract according to the time fixed in the tender, and shall be liable for compensation for delay: The clause further states that the plaintiff's Director of Engineering shall fix the amount of compensation due to the plaintiff in the event of delay by the defendant, and that his decision shall be final. Under this clause the Director can only fix the compensation payable by the defendant and the clause also limits the amount of compensation which he can award. As the clause only entitles the plaintiff to recover compensation, I am not able to accept Mr. Tyabji's argument that it is a penalty clause. The third claim of the plaintiff is of a similar nature, and is for replacement and repair of defective work done by the defendant. It is not disputed by Mr. Tyabji that defective work would be a breach of contract on the defendant's part, and in the event of breach of contract, the plaintiff is entitled under clause 3 to employ labour and use material to repair such defective work and debit it to the defendant, and the decision of its Director of Engineering about the defendant's liability for any defective work done by the defendant is declared to be final. It is true that such a decision could be arbitrary. But if so, it would be contrary to the powers conferred on the plaintiff's Director of Engineering under this clause. As the clause only permits the plaintiff's Director of Engineering to fix the compensation payable by the defendant, I do not agree with Mr. Tyabji's submission that the clause is in the nature of a penalty clause. But the 2nd claim, which falls under clause 23 (d) is described in the plaint itself as a fine, therefore, prima facie it is hit by section 74 of the Contract Act. This means that if a dispute under this clause had been referred to the arbitration of the plaintiff's Director of Engineering the reference might have been illegal, but it does not mean that the parties intended to refer such a dispute to an arbitrator selected by the plaintiff's Chief Accountant under clause 28. Therefore, the only effect of this illegality is that if the plaintiff has any claim for compensation under this clause it can recover it only through the Courts.
6. I now turn to the next two claims of the plaintiff. These claims are for the recovery of an advance paid to the defendant for material and for the cost of the material supplied by the plaintiff to the defendant. According to the learned counsel for the plaintiff, these claims fall under clause 42. As clause 42 refers only to the storage of material, it is quite irrelevant to these claims, but as clause 43 deals with material supplied by the plaintiff to the defendant these claims prima facie fall under it, and as any dispute under this clause has to be referred to the plaintiff's Director of Engineering, prima facie these claims are excluded from the ambit of clause 28.
7. The last three claims of the plaintiff aggregate more than Rs. 3,00,000 and do not appear to fall under any of the other clauses. I therefore invited learned counsel for the plaintiff to show me under what clauses they fall. Learned counsel stated that they fall under clauses 3 and 5 of the said contract. Now, as I have pointed out, these clauses, which make a decision of the plaintiff's Director of Engineering final, are in the nature of arbitration clauses, therefore, they have to be considered strictly. . Bearing in mind this principle and the fact that the plaintiff had not commenced construction of the bungalows in dispute when it filed the suit, I am not able to agree with the learned counsel's submission that these claims fall under clause 3 or 5 of the said contract. The result is that, as these claims do not fall under any of the other clauses, the provisions of clause 28 are attracted, and prima facie the defendant is entitled to a stay of the suit with regard to these claims, the more so as they constitute more than half of the plaintiff's claim in the suit. However, the plaintiff's cause of action for these three claims is based on its allegation that the first defendant has committed breach of contract, and its cause of action for its other claims is also based on the alleged breach of contract by the first defendant. Therefore, if I stay the suit with regard to these three claims, the result will be that this Court and the arbitrator will both have to give a decision on the same question, namely, whether the first defendant has committed any breach of contract as alleged. I do not think that this would be desirable and I would not therefore like to exercise my discretion under section 34 of the Arbitration Act with regards to these claims.
8. As the point which has thus arisen is of considerable importance I have examined the law on this aspect of the case and I may quote here a passage from Russel on Arbitration, 17 th Edn. At page 88 the learned author has observed with reference to the very question under consideration before me as follows:‑
It may be desirable to stay proceedings as to part only, if only that part is appropriate to be decided by arbitration; as where only that part is within the agreement to refer; or the dispute involves in addition to that part a pure question of construction. The Court's exercise of its discretion, however, will of course depend upon whether it is convenient to try the different parts of the dispute separately. Thus a stay will normally be entirely refused where only a `subordinate and trifling' part of the dispute is agreed to be referred, or where two claims one inside and one outside the agreement turn upon substantially the same facts, or the arbitrator can only decide the amount of the claim and not the liability.
9. I also find that a similar question was considered by the Court of Appeal in Turnock v. Sartoris'(43 Ch. D 150). There the facts were that the lessor had covenanted to supply the lessee with water under a lease which contained a clause that differences between the parties about the lease should be referred to arbitration. Some years later disputes arose between the parties and they executed another agreement which did not contain any clause for arbitration. Thereafter the lessor filed a suit against the lessee claiming damages both under the lease, which contained the arbitration clause, and !under the subsequent agreement, which did not contain any provision for arbitration. The lessor con tended that part of the claim, namely, the claim under the lease, was hit by the arbitration clause in the lease, therefore he submitted that he was entitled to a stay of the suit on the basis of that arbitration clause. In repelling this contention Cotton, L J. observed at page 156 :‑
Then it was contended that at all events the question arising under the lease was the principal matter in dispute, and that it ought to be referred, leaving the action to proceed only as to matters not arising under the lease. I think that such a course would not be right. It cannot be right to cut up this litigation into two actions, one to be tried before the arbitrator, and the other to be tried elsewhere.
I am in respectful agreement with these observations. In my opinion it is undesirable that the some disputes should be adjudicated by this Court and by an arbitrator, therefore I do not think this is a fit case in which I should stay the suit in the exercise of my discretion under section 34 of the Arbitration Act. The application is dismissed but without any order as to costs.
A. E./S. A. H. Application dismissed.