JAMIA INDUSTRIES LTD KARACHI Versus PAKISTAN REFINERY LTD KARACHI

ORDER

This order will dispose of the main petition under section 20 of the Arbitration Act as well as Miscellaneous Application No. 691 of 1975 under section 41, Arbitration Act read with Order XXXIX, rules 1 and 2, C. P. C., as common questions arise for decision of both.

2. As the consideration of the injunction application would only arise -in the event the main petition succeeds, it would be convenient to dispose of that first.

3. The application under section 20, Arbitration Act is by Messrs Jamia Industries Ltd., with the usual allegations that there exists an arbitration agreement between the parties and that differences have arisen between the parties to which the agreement applies. The applicant also makes ,the usual prayer for an order to file the agreement and refer the dispute to arbitration.

4. Messrs Pakistan Refinery Ltd., the defendants have filed objections ,to this application. There is no controversy between the parties that the contract executed by them contained the arbitration clause. The defendants, however, strongly challenge that any dispute as contemplated by section 20, Arbitration Act has arisen between the parties so as to call for an order of reference. The only question for decision, therefore, is whether in the facts and circumstances of this case any disputes have arisen which require to be adjudicated by arbitration.

5. Messrs Jamia Industries Ltd. had entered into a contract of fuel oil sales with Messrs Pakistan Refinery Ltd., the defendant herein. On 4th July 1974, parties set down the terms and conditions of the contract in an agreement in writing executed between the' parties. The contract period was from 4th July 1974, ending 31st December 1974. The contract stipulated that during this period the plaintiff Company would purchase for export certain quantities of fuel oil based on defendant-Company's estimates of surplus as would be available from the operations of the defendant's refinery after meeting the internal requirements in Pakistan.

6. Annexure "A" appended to the contract stipulates in detail the programming, shipping, and delivery arrangements agreed to between the, parties. It would be relevant only to refer to the notice clause of this annexure which reads as follows:-

"Sellers (Pakistan Refinery Ltd.) shall give at least thirty-five (35) days notice to Buyers (Jamia Industries Ltd.) specifying a five-days range of dates within which Buyers will be required to receive a consignment of produce hereunder. Buyers shall, within fifteen (15) days of such, notice, give Sellers a firm nomination of day/cancelling days in accordance with Sellers' request and shipping instructions..

Within two (2) working days of receipt of such nominations, Sellers shads advise Buyers their acceptance (giving approximately required E. T. A of vessel) or rejection of such nomination, stating the reasons in case of rejection."

7. It is common ground that a bank guarantee for Rs. 5,00,000.00 was, furnished by the plaintiff as a condition of the tender document to ensure performance of the contract. The operative part of the guarantee by the First National City Bank, Karachi stipulated as follows:-

"It is hereby confirmed and reiterated that we undertake to make an, unconditional payment of Rs. 5,00,000.00 (Rupees five lacs only) to you on your written demand without further question or reference to Jamia Industries Ltd., in the case of any default on their part in, the due performance by them of all or any of their obligations under the said contract."

8. According to the plaintiffs the first consignment of oil was offered by defendants by their letter dated 18th July 1974 intimating dates between 31st July to 4th August 1974. The plaintiffs replied by their letter dated 23rd: July 1974, objecting that the notice was not in accordance with the contract inasmuch as it was for less than 35 days and as such their foreign buyers had showed their inability to nominate a vessel for lifting the cargo. Thereafter -a second notice was sent by the defendants by their letter dated 4th. October 1974, intimating dates between 10-15 November 1974 for supply of' another consignment. But the plaintiffs replied informing the defendants; that the foreign buyers of oil had nominated a vessel for this consignment, with the 'laycan' dates as November 15-25, 1974. On 11th November 1974] the defendants, then notified their offer to supply the cargo between 7-12 December 1974. There then ensued some correspondence between parties in:, respect of the second consignment as a vessel was not readily available to, meet the schedule offered, and offers and counter offers were made but the defendant did not agree to supply the cargo. The case of the plaintiff is. that in regard to the second consignment also the notice sent by defendant on 11th November was in breach of the terms of contract. Ultimately, the defendant by its letter dated 19th December 1974, to the plaintiffs listed the defaults allegedly committed by the plaintiffs. As this summarises the defendants' case it will be useful to refer to its ;text, which is in the following; terms:-

(1) After signing of our fuel oil export contract with you on July 1974:

(a) We offered you a cargo for lifting between 31-7-74 and 4-8-74. You, failed to lift this cargo and we had to make alternate storage arrangements at your cost and consequences. Details of our claims have already been advised to you for settlement.

(b) Subsequently we offered you another cargo for lifting between 10/15-11-1974 which you also failed to lift. However in order to accommodate you we agreed to extend the lifting date to 7/12-12-1974. You confirmed this date and advised us nomination of 'Fiona' which we accepted.

(2) Your desire to lift this cargo between 25-12-1974-3-1-1975 cannot be accepted as you have repeatedly failed to lift this another cargo on the nominated and accepted dates on one pretext or the other. Addi tionally your revised notified laycan days for this cargo, that is 25-12-1974 to 3-1-1975 are outside the range of our contract as approved by the Government which as you are aware expires on 31-12-1974.

(3) Till the expiry of the laycan days of this cargo that is 12-12-1974 your nominated vessel did not arrive and we did not hear from you on the subject and even the letter of credit was not opened in accordance with the contract, we therefore have to make alternate arrangements for this cargo also at your cost and consequences; and we will send our appropriate claims to you.

9. From the above resume of the rival accounts of both parties it would appear that each accused the other of breach of contract. But irrespective of the question as to which party was guilty of the breach, the fact remains that the contract was not performed, in so far as, no supplies were given or taken and no payment was made. However, this brings me to the question of encashment of the bank guarantee, which is perhaps the real bone of contention between the parties.

10. It is the case of the plaintiffs that in view of the stipulations con tained in the guarantee documents, the defendants who were the beneficiaries of guarantee could call for the payments 'in case of any default on their (Messrs Jamia Industries Ltd.) part in the due performance by them of all or any of their obligations under the said contract." Thus their plea is that since the default was committed by the defendants themselves the guarantee did not mature in their favour and therefore they had no right to make a call on the bank. Accordingly, the plaintiffs wrote to the bank apprising them of this situation and advising them that the defendants were not entitled to the payment. It is on this basis that the miscellaneous application for injunction has been made by the plaintiffs seeking a prohibitory order to restrain the defendants from encashing the bank guarantee. On the other hand, the defendants claim that the very purpose of the bank guarantee was to provide adequate protection to the defendants in case of default by the plaintiffs which matter was for the former to determine and call for the payment of the guarantee amount.

10-A. In support of the application, Mr. A. Rauf, learned counsel appear ing for the plaintiffs first referred to the terms of the guarantee document and contended that it was encashable only in case the plaintiffs committed breach of their obligations under the contract. The question whether they did commit the breach was clearly within the ambit of the arbitration clause and hence, he urged, that the defendants were not entitled unilaterally to deter mine the question without adjudication by the domestic tribunal in terms of the agreement and encash the guarantee. He further contended that the pleadings of the parties clearly show that there exist disputes between them regarding the question of sufficiency of notice of intimation for supply in regard to the two consignments. He vehemently argued that the very fact that the plaintiffs assert that they are not guilty of any default in the perfor mance of the contract which allegation is controverted on the part of the defendants expressly in their objections and impliedly by their insistence for encashment of bank guarantee, clearly establishes that disputes have arisen between the parties which are referable to arbitration.

11. Mr. M. H. Kazmi, learned counsel for the defendants, on the other hand, relying on the correspondence exchanged between the parties, con tended that an admittedly defaulting party cannot claim that a dispute exists. He asserted that since there was no rejoinder affidavit filed controvert ing the statements made in the counter-affidavit, the facts disclosed therein must be deemed to be admitted. On this basis he contended that there is no real dispute between the parties but only a pretence of a dispute which is not referable under the law to arbitration. In order to substantiate his conten tions learned counsel referred to the provisions of the contract and submitted that the terms of the contract had separately made provision for the first cargo and the subsequent cargo to be supplied. For this purpose he made particular reference to Annexure "A" to the agreement clause 20 of which stipulated that for the initial cargo for which there was insufficient time to give 35 days notice as specified in the contract the estimated tentative 5 days range will be given separately. In this connection his case was that taking into consideration Article 4(E)(a) of the main contract, clearly the upper limit was fixed for the supply of the first cargo by the end of the month of July 1974 or in any case August 1974, therefore, he submitted, this leads to the clear inference that the 35 days' notice was not required to be given in case of the first cargo. With regard to the second notice learned counsel referred to the correspondence between the parties and contended that there ,can be no controversy that it was the plaintiffs who deliberately avoided to take the delivery.

12. There can be no cavil against the proposition of law that the existence of a difference or dispute is an essential condition for making a reference to the arbitrator, for, that constitutes a cause of action for a application under section 20, Arbitration Act. The Court, has, therefore, t be satisfied that a real question of difference has arisen before compelling the parties to submit to arbitration. A dispute implies an assertion of a right by one party and repudiation thereof by another. In other words materials for a lis as such must be shown to exist. Unless a dispute has developed which requires adjudication, there will be nothing to refer to arbitration. Further, the dispute must be real as the Court will not leave a mere pretence of dispute to arbitrator for decision. However, the scope of the power conferred on the Court under section 20 is 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. For that would amount to usurping the jurisdiction of the domestic tribunal constituted under the arbitration agreement.

13. It is clear from the pleadings of and respective contentions on behalf of the parties that the true interpretation of the clauses of the contract is required for holding whether in the case of first cargo the notice served was sufficient or whether the estimated tentative 5 days range given by the plaintiff was binding on the plaintiffs. It would also appear that with regard to the second cargo a question has arisen whether the notice dated 11-11-1974 by the defendants would attract the application of the 35 days' notice clause of the contract.

14. Now the contention of Mr. Kazmi is that as the terms of the con tract prescribing a minimum of 35 days' notice were not applicable to the first cargo for which an upper limit as stated above was fixed, there can be no dispute about the sufficiency of the first notice. I find no force in this con tention, for, even if it is held that the prescribed period of notice in terms of the conditions of the contract reproduced above, was not attracted in the case of the first cargo, the question still would be whether the notice served was reasonable in the facts and circumstances of the case, for, where no period of notice i, prescribed in the contract it would obviously be construed that the parties agreed to a reasonable notice. Accordingly, it is a matter for adjudication whether the notice in question was a reasonable notice so as to result in breach of contract on part of the plaintiff for not accepting the cargo. In this connection, learned counsel relied. as stated above, on Article 4(E) of the contract relevant part of which reads as follows:-

"Notwithstanding anything herein contained, the sellers shall have the option to re-negotiate the F. O. B. price payable hereunder as mentioned below:

(a) apart from supplying the first cargo at the price mentioned in (A) above, Sellers have the right to re-negotiate with Buyers between July 22, 1974 and August 5, 1974, the price for subsequent cargo to be supplied in August and September 1974."

15. It was urged by him that August 5, 1974, would by operation of this term of contract be an upper limit of time for supply of the first cargo. But to my mind prima facie, the matter is not free from doubt and would require adjudication in the light of all the provisions of the contract. In any case this contention calls for interpretation of the contract for its decision, and a reference to the arbitration clause of the contract would clearly show that even this question is within the jurisdiction of the arbitrator to decide. The arbitration clause is as under:-

"If any question or difference or dispute whatsoever shall arise between the parties touching this agreement or any article or thing herein contained or the construction thereof, or as to any matter in any way connected therewith or arising therefrom then in all such cases the matter in dispute shall be referred in Pakistan to two Arbitrators one to be appointed by the Sellers and the other by the Buyers and in case the Arbitrators are not unanimous to the proposed award then they shall appoint an Umpire to enter upon a reference or if they cannot agree to the appointment of an Umpire, then the same shall be appoint ed by the Court having jurisdiction in the matter under the provisions of the Arbitration Act, 1940 which shall also apply to all proceedings under this Article."

A bare reading of the above clause shows that the aforementioned contention constitutes one of the disputes which falls within the scope of the arbitration agreement. Similarly in regard to the second cargo Mr. Kazmi stated that defendant's letter dated 11-11-1974, not being the first notice for receiving the supply, does not fall within the purview of the notice clause. It is stated that this letter was in continuation of the notice dated 4-10-1974, which duly complied with the requirements of 35 days' period. In this letter which is Annexure'K' to the objections the defendants have stated as follows:-

"In accordance with clause 4 of Appendix 'A' you were to advise nomination within 15 days i.e. by 20-10-1974. Since you did not advise nomination in time, as advised you earlier, your nomination is un acceptable.

However, we offer you this cargo between 7-12/12.

Please confirm the above and advise nomination at the earliest in accor dance with our contract."

Having considered the contents of the above letter it is not possible for me to agree with the contention of Mr. Kazmi that this matter also does not require adjudication.

16. Learned counsel for the defendants, on the question of law as to what constitutes a dispute has first relied on Mohammad Sharif Atta Mohammad v. Mitha Bhai Nathu and others (P L D 1960 Kar. 10). This case related to an application under sections 5 and 33 of Arbitration Act. The decision in that case turned on the question whether the last reference to arbitration was a continuation of a previous reference or not. And it was stated that if the finding on this question was that the last reference was not a continuation of the previous reference, then the claim was clearly barred by time. Having come to the conclusion that the claim was clearly barred by time, the learned Judges held that no real dispute existed between the parties. This case is obviously distinguishable as there is no question of the claim being barred in this case which point could be decided on the basis of uncontroverted facts. Learned counsel then cited the case of Friends Trading Co. v. Mohammad Usman Maula Bukhsh (P L D 1954 Sind 956). Apart from laying down that an existing dispute is an essential condition for a reference to arbitration, over which proposition there can be no dispute, the case was decided on peculiar facts, namely that the parties having settled their disputes before the matter came to the Court, there was no subsisting contract or any dispute requiring adjudication by arbitrators. Next, the learned counsel cited two Indian cases but I do not wish to burden this order with a discussion of those as the law enunciated therein, to my mind, has no bearing in this case. I would, however, refer to a decision reported in the case of Messrs overseas Cotton Co. v. Messrs S. M. Fazail & Co. (P L D 1954 Sind 241). This was a case where an award was made and the Court was disposing of the objections to the same. The facts of this case were that the parties entered into a contract for purchase and supply of cotton and the contracted goods were delivered to the defendant. The defendant, however, did not make full payment and some amount remained due for which the defendant admitted his liability and contended that he had kept back the same in deposit as security for some bales of cotton to be supplied by the defendant to the plaintiff. The contention was accordingly made that there was no dispute between the parties. In repelling the contention, Inamullah, J. (as he then was) observed:

"In the present case on the assertion of the defendant that he had kept back the money as deposit for certain future claim that may accrue against the plaintiff it was clearly a controversy regarding the time of payment. In I L R 46 Cal. 534, Rankin, J., held that though the existence of a dispute was an essential condition for the arbitrator's jurisdiction, the dispute might be either in the acknowledgement of the debt or as regards the mode and time of satisfying it. In the present case I am of the view, as I have already observed, that there ,was clearly a dispute in view of the fact that the defendant had no ostensible right to withhold payment of the amount which he admitted to be brought to the arbitration. I, therefore, hold that in view of what I have stated above there was a dispute between the parties."

17. Even assuming that with regard to the performance of the contract no real disputes have arisen between tile parties the question arises whether the encashment .of the bank guarantee can constitute a subject-matter of .dispute. A perusal of the operative part of the guarantee shows that it uses the pertinent words that the payment was to be made "in the case of any default on their (plaintiffs) part in the due performance by them of all or any .of their obligations under the contract." There has been lot of controversy about the true nature of the guarantee. On the one hand the plaintiffs .contend that .the guarantee is clearly conditional upon their committing the breach, which matter is subject to adjudication. On the other, the defendants urge that the guarantee expressly made payable the amount unconditionally., It is not necessary for me to give my findings on these questions; but I am .clearly of the view that even if a breach was committed by the plaintiffs the e defendauts could not, Ipso facto, appropriate the whole amount, in the light of the principle of law postulated by their Lordships of the Supreme Court in, :The Province of West Pakistan v. Mistree Patel & Co. (PLD1969SC80). In that case Mistree Patel & Co. had agreed to purchase rice and in pursuance of one of the terms of the contract instead of depositing any earnest money with the -sellers gave in lieu thereof a bank guarantee to pay the amount of earnest :money on its failure to fulfil its obligation under the contract. On failure of the said company to lift the goods within the stipulated time the Government sold the goods to a third party and by that transaction instead of suffering any loss made a profit. Thereafter, the Government filed a suit against the ,company for recovery of the amount of earnest money on the basis of the bank guarantee. On the question whether in view of the guarantee given by the bank the Government was entitled to forfeit the amount covered by the guarantee and recover the same, the contention was that the Government was entitled to claim the amount of earnest money irrespective of the fact whether ,it suffered loss or not in the transaction in question. The contention was repelled and Abdul Sattar, J., at page 89 of the report observed as follows:

"In the present case, we are, therefore, to see whether the Province of West Pakistan can claim the whole or any part of the amount which the firm was to deposit by way of earnest money. It will be wrong to argue that since the Firm had agreed to deposit a sum as earnest money and in lieu thereof furnished bank guarantee for the said amount the Government would be entitled to claim the whole of this amount simply because there was a breach of contract by the Firm.

In the present case we had already seen that the plaintiff instead of suffering any loss for the failure of the Firm made a profit of Rs. 10,000."

And further:-

"The question that arises therefore is whether in spite of the above fact the claim of the plaintiff in whole or any part can be justified, we are" of the view that the plaintiff is not entitled to any part of its claim whether the term of the contract regarding forfeiture comes within the purview of section 74 of the Contract Act or not."

18. The defendants do not deny that the disputes relating to the bank guarantee are part of the contract. Indeed, they could not have contended so in view of the clear language of the arbitration agreement. It would, accordingly, appear that a substantial dispute with regard to the question whether the defendants are entitled to claim and appropriate the entire guarantee amount or only a part thereof has arisen which is covered by the arbitration agreement and can only be referred to the forum chosen by the parties.

19, For all these reasons I find no merit in the contention of the defendants that a real dispute has not arisen between the parties:

20. The plaintiffs next pray for a temporary injunction restraining the defendants to encash the bank guarantee from the First National City Bank,. Karachi. The defendants have resisted this application. Mr. Kazmi con tended that a right has accrued to the defendants to receive the payment as it was for them to make a call on the breach committed by the plaintiffs. Her relied on Alvi Sons Ltd. v. Government of East Pakistan and others (P L D 1968 Kar. 222) and urged that the prayer was not maintainable as an injunction of this nature cannot be issued by the Court. I am unable to accept this contention. For, in my view, the rule laid down in that decision is not attracted in the present case. Firstly, the law enunciated was in relation to the permanent: injunction sought under section 56 of the Specific Relief Act. That suit was. filed for declaration that' the plaintiffs, at whose instance, the bank had furnished guarantee had not committed any breach of contract and that the guarantee-holder was not entitled to require payment from the bank. It was in relation to these facts that the Court came to the conclusion that no legal character was involved for which a declaration could be given, as a declara tion that the plaintiff has not committed breach of terms of the contract was not within the ambit of section 42 of the Specific Relief Act. The relief of permanent injunction was refused on the view that if the surety by making: the payment under the guarantee had applied its own funds to the discharge of the guarantee be would be entitled to claim indemnity from the principal, debtors for moneys rightly paid by the surety under the guarantee and not for any moneys which be has paid wrongfully. Since wrongful payment would not be payment under the guarantee at all, the principal debtor would have ample opportunity to, protect themselves against such payment if the surety brought a suit for indemnity.

21. In my view the position in the present case is totally different. 1, have held above that the defendants may not be entitled to claim the entire guarantee amount as it is in the nature of earnest money. It is well settled ; that temporary injunctions are governed by the provisions of Order XXXIX, C. P. C. Accordingly, the considerations for grant of such relief need not to be the same as applied to the grant of the relief of permanent injunction The application under consideration is governed by section 41 of the Arbitration Act which expressly makes the provisions of Civil Procedure Code applicable and the Second Schedule of the Act specifically confers the power, to grant interim injunction. Section 56 of the Specific Relief Act would not therefore operate as a bar to the grant of this application.

22. Furthermore, since I have come to the conclusion that the matter as to what amount, if at all is due to the defendants, is subject to adjudica tion by the arbitrator, it follows that the rights of the plaintiffs be preserved in status quo. Mr. Rauf states at the bar that it is common knowledge that no bank furnishes a guarantee unless security is furnished by way of counter guarantee in favour of the bank. Consequently, he contended that in case the payment is obtained under the guarantee, the plaintiff is bound to suffer injury as the bank would necessarily appropriate the security towards the guarantee encashed by it. Section 140 of the Contract Act provides as under:-

"Where a guarantee debt has become due or default of principal debtors to perform a guaranteed duty has taken place the surety upon payment or performance of all that he is liable for is invested with all the rights which the creditors had against the principal debtor."

Once again, therefore, the question as to what rights the creditor has against the principal debtor (the plaintiffs in this case) is yet to be adjudicated and determined. It would, therefore, be exposing the plaintiffs to injury or loss by the bank appropriating their funds towards the guarantee debt as well as they, would be exposed to the rigorous of litigation with the bank. All this would be obviated if the guarantee is held over to be utilised in terms of the award when the liability of the plaintiffs will have been determined. Of course, the guarantee will remain in force for the benefit of the defendants as they have already demanded payment under the same from the bank.

23. In the result the application under section 20, Arbitration Act is allowed and the defendants are directed td file the original arbitration agree ment in Court within one month from this date. The case will be put up thereafter for further orders in this behalf. The application for injunction also stands granted, and injunction would, therefore, issue as prayed on terms subject to what is stated in the above Order.

S. Q. Application allowed.