PAKISTAN REFINERY LTD. Versus TRANSWORLD OIL LTD.

In this matter Pakistan Refinery Ltd. are the applicants. Transworld Oil Ltd., a foreign company having its office in Bermuda, are respondent No. 1 and Mr. A. R. Qasuri Advocate (the Arbitrator) is respondent No 2. The present application has been moved by the applicants under section 33 of the Arbitration Act, 1940 seeking an order from this Court that there is no arbitration agreement between the applicants and respondent No. 1 and that all proceedings under any such arbitration are a nullity and without any legal effect.

2. The facts are that the applicants entered into a contract dated 20-7-1979 with Jamia Industries Ltd., hereinafter referred to as "the buyers", in terms whereof the buyers agreed to lift 30,000 metric tons plus 10% at buyer's option of fuel oil of the specifications provided in the contract at U. S. $ 174.46 per m. t. F. O. B., Karachi with commission of 50 cents per m. t. payable by the buyers in addition to the said price. The buyers lifted the cargo in question between 9th and 12th August 1979Jand the applicants received full payment through an irrevocable confirmed and transferable letter of credit endorsed in favour of the applicants by the buyer.

3. According to the applicants, the contract was duly performed in accordance with its terms and conditions to the entire satisfaction of the applicants and the buyers and that neither party raised any objection or made any claim against the other. However, by a letter dated 5-9-1979 of Messrs A. Rauf & Co. Advocates, acting on behalf of respondent No. 1, respondent No. 1 made a claim on the applicants in the sum of U. S. $ 10 per m. t. on the ground that the escalation clause allegedly agreed between the parties was not incorporated in the contract, as a result whereof respondent No. 1 was. compelled to pay to the applicants through the buyers certain extra amounts. Respondent No. I claimed the refund from the applicants at the rate of U. S. $ 10 per m.t. It was further stated in the letter dated 5-9-1979 that if the demand was not met respondent No. 1 would be left with no option but to invoke the arbitration clause or take any other steps that may be necessary in the-circumstances of the case.

4. The applicants replied through their Advocates' letter dated 12-9-1979 denying the allegations and taking the stand that respondent No. 1 had no contract with the applicants and the contract was only with the buyers. In short, the applicants claimed that there was no privity of contract between them and respondent No. 1. By letter dated 16-9-1979 of Messrs A. Rauf & Co. Advocates the applicants were informed that the buyers had submitted the offers on behalf of the foreign principals, namely respondent No. 1 and that respondent No. 1 and the buyers have common cause and shall take part in the arbitration jointly. By the same letter Mr. A. R. Qasuri Advocate was appointed as the Arbitrator and the applicants were called upon to appoint their Arbitrator within the prescribed time. The applicants stuck to their position that there was no privity of contract between them and respondent No. 1, but then Mr. A. R. Qasuri Advocate, respondent No. 2 herein, appointed himself as the Sole Arbitrator and gave a notice of proceedings before him on 6-10-1979. In the circumstances, the applicants filed this J. M. application under section 33 of the Arbitration Act, 1940 and by order dated 2-10-1979 this Court after hearing the learned counsel for the applicants and respondent No. 1 granted an interim injunction as prayed by the applicants through C. M. A. 3534/79 moved in this matter. The prayer in C. M. A. 3534/79 was for an order restraining the respondents from commencing or continuing with any arbitration proceedings against the applicants until such time this Court determined the existence or validity of the arbitration agreement alleged by respondent No. 1 and challenged by the applicants.

5. I have heard at great length Mr. Sajid Zahid, learned counsel for the applicants, and Mr. A. Rauf, Advocate appearing on .behalf of respondent No. 1. Before I refer to the precise contentions raised by the learned counsel for the parties, I may observe here that despite the injunction granted by this Court on 2-10-1979, the respondent No. 2 proceeded with the arbitration on 6-10-1979. On that day, according to respon­dent No. 2, no party had appeared before him but on the basis of the claim made by respondent No. 1 jointly with the buyers, the respondent No. 2 made an ex parte award in the sum of U.S.$ 2,76,044.40. This award was presented by respondent No. 2 himself in this Court on 14-10-1979 with an application in Form 12-B of the Original Side Rules of this Court pursuant to the provisions of section 14 of the Arbitration Act, 1940 and rule 282 of the Original Side Rules of this Court. Certain objections were raised by the office of this application moved by respondent No. 2 which were complied by respondent No. 2 on 20-10-1979 and an amount of Its. 5 was also deposited by respondent No. 2 in person with the Nazir of this Court under receipt No. 321 dated 20-10-79. This application was registered as Suit No. 904/79 and notice was issued to the parties. Arguments on the present J. M. 39/79 and Suit No. 904/79 were heard at the same time by me, but after the conclusion of the arguments a statement was made by Mr. A. Rauf Advocate appearing in Suit No. 904/79 on behalf of respondent No. 1 as well as the buyers that these two plaintiffs in Suit No.904/79 did not press for the enforcement of the award made by respondent No. 2 on 6-x0-1979. Even otherwise at the conclusion of the arguments I had expressed my view that the award dated 6-10-1979 could not be sustained in law. In the circumstances by my order dated 24-9-1980 the award dated 6-10-1979 was set aside with costs.

6. I may first refer to the relevant portions of t he agreement dated 20-7-1979 which has been filed in original as Annexure `A' to this J. M. application. The name of the respondent No. 1 is not mentioned anywhere in the argument, which is made between the parties with the applicants referred to as the sellers in the agreement of the one part and Jamia Industries Limited referred to as the buyers of the other part. In the preamble there is a reference to the offer dated 20-7-1979 made by the buyers which was accepted by the applicants and it was further recorded that the applicants had agreed to sell and the buyers had agreed to purchase for export the cargo defined in the agreement on the terms Lend conditions mentioned therein. In Article 11.1 of the agreement it is mentioned that the applicants agree to sell and deliver to the buyers and the buyers agree to purchase for export the cargo in question. Article 1.1.2 states that the cargo shall be uplifted by the buyers. Article IV provides that the buyers shall pay or arrange for payment to sellers at U. S. $ 174.46 per m. t. FOB Karachi with commission of 50 cents per m.t. payable by the buyers in addition to the price. Article IV of the agreement requires the buyers to establish or caused to be established an irrevocable, confirmed and transferable letter of credit in favour of the applicants. Article XII relates to arbitration and the same is reproduced here

"XII.1. If any question or difference whatsoever shall arise between the parties hereto touching this Agreement or any clause of thing herein contained or the construction hereof, or as to any matter in any way connected therewith or arising therefrom, and in all such cases the matters in dispute shall be referred in Pakistan to Two arbitrators (one to be appointed by the Sellers and the other by the Buyers) for decision and on their failure to agree, to an Umpire, appointed by the arbitrators before entering upon the reference. The provisions of the Arbitration Act, 1940, shall apply to arbitration proceedings under this Agreement.

XII.2. The venue of arbitration proceedings shall be Karachi."

7. Article XIV relates to notices and provides that- all notices required to be given shall be sufficiently given if addressed to the applicant's address in Karachi and the buyers' address also at Karachi. Article XV provides that the agreement shall not be assignable by either party without the prior written consent of the other.

8. According to Mr. Sajid Zahid, learned counsel for the applicants, the agreement is between the applicant and the buyers as principal to principal and nowhere in the agreement is there any reference to respon­dent No. 1. According to him, the parties to the agreement are clearly named as the applicants and the buyers and if at all there was any arrangement between the buyers and respondent No. 1, the applicants were not concerned with the same and there is no privity of contract between the applicants and respondent No. 1. Learned counsel further argued that the intention of the parties in any transaction is to be determined from the contract itself and from the present contract the intention of the parties is abundantly clear and it is that the two parties, namely, the applicants and the buyers dealt with each other as principal to principal and the contract could not be interpreted as a contract entered into by ,the buyers for self and also as agent for and on behalf of respondent No.1.

9. On the other hand, Mr. A. Rauf, learned counsel for respon­dent No. 1, referred to the preamble of the agreement which records that the buyers had made an offer dated 20-7-1979 which had been accepted by the applicants. Along with the counter-affidavit dated 1-10-1979 of Mr. Rafiq Ahmad Mian, Director of Jamia Industries Ltd., copy of the letter of 20-7-197.9 of Jamia Industries Ltd. containing the offer has been filed. I, however, find that prior to the offer dated 20-7-1979, an earlier offer had been made by Jamia Industries Ltd. by their letter dated 14-7-1979 addressed to the applicants. As the case of Mr. A. Rauf is based on the offer dated 20-7-1979 and I also consider the letter dated 20-7-1979 as well as the earlier letter dated 14-7-1979 to be relevant and requiring consideration, the same are reproduced here :-

"July 14, 1979.

Please refer to our letter dated July 14, 1979 we have the pleasure to quote on behalf of Transworld Oil Ltd. Hamilton of Bermuda as under

Price : (A) U. S. D. 160.27 per M/Ton for a parcel of 2500 0 Tons 10 % buyers option.

Commission : (B) U. S. D. 74.46 per M/Ton. for a parcel of 30000 Tons 13 % buyers option.

Commission : U. S. D. 0.50 per M/Ton payable by buyers in addition to the above price.

Shipment : Between July 18-27. However our buyers would try to narrow this range.

Escalation : As per buyers telex message No. 03A/DJB dated 14-7-1979 attached.

This offer is subject to the terms as contained in the above-mentioned telex message attached herewith. Except the terms contained in the attached telex message of the buyer we otherwise confirm acceptance of your terms as stated in the contract.

July 20, 1979.

We have pleasure in confirming our offer on behalf of Transworld Oil Ltd. Hamilton of Bermuda and ourselves (hereinafter collectively referred to as "Buyer") as under :-

(1) U. S. $ 174.46 per metric ton for a parcel of 30000 tons?10%. Buyers option.

(2) Commission : U. S. $ 0.50 per metric ton payable by Buyers in addition to the above price.

(3) Shipment : Between July 18-27. However, our. Buyers would try to narrow this range.

(4) Escalation : As per Buyers telex message No. 03A/DJB dated 14-7-1979 attached.

We also confirm that we are in a position to sign immediately your Fuel Oil Sale Agreement.

This offer is secured by a Pay Order of Rs. 3 sacs drawn on United Bank Ltd., Denso Hall Branch, Karachi, dated July 14, 1979, in confirmation of our acceptance of all the terms and conditions P. R. L. contained in the said Agreement."

10. A perusal of the two letters dated 14th July and 20th July 1979 show that the earlier letter communicates an offer on behalf of respon­dent No. 1 whereas the letter dated 20-7-1979 confirms the offer of Jamia Industries Ltd. on behalf' of respondent No. 1 "and ourselves (hereinafter collectively referred to as buyers)". Further the first offer contained in the letter dated 14-7-1979 was subject to the following :-

"This offer is subject to the terms as contained in the above-mentioned telex message attached herewith. Except the terms contained in the attached telex message of the buyer we otherwise confirm acceptance of your terms as stated in the contract."

However, the letter dated 20-7-1979 does not contain the aforesaid clause but instead after the terms of the offer the following is mentioned :-

"We also confirm that we are in a position to sign immediately your Fuel Oil Sale Agreement. This offer is secured by a Pay Order of Rs. 3 lacs drawn on United Bank Limited, Deuso Hall Branch, Karachi dated 14th July 1979 in confirmation of our acceptance of all the terms and conditions of P. R. L. contained in the said agreement."

11. According to Mr. A. Rauf, learned counsel for respondent No. 1, the preamble of the agreement specifically refers to the offer of 20-7-1979 and the acceptance thereof by the applicants and, in the circumstances; while considering whether this agreement is also on behalf of respondent No. 1 reference has necessarily to be made to the letter of 20-7-1979 contents whereof should be treated as part of the agreement. According to learned counsel, if the said letter of 20-7-1979 is treated as part of this agreement then the only logical conclusion that can be drawn is that the contract was signed by Jamia Industries Ltd., both on behalf of itself and also for and on behalf of respondent No. 1, and the fact that in the agreement there is no specific mention or reference to respondent No. 1 and that apparently the agreement is supposed to have been executed between the applicants and buyers only, cannot alter this conclusion.

12, In support of his contention, Mr. Sajid Zahid, learned counsel for the applicants, relied upon. the judgments in the case of Angbats A. B. Kustan v. Central Hardware Stores (1), and in the case of Bubna More & Co. (Pakistan) Ltd. v. Modern Trading Co. (Pakistan) Ltd. (2), and in the case of Bombay Brass Works Co. v. Pakistan (31. In my view, these judgments are not relevant to the point in issue as these refer to section 230 of the Contract Act whereas the present case does not involve the interpretation or applicability of section 230. This section of the Contract Act lays down that in the absence of any contract to that effect, an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them. The section further goes on to specify three types of cases in which a contract to the effect that the agent shall be personally liable shall be presumed. The point in issue in the present case is entirely different. In the instant case what is to be determined is whether the agreement dated 20-7-1979 is between the applicants and the buyers as principal to principal only o3 is it between the applicants of the one part and the buyers for self and for and on behalf of respondent No: 1 as the parties of the other part and in my view the decision of this point depends upon the intention of the parties who executed the agreement dated 20-7-1979.

(1) P L D 1969 S C 463 (2) P L D 1960 Dacca 668

(3) P L D 1960 Kar. 340

13. The agreement dated 20-7-1979, as observed earlier, shows the parties to it as only the applicants and the buyers. The burden, therefore, of establishing that the respondent No. 1 was also a party to this agreement, and has a right to enforce the terms thereof against the applicants, lies on respondent No. 1. Mr. A. Rauf, learned counsel for the respondent No. 1, has, apart from the preamble to the agreement which refers to the offer dated 20-7-1979 made by the buyers and the same having been accepted by the applicants, relied upon Articles 11.1, 111.1, IV.1 and Article IV.2 of the agreement dated 20-7-1979 in support of his contention that this agreement was between three parties, namely, the applicants, the buyers and respondent No. 1. In order to appreciate the precise contention of the learned counsel reference is to be made to the aforesaid clauses of the agreement and the same are reproduced here;

"II.1. Sellers agree to sell and deliver to Buyers, and Buyers agree to purchase for export, receive and pay for 30000 metric tons-+10% at Buyers option of Fuel Oil having the specifications contained in Annexure I hereto.

*************

III.I. Buyers shall pay or arrange for payment to Sellers in manner hereinafter provided for Cargo purchased for export hereunder, at U. S. $ 174.46 per Metric Ton F. O. B. Karachi, with commission of U. S. $ 0.50 per Metric Ton payable by Buyers in addition to the above price.

IV.l. Payment shall become due at, the .date . of commencement of loading of each cargo lot and shall be made

(a) For the quantity determined in accordance with the provision stipulated in clause V hereto.

(b) At the prices and other terms provided in Article III hereinabove.

(c) By Buyers to Sellers in United States Dollars at the time and in the manner hereinafter provided.

IV.2. Within 2 days from the date of issue of notice by Sellers advising upliftment dates of each Cargo lot as provided in Annexure II hereto, Buyers shall establish or cause to be established an irrevocable confirmed and transferable letter of Credit through a first class foreign bank and confirmed by a Bank in Karachi as notified by Sellers in favour of Sellers in an amount of not less than one hundred and ten (110) per cent. of the total price of the maximum Cargo lot in question determined in terms hereof. The Letter of Credit will also conform to comply with and/or incorporate such other terms and provisions as are detailed in Annexure III hereto."

14. Mr. A. Rauf, Advocate, also relied upon the invoice dated 11-8-1979 (Annexure `F' to the counter affidavit) of the applicants which is made out in 'he name of the respondent No. 1.

15. I now propose to consider the various contentions raised by learned counsel for the respondent No. 1. Counsel had relied upon the reference in the preamble of the agreement to the offer of 9-7-1979 and its acceptance by the respondent No. 1. As observed earlier, prior to this offer there was an earlier offer dated 14-7-1979 which was made by the buyers on behalf of respondent No. 1 only. However, , the offer in the letter dated 20-7-1979 was made by the buyers both on their own behalf and on behalf of respondent No. 1. This is a very significant point of difference between the two offers. The first offer which is not on behalf of the buyers is not accepted by the applicants but they apparently required the buyers to make the offer on their own behalf also and this was complied with by l the buyers by making the offer in their letter dated 20-7-1979. The buyers were not a party in the offer contained in the letter of 14-7-1979 but became a party to the offer in their letter of 20-7-1979. Now when the agreement dated 20-7-1979 is executed the name of respondent No. 1 is excluded and the only parties are the applicants and the buyers. In my view the fact that the buyers were required to change the offer as contained in the letter dated 14-7-1979 to the offer in the letter dated 9-7-1979 coupled with the fact that the agreement dated 9-7-1979 was made between the applicants and the buyers only clearly indicates that respondent No. 1 was not intended by the applicants and the buyers to be a party to the agreement. The buyers refer to the name of respondent No. 1 in both their letters of 14th and 20th July 1979 and if respondent No. 1 was intended to be a party, a reference to that effect would have certainly been made. In the agreement the buyers are shown and described as Jamia Industries Ltd. in their individual and personal capacity. The agreement very carefully avoids to mention the name of respondent No. I anywhere in the agreement. From a perusal o the two letters dated 14th and 20th July 1979 of the buyers and the agreement the inescapable conclusion that is reached is that the applicants did no B want the respondent No. 1 to be a party to the contract and in the circumstances the buyers had to agree and the agreement dated 20-7-197 was executed between the applicants and the buyers on principal to principal basis.

16. Mr. A. Rauf had then contended that in Article 1.1.1 of the agreement the words "for export" had been used and this presupposed that the Pakistani party to the contract was the exporter and the foreign party (i.e. respondent No. 1) was the importer. This contention is misconceived. This sub-clause says that the applicants have agreed to sell and deliver and the buyers have agreed to purchase for export. If the foreign party i.e. the respondent No. I was a party to the agreement the words "agreed to purchase for export" would not have been used but perhaps the words "agreed to purchase" only would have been employed. The words "agreed to purchase for export" indicate that the buyers were a Pakistani party and they were purchasing the consignment for export.

17. Learned counsel for the respondent No. 1 further contended that in Article 111.1 of the agreement, the price was mentioned in U. S. Dollars and so also the commission and, therefore, there has to be a foreign company or person as a party. I do not see why it should be so. Just because the price is mentioned in foreign currency it does not necessarily follow that on or more parties to the agreement must be foreigners. As an additions argument in support of his contention, Mr. A. Rauf contended that such a agreement without a foreign party would violate the provisions of the Foreign Regulation Act, 1947. Counsel referred specifically to section 21 of the 1947 Act. Section 21 does neither restrict nor places any bar on Pakistani parties entering into a contract like the agreement dated 20-7-1979. Subsections (1) and (2) of section 21 of the Foreign Exchange Regulation Act, 1947 are reproduced here :-

"21. Contracts in Evasion of this Act.-(1) No person shall enter into any contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of this Act or of any rule, direction or order made thereunder.

(2) Any provision of, or having effect under, this Act that a thing shall not be done without the permission of the Central Government or the State Bank, shall not render invalid any agreement by any person to do that thing, if it is a term of the agreement that that thing shall not be done unless permission is granted by the Central Government or the State Bank, as the case may be ; and it shall be an implied term of every contract governed by the law of any part of the Provinces and the Federal territory of Karachi that anything agreed to be done by any term of that contract which is prohibited to be done by or under any of the provisions of this Act except with the permission of the Central Government or the State Bank, shall not be done unless such permission is granted."

If at all permission was required from the Central Government or the State Bank of Pakistan for anything to be done under the agreement dated 20-7-1979 and such permission was not obtained before signing the agreement, absence of such permission would not render the agreement invalid as provided in section 21(2) of this Act and it is further provided therein that it shall be an implied term of every contract that anything agreed to be done by any term of that contract which is prohibited to be done by or under any of the provisions of the Act except with the permission of the Central Government or the State Bank, shall not be done unless such permission is granted. Mr. A. Rauf was not able to show how a contract of the nature and terms of the agreement dated 9-7-1979 violated any provision of the 1947 Act.

18. Referring then to Article IVA of the agreement, that payment was to be made by the buyers in U. S. Dollars it was contended that this was only possible if respondent No I was a party. According to learned counsel the buyers being a Pakistani party could not pay the price in U. S. Dollars but with respondent No. I as a party this was possible. This contention is linked with the argument based on Article IV.2 of the agreement and I will deal with both the contentions in the next paragraph.

19. Article IV.2 of the agreement provided for the establishment of a letter of credit through a first class foreign bank in favour of the applicants. 1t was argued that such a letter of credit could only be established by respondent No. 1 and not by the buyers. Reading Articles IVA and IV.2 together it follows that payment was to be made in U. S. Dollars through a letter of credit. What is pertinent is that Article IV.2 required the buyers to establish or cause to be established the letter of credit. In the present case the buyers caused through respondent No. 1 to establish the letter of credit. Further it is an admitted position that the letter of credit in the present case was not opened directly in favour of the applicants. It was first established in favour of the buyers who then endorsed it in favour of the applicants. If respondent No. 1 were a party to the respondent, there was no need for routing the letter of credit through the buyers.

20. The other contention of the counsel for the respondent No. I was that the invoice dated 11-8-1979 was made by the applicants in the name of the respondent No. 1. Mr. Sajid Zahid, learned counsel for the applicant referred to paragraph 9 of the rejoinder affidavit dated 23-10-1979 filed by the applicants, in reply to the contention of Mr. A. Rauf, In my view para. 9 of the rejoinder completely meets the argument of Mr. A. Rauf. I may here reproduce paragraph 9 of the rejoinder dated 23-10-1979 :-

"9. As to the contents of paragraph 7 of the counter-affidavit, the applicant company issued the invoice in the name of respondent No. l in order to comply with the letter of credit which was endorsed in favour of the applicant-Company by Jamia, In other words, the letter of credit was duly opened in favour of Jamia by the respondent No. 1 and Jamia, in discharge of its obligations under the contract, endorsed it in favour of. the applicant-Company. In terms of the said letter of credit, the crgo was to be consigned to the respondent No. I and hence the invoice had to be given in their name."

21. Learned counsel for the respondent No. 1 had argued in the alternative that even if the agreement is considered to have been entered into by the applicants and the buyers on principal to principal basis respondent No. I would still be a party. There is no merit in this contention. If the contract is between the two executants on principal to principal basis, unless it was shown that the contract was executed by the buyers also o D behalf of the respondent No. 1, they cannot be treated as a party to the contract. It has not been established that the contract was so signed by the buyers.

22. Mr. A. Rauf had also relied upon section 226 of the Contract Act but in my view this section does not support the case of the respondent No. 1 as it deals with enforcement . and consequences of agents' contract. In the present case I have come to the conclusion that the agreement dated 20-7-1979 was not entered by buyers as agent of the respondent .No. 1.

23. As a result, I hold that there is no privity of contract between the applicants and the respondent No. 1 and respondent No. 1 is not a party to E the agreement dated 20-7-1979. As a necessary consequence I hold that there is no arbitration agreement between the applicants and respondent No. 1.

24. I, therefore, allow the J. M. application under section 33 of the Arbitration Act, 1940 filed by the applicants as prayed with costs as against respondent No. 1.

M. Y. s. Application accepted.

(1) P L D 1969 S C 463 (2) P L D 1960 Dacca 668

(3) P L D 1966 Kar. 340