MUHAMMAD SALEEM BUTT Versus TRADING CORPORATION OF PAKISTAN KARACHI

1. These are objections under section 14 of the Arbitration Act, 1940 to the award dated 27‑11‑1977, which is a non‑speaking award, passed by Mr. Haziqul Khairi Advocate as the Umpire in the dispute between the parties.

2. Objections to an award can be taken under sections 15, 16 and 30 of the Arbitration Act, 1940 (hereinafter called the Act). Under section 15 of the Act objections can be taken for its correction or modification where it appears that a part of the award is upon a matter not referred to arbitration and such part can be separated from the other part and does not affect the decision on the matter referred, or where the award is imperfect in form, or contains any obvious error which can be amended without affecting such decision, or where the award contains a clerical mistake or an error arising from an accidental slip or omission. Under section 16 of the Act they can be taken for remission of the award or any matter referred to arbitration to the arbitrator or umpire if the award has left undetermined any of the matters referred to arbitration, or where it determines any matter not referred to arbitration and such matter cannot be separated without affecting the determination of the matter referred, or where the award is so indefinite as to be incapable of execution, or where an objection to the legality of the award is apparent upon the face of it. Under section 30 of the Act an award can be set aside if an arbitrator or umpire has misconducted himself or the proceedings, or if the award has been made after the issue of an order by the Court superseding the arbitration or after arbitration proceedings have become invalid under section 35, or if the award has been improperly procured or is otherwise invalid. Since in the application containing objections, the prayer is to remit, refer or set aside the award, the objections are obviously, either under section 16 or 30 of the Act, although they are made under section 14 of the Act which section contains no provisions for remission or reference of the award or setting aside the same. Accordingly, I treat them as such for Court always look to the substance of the matter rather than to the form or title of the pleadings, and then applies the law.

3. The facts leading to the passing of the impugned award are short and simple. The plaintiff who is the proprietor of Messrs Amin & Sons as agent of Messrs Heilgers Maritime Company Limited, London entered into a contract dated 22‑9‑1976 for supply of 7,000 metric tons (plus/minus 10 per cent at the option of the seller but not exceeding 7,700 metric tons) of first class Polish Steam coal at the price mentioned therein. The coal was to be shipped by the seller .in one lot in September/ October, 1976. According to the terms of the contract the seller was required to provide performance bond in prescribed manner in the form of a bank guarantee from a first class schedule bank in Pakistan for 2$ of the total value of the contracted goods within seven days of the signing of the contract. In anticipation of the entering into a contract the plaintiff had obtained a bank guarantee dated 16‑9‑1976, from the United Bank Limited for a sum of Rs 1,30,000. It may be convenient for reference to the terms of the bank guarantee if the same is reproduced in extenso hereinbelow.

4. "Messrs Trading Corporation of Pakistan Ltd. Karachi

5. Dear Sirs,

6. Whereas the Trading Corporation of Pakistan Limited, National Press Trust House, I.I. Chundrigar Road, Karachi (hereinafter referred to as the buyer'), has accepted offer for the supply of 7,000 metric tons of Steam Coal to be made by Messrs Amin & Sons (hereinafter referred to as the 'seller') on the terms and conditions governing the contract.

7. An whereas the seller has requested us to issue a guarantee for an amount of Pakistani Rs. 1,30,000 (Rupees one Iac thirty thousand only);

8. Now, therefore, in consideration aforesaid, we, the United Bank Limited, Hotel Intercontinental Branch, Karachi hereby undertake and guarantee due and satisfactory performance of the contract by the seller in all respects and we unconditionally and absolutely bind ourselves to the following:‑

(i) To make payment of Pakistani Rs. 1,30,000 to the buyer or as directed by the buyer on the date of the receipt of demand from the buyer in writing, without any question whatsoever;

(ii) to keep this guarantee valid and in force for ninety days after completion of arrival of the contracted goods in Karachi; and

(iii) to extend this guarantee for such further period as may be required to the buyer in the buyer's sole discretion five days before the expiry of the validity date.

9. We understand that this guarantee is unconditional; and that the sole judge for deciding whether the seller has performed the contract and fulfilled the terms and conditions of the contract, will be the buyer.

10. We further understand that any grant of time or indulgence to the seller without reference to us shall not in any manner absolve us from our liability to make payment to the buyer as stipulated above under this guarantee.

11. Our commitment under this guarantee is limited in amount of Pakistani Rs. 1,30,000 (Rupees one lac thirty thousand only).

12. This Letter of Guarantee shall remain valid upto 31st March, 1977.

13. For United Bank Limited, Hotel Intercontinental, Karachi.

14. (Sd.)

15. Manager,

16. (Sd.)

17. Officer."

18. The contract also provides an arbitration agreement which is as follows:

19. "In the event of any question or dispute arising under the contract, the same shall be referred to the award of arbitrators to be nominated one each by the sellers and the buyers within fifteen days of notice from either side, or in the case of the said arbitrators not agreeing, then to the award of an umpire to be appointed by the arbitrators in writing prior to proceeding with the arbitration. The decision of the arbitrators or the umpire, as the case may be, shall be final and binding on both the parties. The arbitration will take place in Karachi."

20. On plaintiff's alleged failure to supply the contracted coal within the agreed time and the defendant by its letter dated 17‑9‑1976, in terms of the guarantee required the United Bank Limited to pay the amount of the guarantee i.e. Rs.1,30,000 and accordingly received the payment. However the plaintiff disputed the right of the defendant to appropriate the amount of the guarantee on the ground that it was not he who had committed the breach of the contract but it was the defendant which had committed the breach. Therefore, the dispute having arisen between the parties, the plaintiff invoked the arbitration agreement and accordingly appointed Mr. Mehdi Ali Siddiqui as his arbitrator. The defendant appointed Mr. Talmiz Burney, Advocate as its arbitrator. Both the arbitrators entered upon the reference and proceeded within the arbitration but on disagreement referred the dispute to Mr. Haziqul Khairi, Advocate whom they had appointed as umpire. It is his award which is impugned in these proceedings.

21. I have heard Mr. S.H. Kazmi, Advocate for the plaintiff and Mr. Sabihuddin Ahmed, Advocate for the defendant.

22. Mr. Sabihuddin Ahmad raised the following objections to the award .

(1) That the dispute did not fail within the purview of the arbitration agreement.

(2) That the umpire acted without jurisdiction, in awarding the amount of Rs.1,30,000 claimed by the plaintiff by way of refund of the amount paid to the defendant by the United Bank Limited in , terms of the bank guarantee dated 16‑9‑1976.

(3) That the umpire has committed an error which is apparent on the face of the award, by awarding refund of Rs.1,30,000 to the plaintiff without determining the question as to which of the parties was guilty of the breach of the contract.

23. Before I proceed to examine these objections it may be mentioned that in paragraphs 17 and 19 of his statement of claim the plaintiff had stated the facts which constitute the breach of the contract on the part of the defendant and in paragraph 20 (ibid) he had stated that the international price of coal had started falling after signing of the contract and that the defendant purchased 10,000 metric tons of coal at about $71.00 per metric ton inclusive of the coal to which the said contract related and thus the defendant in fact made a profit/saving of $14 per metric ton for the contracted price was $85 per metric ton.

24. The defendant in its statement denied having committed the breach of the contract and alleged that it was the plaintiff who had committed the breach of the contract. In the written statement the defendant sought a declaration to the effect that the defendant was fully entitled to encash the bank guarantee and that the plaintiff's claim was untenable and also claimed the costs of the arbitration proceedings.

25. Now, I would take u p first objection to the award. In regard to this objection it was submitted that the scope of the arbitration was limited to the matters which could arise under the contract between the parties and the dispute relating to the enforcement of the bank guarantee was outside the scope of the arbitration agreement. In this connection the learned counsel tried to make a distinction between the dispute arising under the contract and that arising out of the contract and submitted that although the bank guarantee was given by the plaintiff pursuant to the terms of the contract but the enforcement thereof could not be the subject‑matter of the arbitration for the contract of guarantee was a separate and independent contract as it was a contract between the defendant and the United Bank Limited.

26. In support of this submission the learned counsel relied upon the paragraph 533 at page 272 of the Halsbury's Laws of England, Volume 2, 4th Edition, which reads as follows:‑

27. "However, matters not strictly arising out of the contract, but intimately connected with it, have been held to be within the scope of an arbitration agreement. Thus, a reference of 'all disputes from time to time arising out of or under this contract' has been held to be wider than a reference of 'all disputes arising under the contract'." '

28. He also referred to a case of House of Lords in Produce Brokers Company Limited v. Olympia Oil and Cake Company Limited (1916)1AC 314. He particularly relied on the following observations made by' my Lord Parker at page 327 of the report:

29. "The binding force of an award must depend in every case on the submission. If the question which the arbitrator takes upon himself to decide is not in fact within the submission the award is a nullity. The arbitrator cannot make his award binding by holding contrary to the true facts that the question which he affects to determine is within the submission. For example: "if disputes arise under any particular contract and the parties thereupon agree to refer all disputes arising under that contract, the arbitrator cannot give himself jurisdiction by deciding that any particular dispute arises under the contract in question when it does not, in fact, so arise. This seems reasonably clear when the submission is subsequent to the contract. Where, however the submission is contained in the contract it may be a question of construction whether such expressions as 'all disputes arising under this contract' include questions as to the ambit of the submission itself. Prima facie I do not think that they would, though it is unnecessary to decide the point."

30. I have reproduced the guarantee in extenso, the terms thereof show that the guarantee was given for the due and satisfactory performance of the contract by the plaintiff in all respects. The plaintiff had furnished the Performance Bond in the form of bank guarantee for Rs. 1,30,000 in accordance with the terms and conditions of clause (12) of the contract and the defendant had forfeited the Performance Bond and recovered the amount of the bank guarantee on the ground that the plaintiff had failed to fulfil the terms and conditions of the contract. Now, the questions whether the plaintiff had committed the breach of the contract and, the Performance Bond was rightly forfeited by the defendant would, in my opinion, squarely fall within the arbitration agreement for both the questions arise under the contract and were duly referred to arbitration. What Lord Halsbury has stated and what House of Lords has observed there cannot be any quarrel with the correctness thereof. Surely, a reference of "all disputes from time to time arising out of or under this contract" is wider in scope then a reference of "all disputes arising under the contract". But in my opinion, the forfeiture of the Performance Bonds and payment enforced under the bank guarantee are questions not only intimately connected with but did arise out of the contract, for the contract itself provides that the plaintiff shall provide a Performance Bond.

31. Mr. Sabihuddin Ahmed further submitted ‑that the Bank had paid the amount of the bank guarantee out of its own funds and, therefore the same could not be the subject‑matter of the arbitration and in support of the proposition that when a bank pays money under its guarantee it pays the same out of its own funds and not on behalf of the debtor and in case the bank pays the money wrongly it could not recover the same from the plaintiff, he relied on the decision in Alvi Sons Ltd. The Government of East Pakistan and others P L D 1968 Kar. 222. In this case an injunction was claimed against the Habib Bank Limited. The Bank had issued a guarantee on behalf of one of the parties to the contract for fulfilment of the contract. When the then Government of East Pakistan attempted to enforce the obligation of the Bank under the guarantee, the plaintiff filed a suit and also prayed for interim injunction. While refusing the interim relief of injunction, it was observed by Noorul Arfin, J., that if the surety had applied its own funds to discharge the guarantee the question then would be whether the payment had been made rightly or wrongly. Under section 155 of the Contract Act the surety could claim indemnity from the principal debtor only when the money was rightly paid by the surety under the guarantee and not for any money which was paid wrongfully.

32. This submission is also without any force. Firstly, it is not shown from the record that the Bank had paid the amount of guarantee from its own funds. Normally as experience would show, when Bank issues a guarantee after securing itself by either obtaining money or other securities or margin with counter‑guarantee and when it is obliged to pay the amount under the guarantee it adjusts the amount of the debt against the money of the person available with it or requires the debtor to pay the same. Secondly, in the instant case the subject‑matter of the arbitration was not the question whether the Bank had paid the amount under the guarantee rightly or wrongly which of course, could not form subject‑matter of arbitration for the Bank was not a party to the arbitration agreement but the question which arose between the parties and which became the subject‑matter of the arbitration was whether the defendant was entitled to forfeit the amount of Performance Bond or not. In this view of the matter, reference to the case of Alvi Sons Ltd. v. The Government of East Pakistan and others was irrelevant. The issues in this case were quite different from the questions raised before me.

33. As regards the second objection that the umpire acted without jurisdiction in awarding the amount of Rs.1,30.000 claimed by the plaintiff by way of refund of the amount paid to the defendant by the United Bank Limited in terms of the bank guarantee dated 16‑9‑1976, it would suffice to say that this question was directly raised in the statement of claim before the arbitrator and therefore, he had jurisdiction to deal with it and to allow or disallow the amount claimed. Here it may be mentioned that in the written statement filed before the arbitrators and placed before the umpire the defendant has nowhere taken the stand that the claim of the plaintiff could not be the subject‑matter of reference under the arbitration agreement.

34. Now, I would take up the third and last objection i.e. that the umpire has committed an error which is apparent on the face of the award, by awarding refund of Rs.1,30,000 to the plaintiff without determining the question as to which of the parties was guilty of the breach of the contract.

35. To meet this objection it would suffice to say that the umpire has impliedly found that the defendant was not entitled to forfeit the' performance bond by encashing the bank guarantee. Since under the law he was not required to give separate findings on each issue of point raised before him and he was also not required to give reasons for his findings or award. However, if any, authority is needed reference may be had to Hamdard Dawakhana (Wakf), Karachi v. K.B. Josheph & Co. Ltd., Lahore and another P L D 1971 Kar 279. In this case the arbitrator had framed the issues and had not given separate decision thereon and it was observed by Dorab Patel, J. (as his Lordship then was) that the issues were framed by the arbitrator merely for his own convenience and he was not required to consider every issue and as such the arguments of the learned counsel was without merits.

36. I may mention that it was also the submission of the learned counsel for defendant that under the terms of the guarantee defendant was the sole judge to decide the questions whether the plaintiff had committed the breach of the contract or not and whether it should enforce the guarantee and, therefore, these questions could not form the subject‑matter of the arbitration. In support of this submission the learned counsel relied on Prince & Co. v. Governor‑General‑in‑Council A I R 1955 Pun. 240. In this case the contract inter alia provided that the inspector shall be the final authority who shall certify the performance anal to reject any stores submitted as not being in accord with the particulars of the contract. A dispute having arisen in regard to the rejection of the contracted goods the same was made the subject matter of the arbitration. In this connection it was held that it was clear from the clauses of the contract that the decision of the Inspector was final and any dispute relating to his decision could not be adjudicated upon by the arbitrators or umpire, as such dispute did not fall within the scope of the arbitration agreement and the reference did not embrace the dispute relating to the Inspector's decision.

37. No doubt that under the terms of the guarantee the defendants was made the sole judge for deciding whether the plaintiff had performed the contract and fulfil the terms and conditions thereof or not. But this was only for the limited purpose of enforcement of the bank guarantee Under the terms of the guarantee the Bank was precluded from questioning the demand for payment of the amount of the guarantee or the decision of the defendant with regard to the claim of breach of the contract on the part of plaintiff but the plaintiff himself was not precluded from disputing the decision of the defendant for the contract contained no such term. Therefore, the case cited by the learned counsel for the defendant is distinguishable.

38. It was rightly submitted by Mr. S.H.Kazmi learned counsel for' the plaintiff that in accordance with the terms of the contract the plaintiff had submitted bank guarantee by way of security for the performance of the contract and this guarantee was as good as if the plaintiff had deposited the amount in cash. This could be forfeited only if the defendant had suffered any loss. The plaintiff's case was that the defendant had not suffered any loss and this was a dispute which was specifically referred to arbitration in paragraph 20 of the claim. Although the umpire has not given any reasons and finding separately on this question but by awarding the refund of the amount of guarantee he has impliedly found that the plaintiff has either not committed the breach of the contract or the defendant has not suffered any loss and this implied finding is in accord with the judgment of the Supreme Court in the Province of West Pakistan v. Messrs Mistri Patel Co., and another P L D 1969 S C 80.

39. I, therefore, do not find any merits in the objections filed by the defendant and dismiss the same leaving the parties to bear their own costs. However, I find that the umpire has awarded interest at 12 per cent per annum till full and final payment by the defendant. This he could not have done in view of the provisions of section 29 of the Arbitration Act, 1940, for he could award interest only upto the date of the decree that may be passed by the. Court on the award. If any authority is needed reference may be had, to Union of India v. Bun go Steel Furniture (Pvt.) Ltd., A I R 1963 Cal.

70. Although this objection has not been taken in the objections filed by the defendant but the Court is entitled to go into this question in accordance with the provisions of section 17 of the Arbitration Act, 1940. Since the question of awarding of interest after the date of the decree could be separated and the error could be corrected, I accordingly modify the award to this extent that the plaintiff shall be entitled to interest at the rate awarded upto the date hereof and from the date of the decree at the rate of 10 per cent per annum. Subject to the above modification the award is made the rule of the Court.

40. A. A. Award made rule of Court.