INDUSTRIJA MASINA I TRAKTORA Versus BANK OF OMAN LTD.

JUDGMENT.

The plaintiff is registered as a public enterprise 'in Yugoslavia and is engaged‑inter alia in the manufacture and‑ sale‑of tractors. The plaintiff and defendant No.2 established a Joint Venture Company in Pakistan for the assembly and progressive manufacture of tractors. For this purpose, the plaintiff and another state‑owned Yugoslav Company known as Inter export entered into Joint Venture Agreement and another agreement titled as Licence, Technical Assistance & Servicing Agreement with defendant No.2 on 26‑12‑1981. These agreements were terminated on 26‑3‑1991. During the course of business, the plaintiff supplied tractors and parts thereof to defendants Nos.2 and 3 against Letters of Credit issued by defendant No.1. Defendant No.1 defaulted in payment and thereafter it was mutually agreed between the; parties that the payments would be made as stated in a protocol dated 3‑10‑1985. Under the said protocol, defendants Nos.2 and 3 had to pay US $ 2,261,862 and US $ 303,446 respectively. First instalment was to commence on the 30th day of the signing of the protocol, that is to say on 3‑11‑1985. The entire amount was to be liquidated by 3‑11‑1990. The Bills of Exchange were executed accordingly. The amount of US $ 2,504,786 remained unpaid by defendant No.1 under the bills of exchange: The plaintiff through its bankers Beobanka Beogradaka Osnovna Banka of Balgrade, hereinafter to be referred to as "Beobanka", called on defendant No.1 to make payment on the bills of exchange due on 3‑4‑1989 by telex dated 5‑9‑1990 but there was no response from defendant No. 1. The Beobanka by their letters, dated 16‑10‑1990, 26‑11‑1990 and reminder, dated 11‑12‑1990 called upon defendant No.1 to make payment on the bills of exchange but the said defendant refused to honour the bills of exchange. Notices were sent once again but in vain. The bills of exchange were presented to defendant No.1 which were not only dishonoured but were retained by defendant No.1. The plaintiffs have, therefore, filed this suit, inter alia for recovery of the amount due. On 12‑11‑1991, defendants Nos.2 and 3 filed an application under section 34 of the Arbitration Act, 1940, praying to stay further proceedings in the above suit in view of the stipulations contained in Articles 27 and 16 of the aforesaid two agreements respectively, which contemplate resort to arbitration between the plaintiffs and the defendants Nos. 2 and 3 in the event of the dispute between them. The above application is opposed by the plaintiff.

2. I have heard learned Advocates Mr. Kamal Azfar, for the plaintiffs, Mr. Abdul Sattar Pingar for defendants Nos, 2 and 3 and Mr. Sardar Sami Hayat for defendant No.1. It may be stated that the learned Advocate for defendant No.1 has supported the submissions made by the learned Advocate for defendants Nos.2 and 3.

3. It. is settled law that in order that a stay, may be granted under section 34 of the Arbitration Act, 1940, it is necessary that the following conditions should be fulfilled: "(i) the proceedings must have been commenced by a party to an arbitration agreement against any other party to the agreement; (ii) the legal proceeding which is sought to be stayed must be in respect of a matter, agreed to be referred; (iii) the applicant for stay must be a party to the legal proceeding and he must have taken no step in the proceeding after appearance. It is also necessary that he should satisfy the Court not only that he is but also was at the commencement of the proceedings ready and willing to do everything necessary for the proper conduct of the arbitration; and (iv) the Court must be satisfied that there is no sufficient reason why the matter should not be referred to an arbitration in accordance with the arbitration agreement:" (i) AIR 1955 SC 53 (Anderson Wright Ltd. v. Moran & Co.), (ii) PLD 1985 Kar 745 (Aslo Marines Ltd. v. M.T.Magda and another) and (iii) PLD 1986 Kar i (Uzin Export Import Enterprise v. M. Iftikhar & Co. Ltd.), may be referred in this regard.

4. Although defendants Nos.2 and 3 have filed the application under section 34 of the Arbitration Act, 1940 on the basis of the covenants contained in the aforesaid two agreements, i.e. Joint Venture Agreement and Licence, Technical Assistance and Servicing Agreement but at the same time it is pleaded by them that the above agreements were substituted by a fresh agreement and, therefore, the earlier agreements are no longer required to be performed by them. Para (v) of their application under Order XXXVII, Rule 2, C.P.C. (CMA No.2038 of 1991), is reproduced as under:‑

"(v) That having absolved defendant No.1 of the obligations if any, under the Letters of Credits as also the alleged bills of exchange and a fresh agreement drawn between, the, plaintiff and defendants Nos.2 and 3, the plaintiff is estopped to revert to the original arrangement. The contract having been substituted through novation, the earlier agreement was no longer required to be performed. This .state of affairs was all along accepted by the plaintiff as fait accompli:"

If the above contention of the said defendants is to be accepted, the arbitration clauses in the earlier two agreements have ceased to be operative. II is neither the case of the said defendants that an arbitration clause was provided in the new agreement, nor they have based the application under consideration on the said agreement. The said defendants cannot be allowed to approbate and reprobate at the same time.

The learned counsel for the plaintiff contended that the present suit is based on bills of exchange. The submission, to be exact, is that there was dispute between the parties which was resolved by them under protocol dated 3‑10‑1985 and defendants Nos. 2 and 3 agreed to make the payment by way of amicable settlement arrived at among the parties and consequently for the liabilities admitted by the said defendants, bills of exchange were drawn and duly executed by the defendants and it is the liability under the aforesaid bills of exchange which is being sought to be enforced through the suit and not any of the terms of the aforesaid two earlier agreements. In another words, the dispute had merged into the terms of the said protocol. On the other hand, the learned counsel for defendants Nos.2 and 3 submitted that aforesaid bills of exchange are without consideration.

Since both the parties have raised contentions with regard to novation of the contracts, the said two agreements, wherein Arbitration clauses were incorporated, prima facie, cannot be said to be in existence and therefore' cannot be invoked.

Further on acceptance of plea of novation of the contract, the contention of the learned Advocate for the plaintiff to the effect that the present suit is not in respect of the dispute arising under the said agreements, but is based on bills of exchange, gains ground. As a result, it cannot be said with certainty, that the present proceedings are in respect of the matter agreed to be referred to the Arbitratibn.

5. This brings us to the third prerequisite for staying the proceedings under section 34 of the Arbitration Act. It is contended by the learned Advocate for the plaintiff that the said defendants had taken steps in the proceedings after appearance by filing application under Order XXXVII, Rule 3, C.P..C. After filing the said application on 14‑4‑1991, the defendants slept over the matter and filed the present application after about 7 months on 12‑11‑‑1991. The above act on the part of the said defendants amounts to acquiescence in the proceedings and they cannot be allowed to invoke the provisions of section 34 of the said Act.

It was further urged that the said defendants had themselves instituted a suit against the plaintiff in Lahore challenging the termination, instead of invoking the arbitration clauses in the said agreements. The plaintiff herein filed an application in the said suit under section 34 of the Arbitration Act which was opposed by the said defendants and was dismissed.

Learned counsel relied on the cases of Aslo Marines Ltd. (Supra), Uzin Export Import Enterprises (Supra), Cepcon (Pvt.) Ltd. v. Rizwan Builders Ltd. (1990 MLD 2027) and Pakistan International Airlines Corporation v. M/s. Pak Saaf Dry Clearners PLD 1981 SC 553.

On the other hand, the learned counsel for defendants Nos. 2 and 3 contended that an application under Order XXXVII, Rule 3, C.P.C. is not a step in the proceedings because if the said defendants had not filed such application within the statutory period, the suit would have been decreed against them and, therefore, the said application having been riled under the compulsion of law should not be treated as a step in the proceedings or construed as an element of acquiescence in the proceedings or surrendering the right to invoke the arbitration clause and particularly so as the said defendants in the affidavit filed in support of the said application have specifically deposed that they have been at all times ready and willing to refer the matter to the arbitration and reserved their right to submit application under the aforesaid section of the Arbitration Act. With regard to the proceedings commenced at Lahore, it was contended that the said suit was filed after the institution of the present suit on the assumption that the plaintiff was not interested in invoking the arbitration clause and as such the effect of the said proceedings cannot be considered by this Court.

The learned counsel for Defendants Nos.2 and 3 relied on Food Corporation of India and another v. Yadav Engineer & Contractor (AIR 1982 SC 1302), in support of his contention that an application under Order XXXVII, Rule 3, C.P.C. is not a step in the proceedings.

In the case of Pakistan International Airlines (Supra), their Lordships have laid down the test for determining whether an act amounts to taking steps in proceedings. Their Lordships observed that whether an act is a step in the proceedings is not so much the question as to whether the party sought an adjournment for filing the written statement, although of course that would be a satisfactory test in many cases, but whether taking into consideration the contents of the application as well as all the surrounding circumstances that led the party to make the application, display an unequivocal intention to proceed with the suit and to give up the right to have the matter disposed of by arbitration. It is then concluded that an application of such nature therefore, should prima facie be construed as a step in the proceedings within the meaning of section 34 and the whole burden should be upon the party to establish why effect should not be given to the prima facie meaning of the application.

No doubt that in a suit under Order XXXVII, Rule 2, C.P.C. the defendant is always faced with a dilemma whether to invoke section 34 of the Arbitration Act and allow the time to lapse for filing an application for leave to appear and defend and thus allow the decree to be passed. Such question came up for consideration in the case of Cepcon (Pvt.) Ltd. v. Rizwan Builders Ltd. 1990 MLD 2027 before a learned Judge of this Court who after scrutinising the aforesaid provisions of C.P.C. and section 34 of the Arbitration Act and analysing the case‑law on the subject laid down the rule that an intention on the part of the defendant with reference to invocation of arbitration clause could be spelt out by him, not merely by displaying an intention to file such application but in fact by filing such application simultaneously with the application for leave to defend. If this is not done, and I concur with my learned brother, the application under Order XXXVII, Rule 3, C.P.C. is to be treated as a step in the proceedings as the so‑called dilemma can be overcome, without causing any prejudice to such party, by filing the two applications simultaneously.

The intention of the said defendants so far as the present proceedings are concerned, by omitting to file an application under section 34 of the Arbitration Act is, therefore, to be treated as a step in the proceedings. The case of Food Corporation of India (Supra) does not in any manner lay down that an application under Order XXXVII, Rule 3, C.P.C. is not to be treated as a step in the proceedings. In fact in that case neither any such application was filed nor could have been filed under the circumstances thereof. The issue that was being considered in the said case was whether application for seeking time to file reply to a notice of motion for interim injunction is a step taken in the proceedings which would disentitle that party from invoking the provisions of Arbitration Agreement. In the said case notice was ordered to be issued on 1‑6‑1981, for 2‑6‑1981, when one of the defendants appeared alongwith Advocate, sought time as 'stated above and the case was adjourned to 3‑6‑1981. On 3‑6‑1981 the existence of subsisting agreement between the parties was brought to the notice of the Court and requisite application under section 34 was also filed. The rule laid down in the aforesaid authority is not attracted to the facts and circumstances of this case.

On consideration of the case on the touch‑stone of the rule laid down in the case of Pakistan International Airlines Corporation (Supra), there is no escape from the conclusion that the said defendants had no intention' whatsoever at the initial stages to invoke the 2rbitration clause. which is' evident, apart from the fact that no such application was filed for reference of the matter to the arbitration alongwith the application under Order XXXVII, Rule 3, C.P.C., but they went so far as to institute a suit against the plaintiff at Lahore and when the plaintiff, sought to invoke the arbitration clause for filing appropriate application, it was opposed by the defendants. There cannot be a better case of demonstration of an intention for acquiescence in the proceedings commenced in the Court and abandonment of the right to refer the dispute to arbitration, than the present one. 1, therefore; hold that the said application and so also the above conduct of the said defendants amounts to a step in the proceedings and that the said defendants were not ready and willing, as required under the law, to do everything necessary for the proper conduct of the arbitration and had displayed an unequivocal intention to proceed with the suit and to give up the right to have the matter disposed of by arbitration.

6.With reference to the fourth condition also, I find that there is sufficient reason, on the contrary, to hold that this matter need not be referred to the arbitration.

The Arbitration Agreement specifically provides that in case the dispute is raised by the plaintiff the arbitration proceedings will take place at Belgrade and in case the said clause is invoked by Associated Agencies Limited (defendant No.2), the arbitration will take place at Lahore. On the one hand, defendants Nos.2 and 3 are seeking to invoke the arbitration clause and have raised the dispute with 'regard to validity of the cancellation of the two agreements, and on the other the case is being set up that the plaintiff shall be deemed to have raised the dispute and accordingly are seeking reference to arbitration at Lahore. It was contended by the learned Advocate for the plaintiff, as already detailed above, the dispute that has been raised by the plaintiff is not with regard to enforcement of the aforesaid two agreements but for recovery of money on the basis of bills of exchange and the dispute with regard to cancellation of the two agreements is being raised by defendants Nos.2 and 3. The intention of the said defendants lends further support to the conclusion that they are not willing in reality to enforce the Arbitration Agreement and had it been so, they would not have taken up the plea in the reverse gear in so far as the clear stipulations in the arbitration clauses are concerned.

7. It was lastly contended that defendant No.1 is not a party to the Arbitration Agreement and alternatively the suit cannot be split up, as it may give rise to the conflicting decisions. It is settled law that in a suit where one of the parties in the suit is not a party to the arbitration proceedings, the suit cannot be stayed under section 34 of the Arbitration Act and referred to the Arbitrator.

C.MA. No.5396/91 is therefore dismissed with cost.

A.A./1‑205/K Application dismissed.