Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: Messrs GLOBAL ENERGY & COMMODITY EXCHANGE GROUP ITALY SPA (GECX GROUP) and anothers VS Respondent: TRADING CORPORATION OF PAKISTAN through Chairman and anothers
Court Name: Sindh High Court Judge(s): Muhammad Ali Mazhar Title:Messrs GLOBAL ENERGY & COMMODITY EXCHANGE GROUP ITALY SPA (GECX
GROUP) and anothers vs TRADING CORPORATION OF PAKISTAN through Chairman and anothers Case No.: Suit No,455 and C.M.A. No, 4528 of 2012 Date of Judgment:2013-01-30 Reported As: 2013 CLD 681 Result: Order accordingly Judgment ORDER ' MUHAMMAD ALI MAZHAR, J.---The plaintiffs have brought this suit under section 20 of the Arbitration Act, 1940 and also filed an application under section 41 of the Arbitration Act (C.M.A. No,4528 of 2012) for restraining the defendants from encasing pay order drawn on Bank of Punjab Ltd. In favour of the defendant No,l. The application was placed before learned Single Judge of this court on 3-5-2012 when notice was issued to the defendants and it was further ordered that if the demand draft has been encased, then the defendant No,1 shall deposit the amount of demand draft with the Nazir of this court and in case the demand draft has not been encased then the defendant No,2 even if such draft is presented shall take no action in respect of the same except with the permission of this court or may at its discretion deposit the amount with the Nazir of this court. 2. The brief facts of the case are that the plaintiff No,1 is a trading house which actively trades in commodities having its office in different countries and the plaintiff No,2 is their local agent. The defendant No,1 advertised an International Tender, Notice dated 10-1-2012 and invited bids for import of urea from foreign suppliers through worldwide sources on C&F basis. The plaintiff No,1 participated through plaintiff No,2 in the tender proceedings and submitted its bid for supply of 50,000 MT of urea. The bid of the plaintiffs was accepted by the defendant No,1 and contract was awarded accordingly. The plaintiffs in terms of tender furnished performance guarantee amounting to PKR107,000,000 in favour of defendant No, 1. In pursuance of contract, the plaintiffs arranged urea and also nominated vessel, however, due to some reasons the plaintiffs constrained
---
## Page 2
to substitute another vessel in place of previously nominated vessel, which was duly informed to the defendant No,1, which was accepted. It is also the case of the plaintiffs that under clause 13 of the contract, the defendant No,1 was under obligation to open the letter of credit in favour of plaintiffs as soon as performance guarantee is furnished. The defendant No,1 delayed the opening of letter of credit by six days, however, the letter of credit was finally opened on 26-1-2012 with the expiry date 6-3-2012 according to said letter of credit last date of shipment was 7-2-2012 giving short time to the plaintiffs for shipment. 3. According to the plaintiffs due to various reasons the shipment could not be arranged in time due to which the defendant No,1 decided to cancel the contract and forfeited the performance guarantee and when approached the defendant No,2 for encashment the plaintiffs have obtained restraining order from this court. 4. It is further contended that in view of the arbitration clause no direct cancellation of tender could have been made without invoking the forum- of arbitration and the resolution of dispute in terms of arbitration clause. For the ready reference clause 25 which pertains to the cancellation of contract and clause 26 relating to the arbitration are reproduced as under:-- "25 If the Seller fails to ship the goods within the specified delivery period for reasons other than Force Majeure, the Buyer shall be entitled at his option to cancel the contract and recover the damages besides forfeiture of Performance Guarantee. The Buyer shall not be liable to any risks and costs whatsoever in consequence of such cancellation of the contract." "26 Any difference or dispute or liability of whatsoever nature out of the contract or in any way relating to the contract or to its construction or fulfillment should be settled as far as possible, amicably between the Buyer and Seller. Should the parties fail to come to an amicable settlement the same shall be referred to the award of Arbitrators to be nominated one each by the Seller and the Buyer 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 shall take place at Karachi under Pakistani Law of Arbitration." 5. Mr.Omair Nisar, learned counsel for the plaintiff argued that as plaintiffs were willing to perform their obligation as per terms and conditions of the tender document but the defendant No,1 created numerous problems and hindrances due to which the plaintiffs could not be able to arrange shipment within the stipulated time frame or even in the extended period. Learned counsel argued that in view of the terms and conditions the plaintiffs were entitled to contract with any international party to procure and ship the awarded quantity of urea and the plaintiffs contracted the third party to ship the urea. As per schedule given by the said third party the shipment was to be made after 14 days of establishing the letter of credit. The plaintiff No,2 written a letter to the defendant No,1 with the request to aihend the clauses 44-C and 46-A of the letter of credit but no reply to such letter was ever received hence shipment could not be processed. The defendant No,1 in its letter dated 20-2-201,2 threatened the plaintiffs for termination of contract and forfeiture of bank guarantee. However, after some correspondence the defendant No,1 agreed to make amendment in the letter of credit. The plaintiff No,2 in its letter dated 27-2-2012 informed the proposed amendment in the letter of credit to make it workable but the defendant No,1 'again raised question that the plaintiffs have failed to fulfill the contractual obligations. However, the plaintiffs again informed the defendant No,1 that due to unavoidable circumstances, they failed to ensure shipment now then it would be arranged from Ukraine. The defendant No,1 extended the date of shipment till 15-3-2012 extendable up to 20-3-2012 subject to satisfactory inspection report by a Pre-Shipment Inspection Agent appointed by the defendant No,1. The plaintiffs managed pre- shipment inspection through the agent of defendant No,1 but the end-supplier raised some issues
---
## Page 3
regarding few clauses of the letter of credit, which was communicated to the defendant No, 1. Though, the defendant No,1 extended the date of shipment but with an unreasonable condition that the negotiation df documents (indicated under clause-21 of the tender document/terms and conditions) with the bank will be subject to prior concurrence/NOC of the TCP (defendant No,1). Learned counsel argued that this condition was in contravention of the terms and condition of tender documents and rendered the performance of contract impossible. Learned counsel further argued that though this condition was unreasonable and also in violation of the tender documents but it was accepted by the plaintiffs with the request to the defendant No,1 not to insert this condition in the letter of credit as it will make the letter of credit inoperative and no supplier or bank would be willing to work in such conditions. The defendant No,1 replied on 4-4-2012 in which they again insisted to incorporate the above clause in the letter of credit and directed the plaintiffs to convey their concurrence on the same date latest by 3-00 p.m. And without waiting for the consent of the plaintiffs the defendant No,1 proceeded to amend the letter of credit. The plaintiffs again informed the defendant No,1 the refusal of negotiating bank along with their observation that the proposed clause absolutely not workable and the bank rejected the amendment. 6. He further argued that in order to resolve the issue the working paper was prepared and the defendant No,1 wrote to MCB for amending several clauses of letter of credit and last date of shipment was extended to 30-4-2012 and the date of expiry of letter of credit was extended up to 30-5-2012 with the amendment that all the shipment documents will be verified/attested by the nominated representative of Pakistan Embassy Ukraine. It was further contended that the plaintiffs again informed the defendant No,1 the verification of shipment documents by the representative of Pakistan Embassy, Ukraine will take at least 15 to 20 days, which condition is not acceptable to the supplier, It was further communicated that all arrangements are in place and cargo is available and ready to be shipped at shortest possible notice. The plaintiffs further informed the defendant No,1 that due to this condition the letter of credit has become non-operative. Meanwhile, the defendant No, 1. Again advertised the tender for invitation of bids for supply of urea and the Man- ager of the Bank of Punjab informed the plaintiffs on 2-5-2012 that the defendant No,1 wanted to encash the performance guarantee. On knowing this fact the plaintiffs have filed this application for appointment of arbitrator. Learned counsel also referred to the Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication. No,600 ("UCP") and relied upon Article 10 which provides that except as otherwise provided by Article 38, a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any and beneficiary. In support of his argument learned counsel relied upon the following case-law: -- (1) AIR 1987 ORISSA 59 (Janardan Mohapatra v. Executive Engineer, Sambalpur Central Works, Dbivision CPWD and another). In this case it was held that the power's of the court under the Second Schedule to the Act can be exercised even in a case where the reference to arbitration has been made without the intervention of the court. This provision was intended to empower the court to pass interim orders for the preservation or safety of the subject matter of the dispute during the pendency of the arbitration proceedings. In cases where an application is filed under section 20 of the Act or where reference to arbitration .Is made through the intervention of the court, the court has seisin of the case and can undoubtedly pass interim orders, but there is no reason to suppose that the court has no power under section 41(b) read with the Second Schedule to prevent the properties from being wasted while it is pending before the arbitrator. (See AIR 1964 Madh Pra 219; Daultaram Phoplchand v. Shriram). It is apparent from a plain reading of section 41 that it provides both for the case where the arbitration proceeding is pending before a court as well as for one where such proceedings are not pending before the court AIR 1962 Mad 436 (S.V. Seshmull v. S.N. Umaji & Co.) and AIR 1964 Madh Pra 219 (supra).
---
## Page 4
(2) 2002 SCMR 1694 (Societe Generale De Surveillance S.A. v. Pakistan through Secretary, Ministry of Finance, Revenue Division, Islamabad). In this case it was held that under sections 20 and 41 Application to file arbitration agreement in Court has the legal status of a suit. Court in which proceedings are pending is competent and vested with the jurisdiction to pass interim orders as could be passed in a regular suit in the form of temporary injunction or otherwise. Trial Court, after having held that the arbitration proceedings initiated were competent and maintainable for the reason that arbitration clause of the agreement was holding the field and was binding on the parties and its legal efficacy and enforceability had not been in any manner adversely affected by Bilateral Investment Treaty and International Centre for Settlement of Investment. Disputes arbitration clause, the legal consequences to follow were that International Centre for Settlement of Investment Dispute arbitration was not maintainable and should not have been allowed to be prosecuted any further. If the cdurt passes an order for reference of the matter to arbitrators, it would amount to acceptance of the application and no formal order of filing of arbitration agreement is necessary, for the court while passing such an order would be deemed to have taken the agreement on the file. (3) 2011 CLD 1625 (Messrs Continental Cable (Pvt.) Ltd., v. Messrs China Harbor Engineering Co. Ltd. And another) In this case it was held no injunction should normally be granted to restrain encashment of an unconditional Bank Guarantee issued to cover the amount advanced by way of mobilization advance, It is also well settled that performance bond/guarantee stands entirely on different footings, and again, normally it would not be just and proper to allow its encashment when prima facie evidence of breach of contract was available. In the case of Pakistan Engineering Consultants v. Pakistan International Airlines Corporation, a Division Bench of this court held that unless there was prima facie evidence of breach of principle contract, encashment of performance bond was not justified. The observation of the Division Bench of this court in the case under discussion was upheld by the Hon'ble Supreme Court of Pakistan reported as 1989 SCMR 379. The above case was followed by this court in the case of Zeenat Brothers v. Awan-e-Iqbal Authority's case (PLD 1996 Karachi 183) where again the same distinction was given with regard to mobilization advance guarantee and that of performance bond guarantee. It was held that since encashment of performance bond was dependent on determination of question as to who had committed default for fulfillment of its obligations or in completion of work within given period and such question require evidence, encashment of performance bond guarantee was declined. (4) 2011 CLC 664 (Ch. Abdur Rauf v. MRs, Zubeda Kale= and others). In this case it was held that the Second Schedule of the Arbitration Act relates to section 41 and deals with powers of Courts in connection with interim injunction etc. It has been observed that powers of the Court under Second Schedule to the Arbitration Act can be exercised even in a case where reference to Arbitration has been made by intervention of the Court. The effect of the provision of section 41(b) of the Act is to clothe the Court with the same powers in relation to the Arbitration proceedings and to issue interim order for the preservation and safety of the subject-matter of the dispute. It may be observed that section 41(b) of the Arbitration Act provides that the Court shall have for the purpose of and in relation to arbitration proceedings, the same power of making orders in respect of any of the matters set out in the Second Schedule of the Act as it is for the purpose of and in relation to the proceedings before the Court. (5) 2003 YLR 1450 (Zawar Petroleum v. OGDC and others). It was held that under section 41(b) of the Arbitration Act, 1940. The Court shall have for the purpose of, and in relation to, arbitration proceedings, the same power of making orders in respect of any of the matters set out in the Second Schedule. Before an interlocutory injunction is granted, the plaintiff/ petitioner must (i) have an extremely strong prima facie case; (ii) show actual or potential damage of a very serious
---
## Page 5
nature i,e, irreparable loss, the order should not be sought as a fishing expedition; and (iii) the balance of convenience must favour the grant of interim injunction. (6) PLD 1976 Karachi 644 (Messrs Jamia Industries Ltd., v. Messrs Pakistan Refinery Ltd; Karachi). In this case it was held that 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 an application under section 20, Arbitration Act. The Court, has, therefore, to 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 suc must be shown to exist. 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. 7. Syed Mamnoon Hassan, learned counsel for the defendant No,1 argued that the plaintiffs have not approached this court with clean hands. There is no dispute hence reference to arbitrator does not arise. The plaintiffs have committed default in fulfilling their contractual obligations despite availing sufficient time and extension in shipment dates. Under clause 37 of the contract the plaintiffs were obliged to fulfill their responsibility. The plaintiffs misled this court and obtained interim relief. Learned counsel also referred to Clauses (x) and (xii) of the affidavit in rejoinder submitted by the plaintiffs in which they stated that they are still ready to supply the awarded quantity on the same rates but subject to deletion of unworkable clause in the letter of credit. In response the defendant No,1 submitted a letter dated 28-5-2012 in this court with certain terms and conditions including the insertion of clause required to be made in the letter of credit that the shipment documents will be verified by the Pakistan Embassy in the country of shipment. Few other conditions were also mentioned in the letter including the penalty. It was further averred that the plaintiff No,1 itself cancelled the letter of credit, According to the learned counsel the main cause of concern of the plaintiffs is to avoid the forfeiture and or encashment of bank guarantee for which the defendant No,2 already issued a demand draft but the proceeds were stopped by the defendant No,2 in view of the interim order passed by this court on the interlocutory application moved under section 41 of the Arbitration Act. He further contended that the present application under section 20 of the Arbitration Act is hit by principle of "Acquiescence', 'Estoppel', and 'Aprobate and Reprobate". The letter of credit was opened by the defendant No,1 in favour of plaintiff No,1 through MCB and the last date of shipment of the entire cargo was 7-2-2012. The nomination of vessel was approved by the defendant No,1 but subsequently no information about the actual arrival of the vessel was given. The plaintiff No,1 withdrew the previous nomination and nominated another vessel. This nomination was again accepted by the defendant No, 1. The plaintiff No,1 requested for amendment in letter of credit without indicating the cargo and vessel. The plaintiffs requested for further extension in the shipment period up to 20-3-2012 and again nominated another vessel which was in fact the fourth vessel nominated in a row. The defendant No,1 accepted the fourth nomination also. In view of the consistent approach and in order to protect the interest the defendant No,1 granted extension up to 20-4-2012 on conditions that the supplier will not apply for further extension and the amendment in letter of credit will be subject to the conditions that the cargo will be presented to the pre-shipment inspection agent appointed by T.C.P. But negotiations documents with the bank will be subject to prior concurrence/NOC of the T.C.P. Inter alia that the supplier will arrange extension for the performance bond/guarantee. The defendant No,1 issued instructions to MCB for amendment in the letter of credit and incorporated a clause that all shipment documents will be verified by the
---
## Page 6
nominated representative of Pakistan Embassy, Ukraine with instructions to delete the condition of presentation of the cargo to the pre-shipment inspection agent duly authorized by T.C.P. But again the plaintiff No,1 communicated that letter of credit is not workable in view of the clause relating to verification of documents of by Pakistan Embassy Ukraine. Since the plaintiffs were avoiding contractual obligations on one pretext or the other, therefore, the defendant No,1 decided to cancel the documents under Clause 25 of the tender documents and forfeiture of performance guarantee. In support of his arguments learned counsel relied upon following case-law:-- (1) 1979 CLC 625 (Messrs Asadullah Khan & Co. Ltd. Karachi v. Karachi Shipyard & Engineering Works Ltd. And another). It was held that the powers conferred on the Court under the Second Schedule to Arbitration Act could be exercised only if any proceedings were pending before the Court or in relation to arbitration proceedings and not otherwise. As stated above it is an admitted position that on the date when the present application was filed no proceedings were pending in this Court. Admittedly the application under section 20 of the Arbitration Act if any, has been filed subsequently. (2) 1980 CLC 346 (Messrs Shaukat & Raza Ltd. Karachi v. The Karachi Development Authority, Karachi and another). In this case it was held that proceedings can be said to have commenced only when some action taken before arbitrator, Court or authority. Neither arbitrator appointed nor reference made. Proceedings, held, cannot be said to have commenced in circumstances of case. (3) 1984 CLC 546 (Arbab Abdul Qadir v. Mst. Bibi Fatima and another). In this case it was held that the words "subject-matter of the reference" used in paragraph (1) of Schedule II of the Act are indicative of the stage when such powers could be exercised. The term "subject-matter of the reference" should mean in the context, the stage when reference to arbitration has already been made and before the award is filed. As long as reference is not made clause (a) of section 41 applies and after reference is made Court can exercise powers under section 41 (b) of the Act. If a situation arises before reference to warrant action of interim nature Court can exercise those powers under the Code of Civil Procedure, The words "subject-matter of the reference" would not have been there if it was intended that these powers were to be exercised before reference. The use of these words in clause (b) means that reference has already been made and person has been made to secure that property involved is not disposed of, alienated or damaged during arbitration proceedings. (4) 1987 CLC 2063 (Messrs Commodities Trading International Corporation v. Trading Corporation of Pakistan Ltd. And another). In this case it was held that under section 41 notice issued to opposite party for appointment of arbitrator before expiry of time to enable other party to appoint his arbitrator, application under section 41 of Arbitration Act whether maintainable, where petitioner had issued notice appointing his own arbitrator and before expiry of time during which opposite party could appoint his arbitrator, filing of application by such petitioner under section 41 of the Act, held, was not maintainable. No arbitration proceedings were pending as other side had not yet appointed its arbitrator within period specified in agreement. (5) 1997 SCMR 1508 (Islamic Republic of Pakistan v. Muhammad Zaman Khan and others). In this case it was held that object of passing interlocutory order or status quo was to maintain situation obtaining on that date when party concerned had approached Court and not to create new situation. Court could not grant interlocutory relief of the nature which would amount to allowing main case without trial/hearing of same respondent having handed over charge of their offices pursuant to notification of termination of services. High Court could not have created new situation by suspending termination ordeRs, High Court, thus, could not have reinducted respondents into service before disposal of their constitutional petition. Impugned interlocutory orders were, thus, not sustainable in law and were set aside in circumstances.
---
## Page 7
(6) 1982 CLC 344 (Mst. Sughra Bai v. Mst. Rabia). In this case it was held that injunction granted only to restore status quo and not to create a new situation. Passing of orders aimed at establishing a new state of things different from those existing prior to institution of suit, held, not warranted. (7) PLD 1968 Karachi 222 (Alavi sons Ltd. v. The Government of East Pakistan and others). In this case it was held that suit for injunction that defendant Bank be restrained and prohibited from paying over guarantee amount to person entitled to guarantee arranged for by plaintiff, not maintainable. The relief of…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.