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Petitioner: FAL OIL COMPANY LTD. Through Waqar Ahmed VS Respondent: PAKISTAN STATE OIL COMPANY LTD. Through Managing Director and another
Court Name: Sindh High Court Judge(s): Munib Akhtar Title:FAL OIL COMPANY LTD. Through Waqar Ahmed vs PAKISTAN STATE OIL
COMPANY LTD. Through Managing Director and another Case No.: J.M. Application No.57 of 2013 and Suit No.1139 of 2011 Date of Judgment:2014-06-04 Reported As: PLD 2014 Sindh 427 Result: N/A Judgment ' MUNIB AKHTAR, J.---By means of JM 57/2013 ("the JM"), the petitioner ("FAL"), a company incorporated under the laws of the UAE, seeks enforcement, under sections 3 and 6 of the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011 ("Act'), of an award made in London. The award was made on 3-10-2013 by a sole arbitrator ("Award") in arbitration proceedings between FAL and the respondent No. 1 ("PSO"), and enforcement is sought against the latter. By means of C.M,A. 13569/2013, FAL seeks to restrain encashment of two performance bonds that were issued at, Karachi in favour of PSO by the respondent No. 2, a banking company ("Bank"). Earlier, and before the making of the award, FAL had instituted Suit 1139/2011 ("the Suit") seeking declaratory and injunctive relief against PSO and the Bank in respect of the performance bonds. Interim injunctive relief was sought by C.M.A. 9498/2011 filed in the Suit. On that application, interim relief was granted by order dated 19-9-2011. The foregoing proceedings came about in the following circumstances, 2. It appears that sometime in April, 2011 PSO issued tenders inviting offers for the procurement of low sulphur fuel oil ("LSFO") and high sulphur fuel oil ("HSFO"). FAL bid for both tenders and was awarded two contracts on or about 13-5-2011. The two contracts were (other than obvious differences such as quantities, etc.) the same in all material respects. Three clauses are relevant- for present purposes. Firstly, the contracts were governed by English law. Secondly, FAL was required to provide a performance bond in respect of each contract from a first class scheduled bank operating in Pakistan. The format for such bond was annexed to the contract. FAL met this obligation by providing performance bonds issued by the Bank in the sums of USD 7,771,600 and USD 1,305,600 for the HSFO and LSFO contracts respectively. The format of the performance bonds
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provided, and the bonds therefore stated, that they were governed by the laws of Pakistan. Thirdly, each contract contained an arbitration agreement embedded as a clause therein. The arbitration agreements were in identical terms and provided as follows:-- "The Parties shall endeavor to settle all disputes amicably arising out of the Contract. Those disputes which cannot be so settled, shall be submitted to arbitration. Any controversy or claim arising out of or relating to the Contract or the breach thereof shall be settled by arbitration in accordance with the Rules of the London Court of International Arbitration. Both the Parties shall mutually appoint one arbitrator and the decision of such arbitrator in such arbitration proceedings shall be final and binding on the Parties." ' It was provided that the venue of any arbitration would be London. 3. It appears that certain disputes arose between the parties with regard to the supply of both HSFO and LSFO. It is not necessary to give the details of the disputes. It suffices to note that ultimately PSO gave notice of termination of both the contracts on account of breaches allegedly committed by FAL, and sought encashment of the performance bonds. This led to the filing of the Suit on or about 19-9-2011 and the making of the interim order therein, on the same day, on C.M.A. 9408/2011. The defendants (i.e., PSO and the Bank) were restrained from encashment of the performance bonds. 4. FAL, while denying breach of the contracts on its part, claimed that PSO was in repudiatory breach of the same by reason of the termination notices. It accepted such breach and invoked the arbitration agreements, claiming damages for the loss suffered. Proceedings commenced under the auspices of the London Court of International Arbitration (LCIA), and PSO in turn counterclaimed. The arbitrator stated the dispute in the following terms (FAL being the claimant and PSO the respondent): "8. The Claimant claims damages for the respondent's failure to perform each of the HSFO Contract and the LSFO Contract. The respondent, in its turn, counterclaims for the loss it claims it suffered as a consequence of the Claimant's failure to supply any of the HSFO or the LSFO for which it had contracted. In addition, it seeks declaratory relief that proceedings commenced by the Claimant in Pakistan to restrain the encashment of two performance bonds were in breach of the arbitration agreements between the parties and claims damages for the loss suffered by it in consequence of these proceedings (although at present it is not able to quantify these)." ' The arbitrator made his Award on 3-10-2013. As to FAL's claim, he concluded as follows: "84. As I have found that it was the Claimant and not the respondent who was in breach of the terms of the HSFO Contract and the LSFO Contract, obviously the Claimant has no entitlement to damages." ' As to PSO's counterclaim, the arbitrator concluded that the claim could not be entertained and refused to grant it (see paras 85-91 of the Award). The matter of "other relief" was then taken up. The arbitrator noted in para 94 that: "The Claimant accepts that I have the power to determine whether or not the proceedings brought by it in Pakistan constitute a breach of the arbitration agreements contained in each of the HSFO Contract and the LSFO Contract. Those proceedings were of course the Suit. FAL denied that it was in breach of the arbitration agreements and sought to argue, in part, that the Suit had been brought, and the interim injunctive relief sought, as a "conservatory measure". The arbitrator concluded as fallows: "99. I do not accept that the Pakistan proceedings are merely conservatory. ... [In] Pakistan the Claimant seeks to advance the same arguments that it has advanced in this arbitration in order not merely to preserve the performance bond[s], but also to seek to establish that it has no liability to the respondent. It is a substantive claim and one which the Claimant has given no indication of abandoning now that this arbitration has taken place. Accordingly, it is appropriate that it be ordered (insofar as they concern ,the respondent) to discontinue them." 5 On the foregoing basis, the arbitrator made the following award:
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"108. Accordingly, I determine and declare that: (1) I have the jurisdiction to determine all matters within this reference and to grant the relief sought. (2) The Claimant is bound to refer all disputes under the HSFO Contract and the LSFO Contract, including those relating to the performance bonds issued under each of the same, to arbitration under the LCIA Rules. (3) The proceedings commenced by the Claimant in Pakistan, being Suit 1139 of 2011 in the Sindh High Court against the respondent constitute a breach of the arbitration agreements contained in the HSFO Contract and the LSFO Contract. (4) The Claimant is to bear the costs of the arbitration to the date of this award, as determined by the LCIA Court. 109. Further, I award the respondent: (1) The sum of 19,610.50 in respect of the respondent's other reasonable legal costs:" ' It was noted (in para 107) that PSO was not in a position to quantify the loss suffered by it as a result of FAL's breach of the arbitration agreements by bringing suit in Pakistan. It was observed that the parties had agreed that the arbitration proceedings be "left open for quantifying this loss (as well as to deal with any other matters that might arise in connection with the Pakistan proceedings)". The arbitrator held as follows: "Accordingly, and to this extent alone, this is not a final award". 6. Learned counsel for FAL referred to the facts substantially as above and drew attention to section 3 of the Act. Learned counsel submitted that the non obstante clause gave exclusive jurisdiction to the High Court. Learned counsel submitted that there was no clear finding recorded in the Award as to whether the performance bonds could be encashed. It was emphasized that the bonds could not be encashed for any loss suffered by PSO on account of breach of the contracts since the arbitrator had rejected the counterclaim. FAL was ready to pay the amount awarded by the arbitrator for the loss suffered by PSO for breach of the arbitration agreements (L19,610.50) and the bonds could not therefore be encashed for this amount. In effect, the case put forward by learned counsel was this: the Award should be enforced in terms of section 6 of the Act, and on account of what had been concluded by the arbitrator, the performance bonds could not be encashed by PSO, either for any claim on the main contracts or on account of a claim for breach of the arbitration agreements. Thus, either (or both) of the miscellaneous applications (C.M.A. 13569/2013 in the JM and C.M.A. 9408/2011 in the Suit) ought to be allowed. FAL stood ready to make immediate payment of 19,610.50 by way of deposit with the Nazir of the Court. Learned counsel relied on certain case-law in support of his submissions. 7. Learned counsel for PSO did not object to the Award being enforced under section 6. However, he submitted that PSO was entitled to encash the performance bonds. Learned counsel specifically stated during the course of submissions that such encashment would be limited only, in the first instance, to the 19,610.50 referred to above, and secondly, to any amount that PSO might be able to quantify before the arbitrator by way of loss suffered as noted in para 107 of the Award (See para 5 herein above). In other words, the claim on the performance bonds would be limited only to the claim on account of FAL's breach of the arbitration agreements by filing the Suit in this Court. One question that arose during the submissions was whether the performance bonds, on their true and proper construction (which was, as always, ultimately a matter for the Court to decide as a question of law) guaranteed only the obligations on the main contracts or also the obligation to arbitrate under the arbitration agreements embedded therein. This question, which quickly occupied center stage, naturally required consideration of the language of the bonds. It suffices to refer to only one of the bonds. The bond issued in relation to the HSFO contract provided in material part as follows:
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"[PSO] herein after called the Buyer has entered into a contract with [FAL] (herein after called the 'Seller') for the supply of Petroleum Products, more particularly described in the contract (herein after called HSFO) upon terms, conditions and covenants agreed between them and whereas the Seller has signed an agreement ref. Contract No. PSO/FO/IMPORTS/085/2011 (hereinafter called the 'Contract'). ' And whereas [the Bank], in consideration of the supply of HSFO by the Seller to the Buyer has agreed upon to be the guarantor for the due performance of the Seller of its obligations in accordance with the terms, conditions and covenants of the contract including any covenants and alterations therein as may be mutually agreed between the Buyer and the Seller and to secure all of the Seller's obligations, liabilities under the contract for and in connection with the supply of HSFO including particular [sic] Seller's obligations to arrange the supply in period(s) specified in the contract. ' Now this deed witnessess that in consideration of the aforesaid, if the seller fails to perform or commits a breach of any of its obligations aforesaid, then the Bank, upon the first written demand of the Buyer stating that the Seller has failed to perform and comply with any of the terms and conditions of the contract, irrevocably binds itself to make unconditional payment to [PSO] of the above sum [i.e., USD 7,771,600/-], without reference to the Seller, in whole or in part and any demand made hereunder by the Buyer shall be conclusive evidence of the Seller's said default. ' The obligation of the bank herein shall be that of a Principal debtor and shall be an unconditional and continuing obligation ... Notwithstanding any tithe given, indulgence or forbearance shown and notwithstanding any 'amendments or alterations made in the obligation or the terms conditions and covenants between the buyer and the seller, without assent of the bank, or otherwise and notwithstanding that any claim by the Buyer against the Seller is disputed or contested or referred to arbitration by the Seller. ..." 8. Learned counsel for PSO accepted, quite properly in my view, that an arbitration agreement embedded as a clause in the main (or matrix) contract was a separate agreement in its own right, which operated on its own independent footing and could even be severed from the main contract. However, learned counsel submitted, that principle did not apply here; especially in relation to the performance bonds. The reference to contractual obligations in the bonds (and any breach thereof by FAL) referred to both the main contracts and the arbitration agreements and therefore the bonds could be encashed on account of a breach of the latter. The principle of severability only applied if it was contended that the main contract had become unenforceable, void or voidable or suffered from any illegality or other fatal infirmity, and the issue was whether the arbitration agreement nonetheless survived. In other words, the severability principle applied only in certain limited and special contexts, and it was submitted that none were relevant for the case at hand. The performance bonds could therefore be encashed for breach of the arbitration agreements and the interim order made in the Suit ought to be vacated and the miscellaneous applications dismissed. At the conclusion of the hearing I had allowed learned counsel to submit written synopses. Learned counsel for PSO did so, referring therein to a number of decisions. 9. Learned counsel for FAL, exercising his right of reply, submitted that any loss suffered by PSO on account of the breach of the arbitration agreements had been quantified by the arbitrator and since PSO stood ready to pay this amount there was no need or occasion for encashment of the performance bonds. 10. I have heard learned counsel as above, examined the record and considered the case-law relied upon. It will be seen that the controversy has narrowed considerably. There is no dispute on whether the Award should be enforced under section 6 of the Act. The principal question now is only whether the performance bonds can be encashed for breach of the arbitration agreements. If the answer is in the affirmative, then the miscellaneous applications must be dismissed and the
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interim order recalled and vacated. If the answer is in the negative, the converse position would apply. This is the issue that must now be addressed. (Since, as presently relevant, both contracts and the performance bonds are exactly the same, for convenience, I will largely use the singular herein below.) 11. In my view, the first question that needs to be examined is whether damages can be awarded for breach of an arbitration agreement. English law gives an affirmative answer although it seems that the point has arisen but rarely. It arose in Mantovani v Carapelli SpA [1980] 1 Lloyd's Rep: 375, where the Court of Appeal acknowledged the novelty of the issue. It was observed that "in principle there must be a right to bring an action for damages in respect of breach of such a clause" (pg. 383, per Browne, U). 'Megaw, U also expressed the same view: "I can see no basis for the suggestion that in an appropriate case, where damages can be proved to have followed from'a breach of contract of the nature with which we are here concerned damages should not be recoverable" (pg. 384). (It must be kept in mind that Megaw, U did qualify the generality of the foregoing statement in the immediately following passage. It is not necessary however, to consider that passage for present purposes.) The point was affirmed in Schiffahrtsgesellschaft Detlev Von Appen GmbH v Voest Alpine Intertrading GmbH [1997] 2 Lloyd's Rep. 279 (CA) where. Hobhouse, LJ, while observing that "the aggrieved party also has the option to sue for damages for breach of contract" also noted that "this is rarely a satisfactory remedy" (pg. 285). Reference can also be made to two decisions cited by learned counsel for PSO, Donohue v. Armco [2002] 1 Lloyd's Rep 425, [2001] UKHL 64 (HL) and Union Discount Co. Ltd. v. Zoller [2002] 1 All ER 693 (CA), although strictly speaking, those were cases involving an exclusive jurisdiction clause. In my view, the position under Pakistani law as to whether a party can sue for damages for breach of an arbitration agreement ought to be regarded as being the same. 12. The damages to which an aggrieved party may be so entitled can of course be granted by the court in a suitable action. However, can such damages also be awarded by an arbitrator? In principle, the answer, ought to be in the affirmative, but it must be more nuanced than a simple yes. As already seen (see para 4 above), in the present case the arbitrator noted that FAL accepted that he had the power to decide whether or not the proceedings by way of the Suit constituted a breach of the arbitration agreement. This statement must of course, be given due effect insofar as the present case is concerned. However, it must be kept in mind that this is not the application of any general principle. In my view, if breach of an arbitration agreement (whether a clause in a main contract or a standalone agreement) is alleged, but subsequently a reference does proceed under the said agreement, the arbitrator cannot be regarded as having the power, for that reason alone, to also adjudicate upon the question of whether there was a breach of the arbitration agreement. Since an arbitration agreement is an agreement in its own right (in this para referred to as the "principal agreement") it necessarily follows that a dispute as to whether this agreement has been breached can only be arbitrated if there is an agreement to arbitrate in this regard (in this para referred to as the "secondary agreement"). The dispute(s) that come within the scope of the principal agreement cannot be regarded as including a dispute whether this agreement has itself been breached. (Of course, a suitably worded arbitration agreement could perhaps so provide but very clear words would be needed; these are certainly not to be found in the present case.) If the parties agree to have a dispute relating to the principal agreement also referred to arbitration they must specifically reach agreement for this purpose (i.e., there must be a secondary agreement). Since the secondary agreement would itself be an arbitration agreement, it would have to comply with all the requirements of, inter alia, the law by which it is governed. If there is a secondary agreement, the parties may, for convenience, choose to have the dispute under it (i.e., whether the principal agreement was breached) arbitrated before the same arbitrator(s) as are hearing the dispute under the principal agreement (i.e. Whether the main contract was breached).
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This may have the appearance of there being a reference within a reference, but in law there would be two distinct references. It is emphasized that the arbitrator considering the dispute under the principal agreement in relation to the main contract could not, by reason of his having entered upon this reference, claim or assert any such authority with regard to the other dispute. FAL's acceptance of the arbitrator's power in the present case (to which PSO obviously had no objection) ought therefore, in my view, to be regarded as a secondary agreement between the parties, viz., to refer the dispute (i.e., whether there had been a breach of the principal agreement by reason of the Suit having been filed) to arbitration before the same arbitrator, and nothing more. In other words, there were, in law, two sets of arbitration proceedings before the arbitrator. One was in relation to the disputes on the main contracts regarding the supply of the HSFO and LSFO. Those disputes came within the scope of the arbitration agreements embedded in the said main contracts. The second set of proceedings was in relation to whstner the arbitration agreements themselves had been breached. These latter disputes were referred to arbitration before the same arbitrator. As regards the first set of proceedings, the arbitrator rejected.FAL's claim and also PSO'S counterclaim. As regards the second set of proceedings, the arbitrator concluded that FAL was in breach of the arbitration agreements in filing the Suit and awarded a certain sum to PSO (19,610.50). The arbitrator left this arbitration open for consideration of the loss that PSO claimed to have suffered on account of breach of the arbitration agreements, subject to proper quantification. However, it is crucial to keep in mind that this was only in relation to what I have described as the second set of arbitration proceedings. Insofar as the first set of proceedings is concerned, the Award has become final and there is no issue left outstanding. This is made clear by the arbitrator himself in the last sentence of para 107 of the Award. 13. This brings me to the nub of the matter: can the performance bonds be encashed on account of PSO's claim for breach of the arbitration agreements, both for the 19,610.50 already awarded and for any amount that the arbitrator may award in future? In my view, for the reasons herein after stated, the answer ought to be in the negative. 14. Learned counsel for PSO, referring to the nature of performance bonds as demand guarantees, laid emphasis on the autonomy principle applicable to such guarantees, namely that they were independent contracts that had nothing to do with any dispute on the underlying contract and had to be honored on their own terms. Learned counsel submitted that the Bank was committed to making payment on "the first written demand of [PSO] stating that [FAL] ha[d] failed to perform and comply with any of the terms and conditions of the contract". That obligation, it was contended, was clear on the face of it and included a demand on the basis of breach of the arbitration agreement, since it was embedded as a clause in the main contract. Learned counsel relied on National Construction Ltd. v. Alwan-e-lqbal Authority PLD 1994 SC 311, Shipyard K Damen International v. Karachi Shipyard and Engineering Works Ltd. PLD 2003 SC 191, Toyo Menka Kaisha Ltd v. Ferro Alloys Pakistan Ltd. 1988 CLC 418 (LHC), and also a judgment of the Indian Supreme Court. It is not necessary to consider the cited cases in any detail, since the principle is well established, However, with respect, the autonomy principle does not explain what it is that the performance bond relates to. It may be payable on "first written demand" but a demand in relation or with reference to what? This is the crucial question that needs to be addressed. For ease of reference, the paragraph from the performance bond that sets out what has been guaranteed by the Bank is again reproduced below (emphasis supplied): "Now this deed witnesses that in consideration of the aforesaid, if the seller fails to perform or commits a breach of any of its obligations aforesaid, then the Bank, upon the first written demand of the Buyer stating that the Seller has failed to perform and comply with any of the terms and conditions of the contract, irrevocably binds itself to make unconditional payment to [PSO] of the
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above sum, without reference to the Seller, in whole or in part and any demand made hereunder by the Buyer shall be conclusive evidence of the Seller's said default." ' In my view, the key words for present purposes are "obligations aforesaid". It is the "aforesaid" obligations of FAL that are being guaranteed by the Bank. What does this refer to? It obviously refers to obligations under the main contract. But does it also include obligations in respect of the arbitration agreement? A performance bond is of course a contract, and it is well settled that the intention of the parties to a contract must be objectively determined. Lord Hoffmann's speech in Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 All ER 98 is regarded as a seminal decision on the interpretation of contracts. His Lordship identified a number of principles, of which the following are relevant for present purposes (at pp. 114-5) (emphasis supplied): "The principles may be summarised as follows: (1) Interpretation is the ascertainment of the meaning which the document would…
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